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

.

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

2–6. they are too small in value to be separately measured. 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. overhead—departmental office staff’s salaries. the average (fixed costs divided by number of units) will change as production changes within those ranges. incidental materials). Mixed costs have elements of both fixed and variable costs. i. such as when supervisors are added. Total variable costs change in direct proportion to a change in volume (within the relevant range of activity). Other overhead costs. 2–8. Examples are: materials—food. Utilities and maintenance are often mixed costs. labor—meal preparers. Prime costs are direct. Unit costs are averages only at a given level of production. 5/e . overhead—maintenance. Had they understood how costs of Forrest Gump were to be defined. they may have insisted on a share of revenues or a flat fee instead of profit sharing. © The McGraw-Hill Companies. are clearly indirect. Total fixed costs do not change as volume changes (within the relevant range of activity). 2–12..g. fixed costs. Marketing and administrative costs are treated as period costs and expensed for financial accounting purposes in both manufacturing and merchandising organizations.. 2–10. utilities. Thus. lease on building. 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. 2–11.e. Direct materials and direct labor are by their very nature directly related to the product. 1997 14 Cost Accounting. such as the occupancy costs of the manufacturing plant. Inc. Answer will depend on the restaurant studied. Since some costs do not change.) 2–13. 2–7. within certain production ranges. Examples: labor—instructors’ salaries. the relevant range. Step costs change with volume in steps. 2–9. 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. Some overhead costs are treated as indirect for practical reasons—while they might be directly associated with the product (e. (Probably not.

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

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

.. Chapter 2 17 .........000 3... Ending inventory ....... Inc.....000 1...........000 Total cost of goods purchased ..................................................................... PC..................... b........................ This Year Revenue ..........................................) Prepare statements for a merchandising company: PC..... Inc. 260............... Marketing and administrative costs .............2–17.......................... Income Statement For the Year Ended December 31...600........................... 1997 Solutions Manual.................940.........................860. Utilities in controller’s office..... Depreciation on furniture for company executives .....................................000 300.... $5. This Year Beginning inventory.........600.... Operating profit .................. Cost of Goods Sold Statement For the Year Ended December 31....... Factory heat and air conditioning ...000 3............ Purchases ......000 1...........000 2....060.. Factory security personnel ................... Cost Item a..... PC........ Cost of goods available for sale ............................................. e. Cost of goods sold (see statement below) ........................... Power to operate factory equipment .. Cost of goods sold .. (15 min............060.............................................. (15 min......) Basic concepts......................................................................000................. Fixed (F) Variable (V) F F F V F Period (P) Product (R) R P R R P 2–18.....000 $ 500................ Gross margin.......000 © The McGraw-Hill Companies............000 Transportation-in .....000 $ 340...................360............. Inc............ d..000 $3.... $2............... c.......... Inc..

© The McGraw-Hill Companies.500 – $16.250 x 28.250 x 23.850 + $13.850 + $13.150 + X = $29.000 + $3.000 * 14.2–19. We recommend setting up either T-accounts or equations to solve for the missing data.. (30 min. Inc. Materials Inv. 1997 18 Cost Accounting.250 + X = $23. Work in Process Beginning work Total Cost of Ending work Inventory in process + manufacturing = goods + in process inventory cost manufactured inventory 16. a.250 X = $29.250 + X = $28.200 Finished Goods b.250 Beginning Cost of Cost of Ending finished goods + goods = goods + finished goods inventory manufactured sold inventory 2.500 16.000 + $14.600 X = $23.600 Beginning Direct Direct Ending direct direct materials + materials = materials + materials inventory purchased used inventory 12. 12.) Prepare statements for a manufacturing company.250 – $2.850 13.000 + $3.150 x 29.150 X = $27.250 X = $28.000* + $14. 5/e . Inventory 2.000 c.600 – $12.000 3.250 X = $25.350 *From solution to part b.500 X = $29.

. 37.200(a) Materials available.... Less ending work in process inv.....000 Letters (a)... and c.850.. (b).... Finished goods available for sale .....000(b) 2...450 Less ending inventory ........................... Chapter 2 19 ... Cost of goods sold ....... Less ending finished goods inventory ...... $16...500* Total manufacturing costs .......... 3...... $12............850 Other manufacturing costs .. © The McGraw-Hill Companies....................... (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.. 13..........................150 27. $23.......350(c) 14...........600 Direct materials used.... Cost of goods manufactured..250 3.......500 = $27......................... Beginning finished goods inventory............... b.. 25....................................... *Difference between total manufacturing costs and direct materials used: $3..350 – $23........250 Purchases ........ and (c) refer to amounts found for requirements a.250 31......2–19...... 1997 Solutions Manual.............500 29............. Inc......250 $28....

600 + X = $600.400 * 35.2–20.400 $36.200 36.600 – $32.400 X = $600..000 X = $600.800 X = $177. Work in Process Beginning work Total Cost of Ending work Inventory in process + manufacturing = goods + in process inventory costs manufactured inventory 36.600 *From part b.200 + $36. 5/e .000 + $15.600 X = $600.) 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 15. Inc.800 + X = $173. Inventory 32. © The McGraw-Hill Companies.600 x 600.400 + $35.200 + X = $600. Inventory 14.400 – $36.000 Beginning Cost of Cost of Ending finished goods + goods = goods + finished goods inventory manufactured sold inventory $14.200 X = $599.600 Beginning direct Direct Direct Ending direct materials + materials = materials + materials inventory purchases used inventory $32. 1997 20 Cost Accounting.000 + $15.200 + $36.400 + $35. Direct Materials a.000 – $14.400 c. (30 min.600 X = $173.000 Finished Goods b.200 x 600.800 x 173.

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

.......2–21....600 $88.800 Indirect materials and supplies ....... $ 30..............000 Property taxes........................... Less work in process.................................................. Jan...800 Add material purchases ................................. Total cost of work in process during the year ......... Beginning finished goods................ 5/e .................. Finished goods inventory available for sale ........... 44........ Total marketing and administrative costs ................................................ Jan.............000 Direct materials used ...... Less ending finished goods inventory...................................) Prepare statements for a manufacturing company: Alexis Company.............000 $282.........600 30... $ 36......................... 81.000 Manufacturing building depreciation .............. Jan...200 159......... Marketing costs (sales commissions) ............... 54...400 Less ending inventory.... Costs of goods manufactured during the year.800 304.........800 $ 43.200 278............600 Direct materials available..............400 71............................... Manufacturing overhead: Supervisory and indirect labor .. 1997 22 Cost Accounting........................200 18....................................................... Cost of goods sold . Operating profit ...400 119.........800 282........200 138........... Manufacturing costs: Direct materials: Beginning inventory..... 16...... 1 ................600 26.............. Total manufacturing costs ...........800 Total manufacturing overhead .......600 Plant utilities and power......................800 300................. Alexis Company Income Statement For the Year Ended December 31 Sales revenue ................ 31 .... manufacturing plant ....200 $420............. 1 ...............400 21.... 38..............600 © The McGraw-Hill Companies............ (30 min.............. Direct labor .................000 $ 19........ Alexis Company Statement of Cost of Goods Sold For the Year Ended December 31 Work in process............................................... Dec........ 31 ............. 47........... Administrative costs ....200 273..................... 31 ....... Gross margin ...... Dec.. Dec..... Inc....... 28....... 12... 1 .. Less: Cost of goods sold .

.650 $ 6...200 62.000 Direct materials put into process ...................... 6........ Cost of goods sold .......................100 Total marketing and administrative costs .... Total manufacturing costs ...............................350 16.... January 1............................. 12.......500 Property taxes.....750 Manufacturing building depreciation ..000 4.... Chapter 2 23 ............................................... Less: Cost of goods sold (per statement) ..............950 67..150 Plant utilities and power ......................................050 62.. Finished goods inventory available for sale .................... Manufacturing costs: Direct materials: Beginning inventory...........................................300 35...................... Direct labor ........ Inc..................................... 10............ Tots’ Toy Factory Statement of Cost of Goods Sold For the Year Ended December 31 Beginning work in process........................... $ 8..............150 Direct materials available ..............400 34..... Total cost of work in process during the year...350 Less ending inventory.................................................. Gross margin........... Operating profit .....................450 66.. Administrative costs .) Prepare statements for a manufacturing company: Tots’ Toy Factory........................600 $ 9...2–22........ December 31... 7........... Costs of goods manufactured during the year ................. $ 6..........400 $97. Jan.... December 31....................550 62................. $21................... 18.............300 60...........................450 4........ manufacturing plant ..550 5.......... Less ending finished goods inventory....... 3.700 Total manufacturing overhead ............ 9....... January 1 ............................150 © The McGraw-Hill Companies.......800 28. Tots’ Toy Factory Income Statement For the Year Ended December 31 Sales revenue ..... 1....200 Add purchases ....... 2..... December 31..................200 Indirect materials and supplies.................. Less work in process...................... 1997 Solutions Manual... Beginning finished goods......................................... Manufacturing overhead: Supervisory and indirect labor........ 10......................................................................550 Sales commissions....... (30 min.

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

....... 18................. $131. Marketing and administrative costs: Depreciation (20% of total) ....150 69............ Chapter 2 25 ............. 16........... Operating profit ..........050 Administrative salaries... 1.... $3................................000 Heat...350 Total marketing and administrative costs ........650 © The McGraw-Hill Companies.. light and power (22..................800 Property taxes (25% of total) ................ Less: Cost of goods sold (per statement) ..... Inc.......2–23........ 4................. 1997 Solutions Manual..........200 45..........................350 Marketing costs ......550 $ 15........ 2................950 61...........................................4% of total) ....... Gross profit.....................................................000 Other administrative costs . (continued) Carey’s Cakes Income Statement For the Year Ended December 31 Sales revenue ......

.......100 Plant utilities (other than power to run plant equipment) ...........................600 Depreciation on plant and equipment..................940 Total variable costs...........................................800 Property taxes on building ..520 Unit cost = $215..................... 11................80 1..80 at 1..... (20 min..000 Total costs for 1.520 = $116.........100 x 1......... 5/e ..........000 units 1..500 Total fixed costs.............4) .........000 units: Unit variable cost = $35..4)...... 31....200 + $66.....100 Indirect materials and supplies ($8.........800 = $116.2–24........400 units .......... Variable costs: Direct materials used ($35....280 Direct labor ($66. $ 49...4) ..............400 units Check to see if variable cost per unit is the same at 1......94 Unit variable cost = $163.100 = $116.. 1997 26 Cost Accounting.........) Cost behavior for decision making: Excalabur Company.....200 x 1..................................... 93.. 9....000 1...............000 + $7...........................500 + $8....520 1...........000 © The McGraw-Hill Companies.... 9................................. 6..... 4.200 Power to run plant equipment ($7...500 x 1........... Inc......... 52..................... $163.....400 units as at 1.............000 x 1..520 Fixed costs: Supervisory salaries ...4)...400 units = $153..... $215.

Fixed costs = $52..000 = $31. Inc.100 + $9.000 Fixed costs Volume Variable costs = $116.800 + $6.500 $ 52.400 units) or ($116. Chapter 2 27 . 1997 Solutions Manual.800 ÷ 1.520 116.600 + $4.500 Fixed cost = $52.600 + $4.520 ÷ 1.000 units) $ Variable Costs 163.000 = $31.80 per unit = ($163.800 + $6.800 1000 1400 2000 Volume © The McGraw-Hill Companies.100 + $9. (20 min.) Cost behavior: Excalabur Company.2–25.

b. 5/e .2–26.200 units) a. 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.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..200 units) = $324 © The McGraw-Hill Companies.000/1. Inc.200 units) = $268 Full cost: $120 + $70 + $18 + $16 + ($72. (30 min.000/1.000 ÷ 1.) Components of full costs.000/1.

1997 Solutions Manual.000/1.000 + ($16 x 1. Product cost per unit: $120 + $70 + $18 + ($72. Chapter 2 29 .200 units) = $268 b.2–27. Inc. a.200 © The McGraw-Hill Companies. (15 min.) Components of full costs.200 units) = $67.. Period costs for the period: $48.

000 units) + ($65.000/1.000 units) = $500 4. Full-absorption cost: $175 + $150 + $100 + ($75. Full cost: $175 + $150 + $100 + ($75.000 units) + $40 = $605 © The McGraw-Hill Companies.000 units) Unit variable cost = $465 Variable marketing and administrative = $40 Variable marketing and administrative = $40 Fixed marketing and administrative = $65 ($65.000/1.2–28. (30 min. Inc. Variable cost: $175 + $150 + $100 + $40 = $465 3. 1997 30 Cost Accounting.000 ÷ 1.) Components of full cost: Young Company.000 ÷ 1.000 units) 1. 5/e . a.000/1. 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.. Variable manufacturing cost: $175 + $150 + $100 = $425 2.

Inc. 1997 Solutions Manual.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.2–28. (continued) b. 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 32 Cost Accounting.) $20 + ($55. (20 min..2–29. Variable costs for month + (Fixed costs for the month/hours) = Cost per unit (a unit is an hour billed.75 b. 5/e . Inc.) Components of full costs: Service organizations: Joe’s Tax Service a.75 = $12.25 2.000/20. Price per hour – Variable costs per hour = Contribution margin $35 – $20 = $15 © The McGraw-Hill Companies. 1. Price per hour – Cost per unit = Profit margin $35 – $22.000 hours) = $22.

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.000 20. 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. and other store costs* Operating income/(loss) Valueadded activities $200.000 10. Chapter 2 33 .2–30. Inc. (30 min. 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.000 110. b.000 20.000 8.000 *A portion of these costs might be nonvalue-added if they can be reduced by reducing nonvalue-added activities.000) 90.) Value income statement: Top Videos a.000 2. In addition.000 110.000 80.000 Total $200.000 (10. utilities.000 8.000) 32.000 40.000 $(20.000 $ 30. 1997 Solutions Manual.000 $ 10.000 $ 10.000 10..

© The McGraw-Hill Companies.000 2.000 34.000 3. (30 min.000 91.000 $ 3.000 12.000 Total $130. b..000 16.000 1.000 34.000 *A portion of these costs might be nonvalue-added if they can be reduced by reducing nonvalue-added activities. The chef can also inspect the prepared food before taking it to the customer to reduce the number of returned meals.2–31.000 $ 18. 5/e .200 16.) Value income statement: Atul’s Restaurant a. Inc.000) 96. The restaurant manager can buy better quality goods from suppliers to prevent food waste in the kitchen.800) 51. 1997 34 Cost Accounting.000 9. utilities.800 $(15.000 10.000 2. 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.800 60.000 (5. and other store costs* Operating income/(loss) $130.000 $ 3.

000 17. © The McGraw-Hill Companies. 1997 Solutions Manual.000 38.000 9.2–32.) Value income statement: Tastee Ice Cream Shop a.000 $(9.400 8.400) 6. The ice cream shop manager should consider purchasing a backup generator for future power outages—especially if these outages are common.000 *A portion of these costs might be nonvalue-added if they can be reduced by reducing nonvalue-added activities.000 12.000 22.000 2.400 Total $60..600 42. b. (30 min.400 (4. utilities. 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. and other store costs* Operating income/(loss) 4.000 9.000 3. Inc.400) Valueadded activities $60.000 9. Chapter 2 35 .000 $18.000 $ 9.

500 (from a above) + $15. The answer is (1).Solutions to Problems 2–33. Conversion costs = direct labor + manufacturing overhead Conversion costs = $15. Cost of Cost of Beginning Ending finished goods = goods + finished goods – goods sold manufactured inventory inventory = $59. Prime costs = direct materials + direct labor Direct materials = beginning inventory + purchases – ending inventory = $9.000 +$20. Cost of goods manufactured = beginning WIP + total manufacturing costs – ending WIP = beginning WIP + direct materials + direct labor + manufacturing overhead – ending WIP = $4.500 (from c above) – $3.500 – $18.) Cost concepts: Multiple choice.000 + $21.000 = $54. The answer is (2). Inc.500 + $15..500 Direct labor is given as $15. 5/e .000 + $20.000 = $59.500 d.000 e.000 – $3.000 (from d above) + $13. Total manufacturing costs = direct materials + direct labor + manufacturing overhead = $22.000 – $7.500 © The McGraw-Hill Companies.000 = $37.000 = $57.500 + $15.500 = $22.000 = $4. The answer is (4).500 + $57. a.000 + $20. 1997 36 Cost Accounting.500 b. The answer is (3).500 + $22.000 Prime costs = $22. (30 min.000 c. The answer is (1).000 = $35.

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

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

Direct Direct Total + + Manufacturing = materials used labor overhead manufacturing costs Direct + $173. Materials beginning + Purchases – Materials = Materials inventory used ending inventory $45.000 + Direct materials used.000 + $15.000 = $12.000) d.000) materials used c. 1997 Solutions Manual.400 – $234.600 © The McGraw-Hill Companies.400 = Finished goods ending inventory b. Finished goods Cost of goods Cost of Finished goods + – = beginning inventory manufactured goods sold ending inventory $254. Chapter 2 39 . Direct materials used = $266.200 – $760.600 + $262..000 = $20.600a (= $679.600 materials used Direct = $266.000 – $240.400 (= $12.000 = $679.600 – $173.000 + $240.400 Purchases = $19.400 – $8. Materials Materials Materials + Purchases – = beginning inventory used ending inventory $8.200 + $679.000 + $248. a.) Find the unknown account balances.200 = Materials ending inventory $ 59.200 = Materials ending inventory aAlso can be found from the Direct Materials Inventory account: $24.000 = Finished goods ending inventory $173.2–35. Inc.000 + Purchases – $15. (40 min.

600) labor © The McGraw-Hill Companies.526.800 + $1.526. Revenue – Cost of goods sold = Gross margin $3.800 – $234.300 (= $3.600 = $1. 5/e . Direct materials Direct Manufacturing Total + + = used labor overhead manufacturing costs $234.874.220) beginning inventory f.200 + Direct + $430.526. Inc.000 (= $1.620 (= $85..200 – $1.900 – Cost of goods sold = $1.359.900 – $1.220 = $85.518. (continued) e. 1997 40 Cost Accounting.600 Cost of goods sold = $1.800 – $1.600) g.800 labor Direct = $862.359.200 – $430.518.485. Work in process Total manufacturing Cost of goods Work in process + – = beginning inventory costs manufactured ending inventory Work in process + $1.874.526.200 beginning inventory Work in process = $76.2–35.

...... Cost of goods available for sale ...............800 60.600 Company 2 $12. December 31 .................... Manufacturing overhead ...... Cost of goods sold..000 679............ January 1.... Total manufacturing costs......800 4........) Some instructors require Statements of Cost of Goods Sold which we include here: Company 1 Work in process...600 691......600 Less materials inventory...400 $266...000 19......600 Direct materials purchased ........................................ 286.... Add finished goods....000 $15....... Total costs of work in process during the year ........ (continued) (Extra items...............200 Note: Superscript letters cross-reference to missing amounts in the problem..2–35................000 23.000 2..................... 41 © The McGraw-Hill Companies..... Inc........... January 1....000 679.560 12......................400(c) 27..........600 $56.................000 Direct materials available for use ....... 20... 262................. January 1 ..200 19........................ $ 24...................000 70...........000 240..................................... Less work in process........ Manufacturing costs: Direct materials: Direct materials inventory........ December 31........000 Materials used .......560 $ 8. $ 11.560 58..................400 12.400 173....600(b) 173.800 58..200 12.... Direct labor . Cost of goods manufactured this year .......200 933.200 254... 1997 . Less finished goods...... December 31 .....400(a) $760................

...........200 Direct labor ...... December 31 ............200(d) Materials used ................603...... 367.......... 1.................. 1............................. $ 76..........852..420 Less work in process................. December 31.485....................480 Cost of goods available for sale .... $ 45. January 1 ..................700 Less finished goods............... 248.......... December 31 .....400 Less materials inventory... $234........... 862.....400 Cost of goods sold.................... $1..................200 Cost of goods manufactured this year ...... Inc...................................... January 1...........518...........2–35................. 1... 1...... 334......300 (f) © The McGraw-Hill Companies...... 430...) Company 3 Work in process...... January 1.....400 Direct materials available for use ..... 59.. 1997 42 ................000 Direct materials purchased ........ 85.... 293...000(g) Manufacturing overhead ....620 (e) Manufacturing costs: Direct materials: Direct materials inventory.526..220 Add finished goods..800 Total costs of work in process during the year .....600 Total manufacturing costs................ (concluded) (Extra items...............................................

600 – $16.380 (= $4.100 – $15.300) beginning inventory b. Sales revenues – Cost of goods sold = Gross margin $103.550 – = $ 3.220 – $27.200 = $4.2–36. Work in progress + Total Work in – Cost of goods = beginning inventory manufacturing manufactured process ending costs inventory Cost of goods $2.550 – $3.400 beginning inventory Finished goods = $ 4.600 beginning inventory Materials = $ 2. Inc.250 = Gross margin d.) Find the unknown account balances.800) c. a.100 + $15. Chapter 2 43 ..300 – $56. Finished goods Cost of goods Cost of Finished goods + – = beginning inventory manufactured goods sold ending inventory Finished goods + $27. Materials + Purchases – Materials = Materials beginning inventory used ending inventory Materials + $16.700 + $55.200) beginning inventory © The McGraw-Hill Companies.800 (= $3.050 = Gross margin $47.220 + $27. (40 min.450 manufactured (= $2.800 manufactured Cost of goods = $54.400 – $27.300 = $3.700 + $55. 1997 Solutions Manual.

.100 Total + Manufacturing = overhead manufacturing costs + $124.800 – $7. Inc.200) materials used f. Sales revenue – Cost of goods sold = Gross margin Sales revenue – $27.600 © The McGraw-Hill Companies.100 overhead Manufacturing = $117. Bal.200 = $16.200 = $23.900 Mat.300 overhead Direct labor aAlso found from Direct Materials Inventory account: Beg. used = $12. Used + End. + Purchases = Mat.600 materials used Direct = $12. (continued) Direct labor Total + Manufacturing = manufacturing overhead costs Direct + materials used Direct + $ 3.400 + $27. 1997 . Bal. $3.000 = Mat.500 + $12. e.200) g.600a (= $23.600 (= $16.400 Sales revenue = $43.600 – $3.700 + Manufacturing = $308.800a + $7. Direct + materials used $66. used + $2.2–36.

...........................350 300 $56................700 Company 2 $ 6.............900 $12...........200 45 © The McGraw-Hill Companies. January 1........ $ 2..600 4..... January 1 .....250 3......600 30........200 55.......................100 27...450 Manufacturing overhead ...720 $ 3.................. 3...320 3. Less finished goods........000 15...900 Less materials inventory...... December 31.......550 58... December 31 ....500 2.......400 $27..300 Direct labor ......800 Total manufacturing costs.....2–36...... 13....... 15........ (continued) (Extra items...050 23.450(b) 1.... 16....800 54.) Some instructors assign the Cost of Goods Sold Statements.............. Add finished goods... Here they are: Company 1 Work in process......... Inc..... $ 2..600 Materials used .. Manufacturing costs: Direct materials: Direct materials inventory. Cost of goods manufactured this year ..100 Direct materials available for use ........ 18....................500 12......600(e) 3. 26... December 31 .............................380(d) 31........220 4. Cost of goods available for sale ..... January 1....... Total costs of work in process during the year ...........800(a) Direct materials purchased . Cost of goods sold......800 7.......... Less work in process.........900 56... 1997 ............

...770 17.................... January 1 .................................. Less work in process... December 31... Direct materials available for use ........570 © The McGraw-Hill Companies..... Inc..................................700 117..........200 80.500 76................. January 1........400 $16.... Materials used .400 $302..2–36...200 14........100 390... Direct materials purchased ...........100 $ 66.. Direct labor .... January 1..................000 64................................................................. Manufacturing overhead .......... $ 82.... Add finished goods...... Cost of goods sold..200 330..... Total manufacturing costs............. December 31 ................) Company 3 Work in process........... Less finished goods. (concluded) (Extra item.................970 28.... Cost of goods manufactured this year .............100 124.................................... 1997 ........... Manufacturing costs: Direct materials: Direct materials inventory.. December 31 ..... Cost of goods available for sale .................. Total costs of work in process during the year ..... Less materials inventory........................................730 313.........300(g) 308.

.. Total cost of work in process during the year............................ Less finished goods..150 495........ Bal...2–37......... January 1............. 1997 Solutions Manual. 31.......... January 1............850 40...500 Taxes on manufacturing property ... Chapter 2 47 . 42...... 9....... Bal.. Less work in process.............. Used + End..............000 Plant heat. Cost of goods sold (to income statement)..................850 45... + Purchases = Mat........... 15......... Used + End........ Cost of goods available for sale ......... Manufacturing costs: Direct materials: Direct materials inventory.......... Manufacturing overhead: Indirect labor ..........600 Building depreciation........... 180.....850 used is given.... January 1 ... but this number is not.500 = 7/9 times $40......... aMaterials $ 12. December 31 ... = Mat.950 $191. Bal..550 = $191..... Cost of goods manufactured this year . 6........ 16.................... Beg. December 31.... Add finished goods.000 Direct materials available for use ..050 Insurance on factory equipment.............. $ 53..................500 © The McGraw-Hill Companies..........000 b $31.................... Total manufacturing costs........................... – Purchases $53.....200 508.......... To obtain it.........300 495.....000 104....... (30 min... Direct labor. 233.. Beg.......950 Maintenance on factory machines ..550 Less materials inventory. Inc.050 + 42.550 Total overhead ....500b Miscellaneous factory expenses .......150 12........ 18.....500 – $180.......050 200....... 6............ December 31 .... Bal.......... Garcia Mesa Company Statement of Cost of Goods Sold For the Year Ended December 31 Work in process......) Reconstruct financial statements: Garcia Mesa Company.000 $490......... light and power..........000 535..............................500 Materials used .........550a Direct materials purchased ..

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

000 lower 0 117...... Next year’s income statement: Baseline (Status Quo) Revenue . 0 Operating profit (before taxes) . (150......000) $ (475. 0 Variable ...............000) Equipment depreciation ..000) Fixed (cash expenditures) ........... $1.........000) Loss from equipment write-off ...........600..........000 higher 230...000) 0 (750.......000) Other depreciation . 1997 Solutions Manual.. Despite the effect on next year’s income statement.000) Equipment depreciation .. b........000 Operating costs: Equipment rental ...........600..........) Analyze the impact of a decision on income statements: Micro....000 aEquipment Rent Equipment $1..........000 Operating costs: Variable ......... (200...... (200..000 lower write-off = $1 million cost – $150...... (150......... the company should not rent the new machine because net cash inflow as a result of installing the new machine ($160...........500 lower 150......... (30 min...... Inc.... a......600...000 + $37..............500) 0 (125...... (125...000) 0 (125...... Chapter 2 49 ........000) Other depreciation ..000 accumulated depreciation for one year (equipment was purchased on January 1 of the year)... This year’s income statement: Baseline (Status Quo) Revenue ...000 Difference 0 (200......000) $850........000) 0 (150...........500 Difference $160.. (750..000) (200.......... (125.. Inc.000 lower (850......... © The McGraw-Hill Companies.. $1...000 higher 0 37....000) 0 a $850..................... (750.............2–38.................. $375........000) Fixed cash expenditures.500 higher c..........760........................ $ 375.000 (230.000 Rent Equipment $1........500) does not cover cash outflow for equipment rental..000) Operating profit .......................000) $492...............000) (712...

.

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

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

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

$236.4 million = EB EB = $157.000 = $400.000 (see item 5) b.000 BB + TI – TO = EB $150.000 3–19. $150.. BB + TI – TO = EB 0 + $394 million – $236.000 – X = $125.Solutions to Exercises 3–18. $394 million = $104 million + $164 million + (.000 + $10. $410.7 x $180 million) b.000 + $410. Inc.) Basic cost flow model: Boeing Company a.6 x $394 million c. (20 min. $125.000 + $410. $435.000 (see items 2 & 3) c.000 – $125. (20 min.6 million © The McGraw-Hill Companies.4 million = .) Basic cost flow model: Singh Company a.000 (see item 5) d. 1997 54 Cost Accounting. 5/e .000 X = $150.000 X = $435.

000 – 3–21.000 = $154.000 X = $168.000 – $38.000 – $320.000 b.000 X X X = $320. (20 min.600 X = $49.) Basic cost flow model. Chapter 3 55 .400 X = $12. (20 min.000 + $220.) Basic cost flow model.000 – © The McGraw-Hill Companies.000 c.000 – $71.000 – $190.000 X = $62.000 – $152.000 = $616. Based on the basic formula: BB + TI – TO = EB a.000 + $128. $170.600 – $56.000 + $700.800 + X – $176. (20 min. $34.800 + $176.000 b. $71. 1997 Solutions Manual. Inc. $78.000 – 3–22.3–20.000 = $62.000 + $700. $390.400 – $14.000 – $256. Based on the basic formula: BB + TI – TO = EB a.200 + $44.000 = $12. $136.000 = X X = $112. $14.000 + X – $220.000 = $78.000 + $560.000 X = $42.000 = X X = $28. Based on the basic formula: BB + TI – TO = EB a.000 c.000 = $312.000 c..000 = $390.000 = $770.) Basic cost flow model.000 + $560.000 + $140.000 + $160.000 X = $211.000 + $140. $312.200 X X X = $64.000 = $49.000 – $64.800 X X X = $256. $56.200 + X – $44.000 + $32.000 = X X = $140.000 b.

150 f.000 + $10.500 = $3. = – = = EB $10.000 $ 5. 5/e .500 + $3.300 d.300 – $41.850 TIOverhead + $4.500 + $29.200 + $29. Materials are transferred from Direct Materials Inventory to Work in Process Inventory: $10..750 – $9.000 – $10.300 = $4. BB + TI – TO = EB $23. Cost of goods charged to Cost of Goods Sold comes from Finished Goods: $41. Goods are transferred from Work in Process to Finished Goods: $29.) Basic cost flow model: Tower Designs.500 © The McGraw-Hill Companies.000 = EB EB = $11.3–23.000 e. BB + TIMat’ls + TI Labor + TIOverhead – TO = EB $3. BB + TI – TO BB + $9. c. Inc.500 + $8.250 a. (20 min. 1997 56 Cost Accounting.000 BB BB b.300 TIOverhead = $12.750 $10.500.850 – $3.500 – $8.500 + TIOverhead – $29.

500 = $11.550 TIOverhead = $14. a.000 e.000 BB = $15.500 + $25.000 + $31. BB + TI – TO = EB $69.750 b.250 BB = $31.500 – $25. Chapter 3 57 .) Basic cost flow model: Bridal Wear Corp.500 © The McGraw-Hill Companies.250 – $27.900 – $123. Cost of goods charged to Cost of Goods Sold comes from Finished Goods: $123.500 + $11. Materials are transferred from Direct Materials Inventory to Work in Process Inventory: $31. BB + TIMat’ls + TILabor + TIOverhead – TO = EB $9.900 = $14.500 + $87. (20 min.000 – $31. BB + TI – TO = EB BB + $27.900 d.500.3–24.. Goods are transferred from Work in Process to Finished Goods: $87.000 = EB EB = $34. c.500 + TIOverhead – $87.900 TIOverhead = $36.450 f. Inc.550 – $9. 1997 Solutions Manual.600 + $87.000 – $31.

.. 1997 58 Cost Accounting...........000 = $120............000 = $600....000 x 75% 8$10.......3–25.000 x 30% 9$15..... Inc.............000 2$20.250 = $200..750) 1$40..000 Curly $20.0003 66..000 x 55% 7$8....0001 Cost of goods sold .000 15.000 10..000 = $200..000 x 5% 6$66...0002 36.0005 (6.... (20 minutes) Customer Costing: Powertools....000 x 20% = $200..500 = $105....000 = $360.5008 $ 3.... (20 minutes) Customer Costing: Custom Trailers Inc... 234................. $ 47.000 x 10% 9$15...$ 40..0006 74....0003 90...$360.000 15...........0004 Gross margin ....250 = $600.... (8......000 = $120.500) UTrail $210.......750 = $35...000 x 25% 8$10...250 1$360.000 x 35% 4$234...... Trail Rite Sales revenue . 78.000 x 15% © The McGraw-Hill Companies.....000 x 60% = $600........... 126.7509 $ 58.. 5/e .000 x 65% 5$36......... Larry Sales revenue ...000 = $360.....000 x 70% 4$48.750 = $35......000 x 40% 5$6...000 x 25% 7$78........000) 10. 8.500 Moe $140. $(16.000 2$30..000 = $360.......7509 $104..000 M&A costs..000 Trail Ways $30......750 = $105....0004 Gross margin ..000 = $120.000 x 5% 3$210..000) M&A costs..5008 $(16.......0002 6......000 x 45% 3–26................0001 Cost of goods sold .... 48.000 x 10% 6$90..000 x 10% 3$140...0006 120.......750 = $105...7507 Operating profit . Inc.....7507 Operating profit ...0005 14.....500 = $35....

.....................200 25...........000 16. 94....... (20 min.................................................. 25.... Journal entries: Cost of Goods Sold ............................................................ Inc.... Cost of Goods Sold ................. (20 min....................... Cost of Goods Sold...........000 Accounts Payable ...000 Cash .................000 Accounts Payable ............................ Work in Process Inventory ......... Inc............................................ 48...............................000 Accounts Payable .... Cost of Goods Sold .......................................... 14. Cost of Goods Sold..........200 © The McGraw-Hill Companies............. 1997 Solutions Manual............. Work in Process Inventory ... Journal entries: Cost of Goods Sold ..................000 3.. Chapter 3 59 .........................000 12.............. 3.000 44...........) Backflush costing: Interplay Systems....... Wages Payable. 8... Wages Payable.....160 3–28..000 20...........................3–27..........................160 14......................................... Manufacturing Overhead Applied ......000 50...............000 8.......................... Inc.....) Backflush costing: Carson Biotech........................................

H.840 Cash 16.000 Cash 16.3–29. Inc.000 Cost of Goods Sold 62. O.000 Backflush Costing Accounts Payable 14.000 Materials Inventory 14.000 48.000 3. 5/e .H.. Traditional Sequential Costing Accounts Payable 14.840 Cost of Goods Sold 58.000 Mfg.000 Wages Payable 12. O.160 3.840 Finished Goods Inventory 58.000 Mfg.) Comparing backflush and traditional costing: Carson Biotech. (30 min.000 14.160 58.160 © The McGraw-Hill Companies.160 Work in Process Inventory 3. Applied 20.000 3.000 Wages Payable 12. Inc.840 58.000 Work in Process Inventory 14. 1997 60 Cost Accounting. Applied 20.

000 8. Chapter 3 61 .000 110.3–30.000 8.200 8.200 Cost of Goods Sold 119. Traditional Sequential Costing Accounts Payable 25.000 44. Inc.) Comparing backflush and traditional costing: Interplay Systems.200 © The McGraw-Hill Companies.000 Wages Payable 44..200 Finished Goods Inventory 110.000 25.000 50.800 Cost of Goods Sold 110. 1997 Solutions Manual.800 50. (30 min.000 50.800 110.000 Work in Process Inventory 25.000 Wages Payable 44. Inc.000 Materials Inventory 25.000 Work in Process Inventory 8.800 Backflush Costing Accounts Payable 25.

The first question should be “are there any strategic implications if we drop Trail Ways as a customer?” (i. the marketing manager should consider whether revenues can be increased and/or cost decreased to make this customer profitable. 3–32. Then.1%) is well below UTrail’s profit margin percentage (49. should look at Trail Ways carefully given that Trail Ways is not a profitable customer.Solutions to Problems 3–31. The first question should be “are there any strategic implications if we drop Larry as a customer?” (i. Trail Ways’ profit margin percentage (13. Inc. Powertools may decide to focus on increasing sales to Moe given his relatively high profit margin percentage. Then. Although Curly and Moe are both profitable.5%) is well below Moe’s profit margin percentage (41. the marketing manager should consider whether revenues can be increased and/or costs decreased to make this customer profitable. 1997 62 Cost Accounting.e.6%). Although Trail Rite and UTrail are both profitable. The marketing manager for Powertools Inc. © The McGraw-Hill Companies. will he be profitable in the future? Is his company growing?).e.6%). may decide to focus on increasing sales to UTrail given their relatively high profit margin. will they be profitable in the future? Is the company growing?).. 5/e . should look at Larry carefully given that Larry is not a profitable customer. Curly’s profit margin percentage (17. The marketing manager for Custom Trailers Inc. Custom Trailers Inc.

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

1997 64 Cost Accounting.000 Finished Goods Inventory 225.000 225. Inc.000 Backflush Costing Accounts Payable 100.000 25.000 Cost of Goods Sold 250.000 Cost of Goods Sold 175. Traditional Costing Accounts Payable 100.000 50..000 25. Inc.000 Wages Payable 150.000 175.000 © The McGraw-Hill Companies.3–34.000 75.000 Work in Process Inventory 250.000 Work in Process Inventory 25.000 Wages Payable 150. (30 min.) Comparing backflush and traditional costing: Creative Designers.000 50. 5/e .000 Finished Goods Inventory 50.

. Chapter 3 65 . Companies with computerized inventory systems are more likely to log in an order at the point of sale. © The McGraw-Hill Companies. Answers will vary. Students should not assume a retail store uses justin-time in a literal sense. 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). 1997 Solutions Manual.3–35.

000 = $10.000 To: Meter Ass y 210.000 c from Meter 1.591. 1997 .731.040.000 c $210.731.000 WIP Case Assembly materials 40.000 Case Ass y 40.000 materials labor overhead WIP Meter Assembly 210.125.000 $40.000 Testing 90.250 $0 to Finished Goods 1.250 Overhead Applied Meter Ass y 840.250 e from Testing to Case Assembly 1.000 $260.000 b from Meter 1.000 labor 90.000 Testing 10.125.000 83.250 $0 to Cost of Goods Sold 1.000 labor 350.731.000 Case Ass y 350.000 a$840. T-accounts a. Traditional cost system: Accounts Payable Materials 260.000 x $1.000 a $125.000 overhead 160.250 $0 Wages Payable Meter Ass y 200.000 d Finished Goods 1.. (45 min.750 Cost of Goods Sold from Finished Goods 1.731.000 b$160.000 b Testing 40. e$95% of WIP Case Assembly costs were transferred out.250 to Testing 1.591.3–36.000 $260.000 x $1.040.) Compare backflush and traditional cost flows: River City Quality Instruments.000 $260.000 a Case Ass y 160.000 = 66 © The McGraw-Hill Companies. c$40.000 = x $1.000 840.000 Materials Inventory purchase 260.000 200.040. Inc.000 d$90% of WIP Meter Assembly costs were transferred out.000 WIP Testing materials 10.000 overhead 40.

Backflush system: Accounts Payable Materials to COGS 260.750 a10% b5% of Meter s costs are still in inventory. of Case s costs are still in inventory. (continued) T-accounts b.000 a $83.040.000 125.750 b Wages Payable to COGS 640. Inc.040. 1997 Solutions Manual.000 Overhead WIP Meter Assembly from COGS 125.750 83. © The McGraw-Hill Companies.000 Materials 640.000 Cost of Goods Sold 260.. Chapter 3 67 .000 Labor Overhead 1.000 1.000 Applied to COGS WIP Case Assembly from COGS 83.3–36.000 to Meter to Case 125.

30) © The McGraw-Hill Companies. Inc.3–37.20 + $.200 4.200 WIP: Packaging 2.600 Cost of Goods Sold 51.600 Conversion Costs 21.000 x ($1.600 b (Packaging) a $4.80) = 1. 1997 68 Cost Accounting. a. Backflush costing Accounts Payable or Cash 29.30 + $.80 + $.200 b $2.000 x ($1.200 a (Culturing) 2. 5/e . (30 min.600 = 2.30 + $.000 4.400 WIP: Culturing 4.600 2..) Compare backflush and traditional cost flows: Davis Agriproducts Inc.

600 44.600 29..600 e Conv. Inc.000 units.400 Finished Goods Inventory 44.30 for conversion costs x 18.30).30 + $.400 f 2. Costs 5.000 c 37.200 Cost of Goods Sold 44. d $16. e $3.600 Materials 26.400 = $.000 = $1.80 for conversion costs). Costs 16.200 0 44. f $5.80 + $.600 WIP: Culturing WIP: Packaging 37.600 = $.000 units x ($1. c $26.200 = 18. = 17.000 units. 69 © The McGraw-Hill Companies.3–37. (continued) b.800 b $44.20 for materials x 18.20 + $.800 Materials 3.200 a $37.000 units. 1997 . Traditional costing Accounts Payable or Cash 29.000 = $.800 a Conv.30 for materials x 20.30 for materials + $.200 b Conversion Costs 21.000 units.200 Materials Inventory 29.000 units x ($1.000 d 4.80 for conversion costs x 20.

..... The company should look closely at three customers—Davis Agriproducts (loss of $2........................ Totals .............000 $95.. if salaried supervisors’ costs are allocated to each client.000 (2.........500 $389. and thus.........000 Sierra University .500 $484..... 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. The labor costs allocated to each client is straightforward assuming these labor costs are strictly variable costs within the relevant range....500 Costs $91. .....000).......000) 3... Ott Investment Advisers . American River Restaurant .... Given Brown and Associates’ significant loss.500 Operating Income $39..... Quality Lawn Care should also consider dropping Brown and Associates as a client.000 90.000 (16. However........ 1.........000 40.. American River Restaurant (negligible income of $3. 5/e ....000 38...............000 92. 2.... Davis Agriproducts Inc.... 1997 70 Cost Accounting.............. 3....000 186.............000 54.........000)..3–38.......... Customer Costing: Quality Lawn Care Inc.... there is the potential for arbitrary allocations..000 115........... If no other strategic factors are involved (for example. inaccurate labor costs for each customer.... Brown is not expected to grow or provide references for other significant profitable business). Brown and Associates ..............000) 71.. Revenues $130....000 37....000). © The McGraw-Hill Companies...... and Brown and Associates (loss of $18.......... Inc.... It is also difficult to allocate equipment costs to each project given the difficulty of tracking equipment use by each customer..

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

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

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

Ind. 1997 Cost Accounting. Payroll Payable 6..500 T-account 30.000 + $7. 3.500 *$26.675 Balance 1/1 5.000 26.500 Per Finished Goods 12.125 8. Accounts Payable 10. Materials Inventory 18.000 10. Overhead applied Balance 1/31 2.250 Manufacturing Overhead Applied 8.000 – $500 – $8. 7.525 + $10. 15.525 = $18.500 74 © The McGraw-Hill Companies.000 13.4–16. 9. Direct labor 8.000 7.075 15. Direct materials 6.000 5. 10. 7.) Assigning costs to jobs: Apex.625 4. Direct materials 7.. Inc.625 10.250 6.525* Balance 1/1 1. Balance 1/31 500 8.500 Work in Process 4. Actual Manufacturing Overhead 500 13.000 1. materials 10.525 2. 3. Cash 4. (15 min. Inc. 5/e .250 12.

925 Balance 1/31 © The McGraw-Hill Companies.900 – $20. 1997 Solutions Manual..900 6.075* 17.750 Transfer to Cost of Goods Sold 30. Chapter 4 75 . (continued) Accumulated Depreciation— Property.4–16.925 + $17.250 Balance 1/1 Goods completed Balance 1/31 32.075 = $32.750 Cost of Goods Sold 32. Plant. Inc. and Equipment 9.925 *$30. Finished Goods 20.

000 = $200 (variance) f....000 + $5....000 11. $6....................000) – $12.. BB + TI – TO = EB EB = $4....000 c....000 ÷ $24 = 250 hours Manufacturing overhead applied ..000 Underapplied OH.. Sales . $6... 250 x $20= $5.......... $6. $8. Direct labor .....400 $ 6.... COGS . $12....... $24 per hour Direct labor hours .............) Assigning costs to jobs: Avian Company...... the debit addition to the Finished Goods Inventory account................................ 1997 Cost Accounting................. $18.. 3.400 + $6............. d......400 e......200 Operating profit..000 + ($6.... the credit side of the Materials Inventory account......000 Labor rate ................600 76 © The McGraw-Hill Companies..000 EB = $9........... a............. 5/e ........ $5......200 – $5. b.400.... 200 S&A costs .. (25 min. Inc............000...........4–17.......

............... bDirect cDirect © The McGraw-Hill Companies....... 165......4–18.............000 – ($220.000a Total manufacturing cost during the year ....... so direct labor was $220....000 (= $165.................... (10 min. Inc..000...........) Predetermined overhead rates: Kustom-Kraft..000]..... Direct material used . 220.........000b Manufacturing overhead applied ..000 Supporting Computations aManufacturing overhead applied: $165..... Inc.. 500. $115...... 1997 Solutions Manual...000) labor: 75% of direct labor equals $165....000 ÷ 75%) material used equals total manufacturing cost less direct labor and manufacturing overhead applied [$500.000) = $115.000 = 33% x total manufacturing cost (33% x $500..................000 + $165...............000c Direct labor .............. Chapter 4 77 .......

000) –60.000 Job 2: 30. $52. Factory overhead = 80% x $2. Application rate: Job 1: $20.) Predetermined overhead rates: Xavier Corp.000 = $.000 To solve for direct materials we set up the cost equation. Total cost $11.500 Job 3: 40.500 = $2.000 a. 75 is the only job in the account. (20 min. We can find the account’s ending balance using the basic cost equation: BB + TI – TO = EB EB = $ 5.55 = 22.. Inc.500 and that overhead is applied at a rate of 80% of direct labor cost.000 Direct materials Direct materials = = = = direct materials + direct labor + factory overhead direct materials + $2.000 $49.000 We are told that direct labor for Job No.000 EB = $11.500 manufacturing overhead variance 4–20.500 78 © The McGraw-Hill Companies. 75 is $2. the ending balance of the account must equal the total cost of the job. So.4–19.500 b.500 = $2.000 $11.55 per dollar of direct labor $80.000 + $20.55 = 16.000 – $49.000 $6.000 x .000 x $.55 = $11. (15 min. 5/e .000 + $16. 1997 Cost Accounting.500 + $2. $44.000 – $2.) Applying overhead using a predetermined rate: Paige Printing The answer is (3).500 – $2.000 + ($30. Since Job No.000 x .

..... Inc. 1......... (15 min.000 – $650.........) Calculating overhead variance: Owings Co.... Chapter 4 79 ....or overapplied overhead: Xavier Corp......... 250a Finished Goods Inventory... 2.500 x 25% c$1...500 x 10% 625 = $2.. 1997 Solutions Manual..625 = $2.. Calculation of manufacturing overhead variance: Manufacturing overhead applied .....000 hours = $660..... 625b Cost of Goods Sold....500 underapplied Proration of manufacturing overhead variance: Work in Process Inventory..000 overapplied 4–22... $49...000 Overhead variance = applied overhead – actual overhead = $660....... The answer is (1)....500 Manufacturing overhead actual ....... 52......000 Manufacturing overhead variance ..000 = $10...........4–21. 2.500 x 65% © The McGraw-Hill Companies. (15 min..........625c Manufacturing Overhead Variance ... Predetermined overhead rate = estimated overhead/estimated allocation base = $600..000 hours = $6 per hour Applied overhead = predetermined overhead rate x actual allocation base = $6 per hour x 110.) Prorate under.000/100...500 a$ b$ 250 = $2...........

260 Direct Applied Labor Overhead Total Z-14 .. Additional Direct Labor $1.120 applied – $4... 2.. Overhead applied during month: X-10 . 80 © The McGraw-Hill Companies.840 = $8.. (25 min. $1.920 Y-12 .400 – $4.... 1.....420 Total .920 $1.... $4..840* $1........ $1.... $2.000 Total $4.. 1997 Cost Accounting.260 Beginning Total X-10 ..240 – $1.000 actual = $120 overapplied.. $1.... 5/e .... $ 700 Y-12 .420 $4...260 b.260 *$2.000 c.4–23..120 Variance = $4.000 Additional Applied Overhead $700 $2...) Compute job costs for a service organization: Terne Corporation a.. Beginning of month Direct Applied Labor Overhead X-10 ... Inc.400 $4.000 Z-14 .280 $640 Y-12 .020 $7. $840 Each month $420 Total $1...

....... and $12 per hour x 1.000 Gross margin ... per hour x 600 hours for Client A. Applied 24.000 20...... 1997 Solutions Manual.... cSum of work done during September.... $ 36.400 hours for Client B...H..... 120..000b Service Overhead 20...... $280..000a Cost of services billed . and $70 per hour x 1...... Chapter 4 81 .H.000d 24..000c Wages Payable 140........ Variance 4.000 Operating profit ..000d per hour x 600 hours for Client A..) Job costing in a service organization: Ernest Peat & Co...000 a$280..400 hours for Client B....000c 24...000d a$70 b$12 Service O... (30 min..000b Service O.....4–24......... Ernest Peat & Co..... all billed to clients.....000 hours x $140 © The McGraw-Hill Companies. a.............. Cost of Services Billed 164....000 = 2.... Income Statement For the Month Ended September 30 Sales revenue .......000 actual) b. 4...... 164........... 84.000 applied – $20.......000 Marketing and administration......000a Work in Process 140.... Inc.......... dClosing entry to record overapplied overhead of $4............000 (= $24.000 Add: Overapplied service overhead........000a 164.............

all due to production volume. see T accounts below: Manufacturing Overhead 120. 1997 Cost Accounting.000 (given as actual = expected) Manufacturing Overhead Applied 124. is $4.00 per direct labor hour.000 direct labor hours expected. 31. If the overapplied overhead. then an extra 1. With $120. (25 min. Consequently.000.000 (= 30. 31. Also. we solve for actual hours worked: Actual hours worked = $124.. 5/e .000 direct labor hours were worked ($4. Inc. the application rate for the fixed costs was $4.000 + 1.Solutions to Problems 4–25.000 hours worked.000) direct labor hours were worked.000 direct labor hours were worked.000/$4 = 31.) Estimate hours worked from overhead data: Grault Co.000 in fixed costs expected and 30.000/$4 per hour). 82 © The McGraw-Hill Companies.000 (= $4 x Actual hours worked) From these accounts.

000.400.000 + $188. (e) $800. the charge to Work in Process that is not due to direct materials or direct labor.600 from the Cost of Goods account.200 (charged to Manufacturing Overhead) = $471. (b) $188.600 – $42.400.000 + $200.600 (from f).200 (from e) – $805.000 + $239. © The McGraw-Hill Companies.400 (charged to Manufacturing Overhead) = $48.600 – $19. (i) $6. $16.000..600 + $361. Chapter 4 83 .000 – $8. (40 min. From the Materials Inventory account. Inc.600 – $72. (f) $805.000 – $248.000 + $242.400 = $188.400 – $408.400 + $800. 1997 Solutions Manual. (h) $63.000 (c) $242.000. (d) $361.000 – $35.) Assigning costs—missing data.000 = $28. (g) $23. the other side of the credit to the Accounts Payable— Materials Suppliers account.200.4–26.000 = $324.200 = $44. (a) $200.200.

200 Balance 9/1 Purchases Balance 9/30 Direct materials Indirect materials Work-in-Process Inventory Balance 9/1 16.700 (a) 43.000 187.335 Finished Goods Inventory 64.500 7.500 1.200 28. (50 min.881 52.540 Balance 9/1 (d) Balance 9/30 (h) Proration Balance 9/30 (c) (h) Proration (a) (e) (f) (g) 84 © The McGraw-Hill Companies.100 (b) Direct labor 88.135 Balance 9/30 95.524 (Actual) Manufacturing Overhead 8..000 24.800 (a) 8. 5/e . 1997 Cost Accounting.200 13. Materials Inventory 22.200 (b) Overhead applied 132.240 Manufacturing Overhead Applied (b) 132.000 (h) 12.100 99.800 187.) Assigning costs—missing data.500 50.100 56.000 (d) Balance 9/30 92.300 (a) Direct materials 43.200 (h) Proration 3.4–27.381 Cost of Goods Sold 201.200 (c) 201. Inc.

000 – $187.4–27.100 in direct materials issued.800 = EB + $14.700 + $56.500 + $201.500 – $64.000 (e) 13. 1997 Solutions Manual.200 © The McGraw-Hill Companies.200 minus the increase of $5.200 = $92.700.700 = 180% X X = $201. The beginning balance equals the ending balance of $28.700 (a) From the work in process account we obtain the $43.300 $64.000 = 150% X X = $88.300 EB = $50.500 Cost of goods manufactured = Finished goods EB + Cost of goods sold – Finished Goods BB = $50. (continued) Wages Payable (b) 88.000 Sales Revenue (c) 362.100 (debit to work in process) = $8.100 + $88.500 equals $22.200 (b) Let X = direct labor costs Overhead applied = 150% X $132. Inc.800 – $28.200 – $43.500 (d) Finished goods BB = Finished Goods EB + $14.000 + $132.200 Work in process EB = $16. Chapter 4 85 .800 = $187.300 + $43..000 (c) Let X = Cost of goods sold Sales = 180% X $362. The unaccounted balance represents indirect materials and is determined as: $22.

540) $ 3. 5/e .540) Cost of goods sold (60% x $12. (h) Proration to: Work-in-process (25% x $12.881 7.135 1. (g) Charge overhead to manufacturing overhead.4–27. Inc. (continued) (e) Indirect labor = Payroll – Direct labor = $101.524 $12..000 – $88.000 = $13. 1997 Cost Accounting.000 (f) Charge factory depreciation to manufacturing overhead.540 86 © The McGraw-Hill Companies.540) Finished goods (15% x $12.

.. The amount is clearly not material (0. $ 54...00 per hour. 17.000 in direct labor wages divided by 8. Chapter 4 87 .... 45. 8.4–28...00 x 2.... $ 6..) Analysis of overhead using a predetermined rate (multiple choice): Sparkle Corp.. (1) $18.......000 Indirect labor wages ..... (40 min.500 Supplies..00 x 3...00 x 8.000 Supervisory salaries ...000 Beginning balance....500 Factory equipment costs ..... c.500 f.....500 e...... 28...000 d.....500 hours = $28...60 per DLH b... (4) $10....500 a.000 = $10.....000 Direct materials .500 $9. 31. Inc. (2) $76... © The McGraw-Hill Companies.. 6. finished goods inventory....500** $158... (3) $158..000 direct labor hours = $18... then the proper answer would be (2).00 = $68... $8.000* Overhead applied ....... (2) $43..500 *The wage rate for direct labor is $8..000 $43. (5) Credit it to cost of goods sold.000 Direct labor ..60 per DLH 60...500 direct labor hours = $76..000 $9...500 direct labor hours... **$9...00 x 3...000.1% of cost of goods sold)... so it is not worth the effort involved in prorating.. 6.000 Factory facilities.... and cost of goods sold. prorate it between work in process inventory.500 direct labor hours).... ($8. If it were material.. $636.... 1997 Solutions Manual.....

500 (3) Beginning Finished Goods Inventory: Cost of Goods BB + = Cost of Goods Sold + EB Manufactured BB + $8.) Basic cost flow model: I.000 = $9.500 – $4. Dunce. a. + Direct Materials + Direct Labor + Used Incurred Overhead Cost of Goods Ending Work = + Manufactured in Process $1. WIP.000 = $3.4–29.000 = $9.000 (2) Cost of Goods Sold: Total Revenue – Gross Margin = Cost of Goods Sold $13.500 + $3.500 + Direct Materials Used + (375 x $5) + $750 = $8.875 + EB $775 = Ending Direct Materials Inventory 88 © The McGraw-Hill Companies.875 (5) Ending Direct Materials Inventory: BB + Purchases = Direct Materials Used + EB $1. (40 min.000 Direct Materials Used = $5. Inc.000 BB = $4.000 – $1.250 = $5. 1997 Cost Accounting. T-accounts follow these answers: (1) Marketing and Administrative Costs: Gross Margin – Operating Profit = Marketing and Administrative Costs $4. 5/e .400 + $5.000 + $2. M..500 (4) Direct Materials Used: Actual Beg.

000 Cost of Goods Sold 9.500 C.875 Cost of Direct labor 1.250 750 1.000 Goods Overhead 750 Manufactured EB 2.4–29.000 9.875 Used 775 Work in Process Inventory BB 1. Inc. 1997 89 . Overhead Direct Labor Marketing and Admin.875 8.000 89 © The McGraw-Hill Companies.G.400 5. EB BB EB Wages and Accounts Payable Purch.000 BB Purch.. 5. 3.500 Direct matl.250 5.500 8.875 3. (continued) Direct Materials Inventory 1.S.000 Finished Goods Inventory 4.500 Marketing and Administrative Costs 3. Manufacturing Overhead 750 750 5.

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

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

560 Dry Cleaning Direct Overhead Cost 500 125 250 200 3.) Cost accumulation. 1997 .. Salaries and Accounts Payable Dry Cleaning Direct Labor Cost 2.4–31. (30 min. T-accounts (Not required—see next page for income statement) Wages.000 (= $8 x 125) Repairs Direct Labor Cost 720 (= $8 x 90) Unassigned Labor Cost 200 (= $8 x 25) 92 © The McGraw-Hill Companies. service: White and Brite Dry Cleaners.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 (= $8 x 320) 2. Inc.

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

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

Labor ..500 $17......000 a $ 60.. a.. etc....4–32. $4.) Job costs..000/2....000 (= 300 x $80) $ 9..000 30... 95 © The McGraw-Hill Companies. (25 min..000........000 x $30...000 $35.....000.000 x $30.500 a Original John’s $40.....000 (= 500 x $80) $15. a$15...000 = 1.000 (= 500 x $30) $ 7.000 (= 1.000 (= 200 x $30) 3..... Margin . 1997 .. Inc.500 = 300/2..000 Sails Inc.000 $80. service: Wehelp Consultants..000 (= 300 x $30) $ 4. Overhead.. Nocando Revenue..500 $10..000 a $6...000 x $30) $15..000 (= 1......000 x $80) $30. $24..500 a Unassigned Costs (not required) Total $144.....

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

To complete Job A-15: $68 Direct Labor + ($68 x 150%) Applied Overhead = $170 . b.4–33. c.) Job costs in a service company: McHale Painters Inc. Chapter 4 97 . © The McGraw-Hill Companies. (50 min. Direct Materials + Direct Labor + Applied Overhead = $174 + $32 + $64 + $84 + [150% + ($64 + $84)] = $576 . Inc. Transfer to Finished Goods: Job A-15 Beginning Inventory Cost + Current Cost = $174 + $64 + 150%($64) + $170 = $504 . 1997 Solutions Manual.. 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 1.354 a.

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 . Inc. 5/e . *These letters refer to solution parts b and d above.. © The McGraw-Hill Companies. f. 1997 98 Cost Accounting. To complete Job A-38: $108 Materials + $200 Direct Labor + (150% x $200) Applied Overhead = $108 + $200 + $300 = $608 .4–33. (continued) d. 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 .

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

5/e .000 = $16.200 Accounts Payable 71.000 + $31. Inc.600 34. (continued) b.600 – $2.000 T-account (7) Direct Labor 50..200 – $115.000 – $34.600 (2) (7) (8) (10) (9) (3) (1) © The McGraw-Hill Companies.000 109. Work-in-Process Inventory Balance 1/1 16.000 71.4–34.100 2.000.600 71.200 Balance 1/31 74.000b b$74.400 (9) Overhead Applied 88. Actual Manufacturing Overhead 2.100.500 + $34.200 21.000 25.500 115.100 + $40.000 Manufacturing Overhead Applied 88. Balance 1/1 (1) Balance 1/31 a$109.700 Materials Inventory 74.700a (2) (4) = $74.200 43.400 + $88. 1997 100 Cost Accounting.100 Per Finished Goods (4) Direct Materials 34.000 + $50.

200 Payroll 56. (continued) Cash 71.000 43.000 115. 1997 Solutions Manual.100 Cost of Goods Sold = $131.000.000 (10) Finished Goods 83.600 38.000 Payroll Liabilities (Including Taxes) 18.100a 131. Inc.000 Administrative and Marketing Costs 8.000 28. Plant.000 84.400 – $83.700 Balance 1/31 © The McGraw-Hill Companies.700 + $66..000 28.400 Balance 1/1 Goods Completed Balance 1/31 a$115. Chapter 4 101 .4–34.700 66.400 (3) (5) (8) (5) (6) (7) (5) (6) (7) Accumulated Depreciation—Property. and Equipment 21. Cost of Goods Sold 131.

720 (1a) 9.990 2.110 = 13.750 460 (3a) (3b) (3c) Cost of Goods Sold 128. T accounts.) Cost flows through accounts: Leevies Pants Inc.. 1997 102 Cost Accounting.110 a 52.750 + $8.820 (4b) 1. 5/e .720 + $49.420 (2) 100.110 b Finished Goods Inventory 76.110 52.400 (4a) 8.000 (3) 6.220 Fixed Manufacturing Overhead* 10.820 © The McGraw-Hill Companies.000 (2a) 31.920 76.300 (1b) 9.700 (4c) a$76. (50 min.4–35. Direct Materials Inventory 13.400 = $9.300 + $31.110 128. Inc.240 + $2.990 + $10.760 (2c) Variable Manufacturing Overhead 2.110 b$52. a.000 + $2.240 (2b) 19.220 Wages Payable 49.400 (1c) Work-In-Process (1) 32.200 (4) 20.

© The McGraw-Hill Companies.4–35. Chapter 4 103 .000 = $31. Total Direct Labor Hours = $400.30 x $104. b.000 = 80.000.000. (continued) Total Direct Labor Costs = $400.000 = $72.800 Predetermined Fixed Overhead Rate = $72.39 per Direct Labor Hour.200 Predetermined Variable Overhead Rate = $31. 1997 Solutions Manual. Fixed Manufacturing Overhead = 0.000 = $0.91 per Direct Labor Hour. $5 per Hour Variable Manufacturing Overhead = 0. Inc..000 = $0.70 x $104.800 80.200 80.

420 (2) 100. one for “actual” and one for “applied. 5/e .760 (2c) Variable Manufacturing Overhead* (Actual) 6.596 (4c) 2.720 1.300 (1b) 9.200 (a) 1.” We put them in one account to save space.4–35.437 (3b) 1..918 (4a) 5.920 (Applied) 8.663 Finished Goods Inventory 75.123 Under.663 124.600 (Applied) 3.400 (1c) Work-In-Process (1) 32.or OverApplied Overhead 2.720 (b) *These can be divided into two accounts.800 (4) 18.720 (1a) 9.000 (3) 7. 1997 104 Cost Accounting. T accounts Direct Materials Inventory 13.600 (a) Fixed Manufacturing Overhead* (Actual) 20.200 75.460 48.541 (3c) (b) Cost of Goods Sold 124. Inc.822 (3a) 2.123 Wages Payable 49.240 (2b) 19. © The McGraw-Hill Companies. (continued) c.000 (2a) 31.460 48.686 (4b) 3.

..... (128.120) (11.877 (1... $ 11.......200) $ 3........................ 1997 Solutions Manual............. Chapter 4 105 ...... — Marketing and Administrative Costs .............................................200) Operating Profit (Loss).... (continued) Actual Full Absorption Costing Sales Revenue.........220) Gross Margin .000 Less Cost of Goods Sold ......... $140......................000 (124........4–35.... d....123) $ 15.... (11..557 © The McGraw-Hill Companies........ $ 580 Normal $140... Inc..780 Less: (Under-) Overapplied Overhead ..

........................................................................... 18.. 175................................................................ Overhead and advertising Overhead [$1................................. 6................ 100............. Accumulated Depreciation.......................... 1.700 175................ Billing Accounts receivable ............................000 Accounts receivable .............................700 Accounts payable .............000 1..........) Show flow of costs to jobs: Bright Equipment Co............. 4................ 1997 106 Cost Accounting....000 18.000 Sales revenue................ 25.. Cash .................... Indirect labor Manufacturing overhead—Indirect labor .........................350 + $640 + $400 + $650 + $900].................000 100.............................200 5..... 5..................................... (60 min............... 3........................4–36.......................................... Selling costs—Advertising................................ Materials and equipment inventory.........................340 900 © The McGraw-Hill Companies......... Indirect materials issued Overhead ................300 310 310 5..... 5/e ........................ 25........... Inc............ Cash...................................................................................................300 1................................100 + $1.......040 1.000 Accounts receivable ....................................... Payment received on account Cash.......... a............................................. Wages payable............ 2.................................... Inventory purchase Materials and equipment inventory ...................

........... 5................. 6......200] .................800 + $1......200 + $17........... Chapter 4 107 ...... Work in process—direct labor [$9...........000 6......... 40. Transfer of Job 51 Cost of installations completed and sold ..............000 Work in process—overhead applied [15% x $40....000 + $6.900 16...100 + $900]................ Work in process—overhead applied [15% x $109.090 109. 310 Entry 6 .200 10. Note: No finished goods inventory account is required.......... 40............ Overhead analysis: Applied (Entry 7)..........600 Work in process—direct labor [$1.....090 Materials inventory.................200].........600 7...... 1997 Solutions Manual......040 Underapplied ...........200 + $14..................................... Inc................ Charges to Work in Process Work in process—materials and equipment [$3....................... (continued) a........................4–36.................200]....... b..... 8......................... 7........... $1..090 6............. Overhead applied...........650 $ 560 © The McGraw-Hill Companies......380 $6........ (continued) 7...........600].... Incurred Entry 4 ................ 136...................700 + $1...................................200 + $3.200] .......300 Entry 5 ............................... Wages payable .000 + $14.....480 Work in process—materials and equipment [$95...

300 + $118.480 560 137.460 Cost of Goods Sold** 136.790 Work in Process Inventory Balance 9/1 162. © The McGraw-Hill Companies.040 40.950 **Not required.700 (5) Balance 9/30 25.250* Current charges (7) 53. 1997 108 Cost Accounting.600 310 (8) 136.690 Job 51 Balance 9/30 79. 5/e .4–36. Inventory balances Materials and Equipment Inventory Balance 9/1 48. (continued) c. Inc.000 (7) (2) 18..480 (8) Underapplied overhead Balance 9/30 *Job 46 + Job 51 = $43.

4–37." then solve for each item in the account as follows: Work-in-Process 86. Chapter 4 109 . ending + Cash payments – Accounts payable. This is a challenging problem..700a = $67.400* – $43. 1997 Solutions Manual. We put the work in process account on the board for the "big picture.300 –0– (a) Balance.700 ( c) Direct labor © The McGraw-Hill Companies.314 finished goods 67.400 = Payroll – Indirect labor = $82.314 *Purchases = Accounts payable.) Reconstruct missing data: Badomen Equipment Inc.600a = $66. beginning = $50.900a – $21.400a – $14.100a + $37.000a – $2.700 Disaster loss 33. (70 min.086b = $70. Inc.000a + $66.. beginning (b) Direct materials (c) Direct labor (e) Overhead applied Balance.200 Transferred to 70. ending 53. (a) Given (b) Direct materials = Beginning inventory + Purchases – Ending inventory – Indirect materials = $49.014 (f) The calculations are shown below. We usually present these using both T-accounts and the following formulas.500 (d) 204.

300 – $53. ending + Cost of goods sold – Finished goods. 1997 110 Cost Accounting.200a = $33.314 + $67. Inc. 5/e ..500 (e) Overhead applied = Ending manufacturing overhead – beginning manufacturing overhead + overapplied overhead = $217.500 = $204. beginning = $37.4–37.900a + $1. aGiven bGiven in problem in paper fragments © The McGraw-Hill Companies.600a) – $32.300 (f) Loss = $86.000a – $184.600a – $348.700 + $33. (continued) (d) Cost transferred to finished goods = Finished goods.500a + ($396.000a = $53.014 Note: The insurance company may dispute paying the $1.200a + $70.200 overapplied overhead.

000 direct labor hours Total variable overhead (1.000 Total variable overhead (1..52......150.52.000 = $15... 1............000 300....880................150..40 = $11..000) Total fixed overhead ..000 Total overhead rate = $30. We like to use it here to motivate overhead cost assignment for decision making and performance evaluation....248.000 hours The information above should be incorporated into a report to management... 1997 Solutions Manual.. © The McGraw-Hill Companies.40) .....000 x $15...... Calculate the cost and volume differentials to determine the variable overhead rate: $34...40 per direct labor hour Total overhead (Year 1).....380.252. This problem relates overhead allocation to decision making... (60 min... (21.. Inc.380................000 1........ 13.4–38....958............. $13..500.000 – $29......710..40) ..... 1. Fixed overhead rate = $26...... as well as here...000 Total fixed overhead ... $30...080.....248...958....000 = $4...620.. Chapter 4 111 ....000 Total overhead. fixed overhead rate = $13......... $17.. Also.....000 = $11.... $34....500...000 hrs......000 = $26.150.248..000 Total overhead costs at 1.) Deriving overhead rates: Premier Pasta Company.......92.000 – 1.....150....92 – $15...000 x $15......... It could be assigned in later chapters on decision making or budgeting..

40] = $30.150 hrs.380 *$29.958* 29.958. © The McGraw-Hill Companies.880 1.4–38.080 1. 1997 112 Cost Accounting. Inc. 5/e . we find it helpful to present the following graph of these relationships: (000 omitted) $34.880 + [(1..150 Direct labor hours 1. (continued) For presentation to students.500 ~$15. – 1.080 hrs) x $15.40 30.

102 3..600 4. Chapter 4 113 .000 Overhead Variance 4.000 12.000 6. 103 1.200 9.00010 2.800* Note: See footnotes on next page.600* M* L* O3 4/1 L1 O4 Job No.800 0 Wages Payable 32.000 0 Overhead Actual Applied 20.000* M5 L6 O7 Job No. Inc.000 6. 102 3.000 12.000 9.0009 M* L* O8 4/30 Job No.600 10.000 19.000 19.4–39.000 12.200 17.000 M L O Job No.200 9. 101 2.600 4.) Incomplete data—job costing: Paige Printing Inc.000 6. 1997 Solutions Manual.200 3.000* 16.400 5. 101 2.600 30.400 9.600 M* L O2 Cost of Goods Sold Job No.800 16. The following information should be included (in summary) in a report to management. (45 min.000 21. © The McGraw-Hill Companies. Work-in-Process Cash 4.

.600 – $10.000 – $16. 102 = Purchases – materials for Job No.000 + $5. 102 = 0.600 = $3. Inc.800 – $2.800 4Overhead 5Materials for Job No.000 6Labor for Job No.000 7Overhead 8Overhead for Job No. 103 = 0. 103 = $4.200 $0.600 = $4.200 = $9.400 = $5.800 + $6. (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. 5/e .000 © The McGraw-Hill Companies.800 applied in April = 0.400 = $12. 103 = $32.200 = $16.000 – $9.600 = $4.600 $19.50 x $9. 102 = Total direct labor costs – Labor for Job No.50 x $10. 101 – Labor for Job No.000 10Underapplied overhead = Actual – Applied = $20.4–39.000 = $6.000 – $19.000 = $4.000 for Job No.600 = = $9.50 x $12.600 – $1. 1997 114 Cost Accounting.50 x $9.600 since the beginning inventory was 50% complete 2Applied overhead = $30.50 per labor dollar ∴Applied overhead 3Overhead in beginning inventory = 0.200 9Applied Overhead = $4.

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

.

Using the basic cost flow equation. the prior department costs are not useful for evaluating the performance of the manager of the department receiving the units.e. 1997 Solutions Manual. Prior department costs behave the same as direct materials which are typically added at the start of production. From BB + TI – TO = EB. 5–2. the equivalent units represent only the work done in the current period. 5–6. 5–5. 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. 5–4. While such a distinction is made by the department transferring the units out. From BB + TI – TO = EB. the units in the beginning inventory are transferred out first. Rearranging yields: Beginning Inventory = Transferred Out + Ending Inventory – Current Work 5–3. The equivalent units concept equates units at various stages of completion to a common measurement unit. we have: Beginning Inventory + Current Work – Transferred Out = Ending Inventory. 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. With FIFO costing. Inc. rearrange the terms to solve for the unknown beginning inventory. Under FIFO costing. 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. Thus. TO = BB + TI – EB © The McGraw-Hill Companies. including costs from prior periods that are in beginning inventory).. 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.. Under weighted–average. Units started and completed during the period are charged out using all current period costs. Chapter 5 117 . They are treated separately because they represent the accumulation of costs from previous departments rather than the receipt of materials from the stores area.Chapter 5 Process Costing Solutions to Review Questions 5–1.

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

. a6.500 units in beginning inventory + 12............ Computation of Equivalent Units Produced—Weighted Average a.......000 975 E....000 Equivalent units in ending inventory: Materials: 10% x 6..... Inc...975 E. Chapter 5 119 ..... Materials Units transferred out. Conversion costs: 15% x 6.500 units.. units in ending inventory = 3.U................) Compute equivalent units—weighted average method.....U. Conversion Costs 9..500a units ....500 b.....U......U. (20 min........ 650 E... 9.000 units transferred out.650 E.Solutions to Exercises 5–14. Total equivalent units for all work done to date ..000 units started this period – 9............................... 1997 Solutions Manual. © The McGraw-Hill Companies.. 9. 9.

... C5..975 E. = 9.... Inc. Started and completed during the period. 975 E.. a80% b..500 E.500 units beginning inventory + 12....000 units transferred out..... 5/e ....... 8.U...U....500 units....000 units transferred out less 3. Conversion costs: 15% x 6.000 units started this period – 9. Alternative Method Equivalent Units E.U.U.. – 525 E.U. = 100% – 20% already done at the beginning of the period. 9.. Materials: 8..) Compute equivalent units—FIFO method...U..U... d6....500 units ..450 E.500 units. 5..U..... Conversion costs: 85%b x 3..000 units + 650 E. 5.... b..450 E..950 E... units of work = transferred + ending – beginning done this period out inventory inventory a. © The McGraw-Hill Companies... Conversion Costs 2.. 650 E. 2..500 ending inventory = 3.U. c Units still in ending inentory: Materials: 10% x 6.U.. Materials Compute Equivalent Units—FIFO To complete beginning inventory: Materials: 80%a x 3.......U....950 E......5–15.U.... 1997 120 Cost Accounting.500 units started and completed = 9.U.. a.500 units from beginning inventory... E.U. Conversion Costs: 9.....500 E...800 E..............U.... – 700 E...... = 9..500d units.....000 units + 975 E.. (20 min. b85% = 100% – 15% already done at the beginning of the period..U....

Chapter 5 121 .................000 Equivalent units in ending inventory: Materials: 25% x 10.....000 1.000 units.......5–16. Materials Units transferred out... 32...000 units.....) Compute equivalent units—weighted average method. Total equivalent units for all work done to date .....500 Conversion costs: 15% x 10. Inc.....500 b. a... 30.... 2.................... (15 min........ 1997 Solutions Manual...500 31...500 © The McGraw-Hill Companies.. Conversion Costs 30..

.U.000 E..000d units. d b.. © The McGraw-Hill Companies... 5/e . b45% = 100% – 55% already done at the beginning of the period..000 E.U.U. Materials To complete beginning inventory: Materials: 45%b x 5.....000 units transferred out less 5.500 E..U. c30% = 100% – 70% already done at the beginning of the period....500 E.U.750 E. Conversion Costs 1..000 units in beginning inventory = 30.U.U. 25.. Units still in ending inentory: Materials: 25% x 10.. – b.750 E.U.... 2...500 E. 29.000 units + 1... – E. Conversion Costs: 28.000 E... 3. Conversion costs: 15% x 10... Started and completed during the period.. 2. 1.U.U. 1997 122 Cost Accounting...U...000a units . Materials: 29.... – units of work transferred ending done this period out inventory a.U.250 E..000 units + 2. d25.... Conversion costs: 30%c x 5.. 25......000 units started this period..) Compute equivalent units—FIFO method.000 units transferred out + 10...5–17.... Alternative Method Equivalent = Units + E.. Inc.... = 30....000 units started and completed = 30..000 units from beginning inventory.. (20 min.000 units... a.. a5.500 E. = 30...750 E.000 E. 28.U.U.000 units in ending inventory – 35.000d units.U. beginning inventory 2.500 E.....500 E.U......

........) Compute equivalent units—weighted average method: Keanu Co.....................000 Equivalent units in ending inventory (16........ costs: 250 units x (1–40%) . Conversion Costs Eq......5–18........... units To complete beginning inventory: Materials: all complete ..........000 5–19 (20 min................................. costs (200 x 25%)...000 units x 75%) .....) The answer is (d) Compute equivalent units—FIFO method: Alyssa Co....) ...... (20 min............. out—250 beg... 0 150 800 200 1.......... Conversion Costs: Units transferred out ... Conv...... 12.000 800 © The McGraw-Hill Companies........... Conv..000 50 1................................. 52... units Materials Eq................................ 1997 Solutions Manual........ 40................. Invent......... Equivalent units of production .............. Chapter 5 123 .............. Units in ending inventory: Materials (200 x 100%).. Inc..............050 units trans. The answer is (a).000 Total equivalent units for conversion costs. Started and completed during the period (1.

................ Inc............ © The McGraw-Hill Companies................. $11.......000 170... Units in ending inventory: Materials (50. Total units to account for ..........000 220....................... Units 60....000 Direct Materials Flow of costs: Costs to be accounted for: Costs in beginning WIP inventory .........................000 x 100%)...200 $ 0......000 Units accounted for: Completed and transferred out Materials (170..................... 1997 124 Cost Accounting................... Physical Units Flow of units: Units to be accounted for: Beginning WIP inventory ...000 160....) Compute cost per equivalent unit—weighted average method: Alexis Co........000 35....000 units) .................5–20.000 220.000 50.. Materials Eq.........200 $46..... 5/e .......................... Total costs to be accounted for ...200/220... Units started this period .... Current period costs ........ The answer is (9).............000 220....000 x 100%)...................... 170.... (20 min.....21 Cost per equivalent unit Materials ($46.000 50............................ Total units accounted for...............

Units in ending WIP inventory: Conv............. 40............000 16.................... Started and completed currently ... costs 40.......000 32...000 648...........) Compute equivalent units—FIFO method: Juan Co.... (20 min..000 680....000 600..... Equiv..000 © The McGraw-Hill Companies........ Chapter 5 125 ......... 1997 Solutions Manual..000 x (1–60%) . Physical Units Flow of units: Units to be accounted for: Beginning WIP inventory ......000 x 40% ......... Total units accounted for ........5–21......... Inc...... units Conversion Costs 40....000 720............ costs 80.000 600.................. Units started this period ....000 80....... The answer is (b)... Total units to account for........000 720........000 Units accounted for: Completed and transferred out From beginning WIP inventory: Conv.....................................

.............. Physical Units Equivalent Units Materials Conversion Costs Eq........................... 850 Units in ending inventory . Conv..... 9...............458 $ 6..........000 1.... 1997 126 Cost Accounting.) Compute cost per equivalent unit—weighted average method... (35 min.. costs ($3...40 $ 3..............720 $6........150 850 120 970 850 60 910 Total Flow of costs: Costs to be accounted for: Costs in beginning WIP inventory ........ 150 1...........208 $ 136 3.....042 Total costs to be accounted for ..80 © The McGraw-Hill Companies.......... $9....... 1..... 5/e ........5–22... Inc.. 300 Materials (300 x 40%).. $ 624 Current period costs ....666 Cost per equivalent unit Materials ($6. costs (300 x 20%)...... Direct Materials Conversion Costs $ 488 5......... Total units to account for .........458/910) ........ Units started this period ......322 $3. Total units accounted for . Conv.......... units Flow of units: Units to be accounted for: Beginning WIP inventory .....208/970 units) ......... units Eq.......150 Units accounted for: Completed and transferred out ....

.. costs ($3..666 Direct Materials Conversion Costs $ 488 5............042 Total costs to be accounted for ..... 850 300 850 120 850 1...150 Units accounted for: Completed and transferred out ....670 Cost of ending WIP inventory ...........5–23........ 996 Total costs accounted for ...... Materials (300 x 40%) ..... (20 min. units Flow of units: Units to be accounted for: Beginning WIP inventory ....458 $ 6.720 $6....... $9. 9..............) Assign costs to goods transferred out and ending inventory— weighted average method...40 $ 3........... © The McGraw-Hill Companies...... Costs accounted for: Costs assigned to units transferred out $8..................... costs (300 x 20%) .. Total units accounted for....... $ 624 Current period costs ...... Inc.....458/910) ...... Physical Units Equivalent Units Materials Conversion Costs Eq.................666 Cost per equivalent unit Materials ($6...80 $5........... 1997 Solutions Manual....230 228 $3.208 $3.........000 1...458 Costs transferred out total $8.............. units Eq.. $9........... Total units to account for..208 $ 136 3.............150 970 60 910 Total Flow of costs: Costs to be accounted for: Costs in beginning WIP inventory...208/970 units) ........... Units started this period .........440 768 $6... Conv................... 150 1.................... Conv.670.. and costs in ending inventory total $996... Units in ending inventory . Chapter 5 127 .......322 $3.....

...... 1997 128 Cost Accounting.... Started and completed currently............. Conv....150 Units accounted for: Completed and transferred out From beginning WIP inventory . costs 150 x (1–30%) ........ Conv..... 150 1.......... $9.......... Total units accounted for............... Inc.322/865 units) . Total units to account for ..50 $ 3.720 $6..042 Total costs to be accounted for .666 Cost per equivalent unit Materials ($5.............. units Eq......... 1...... Physical Units Equivalent Units Materials Conversion Costs Eq......) Compute cost per equivalent unit—FIFO method...322 $3.. costs (300 x 20%).........208 $ 136 3........... 9........5–24..... 150 Materials 150 x (1–60%) .... costs ($3..................458 $ 6........... (35 min.. 700 Units in ending WIP inventory 300 Materials (300 x 40%)........ Units started this period ............150 60 700 120 880 60 865 105 700 Total Flow of costs: Costs to be accounted for: Costs in beginning WIP inventory ..... Conv.. $ 624 Current period costs ..84 © The McGraw-Hill Companies.... units Flow of units: Units to be accounted for: Beginning WIP inventory ..720/880 units) ....... 5/e .000 1........ Direct Materials Conversion Costs $ 488 5..

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

.......... costs ($3............ 1. Total costs accounted for .....228 *Includes $1 rounding error............... costs ($3.5–25....... $9.......... $9.......... © The McGraw-Hill Companies............ $8. 1997 130 Cost Accounting.............84 $ 488 $ 136 390 404* 4...688 $3.............. Current costs of units started and completed...........84 x 105 units) ... and costs in ending inventory total $1.... (continued) Total Flow of costs: Costs to be accounted for: Costs in beginning WIP inventory .656..... Conv......... 9.. costs ($3..................010 Materials ($6........322/865 units) ............ $ 624 Current costs added to complete beginning WIP inventory ....... 794 Materials ($6............666 Direct Materials Conversion Costs $ 488 5......208 $ 136 3................................458 $ 6..010................720/880 units) ..50 x 700) .....550 $5.428 780 $6.... Inc.......... $ 624 Current period costs ..238 Materials ($6................208 230 $3.. Costs accounted for: Costs assigned to units transferred out Costs from beginning WIP inventory .. Costs transferred out total $8....... Conv.. 5/e ...656 Cost of ending WIP inventory .. Total costs transferred out ........... costs ($3..720 $6......666 Cost per equivalent unit Materials ($5......................... Conv..........84 x 60) .....50 x 60 units) .........042 Total costs to be accounted for ...........458 2..84 x 700) .....50 x 120) .................322 $3................ Conv.....50 $ 3................ 7..............

. Conv.000 2...420/21...000 units) .. 17..000 21..000 Total Flow of costs: Costs to be accounted for: Costs in beginning WIP inventory....... 1997 Solutions Manual........000 17. Chapter 5 131 . Materials (5...000 4.. 895....420 $ 73... Units in ending WIP inventory.02 $ 30......... $1....820 390........240 Total costs to be accounted for .. Total units to account for. units Eq. costs (5..000 5............000 Units accounted for: Completed and transferred out ......000 19.000 x 80%) . (35 min.... $ 124.........019... Inc.400 Cost per equivalent unit Materials ($441.....980 $ 21.... costs ($577..... Units started this period ...........000 14.....000 22. Conv..000 units) ....000 22....980/19.....5–26.. 8...640 $577.000 17...42 © The McGraw-Hill Companies........000 x 40%) ................ Direct Materials Conversion Costs $ 50..160 Current period costs ..600 $441.... Physical Units Equivalent Units Materials Conversion Costs Eq..) Compute cost per equivalent unit—weighted average method. units Flow of units: Units to be accounted for: Beginning WIP inventory ...........340 504....... Total units accounted for .

000 Materials (5...000 Units in ending inventory .02 $ 30................ 5..... costs (5..... Physical Units Equivalent Units Materials Conversion Costs Eq..... $ 124..... and costs in ending inventory total $144...... 144...........480 Costs of ending WIP inventory .....980 $ 21.340 84. 5/e ....840 $577......000 2.000 17.... units Eq.. Units started this period ........... (20 min. 1997 132 Cost Accounting.420 $517. $1....... 17........... 8......... $1..........980/19. Total units accounted for.....000 21... 895........019..) Assign costs to goods transferred out and ending inventory— weighted average method...............400 Direct Materials Conversion Costs $ 50........420 $ 73...820 390. Total units to account for ......... Inc..000 19..000 Units accounted for: Completed and transferred out ..................... $ 874............... © The McGraw-Hill Companies. costs ($577..............000 units) ...160 Current period costs ..480..........000 Total Flow of costs: Costs to be accounted for: Costs in beginning WIP inventory .000 17....... Conv...... Conv.....640 $577..140 60..000 units) ........080 $441...... Costs accounted for: Costs assigned to units transferred out.920 Total costs accounted for .240 Total costs to be accounted for .........980 Costs transferred out total $874..600 $441..920.019.........420/21.340 504.000 x 40%)... units Flow of units: Units to be accounted for: Beginning WIP inventory ...... 22..000 x 80%)..400 Cost per equivalent unit Materials ($441.........42 $357...........000 14....5–27.......000 4.000 22..

$1....40 The unit costs are slightly higher under weighted-average than under FIFO. Chapter 5 133 ... Total units accounted for .000 5..000 5....600 9............5–28.. 8...... The costs per unit in beginning inventory were slightly higher than the cost per unit incurred this period. which increases weighted-average unit cost... © The McGraw-Hill Companies. Total units to account for. Inc. Units in ending WIP inventory ...... 895................980 $ 21.00 $ 30.000 x (1–30%)........000 22.640/16......400 Cost per equivalent unit Materials ($390....000 x (1–30%) ...000 4.......000 Total Flow of costs: Costs to be accounted for: Costs in beginning WIP inventory...600 9.. costs (5..........000 x 40%) ... Physical Units Equivalent Units Materials Conversion Costs Eq....640 $577...... 1997 Solutions Manual... Materials (5.......) Compute cost per equivalent unit—FIFO method... Conv.600 units) ... Started and completed currently . Conv.000 14............ units Flow of units: Units to be accounted for: Beginning WIP inventory ..000 9.. Units started this period .... Materials 8....240 Total costs to be accounted for .600 5...... (35 min. $ 124......... units Eq......600 2.........600 $441.600 units) ... Conv......820 390..600/18.......000 x 80%) .000 16.160 Current period costs ..000 22.......... costs 8... costs ($504. 8.019.. Direct Materials Conversion Costs $ 50.340 504.000 18..000 Units accounted for: Completed and transferred out From beginning WIP inventory..420 $ 73....

..000 18..600 9.. (20 min....) Assign costs to goods transferred out and ending inventory— FIFO method..000 Total units to account for .. Started and completed currently.5–29............. units Flow of units: Units to be accounted for: Beginning WIP inventory . 22.. Inc..000 © The McGraw-Hill Companies....... 8.000 Units started this period . 1997 134 Cost Accounting..... Physical Units Equivalent Units Materials Conversion Costs Eq....... Total units accounted for...000 x (1–30%) .... 9... 8.. Conv..000 4...... 5/e .......000 x 80%)................ costs (5..... 22. Conv....000 16.....000 x (1–30%) ....000 x 40%).... costs 8.....600 9..... 14...........600 2............600 5....000 5.... units Eq..000 Units accounted for: Completed and transferred out From beginning WIP inventory .........000 Materials (5. 5.........000 Units in ending WIP inventory.000 Materials 8.....

.. The reason for the difference in unit cost is explained in Exercise 5–28..40 124....240 462....980 $ 21......000) ......... (continued) Total Flow of costs: Costs to be accounted for: Costs in beginning WIP inventory... Conv...600 $357..600 $441....................820 390...... $ Current costs added to complete beginning WIP inventory .....600 $517.....600 189.......640/16..................40 x 5.019.... Total costs accounted for .................600) .. Costs accounted for: Costs assigned to units transferred out: Costs from beginning WIP inventory.000) .......800 $577.....180 Cost of ending WIP inventory..... Inc................340 504............ $1.5–29.....40 for conversion costs...800 Materials ($21 x 4...................820 $ 73....600 units) ... the unit costs are $21...........160 287................ Materials ($21 x 5...... $ 124.....600 170. the unit costs are $21 for materials and $30.. costs ($30..000) .....40 x 2........000 $441..42 for conversion costs..........400 Ending inventory is slightly higher under the weighted-average method because the unit costs are higher under weighted-average... costs ($30....420 60..980 273......................640 $577.420 $ 73.......840 $ 50........340 117.......... $1...... Total costs transferred out . $ Direct Materials Conversion Costs $ 50...420 84..000 874.. Under FIFO... 895..600) ..........................240 Total costs to be accounted for ........400 Cost per equivalent unit Materials ($390. Conv.......600/18...160 Current period costs .... costs ($30.00 $ 30...... 1997 Solutions Manual............... Current costs of units started and completed: Materials ($21 x 9................ costs ($504.....000) ..... Chapter 5 135 . Conv.......600 units) .... © The McGraw-Hill Companies...40 x 9..02 for materials and $30..019......... 144. Under weighted-average.. Conv..............

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

.....900/7........ Dept......340/8........... $125......246 50.. 2 ($8. Total costs transferred out ...........400 $74.. 8.... No..480 Prior department ($4......................... Dept.400 $ 3..500 32.....906 0 20............ Inc...340 $78.....246 $ 4..70 $ 8................40 x 6..... 2 ($8.........500 $ 3...240 Total costs to be accounted for ....160 28.... $117. Dept....40 $14....780 $78.. Total costs accounted for ..700 $47....600 Prior department ($4..000) ........... 78.............. 20..... 1997 Solutions Manual...400 units) ....646 Cost per equivalent unit Prior department ($32.40 x 2... 2 $14....466 © The McGraw-Hill Companies..000) ....70 x 1.. $ 18.900 $47........ $125...160 Prior department .....166 Cost of ending WIP inventory..........................646 Prior Department Department No.. No.............. $ 18........... No..5–30........................406 Current period costs .... Dept.................700 4............ Costs accounted for: Costs assigned to units transferred out: Costs from beginning WIP inventory.... Chapter 5 137 .... 2 ($8................. (continued) Total Flow of costs: Costs to be accounted for: Costs in beginning WIP inventory...000) ..406 Current costs added to complete beginning WIP inventory ......... 2 ($74.850 units) ......906 74.....000 units) . No.....40 x 450) .......400 3...70 x 6..200 $42.. 107. Current costs of units started and completed: ................................

.726 $78......466 Total costs accounted for ......406 Current period costs . Department No...500 32..... Total units to account for ....000 10..340 78........... Department No.000 1.. (50 min...906 74..246/9....... This is $14 less than FIFO.......000 10....... 2 (1.... $125..000 1.000 units).......5–31.....480..........................000 10................... 9.740 $47.............. Total units accounted for....450 Total Flow of costs: Costs to be accounted for: Costs in beginning WIP inventory ........ $ 18....000 Units accounted for: Completed and transferred out .... The difference is due to the differences in costs per equivalent unit between FIFO and weighted-average.. $125...400 $74.... Under weighted-average..................................... 107.....400/10.... © The McGraw-Hill Companies.................450) . Prior department (1......520 3.000 units x 45%) .400 $ 3..28 $42.......246 $ 4.900 $47....000 9.. Physical Units Equivalent Units Prior Department Department No.......000 7............... 1997 138 Cost Accounting. Units in ending inventory ...... 2 Flow of units: Units to be accounted for: Beginning WIP inventory ..............660 4......... 5/e ...246 The ending inventory is lower under the weighted-average method than under the FIFO method.....) Production cost report—weighted average method: Overland Co... Inc....646 Direct Materials Conversion Costs $14...000 units x 100%) ....240 Total costs to be accounted for ....... 2 ($78.. Costs accounted for: Costs assigned to units transferred out...............74 $ 8............. Units started this period .......... 3...........000 9..646 Cost per equivalent unit Prior departments ($47.......466......... the ending inventory is $8... $117.000 450 9.......... which is $8.180 Costs of ending WIP inventory .... 8..............

....U.....U..U.000 in beg...000 transferred out.) Compute equivalent units—multiple choice.000 Materials 330.. 370.... 330..... a320.. 330.. in ending inventory: Materials 100% x 12........... bMaterials started + 50.. 137.000a Conversion Costs 330. Materialsb.000a –0– E. The answer is (4)...... The answer is (2).Solutions to Problems 5–32..........500a 5..... 1997 Solutions Manual. are added at the end of the process...500 E.........500 E. E....000a E.U.U..500 = 132.000 E......... © The McGraw-Hill Companies...000 E.........500 units.. = 330..U..000 units....U........... produced this period..000 + 25.... Conversion costs 90% x 40... transferred out = units started + beg.........U...U..... 145.. inv... Materials Units transferred out.000 – 12....... Inc. Prior Department Costs Units transferred out..000 E. Conversion costs 40% x 12. produced this period....000 E....... aUnits Conversion Costs 132.. 40.000 E... a.....000 E.. 132.. 36..500 units..U..000 in ending inv.U.......... inventory – ending inventory = 120.500 b.....U..U. Chapter 5 139 .. in ending inventory: Prior department costs .U.. 12...... (45 min. – 40.....500a E...000 E.... 366.. E..

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

............ 50.. Chapter 5 141 ...000 Units accounted for: Completed and transferred out From beginning WIP inventory..000 320.... 270.............000 150. Total units accounted for.................. 1997 Solutions Manual.........5–33..000 Total units to account for ... Started and completed currently ....... (30 min) Production report to find conversion costs in ending WIP inventory— FIFO method a...................000 60.000 x 20%) ..000 Units started this period .000 150........................ (50.............000 x 50%) ...000 10.000 220.. (120. Inc...... The answer is (3) Physical Units Equivalent Units Conversion Costs Flow of units Units to be accounted for: Beginning WIP inventory ..000 120.......000 © The McGraw-Hill Companies.. 320.. 50.. Units in ending WIP inventory.

.....20 x 150.............................. 330. costs ($2...5–33..... 1997 142 Cost Accounting.....000 Current period costs ...20 x 10........000 (Answer) Total costs accounted for ..........000 Current costs added to complete beginning WIP inventory: Conv.... $ 86. 484...... 132.... 22.......... Inc.000) ......... costs ($2...000/(50...........15 [= $86....20 as calculated in (a) above.................. © The McGraw-Hill Companies.000 Total costs transferred out ..000 Total costs to be accounted for ..... $ 86..................20 Costs accounted for: Costs assigned to units transferred out: Costs from beginning WIP inventory .000 b....... costs ($2.... units x 80%)] Cost per unit for the current period is $2...000 Cost of ending WIP inventory: Conv.......000) ..000/220. 5/e .. $570.000) .... The answer is (2)....000 equiv... Cost per unit for the previous period is $2... $570............ $438....000) .....000 Current costs of units started and completed: Conv..... $ 2........... (continued) Conversion Costs Flow of costs: Costs to be accounted for: Costs in beginning WIP inventory ..000 Cost per equivalent unit ($484..20 x 60.........

000 1. Units in ending WIP inventory.............. (50 min.................800 4.000 6...............000 5......000 4.... Materials Labor Manufacturing overhead 1. Total units to be accounted for .................... 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....800 (90%) 5..... Inc.000 1....... Total units accounted for .) Prepare a production cost report—weighted average method: Baja Corporation...........000 700 (35%) 4. 1997 ... Started and completed currently ...........000 2.. 1..000 6....400 4...... Units started this period ..000 3.000 4.... Total transferred out..400 (70%) 5.5–34.000 4...000 2..... a....000 (Section 2) COMPUTE EQUIVALENT UNITS Prior department costs Units accounted for: Units completed and transferred out: From beginning inventory...700 143 © The McGraw-Hill Companies..

.....000).... $128.....700 Prior department costs $ 32..000 $43.....200 Manufacturing overhead ($5 x 700) . 3....000 $ 80..............000 11.800) ...000 Total costs of units transferred out .....500 Total ending WIP inventory........000 $116.... Labor ($43.000 64. Materials ($116....000 Labor ($8 x 4......000 Costs assigned to ending WIP inventory: Prior department costs ($32 x 2........200 3........ 32..00 Materials $ 20.......200 ÷ 5................................000 Materials ($20 x 4.............500 $20....800)...000 Manufacturing overhead ($5 x 4..000 $20..000 $32..... 20..000 $23.. (continued) DETAILS Total costs Costs to be accounted for: (Section 3) Costs in beginning WIP inventory......000) .............. 310...000 Labor $ 7......................700 Current period costs ..000) ...500 144 © The McGraw-Hill Companies........500 ÷ 4.......000 $116....... 260............ Inc.700 Total costs accounted for .5–34... Manufacturing overhead ($23.000 $43... $374.00 $5.. 36....000 160......000).200 36...700).000 96. 64...............000 $192....... 1997 ................000 36..400).............. $114. 11......000 ÷ 6. 80...000 Labor ($8 x 1.....500 18...000) ...................000)...000 $32.........................000 ÷ 5. Costs accounted for: (Section 5) Costs assigned to units transferred out: Prior department costs ($32 x 4...000 Total costs to be accounted for . $ 64... $374...............00 $128.... a...............000 Materials ($20 x 1..500 $192.00 $8......700 Cost per equivalent unit: (Section 4) Prior department costs ($192........400) .200 Manufacturing overhead $ 5.........200 $23............

............. Inc... 64.......000) ..500 b..... 1997 ..... a..........500 Total ending WIP inventory.......000 64.... 11.. • Manufacturing overhead: overhead costs per unit ($5) is slightly higher than management’s goal of $4. 80..........000) ...5–34..... 145 © The McGraw-Hill Companies... • Labor: Equivalent unit labor costs per unit ($8) is below management’s goal of $10...........000 Costs assigned to ending WIP inventory: Prior department costs ($32 x 2......200 $23.800) ..000 $32. $114. 3........................000)....000).000) .. 36.700 Materials Labor Manufacturing Overhead $128....... 20.000 $ 80...500 $192.. 260. $374.......400)....000 Manufacturing overhead ($5 x 4..... $128.... 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..........200 3.................. 32....00 x 700) ..000 Materials ($20 x 4........000 $43......................000 $116....000 Labor ($8 x 4....000 Materials ($20 x 1.........200 Manufacturing overhead ($5.......50........................700 Total costs accounted for ....000 11...000 36.000 Labor ($8 x 1....000 Total costs of units transferred out .000 $20..... (continued) Prior Department Costs Costs accounted for: (Section 5) Costs assigned to units transferred out: Prior department costs ($32 x 4....

..000 6........... a.... Started and completed currently .......800 400 (40)%a 500 (50%)b 3....800 (90%) 4.. Baja Corporation Assembly Department Production Cost Report—FIFO FLOW OF PRODUCTION UNITS (Section 1) Physical units Units to be accounted for: Beginning WIP inventory ........000 2....... (50 min...... Inc. 146 © The McGraw-Hill Companies....... 1997 ...................... Units in ending WIP inventory.....000 1... Total units accounted for ....000 5....... 1........000 3.400 (70%) 700 (35%) 4...................... Units accounted for: Units completed and transferred out: From beginning inventory...000 –0– 3.......) Prepare a production cost report—FIFO method: Baja Corporation......5–35........... Units started this period ...000 6... b50% = 100% – 50% already done at the beginning of the period....000 –0– 3................000 5.........200 a40% = 100% – 60% already done at the beginning of the period..000 1.....000 3.....000 2..800 4.....000 (Section 2) COMPUTE EQUIVALENT UNITS Prior department costs Manufacturing overhead Materials Labor 1.. Total units to be accounted for ......

Inc...........800) ............000 $43........ 310.000 160...000 $32........200).00 $20....... Manufacturing overhead ($18...800)......... 1997 ....... Materials ($96....500 18.000 ÷ 5...................000 $192..000 Total costs to be accounted for .000 96........500 Costs to be accounted for: (Section 3) Costs in beginning WIP inventory...................50 $4.............. 147 © The McGraw-Hill Companies.....000 ÷ 4....000) ...........700 Cost per equivalent unit: (Section 4) Prior department costs ($160...............5–35.......000 $23. $ 64............ Labor ($36.....2857 Materials $ 20.200 Manufacturing overhead $ 5.000 ÷ 4............... (continued) COSTS DETAILS Total Costs Prior department costs $ 32....00 $7.700 Current period costs .......200 36.............000 Labor $ 7............... $374.... a...............................000 ÷ 4..000 $116.....

.....200 Prior department costs Materials Labor Manufacturing overhead $ 32.............5–35...50 x 3......000 Manufacturing overhead ($4........ 12......000) . 191.... 60.... –0– Materials .... Inc......... 1997 .............. (continued) Details Total Costs Costs accounted for: (Section 5) Costs assigned to units transferred out: Costs from beginning WIP inventory....................2857 x 500).. a.......500 Manufacturing overhead ($4..................... 69...........000 $ 7..000 2.....500 12... $ 64........143 96.........000 –0– $ 20..........700 Current costs added to complete beginning WIP inventory: Prior department costs ......843 Current costs of units started and completed: Prior department costs ($32............00 x 3........ 96..............00 x 3. 261...143 Total costs from beginning inventory ....000 60...200 $ 5........ 3.......................500 –0– 3....857 148 © The McGraw-Hill Companies.............................000)..................................................50 x 400) .857 Total costs of units started and completed ....000) ... 2.000 Materials ($20................000 Labor ($7..............000)............. 22.................. –0– Labor ($7.........................000 22.357 Total costs of units transferred out ...................2857 x 3........

.29) is below management’s goal of $4.... $64....50.....50 x 1.............................500 3...............400) ... a.....500 b. Inc...........500 Manufacturing overhead ($4.......... 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......000 $116....00 x 2.000 Materials ($20....000 $192......500 Total costs accounted for ..................... 149 © The McGraw-Hill Companies............... 3..... $374.........700 Prior department costs 64.. Manufacturing overhead: Overhead costs per unit ($4....00 x 1..000) . $113...50) is below management’s goal of $10.5–35............200 $23...... Labor: Equivalent unit labor costs per unit ($7....800) ...... 1997 ....2857 x 700)..........000 $43........... 10.... 36...000 10...............000 Total ending WIP inventory ......000 Materials Labor Manufacturing overhead 36....000 Labor ($7.......... (continued) Details Total Costs Costs assigned to ending WIP inventory: Prior department costs ($32..................

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

......000) .......000 Overhead $ 189......000 $1...000 Labor ($2......................000).5–36..000 $1...050....196... 4.....500..000 375.000).............. Labor ($2..........000)..25 x 900.000 Cost per equivalent unit: (Section 4) Materials ($1....000 151 © The McGraw-Hill Companies......000 1....000 $2.....188...........000)... 375.......197...... 1997 ...000) ........196... $ 704....125.200.20 x 150..32 $1........25 DETAILS Labor $ 315........000 1... Costs accounted for: (Section 5) Costs assigned to units transferred out: Materials ($1.32 x 900....500. Inc....125........310..000 ÷ 1.......995. 1.......000 $1....386....000 $1...386...... 1....188.000 ÷ 1...000 $1..980..............000 $1.....000 Total ending WIP inventory.. 198..............492..000 Costs assigned to ending WIP inventory: Materials ($1......000 Overhead ($1...000 Materials $ 200. 903..500....050...000 $2.000 Total costs of units transferred out .000 Total costs to be accounted for ...000 1...386.000 Overhead ($1.293...000 198.....000) ......... COSTS (continued) Total costs Costs to be accounted for: (Section 3) Costs in beginning WIP inventory....980....... 4................. $5..000 330..000 $1...........310. $1... 330... $5...000 Current period costs ...32 x 150.....20 $1...000 ÷ 1.....000) ....310......000 Total costs accounted for ..... Overhead ($1.000) ..000 Labor ($2........20 x 900......000 $2.........25 x 300....300........

...... Inc.... ($242..............20 + 1...240 Additional computations: a200. 5/e ....040) Journal entry: Work in Process .... © The McGraw-Hill Companies.000a $ 55.... 903..800 242...960 Correct . Work in process would have been understated.040 55.000 c.32) = $954...... 1997 152 Cost Accounting.. $660....009....... Income would have been understated..... Finished goods would have been overstated........000 Difference ............000 ($1.. Finished Goods .......5–36...25 + 2.. Cost of Goods Sold...800 186........ (continued) b. Adjustment required: Work in Process Per problem statement ... Finished Goods $1....800 954........

200/25... Work in Process 358. for materials) (20.000 $357.500 Overhead applied in beginning WIP inventory is 125% of direct labor costs (i...988b Additional computations: a$120..... The journal entry to assign the overapplied overhead to cost of goods sold is: Overapplied overhead ..500 – $286.L..250 E....000a 120...........L... for conversion costs) (20.000 E.500 © The McGraw-Hill Companies..250 – 11..250 E. Cost of Goods Sold $626.000 = = = = $643..000). transferred x ($150.U....148a To Cost of Goods Sold 268..000c Transferred out: From beginning inventory 150....500 Based on the balance in the manufacturing overhead account.500 materials conversion costs 256. Therefore.e... (70 min.500 $286. $162.U...000 in ending inventory) Finished Goods 895.000 E. Inc. D.500 (i. $357. = 31.....500 Cost of goods sold. 27.000). 27.988 = 20.L...604 (70%) total credits in Work in Process..500 $643.. = 25.L.000 E. 1997 Solutions Manual..160 = 20. the ratio of applied overhead to total conversion costs found in the beginning inventory should also hold for conversion costs this period..500/$130.) Show cost flows—FIFO method: Bran-U-Flake Co.25 D....250 E.000...U.25 D.U..... Since the application rate has not changed. transferred out x ($643.160a 416.500/31.U..200 From current work 643... 2... Chapter 5 153 . overhead is overapplied by $27. $643.604 Overapplied overhead (See explanation below) From Finished Goods 27. actual overhead is $330..e..544 Transferred in Balance aFrom 626... 1. + D..000 in ending inventory) b$416.500 – $330.U.5–37..552 Beginning Balance Current work: materials (given) conversion (given) Ending Balance 358..... For this period.000 – 5..

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

........................348 + $33.......................000 Total costs to be accounted for ........................ 392 Total ending WIP inventory..... 36.......260 Total costs of units transferred out ....... Chapter 5 155 ......... $36....... Production costs total $3...348 Total costs from beginning inventory .................................... $ 840 Current period costs ......... 33............ $33.......................... Various Payables 36.....5–38................................000 a$35......840 840a 35............260.........913 x 8......260 Total costs of units started and completed ....000 392 From this period's costs $ 840 2....913 per unit....................... c...............840 $3............260 392 $36................................... $ 392 Total costs accounted for ........500) . $ 840 Current costs added to complete beginning WIP inventory: Conversion costs ($3............188 Current costs of units started and completed: Conversion costs ($3.....840 Cost per equivalent unit: (Section 4) Conversion costs ($36.........................348 33... Inc........... The company’s target has been achieved.............840 b......... 2............913 x 100) ....... 1997 Solutions Manual.......... $36.................................913 x 600)............ Costs accounted for: (Section 5) Costs assigned to units transferred out: Costs from beginning inventory.......................... (continued) COSTS Total costs Conversion costs $ 840 36....... Beginning inventory: Conversion costs This period's costs: Conversion costs Ending inventory Work in Process To Finished Goods Inventory 840 From beginning inventory: 36.200).608 Finished Goods Inventory 36...... $ 3..608a All costs have been accounted for........ © The McGraw-Hill Companies........................................ $36................913 Costs to be accounted for: (Section 3) Costs in beginning WIP inventory..000 ÷ 9.. less than management’s target of $4................000 $36.....448 = $2........448 Costs assigned to ending WIP inventory: Conversion costs ($3.........

. Equivalent units worked this period are the sum of the equivalent units to: (a) complete the beginning inventory (b) start and complete some units.000 = 11.U. (40 min.700 = $8. using BB = = = 400 = X = TO + EB – TI (2.200 x $8.800 = 500 – 500X + 2. for the problem are: 4. $8.000 E.) Solving for unknowns—FIFO method.250 + (1.5–39.000 + 1.700 collecting terms: 2. 5/e . That is 11. Then. 2.U.200 + 6.70 = $97.800 400 units 500X 80% b.800 – 2.440 © The McGraw-Hill Companies.200 The total costs incurred are the cost per equivalent unit times the equivalent units worked this period.70 per E.800 equivalent units Let X be the unknown percentage of completion. and (c) to start the ending inventory Which.500 x 30%) 2. a. 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 = 2.800 = 500 (1 – X) + 2. 1. 1997 156 Cost Accounting.250 + 500) + 450 – 2. Inc.700 – 500 = –500X 400 = 500X X = 80% Also. The cost per equivalent unit is obtained by dividing the ending inventory costs by the equivalent units in ending inventory.

5–39.000 + 6.000 – 8. (continued) c. Chapter 5 157 . Inc. 1997 Solutions Manual.000 units © The McGraw-Hill Companies.000 = 17..000 units transferred out –1. in equation form: Current Starts = TO – BB + EB = 19. d. Current units started equals units transferred out minus beginning inventory plus ending inventory or.000 units in beginning inventory 7. 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 started and completed.

) times the cost per equivalent unit ($3.500 and solving for TI: TI = $67.200 (6. The inventory equation yields: BB + TI = TO + EB Given the information in the problem.350 completed this period less 4. The right hand side of the equation is the total equivalent units represented by all costs in the account (18.100 started in a prior period equals the 250 started and completed this period.500.350 Of the 4.350 units transferred out. Units transferred out equals beginning inventory plus current work minus ending inventory. The cost per equivalent unit is $3.100 were from the beginning inventory.200 are entered in the equation: $14.) Solving for unknowns—weighted-average method.500 – 3.75). Inc. There are 1.100 + 3.500 – $14. 5/e ..U. 1997 158 Cost Accounting.5–40.200 E.300 © The McGraw-Hill Companies. 4.75 (or $4.500 ÷ 1. The resulting $67.200 + TI = $67.000 x 20%) equivalent units in ending inventory at a cost of $4. b.250 = 4. (50 min.200 = $53.000 E. In equation form: TO = BB + TI (current work) – EB = 4. we can compute the right hand side.). Therefore.U. 250 units were started and completed. 4. That is. a.500 and the beginning inventory cost of $14.

200 $800 Equivalent units in ending inventory equals $800 divided by the cost per equivalent unit.U.U.000 – $19. = .200 + EB $20. Since ending inventory contains direct materials cost of $630. in EB = $800/$4 = 200 E. it must contain $630/$2. Inc. in EB times $4. (continued) c. Costs per equivalent unit is the $19. If the inventory is 25% complete with respect to direct materials costs.25 (units in EB) Then units in EB = 300/.U.360/1.200 © The McGraw-Hill Companies.800 units = $4 per E. in EB E.600 units transferred out = $2. d.200/4.U. First.10 equivalent units or 300 equivalent units.. Therefore.25 = 1.U.5–40. since 300 E.100 = EB = = TO + EB $19. Chapter 5 159 .00 and solving for E.200 transferred out costs divided by the units transferred out: $19. 1997 Solutions Manual. we compute the cost of ending inventory: BB + TI (current work) = $1. The cost per equivalent unit is: $3.10 per E.U. Cost assigned to ending inventory is based on the relationship: $800 = E.U. then these 300 equivalent units represent 25% of the physical count of units in the ending inventory.900 + $18.

.

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

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

......Solutions to Exercises 6–13...................................000 Units accounted for: Good units completed and transferred out .... Costs assigned to spoiled units..........................000/2....000 © The McGraw-Hill Companies.. a..... $ –0– 20.....................................000 $20.........................................000) ....................000 –0– $20....................................................... (Step 1) Physical Units Flow of units: Units to be accounted for: Beginning WIP inventory ............... Cost per equivalent unit (step 4): ($20.600 400 2......... Current period costs ...... 1997 Solutions Manual..... Chapter 6 163 .................... Total costs to be accounted for. Total Costs Flow of costs (step 3): Costs to be accounted for: Costs in beginning WIP inventory ........... Inc......... Spoiled units........ (Step 2) Equivalent Units –0– 2...... Total units to account for ....00 $16.....................................000 1................. Sierra Company.................. Total costs accounted for.................000 $ 10..... Total units accounted for . Costs accounted for (step 5): Costs assigned to good units transferred out...........600 400 2..............000 2.......000 4...............000 1. (40 minutes) Normal spoilage.................................................. Units started this period....... Cost of ending WIP inventory........

000 a 1.500 = (600/1.500 Spoilage adjustment a$16.000 2.000 units sold x $10 bAllocate based on good units: $1.000 a 10.000 a 4.500 = (1.500 b 7.000 Finished Goods Inventory 16.000 Cost of Goods Sold 10.6–13.600 x $10 $10.000 © The McGraw-Hill Companies. Inc. 5/e .000 $2.600) x $4. 1997 164 Cost Accounting. Work in Process Inventory 20.. (continued) b.600) x $4.000 16.500 b = 1.000/1.000 = 1.

..............000 800 200 1...................................................... (40 minutes) Normal spoilage...............................000) ......... Units started this period ..000/1........................................... $ –0– 20.6–14......000 $ 20...................000 © The McGraw-Hill Companies.... Costs assigned to spoiled units ........... Spoiled units .. Cost of ending WIP inventory .............. 1997 Solutions Manual. Cost per equivalent unit (step 4): ($20..... (Step 2) Equivalent Units –0– 1...................... Total units accounted for............................... Total costs accounted for ............................ Inc. Appalachian Enterprises............................................ Total costs to be accounted for ... Total units to account for.......................................000 Units accounted for: Good units completed and transferred out ................................. Current period costs .......... Costs accounted for (step 5): Costs assigned to good units transferred out ............00 $16........000 4..... Total Costs Flow of costs (step 3): Costs to be accounted for: Costs in beginning WIP inventory........000 1..........................000 –0– $20.......................... Chapter 6 165 ....000 800 200 1. (Step 1) Physical Units Flow of units: Units to be accounted for: Beginning WIP inventory ...........000 $20..........

.............11 $17.....778 2... Total costs accounted for ... Units started this period .. Current period costs ....800) .......................................... Sierra Company.............000 $ 11......... (Step 2) Equivalent Units –0– 2....... Total Costs Flow of costs (step 3): Costs to be accounted for: Costs in beginning WIP inventory . Total units to account for ................222 –0– $20.600 200 1.......... Costs assigned to spoiled units....800 Units accounted for: Good units completed and transferred out ...........................000 1... Spoiled units (400 x 50%) ...................................................... Inc....000 2........................... $ –0– 20....................000 1.......................000 $20........... Cost per equivalent unit (step 4): ($20............... Costs accounted for (step 5): Costs assigned to good units transferred out.................000 © The McGraw-Hill Companies...... Cost of ending WIP inventory............................................. 1997 166 Cost Accounting...... Total costs to be accounted for ......................... Total units accounted for ...000/1...................................600 400 2..............6–15. (30 minutes) Spoilage during the process.................. 5/e ............... (Step 1) Physical Units Flow of units: Units to be accounted for: Beginning WIP inventory ...........

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

.......... $ –0– 10...... Vail Company................................6–17................. a. (Step 1) Physical Units (Step 2) Equivalent Units Flow of units: Units to be accounted for: Beginning WIP inventory .. Costs accounted for (step 5): Costs assigned to good units transferred out..........................................800 © The McGraw-Hill Companies.................................................... Units started this period ..............800/2.......... 5/e .............40 $ 9.. Spoiled units....000 2..........080 –0– $10........................................ Inc.............. Cost per equivalent unit (step 4): ($10........ Costs assigned to spoiled units.....800 200 2.......................................................... Total units accounted for ............800 $10.800 $ 5.....000) ................................. –0– 2....... 1997 168 Cost Accounting........000 1.000 Units accounted for: Good units completed and transferred out . (40 minutes) Normal spoilage.......800 200 2...000 1................................... Total costs accounted for ...................720 1.. Total units to account for ..... Current period costs ... Cost of ending WIP inventory......... Total costs to be accounted for .......... Total Costs Flow of costs (step 3): Costs to be accounted for: Costs in beginning WIP inventory ..................................

800 to Cost of Goods Sold.720 x 300 in ending inv.800 9.720 x 1.500/1.720 1. b$1.)/1. Inc.100 c Cost of Goods Sold 8.800 to Finished Goods Inventory and 1..6–17.100 = [($9.800 units produced] © The McGraw-Hill Companies. Chapter 6 169 .800 b Spoilage adjustment 8. (continued) b.080 allocated 300/1.080 a Finished Goods Inventory 9. Work in Process Inventory 10.720 180 a 1.800 units produced] + $180 c$8.100 900 a aSpoilage of $1. 1997 Solutions Manual.800 = [($9.500 units sold)/1.

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

..... Abnormal Spoilage Expense ............ The answer is (2).........000 Work in Process Inventory........... (10 min.. 100......) Normal versus abnormal spoilage: multiple choice....... Abnormal Spoilage Expense ....) Normal versus abnormal spoilage: Tree Co.. 120....... Inc... Abnormal spoilage is treated as a period expense and appears in the income statement.000 Work in Process Inventory.000 6–20. (10 min. (10 min.... 1997 Solutions Manual........... 120...... 100.6–19.) Normal versus abnormal spoilage: Park City Co.. © The McGraw-Hill Companies.. Chapter 6 171 ...... Normal spoilage is usually treated as an inventoriable cost.000 6–21...

....................491 $24...........440 Total costs accounted for . 1997 172 Cost Accounting...000 $ 8...000 5............. $72...........000 $45............... 6...... Conv.... Units Flow of units: Units to be accounted for: Beginning WIP inventory ....... 5....000 x 60%)........... Costs accounted for (step 5): Costs assigned to good units transferred out... © The McGraw-Hill Companies....600 Direct Materials 5........ 5....000 Materials (1.....000 $ 4............ 1....453a 2.......000 600 5.......000 $42............ Units Eq........ costs (1.... 5/e .....000 aRounded......000 Total units to account for ..... Inc..... $ –0– Current period costs ...000 Total costs to be accounted for .........821 $ –0– 45.. costs ($45. units) ............... units) ..893 $27. 72..000/5.. 6...000 Spoiled units transferred out: .......................................6–22..000 x 30%)....000 300 5.. Conv...... $66.............. $72........000 Units accounted for: Good units completed and transferred out ...000 Cost per equivalent unit (step 4): Materials ($27......300 eq...300 Conversion Costs Total Flow of costs (step 3): Costs to be accounted for: Costs in beginning WIP inventory ........ Total units accounted for ....... (45 minutes) Spoilage During the Process...547 $45....... 6.107a 2......000 $27................ Davis Company (step 1) Physical Units (step 2) Equivalent Units Materials Conversion Costs Eq....... –0– Units started this period ...........................000 $ –0– 27....600 eq....000/5.......560 Costs assigned to spoiled units..

.. $60...... $60............000 Materials (1......... –0– Units started this period .......462a 1...$ –0– Current period costs ..........................000 Total costs to be accounted for ......000 aRounded... 6........000 x 20%) . units) ............ Davis Company (step 1) Physical Units (step 2) Equivalent Units Materials Conversion Costs Eq................... 6......000 Cost per equivalent unit (step 4): Materials ($20.200 Conversion Costs Total Flow of costs (step 3): Costs to be accounted for: Costs in beginning WIP inventory...6–23......000 500 5. © The McGraw-Hill Companies.200 eq........000 $40..............................................000 Costs per unit are lower in exercise 23 because the inspection point was moved to a point earlier in the production process...000 Spoiled units transferred out: ..636 $ –0– 40........ $ –0– 20.... 6... Conv.......... 5.....000 Total units to account for. (30 minutes) Moving the Inspection Point..........500 Direct Materials 5....... Units Eq...500 eq....... units) ..538 $40............ costs ($40. 1997 Solutions Manual... Inc... Costs accounted for (step 5): Costs assigned to good units transferred out .......000 200 5.000 Units accounted for: Good units completed and transferred out ......000/5..000 5....000 $ 3...........692 $18.000/5..357 Total costs accounted for ..000 x 50%) .818 $20.....182a 1..... 1....... Chapter 6 173 .................... 3......643 Costs assigned to spoiled units ........... Units Flow of units: Units to be accounted for: Beginning WIP inventory ... Conv...000 $20.............. $56.................................000 $38.000 $ 7...... Total units accounted for.......... costs (1.... 60........................

.................... units) .....500 x 35%)........... Conv........ 1... Costs accounted for (step 5): Costs assigned to good units transferred out... $750...... 27..... 5/e ..489 Total costs accounted for .000 aRounded..... 20.. Inc.... $750........000 $450. costs ($450.. Total units accounted for .500 525 19......... (step 1) Physical Units (step 2) Equivalent Units Materials Conversion Costs Eq...........8% = $27. Thus...000 Units accounted for: Good units completed and transferred out ......500 x 55%)...286 $291..... 20.. Units Flow of units: Units to be accounted for: Beginning WIP inventory ..000 18....769 $ 23.... –0– Units started this period ................ Conv...... management should bring in the special team. Woodland Company a.... units) ......025 eq....000 Total units to account for .........000 $300. costs (1...000 b......000 $ 15.000 $430..................511 Costs assigned to spoiled units..000 Total costs to be accounted for ........... Units Eq............325 eq... 750.. 18...............................000 300......500 Spoiled units transferred out: .............325 Conversion Costs Total Flow of costs (step 3): Costs to be accounted for: Costs in beginning WIP inventory . © The McGraw-Hill Companies...................... 20.. Spoilage is greater than 1% (3.211 $450.....Solutions to Problems 6–24..000/19......279 $300..............000/19....500 825 19.....721a 8.489/$722.. $ –0– $ –0– Current period costs .................000 Cost per equivalent unit (step 4): Materials ($300.....500 Materials (1. (45 minutes) Spoilage During the Process............025 Direct Materials 18.................... $722. 1997 174 Cost Accounting...789a 19.........511). $ –0– 450........

.000/11........6–25.......... Conv................. Units Flow of units: Units to be accounted for: Beginning WIP inventory .......250 x 30%) . Costs accounted for: Costs assigned to good units transferred out ....000 Spoiled units transferred out: ..................912 1. Total units accounted for...201 Total costs accounted for ...........992 $ 6.... 11...........347 $21..000 $ 6.............. 90....975 units) .............................750 x 30%) ...000 Units accounted for: Good units completed and transferred out ..................$101......$ 91............ 1997 Solutions Manual.......750 x 50%) ..000 $69......000 aRounded..000/12. costs (2....812a 3....$ 11....................000 525 675 12..... © The McGraw-Hill Companies....$101...... Physical Units Equivalent Units Materials Conversion Costs Eq....... 1. Units Eq.. (45 minutes) Spoilage During the Proces—weighted average: Orth & Kids Company..... costs ($76........345 $25...000 875 11. Inc...743 1.... Chapter 6 175 ... Thus..... 15.............332 2....856 $76..........000 $25..... Conv.......... 3..250 Materials (2..............750 Materials (1...... Conv......... 15.075/$91.........000 11. $ 5..000 70......... Units in ending inventory: 2.724 Costs assigned to spoiled goods ................ 12..075 Cost of ending WIP inventory .724)........ management should bring in the special team..550 Direct Materials 450 11.........975 Conversion Costs Total Flow of costs: Costs to be accounted for: Costs in beginning WIP inventory..000 Total costs to be accounted for ..............000 $ 1.................. 5.000 b.......550 units) ............. Spoilage is greater than 2% (5...000 Units started this period .................000 Total units to account for..............000 $76..5% = $5..000 Current period costs .. 4.. a.. costs (1........250 x 20%) .......000 20...........000 Cost per equivalent unit: Materials ($25....

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

... Total costs accounted for ....788 Materials ($1.. Conv..... Thus......050 units) ...332 15.6–26....547 Cost of ending WIP inventory: 4..............365/[$11............... Total costs transferred out ..000 1....000 Current period costs .............000 20...311 $25.. Conv............000 aYour $ 5....... costs ($6...689 1. 1997 Solutions Manual..........142 $76.........................942 x 875) .. Conv.025 units) .$101....942 x 675) ..453 Materials ($1..858 answers may vary slightly due to rounding.394 Materials ($1......000 $1..000 + $8.788 + $71..... 5.000/10...456a 7.534a 55............. costs ($6..... Current costs of units started and completed. costs ($6......000 $ 6...........000) .............................000 Cost per equivalent unit: Materials ($20......000/10...... © The McGraw-Hill Companies......666 $72....942 $ 6........................300 units) ....000) .................... 71.. Conv....942 x 8... Spoilage is greater than 2% (5........000 $76............ Costs of spoilage............ Inc...........000 Current costs added to complete beginning WIP inventory: 8..... Chapter 6 177 .......983 x 525) ..000 70.......983 x 450) .. management should bring in the special team.........983 x 1..394]).......699 $23. Costs accounted for: Costs assigned to units transferred out: Costs from beginning WIP inventory......365 Materials ($1.....000 3..000 Total costs to be accounted for ....000 $6............860a 1.942 x 750 units) . costs ($70..........$ 11.$101...............$ 96...........983 $ 5..... (continued) Total Direct Materials Conversion Costs Flow of costs: Costs to be accounted for: Costs in beginning WIP inventory. Conv..000 $25... 90.....$ 11.....983 x 8......9% = $5.....000 3.. b. costs ($6.........

.. Total units accounted for 100.......... The answer is (2)–total equivalent units for conversion costs = 88...............000 Conv...000 Spoiled units transferred out: 4.. cost (4...... 66......... 1997 178 Cost Accounting....000 4.000 x 100%) .... Units Units accounted for: Good units completed and transferred out .......000 Units started this period ..6–27. 100.........000 x 60%). 20................000 © The McGraw-Hill Companies..... costs (30......000 Conversion Costs Eq........ Inc.........000 88............000 Conv.................... (15 minutes) Equivalent units—multiple choice: Mesa Verde Co...000.......... 80. Units in ending inventory: 30.....000 Total units to account for .000 18......... Physical Units Flow of units: Units to be accounted for: Beginning WIP inventory ..........000 66.... 5/e .

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

...000 Conversion Costs Total Flow of costs: Costs to be accounted for: Costs in beginning WIP inventory .. Physical Units Equivalent Units Materials Conversion Costs Eq................................000)...000 190.........000/4...................000 Current period costs .. Spoiled units transferred out: ................000/5..000 $200........000 Cost per equivalent unit: Materials ($200.. © The McGraw-Hill Companies.. Materials (1.. Units Flow of units: Units to be accounted for: Beginning WIP inventory ... Thus................... 1997 180 Cost Accounting.... 5/e ....000 196...000 3..... Costs accounted for: Costs assigned to good units transferred out.... further action should be taken to reduce the cost of spoilage.600 200 4.000 Total costs accounted for .... Inc.000 50.000 units) ......000 Direct Materials Units accounted for: Good units completed and transferred out ... 26......... Units Eq.... $400..........6–29..........000 x 100%).... Total units accounted for ..000 $ 40.. Inc..000 $ $ $144..000 units) ...............000 Costs assigned to spoiled goods......... $324...........800 5..............000 Total costs to be accounted for ....600 1........... 386......000 $200......000 x 20%)...... costs ($200. Total units to account for ........ 3... 50.................. Costs (400 x 50%)........000 16................... Conv.......000 40...000 3.600 1...000 5...000 Cost of ending WIP inventory.000 Spoilage is greater than 10% (15... Units in ending inventory: Materials (400 x 100%) Conv............... Costs (1..............00 $180. $ 14..000 Report to management: $ 10.......................000/$324.... (45 minutes) Spoilage During the Process—weighted average: Oregonian.............................. 200 4..00 4....000 200 400 400 5.............. Conv...000 $200.. $400.....000 10...000 10.4% = $50................000 $200. Units started this period .

....475 $0...... 52..........500 $ –0– 6....658 $6..475 $6...175 $ –0– 43.. $52.300 100 2.500 $2...200 $43.175 Cost per equivalent unit: Prior dept. costs (2. 907 Cost of ending WIP inventory .. Costs 5.. Physical Units Prior Dept.200 $ 7......... Materials (2............ $29..480 units) ...300 Spoiled units ...... 6...200 $1.000 3..........6–30...... Units Conversion Costs Eq........... Units Flow of units: Units to be accounted for: Beginning WIP inventory .........456 $1........ 2..........600 x 45%) ............. Materials ($2.505 46 949 $2...000 Prior Dept.......... 100 Units in ending inventory: .......... 21.... 3.. a..... Total units accounted for.. costs (2.600 x 100%).............. (45 minutes) Spoilage During the Process.......000 Total units to account for....200 $ –0– 2.475 © The McGraw-Hill Companies..327 Total costs accounted for .500 $4.600 x 80%) ....417 $23.......... Inc.... 6. $ –0– Current period costs ...000 Units accounted for: Good units completed and transferred out......300 100 2..080 6. Conv...... Units Equivalent Units Materials Eq....... Racquet Products............. Inc.480 1... 1997 Solutions Manual. 6...........200/6.. Conversion costs ($6........ ($43...............475/4.......600 Prior dept..570 Conversion Costs Total Materials Flow of costs: Costs to be accounted for: Costs in beginning WIP inventory............ Chapter 6 181 ..........175 Total costs to be accounted for ....570 units) Costs accounted for: Costs assigned to units transferred out......000 units) .....600 3.. costs Eq..170 4.........500/5.676 141 1...........760 720 18...941 Costs assigned to spoiled goods ... $52.........720 $43. –0– Units started this period (transferred in) ..300 100 3.

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

. (70 min....000 20.) Process costing with spoilage: Stateside Corp....000 (Section 2) COMPUTE EQUIVALENT UNITS (Weighted Average) Materials Labor Overhead Units accounted for: Units transferred out ...... Westcoast Division Production Cost Report—November FLOW OF PRODUCTION UNITS (Section 1) Physical units Units to be accounted for: Beginning WIP inventory ...................000 15. Stateside Corp......000 Note: See footnotes at end of production cost report.. Units started this period ............000a 3.......000 15.....6–31.000 (33%) 16. Units in ending WIP inventory. Inc..... 183 © The McGraw-Hill Companies...000 -01.000 (33%) 16.... 15.. Spoiled units ...000 3. Total units accounted for ......000 20......... 1997 .......000 15... Total units to be accounted for . 4.000 16...000 -01....................000 2.........000 2...........000 20.....

.600b $104.................000) ...........000 $108. Overhead ($115.....22 x 15..........800 81......00 $7.............. 306...300 $120...........000 Total costs of good units transferred out........860d 93.............200 ÷ 16...... $ 78............ COSTS (continued) DETAILS Total Costs Costs to be accounted for: (Section 3) Costs in beginning WIP inventory... Labor ($128..000).......20 x 15.....340c $115.....000) ..................650 103............................300 Labor ($8..000). $ 69.000 Overhead $ 21.. Inc..22 Labor $ 24....310 Current period costs .. 278. 184 © The McGraw-Hill Companies... Costs accounted for: (Section 5) Costs assigned to good units transferred out: Materials ($5. 1997 ..........300 Materials $ 22........350 $128....200 $8.......6–31... 108.20 $ 78......000 Note: See footnotes at end of production cost report..000 ÷ 16..................... $347.290 Total costs to be accounted for ..400 ÷ 20........000).00 x 15.000 Overhead ($7...........600 Cost per equivalent unit: (Section 4) Materials ($104.... 120...400 $5..000).

..600 = $10............ 1997 . 8......... management should call in a special team to investigate and fix the problem..................00 x 1....... Inc.350/$5)] d$21......000)....... Report to Management: Spoilage is 3..........000 (Dept.....................000 units b$81....000 pounds x $51.....000 7..000) ..............000 Overhead ($7....000 + (4..... Thus..000)..600 aBB Materials 15. 185 © The McGraw-Hill Companies. Overhead) b....660 Labor ($8......20 x 1.860 = $12....000 + [$2 per hour x ($103. 7......4% of the cost of good units transferred out (3.............860 Costs assigned to spoiled units: Materials ($5.............440/$306...6–31.................660 Labor Overhead 8.......... 15.. $347.440 Labor ........................22 x 2...000 + $51...860 (Div. (continued) DETAILS Total Costs Costs assigned to ending WIP inventory: Materials ($5.. overhead) + $9..200 + TI = TO + EB + spoilage 4... 30.......000 $115..200 10..440 –0– –0– $104........ 10.........22 x 3..4% = $10..000 = 15....000 + 3... –0– Overhead.....340 = $52......000 pounds) c$93...000)...........000 + spoilage Spoilage = 2..500/10.440 Total costs accounted for ...... –0– Total costs assigned to spoiled units....400 $128..000 + 16.......... 10....200 Total ending WIP inventory...300)...........

.

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

(Recall that the amount of service received by the first department to allocate in the step allocation sequence is ignored.. while the simultaneous solution method fully recognizes inter-service-department activities. The direct method makes no inter-service-department allocation. or that services the greatest number of other service departments. This criterion is used to minimize the unrecognized portion of reciprocal service department costs. 7–7. 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 7–6.7–5. Allocations usually begin from the service department that has provided the greatest proportion of its services to other departments. 5/e . the step method makes a partial inter-service-department allocation. Inc. 1997 188 Cost Accounting.) © The McGraw-Hill Companies. The essential difference is the allocation of costs among service departments.

The reciprocal method takes into account all of the services rendered among the service departments. 7–12. However. However.Solutions to Critical Analysis and Discussion Questions 7–8. Many of the exact reasons for the continued use of information based on allocated costs are still unknown. This created incentives for technical people to type their own work. Allocated costs were higher because high cost lab space. An awareness of total costs may influence managerial behavior and decision making. nor to a specific manufacturing department. 7–9. Costs allocated to word processing were high. This principle can be extended to even more factors. The concepts of direct and indirect are related to a specific cost object within the organization. Thus. Chapter 7 189 . 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. 1997 Solutions Manual. The fixed portion is allocated on the basis of capacity demanded and the variable portion on the basis of services used. 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. its widespread usage by management would indicate the information is beneficial. thus word processing’s charges for typing was high. 7–10. For example. However. Inc. However. 7–13. more than one factor may be used to relate the cost to the cost objects. Costs which have a significant fixed component and a variable component as well are often allocated using dual rates. Management may believe there are benefits to the use of allocated costs. When a cost has two or more different relationships between it and the cost object. 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. the costs of the payroll accounting function which represents a service used by many different departments cannot be traced directly to a product. 7–11. Cost allocation may make managers more aware of common costs affecting long-run profitability. Allocated costs are also used for contractual and regulatory purposes. Allocating zero costs is another allocation method. A disadvantage is that common costs must be covered before the company as a whole earns a profit. library costs and travel support costs were allocated to Word Processing. 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.. It too is an arbitrary method. an advantage of not allocating costs is that the time saved reduces the expenses of cost allocation. It is preferred (assuming cost-effectiveness) since it results in an allocation scheme that reflects the total cost of the use of each service. © The McGraw-Hill Companies.

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 a number of employees were an appropriate allocation base. No entirely satisfactory and unique solution is readily determinable. therefore.000 1 employee x ($12. An interesting problem arises when the joint capacity may be less than the capacity that would be required by each department individually. The manager of the department which does not add the employee benefits from the actions of the other department. in fact. Now if P1 adds an employee. 7–16. The service costs are being allocated on the basis of use when. some of the costs were incurred to provide capacity. 1997 190 Cost Accounting. This would be the same as the allocation to P2.7–14. reduce the allocation to the department which does not add the employee. 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. Thus.. Inc. 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. If each producing department has one employee and service department costs total $12.000 ÷ 3 employees) = $4. the allocation would be: P1 P2 2 employees x ($12.000 ÷ 3 employees) = $8. The addition of an employee in one department will increase the allocation base and. it may not be possible to obtain correlation between a cost and the allocation base.000 cost reduction even though the manager of P2 took no action which would warrant such a reduction in costs. An example may serve to highlight the point.000. though.000. © The McGraw-Hill Companies.000 and the manager in P2 has a $2. 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. then the allocation would be: To P1: 1 employee x ($12. 5/e . 7–15.000 ÷ 2 employees) = $6. In practice.

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

Allocation by wire service hours results in an allocation of more costs to the TV station.000 = $82. 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. The TV station uses relatively more wire service hours than the radio station and when wire service hours is the allocation base.) Alternative allocation bases: Cytotech Company.000 = $40.142 c.858 + $82. TV Station 450 x $100.000 450 + 300 Check: $100. 1997 192 Cost Accounting. it receives the greater cost allocation. it receives a greater portion of common costs.000 = $60. a. © The McGraw-Hill Companies.142 100 + 460 Check: $100.000 = $17.000 = $60.000 + $40.000 = $17.000 450 + 300 Radio Station 300 x $100.7–19. (15 min. 5/e . Wire service hours basis. Inc.858 Radio Station 460 x $100.000 b. Hours of news broadcasts TV Station 100 100 + 460 x $100.. Use of hours of news broadcast as a basis allocates more costs to the radio station.

. If so................. Inc........... The front of the store may be more valuable space........ 33.....000 x $400...........000 30.000........000 Dry Goods $112........500 b.” There is little question that store areas with a greater customer traffic count are considered more valuable..... 120.......... © The McGraw-Hill Companies........ “Meat” should be allocated more per square foot than “Dry Goods......) Alternative allocation bases: WARP Enterprises. $51.....000.....333 120.............. An allocation scheme based on traffic count or profits before cost allocation might be considered more reasonable..500 100....000 x $400...........000 Operating profit (loss) ......... (20 min....7–20. Operating profit before building occupancy costs Building occupancy costs: 10... a....667 Meat $85.....................000 $ 12.. 1997 Solutions Manual.. Chapter 7 193 ....

00 per standard jacket 80. Materials used: 1.000 Deluxe: 150. 5/e .40 = $640. 1997 194 Cost Accounting.000 = $12.000 Deluxe: $200.000 © The McGraw-Hill Companies.7–21.67 per deluxe jacket 15.000 = $64.000 x $6.000 Deluxe: $640.40 = $960.) Alternative allocation bases: The Quality Jacket Company.000 = $8.00 per standard jacket 80. Standard: $640.000 = $6. Multiply the rate times the materials used per product: Standard: $300.000 + $200.000 = $42. Rate = $1.20 = $640.000 3. Divide the total overhead allocated to each product line by the units produced: Standard: $960.000 x $6.20 = $960.000 x $3.40 per hour of direct labor 100.00 per deluxe jacket 15. (25 min.000 + 150.000 Deluxe: $960.600. Standard: 100.000 2.000 2.000 Direct labor hours: 1. Compute rate per dollar of materials used: $1. Inc.000 3.20 per dollar of materials used $300..000 Rate = = $3.600.000 x $3.

000 With units of output as the allocation base. Chapter 7 195 . © The McGraw-Hill Companies.280.000 = $32. Rate = $1. Standard: 40.00 = $320.000 3.000 $320.000 x $32.00 per standard jacket 80.280. the rate will be the same for both types of jackets..33 per deluxe jacket 15.00 per machine hour 40. Standard: Deluxe: $1.000 2.00 = $1.84 per jacket 80.000 = $16.600.000 = $21.600. 1997 Solutions Manual.000 Deluxe: 10.7–21. Rate = $1.000 x $32.000 = $16.000 Output: 1.000 + 15. Inc.000 + 10. (continued) Machine hours: 1.

.00 (MH)..75 10.....33 80...00 8..........67 (DLH) ....00 $29....84 $110. C.. D....000/15. 16. 8..... C...... Management should evaluate the cause and effect relationship comprising overhead costs to determine the most appropriate allocation base...33/jacket Direct labor = ($8 x 150....17 b... The allocation method chosen does not affect The Quality Jacket Company’s total manufacturing costs............84 Per unit variable cost calculations: Direct materials = $300...... Alternative allocation bases: The Quality Jacket Company. 5/e .. © The McGraw-Hill Companies.00 21. D.. $136.00 Total ......... Materials used Direct labor hours Machine hours Output DLH $ 3.000 = $13.......33 Direct Labor .. Allocation base options: (Allocations taken from Exercise 7–21) Standard Jackets A.....75 10.00 (Output)....00 (MH) .. Materials used Direct labor hours Machine hours Output Allocation (Mat) . 80......66 Output $ 13.....000/80....000 = $3.. 1997 196 Cost Accounting.................00 (DLH) ......... $42........84 $30......000)/80.. 16......... Four different cost numbers per jacket are reflected in the available selection of four different allocation bases.....00 16......7–22.000 = $10. 16..............67 Total .00/jacket Options: Mat Direct Materials ......75 Direct Labor ........................ 42.00 64.........33 $114.. 12..... $25..00 Allocated Overhead ..00 16. B....75 MH $ 3. Inc.. 21... 64......000 = $80/jacket Options: Mat Direct Materials .....75/jacket Direct labor = ($8 x 100. $ 3.......00 DLH $ 13...33 80....00 16.75 Deluxe Jackets A.. B.. only the costs assigned to each product...33 (Output).33 MH $ 13. 10... $ 13..000)/15...75 10. a...........00 $21...59 Allocation (Mat)..75 Output $ 3...33 80...84 Per unit variable cost calculations: Direct materials = $200. $12.00 $157.00 Allocated Overhead ......

....30) $37.....20 used by P1 and P2.. Chapter 7 197 .10 + .. the allocation basis is the ..500 = ...500 = $100.000......000 (Since .500 + (.50 + .500 = x $100....000a 37.) $40. 1997 Solutions Manual...10 are ignored..500 . $40.000 = b $62..500 a P2 $40...30 x $100.30) (.000.000a S2.80 of service department 1’s costs used by S2 . $102.. and $62..10 x $80.. $37.500b $77. Direct Method: To From P1 S1.. (20 min..000 © The McGraw-Hill Companies.) Cost allocations—direct method: Acme Corporation.. 62.500b Total Costs ...7–23..50 ..50 + .. Inc.

. $77..138............. Costs assigned to jobs: Job 10: Labor hours Machine hours: Total ..........H. $102...................89 = $91......202 $ 11........ Job 11: Labor hours: Machine hours: Total ......000 after allowing for rounding ($105..................091 10 x $1....55 = $63......138.............. (30 min....... Total ......410 $74...........) Allocating service department costs first to production departments................799 = $180......500 110 mach... hours = $704............... $102............. P1 Costs allocated to each department (from Exercise 7–23) ........ Machine hours ..............111 14.111 20 x $704..............89/L............................001)... 1997 198 Cost Accounting.55/M.. Allocation bases: Job 10: Labor hours.....091 $105.........500 –0– 20 –0– 90 110 Total $180.......... P2 ...... © The McGraw-Hill Companies....H..410 $ 91................... 5/e .. Job 11: Labor hours....... Inc...138.......55 = $14....799 Note: The total costs allocated to jobs equals $180.......... 80 x $1..389 90 x $704.....500 80 –0– 10 –0– 90 P2 $77....89 = 11.. Machine hours .389 63.500 90 labor hours = $1.7–24.... then to jobs: Acme Corporation.......202 + $74......................000 Department rates: P1 ....

.000 = x $48.000 = b © The McGraw-Hill Companies...000a 36. 1997 Solutions Manual......000 (100 + 400) 400 $16....000 100 x $20.000) $12. Total costs allocated . a Maintenance $48.000) Maintenance allocation .000 (1.000 x $48..... Inc..... Inc.....000 $36.000 + 3.000 + 3... (25 min...000b $16..000 Assembly NA $16....000b $52..000 = 1.000 (1.. $20.000 = x $20....) Cost allocations–direct method: Custom Tailors...000a 12..000) Cutting NA $4. GFA Service department costs..000 (100 + 400) $ 4.. (20.7–25.000) 3..000 GFA allocation.. Chapter 7 199 .000 NA (48..

000a S2 .. Inc...000a (20.000..000 (.500 $69.. a$64.000) To P1 $50......50 + .$ 80. Therefore.000 (..000 = 50% x $100. $100. S1 should be allocated first... Step Method—reverse order: From Amount S2 ...000 P2 $30..000 = $80....000 b$164...30 $102. To From Amount S2 P1 P2 a a S1 .000 $110..000 = x $100..30) $102.000 $ 8.10) © The McGraw-Hill Companies.000 = 10% x $80..500 = $164... 1997 200 Cost Accounting..10 + . $100....000.....000 from S1 c ........000b (64...... $50...000 and $30..50 .500 + $61.7–26. 5/e ..500c Total Costs .000 = 30% x $100...500 = 80% x $80.$164..500 = x $164. $61. (25 min..500c 61.000c $100....000b Total Costs ..000 = $100........000 b$100.000 S1 $20..000c $80..000 S1 .500 = x $164.) Cost allocations–step method: Acme Corporation....000a 50.. a.. a$20.50 + .....000 = 20% x $100..............000.....000) 102. Step Method—recommended order: S1 provides 80% of its services to other service departments while S2 provides 20%.000 direct costs + $20.000 $64....10 $50.000 from S2 c .000a 50. $8.....000 direct costs + $64...30) (.000 b......000 $ 8..

680 = © The McGraw-Hill Companies.. 1997 Solutions Manual.. GFA Service department costs.600a 5.... Inc...) Cost allocation—step method: Custom Tailors.7–27...........000 (1...000 + 1. (15 min.000) 3......480 Using this method...000 x $48.920b $15.. more costs are allocated to the Assembly Department than by using the direct method. 9... Chapter 7 201 .....680b $52..920 = 100 x $29...000 + 1..000 x $48.....800 = b $5......... a $9..000 + 3.....800a 23...000) $28.000 Maintenance allocation .....600 (100 + 400) $23..000 + 3.600) Total costs allocated . Maintenance $48.600 (100 + 400) 400 x $29...... Inc.520 Assembly NA $28..000) Cutting NA $ 9...600a GFA allocation.000 (48....... $(29. $ 20..600 = 1.000 (1.

238 Allocating to P1 and P2: P1 = .000 + $20.048 S2 = $100.476 © The McGraw-Hill Companies.000 + .16S1 S1 = $100.2S2 S2 = $100.1S1 + .8($119.84 S1 = $119.8S1) = $80.048) + .000 + .000 .1($119. Inc.) Cost allocations—reciprocal method: Acme Corporation.048) = $195. (45 min.5($195.1S1 + .048) + . Set up the equations: S1 = $80.7–28.000 + .524 P2 = . 5/e .000 + .000 + .2($100.3($195.238) = $109..8S1 S1 = $80.3S2 = .5S2 = .000 + . 1997 202 Cost Accounting.1($119.238) = $70.

990) + .96S1 = $72.000 + .182 P3 = $390.55($89. Chapter 7 203 . Inc.500 + .990 .042 Not required—Costs allocated to P1.500 direct = $28.4S1) S1 = $67.776 P2 = $312.776 total – $120.000 $67.682 allocated P3: $447.500 $390.950 S1 = $72.20S1 . (15 min.000 $59.182 total – $312.3($75..950 = $75.000 + .990) + .4($75.896) = $160.10S2 0S2 Computations: S1 = $67.2($75.950 + . 1997 Solutions Manual.1($75.15($89.896) = $447. P2 and P3: P1: $160.40S1 + + + + + .20S2 .96 So S2 = $59.000 direct = $40.55S2 .2($89.042 allocated © The McGraw-Hill Companies.500 + .30S1 .776 allocated P2: $341.000 + $5.000 $312.896 Next solve for P departments: P1 = $120.10S1 0S1 .990) = $89.15S2 .500 + .896) = $341.1($59.500 + + + + + .000 direct = $57.990) + .7–29.) Cost allocations—reciprocal method: two service departments.04S1 .000 + .042 total – $390. P1 P2 P3 S1 S2 = = = = = $120.

....000) 3. 5/e .. Maintenance $48...104 (1..7–30....725 Assembly NA $20.600 + 1/30 (G) $29.276 a G M G G G 29/30 (G) G M M $5..104) Cutting NA $5..000) $10. (30.000 x $53.862c $52...000 + 1/6(G)) $20...104 (1.000 + 1/5(M) Maintenance costs = $48... (35 min..621 Total costs allocated .414b 31..621 = c NOTE: Minor discrepancies in the solution are a result of rounding..621 $48..000 + 1/5 ($48...000 + $9..000 + 1/6(G) $20....621 (100 + 100 + 400) 1.414 = x $30.621) $53.862 = x $53... 1997 204 Cost Accounting. © The McGraw-Hill Companies.104 = = = = = = = = = = GFA costs = $20.000 GFA allocationa ...) Cost allocation—reciprocal method: Custom Tailors....... Inc.000 + 3....104b (53. Inc..104b 10.600 + 1/30 (G) $29. GFA Service department costs ...000 + 1.104 b 100 x $30.600 (30/29) = $30..$20..000 + 1.000 + 3.600 $29.000 5.......621c $15. 10....621) c Maintenance allocationa..000 $31....621 (100 + 100 + 400) 400 $20.000 + 1/6 ($30.

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

) Single vs. dual rates: Cytotech Company.086 Radio Station Fixed Costs: Variable Costs: 460 x $52.086 + $61. 5/e .200 450 + 300 Total of fixed and variable costs $61. (15 min.7–32.000 = $38. 1997 206 Cost Accounting.000) = $28.000 – $52.000 – $52.714 300 x ($100. TV Station Fixed Costs: Variable Costs: 100 x $52.286 450 x ($100.000 100 + 460 = $ 9. Inc..914 Check: $100.914 © The McGraw-Hill Companies.800 450 + 300 Total of fixed and variable costs $38.000) = $19.000 100 + 460 = $42.

000 = $105.000 = $105.000 x $200.000 + 12.000 = $150.000 + 900.000 Check: $200.000 Personal Injury 12. Chapter 7 207 ..000 Personal Injury 900.000 = $50. (20 min.7–33.000 x $200. Inc.000 + 12.000 = $94.263 + $94.000.000 4.000.000 x $200. Bankruptcy 1.000 x $200.737 1.263 1.000 b.000 + 900. 1997 Solutions Manual.000.000 = $50. a.) Single versus dual rates: Law firm.737 © The McGraw-Hill Companies.000 4.000 Check: $200. Bankruptcy 4.000 + $150.

000 4.000 + 12.000 x $100.632 1.) Single versus dual rates: Law firm.368 1.000.000 x $100.000 Total $77.632 + $122.632 Personal Injury Fixed Costs: 900.000 Variable Costs: 12. Inc.000 = $77.000 + 12. 1997 208 Cost Accounting.000 4.000 x $100.7–34. 5/e .000 = 75.000 Total $122.000 Variable Costs: 4. (20 min. Bankruptcy Fixed Costs: 1.000.000 = $52.000.000 + 900.000 = $ 47.000 + 900..000 x $100.368 Check: $200.000 = 25.368 © The McGraw-Hill Companies.

710 $300.000 $250.3% 22.0% Assets $240.7%) 3 (14.93% = $ 74.000 x 28.5% + 23. 1997 Solutions Manual.5% 17.000 x 22.5% + 22.200.000 = = = = 26.93% = $ 71.000 $210.57% = $ 85.000 $4.0% 14.000 $35.000 $4.000.0% + 27.000 $4.000 $4.000 $250.000 $250.000 x 24.0% 28.000.710 B $300.7–35. (20 min.5% 100.2% 100.000 $60.000 $1.0% 100.3%) 3 (28.57% 100.790 C $300.000 $900.000 = = = = 34.93% 22.00% Allocation of headquarters’ costs A $300.57% = $ 67.93% 24.0% Allocation percentage A B C D (34.) Multiple factor allocation: Edee Bower Clothing.000.790 D $300.57% 23.0% + 25. Inc.0% + 17.8% 23.000 = = = = 25.100.0% + 30.2%) 3 = = = = 28..000 $250.0% + 27.000 $700.000.0% 24.0% 27. Chapter 7 209 .000 $1.000 $250.000 © The McGraw-Hill Companies.000 $200.000 $70.000 x 23. Store A B C D Payroll $85.0% 30.0% + 26.000 $900.8%) 3 (24.7% 27.0% Percentage factors Sales $1.000 $900.000 $900.000.

15] x $400. Inc.6 + $.2 + . 1997 210 Cost Accounting. (25 min.2 + $.4286 + .150 + .4 + $1.000 x 7% 3 $2. Inc. Mo: –0– since there is no income tax Ill.6 $1.6 $1.6 + $.5 + + x $400.4 + $1.) Determine state income tax allocations: Multi-State.5 Cal: [ ] 1 [. 1 $2.8 $2.000 x 7% 3 = $7.734 Tax Liability = Note: Dollar amounts in millions of dollars © The McGraw-Hill Companies.8 + $..3 + $.5714 + .5 [ ] = 1 [.8 + $.000 x 5% 3 = $6.3 x $400.7–36.2 + $.3 + $.6 $.143 Tax Liability 1 $1.250] x $400.8 $.8 $2.000 x 5% + + 3 $2.8 $.4 $. 5/e .

. one can argue that RAM-B is a specialized product..000 $25. Different per unit costs result from using two different allocation bases (direct labor costs and units produced). ROM-A 200.....840 $.600 a b $3..400. and thus should cost more than ROM-A....... Chapter 7 211 .. Since labor costs represent a low proportion of total costs for both products.... 1997 Solutions Manual. Direct labor .. Costs per unit..840 = 200..000 15.. Units produced.Solutions to Problems 7–37. Direct materials ..000 b.128 = 1.000.000 $25..........000 RAM-B 1.000 $2....400. Total costs .000 x $2. Overhead .. Units produced.304 = $600/$625........ Overhead ..600 a$15..........600 $224 600 120b $944 $.000 x $2.000 x $2..000 200..955 $3....000 1...000a $41.... Direct labor .59 = $944 1.. Inc.000 c. Total costs ......... ROM-A 200..000 = 1.. Costs per unit...000 1...304b $3...000/32. units produced likely provides a better allocation base..) Choosing an appropriate allocation base in a high-tech environment: Chips Corp. a.. © The McGraw-Hill Companies.... However.600 $ 224 600 2.840a $29.000 3.000..........205 = $41.000 RAM-B 1.000 b$120 = 200...149 $29. Direct materials .600/32.. (25 min.128 $1......000 x $2..840 = $1.....400.000/$625.000 $.....400....

.... Rails Units produced . $5..125b $3. Inc.. $7. 400 Overhead.) Choosing an appropriate allocation base in an automated environment: Fences Plus Corp..000 a. $8...000 x $550... 900 Direct materials . it would seem that the only difference is the length of the production run... $8. Hence...805 $126.. © The McGraw-Hill Companies. the relative cost is about 2.. Posts 30 $180 500 66b $746 $24...000 b.. 2..000 x $550.......867 = $746 30 c....000 x $550. Since materials costs and time to produce are approximately the same for both units....960 Costs per unit .000 b$3...580 Direct labor . 1997 212 Cost Accounting.000 x $550......... In b.422 $8.960 900 a$1.......... 400 a Overhead.000 b$ 66 = 30/250... They are related to the number of production runs.....500 = $400/$88.....480 = 900 a$2... they do not seem to reflect the cause-and-effect criterion for allocating costs to units.. (25 min.980a Total costs ... is that labor costs are not closely related to production......833 $3......480 Costs per unit .805 = 30 Rails Units produced . 5/e .......... which seems more reasonable...... 1. In a. the relative cost of posts-to-rails is 13..... but not to units produced.....980 = 900/250.... $9...5:1 which seems excessive for production run differences alone.8:1...125 = $500/$88. 900 Direct materials ..844 = $7..... The additional problem with a....580 Direct labor .. The second method appears to relate overhead with the costs of units produced in a more reasonable manner.. Posts 30 $180 500 3.. $5.500 Total costs ..7–38..

which ignores Building Occupancy: . ..000.52 = $624 ÷ $1.000 square feet..7–39..200...09 = 9 ÷ 100...06 = 6 ÷ 100.. which ignores Payroll Accounting: ...20 = $240 ÷ $1... .06 .200.. dBasis is $1.... a. which ignores Equipment Maintenance: . 1997 Solutions Manual.... Chapter 7 213 . reduce the different allocation bases to proportions used by departments other than the same department. — a Employees . (50 min.) Step method with three service departments: Crash Test Corporation.. .20 d — a . .... Building Occupancy Building Area ..200.000.....01 d aSelf-usage Proportion Used By Payroll Equipment Accounting Maintenance Painting b b ...06 . etc.50 .06 = 15.09 c Equipment Value .. cBasis is 100 employees. etc..72 a c — .. .18 .27 is ignored bBasis is 250...000 ÷ 250..04 = 10..35 . To facilitate solution.04 .01 = $12 ÷ $1. Inc.. etc.200..52 d Polishing . © The McGraw-Hill Companies..000 ÷ 250. .

436 $2.025.280 205.50) .20 x $264..01 $2..000 To Building Occupancy $360.01 + .439.000 which is the total of the direct costs for all service and producing departments.454 = .000.. 1997 214 Cost Accounting.800. etc. etc..20 + .35 + .114c $1.568) 137. Totals ..52 + .27) b .640 = x $264.000 Painting $1..413. 5/e .72 x $415.830 = x $552.. a $52.35 + . $264. Inc..7–39.18) c © The McGraw-Hill Companies.800a (552.09 + .800.454c $2..928b (415. (....042 83..564 + 1.000..436 = $3...564 71...928 = $332. (.568.000 (264.025...830b 332.09 x $552. (.35 $205.72 + . (continued) Rank for allocation: Equipment Maintenance Payroll Accounting Building Occupancy Crash Test Corp.. (continued) a.280 294.. Step Method Equipment Maintenance Direct Costs ..114 = x $415.800 = .350.413..52 + .000 FROM Equipment Maintenance.568 (.18) .50) $52.20 + . Payroll Accounting $500.000) 52.640a 52.72 + ..000 Polishing $965.18 $83..01 + .800) 2.27) . (. Payroll Accounting ... Building Occupancy .09 + . (..

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

5 + ...$40..500 c.000 – $60. Total allocated to P2 = $22..500 S2 = = $60.500 To P2 –0– $22. All of S1’s costs were allocated to P1 and none were allocated to P2..000 ) + From P1 S1 ....000 from S1 is allocated to P1.7–40... Amount allocated from S2 to P1 = $37.375 To find the cost of S1’s services: S1 = Total – S2 S1 = $100.. © The McGraw-Hill Companies..3 x (S2) ..500 (= $22. b..500 = .$37.000 S1 = $40.3 x $60..3 $22. not to S1. (40 min. nothing is allocated from S1 to P2....500 ( .. S2’s costs are allocated only to P1 and P2..5 .500 from S2 to P2 = . Inc.000 Since $40.000 S2 . To find the cost of S2’s services: $22.500 + 0).5 .) Solve for unknowns: Pete’s Delicious Foods. a. Since the direct method is used...375 x (S2) $22.. 1997 216 Cost Accounting....000 ... 5/e ..

Inc.00 c (36) 0 13. (60 min..30 $71. 1997 Solutions Manual.. (S3) .50) (.. 2 Allocation: To Amount to From: be allocated Natural gas (S1) .05 x $48. $35 = $70 x .5 = x $36. $ 70 Equip..—fixed (S2) .50 + ..30) (.00a b (48) 6 3b 30.. b.55 . a..50 22. 1 P2 = Production Department—No.. Let: S1 = Natural gas production S2 = Electric generating—fixed S3 = Electric generating—variable S4 = Equipment maintenance P1 = Production Department—No.15 ..30 + .40.00 28a 7.30 . 48 Elec.10.00 9.000 from the outside utility.55 + .. ..55 + .50) d S3 allocation: ... The company considered only the direct costs of the electric generating plant... $22.. Maint..7–41.. It did not include the costs of natural gas received to power the electric plant or other indirect costs.50c (111) 71.000 internal cost to $160..10 + .—var. etc..30) © The McGraw-Hill Companies..18d $722. Chapter 7 217 . then the company would compare $147.) Cost allocation—step method with analysis and decision making: Elektrik Corp.50 b .30 + ..82d 39.10 S4 allocation: $6 = x $48. 111 S4 $48 S3 P1 P2 $ 80 $600.32 $545. $7 = $70 x . 36 Elec.00 $440.18 = x $111 (.. $3 = .68 S2 $30 Costs allocated from the electric department S2 + S3 = $36 + $111 = $147 If electricity generation causes the costs allocated to it.50 $13. aS1 allocation: $28 = $70 x . (S4) . $39..80 cS2 allocation: ..00a 35.82 = x $111.05 + .50 = x $36 (.

..... 110. it loses $58.. 1997 218 Cost Accounting................10 + . If the company could realize $58.. (continued) c.... 5/e .......000 electric company rates..... Inc.000 = $48.. If Elektrik produces its own electricity.......... want to consider other factors when making this decision......000a Equipment maintenance........... Management may.000 in potential sales of natural gas..05 $9.. of course.. then the relevant costs would be: Natural gas ....... b ........... aThe $58.....000b Direct costs.....7–41..80 [ ] © The McGraw-Hill Companies..........000 equipment maintenance x .000 from the sale of natural gas is an opportunity cost. $58...... 9.....000 which is greater than the proposed $160...000 $177.000 from the sale of the natural gas......

.925) (6..... Inc.3% Cost Allocation S2 –12..0% 0......000 Inverse Matrix Performed By: S2 S3 S4 10..0% 30.0% 10..........0% 55..115) P1 ..0% 0. 1997 Solutions Manual. 34........1% P1 .. 65..0% 0............733 18.....0% 15......9% 60.....0% 10..0% P2 0. 50..0% 0...6% –10...0% 5.0% 0.3% S4 –22.7% P2 ..7% 38.0% $30..... –42...0% 50.......000 © The McGraw-Hill Companies.. (1...667 17......0% 50.......2% –101.0% P2 ....0% S4 ....... –2.....$(73. Chapter 7 219 . –0.0% 30.7% –101.. 24.. 0..0% –100.0% P2 0.....374) (1...0% Costs to be allocated: $70.0% 0..249) $ (3.0% 100.....–104..0% –5......883) (83..6% S2 .......239) (48.040 From: S3 S4 $ (9.......718 $228...7% 64....333 30........................5% –104.0% 0..... (30 min. 40......0% 0..960 P2 ........0% 20.0% 0...1% S3 –11.........0% 0......2% –14.. Services Used By: S1 S1 ..936) (424) (4...0% 0....6% –0.0% 100... 10....282 $111..........823) S2 ...0% 0......000 P1 0.2% S3 ...0% 0........0% 100..000 $80...0% S3 ....0% 0.0% –100..829) 49......) (Appendix) Cost allocations—reciprocal method (computer required): Elektrik Co.......0% P1 0.0% S2 ....484) (3........0% 10.........8% –10.0% 0..722 30..3% 61..0% To: S1 S2 S1 ...0% P1 .........312) S3 .. (29. –100.267 11.0% 5......283) $(10. 0....7–42.......0% S4 ....... (148) (30. 45...........685) S4 ..278 P1 $– – – – – – P2 $– – – – – – Total Allocated to Production $116..816) (4.0% 0.......0% –100.......0% 36..000 $48..0% 0..0% 100....0% 0..0% S1 S1 .......4% 39..9% -5....

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

000) b. 1997 Solutions Manual. The direct method is used.500) c. General factory administration is allocated based on direct labor hours. (88.840 = 8 x $240.000 = 437.500 + 437. The amount allocated to the fabrication department is $111. a. © The McGraw-Hill Companies. The answer is 3.000 + 72. Inc. (35 min. The answer is 1. The answer is 2. $3. (562.) Allocate service department costs— direct and step methods: Doxolby Manufacturing. Factory maintenance is allocated based on square footage occupied. The amount allocated to the assembly department is $70.500 x $160.000 (8 + 12 + 280 + 200) d.7–44. Factory cafeteria costs have already been allocated from it to other departments.200.000 = .760 = 88.016 x $240.000 x $203. The answer is 3. The direct method is used. Chapter 7 221 ..000. There is no allocation of costs back to the department after costs have been allocated from it.

406 x $12.240 2.. Allocations based on time usage: Proportion of Department Total Time a Reservations .050.000..500 ÷ 15.000 x .000 part (a) = $7... Dual rates should be used. Inc.500...892.. .110 Maintenance . a. but had a relatively low storage capacity requirement..240 = 600 ÷ 2.150 . .. . 2 + 4 $4.000 x .500 ÷ (1. . For example.084 2..... 5/e .000..161.000..500 + 1..000.277.282.323 afrom (2) (3) Allocated Proportion Time Cost of Capacity b $1..323 c......700 ÷ 15... etc.862...300 3.000..110 = 1. .500 b.000..000 420..657.500 = ..150 $12.000 = . .) Cost allocations—comparison of dual and single rates: Sky Blue Airlines...406 = 6.. $1. Maintenance had the highest time usage (and thus.200... $2... ..050. Using dual rates. b$1..050...323 = 5..500 ÷ (2.500 .000) = 2...975. there may not be a causal relationship between time usage and storage-related costs.300 = ....000 a2.300 ÷ 15.406 Accounting .277.050.200.323 x $12.000 = .076 = 190 ÷ 2.... $3.892..600 c 775.892...700 + 6.135.050.000. .050. $775.600 x $5.110 x $12...161a Scheduling ..161.000 b. If a single rate (time usage) is used. was allocated a large share of total costs using a single rate).940.500.150 $12.050 1.....000 ÷ 15..500 d$3.7–45..000 + $5....500 = ...500 = $7.050.323 Allocated Cost b $1.406 Accounting .150 = $7.325.940.500 + 600 + 210 + 190) = 1.050 ..000..300 + 5.050.862.892..500....000 x .000 (5) Total Allocated Cols...240 x $5.050.000.. $2. .600 = 1.000 x ..300 ..150 = ....161 Scheduling . ..500 4..325.135....110.500.110 Maintenance ... Dual allocations (1) Proportion of Time Usage Reservations . ....500 ÷ 2.000 380.050 1.050.. .076 (4) Allocated Capacity Cost $3.135....500 3.084 = 210 ÷ 2.500.300 2. Maintenance would receive a fairer share of costs.000) = $1. © The McGraw-Hill Companies..000d 1.161 x ($7. $4. 1997 222 Cost Accounting...300 = $7...406... $1..050.....050 c. (40 min. . ...

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

. Inc.839).717 miles equals . The minimum cost to the company would be $1. b.640. This alternative would result in a reimbursement of $2.678 miles (= 1.839 + 1.400.640).7–47. .. the employee would request the full $2. 1997 224 Cost Accounting. © The McGraw-Hill Companies. Dividing by the total mileage of 4. This problem demonstrates the need for ex ante policy when there are arbitrary and potentially contentious allocations. 5/e .059. Depending on policy some amount between $2.059 (i.800) is greater than the cost of the excursion ticket. A reasonable alternative could be computed as follows: The round trip-business portion of the trip was 3.) Cost allocation for travel reimbursement.059 and $2.400 = $2.e. Since the round-trip cost of the Salt Lake City portion (2 x $1.640. The maximum reimbursement would be $2. (30 min. Since the trip was primarily for business it would seem appropriate to reimburse a minimum of $2.78 or 78% of the total fare. c. a.78 x $2.640 would usually be suggested as a basis for reimbursement.

Inc. Laundry & linen 4. 1997 . Employee health & welfare 3.. Buildings depreciation and maintenance 2.7–48. Central supply 225 © The McGraw-Hill Companies. Step method solution: Order of allocation: 1. (50 min.) Cost allocation—step method: Wecare Hospital Case. Maintenance of personnel 5.

..10 + .09/.85 = sum of proportions allocated to departments after laundry & linen in the allocation order = ....10 ..34 . Additional computations: a. the denominator of the allocation equation Xi is equal to one. Maintenance of personnel.....82b) Radiology .110 (...15 — — — Maintenance of Personnel ..40..000.02 ..118 (. The sum of the allocation percentages (i..82b) Laboratory .059 + .) 226 © The McGraw-Hill Companies..05 –0– — — Central Supply –0– . Employee Health & Welfare and Maintenance of Personnel are not used by departments ahead of these departments in the allocation order. Employee Health & Welfare ...82b) Patient Rooms . (The last term was rounded down so the four would sum to one. Therefore..85a) .. Laundry & linen .12 — Operating Rooms .10/......353 + ..05 . .) b.04 ..82b) Since the services of Buildings Depreciation and Maintenance..805 (..08 ..43 ..30/.85a) .40/..09 + .05 .059 (.036 (...05/..02 .......... Central supply ..85a) ..10 .04 + .e.049 (. (The third term was rounded down so the four would sum to one..25 .470 (.30 + ..7–48....470) equals 1. Laundry & Linen .10 .118 + .66..03 –0– ...85a) . 1997 .. Inc.353 (.71 .36 ...66/...03/.04/. (continued) TO (Department) Employee Health & Welfare –0– — — — — FROM (Department) Buildings Depreciation and Maintenance..82 = sum of the proportions allocated to departments after central supply in the allocation order = .. the proportion allocated to each department equals the proportional usage of the total ∑ Xi service allocation base.03 + ..05 + .

572 $233....600 18.000 83.......71 x $830...000 18.......250 182.269 Laboratory $125....... Medicare portion...... $589. 1997 ....... Inc..000a 56.947 105.405 112.........250) Maintenance of Personnel $210. Medicare reimbursement claim...000) Laundry & Linen $250....000 16..262 Patient Rooms $2.000 = ...300 = .940 28.......547 Radiology $160.750 137.612.....346 20% $ 62...250 –0– 37.889 $311.7–48.10 x $830..... Buildings Depreciation and Maintenance..000..300 161.750 45.....388 36% $1. Maintenance of personnel .000 16... Central supply ..500 93..000 These allocations are computed by multiplying the proportions on the previous page times the amount to be allocated..000 –0– 11.....220 Direct costs.000 83..230 87.... Employee Health & Welfare .......500 = .. a b $830..896 $4..450...... Laundry & Linen .. 227 © The McGraw-Hill Companies...478.... (continued) Buildings Depreciation and Maintenance Employee Health & Welfare $375...000.....660) Operating Rooms $1.000 –0– (375.......410b (793.250b (389.....000 589.750) Central Supply $745..000.800...932 31......000 22. $16...000) $83...600 = .750 –0–b (311... $41....078 28% $ 65.922.000 (830..... Totals .188 25% $ 480..........02 x $830.000 41....175 38.....600 15.....966 24.........303b $1...995 638.05 x $830....

.

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

Is there a causal relation? Allocate costs to the product that causes the cost. 2. therefore. 8–7. are not a problem to allocate. Thus. Low volume products often require more machine setups and purchase orders for a given level of production output. Furthermore. Solutions to Critical Analysis and Discussion Questions 8–9. Reasonableness—Some costs cannot be linked to products based on either causality or benefits received. © The McGraw-Hill Companies. As companies have become more automated and less labor intensive. Products can be goods such as an automobile. so they must be allocated on the basis of fairness or reasonableness. when overhead is applied based on the volume of output. While direct material and direct labor costs may be the same under different cost systems. the low volume product adds complexity to the operation by disrupting the production flow of the high volume items. Traditionally many companies have allocated overhead to products based on the volume of direct labor. and more inspections. it is also incorrect.. 1. based on direct labor. While it is true that there is really only one correct cost for a product. 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. because they are produced in smaller batches. the allocation of overhead costs will probably vary according to the cost system and allocation base you use. 3. Indirect costs can be the overhead costs incurred in manufacturing a good or providing a service. can result in erroneous product costs. or a service such as an X-ray examination in the hospital. 8–8. Direct costs such as direct labor and direct materials are traceable directly to a specific product and. 8–12. 5/e . Are benefits received? Allocate costs to the product that receives the most benefit. it is not surprising that this allocation of overhead to products. If this step is omitted the production department costs will be understated. Uncertain—While omitting the allocation of service department costs to production departments is definitely simpler. False—activity-based costing provides an alternative method of allocating indirect costs for both service and manufacturing products. Low volume products may be more specialized requiring more drawings and specifications. False—this chapter deals with the problem of allocating indirect costs to products. 1997 230 Cost Accounting. no cost system can measure these costs perfectly. 8–11. Inc. and ultimately the product costs will be as well.8–6. These companies should use activity-based costing to determine the real activities that cause the costs. Further. it is easy to see how high volume products are allocated relatively more overhead than low volume products. 8–10.

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

000 800.....000 hours x $40 per hour b.600. hrs......000 Overhead. Each department should try to assess what causes its overhead. hrs..000 Direct Materials ...000 = 10.. and use that as its allocation base...500.. Revenue ..000 mach. it is usually not very accurate... 360.000 Direct Labor .000 = 10..000a Profit ..... Paperbacks were more profitable.. Paperbacks Revenue .000a Profit .....000 a$360. $3. When overhead costs are broken down into department cost pools.000 750.........000 600.....040... © The McGraw-Hill Companies.. 600.) Plantwide versus department allocation: Comprehensive Publishers......500...... x $36 per hour = 15......... 600..000 Hardbacks $2..000 = 15..000 800.000 hours x $40 per hour b$600... 1997 232 Cost Accounting..000 Overhead.000 Direct Labor . Inc............ we see that Department P is allocated a smaller share of the overhead..000b $ 700.. 1...600. Inc..........600..000 a$400........ $1... 1......... The plantwide allocation method allocates overhead at $40 per machine hour for both types of books.600..000b $ 550. 400.... $1..000 b$750.000 Direct Materials . While this is the simplest method.000 mach.Solutions to Exercises 8–19.000.... x $50 per hour c..000 400.. (30 min..000 400.... $3....... Harry was wrong. 5/e .......000 Hardbacks $2... Paperbacks a. It assumes that overhead in both departments has the same rate..

.520 machine hours)...... Once the overhead was reallocated into department cost pools.. Chocco Bar c..8–20. Department M has an overhead allocation rate of $2... 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.....640/2....960/1. Overhead ... Plantwide allocation does not correctly allocate the overhead by department.. the cost of the Marsh Bar fell to $243.. Raw Materials (per case) .... Overhead ... Inc.....20 per labor hour ($3.. Total cost (per case) ..... Chapter 8 233 . Although it requires more time and skill to collect and process the information.....00 per machine hour ($17. 1997 Solutions Manual.. © The McGraw-Hill Companies...00 per case..... Monica was correct in her belief that she was being allocated some of Department C’s overhead..... Chocco Bar a........ it simply uses one allocation rate for all products in all departments... department allocation generally yields more accurate product cost information..... 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.... Department C has an overhead allocation rate of $7... (35 min.. Total cost (per case) ................ Under plantwide allocation..00 per case. Direct Labor (per case) ......... Direct Labor (per case) .. Inc..20 per labor-hour d.800 labor hours). a case of Marsh Bars cost $285...... Raw Materials (per case) .) Plantwide versus department allocation: Specialty Sweets..

00 $1.00 to produce. 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 $. The PC BB Special costs $121.10 per part PC BB Special # of Cost Cost per Drivers per Circuit Board Board x 100 parts $ 10.00 Total overhead per printed circuit board Cost of direct materials Total cost of manufacturing each board 36.50 43. © The McGraw-Hill Companies.20 per insertion $3.00 3. (30 min.00 per hour x 1 raw board x 60 insertions x 1 board 1. those that allow for less quality inspection time and less insertions per board. Inc.00 1.00 Cost of Type 67A from Illustration 8–4 $ 9. 1997 234 Cost Accounting..00 per board $.00 b. a.) Activity-based costing: Hewlett-Packard.8–21.50 to produce while Type 67A costs only $118. 5/e .00 $118.00 per board $70.00 16.00 3. they should try to incorporate some of the design features of the PC BB Special into Type 67A.50 14. Specifically. However.00 12.50 85.15 hours 10.00 75.00 $121.00 Quality testing x . Hewlett Packard should continue producing Type 67A.

000 Cost Driver 4. 1997 Solutions Manual.000 per setup $100 per inspection hour $30 per hour Cost Driver 6.000 Total allocated to each product b.000 45.000 pounds 15 setups 200 hours 500 hours Cost Allocated to Unique Product $ 8. Activity Purchasing materials Machine setups Inspections Running machines Rate $2 per pound $2. (30 min.000 30.000 $73.) Activity-based costing: SU Company.. The disadvantage of activity-based costing is that it requires a more detailed breakdown of costs.000 20. If SU Company had been using machine hours to allocate its overhead to the Standard and Unique products.000 15. He would not have known which activities were causing the costs or in what amount.8–22. Ned would have had a much harder time reducing costs. a. 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. Chapter 8 235 .000 $87. These activities can then be changed to reduce costs. © The McGraw-Hill Companies.000 pounds 5 setups 200 hours 1.500 hours Cost Allocated to Standard Product $12. An advantage of activity-based costing is that overhead costs are broken down into activities that cause the costs. Inc.000 20.000 10.

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

.000 per production run x 40 runs for Standard g$36..... Total unit cost..000 80..64j Total $240.....000 $435.000 10..000 90..... © The McGraw-Hill Companies...64 = $264. Chapter 8 237 .000 $264..... $1..000 = $200 per order shipped x 100 orders shipped i$1...) ABC versus traditional costing: Audio Corporation.. 1997 Solutions Manual..000 in shipping costs/150 processed orders f$80....000 total costs for Standard/320.000 84....000 for Standard and High-Grade.......000c Qual.000 per quality test x 12 tests for Standard h$20.....36 per Standard cassette and $2.... The total cost per unit is the total cost per product divided by the total units produced.000 239..000 in production costs/50 total runs d$3.....000d Ship...000 = $2. tests . respectively. (35 min.. orders .. Overhead costs Prod..000 54..000 = $3...000f 36......000 $2...36i High-Grade $ 66...000 100..000 per test = $90.64 per High-Grade cassette. Total costs.000 units produced Reading from the table above.....000 in quality costs/30 total tests e$200 per order = $30........... 200e Total overhead.. a.000 and $84.000h 136...000 $1..36 = $435.... Inc.000 20.000 30..000 per run = $100..... 3......8–24.000 125.000 units produced j$2.000g 20.. Rate Direct labora .000 220.000 114.... aData bData Standard $174...... we can see that the total overhead assigned is $136.....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 $699.....$2.000/100........ Direct materialsb .... runs ...

..8–24.....000 total direct labor d$159.. (continued) b.000 given in the first table in the exercise given in the first table in the exercise c$...43e High-Grade $ 66.. Inc. Total unit cost .......43 and $2..... c Total overhead.000 60.500 $2....500 $240. Audio has been understating the cost to manufacture High-Grade cassettes and overstating High-Grade’s profits... 1997 238 Cost Accounting.000 total overhead/$240... c...917 Total costs ...000 Standard units produced From the table above..000 114....000 220... total overhead allocated to Standard and High-Grade is $159. Rate Direct labora .. The unit cost for Standard and High-Grade is $1. aData bData Standard $174..000 e$1. Direct materialsb .000 125..000 $699.500 = $..43 = $458.500 and $60.917 per direct labor dollar x $174.. 5/e .......500d $458....500 $1..917 = $220....000 159... By allocating overhead on the basis of direct-labor..........500/320...41 Total $240...000 239.. $..500 respectively.41 respectively....... © The McGraw-Hill Companies..

..000 square yards c.......18 x 130.......400h 36...000/60 clients served d$3....33 x 15 commercial clients g$11.....000 180.....250g 23...000 62.000 40.... 3... a$133.....000 Commercial $133.......700c $ 48......000 hours x $9 per hour c$133. Overhead .000 6.. Rate Revenue .....000 hours x $19 per hour = 7....700 Total $419... Greenthumb is that she reconsider dropping residential services in favor of the commercial business..... Chapter 8 239 ........ 1997 Solutions Manual..000 18..... We can explain the differences in profits under the two cost methods by showing Ms.......600 25......350 Residential $286..000 8.... Direct Labor ...000 $177...000 = 7..650 Total $419.300 $128... © The McGraw-Hill Companies.8–25........214 x 3.000f 11.000/5.. Greenthumb that commercial work has a profit margin of 25%....300 Residential $286..350 $143.. Profit ......000 180.......33 per client = $8.000 = 7... (30 min.500 equipment-hours h$23.....000 Commercial $133.000a 63..600 equipment hours e$0.....400 = $0... while the residential business has a profit margin of 50%.. The recommendation to Ms........000 62.000 = $133....000 117...700 = ($62.............. a...000 square yards f$2....250 = $3. 0.. Overhead Transport ...650 $ 33.000a 63.. we can show Ms...000 36...000 hours x $9 per hour c$21...... Greenthumb that there is little correlation in costs between direct labor and the overhead costs.......000 = 7........ Inc. Inc....000b 21. Direct Labor ... Revenue . a$133.....000 hours x $19 per hour b$63.000 hours) x 7.000 $177.000 b$63..000/200...... $133c Equipment ...000 117..) Activity-based costing in a service environment: Green Garden Care....18e Total Overhead . Profit . From the table in part b of the solution.......000 6...18 per square yard = $36..000b 2...000 hours b..750 12...214d Supplies....214 per hour = $18...000/20...

..........250f $36.... 277.....8–26. The ABC system should be adopted if the benefits from improved information exceed the additional costs required to obtain the information...25 per unit shipped = $30..000 OH/120... a.750 $58..000/54 parts c$0... © The McGraw-Hill Companies..750 = ($95.....000 = $2...000 units shipped b....... 1997 240 Cost Accounting.....5 hours per clock x 60... Overhead ..000 $71. the more accurate method is also more expensive.000 clocks produced b$23.000 Travel Clocks 30....000a $23.25c Total Overhead......000 x 10 setups e$5....000 hours c.000/25 setups b$277. (35 min.25 x 45.78b Packaging and Shipping.......000e 11...000 10...000 per setup = $50...... Handling ......250 = $0.78 per part = $15..750b Watches 90........... Inc.000a Mat.250 Watches $30.. Not necessarily.78 x 18 parts f$11... a$2.. 5/e .000 = $277.....000 $ 95..) ABC versus traditional costing: Travel Gadgets Corporation. 0..000 hours = 0.250 Total 120.. Activity-based costing provides a more accurate allocation of overhead costs..750 Production Setup . a30. Note: Your answer may vary slightly due to rounding. Direct Labor Hours.000/120...000 units shipped d$20.. However......... $2....000d 5...000 18.......000 hours) x 30... Cost Driver Rate Travel Clocks $20....

....67 per client x 72 clients e$28..8–27...600 hours d$48...000 40... or when cost drivers are highly correlated with the volume-related allocation base. Salary ...000f $ 28..800e 25..000 = $25 per computer hour x 1.000 Revenue ..000 129..000 Revenue....5% to Tax and 67......000 62.......000 $208... the labor-hour allocation and ABC would have been identical. a$666... $48a Profit.... Account Rate Tax $130......600 Consulting $270.000 revenue/$100 per hour = 4.... and may lead Jack to concentrate more heavily in tax work.....000 hours of labor $48 per labor hour = $192.. Under labor-based costing..... If Jack’s three cost drivers were each also distributed 32..5% to Consulting. In this case...000 80....000d 28.. labor hours were distributed 32......800 = $144 per hour x 200 transactions f$25..000 32. Chapter 8 241 .....000 43.....000/500 transactions c$25 per computer hour = $40...000/1.400b $ 67..000 48. a$400...200 Consulting $270. ABC and traditional costing systems generally yield comparable product-line profits when overhead is a small portion of costs......600 $140..000 192... Expenses: Sec..... Expenses .......000 = $666......300 hours of labor c...000/120 clients per transaction = $72.000 $208. © The McGraw-Hill Companies...........000 72......000 of expenses/4....400 = $48 per labor hour x 1.........000 $179... ........ 1997 Solutions Manual...400 Total $400.... (35 min..200 15.800 Total $400. d......5% to Consulting.67a Supplies..000 hours b$62... 25c Profit .... 144b Computer Deprec. a......) ABC versus traditional costing in a service company: Jack Chapman & Associates.5% to Tax and 67. Account Rate Tax $130. $666...67 b$144 per client = $80.000 hours b.. tax work appears relatively more profitable than under ABC. Inc...

800 per setup = $45.8–28. Inc.000 to WIP Overhead Applied: Running Machines 10.000 to WIP © The McGraw-Hill Companies.000 Direct Labor 100.000 Qual.000 Overhead Applied: Materials Handling 2..000 to WIP Work in Process (WIP) Inventory Department F Direct Materials 200.000 Overhead Applied: Machine Setups 25 setups x $1.500 pounds x $12.000 to WIP Finished Goods Inventory 600.000 Overhead Applied: Quality Inspections 500 inspections x $150 per inspection = $75.) ABC: Cost flows through T-accounts: Moss Manufacturing.000 Machine Setup OH 45.000 hours x $15 per hour = $150.00 per pound = $30. 1997 242 Cost Accounting.000 Wages Payable $100. Materials Inventory $200.000 Running Machines OH 150. Inspect. OH 75. (30 min.000 600. Inc. Handling OH 30.000 Mat. 5/e .000 600.

000 to WIP © The McGraw-Hill Companies.000 250.) ABC: Cost flows through T-accounts: Fleetfoot.000 to WIP Overhead Applied: Materials Handling 20.50 per yard = $10.000 Qual.000 hours x $5 per hour = $50.000 Running Machines 50. Inc.000 to WIP Work in Process (WIP) Inventory Department B Direct Materials 100.000 to WIP Overhead Applied: Running Machines 10. Handling 10. Inc.000 Direct Labor 50.8–29.000 yards x $. 1997 Solutions Manual. Materials Inventory $100.000 250..000 Overhead Applied: Machine Setups 50 setups x $400 per setup = $20. Inspect.000 Overhead Applied: Quality Inspections 400 inspections x $50 per inspection = $20. (30 min.000 Mat.000 to WIP Finished Goods Inventory 250. Chapter 8 243 . 20.000 to WIP Wages Payable $50.000 Machine Setup 20.

1997 244 Cost Accounting.500 Revenue .....000 = $375 per inspection x 40 inspections h$12. Direct Materials .. For example.500 Total $379.. Operating Profit .000 20...... thereby reducing setup costs. management may be able to operate with fewer but larger production runs........ Activity-based costing highlights the activities that cause costs..000 55.000h 55.000 = $0. Focusing on activities can identify non-value adding activities that can be eliminated without reducing the product’s value.....500 $ 14.....000 = $1. Direct Labor ...000 of Sales and Marketing costs/60 advertisements e$13. 375c Sales & Marketing.. a0..000 30....325 = $19...000 60.000 154.000 = $60...000g 12..... a...500 30.000 48.... 5/e ...) Comparative income statements and management analysis: Nykee.. Inc.000 direct labor costs f$15. (40 min....000 of direct labor costs = $45.500 b.000 99. Nykee..000 of Quality control costs/80 inspections d$1.....Solutions to Problems 8–30..325 x $40..500 45.... Indirect Costs: Administration .. 0...500 of Administrative costs/$60....000 19..000 60.........000 13.000 50..000d Total Indirect Costs ..500b Quality Control .000 15..000 6.. © The McGraw-Hill Companies.... 1.000 Marathon $184.000 = $1.000 $ 45.... Inc...000 of Production setup costs/30 production runs c$375 = $30.500 per setup x 10 production runs g$15.. Income Statement Account Rate B-Ball $195.000 40..500 $ 59....325a Production Setup ... and provides insight into which costs could be reduced...000e 15..000f 15....000 per advertisement x 12 advertisements b$1...000 105.. Inc.. 1.......

after analyzing the factors driving the overhead and applying these costs to our products... Income Statement Account Rate B-Ball $195...000 Direct Labor Costs d. Inc. Under activity-based costing...000 154... are identified and their costs are applied to the products in relation to usage. direct costs do not differ under the two methods. we find that the B-Ball line should receive only about half as much overhead as the Marathon product..000 towards profits. Chapter 8 245 ..... © The McGraw-Hill Companies. 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.... cost drivers.575a Operating Profit.. However. a2..000 105.. Overhead Costs ....000b $ (3.500 of Overhead Costs/$60. all overhead costs are pooled together and allocated to our products on the basis of direct-labor costs.. such as inspections and set-ups... Direct Labor ....000 51.000 103. For instance..500 $ 62..000 Direct Labor Costs = 2.. Nykee.. more than three-times the profits of the Marathon product line..000 = $154.000 55. 2. instead we should pursue ways to reduce our costs..000 60. the B-Ball product is shown to contribute $45.000 50.. Traditional labor-based allocation is less accurate than activity-based allocations because many overhead costs are not well correlated with labor costs....8–30.000) Marathon $184. The two costing methods differ in their results because of the way overhead costs are allocated between our products..500 Revenue .... Under the more accurate method of activity-based costing.000 20... the BBall product line is not profitable (losses of $3.. Management should not drop the B-Ball line.......... Inc.575 b$103..500 $ 59.... Direct Materials ... and management might wish to eliminate the B-Ball product.. Under our traditional method. (continued) c... Under the labor-based approach. such as reducing the number of setups required...500 Total $379... Our findings suggest that management might make sub-optimal decisions if it were to continue to use labor-based overhead allocations.575 Overhead Rate x $40....000).... 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......000 40...

.. 1997 246 Cost Accounting. Total Indirect Costs ..000 80..000f 60..000 Total $1......000 $ 17... production setups.. which is a separate issue.1667 x $360........... as the savings would be greater than the ‘same’ effort would produce if directed at inspections...... Quality Control . The advertising activity is examined in conjunction with the benefits provided in the form of future sales. Setups cost $500 each and inspections cost $200 each...000 = $100..8–31.000 200.. between setups and inspections. Activity-based costing highlights the activities that cause costs... and advertising... and provides insight into which costs may be reduced...000 360.......000 200..000h 243.. Indirect Costs: Administration ....000 100...000 = $800 per advertisement x 60 advertisements b...... Operating Profit (loss) ............. Sales & Marketing.... Inc...167a $500b $200c $800d 60..000 480... the effort of making a one unit reduction in an activity should be directed at setups... Filmworks’ management has identified three cost driving activities.000 = $200 per inspection x 300 inspections h$48...: Income Statement a.) Comparative income statements and management analysis: Filmworks. Filmworks...000 40..000e 75. Inc...000g 48.000 $ 240...... (40 min...000 administrative costs/$600.000 100.000 sales and marketing costs/100 advertisements e$60.000 of direct labor costs = $200.. 5/e ............000 100. Direct Materials ..000 600....000 quality control costs/500 inspections d$800 = $80....000 direct labor costs f$75..000 0..000 100.000 $223. For instance.1667 b$500 Rate Deluxe $720.000 production setup costs/400 photo sessions c$200 = $100..........000 40..000 237.000 = 0...000 240.000 125...000 = $500 per session x 150 sessions g$60.. Inc....... Therefore. Direct Labor ............... quality control inspections.. Production Setup .. a0.520....000 Standard $800. Account Revenue . © The McGraw-Hill Companies.000 32.....

. c. However...... direct costs....... Our findings suggest that management might make sub-optimal decisions if it were to continue to use labor-based overhead allocations....000)..000) Standard $800....... The two costing methods differ in their results because of the way overhead costs are allocated between our products. 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.. Inc.... 1997 Solutions Manual.80 Operating Profit (loss) .000 Direct Labor Costs d... a difference of $45. (continued) Filmworks.... Direct Labor ..000...000 100......000 200.....000 in profits....000 b 288...000 100.000 600.80 b$288.. 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.....000 Total $1.8–31.000 in overhead.000 192. a Overhead Costs .. Direct Materials . Under the more accurate activitybased costing. such as Materials and Labor do not differ under the two methods...000 $ (28..... a0. the Deluxe Portrait line earns $17. cost drivers... Chapter 8 247 .....000 = $480..000 360..000 Direct Labor Costs = $0. after analyzing the factors driving the overhead and applying these costs to our products.... For instance.000 240......000 $ 240. Under activity-based costing....80 Overhead rate x $360. Under our traditional method......... © The McGraw-Hill Companies...... are identified and their costs are applied to the products in relation to usage... Inc: Income Statement Account Rate Deluxe $720....000 Revenue .520..000 of Overhead Costs/$600. the Deluxe Portrait is not profitable (losses of $28. Under the labor-based approach.... 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.. 0. we find that the Deluxe line should only receive $243.000 $268.. such as inspections and set-ups.000 480...

250 b .. # runs Mat. 1997 248 Cost Accounting.... 2.......000 8.. Mach...600 Total $26... # insp...... Predetermined rate = estimated activity/estimated allocation base for direct labor hour = $315.........700 High-Lead $ 5...000 $315.....000 40..... Indirect Costs 9........200 1. Packing..450 $19..500 $65.. © The McGraw-Hill Companies...000 30 320.) ABC and predetermined overhead allocation rates: Import Glass & Crystal Co.. # units Total est.... (50 min. $13.000 Driver Units 100 50 80......000 20..... lbs... ..600 $20. bNumber of labor hours x $63 per hour...........000 12.. overhead..... Costs $ 15.-hrs.........000 60...... Hdlg................. .... .....000 Direct Labora ..000 3..... . Computing overhead allocation rates Activity Cost Driver Est.....000 7... 5/e .250 9..000 2.000 100....... mach.. $24... Inc.. Qual.125 Order Proc...... Setup .... # orders Prod......8–32...000 Allocation Rate $ 150 1. Dep........67 0.450 Total Cost ...000 80...700 aNumber of labor hours x $15 per hour. a.25 10 666..000 Direct Materials ...500 31...000/5...000 hours = $63 per hour b.... Production Costs using Direct Labor-Hours Account Unleaded Low-Lead $ 8. Cntl. mat...

It allocates the individual components of our overhead to our products based upon the product’s use of that overhead component....000 3.. 2.. ..875 $63...267 aRounded across the row.. 2. As seen in the activitybased costing report...500 1.000 Direct Labor ..500 Total Cost ........ ..... © The McGraw-Hill Companies.250 Indirect Costs Order Proc. Dep.250 Mach..200 Mat.. 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....... 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. Production Costs using ABC Account Unleaded Low-Lead $ 8......000 300 2............467 High-Lead $ 5. Hdlng. 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..000 7.. We recommend assessing the cost of using an activity-based system in our company. 5.000a 3. d...250 800 667 375 $13.. 600 Prod. ......000 $17...800 Qual... 667 Packing..8–32.. Chapter 8 249 .. Cntl. .250 450 1... $32.000 8......200 2....... $13. 1..... Our existing direct-labor cost method distorts our product costs because there is little correlation between our direct-labor costs and overhead.. Setup . 6.... Activity-based overhead is more accurate.. With the more accurate product costs.. we should begin to concentrate our efforts upon reducing the costs of our more expensive overhead operations.800 10. Inc..500 1.400 1...350 4..... (continued) c.....400 667 1....... Reducing our materials handling and machine depreciation and maintenance costs should be a new priority...000 2. 1997 Solutions Manual......000 2.525a Direct Materials .....792 Total $26.

. (50 min.000 2....000/200 orders) $5 per lb...000/20.) $12 per hour ($120. of material Machine hours # of inspections Units shipped Allocation Rate $600 per run ($60.) $2.) ABC and predetermined overhead rates: Shades Co.000/2.. Inc. a.8–33. ($100.000/10.....000 $31.....900 Fashions $ 2.......200 of hours x $20 per hour of hours x $250 per hour © The McGraw-Hill Companies.....000 Direct Labora .000 Total Costs ...000 $34....000/100 runs) $500 per order ($100....200 27..000 units) $250 per hour ($500.....500 2.. 2...000/8. ($40...) b.......... $31.. 25....000 aNumber bNumber Stars $ 2. 1997 250 Cost Accounting... 5/e .) $4 per unit ($80.....500 per insp..000 hrs.000 lbs. Nerds Direct Materials ..000 hrs.400 30.. $ 4...000/40 insp. 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 Overheadb .

. © The McGraw-Hill Companies... It allocates the individual components of our overhead to our products based upon the products use of that overhead component.000 d..... 1. Activity-based overhead is more accurate..500 2.400 1.....000 3. equipment maintenance and shipping costs—costs that were not visible under the direct-labor approach.... = $2...000 $22....... 2. a large share of our total overhead is comprised of order processing...... quality management...... c....200b Mat. 4..... $28......900 Fashions $ 2.200 a$500 b$600 Stars $ 2.000 e$2.000f Total Cost ........ 1997 Solutions Manual.000d Quality Management...200 c$5 per lb... 2. 6....000 d$12 per hour x 500 hours = $6...800 1.000 per run x 2 runs = $1.000 Direct Labor ..000 1.800 per order x 8 orders = $4... 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. Chapter 8 251 .400 4...000 2...... Inc. Handling.200 $21...............8–33.500 per inspection x 2 inspections = $5...000 Order Processing ... With the more accurate product costs..... x 400 lbs. Reducing these overhead costs should be a top priority.000 units = $4.... Maintenance .... 5...000 2.....000 4.000 2.....000a Production Setup ..200 2.. $ 4.000 f$4 per unit x 1.. As seen in the activitybased costing report.....000e Shipping .. We should use activity-based costing if we find the benefits from the new system exceed its costs.000 3... we should begin to concentrate our efforts upon reducing the costs of our more expensive overhead operations..600 5.000c Equip. 4.. Our existing direct-labor cost method distorts our product costs because there is little correlation between our direct-labor costs per product and overhead.. (continued) Nerds Direct Materials .600 5...

... 23......600 hours/Total machine hours) x $261.........000 11.....440 9...000 54... a(Machine Summit $560.... 5.....600 88.000 83... $163.........000 Direct Costs: Direct Mat....400 26.600 $216...000 140.... OH: Mach. Inc.......000 $ 243..000 140... Other . ............... Cannonball Corporation Income Statement Aerolight Sales ....................500 20.......000 8....400 Var..........840 24........) Choosing an ABC system: Cannonball Corp.............. $159.........000 46. Overhead b... (40 min......000 24.8–34.280 $ 95.000 Direct Costs: Direct Mat... ....600 © The McGraw-Hill Companies..400 261.....400 Fixed OH Plant Admin........ 1997 252 Cost Accounting..000 23.......000 $ 94.000 125.....000 Direct Lab. 2......415..160 24... Other .....000 92... 150.....250 13..... Mrg.720 Total $1.. ...........000 $ 243.870 Spinner $475..900 Total $1.....250 Depreciation.830 Fixed OH Plant Admin.....000 Direct Lab...........000 Warehousing.. 14.... $380..440 24......000 36................400 Cont.......000 24........000 total var.....000 471......000 54........ Cannonball Corporation Income Statement Aerolight Sales. Gross profit ....000 64....000 240..... 52.. Summit $560......600 88..........000 200................400 Var.415. 8.000 590.400 Shipping .. .....000 42.000 240.............. OHa . ... 16. 14.000 92... Setups . a....200 Cont. Mrg.... $380.. 150......720 Order Proc..480 Spinner $475.....000 93.. 5/e ......520 $212... Gross Profit ..000 590.000 200.....000 471.

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

management should be able to see the relationship between product complexity.8–35. 1997 254 Cost Accounting. those activities that drive the costs. or redesigning the plant layout.e. (15 min. By breaking down costs into cost drivers. product volume and product cost. (Management might consider running larger batches.. Inc. i. 5/e .) (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. 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.) Benefits of activity-based costing.. This would be vital information for pricing decisions and profitability strategies.

000 in overhead costs come from the additional depreciation and maintenance for the new equipment. Inc. Chapter 8 255 . she might find that the additional $200. 1997 Solutions Manual. most companies that become more capital intensive see overhead increase and labor decrease..) 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. Further. For instance. (15 min.8–36.

750.. 400.......000 Home Manufacturers..000 Shipping ..200.............000. Margin ..........000 4.......000.600....200...000 $3........ 5/e . Inc.. $6...000 600. $2.000 600.000 3...000 Var.200..800..... Inc........000 1....000 Cont..000 4.800..000.000 2.... Inc.280.200.8–37...000 Home Value $10...000.000 320......000 Warehousing...............000 Order Proc....000.... Income Statement Basic Sales .200. OH: Mach..258.000 Machine operation ... Cont..... Gross Profit .....208........000 280.000 800...........200...800. Home Manufacturers.000.000 2. 160....000 $ 5.000 © The McGraw-Hill Companies.......000. $6.000 2..000 $ 5.............000 $ 3....000 2......000 800.... ...000 Total $25..600... .. Income Statement Basic Sales .200.000 330..800.000 600.......000 600...000 Castle $9..000 $2..000 1......000 7..000 Castle $9......000 Plant Admin..000 Direct Labor .. Home Value $10...... Margin ....000 640. 320......000 1....792.. Setup.......000 640..000 2..000.. a......000 $ 9..000 1..000 $3.000 2..000 7.. 400.000...000 1....000 Total $25....000...000. 270.200..... Inc.... ...000 288.312...............000 400..) Choosing an ABC system: Home Manufacturers.000 $4. Direct Costs: Direct Mat..000 5.000 1............320..200..000 400. (40 min.....000 3.392.. Plant Admin.....088......... Var.000..800..000 $9...000..000. Direct Labor ..000 160.000 2. 1997 256 Cost Accounting...000 Direct Costs: Direct Mat.... Gross Profit .. b. OH . 2. 192.

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

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

.... (continued) Departments (000 omitted) Service Manufacturing Power Maintenance Molding Component Assembly Departmental overhead costs ......760 875 MH $37......000b ...000) Variable: ($5.400 b1........ (12........44/MH 4..8–38.... 150/1.000 2....000 x each of: 500/1..600 320 6............ a125 $4.88/DLH 1......000) $21... 1997 ......200 800 $22... Inc. 350/1.. 10/125a ........................000 2..500 DLH $17.. b.400 Allocation of maintenance costs (direct) 4..760 2..........800 960 $25.12/DLH 0 = 90 + 25 + 10 = 500 + 350 + 150 c800 = 360 + 320 + 120 d6..000 259 © The McGraw-Hill Companies.....000 x each of: 90/125a................................400) x each of: 360/800c.. 320/800c.880 $16...000 DLH $11..000 (4........ $ Base .880 $ 0 $32....680 1...000b.. (6.................... 25/125a....... Rate (Departmental overhead ÷ Base) ...000 + 1.200 2......000 + 1...... 120/800c ... Allocation of fixed power costs (direct) Fixed: $12.....400)d Total allocated departmental overhead costs...000b. $18......560 $23.....400 = 5..............

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

..... Krispy Krackle and Creamy Crunch........00 Allocated overhead per unit.........00 7.....16% No $ 9.....00 Direct labor cost per unit ... Almond Dream has a much higher proportion of direct labor hours than Krispy Krackle or Creamy Crunch...00 18....000 Total overhead = $69.09% No From the table above...........500 Total labor-hours = 11....... 1997 Solutions Manual.......24 Selling price ... (60 min... we can see that the overhead allocation system used by CBI would lead them to drop Almond Dream and keep the remaining two bars. b....00 $18.......... Total units produced....00 6............. so Almond Dream is allocated a greater share of the overhead costs......00 Allocation rate per labor-hour = $6.000 $8.... Direct labor cost per unit ...00 18..00 6.......... a. $94. Yes $ 2....8–39....................000 $9........................ Almond Dream 7 1.....32 $21... 44..000 Creamy Crunch 1 1............................ Chapter 8 261 .00 Gross profit margin . Inc..000 $2... $85.......00 3.. Material cost per unit .......000 Direct labor costs per hour = $6..32 $35...87 % Drop product? ... 42... Labor-hours per product..............00 $42.96 $38.......00 39... © The McGraw-Hill Companies............ Product Costs: Labor-hours per unit .....) Distortions caused by inappropriate overhead allocation bases: Chocolate Bars..... $ 8........000 Krispy Krackle 3 1. –10..... Inc...32 per labor-hour Costs of products: Material cost per unit .00 29..24 Product cost ....96 $55.00 $6................00 1....

...................10 $6.......................... ($6.................. Direct labor cost per unit ...00 18.90 Gross profit margins: Selling price ......00 –28.00 = 17.......................10/$35. © The McGraw-Hill Companies.... Krispy Krackle $ 2.... Direct labor hours per unit ..... Labor hours per product ...........00 1 2......00 = (12..........00 –61.. (continued) Krispy Krackle Direct labor cost per hour ..000 Allocation rate per labor hour = Total overhead/Total labor hours = $69..... c........ 1997 262 Cost Accounting.......... Allocated overhead per unit ($13.... Total labor hours: 5....00 13................000 2..........2) % The recommendation to management is to drop Krispy Krackle and increase production of Creamy Crunch......70 $ (6....90 per labor hour Allocated Production Costs: Material cost per unit ...00 41......00 6.90 per labor hour) ... Inc...........................90 $ 6......70 Creamy Crunch $ 9...70 $61.................90 $28............. $55......000 = $13.70)/$55.... Product cost—direct labor allocation base ..000 3...... 5/e .8–39...........70) $35..............00 3 1.000 $6.500/5. Total units produced .... Product cost ...000 Creamy Crunch $6........4% Profit margin percentage ...........

.................... 1997 Solutions Manual... Total labor hours: 3.... Labor hours per product ...00 23......... and misallocation of overhead can lead management to make unprofitable decisions..... Creamy Crunch $ 9........... Total units produced ........ in total.......00 1 3....17 $38...17) Gross profit margins: Selling price ..........17 $ (3...000 Allocation rate per labor hour = Total overhead/Total labor hours = $69.. CBI is a profitable firm................... Profit margin percentage ....000 $6..00 = (9...000 = $23......17 per labor hour Allocated Production Costs: Material cost per unit ........ Chapter 8 263 ..............8–39.................................. Direct labor hours per unit ............17)/$35......... Product cost—direct labor allocation base...... d................ Direct labor cost per unit ....000 3.....00 6..............1)% The recommendation to management is to drop Creamy Crunch and sell out! e........17 $35. The policies and allocation method employed by CBI encourage poor decision making...... ($3................ Allocated overhead per unit .........00 –38.................... Inc.....500/3........... © The McGraw-Hill Companies........ 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.......................................... Product cost .. The direct labor hours are inappropriate as an allocation base and give misleading information............. (continued) Creamy Crunch Direct labor cost per hour .....

...3% x $24.....000) 3........00 –71. © The McGraw-Hill Companies.. 2.............000) ..4% Krispy Krackle $ 2....0 Factory space (%) 10% 40% 50% Allocated Costs: Total Per Unit $21...... (90 min..072 Krispy Krackle (27..73 $ (1.......500 – $15........3%) 7.....3 46..........500) + (40% x $30..73 $36... 1997 264 Cost Accounting.30 15........07 26....000 (10%) Total rent for factory space: Total machine operating costs: Total other overhead: Total units produced/month: Krispy Krackle 3..........000 (40%) Creamy Crunch 1.......6 27.. 5/e .. Direct labor .1 Machine hours (%) 13.....000) ....000 (100%) $15........ = 21..........000) .000) + (40% x $15....000 units Product allocation base: Fraction: Labor (%) Almond Dream ......000 (40%) (50%) Total 11.00 –36.............07 $13............000 per month $30.1% x $24.......93 16...3% x $30..........73 Almond Dream (63......000) + (10% x $15.. Selling price ....000) + (50% x $15.........07 $71.8–40...... Product cost ..000 (100%) 10.. = 26..).........73 $35...........000 (46.........1%) 6.500 per month (= $69.70 21.. Profit (loss) ..3%) Factory space (sq....7%) 4. Production cost per unit...500) + (13..000 (27.000 (13............... Creamy Crunch ..7% x $30.000 per month $24....3 9.....000 units....000 (9. Almond Dream Total direct labor hoursa .699 Creamy Crunch (9.......) Multiple allocation bases: Chocolate Bars..000 – $30.......000 (63...73) (4.00 6....500) + (46........00 21.....6% x $24..... 7.6%) Total machine hoursa .........00 21.......... Krispy Krackle..........7 40.............00 –46.... Profit margin ratio .1% Creamy Crunch $ 9........70 $46..... Inc. aTotals Almond Dream $ 8.00 42...000 (100%) 15...........9)% equal hours per unit times 1..................70 $ 8.................................. Allocated OH ....00 18..... 63..07 $85....70 $55................ Inc.....730 Allocated production costs: Material cost ........ a....00 26......... ft.................. = $21.000 5................. 1.....

000(33...500 per month 17.......3 (rounded) 66....4%) 4....000 3...4%) Krispy Krackle 3 7 4... Machine hours required .....000(82.... Labor hours required .000 hours Product allocation base: Fraction: Labor (%) Almond Dream . Creamy Crunch uses 50% of the factory space and thus is allocated half of the rent costs.000 per month $24. management would recommend dropping Creamy Crunch.000(63. aThis Machine hours (%) 36...6%) $15..000 14....4 63.... two.....8–40..000 square feet of space available..4 17.000(17...... Inc.. Direct labor hours per unit .....6 product mix leaves 4.... Based upon the table above and the gross profit margin rule...7%) 1.000 3. Unit of output per month .6 Factory space (%) 33.)a.. 1997 Solutions Manual.000 units 11. 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... (continued) b.. Factory space (sq.... ft...6%) 7... Chapter 8 265 .000(66......3%) 2. Two characteristics of Creamy Crunch appear to make it appear relatively unprofitable: one.. © The McGraw-Hill Companies. Krispy Krackle .....7 (rounded) 82. Machine hours per unit ...000 per month $30. c.... the selling price is comparatively low as compared to the other two products....000(36.

......500/3............... = 33. 1997 266 Cost Accounting..000 = $23.....83 13....05 33.............. Almond Dream appears to be the most profitable product.................500) + (36.9% Krispy Krackle $ 2......7 x $15...................000) ..............95 19.. computed as follows: Units Produced = 3...........39 $55.6% x $30........00 42......... Production cost per unit.......00 18....17 $11.......... Profit margin ratio: Ratio = Gross Margin/Price .. Allocated OH .. Selling price ...000) .......9% © The McGraw-Hill Companies.392 Allocated production costs: Material cost .8–40.........05 $85.61 2. Inc.................... Almond Dream $ 8....00 23.......00 –68................................000) + (66.00 –73..........000 Overhead Allocation = $69....108 Krispy Krackle (17.. Product cost ........ Selling price ..... Almond Dream $ 8...........9%.... Production cost per unit....................00 –53.000) + (33......... In fact...........................9% Based on the gross profit margins of Almond Dream and Krispy Krackle... management should drop Krispy Krackle and continue to produce Almond Dream.....3% x $15.................39 $53...00 33...........4% x $24........................ Allocated OH ..... (continued) Allocated Cost: Total Per Unit $18.... its margin ratio is only 13................................. 5/e . Profit margin ratio: Ratio = Gross Margin/Price ........39 Almond Dream (82............05 $16....17 $85..... Direct labor ... Direct labor ...17 $73................4% x $30.17 Allocated production costs: Material cost .. Product cost ..00 18...... = $36.......39 $ 1..05 $68....00 42.....6% x $24.........500) + (63........

+ 69.500 – 129.. (continued) If we compute the gross margin for the three products at maximum production. computed as follows: Almond or Krispy or Creamy Dream Krackle Crunch Units ..... $ 24... we find Almond Dream and Krispy Krackle to be equally profitable.500 $129.............. $ 35..8–40...000 $ 6.500 $ (9...500 + 69.........................500 – 114..500) Moral: Don’t make too much of allocated cost numbers in decision making.... – 219......000 Overhead .... 1997 Solutions Manual............000 Labor ............500 + 69...000 18. Chapter 8 267 .. (continued) c.000 $ 27.......500 Gross Margin ......000 Costs Materials . Inc....000 $165.............500 $ 35.000 – Total Costs ........ $255. 3.000 3........500 $114.... © The McGraw-Hill Companies..500 Revenue ..500 $219...000 $105.000 3..000 54.... 126.

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

factory.. 2) Computers: Inventory storage costs and materials scrap. hospital. 1) University: Litter pickup and equipment storage. 1) Lumber: Inventory movement and scrap lumber materials. 9–8. factory. 1) Automobiles: Rework on cars in the production process and warranty claims. Answers will vary. Answers will vary. 9–12. Answers will vary. 9–11. Solutions to Critical Analysis and Discussion Questions 9–9. Capacity-sustaining costs are fixed by management’s decisions to have a particular size of store. 2) Restaurant: Throwing out spoiled food and turnover of personnel.and customer-level costs: Costs that support customer requests and product specifications. 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). 1997 270 Cost Accounting. Unit-level costs are associated with specific units. 3) Batch-related costs: Costs related to producing products in batches. 1) Capacity-related costs: Costs that are fixed by management’s decisions to have a particular size of store. 2) Product. Inc. 4) Unit-level costs: Costs that can be associated with specific units. 2) Bicycle repair shop: Sending incorrect part back to supplier and customer returns resulting from faulty assembly. 1) Hospital: Storage of supplies and on-duty nurses without patients. 2) Furniture: Inventory storage and repair of defective products. Answers will vary. 9–10.9–7. © The McGraw-Hill Companies. hospital. or other facility. or other facility. 5/e .

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

$8. Resources Used Setups...750 ($175 × 50) $6..6 × 5....000 ($6. Resources Used Energy ... 1997 272 Cost Accounting..300 (given) $6. resources supplied: Steamboat Industries...Solutions to Exercises 9–20.000) Resources Supplied $3.300 – $3.. Clerical ....925 – $8....300 – $6. (15 min..... 5/e ....000) $1..000) 9–21....) Resources used vs.. $3.000 – $5..300 (given) Unused Resource Capacity $175 ($8...... Inc....000 ($0... resources supplied: Great Lakes Corp.... Inc..00 × 5....... (15 min.925 (given) $6....000 (given) Unused Resource Capacity $300 ($3..... Repairs .000) © The McGraw-Hill Companies.) Resources used vs.......750) $300 ($6...000 ($30 × 200) Resources Supplied $8.000) $5.......000 ($1..

.. Energy .... Customer service . resources supplied: Eagle Products.. Unit-related costs typically have little or no unused resources since they vary directly with output......160 ($24 × 340) $12.... $48.000 (given) $ 4.) Resources used vs.....600 ($120 × 80) $4.000) $8.......250 (given) $13.. Resources Used Materials..000 ($150 × 80) $9.. Corp.. Setups .. (40 min...120 (given) $12..600 ($30 × 420) Resources Supplied $48.. Inc.. Purchasing ....000 ($6 × 8...500 (given) Unused Resource Capacity $ — $ 960 $ 600 $1...600 (given) $11..400 $ 800 $ 450 $ 900 Unused resource capacity is the difference between resources supplied and resources used.800 ($40 × 320) $12...........000 ($80 × 50) $12.. Long-term labor.9–22..000 (given) $ 9...... Administrative.... Chapter 9 273 ..... 1997 Solutions Manual.. © The McGraw-Hill Companies......800 (given) $13....... 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.....

.........160 56.000 a........... Purchasing ..............110 $ 48......) Resources used vs... Materials ..........000 9........120 Setups.......... Corp...........000 8........600 21.......... 11.............000 23......... 12........... Operating profit..................120 12..........500 26.. 4..400 107..000 Customer service ..350 5...600 11.600 Purchasing ..730 $150... 112........600 4.... 5/e ... Administrative................. 13..000 9......... Sales .........800 Long-term labor ..... 13......... 1997 274 Cost Accounting.......................800 12.....120 57......250 Administrative .. (45 min.. Batch Setups ....270 112... Energy..........000 12............. $150.......9–23.......... Unused Resource Capacity Resources Supplied $ 48.............. Total costs ..270 $ 37.....160 12.........400 2. b............800 13.......250 13...270 $ 37............... Inc........730 © The McGraw-Hill Companies............ $48.....000 Resources Used Costs Unit Materials.................. Product and customer sustaining Customer service . Capacity sustaining Long-term labor...........600 25..........600 4................500 Total costs .......... resources supplied: Eagle Products.................160 $ — 960 960 600 1......750 112......................000 800 450 900 1..... 9.000 Energy ......... Operating profit..... Sales ...........

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

................400 (given) $18...150 $5............ Setups.750 (given) $16.650 (given) $26.500 (given) $ 5............ $16.000 ($75 × 160) Customer service .... Purchasing ...............250) $21.. $ 3.... Resources Used Materials ... © The McGraw-Hill Companies.......... Unit-related costs typically have little or no unused resources since they vary directly with output.......250 Unused resources capacity is the difference between resources supplied and resources used...500 ($30 × 1................. Administrative ...150 $ 4.........000 ($50 × 420) Resources Supplied $16...... 5/e ....500 ($22 × 750) $3....500 (given) $51.....900 $14.. 1997 276 Cost Accounting.) Resources used vs........ (30 min......600 ($30 × 120) $37....... Corp..........9–25. 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.. Long-term labor ...500 $ 1........ Energy ...................... resources supplied: Inntell.............................500 (given) $ 4.....600 ($80 × 220) $12.... Inc...........250 (given) Unused Resource Capacity $ $ — 575 $ 1......825 ($15 × 255) $17...

.....150 5.... 16............500 Customer service ... Inc.550 $ 75......150 6..325 17...............600 27............900 139..400 Setups ...400 20.........900 8............550 $ 75............ Purchasing...............250 Total costs ..250 5...... Materials................. resources supplied: Inntell......500 35...........925 139..............650 26....... 51.....500 109....... Administrative ...............................450 $215. $16...750 Purchasing ......................... 1997 Solutions Manual...........) Resources used vs.... (45 min........... b.550 14................... Corp...400 29......500 Energy ....9–26.......450 © The McGraw-Hill Companies........... Batch Setups.......000 58... 18..............500 Long-term labor .500 21. $215..... Operating profit .050 1.......250 77.................................... Sales .............000 Resources Used Costs Unit Materials .................................... Operating profit ................ Total costs .......000 139.....600 37...........200 3........ 5......250 19.........750 16.................. 26........... a... 4..............500 3. Capacity sustaining Long-term labor ................. Energy .....650 Administrative........625 $ — 575 575 1.............900 18.................. Unused Resource Capacity Resources Supplied $16..................500 51............900 $16..........................500 4...... Chapter 9 277 ..........600 9.... Sales ............... Product and customer sustaining Customer service......825 20......

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

..000) $ 21.. © The McGraw-Hill Companies.... resources supplied: Arther Consultants Resources Used Energy ...000 ($90 × 5.. Long-term labor... Customer service .........000 ($50 × 420) Resources Supplied $ 35...... $ 32....520 ($6 × 5.800 (given) $560..) Resources used vs....000 × 30) $ 5...... Inc. (30 min..750 Unused resource capacity is the difference between resources supplied and resources used...000 ($1...500 (given) $ 40...000 (given) $ 22. Chapter 9 279 .. Human resources .. Unit-related costs typically have little or no unused resources since they vary directly with output..500 ($20 × 275) $450.420) $ 30..980 $ 10..000 (given) $9....... Administrative..... 1997 Solutions Manual.....9–28.. 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......000 $ 1.000 $ 4.750 (given) Unused Resource Capacity $ 2.....300 $110.

.000 Customer service .... Inc......... resources supplied: Arther Consultants $825....................... Operating profit..............750 Total costs .............750 121...................500 Capacity sustaining ......000 Long-term labor ....... 1997 280 Cost Accounting............300 10...050 668.....) Resources used vs...750 622.....000 Administrative .............. Sales Energy ...............500 Human resources . 30..020 Operating profit ...........030 $ 35.750 668....... Resources Used Costs Unit Energy . 668...500 9.........................950 b. 35....000 22....000 Unused Resource Capacity Resources Supplied $ 2..950 © The McGraw-Hill Companies..... 9.. Human resources .........000 1........ 22....................... 450.... 40.....000 Administrative ..............800 40.....................050 $156...... 21... 539....9–29......................750 129...000 Total costs .800 Long-term labor .........050 $156...000 110.........000 501.....000 560.000 a. $ 32. 5. (45 min....520 Product and customer sustaining Customer service ................. 5/e ...... Sales .... 560.................. $825..980 4..

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

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

. 4....000 2.......... 6......000 28....000 15......900 76....500 76.000 Engineering changes ......400 1... 2......000 7..............000 Administrative .. This is useful for managers in that it indicates what actions might be taken to reduce costs (for example. 7.....000 11.600 c... © The McGraw-Hill Companies...000 13...... respectively). Inc............... (continued) $85................. 3...... 7....... A traditional income statement shows only management resources supplied but gives no indication of the resources used and unused resource capacity......... 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.400 $ 8....000 3......000........ Unused Resource Capacity Resources Supplied $ 500 0 400 0 0 900 500 3.........500 2... 1..500 Depreciation..............500 10.....000 Customer service.... Based on the information in (a) and (b)....000 12.. It also includes the type of cost (unit........000 2.......... 5................000 10...................000 2....... reduce excess machine capacity by eliminating any unneeded machinery)......................000 Materials .000 4.500 Product and customer sustaining Marketing ........ 63...... 1997 Solutions Manual. 15....000 Batch Quality inspections...000 Energy........000 and $3..000 7.500 Setups.....000 0 1....500 Capacity sustaining Long-term labor...........9–31..................400 15....... 2.500 $ 3.........000 3.000 20. batch........ product & customer sustaining.900).500 Total costs .500 500 1...900 5.000 3.. we can see that depreciation and setups provide the majority of unused resource capacity ($4........... 5..............000 Short-term labor ................ Sales Resources Used Costs Unit Parts management.000 7.......... Chapter 9 283 ...500 10..500 12..000 28......500 5........... 2......500 Operating profit .. $ 3.. Management has no way of knowing the amount of unused resource capacity or the cost of unused resource capacity ($12..000 Outside contracts ..... and capacity sustaining) which allows management to assess its flexibility in controlling costs.......000 b.

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

..................000 Parts management.......000 Capacity sustaining Depreciation.. 10...000 26....000 Materials ...........000 26.. 10.....000 60........ Unused Resource Capacity Resources Supplied $ — 0 1....................000 Engineering..000 59.....000 Batch Setups......... 14.................000 30..........000 1.000 b..........000 34........000 288..000 66....000 2...9–32...000 21...000 7...... 24..000 Short-term labor .......000 16..........000 0 1........000 © The McGraw-Hill Companies......000 100.......... 15.......000 6. 6... 28...000 42......000 22................000 16.......000 $ 12.....000 Customer service ..000 Long-term labor.........000 12..........000 99........000 Energy................000 Quality inspections......000 54...... 60.... 7..... Chapter 9 285 .........000 14.........000 2..000 Administrative ..000 $ 87...000 Product and customer sustaining Marketing .......000 7.... (continued) $375... 20...000 20.....000 2. Inc...000 42...... 1997 Solutions Manual..............000 8......000 Total costs ....000 40...............000 2............... $ 12....000 8...............000 288.........000 6. 20... 246................ 20.............000 4...000 80..000 Operating profit .. Sales Resources Used Costs Unit Outside contracts .

© The McGraw-Hill Companies.9–32. It also includes the type of cost (unit. Management has no way of knowing the amount of unused resource capacity or the cost of unused resource capacity ($42.000. (continued) c.000. batch. and $6.. product & customer sustaining.000. 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. and capacity sustaining) which allows management to assess its flexibility in controlling costs. we can see that depreciation. 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. 5/e . Inc. reduce excess machine capacity by eliminating unneeded machinery). setups and administration provide the majority of unused resource capacity ($16.000). $6. This is useful for managers in that it indicates what actions might be taken to reduce costs (for example. 1997 286 Cost Accounting. respectively).

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

..500 Long-term labor ......000 0 2....000 192......... 40.. 50... Based on the information in (a) and (b)....750 1...... batch... $145..250 568....000 170................. 40. reduce excess marketing capacity by eliminating salespeople with overlapping sales territories)....000 201...750 8...... Inc...750 Operating profit...........750 51...000 52.. we can see that marketing and administration provide the majority of unused resource capacity ($14...000 79..000 199........... respectively)...000 21......000 1.. 000 12... product & customer sustaining.....000 68.000 Short-term labor................000 Quality inspections .......750 16.....250 88.........000 16....000 Parts management .. 40...000 Customer service........500 $145............000..9–33...000 11........ 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 35.........500 Total costs .......000 70........ and capacity sustaining) which allows management to assess its flexibility in controlling costs.................750 c..........000 b....000 and $12.....000 1...000 96. 56.... 28....... This is useful for managers in that it indicates what actions might be taken to reduce costs (for example..000 Batch Setups .....000 44..250 $ 81.....000 Product and customer sustaining Marketing. 14.000 4.. Unused Resource Capacity Resources Supplied $ — 2...000 7.. (continued) $650....000 14.....000 10..... Management has no way of knowing the amount of unused resource capacity or the cost of unused resource capacity ($51........... 1997 288 Cost Accounting.........000 Administrative ........... 15.000 52.000 14.. 5/e ............250 568....250 79...... © The McGraw-Hill Companies........... 80.. 516.. Sales Resources Used Costs Unit Materials .......000 Energy .....500).. A traditional income statement shows only management resources supplied but gives no indication of the resources used and unused resource capacity...000 42.......................... It also includes the type of cost (unit.. 8.......250 Capacity sustaining Depreciation ..

500 310.000 85.000 120. (50 min.000 $ 145.000 79.205. Chapter 9 289 ..000 89. Sales Marketing Depreciation Training personnel Energy Short-term labor Long-term labor Administrative Quality inspections Total costs Operating profit © The McGraw-Hill Companies. Inc.000 1.) Freefall Engineering Corporation $1.000 42. 1997 Solutions Manual.000 a.500 54.350.000 425.9–34.

350.....000 54.... 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 17........500)....... 5/e .............. Unused Resource Capacity Resources Supplied 80.. This is useful for managers in that it indicates what actions might be taken to reduce costs (for example...000 5........ Administrative .......000 572....000 245......000).... Long-term labor ......... A traditional income statement shows only management resources supplied but gives no indication of the resources used and unused resource capacity.000 1.205.500 310..500 8..091.000 Total costs ..........000 b. Product and customer sustaining Marketing... by reducing the short-term labor force). Management has no way of knowing the amount of unused resource capacity or the cost of unused resource capacity ($113...500 425....000 415............000 70..........500 4..000 79....000 395. 1997 290 Cost Accounting.... 1......500 65.... Batch Quality inspections ....000 120...000 $ 145............000 2...... Based on the information in (a) and (b). © The McGraw-Hill Companies. and capacity sustaining) which allows management to assess its flexibility in controlling costs..............500 112.... Capacity sustaining Depreciation ..000 45..000 21.000 157. Short-term labor....500 42..9–34.....500 37..........000 9.....000 9...500 113.. product & customer sustaining.000 174....000 325. Sales Resources Used Costs Unit Energy .. Inc.......000 89..000 87.... we can see that short-term labor provides much of the unused resource capacity ($65..... batch.......000 37......205.500 1...500 4... It also includes the type of cost (unit.........000 42... (continued) $1................ Training personnel...500 10....000 70...500 Operating profit.........000 593...... c......500 85......

......... 16. Operating profit ......500 Short-term labor .. 9........ Chapter 9 291 ...........9–35.000 $102........000 Customer service .............. 1997 Solutions Manual.............000 © The McGraw-Hill Companies............... Sales .. $345......000 Administrative ........500 Training .............. 107.........000 Depreciation....... 5...............) Investment Advisory Services..000 243..... Inc.... Inc....... (50 min........000 Long-term labor ... 22. 28..........................000 Total costs .. 19..000 Energy ....... Marketing .. a............ 36....

000 52............... Sales Resources Used Costs Unit Energy . Unused Resource Capacity Resources Supplied 14. 5/e .................9–35.. Capacity sustaining Depreciation ....... This is useful for managers in that it indicates what actions might be taken to reduce costs (for example..... Administrative ..500 0 3.000 c....000 128..000)...125)...... Long-term labor ...000 25. product & customer sustaining.......000 6. by reducing the long-term labor force)................500 4...........000 7.000 1... 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........ © The McGraw-Hill Companies...............875 15............500 13.125 4......... Total costs .. Product and customer sustaining Marketing....000 243.000 19.............000 28....000 42.500 107.. Short-term labor.................875 2.000 5........ A traditional income statement shows only management resources supplied but gives no indication of the resources used and unused resource capacity..500 5....500 31.000 148. Customer service..000 9.000 $102.125 16..000 20...000 22......... we can see that long-term labor provides much of the unused resource capacity ($13.........000 211......000 46. (continued) $345.............. Inc..125 4.......500 36....................000 b..875 37. Training..........000 94....000 19............. and capacity sustaining) which allows management to assess its flexibility in controlling costs....000 32........ Based on the information in (a) and (b). batch..........000 3..... It also includes the type of cost (unit...500 243...... Management has no way of knowing the amount of unused resource capacity or the cost of unused resource capacity ($31. Operating profit. 1997 292 Cost Accounting....

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. © The McGraw-Hill Companies.. Inc. Chapter 9 293 . Answers will vary. Take call-in orders from on-site salespeople throughout the day rather than at the end of each day. a. 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. 1997 Solutions Manual.9–36.

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

one could use the example in the text and try alternative allocations to Grade AA Lumber or Grade B Lumber. petroleum. if at all. 5/e . 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. Solutions to Critical Analysis and Discussion Questions 10–9. 10–12. The resulting allocated costs must be used with care. and many other processing industries. Byproducts represent a minor part of the value of the output. © The McGraw-Hill Companies. Joint products represent a major part of the relative value of the output from the production process. The joint costs are the same regardless of whether one sells or processes further. The costs of disposing of scrap can be reduced or eliminated. Thus. 10–8.10–7.. livestock. Even if one of these products is charged with all $180. therefore. wood scrap may provide incremental revenue for the company. It may take on a negative net realizable value. Some people use fully allocated cost numbers for long-run pricing and other long-run decisions. an allocation method must be chosen which reflects to the best possible extent a matching of the costs incurred with the benefits received. in any decision-making context. 1997 296 Cost Accounting. Inc.000 of joint costs. To test this. no matter how the costs are allocated. Also. and always have positive net realizable values. they will cancel out in the sell or process further decision. Scrap is also a minor part of the output. real estate development (produces lots). such as when there are costs of disposal. In fact. 10–11. railroad (many cars on the same train). the image of the company being sensitive to the environment will likely add value to the company’s reputation. the sell or process further decision is unchanged. 10–10. Examples include timber.

) Net realizable value method.000 © The McGraw-Hill Companies.000 x $150.000 = $30.000 To Output T: $250.000 x $150. Total joint costs are $150.000 conversion).000 – $200. Chapter 10 297 .000 $250.000 = $120.Solutions to Exercises 10–13. (15 min.000 $250. Inc.. These costs are allocated as follows: To Output L: $200. 1997 Solutions Manual.000 materials plus $100.000 (based on the $50.

000 $140....000 Check: Total allocated = $100.....000 .000 % of total sales values at split-off. 30% = $42... Copper $80....000 = $20.............000 ... 20%a Cost Allocation: 20% x $100....000 a 20% = $28... Although not required.. $20...10–14. $28...000) $100...000) $70...) Net realizable value method: Durango Corporation..000 Additional processing.000 $140........000 $30...000 (10....000 © The McGraw-Hill Companies..000) Approximate sales value at split-off ...000 Manganese The diagram can be used to help organize the solution which follows: Lead Selling price ..000 Lead ($12......000 .000) $80............000 50%a Manganese $60. Inc.000) $140........000 (18....... 30% x $100.000) $60.000 (40..............000 Ore ($10..........000 50% x $100. (12... 50% = $70......... $40.....000 Copper ($18.. (20 min.......000 .000 + $50...000 $140..000 .000 + $30...........000 100% $50..... the process may be diagrammed as follows: $40...... 5/e .000) $42..000 30%a Total $180........ 1997 298 Cost Accounting....

000 © The McGraw-Hill Companies.500 + $7.500 (which is $10.500 times X = $6. solving for X. we obtain: 10. (20 min.000). the appropriate basis for allocation using the net realizable value method is $17.500 + $7.000 So. Inc.500 X = $6.500 X = $10.000 to leprechauns must have been the result of the allocation equation: $10. Since the sales value of each product at the split-off point is available.10–15. 1997 Solutions Manual. Chapter 10 299 . Let X equal the unknown total costs. Inc. The allocation of $6.000 17.000 $10..) Net realizable value method to solve for unknowns: Green Products.

5/e .) a. Net realizable value at split-off is used to allocate joint costs to joint products. no allocation is needed. If further processing is needed. The net realizable value method produces the same gross margin ratio. the net realizable value is the selling price at split-off. If further processing is needed. © The McGraw-Hill Companies. The answer is 4. c. For joint products saleable at the split-off point. The answer is 1. Net realizable value method: multiple choice. b. the net realizable value is approximated by subtracting additional processing costs from the final sales value. 1997 300 Cost Accounting.10–16. To determine the net realizable value at split-off. net realizable value is the selling price at split-off. d. (20 min. For joint products saleable at the split-off point. The answer is 2. it is sometimes necessary to work backwards from the point of sale. The net realizable value for each product is used to allocate joint costs.. The answer is 3. The costs beyond the split-off point can be identified and thus assigned to each product. the net realizable value is approximated by subtracting the additional processing costs from the final sales value. Inc. Therefore.

000 40. The answer is 3. 1997 Solutions Manual.000 12.000 ($125. The calculation is: W X Y Z Net Realizable Value at Split-Off $ 70.000 $80. The answer is 4. 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.000 = $84. The net realizable value method allocates joint costs in proportion to the net realizable value of the individual products.000 30/200 x 80..000/225.000 product A + $100.000 24.000 $200.) a. Chapter 10 301 .000 40/200 x 80.000 ($140. the calculation is: 140/200 x $120. © The McGraw-Hill Companies.000 product R). the calculation is: 100. Net realizable value method: multiple choice. Inc.000 Note: The costs incurred after split-off are not joint costs and are therefore not included. The answer is 3.000 = $52.000 16.000 Allocation 70/200 x $80.000 60/200 x 80.000 x $117.000 and the total sales value at split-off for main products of $225.000 c. Given total joint costs of $117.10–17. The net realizable value method allocates joint costs in proportion to the net realizable value of the individual products.000 b.000 30.000 60.000 and total sales value at split-off of $200.000 product B).000 Joint Costs Allocated $28.000 product C + $60. Given total joint costs of $120. (30 min.

000 = $31..000 Additional processing costs .000 Total costs allocated to Y .000 x $63... $36..) a.. Physical quantities method: The Rote Co...000 Amount allocated from joint costs: 70.... Inc.000 x $63..000 Additional processing costs . $49.. Total units of X = Total units produced = Joint product costs = 14....000 Joint product costs = $ 63.000 Amount allocated from joint costs: 14..000 units $63.10–18. 5/e ......500 28... Net realizable value of Y at split-off = $ 70. The answer is 2.. (20 min.. 1997 302 Cost Accounting......000 Total net realizable value at split-off = $200..500 b.050 © The McGraw-Hill Companies..000 units 28.. 18..000 Total costs of Product X . The answer is 4.. 14.000 = $22.050 $200.

000 = $35. 1997 Solutions Manual.000) to obtain the net processing costs to be allocated ($88.000).000 units © The McGraw-Hill Companies.000 = $52.000 units + 75. Chapter 10 303 . (20 min..200 50.000) is deducted from the total processing costs ($90.000 units x $88. The allocation computations are: To Nitro: 50.000 units x $88.800 50. Inc. The net realizable value of the methane ($2.10–19.000 units and to Phospho: 75.) Physical quantities method with by-product: Friendly Fertilizer Corporation.000 units + 75.

.... $400....000 Other income ...... The answer is 3....... Net amount from by-product = $9............600 [= 2....000 – $9...600 COGS ......825 Gross margin ................. (25 min......000 Other income ..........600 409.................... The answer is 1... (40 min........... The answer is 1............ $70......... Sales .......... $35....400 units x ($5 – $1)] Cost of goods sold = $200..... 1997 304 Cost Accounting...000 $36. 200.... By-products: multiple choice: Seinfeld Corp.000 $34............ Inc.10–20. 36.... Gross margin would not be affected....................175 36.................... (175) Adjusted cost of goods sold .......000 Gross margin ............175 Method 1 Sales revenue ........... $209.......... There would be no effect on the company’s profits.. -0Total revenue ...............000 175 ($225 – $50) $70.................... Method 2 $70...000 Less: By-product net realizable value .........000 Cost of goods sold: Unadjusted ........600 c.175 10–21.600 b. 5/e ...400 Gross margin = $400..400 = $209... $34.........) By-products: Leather Products. 9......600 = $190. Inc..000 – $190.....) a............. $70.......... © The McGraw-Hill Companies..........

.....000 Gross margin............000/$12 per hundred cubic feet = 75...000 75.. Chapter 10 305 ....000 This contribution is compared to the foregone bark sales of $900...... $1. Inc.......222 10.000..333 22.000 ccf x 10% x $ 4/ccf = $ 30.....10–22.. (30 min.000 Joint costs .....889 Gross margin percentage. The contribution from additional processing equals: Revenue ..000 40........ 10–23.. (35 min........ We recommend processing further.000 hundred cubic feet (ccf) Second. 1997 Solutions Manual....000 17..) Sell or process further: Yuba Sawmill.... $ 950..........222% Manganese $60....000 22.....222% © The McGraw-Hill Companies..000 ccf x 30% x $32/ccf = $720...... determine the normal volume of bark chips: $900.. 8. 12.....470...) Constant Gross Margin Method: Durango Corp......000 ccf x 60% x $16/ccf = $720...000)..000 28. compute the revenue from sales of horticultural bark: Large Medium Mulch 75.. $40....000 + $720..000 13...........000 75.. 19..000 ($720...222% Sales value..000 100. 22..111 Additional process costs..000 52.667 18..470.. First....... Inc.......000 which results in total revenue of $1. 520......000 Incremental processing costs .000 40.. Lead Copper $80.......778 22.....222% Total $180......000 + $30..000 Contribution from additional processing.

...000 = $4.. 48.00) a15.) Net realizable value of joint products—multiple choice: Bryce Manufacturing Company.... 1997 306 Cost Accounting.. (45 min..Solutions to Problems 10–24... Price per unit = $60. all costs in Department 1...00 15.000 (= 25... the net realizable value is simply the sales value of all units produced.000 units x $4. Cost of zeon .000 units sold Units produced = 25.$280..000 Direct labor .... Inc....000 sold + 10..000 Overhead...... a.$192.000 in ending inventory = 25.000a units Total net realizable value = $100. Since there is no further processing for argon after split-off. The answer is 3.000 Total ..000 © The McGraw-Hill Companies.... that is..... The joint costs to be allocated are all costs up to split-off... 40. 5/e .. The answer is 2.........000 units b...

.........000 in ending inventory = 25......000d = $ 56. $100.......000b Net realizable value of neon .....000 = $140...... Inc....000 x 25...000 Allocation of joint costs to xon: $60...........000 a $60.. 140..000 units x $3.333 a15.......... Chapter 10 307 ...000 = $93. 60.........000 Overhead ..........733/unit 25.000a Net realizable value of xon....10–24.......000c Total ..... the allocation to argon is: $100.000 units © The McGraw-Hill Companies............ The answer is 1...... 90.733 = $37.........000 Additional processing costs: Direct labor ............000 x $280...000 Cost per unit = $93...000 = $60...000 c $283.... Using information from c above..... Net realizable value of argon ...000 – $90. The answer is 2. 1997 Solutions Manual..000 – $42.000 $300...........000a units produced Cost of ending inventory: 10....000 = $280....333 = $3........000 units – $130.000 Total cost of xon ....... $300......000 15....000 units b$192.000 units d$192........ $188......000 + $48.......000 units = $100....333 $300.000 45.... (continued) c.....000 sold + 10......000 – $108...000 + $40..000 x $280.....500 x 60. 42...000 ( ) d.....

000 lbs... 140.100 $102.......... (40 min..50 = $177... 1997 308 Cost Accounting.000 pounds at $1.000 pounds at $1.... Departments a.....50 a pound* Z.750 73....75 = $30.. Inc....000/118.....000/140.900 21.. $1....000 Separable costs = $102.. $1....... 118.....000 pounds at $.. Production Costs A B C 10–25.. 20.Net realizable value and effects of processing further: Miller Manufacturing Co.000 Manufacturing overhead ... © The McGraw-Hill Companies.. 48.000/40...... 220.) Raw materials ....... $112......000 Y.. $180............000 split-off point *$... 5/e ........000 — 191.000 lbs...000 Joint Cost of $180.000 Direct labor ....250 $265...000 lbs...75 a pound* Separable costs = $265....000 Total....000 A diagram of the problem follows: X............75 a pound* — 80..75 = $245.

.....000 = $385.000 — $ 75....000 ...000 = $63...........000 + $20...000 $120.000 70.000* $385...........000 35% Product Y Product Z Total $1.75 Z: $245........... Multiply by pounds produced: X: 40.......... — Y: $80........000 Z: 40% x $180........ Inc........ 140.....000 100% 2...............000 ÷ 40.......000 Z: 140............. (continued) Product X 1.000 = $180.000 ** — 102..000 $177...........000 ......................000 Y: 25% x $180.......000 Percentage of total.000 25% — — 265.. $105..... Gross sales values....10–25........000. $.. — Z: $191...000 Less costs of separate processing: X: — ..000 ÷ 140.000 + $48....000 x 110........ Total joint costs: $112..............000 + 80.750 + $73........000 .... * Given **Or: $245..250 ......000 Allocation: X: 35% x $180............000 © The McGraw-Hill Companies....... Selling price per pound: X: $30.... — Estimated net realizable values at split-off point ................75 220...900 + $21................000 + 100.....000 = 72......000 40% $300.....100....000 = 45...... Chapter 10 309 .......... 1997 Solutions Manual... $105..

..000 Incremental costs of further processing X: $2............000 $147.................... 73.... (continued) 3.... $547.. $497................. Inventory .....30 – $.......000 $ 45...........250 Total costs accounted for ........ Total. Total costs of Z ..................... Sold: (40........545 $167.............................. Product Y: Joint costs allocated.......000 Incremental income from further processing X.............................. 20.............. 48........ A .750 Manufacturing overhead—A. Product X: Joint costs allocated.....................455 $547..... Incremental revenue of further processing X: ($4..............000................000 $337.......000 Cost of Goods Sold Ending Inventory $ 18....... 191................................ © The McGraw-Hill Companies..................... Inventory ....... Separate processing costs.....000 0 Proof of total: Raw material cost Dept................000 Direct labor cost—B .... Sold: (140.10–25......000 Direct labor cost—A .....000 $ 45.000) x $63.......................000 ÷ 220........00 x 140....................545 147................ $217...75 forgone) x 140............. Product Z: Joint costs allocated................000 b....... all sold ...000 265.......................000.................... 280............000 Manufacturing overhead—B.. By doing so. Total Costs $ 63....000 $ 72............ The memo should recommend that Miller process product X further...455 122..000 $379......000 214....000.................... Separate processing costs..... 80.000 102....... profit will increase $217...000 ...... 1997 310 Cost Accounting.900 Direct labor cost—C..... Inc..............000) x $337.. Totals.........000..............100 Manufacturing overhead—C ......................... 21.................. 5/e .. and 4....................... $112..000 c.000 ÷ 140.

000 = $35.000) x $100.000 = $50. 1997 Solutions Manual.) Find missing data: Net realizable value: Air Extracts.10–26. Inc. Allocate joint costs to hydrogen: $15. 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 to hydrogen = $21.000/$60.000 (answer to a) 3. 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 (answer to c) Oxygen: ($21.000 joint costs = $9.000) x $100.000 total – $30.000 x $60. 1.000 (answer to d) © The McGraw-Hill Companies.000 hydrogen net realizable value/$100. (35 min. Inc. Chapter 10 311 . Joint costs allocated to oxygen: $60.000/$60.000 to nitrogen – $9.000 (answer to b) 2..

..646.000 = 55..600 100% $800.000a Packaging Costs ......000 80.......000 224....00 b$2....794...) Joint cost allocations: Exotic Aroma Company.000 x $63. Inc...000 = 42..794.....000 180.000 100. 44.... — Net Realizable Value at Split-off ..794.....000 Calculation of Net Realizable Value at Split-off: Seduction Revenue ....000 Allocation of Joint Costs Incurred in July: Seduction .7% $3.000 $2.400 Romance ..... $1. 5/e .000 Total $3...000 $224.......680.. 45 min.. Joint Reduction Process $400.00 Percent of Net Realizable Value at Split-off Seduction $1....000 Romance $2. a.....114... $1... 120.....3% $3...000 = $354...000 = $445.....000 Romance $2.000 Additional Processing Cost ...10–27.000 220..000b 308............000 = 44. 55.800.000 Splitoff Seduction Romance Second Pressing Additional Costs $ 44.....000 x $180.680.........000 = 10... 1997 312 Cost Accounting...000 © The McGraw-Hill Companies....800.114.3% x $800.000 a$1......646...000 Joint Costs: $800.7% x $800.

....000 Allocation of Joint Costs: Seduction . its sales price is significantly higher than Romance................................... Net Realizable Value Method: Total Costs in Joint Reduction Process....... x $1.... Inc.....144 Romance .................. 18.. $782...8% = 646..........000 x 80........000 lbs........... has a much lower sales price but has a large volume... $800....000 = 19.......... Romance. these results are merely from the joint allocation method and have no sound economic basis....856 100% $782....000 x 44............ incurred very little of the joint cost because so few ounces are produced.................000 x 19.2% 52.......... Percent of Total Units Completed Seduction 10....426 Romance .2% = $150..... Thus...000 Less Net Realizable Value from Squeezed Petals (12............ Therefore....... Physical quantities method..... $782...3% = $346... $800.... d. Physical quantities method: Seduction..................000 x 19......000 Cost to Allocate .....600 Romance . However....000 Seduction .......2% = $153........... 1997 Solutions Manual.........000 x 55....000 x 80.......000 = 80.........................................574 100% $782........ Romance is allocated a large portion of the joint costs and looks relatively less profitable.......... Estimated net realizable value method: Even though Seduction has relatively few ounces produced.... $782.......... on the other hand........... $800...................................000 Romance 42..........400 100% $800...................8% = 631....10–27..... $782....... Chapter 10 313 ......50) ........ which has a high sales price................ Seduction is allocated a greater share of joint costs if the allocation is based on sales value............ $782......000 © The McGraw-Hill Companies.... (continued) b..7% = 435...000 c......000 Physical Quantities Method: Seduction ...8% 52....

000a 18.000 435. (30 min.) Cost flows through T-accounts: Exotic Aroma Co.434.426 (Seduction) 18.000 346. bEntry made to credit by-product revenue to work-in-process inventory.000 Work in Process Inventory (Reduction) 800. Inc.574 659.574 224.434. 18..000a Cost of Goods Sold 1.000 By-Product Revenue 18.000 aEntry made when by-product was sold. 1997 .000 308. 314 © The McGraw-Hill Companies.10–28. Rec.000 Work in Process Inventory (Packaging) 120.574 1.000 428.000 Finished Goods Inventory 659.574 (Romance) 346.426 428.000b Cash or Accts. Work in Process Inventory (Second Pressing) 435.

.....000 + $630.200) Approximate net realizable values. I) a40.. $ (76...000 To Gamma: $630.000 Cost allocation: To Alpha: $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...000 (Dept III) good output = 44..000 $420.200 @ $10) Separate processing costs: Department II....000 (= 46. 1997 Solutions Manual..........000 = $116.. $420......... Department IV ...... Chapter 10 315 .000 units Rho (Dept....... (32..000 Gamma $960..200 Alpha (Dept IV) 19.....000 = $174... good outputa 110. Alpha Sales value after completion..800 @ $4.000) $630.960) Sales revenue from Beta....000 x $290. Inc. 83.000 (= 40..... $462.........000 + $630... (16...000 (Dept. 70% 30% 46.000) Department III..160 (= 19.) Ninja Turtle Company..000 60% 40% 66..000 x $290. (50 min.000 $420............. II) 44........000 Gamma...20) Additional processing cost for Beta.000 © The McGraw-Hill Companies..000/110% The next step is to determine the net realizable values of Alpha and Gamma at the first split-off....10–29..800 Beta 40.........000 @ $24) (330..

........) Find maximum input price: Net realizable value method: Harrison Corporation...000 net realizable value (= 30. the company will incur an operating loss.. See calculations in (a) for further detail..000 units of Product J).... $521.....750 estimated net realizable value ($332.. A diagram of the operation appears as follows: Product J $114...... Inc..... Given the current product mix (30. Harrison should pay no more than $13. $275.....000 units of Product M and 8..000 units @ $41......675/38.250 Additional Processing costs $332. © The McGraw-Hill Companies.....728 per unit of material..50) $275.728 (= $521.000 units @ $12) The total allowable materials costs would then be: Sales value of J at split-off...000 Joint conversion costs . If the materials price exceeds this amount. b. 1997 316 Cost Accounting.000 – $56....675 Max materials price per unit = $13.. (35 min. 5/e .750 Sales value of M at split-off .000 units)... (114. 360.10–30..075 joint costs Product M $56..075) Balance (maximum materials cost) ......000 (= 8.....250) $360.

b. The net realizable value of the by-product (Donatello) reduces the joint costs of the other two products.650 10% x $365.600 net realizable value of Donatello. Inc.300 60% + 30% No joint cost is allocated to Donatello.500 = $ 36. Thus.) Effect of by-product versus joint cost accounting: Rambling Rose Corporation.500 – $37. there is no need to allocate joint costs to the by-product.. = $365.550 (2) Allocated for as a by-product. a.900a = $218. (1) Accounted for as a joint product. 1997 Solutions Manual.300 Raphael: Donatello: 30% x $365. (30 min. Allocation: Michaelangelo: Raphael: Donatello: a$327.900a = $109. © The McGraw-Hill Companies.10–31.500 = $109.500 = $219.600 60% + 30% 30% x $327. Chapter 10 317 . Allocation: Michaelangelo: 60% x $365.900 60% x $327.

600 = $21...600 = $64..000 Chips $140..000 Chips 15. Use of the physical quantities measured in Part (a) would suggest that there is a loss on purified wafers.600 = $10.000 + 15. 5/e ..000 + $140.600 = $85.600 c.400 45.. 1997 318 Cost Accounting....000 x $85.200 45.600 b. This loss would be calculated as: Revenue from purified wafers.200) However.000 + $25..) Joint cost allocations and product profitability: Silicon Materials.....600 = $74.600 a.. It is not possible to determine which product is more profitable.000 x $85.. $(44.... One cannot be produced without the other—hence only the profitability of the total output is relevant.200) Loss on purified wafers. Inc.000 Total $85. Allocation on the basis of units of output Purified wafers 45.. the $20. (30 min.000 + $140. net income would fall if this “losing” product were discontinued.000 revenue would be lost but total costs would be unchanged.. Total cost = $60..000 Total $85.. (64.. if purified wafers were not sold. Hence. This illustrates the potentially misleading effects of cost allocations.000 Allocated cost of purified wafers. $ 20.000 x $85. Inc.. © The McGraw-Hill Companies.000 x $85..10–32.900 $20. Allocation on the basis of market value Purified wafers $20...000 + 15.700 $20....

. of input Fixed cost allocation ...... = $4. 1997 Solutions Manual.. Inc.......250 ÷ 25..... 50 Maintane .... Output: Output Mix Greenup .....000 kwh/100 lbs....... $4....... and Winterizer... 32 20 40 Kwh/100 lbs. Maintane.. 20 Kwh/lb.. = 25.... (60 min....... Allocated cost per lb.75 per lb..600 600 800 3....... © The McGraw-Hill Companies..000 lbs.....75 for Greenup....$81... Input 1. Feedstock cost.....000 Maximum processing: 750.... 1..000 kwh 3.. 30 Winterizer.......000 = $3.. Chapter 10 319 ...) Effect of cost allocation on pricing and make versus buy decisions: Ag-Coop. a..10–33.50 Joint costs .25 per lb..

600 $200. 5/e ...000 = $118.. of Winterizer $41..32 Number of Lbs.. (20% of Sales Price) $2.... 25.. of Maintane $54.250 + (25......10–33. of Greenup = $118.26 Allocated cost/lb.600 Allocated cost/lb.600 = $4. © The McGraw-Hill Companies. 10.....000 lbs.3 = 7.600 = $4.97 [ [ [ ] ] ] ÷ 12..000 41.50 Maintane..... $10. ÷ 5.. (continued) b.600 = $4...750 Quantities of each product produced: Greenup ..000 Total NRV $105...80 2.750 x $105...10 1. 9..5 = 12.000 x .500 lbs.08 NRV/lb. Total joint cost incurred in processing 30.2 = 5.000 x .93 ÷ 7...... Allocated cost/lb..500 lbs. 25..20 8....40 Selling Cost/lb.500 7.. 1997 320 Cost Accounting. of input = $81.750 x $200.. $8...500 Maintane. Greenup .000 lbs.......000 Sales Price/lb...000 x $1..500 5...000 x ....00 Winterizer .500 Winterizer .600 = $118. 25.. Inc......750 x $200.50) = $118.000 25.000 $200..40 7. 12.000 54......

885 – $81.32 x 6.368.200 3.64 – $33.6 = 13.10–33.850 Outputs under alternative production schedule B: Product Greenup Maintane Winterize Output Mix 60 10 30 Unit kwh Usage 32 20 40 Usage/100 Lbs. d.750 $ 81.554) + ($7.554 Amount of Maintane produced = 22.590 The margin under alternate production schedule B is: ($8. because the joint costs are the same for either production schedule.777 22.368.50 x 22. 1997 Solutions Manual.000 kwh = 22.590 x .320 Pounds of input processed = 750.590 x .250 = $71. The decision would not be different. Inc.40 x 13. (continued) c.04 for schedule B..777) – ($1.590) – $81.600 (from b above) Less joint costs incurred 118. © The McGraw-Hill Companies.60 + $16. The profit under current production schedule A is: Total net realizable value = $200.80 + $56.320 kwh per hundred pounds Amount of Greenup produced = 22. Chapter 10 321 .850 versus $71.20 x 2.590 pounds 3.3 = 6.259) + ($8.1 = 2.590 x .04 ∴Current production schedule A yields a higher operating profit of $81.920 200 1.853. of Input 1. even if joint costs are allocated based on the net realizable value method.264.259 Amount of Winterizer produced = 22.250 = $113.384.

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

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

.......000 120.. Direct labor ............ 1.236...... Unit Cost $ 6...........236........... Variable manufacturing overhead .378....000 c.............................................000d Less: Variable cost of goods sold ....50 x 104............ 874. Sales revenue .... Inc.....50c $11..................000 Operating profit ......000 units e$1..........000 Fixed marketing and administrative .......... (30 min...............000/120......000 units c$1......................236..........000 = $21........50a 3.... $2......... 858......Solutions to Exercises 11–12...000 a$6...75 a....378. 1997 Solutions Manual..............000 Less: Marketing and administrative costs .... Direct materials ...............000 + $450...000/120...........50 = $180.. Chapter 11 325 . Sales revenue ..... 120.................. $574.....) Variable costing versus full-absorption costing: Comparison of operating profit: Jarrard..... 260....000 Less: Cost of goods sold.......................................222.. 180........... b........................... $598....................................000 units sold x $780.222.....000 Operating profit ..000 units fCost of goods sold = 104.000e Variable marketing and administrative..............................000/120.........000 units = $450.........50 b$3................000 Contribution margin ........75b 1......000 units d$2................. 1.....000 Less: Fixed manufacturing costs ..........000f Gross margin ....75 = $780..... 140.........000 + $180............... Inc.........000 = $11.................000 + $180..75 x 104..000 units produced = $1............ Total variable unit cost .....000 ( ) © The McGraw-Hill Companies.... $2...........

...) Comparison of variable and full-absorption costing—multiple choice: Larue Corporation.....000 units x $12.......000 64.......... only variable costs are.80 $4... 2.60 Variable overhead............000 Marketing and admin......... (80........ Raw materials ....000 © The McGraw-Hill Companies.....000 100................ The answer is 3.. $240....... 5/e .....000 Operating profit.40 Direct labor .......... Fixed costs: Manufacturing ...... ........000 units x $... fixed factory overhead is not included in inventory.. ... Inc........80 Fixed overhead ............... $960.. 1997 326 Cost Accounting...... 1............. 128. ................80 c......000 368.......000 $144...........40a $7....00) . $2...40 Direct labor ...20 a$2.......... Variable costs: Cost of goods sold (80..11–13.......................... The answer is 1....... Under variable costing............. Raw materials ...........80) .....000 384.40 = $240..... a...60 Variable overhead... The answer is 3....000 512.....000 units x $4.... 1.......... Marketing and admin...........80) ......... $2. Contribution margin .000 units produced b....... (25 min....... Revenue (80......

...........000 x $7.....000 576....11–13.. Unit cost under full-absorption costing is $7..00) ... 1997 Solutions Manual................. The answer is 2......000 $192..000 ($7... $ 64. The answer is 2.......... The answer is 4...000 © The McGraw-Hill Companies............ Marketing and admin: Variable .....000 units in ending inventory....20 x 20...000 384....000 units).000 units in ending inventory...... Unit cost under variable costing is $4......000 units).......80 x 20... Inc. e....000 ($4............. Gross margin ......80.....................000 Fixed .........................000 x $12................ $960. Chapter 11 327 ...000 192.....20) . There are 20... There are 20...... 128.... (continued) d... The value of ending inventory is $144.. The value of ending inventory is $96....... Revenue (80..................... f.....20..000 Operating profit ............. Cost of goods sold (80.

........000 units produced ]) x 250...... 3..40 x 250.......700.700........000c Contribution margin . a....000. The $235..000 units in ending inventory 344. Inc........................... 600...700...375. 1997 328 Cost Accounting......000 difference in profits in Year 2 occurs because $235..000....000 fixed 250...000 = © The McGraw-Hill Companies...000 Operating profit.... 5/e ..000 $10.860.......000 600..000 840.... $1.000 860.. ..........000 Less cost of goods sold ...11–14.000.000 units sold $860.625.000 Less: Variable cost of goods sold.625....000c 840...140. 6..........000d Variable marketing and admin.000.000..000 Less: Fixed manufacturing .... 6..000 = = b$6. all of the fixed costs are expensed during the period.........000..000 Fixed marketing and admin. Full-Absorption Year 1 Sales revenue .. ..000. 3.000 )] x 250... Despite the appearance of higher profit on Tammari's full-absorption income statement.....000 e in fixed costs are included in inventory under full-costing whereas under variable costing.000 c$600.....400.........) Comparison of variable and full-absorption costing: Analyzing profit performance: Tammari Enterprises... $10.000 units sold = $24 x 250.000 Operating profit....... $10.......000 e$235.. They have merely shifted part of their fixed costs into inventory....000a Gross margin .. they were no more profitable in Year 2 than they were in Year 1....000 6.000 units sold ( $860........860....... ..000b 3... 860.000 $1.000 units sold = $2.......000c 3...........000 c...400..000d 600.....000 fixed x 94. Variable Costing Sales revenue ............000 ( [ $24 variable + $24 + [ $860......000 Year 2 $10.... 840.. a$6.000 b..... 840.935.....000 $ 1.. 600...... $ 1..........000 Less: Variable marketing and admin... (20 min..000 344...000c Fixed marketing and admin.....000 6.....000 units produced d$6....

000 Wages Payable 262.500 Variable O.500 160.H.000 d Fixed O.000 c 165.000 d$642.000 units produced = $40.000 + $60.) Comparison of cost flows under full-absorption and variable costing: H2O Products.000 = $637.11–15. 75.000 © The McGraw-Hill Companies.H.H.000 units sold 100.000 75.000 b 75. Chapter 11 329 .500 x 80.000 units sold 100.000 other mfg = $85.000 Wages Payable 262.000 b 75.000 + $20.000 units produced c$165. 165.000 262.000 fixed manufacturing costs from problem = $802.500 Work in Process 300.000 Work in Process 300.000 637.500 Cost of Goods Sold 642. 1997 Solutions Manual.000 Fixed Overhead c $165.500 x 80.500 Finished Goods 802.000 a Finished Goods Variable Cost of Goods Sold 510.000 802. Variable Costing Direct Materials 300. a.500 637. Full-Absorption Costing Direct Materials 300. (25 min.500 510. 75.000 75.000 b$75.000 165..000c b.000 a$510. Inc.500 642.000 262.500 127.000 repairs + $15.500 Variable O.000 supplies + $20.

000 units 47.000 b = $3.000 Variable Manufacturing Overhead (Actual) 104. a.000 252.000/$8.) Comparison of full-absorption and variable cost flows using normal costing: Jumpin’ Jimminy Products.20 x 30.496 = entry cClosing © The McGraw-Hill Companies.40 per hour). a$96.000 labor hours $448.000 448.000 Note: The company used 30.000 448.504 426.000 Direct Labor 252. 1997 330 Cost Accounting.000 a 8.000 labor hours (30. (25 min..000 Work in Process Inventory 100.000 21.000 (Applied) 96.000 c 96.600 units $426.496 Under/Over Applied Overhead 8.000 x 50.11–16. Variable costing Direct Materials 100.000 hours = $252.000 c Fixed Manufacturing Overhead (Actual) 116. Inc.496 b Finished Goods Variable Cost of Goods Sold 426. 5/e .

000 a 120.000 x 47..000 units entry © The McGraw-Hill Companies.000 c 4.000 = $4.00 x 30.000 Finished Goods 568.000 Direct Labor 252.736 b 120. 1997 Solutions Manual.000 b$540. Inc.600 units 50.000 c Fixed Manufacturing Overhead (Actual) 116. (continued) b. Chapter 11 331 .000 27.000 (Applied) 96.11–16.000 a 4.000 c 96.736 Under/Over Applied Overhead 8.000 252. Full absorption costing Direct Materials 100.000 a 8.000 Variable Manufacturing Overhead (Actual) 104.000 c a$120.000 labor hours = $568.000 568.000 Cost of Goods Sold 540.736 cClosing Work in Process Inventory 100.264 540.

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

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

.000 (= 1.......000= b$135.. Sales revenue ........000d Operating profit.. 6........ Since sales exceed production...... $2.. $2.....800 Note: Full-absorption costing expenses $21........... 140............ 135. 135. Inc.500 units x ($164 + $70.........200b Fixed marketing and admin.500 units from beginning inventory...........911......200 c$140...........500 units x $294 = 6.000 = = d$91......... ...000 Less: Variable cost of goods sold..............800 b...500 units x $14 6. Inc..000 = e$1. © The McGraw-Hill Companies. 1997 334 Cost Accounting. $ 462.........600......20 + $28)..........000d Operating profit..........) Compare income statement amounts using actual costing: Barrett. 689......11–19............ as shown by comparing the variable costing results in a with the following fullabsorption results........729............. Sales revenue ....... $ 504....80 + $31..80 5............ 1..500 units x ($164 + $70.....911... 1. 91.80 + $31................... ............000 units x $28 6..... including 1....000= 6........ 91...000a Variable marketing and admin..000e Gross margin .....500 units from beginning inventory..729.500 units x $20......000 Less: Cost of goods sold .......200b Contribution margin ....... (40 min......... including 1.....600.. a............500 units x $266 = 6........... 735....500 units x $14) in this period from prior period’s production that variable costing already expensed in the prior period....20).000c Fixed marketing and admin......800 Less: Fixed manufacturing overhead ... a$1...... profits reported under variable costing will be greater.....000 Less: Variable marketing and admin...... 5/e ..........

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

..800 x 40%)......................... costs ($49..... $ 31........880 $ 17........................... 12.................. They can also be derived from knowing what percent of manufacturing costs are variable last year and this year...............200)a Variable marketing costs ($83..............................200 66...... Cost of goods sold: Beginning inventory ($22.. Operating profit before tax—full-absorption costing.........900a Cost of goods manufactured ($315...800) Operating profit before tax—variable costing............. $ 17...................... $ 9... Operating profit before tax (variable costing)........ Inc.....000 x 45%) ..................600 29.. b................................... (60.............500 16................ Fixed marketing costs ($83........000 170.920 158..... Revenues ...... Contribution margin .....480 94....000 x 55%) .) Variable costing operating profit and reconciliation with full-absorption: Emerson Corporation...... Fixed manufacturing costs ($315..... © The McGraw-Hill Companies. (1) Reconciliation of full-absorption operating profit to variable costing operating profit............. 5/e . (60 min................000 x 70%) ......................500 Ending inventory ($86......... Although some of the fixed manufacturing costs are deferred on the income statement...000 x 30%) ....000 x 80%)......000 x 20%) ..................................500 given in footnote to annual income statement.... they are likely paid for with cash in the current period..... 1997 336 Cost Accounting...... 220.. Emerson Corporation a.........100 Deduct fixed costs in ending inventory ($86............... aAmounts $415. Fixed administrative costs ($49........800 x 60%)...............200 Add fixed costs in beginning inventory ($22...........000 x 30%) .... (25..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...11–21...............000 x 70%)... Variable admin........400 19...................

.....000 280....000 Year 1 Full-absorption operating profit ..................000 $ 95..... 225........000 280........000 –0– $ 95.......000 © The McGraw-Hill Companies.............000 Fixed manufacturing costs ..000 x $46)..000 $190....000 75..........000 2 year Total $920.........................000 75.....000 x $46)........... –0– Contribution margin ..000 $ 20... $460.................000 Fixed marketing and admin.000 b........................ $170..... costs ........................000 470........ 310.000 450..........000 $190.000 –0– 450..000 Marketing and admin.... –0– Current production ..........000 Operating profit ... 225.. Chapter 11 337 ........................) Full-absorption versus variable costing: Korona Company........................................ $460. Variable costing operating profit: Year 2 $460.......... 75. Full-absorption operating profit: Year 1 Sales revenue (10....................000 Cost of goods sold: Beginning inventory..000 2 year Total $920....000) Cost of goods sold ............... 150..... $ 95...000 Gross margin ................ –0– Less fixed costs in ending inventory .. 140........11–22.........................000 140..000 c................. 1997 Solutions Manual........... 140........................000 225....................... $ 95.....000 Variable costs ........... Reconciliation: Year 2 $460.........000 Operating profit ................. Inc........................................... (40 min.......000 Year 2 $ 20.........000 –0– 300...... (75...... a.....000 140.000 160.................. costs .......................000 –0– 450......000 –0– 460.....000 Add fixed costs in beginning inventory......................... $170....000 Year 1 Sales revenue (10..........000 Ending inventory......................................000 –0– 920...... 460...............000 Variable costing operating profit ....000 225............

.400............... 5/e ..000.......000 $(19.000 20.......... 1997 338 Cost Accounting.....000 Fixed manufacturing costs .....000..................000.. Year 1 Sales . 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....000.000) Year 2 $ 60. b.......000) Bonus . costs ....11–23.000. $ 60.....000......000 (18..............000...000) 1......000. the president is not entitled to a bonus...000 Marketing and admin........ a.. This is a classic problem in full-absorption costing that is based on actual practice in a large manufacturing company.....000.....000........................... as shown below...000................................000........000 Variable cost of goods sold ...........000.......................000.. A variable costing income statement would be a better measure of performance.......... $(18......000 Operating profit (loss) before bonus ..........) Effect of changes in production and costing method on operating profit (“I Enjoy Challenges”): Brassinni Company.. The fixed costs deferred in inventory amount to $32.......... 40.. 48... these would be period costs and the Year 2 operating profit would be an $18... (40 min............... 20...000..000 40.000) Ending inventory value at end of Year 2 = 20...000. Operating profit (loss) after bonus ....000 48......000 Contribution margin ...........400.000...... The Year 2 income statement is based on the accounting convention of full-absorption costing.000 units not sold x $2 variable manufacturing cost per unit = $40...............000..... Inc... Under these circumstances..000 loss......000 10.... (18.........000 © The McGraw-Hill Companies.... 10. Under variable costing...

........000...000 Marketing and administrative ......................................000......000.. $78. Inc................000.000....80 $6.000) Adjustment for overapplied fixed manufacturing costsb ........ Full-absorption—normal costing.....................80 Cost per unit of production = $6.....000) = $144..000 Be careful. 1997 Solutions Manual. Here is how the president could have really made money (for himself)! Year 2 Sales ..... Chapter 11 339 ..............000 Adjusted gross margin ...................000 Operating profit .................... © The McGraw-Hill Companies...........00 Applied fixed manufacturing cost per unit = $4.............. $60.. 96.000...........000.000.......................000.................) ”I Enjoy Challenges” normal costing: Brassinni Company......80 x 30......000......000.000 a Variable cost per unit = $2.........000 Actual fixed manufacturing overhead = 48.... 68.......... (8.000 Gross margin................80 x 10.000 units = $68........ 88.........000 Cost of goods solda .................................11–24. This works to the president’s advantage only if overapplied overhead is not prorated to inventory and to cost of goods sold.......... 10............... (25 min...........000 Total overapplied fixed manufacturing overhead = $ 96....000 cost of goods sold bApplied fixed manufacturing overhead ($4.........000......................000......................

11–24.000 Finished Goods Inventory 60.000.000.000. (continued) Diagram of Cost Flows Work in Process Inventory 60.000 144.000c Under/Over Applied Overhead 96.000.000 144.000.000 60.000.000 68. 1997 .000..000 136.000c crefers to closing entry 340 © The McGraw-Hill Companies.000.000.000 Cost of Goods Sold 68.000 144.000 Variable Fixed overhead Fixed Manufacturing Overhead Actual Applied 48.000.000 96. Inc.000.000.000 144.000.

.....000 341 © The McGraw-Hill Companies...000: Completed: 10......2) 110.2 .000 100.000 (12/31) 30.....000 (0.000 90.........000 (12/31) 15.......000 (12/31) 10.000 Finished Goods Inventory (1/1) 10............000 110..000 Work in Process Direct Materials (1/1) 10.........4) 115. 1997 .........000 Work in Process Conversion Costs (1/1) 10.000 115.000 x (1 – ........000 x . 6....11–25..000 Ending inventory: 15......000 115. Note: This problem requires an elementary knowledge of process costing... 3....000 Less Ending inventory ....) Comparison of full-absorption and variable normal costing in a process operation: Devonelli Company...000 (0..000 Equivalent units . (65 min. a.000 Equivalent units of Direct Materials = 115...000 (12/31) 15......000 120.4) ....000 110.000 Cost of Goods Sold 90. 109.000 Started and completed: Started .. Inc.000 = same as units transferred from Materials Inventory Equivalent units of Conversion Costs = 109. 15.....115.. Flow of units Direct Materials Inventory (1/1) 5.....

000 Under/over Applied Overhead 3.000 (12/31) 40.000 480.000 1.000 for materials and 109. Inc.000 Variable Manufacturing Overhead Actual 330.000 Applied 327. 115.000 c 220.000 b b 8.000 for other costs.000 327.000 (a) 8.000 units transferred out times unit cost given in the problem. Direct Materials Inventory (1/1) 20. 10.000 c 330.000 990. times unit costs given in the problem.000 460. units.000 units.000 aEquivalent bEquivalent Applied 218.000 c 220.000 (a) Fixed Manufacturing Overhead Actual 210.000 3.000 330.000 a 218. Flow of dollars. 342 © The McGraw-Hill Companies.000 a 81.000 b 12.000 (b) 8.000 for other costs.000 218.000 460. times unit costs given in the problem.000 c (1/1) Finished Goods 110.000 (b) Direct Labor Costs 218.000 440.000 Cost of Goods Sold 990. c110.210.000 Work in Process Inventory M L VOH FOH 40.000 for materials and 4. (continued) b. 1997 .11–25..000 b 8.

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

..... 1997 344 Cost Accounting.. 5/e ..................000 $ 93............000a –0– 180..... Operating profit......) Incomplete records: Solano Company.....000 b. Calculations: aSales – contribution margin = $450....... Variable Costing $450.......... Operating profit........................ (50 min........... a.000 $3/unit = 90. (1) Units sold = Variable cost of goods sold Variable manufacturing cost = $270... Fixed marketing and administrative costs .. Fixed marketing and administrative costs ...................... Variable cost of goods sold ... Gross margin .......11–26..... Variable marketing and administrative costs Contribution margin ......................000 66...........000 – $180..................000 – $81......000 bSales – gross margin = $450... Comparative income statements.....000 units © The McGraw-Hill Companies......000 $ 60................................... Inc. Sales ......................000 369....000 = $369..........000 270.000 21...................000 Full-Absorption $450....................... Fixed manufacturing costs ...000b 81..................................000 = $270........ Cost of goods sold...000 21.......................000 Sales ....................

000 units (= 90.000 66.000 33.000 units x $1. 1997 Solutions Manual. and $4.00 per unit. c.000 units (2) Full-absorption cost per unit = $4.000 From current period's production 60.000 units (3) Last year's costs were the same as this year's costs.000 higher than full-absorption costing. (continued) $369. See part (2) of b above. Inc.000 $33.10 = Fixed mfg.10 – $3.10 = From beginning inventory 30.10 = Fixed cost per unit = $1.10 per unit for fullabsorption.000 90. Fixed manufacturing cost per unit = $1. production was 60. costs Units produced $66.000 – 30. sales must have exceeded production by 30.000 $33. ( ) Also.000 $99.10 (= $4. Since variable costing operating profit is $33.11–26.10/units Therefore.000.000)..000 units x $1.00 variable costs) Difference in income = $33.000 Units produced Units produced = 60. 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 units = $1. Chapter 11 345 .10 = Difference (excess of full-absorption costing expenses over variable costing) © The McGraw-Hill Companies. Therefore. the cost per unit for last year for variable costs is $3.

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

...... First find units sold.600. not units produced....000a Underapplied overhead (5. Less: Fixed nonmanufacturing costs ................ Cost of goods sold.000/$12 = 100...... The Vice President for Sales should find the variable costing approach to profit determination desirable for many reasons......000 400..... Because the production during November (145....000 1.................. including: • Variable costing income varies with units sold....... consequently.000 780....000 units..000 units)......000 in operating profit before taxes. 20.......... (1) Lockard Co... manufacturing cost per unit does not change with a change in production levels.000 $ 380....600.000 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.................................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..... (30 min..) Evaluate full-absorption and variable costing...200.......400.000.. a............000 unit increase in the inventory balance results in $180.000b units @ $4) .. • The contribution margin offers a useful tool for making decisions. © The McGraw-Hill Companies.....000 (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.. $1.000 volume = 150... Inc...000 Sales (100.. Chapter 11 347 ...000 units) exceeded sales of November (100. • Fixed manufacturing costs are charged against revenues in the period in which they were incurred..000 = $1.620... Income Statement: Full-Absorption Cost Basis For the Month of November $2..000 Gross margin .11–28.. Units sold = Variable cost of goods sold divided by Variable manufacturing cost per unit = $1.... b. normal costing: Lockard Company......... the fixed cost assigned to the 45.... 1997 Solutions Manual..... aCost bEstimated x volume = ($12 + $4) x 100..... Operating profit ...000 units @ $24 per unit) ..... actual volume = 145..

000* x 1/2a = 115.000* 15.000* 110.000 (1/2 complete)* 110.000* Cost of Goods Sold 115.000 units: Completed 10. 348 © The McGraw-Hill Companies. Inc.. aTo convert from 2 units of Harsh required to make one unit of Jink. and b.000 115.000 x (1 – 1/2) Started and completed Ending inventory 15.000 50. Note: This problem requires an elementary knowledge of process costing.U.000* Work in Process Inventory—Conversion 10. and calculations answer requirements a and b. (90 min.000 15.000* 40.000* 12. 1997 .000 units = 5.000 = 5. *Units given in the problem.000* 115.000* 220. The following flow of units and costs.000 E. and full-absorption costing: Sega Corporation.000 110.) Comprehensive problem on process costing.000* 10.000* 230. Units Materials Inventory Work in Process Inventory—Materials Finished Goods 17.000 100.000 x 1/3 = 115.000 110.000 (1/3 complete)* Equivalent Production: Materials Processing = 110.Solutions to Integrated Cases 11–29. variable costing. a.

000* 35. VC refers to variable costing *Dollars given in the problem.000 891.276.000* 45.000* 40.000 120. Chapter 11 349 .500 1.200 Cost of Goods Sold (FA) 1.000 1.150. 1997 Solutions Manual.000* 330.11–29.000* 60. Inc.000* 345.276.000 Cost of Goods Sold (VC) 1.000 770..000* 330.000* Finished Goods (FA) 188.700 1.000* 345.000* Work in Process Inventory—Materials 30. © The McGraw-Hill Companies.150.000* 770.000* Work in Process Inventory—Conversion (FA) 40.221.000 1.500* Work in Process Inventory—Conversion (VC) 35.500 Finished Goods (VC) 170.000 133.100. (continued) Dollars Materials 75.500* 891.000 FA refers to full-absorption.

.... 145...000) 1..300..000 170.....................500 Marketing & administrative ........ 1.878......... — — Under/over applied overhead ......................500 Fixed conversion costs................................221.............. $ 70.................150.....100.500) Manufacturing costs.000 Ending work in process ...........500 Current period costs.000) 1..........700 Ending finished goods .....115.....029...........236.............................. Cost of sales: Manufacturing costs: Beginning work in process .000 (80... 188......500 Comparative Income Statements Full-Absorption Variable Costing $2.....000 $ 884...................000 Net income .. 1.. (85....000 $ 65.300......... Inc....000 (120.11–29.............000 –0– 1..... –0– Gross margin. 1...............000 145.......000 1............................................000 Beginning finished goods.000 $2.276.......................023....200) Cost of goods sold......000 — 350 © The McGraw-Hill Companies... 1997 ................................ (continued) c...........000 121....... (133... Sales ..................... $1..... 1............

. (continued) d...700b Fixed costs expensed under Full-Absorption.. Chapter 11 351 ...10 © The McGraw-Hill Companies..... 1997 Solutions Manual.. + 12..... 18...000 = $126..... Inc............. 24........10 = (5...10 = $24..000 E... Reconciliation of Variable and Full-Absorption Costing Fixed costs expensed this period under Variable Costing ....200 + FG) x $1..700 x 115...000 E.. $121. Assume FIFO flow..000 Add previous period fixed costs Expensed under Full-Absorption ... $126....10 = $18...........500 b(WIP c$1.U....10 = (5.200a Less current period fixed costs Retained in inventory under Full-Absorption ..U..11–29.......000 + 17...500c a(WIP + FG) x $1..........000) x $1...) x $1..

Inc.400 $ 7....950) 100 dresses @ $75 300 dresses @ $37......100 $11.50 400 @ $30 400 @ $7 300 @ $3 300 @ $30 © The McGraw-Hill Companies...11–30..... 1...000 ÷ # of dresses.... $25.800 900 9.....700 ($5. (45 min... even though one might normally think that these costs are variable... Under full-absorption costing.. a. neither fullabsorption nor variable costing gives a totally satisfactory answer....................000 dresses even though only a fraction of the lot will be sold... 5. $30 b...........500 11. 1997 352 Cost Accounting...) Full absorption and variable costing—Importing decisions: Cotierre.000 2. 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. Revenues: Costs: Cost of goods sold Commissions Total costs Operating profits c.. 5/e .. The key to this problem is to realize that the purchase and duty costs for the lot of 1..000 Import duty ...000 Total cost.. 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..250 $18..000 dresses are essentially fixed..... $30.. In this situation....750 12...... The reason the costs are fixed is that it is necessary to acquire the full 1.......000 $24....000 units Cost per dress.500 9.100 $11.000 2. the inventoriable cost of each dress is: Purchase price ....

050 400 @ $7 300 @ $3 This solution is not much better than the previous one. Thus.500 30.600) In the second period. the company could consider that it incurred $30.000 cost to the revenue expected from the dresses that are expected to be sold.750 2. Chapter 11 353 .100 ($9.250 $18. An alternative would be to relate the $30.500 11.250 $41.000 11.50 $30.000 to the first period since it is a fixed cost.250 © The McGraw-Hill Companies.800 900 $ 3. Provision could also be made for the expected disposal costs. 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..50 $ 7.900 ÷ $41. 1997 Solutions Manual. One alternative considers the inventoriable cost of the dresses to be zero and charges the full $30.11–30.000 2. but it would tend to match the expected dollars revenue with the costs of the lot of dresses.100 $32.900 in costs to obtain the following revenues: Full price dresses Half price dresses Expected revenue $30.700 $15. an operating profit is computed as follows: Revenues: Total revenues Costs: Commissions Disposal costs Total costs Operating profit 100 dresses @ $75 300 dresses @ $37. (continued) d. Inc.250 = 74.91% 400 @ $75 300 @ $37. The inventory value would not be a standard one.

Inc.750 14.100 $18.500 16..955 $ 3. 1997 354 Cost Accounting.91% 300 @ $7 $22. 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 @ 74.855 2.50 $ 7.904 $18.750 x 74.046 2. 5/e .800 $16. (continued) d.500 11.545 100 dresses @ $75 300 dresses @ $37.250 $18.846 $ 1. (continued) For each dollar of revenue.11–30.91% 400 @ $7 © The McGraw-Hill Companies.91¢ would be deducted to cover the cost of the dresses and the disposal costs. 74.

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

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

If the predictors are correlated (a common problem with accounting and cost data). 12–14. (Appendix) How well defined is the model? That is. 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. Negative intercepts usually mean that there is some error in the specification of the cost estimate. multicollinearity is a potential problem. Chapter 12 357 .. It may be that the slope of the cost curve is particularly steep over the values used in the estimation process. This would be particularly likely if the company were operating close to capacity. 12–13. It is possible for empirical data to show a negative intercept even though fixed costs cannot be negative. 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. 1997 Solutions Manual.12–12. Inc. 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). 12–15. for example. Also. If the company is operating close to capacity. If the appendix has been assigned. then there are overlapping effects which are being explained by the correlated variables. If more than one factor is used. The specific effect of one variable on the cost estimate cannot be determined independently. does the one independent variable explain variation in the dependent variable? Are the residuals normally distributed? © The McGraw-Hill Companies.

350..000 b...000/70....000/80.000 ($308.000 (1...000) 416.000) 516..... (15 min.000 Cost Item This Year’s Cost at This Year’s Volume $ 576.......000) 352.000 ($364..000) 308..000 Direct labor....000) 364....25 ($1....000 516..Solutions to Exercises 12–16.000 units) 358 © The McGraw-Hill Companies.000 (1.04 x $350..000 Total costs......) a.000 $1....000 x 80.558... $1...000 Variable overhead.000 Fixed overhead .000 (1... 480. Inc...860..075 x $480..000 Direct materials ... $22...000 x 80..000 units) ($1..257 This year .692.000 ($504.860... $ 420.. 308.. Methods of estimating costs—account analysis... Last Year’s Cost This Year’s Cost at Last Year’s Volume $ 504...2 x $420.000) $1..000/70. $23...558.000/70..... Costs per unit: Last year .000 x 80....000/70. 1997 .

239.1 x $307.725 ($338.........232.500 Variable overhead... 237.000) 185.005..05 x $237..96 ($1..000/50.403 Direct materials .000 units) Year 2 ..500 Direct labor.403/65. $307... Methods of estimating costs—account analysis...000 units) 359 © The McGraw-Hill Companies......... Inc.053 ($275.000/50............550 Cost Item Year 2 Cost at Year 2 Volume $439.000 b..500) 142...425 (1.500 x 65...250 ($142... $18. $927.500 Total costs.. 1997 . (15 min.375 (1.........54 ($927...) a......000) 358.... $18.000/50..000/50.375 $1..12–17...500 Fixed overhead ..500) $1...000) 249.232..500 249..250 (1....500) 275. Costs per unit: Year 1 . Year 1 Cost Year 2 Cost at Year 1 Volume $338...425 x 65. 142.15 x $239...250 x 65...

25) = $550. so this estimate is subjective.000 = $550.000 Note that 40.) a.000 + ($31. 1997 360 Cost Accounting.000 = $1.800 = $31.25 x 40. Inc. (10 min.12–18.2 million 33.6 million – (33.000 miles) = $1. = = = Cost at highest activity – Cost at lowest activity Highest activity – Lowest activity $1.550.25 x 32.000 miles) = $1.25 x miles) = $550. Variable costs Methods of estimating costs—High-low: Continental Company.000 + ($31.000 + ($31.6 million – $1.800 miles $.800.000 miles is outside the range of the cost observations.2 million – (20. Maintenance cost = $550. © The McGraw-Hill Companies.600 miles – 20.25 per mile Fixed costs = Total costs – variable costs = $1. 5/e .600 x $31.800 miles x $31..000 b.25) = $550.4 million 12.

..12–19. a.. For 380 MH: Overhead costs = $629 + ($11.475 $3.013 © The McGraw-Hill Companies. 290 Variable cost estimate = = = Overhead Costs $5.... (25 min.975 Cost at highest activity – Cost at lowest activity Highest activity – Lowest activity $5. High-low estimate Machine Hours (MH) Highest (month 9).. Inc.475 – ($11. Chapter 12 361 .475 – $3.538 per MH x Machine hours) b.975 420 MH – 290 MH $1. 1997 Solutions Manual..538 x 380 MH) = $5...975 – $3.500 130 MH = $11.) Methods of estimating costs—High low: Nate Corporation....538 x 290 MH) = $3.346 = $629 The cost equation then is: Overhead costs = $629 + ($11.475 – $4.538 x 420 MH) = $5.. 420 Lowest (month 12) ...538 per MH Fixed costs = Total costs – Variable costs = $5..846 = $629 = $3.975 – ($11.

00 316.00 © The McGraw-Hill Companies. SCATTERGRAPH $5..475.) Methods of estimating costs—Scattergraph: Nate Corporation. 5/e .0 4.00 420.0 4. (15 min.797.136. Inc.12–20.0 290.00 Machine Hours 394.0 3.0 5.0 4.780.00 342.119. 1997 362 Cost Accounting.00 368.458.

350 4.100 $4.650 4.800 4.800 6. 1997 Solutions Manual.950 4.000 5.800 4.050 3.200 4.250 5. (15 min.500 4. $5. Inc..12–21.900 3.750 $3.200 4.000 © The McGraw-Hill Companies.) Scattergraph Methods of estimating costs—Scattergraph: Nate Corporation.400 5.600 5.400 Materials Costs ($) 5. Chapter 12 363 .

12–22. Simple regression estimate Overhead = = = = $348.5920 x MH) + (.) The answer is (1). (10 min. Estimating costs—Simple regression: Ginfee.24 + ($4.20 © The McGraw-Hill Companies.) Estimating costs—Multiple regression: Nate Company. 1997 364 Cost Accounting. Inc.24 + ($4.5920 x 380) + (.79 12–23.) Estimating costs—Simple regression: Yamahonda Motors Company.17 + ($12.000) $694.25 x 1. (20 min.744. 5/e .62 $4.635.149 x 380) $348. Q = $6. (20 min.250 12–24..000 machine hours) = $6.964.17 + ($12.2392 x MC) $694.196.149 x MH) $348.00 $3.17 + $4.2392 x $5.250 = $11.616.96 + $1. Multiple regression estimate: Overhead = = = = $694.000 + ($5.000 + $5.24 + $1. Inc.

000 + $128.44. The fixed costs.000 + ($6. b.000 $ 956.000 ÷ 100.000 + ($6. Chapter 12 365 .) Interpreting regression results—Multiple choice: Pentag Company.00 direct materials ($100. the explanation of variation in Y from the X regressor.000 64. The variable costs from d above are $2.40 x 10. are $110.44 The regression analysis provides a figure of $6.000 hours) ÷ 100. a. (20 min. (2) TC = $110. e.000 units] $2.40 x DLH) $110.000 $238.40 x 20.000 $1. $956.000 80. The equation resulting from this regression analysis is TC = = = = $110.000 selling price ($12 x 100. *CMA adapted © The McGraw-Hill Companies.000 units) .44.000 direct labor hours will be needed to produce 100.200.000 100. 1997 Solutions Manual.000) direct materials direct labor variable overhead ($6. It is expected that 10.56.000 units.000) $110.000 = $9. given by the regression analysis.000 ÷ 100.000 units) .000 ÷ 100..40 x 10.12–25.000 + $2.64 overhead [($6. (1) R2 = .40 in variable overhead per direct labor hour. (1) $9. The variable costs per unit are: $1.80 direct labor ($80.44X.908.000.000) contribution c.000.56 per unit d. (3) $2. Inc. (4) $238.

Quite often the advertising expenditures result in sales being generated in the following month or so.15 x food costs) b. Inc. In addition.) Interpreting regression results—simple regression: Ben’s Big Burgers.650 + (1. (15 min. This problem is frequently encountered when applying analytical techniques to certain costs. (15 min.750 = $66.400 © The McGraw-Hill Companies. a.15 x $25..650 + $28.) Interpreting regression results: Leonine Company.000) = $37. 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. many companies increase their advertising when sales are declining and cut back on advertising when there is capacity business. At $25. 1997 366 Cost Accounting. A better model might be developed by relating this month’s sales to last month’s advertising.650 + (1.12–26. Overhead = $37. 5/e . Similar problems exist for repair and maintenance costs since machines are usually given routine repairs and maintenance during slow periods. 12–27.000 in food costs: Overhead = $37.

25) = $421 © The McGraw-Hill Companies. Inc.200 employees) = $8.074 x $34.200 employees. 1997 Solutions Manual.074.25) So the upper confidence limit is: $492 + (2.400 = $2. a.820 b.420 + $2.) Interpreting regression data: Comador Commercial Bank.25) = $563 and the lower confidence limit is: $492 – (2.12–28.066. At 4. (30 min.074 x $34. Chapter 12 367 ..420 + ($492 x 4. the cost estimate would be: Personnel costs = $8. The confidence interval for the slope coefficient is: $492 ± (2.074 x $34.

.....400 x ..950 Cost of 4 units Direct materials ............120 per unit .. Average Manufacturing Costs per Unit $ 4..530 © The McGraw-Hill Companies.....840 x ......... Total hours 100 160 (Y = 100 x 2–..500 ($750 x 2) Direct labor .... X 1 2 4 8 16 12–30. (20 min.322 = 80) 256 (Y = 100 x 4–..12–29.................... $5..... Overhead .000 3.) Learning curves: Dianetics Manufacturing....50 ($2. $10........900 per unit . 5/e ............... 2. 2..000 2..000 x 75%) 1... $ 2........... Overhead .. Inc........ 1997 368 Cost Accounting...500 20..) Learning curves: Paradigm Stainless Steel Company.........250 Cumulative Number of Units Produced...400 ($15 x 160) Var..280 [($100 x 4) + ($3.000 13....... $2.. $1....250 ($3.......265..............000 9.322 = 64) Units 1 2 4 Average per unit (Y) 100 80 64 Cost of 2 units Direct materials . $ 3.840 ($15 x 256) Var..........000 6...50 x 75%) Total Manufacturing $ 4. (30 min...................250 x 75%) 1....62 ($1.....687........687.000 [($100 x 2) + ($2.75)] Total ... 3... 3.000 ($750 x 4) Direct labor ....75)] Total ..

500 25. a...500 – ($2.000 MH) $99.500 Check: Fixed costs = $64.500 – $23.000 = $41.30 per MH Fixed costs = = = = Total costs – Variable costs $99.000 MH – 10..500 Cost at highest activity – Cost at lowest activity Highest activity – Lowest activity $99..500 The cost equation.. then is: Overhead costs = $41..30 x Machine hours) © The McGraw-Hill Companies.. and regression: Nilsine Company..000 64. 1997 Solutions Manual..000 MH = $34.) Methods of estimating costs—high-low. Lowest (Month 8) ..000 MH) = $64... scattergraph. (40 min.Solutions to Problems 12–31. Inc.30 x 10..500 ÷ 15..000 MH = $2.. Chapter 12 369 .000 – $64..... Variable cost estimate = = 25.000 10.500 $41..000 – $57. High-low estimate Machine Overhead Hours (MH) Costs Highest (Month 2) .500 + ($2.000 – ($2.000 $99.30 x 25.

+ ---.344 © The McGraw-Hill Companies.1549 x Machine hours) Which for 22..500 hours would be: Overhead costs = $39.485 = $88. 1997 370 Cost Accounting. (continued) b.859 + ($2.500) = $39. 5/e .100 ** * 85.000 19.500 +* + ---. The regression results indicate an equation of the form: Overhead costs = $39.300 71.000 25.+ ---. Scattergraph N = 24 out of 24 $99.400 * * * * * 64.000 10.1549 x 22.12–31.+ ---13.+ ---.+ ---.+ ---.859 + $48.+ ---.+ ---.000 16.000 Machine Hours c.200 * * * * * * * * * * * * 78.+ ---. Inc.859 + ($2.000 * * * 92.000 22.

..... (60 min.220 9..000 units – 56....000 181... 16..........670 – ($1...... High-low method: (Note: Rounding affects the answers.200 $171... 181. 14..) Variable cost estimate = = = Cost at highest activity – Cost at lowest activity Highest activity – Lowest activity $777...... a..640 – $142. $742.680 + $1. 1997 Solutions Manual.......640 – $717... Inc.420 236....640 – ($1..680 + ($113........500 Indirect labor ..210 27........ 194...240 Cost equation: Overhead = $629.......350 7..000) $777..970 41.......680 $113........900 units $59...459 x 56......... 24...000 Equipment maintenance .750 Technical support .000 units) = $629..12–32..330 8.. 11..670 98..100 units = $1.100 6.... 27..830 Personal property taxes . simple and multiple regression: Dellila Undersea Gear Corporation..750 Data processing ..459 x 98.) Methods of cost estimation—account analysis... 236..900) = $717.653 (allowing rounding error) © The McGraw-Hill Companies.459 per unit (rounded) Fixed costs = = = = Total costs – Variable costs $777...........210 Equipment depreciation ....420 Power...920 $629...470 1....500 15. $ 37........670 – $83..940 Totals ........017 = $634.... Account analysis approach: Cost Item Total = Fixed + Variable Indirect material ..000 23..........240/80.......200 Building occupancy .500 $ 37......4155 per unit b......940 16...982 $634.... Chapter 12 371 .658 Check: Fixed costs = $717.

A combination of account analysis and either simple or multiple regression would probably provide the best estimated relation between costs and activity.547 + ($1.547 + $120.080 – $6. The account analysis approach is based on considerations of future prices and costs. Hence.547 + ($1.658 + $116.320 $746.640 + $120. Since the high-low method uses only two data points.459 x 80. Multiple regression estimate: Overhead = $632. 5/e .640 + ($1.000) = $634. (continued) For 80.658 + ($1. (continued) b.867 d.000 units. its results are subject to some question. The multiple regression does not improve the fit over the simple regression (R2 is virtually unchanged).045 e. © The McGraw-Hill Companies.12–32. 1997 372 Cost Accounting.000 units) $626. Inc..720 = $751. and interpretation costs.504 x 80.) c.000 units) – ($59. Simple regression estimate: Overhead = = = = $626.675 = $746.067 x 113 index level) = $632.378 (Note: Your answer may differ somewhat because of rounding.501 x 80. estimated costs are: $634. multiple regression benefits may not justify data collection.504 x Production units) $626. The simple regression has a high correlation coefficient and seems to “make sense. analysis.” It would appear to offer the best estimate based on projections from past data.

12–33.6 * * 5. .0 * * * 6. The unadjusted R-square is . In the first place.0 * * * * 404.4 * 4.60 522.00 375. (45 min.950..117. Chapter 12 373 .8 * 5.. it would be helpful to see if the data meet the requirements of regression.82 implies that approximately 67% of the variation in overhead is explained by the equation.00 Units © The McGraw-Hill Companies.) Interpreting regression results—simple regression.40 433. Plotting the data on a scattergraph will show the following: $6. However.20 492.533. the correlation coefficient of .82 squared). Inc. 1997 Solutions Manual.2 * * 5. this is not a bad correlation for real data.e. Of course.783.366.80 463. the results would be as Gearld reported them.701. If we were to run the regression with the data given.67 (i.

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

2884 x 420 hours) f. (2) V = $7. (4) $3.820 = 220 hours 520 hours – 300 hours F = $570 = $4.746 = $684. (3) √.12–34.65 + ($7. 1997 Solutions Manual. (4) Variable cost coefficient b. (1) Independent variable d. Chapter 12 375 . Inc.) Interpreting regression results—Multiple choice: Lerner.50) ( ) . e. (2) Dependent variable c.470 – $2.* a. Inc.50 = $1. (1) 99.99724 g.470 – (520 hours x $7. (30 min..650 $4.724% © The McGraw-Hill Companies.

200 + 2.) Learning curves: Jammin’ Corporation.248 – (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. the standard per unit becomes: 3. Inc.248 hours used in the production of the first 32 units. 1997 376 Cost Accounting.85 = 289 hours per unit. 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. b. Assuming this learning rate up to a cumulative output of 32 units. Various inputs to the production process may be used more efficiently as cumulative output increases. In short.e.808 hours used in the production of units 17 through 32. a. lots of 8 units. or 9. 5/e . 16 units © The McGraw-Hill Companies.240) = 3.12–35. This implies a total of 289 x 32 = 9.200 + 2.. this quantity can be calculated as: (3. but in most production processes the majority of cost savings associated with a learning phenomenon involve the use of human labor. (45 min.808 hours = 238 hours per unit. If the average hours per unit in this production batch is taken as the direct labor standard. i. In the case of direct labor hours used in the production of Inexcess. average hours employed for each unit when 32 units are completed should equal: 340 x .240)/16 340 average direct labor hours = 3.200/8 400 average direct labor hours = 85% c.

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

. manufacturing. if potential labor cost improvements are ignored.00 $72.. In the analysis below....... The analysis prepared by the engineering. Therefore.... fixed factory overhead costs and general and administrative costs have not been included because they are not relevant... or supervision would be required if the gauges were manufactured.00 30.00 differential cost to manufacture them... (40 min...... Variable factory overhead ...000 $720.... Assembly labor . 5/e .. 1997 378 Cost Accounting..00 30. Inc. A differential cost analysis similar to the one shown below should have been prepared to determine whether the gauges should be purchased or manufactured.000 $12.000 Unit Per Assembly Run Unit Purchased components. a....... Differential Cost Analysis Cost of 10..) Learning curves: Krylon Company. space. Krylon Company should purchase the gauges because the purchase price of $68.... and accounting departments of Krylon Company was not correct unless the potential labor cost improvements are ignored.000 300... $120.. these costs would not increase because no additional equipment..00 © The McGraw-Hill Companies........00 is less than the $72....000 300.12–36... Total incremental cost.

. (continued) b.... Chapter 12 379 ..............8) Total Cumulative Labor Cost $ 300.000 Assembly labor.00 24...72 3..12–36.36 1..... $42.228.. The reduction is possible as the laborers become more efficient in performing the tasks.. $12......000 80.. 68..417.... A revised analysis which considers an 80% learning factor is shown below: Cost per Unit Total Differential costs to manufacture 80. With (say) an 80% learning curve by lot...........000 40.000 768.600 or $42... This results in a total savings of $2.....000 20......00 5.....228..00 $ 960..000 10...2 x ... 15.....600 Cost to purchase. Inc........) If Krylon Company can experience a learning factor.. Krylon’s assembly labor and variable overhead costs should decrease by 20% every time there is a doubling of cumulative production..000 (= $68 x 80.... The following labor cost and variable overhead cost behavior by lots would occur (assuming 80% learning curve).......8) 19...36(= 19.000 gauges Purchased components....417...... (A steady-state phase will probably occur after a time as the operations become more routine or the production life is sufficiently long..8) 15.............000 1..... The total incremental cost to manufacture the gauges is $3.......00(= 30 x ......000 40....800 Total incremental cost...800 This means the average cumulative cost of the assembly labor for the first 80.....000 Savings if gauges are manufactured .. other learning patterns exist in practice...........440..20(= 24 x ... it probably should manufacture the gauges rather than purchase them.000 Cumulative Average Labor Cost per Unit $30.........400 (Note: We use the 80% learning curve here only as an example.022.36 1. 1997 Solutions Manual.....440. 15..36 per gauge.022.400 or $25..000 480... $25.000 gauges is $15...............000 20..28 $2....72 per gauge as compared to the purchase price of $68....000 Cumulative 10. Quantity Per Lot 10.) © The McGraw-Hill Companies....800 Variable factory overhead ...000).00 per unit or a total cost of $5.228.28 per gauge in the first year.............

.

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. 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) = $5.633 © The McGraw-Hill Companies. (30 min.) CVP analysis—Multiple products: Almay.00 – $5. 1997 Solutions Manual.00 ) $80. a.000 .371 (rounded) = $215.13–37.000/ = ( $9. To compute break-even sales dollars. Inc. Chapter 13 395 .66 $9..

3% x $10) + (16.633 Break even point Total cost line TC = $80. 1997 396 Cost Accounting.00 © The McGraw-Hill Companies.66 xb Total revenue line TR = $9.959c revenues = (50% x $6) + (33. Inc.959 = $215.000 + $5.7% x $10) = $5.13–37.00 xa $80.3% x $6) + (16. costs = (50% x $4) = (33..00 .7% x $16) = $9. (continued) b.633 $9. 5/e . 23.66 .000 Total fixed costs Volume aWeighted-average bWeighted-average c 23. Cost-Volume-Profit Graph $215.

Forshiem Co. 13–39.80 x ($1. Meribell Co. Meribell profits increase by $30.000 60.) Thyme Corporation.000. Contribution margin ratio b.000 700.60 500. (30 min.000 $ 240.000 = 40% a.000.13–38.000 [= . vs.000 $2.000 © The McGraw-Hill Companies. Contribution margin per unit = $800. = Contribution margin Sales = $800.000 100 20 80 56 24 Sales Variable costs Contribution margin Fixed costs Operating profit $1. Chapter 13 397 . Inc.000.000 800.10)].000 x .) Analysis of Cost Structure.000 300.000 [= .000 100 70 30 6 24 b. (15 min.000 200.000 x .000 560.000. 1997 Solutions Manual.000.000 = $1.30 x ($1. Meribell Co.10)] and Forshiem profits increase by $80..000 $ 240. Amount Percentage Forshiem Amount Percentage $1.

Inc. margin Sales: $90 per unit 33 per unit $57 per unit π = (P – V)X – F 0 = ($90 – $33)X – $1.520.Solutions to Problems 13–40.000 per year a.000 = ($90 – $33)X X = $1.667 units © The McGraw-Hill Companies.520. 5/e . costs Cont.000 publishing $15 promotion $6 administration $12 materials Sales Price: Fixed costs: Variable costs: Present units sold: 25..) CVP and decisions: Schill Education Corporation.520.000 office and administration $720. $90 per unit $800.000 $57 X = 26.000 $1. 1997 398 Cost Accounting. Break-even Price Var. (35 min.

. 25... Operating profit ..000) Profit improves (loss lessens) by $20......000 = 375..........................720................... Promo........................... Promo... Profit effect Present profit Sales .......................................... (continued) b........000 = 200......................... 25.... Pub......... 35..000 = 210... ......000.. c....000 = 150...... Fixed costs .................................000 = 375......................000 1. Cont........425.....000 x $90 = $2......................... cost ... margin...................000 $ 200.......... Operating profit .....000 x $15 25..000 = 600....................000 x $90 Promo...000 $ (95...................000 = 225..............000 725. 25..000 = 1................000 x $12 Cont............................ (old) .. Improved profit performance by $295............ Admin......000 x $ 6 40..13–40....520............. Variable Costs ...............000 x $33 = 825......................000 = 240.........000 = 420........000 = 1...... Profit effect at sales of 25. Admin...............................000 800.............000.... 10....000 over present profit (loss).....000 units Sales .000 x $20 Sales com................000 units Sales .....000 With Representative Sales .......000 $ 360....................... Cont.............................000 © The McGraw-Hill Companies........000 x $40 = $3........... Fixed costs . Publisher cost.....000 x $ 6 Materials...000 x $90 40........... Contribution margin .. ........................... 35.....000 x $ 6 25....160...... Fixed costs .....600.. Improved profit performance by $455...... 1997 Solutions Manual.......... Chapter 13 399 ...250...............000 1........... margin........600.000 x $90 25............150........ Fixed costs ................. Inc.............. ........520.................000 x $40 = $2.000 x $15 Admin... 40.... Operating profit (loss).........000 1... Profit effect at sales of 40......000 1........... (new)...000 x $15 40....250..000.......000 800..............000) = $3... Operating profit ....... margin...............000 x $90 x 25% Promo...000 $ (75....................000 1..000 25.... 10. 35..

142.000 + $1.000) – ($8.780. (35 min.151)($16.) CVP analysis and price changes: Knoll’s Manufacturing. or sales of (197.142.400 Profit target = $280.800 = ($16.90)X – $1. 5/e .400 P = $296.400 + $296.800 = P(200.142.156. Inc.120.800 + $1.142.000) = $1.90)X – $1.800 π = (P – V)X – F $296.90)(200.000 = ($16.400 X = $1. a. Variable costs.142.20 – $8.000)(106%) = $296.000 P = $16.142.20) = $3.846 c.000) – $1. π = PX – VX – F $296.90 = 194.000 $16.000 π = (P – V)X – F $280.400 + $280.554 b.3% increase © The McGraw-Hill Companies.849)($16. Profit target = ($280.142. New variable cost per unit: Labor Materials Overhead (110%)(25%)($8) + (115%)(50%)($8) + (105%)(25%)($8) = $8.151 units.20 – $8.20) = $3.20 New fixed costs = (102%)($1.90 = 197.400 X = $1. 1997 400 Cost Accounting.193.849 units (rounded) or sales of (194.800 $16.90 Price: Fixed costs: Sales: New price = (108%)($15) = $16..20 – $8.10 (rounded) or a 7.400 200.20 – $8.13–41.

51 aReflects 8% increase in direct labor.00 – $19.80) = ..00 New sales price: (X – $20.20 = (. 1997 Solutions Manual.208)X = $20.208 X X – $20.20) = . (1) $25.792 = $25.00 – $20.20 X = $20. Chapter 13 401 . (20 min.000 ($25. (1) 97.208 $25.51 $468. © The McGraw-Hill Companies.) CVP analysis: Softcush Company. a.500 units = b.20a) Current contribution-margin ratio: ($25.13-42. Inc.20 .208)X (1 – .

000 (250.000 $ 200.000)($6) = $1.000 units (175.500 (175.000 $ (100.000 (250. 1 (250..000)($4) = 1. 3 $1.000)($1.25) = 568.050.500. 1997 .000 $550.000)($6) = $1.00X X = $800.000 $2.000)($2.000 800.750 (175.000 $300.750) $1.000 $800.000 (250.000 Alt.000 (250.000)($2.50) = 262.75)X – $550.00 = 200. 2 $1.000)($3.000 $1.000)($1.000 $ (37. costs Cont.000) Alt.000)($4) = 700. costs Cont.000)($4.000 $4.50) = 1.250 550.000)($2) = 350.000 = $2.000)($3.000 (175.500.000 units Present Facilities Break-even point: π = (P – V)X – F 0 = ($1.00)X – $800.500 300.000 units 175.75X X = $550.500 Alt.) CVP analysis with changes in cost structure: Pallamer Prefab.000 300.500.000 (175.500) $1.000 $ (68.000 = $4.500 550.000 units Sales Var.500 (250.75) = 481. Semiautomatic Machine π = (P – V)X – F 0 = ($2.000)($4.000 $ 137.000 (175.050.13–43.000 800.50X X = $300.000.75) = 687.25) = 812.000 402 © The McGraw-Hill Companies.50) = 787.000 (250. margin Fixed costs Operating profit 250.000 $ 75.50) = 375. (35 min. Inc.50 = 200.50)X – $300.125.050. margin Fixed costs Operating profit Fully Automatic Machine π = (P – V)X – F 0 = ($4.000 (175.75 = 200.000)($2) = 500.000 units Sales Var.000 = $1.

e. but at 11 1/3 students it would just break even. but a loss at 13.000). 0–6 students: π = $300X – $1. a. 14.000.200 x 6 teachers] – $1. (35 min.000 = $800 b. π = $300X – $1. which is infeasible X = $300 7–12 students: π = $300X – $2. ($300 x 10) – $1.200 – $1. Operating profit = [($400 – $100)30 students] – [$1. (Note: An incorrect but common method is to substitute the ratio X/6 for Q and solve for X. c.000 X = $3. Inc. the center would show a profit of $800 (i.000 = $9. This gives 9 students. or 15 students.000 $2.400 – $1..200Q – $1.000 X = $3. at 10 students.000 $4.13–44.400 = 11 1/3 students $300 13–18 students: π = $300X – $3. Chapter 13 403 ..200 – $1.600 = 15 1/3 students X = $300 The Center shows a profit at 12 students. where X = number of students and Q = number of teachers.200Q – $1.200 = 7 1/3 students $300 11–20 students: π = 300X – $2.200 – $1. π = ($400 – $100)X – $1.000 X = $2.400 = 11 1/3 students $300 That is. © The McGraw-Hill Companies.000.) This part demonstrates the impact of step costs on cost-volume-profit analysis. 1997 Solutions Manual. then showing a profit again at 16 students. 0–10 students: π = $300X – $1. but it assumes 1 1/2 teachers are employed.) CVP analysis with semifixed costs: Le Muir Preschool.600 – $1.000 – $7.200 – $1. where X = the number of students and Q = the number of teachers.200 = 7 1/3 students.400 – $1.

800 – $7. No change in fixed or step costs. Yes.800. The Center would increase profit by $1. 5/e . Profit would decrease by $900.. Inc. (continued) d.800.600 2) Differential method: Increase in total contribution = $300 x 6 = $1. (From Part a) Status quo: π = ($300 x 36 students) – ($1. © The McGraw-Hill Companies. if the maximum 6:1 studentteacher ratio is to be maintained.000 Alternative: = $10.200 x 6 teachers) – $1. Two methods are presented here: 1) Total method: π = $800.13–44. 1997 404 Cost Accounting. Although the total contribution would increase by $300. e.200 – $1. another teacher would be hired at a cost of $1.000 = $2.200.

250](1 – .000 $81.000 – $11.13–45.. d.000](.75X – $81. Profit-targets: Maus and Company.000) – $135.000 units (13.250](1 – .4) 0 = $6.000 πa = [(P – V)X – F](1 – t) 0 = [($25 – $13.000 = $6.75X – $87.750 πa = [(P – V)X – F](1 – t) 0 = [($11.25)(22. 1997 Solutions Manual.750 X = $87.75X $81. (40 min.75 = 12.000 – $11.25X – $135.000 b.750 $6. Chapter 13 405 .75)(20.) a.75 = 13. © The McGraw-Hill Companies. Inc.000 X = $6. πa = [(P – V)X – F](1 – t) πa = [($25 – $13.000) – $135. c.000](1 – .25)X – $135.4) = $60.000)($25) = $325.4) = $54.4) = [$11.6) = $6.000](1 – .75)X – $135.000 units πa = [(P – V)X – F](1 – t) πa = [($11.

6F $88.500 Subtracting fixed costs of $135.000 $88..000 from $147.500 – .000 $60.000 $54. Inc.75 = 21. 5/e .000) – F](1 – . © The McGraw-Hill Companies.13–45.75X $141.000)($25) = $525.750 $6.500 F = .500 leaves $12.000 $141.4) = $148.000 units (21.250](1 – . [(P – V)X – F](1 – t) [($11. (continued) e. πa $54.75X – $87. 1997 406 Cost Accounting.4) $6.6 = $147.25)X – $146. Note: Parts d and e can also be solved using the contribution margin ratio.25)(22.500 = [(P – V)X – F](1 – t) = [($11.750 = = = = f.750 X = $6.500 available for advertising.6F = .000 πa $60.

875 units π = (P – V)X – F π = ($50 – $35)15.000 – $264.000 units) – (V)(12.000) – $264.000 + $264. First find the variable cost last year: π = PX – VX – F –$20.000 units) + $8(X – 15.000 π = ($50 – $35)15.000 units.000 The company is more profitable in Level 2 at 25.000 + ($50 – $42)10..000(level 1) –$20. (40 min.2($35) = $50 – $42 = $8.000 = $25.000 – $264.000 = $35.13–46. Level 1: X = Level 2: 0 = = $8X = $8X = X = c. 1997 Solutions Manual.000 = 13. Level 1: P – V = $50 – $35 = $15 per unit Level 2: P – (1.000 – $225.333 units (rounded) P–V $50 – $35 b.00 per unit a.2)V = $50 – 1.000 $225.000 units) – $200.000 units) – $200. © The McGraw-Hill Companies.000 = ($50)(12.000 $159.000 V = 12.000 = $41.000 – V(12.00 per unit F = $200.000 $420. Level 1: Level 2: ($15)(15.000 + $8X – $120.000 19.) CVP analysis with semifixed costs and changing unit variable costs: Theloneous & Company. Inc.000 – $200. Chapter 13 407 .000 = $600.000 $120.

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

but fixed costs must also be managed and controlled. Inc. Assist in decisions relating to eliminating a product.13–47. © The McGraw-Hill Companies. 1997 Solutions Manual. (continued) b. CVP analysis tends to focus on incremental variable costs. Identify products which can support heavy sales promotion expenditures. (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.. Determining how to treat joint or common costs. (3) Crandell Products should be aware of the following dangers when using CVP analysis: • • • The use of inaccurate assumptions for the calculations. Determining efficiency and productivity within the relevant range. Chapter 13 409 . CVP analysis tends to focus on the short term. Accepting a special order at a discounted price. Determining a constant sales mix 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.

.

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

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

1997 Solutions Manual. Activity-based costing may actually provide better cost information than costing systems that allocate indirect costs based on one volume-based cost driver.) be allocated to each customer? Whatever the allocation base. insurance. many companies use cost-plus pricing. For example. The costs in 14-13 are those required to operate the car for an additional few miles. Activity-based costing provides more detailed cost data that might lead to more informed decision making regarding prices. Also. they should be retained. 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. First. it has the cost information necessary to use a cost-plus costing approach. 14–15. The costs in 14. etc.14 vary with the number of cars and not with the mileage driven. there will be some level of arbitrariness to the allocation. 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. Since this company uses activity-based costing. there is the possibility that if you buy a new car you will be asked to drive your friends around more often than otherwise. Chapter 14 413 . Since market prices are typically not available for custom orders.14–14.. 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. The most difficult part of this task will likely be assigning indirect costs to each customer. The costs that vary with the number of cars do not vary with mileage. Next.) If overall company profits do not increase by dropping these customers. how will fixed costs (rent. 14–16. salaries. this project will be difficult to carry out. Of course. if the accounting system does not easily track revenues and direct costs by customer. Inc. 14–17.

..... 1997 414 Cost Accounting...........500 Alternative (Remachining) $4.. 5/e .......000 original cost is sunk..000 Difference $3.000 (higher) 2.. Alternative presentation: Status Quo (Scrap Sale) Revenue .........500 (higher) $ 500 (higher) The $10....... Contribution ...... Less: Cost to remachine.................... Cost to remachine..) Using differential analysis: Peterson Publishing Machinery....... (15 min...500 2.... Inc.. © The McGraw-Hill Companies..500 2. $1..500 –0– $1...... $4.....500 $2.......500 $ 500 Revenue ................ It is optimal to retool the binding machines..... Opportunity cost of scrap sale ..500 1.........Solutions to Exercises 14–18... Contribution from remachining........................

000 (higher) Revenues .000. a $8..200.000 = $450... Alternative presentation..000 Contribution to operating profit $4.000 3.....000 – $2...00 unit $6..14–19...650.......000 400....000 4.. Per Unit Revenues .......400......000 450...000 4...000 Units Alternative 450.000 3.........00 Variable costs: Manufacturing costs: $16 x $6...000 (higher) –0– 200..000 – $2.....00 50....800.800.000. bNo additional marketing costs according to the exercise.000 Units $650....000 $200..) Special orders: Torous Company..000 400.000 Units $8...000......000 Difference $650.000 = $9.000 $1..000 (higher) 450..000 4.000 $9.400..000 (higher) –0– $200... Variable costs: Manufacturinga ...000 additional cost.... Operating profit ..400.. Status Quo 400. Fixed costs ..00 per unit x 50.. Marketingb ......600..000 = 9. Contribution margin ...000 $1......... (25 min.000........ 1997 Solutions Manual......000 3... Chapter 14 415 ......00 $6.. $13.000..400. Inc..000 $16 x $6...050.200.000 © The McGraw-Hill Companies..

..000/100..60 x 100.60 x 160..000 units of output the fixed portion of factory overhead is $2..000 units ..000 fixed factory overhead At 100.....40 per unit ($240...000 – 100.....50 $1. Thus. *CPA adapted © The McGraw-Hill Companies...000 units ... Direct labor: $150.. The difference in unit cost was caused by the difference in average unit cost of factory overhead...000 units of output the fixed portion of factory overhead is $1.50 1.000 Variable costs per unit = $1.. Change in cost ($496.000 units) variable overhead = $240.000 ÷ 160.000 factory overhead – ($1..000 units ..000 Units of Output of Output Direct material: $150..000 fixed factory overhead or $496.000 = Change in output (160.... Inc..00 $7.90 per unit decrease in average unit cost apparently results from spreading the fixed costs over an increased number of units of production...) Special orders: Pralina Products Company...10 $6.000) $96.50 per unit ($240.60 per unit.....000 units ...000/160.60 If variable factory overhead is incurred at $1..000 units .000/100.. The computations for costs per unit follow: Cost per Unit 100..000 factory overhead – ($1.000 Units 160....000/100. 1997 416 Cost Accounting. And at 160..000 ÷ 100.000 units ...* a..50 4... 5/e .000 units).000/160. Factory overhead: $400.50 1. Cost per unit ... $1.000) 60.000 – $400.. the $..14–20...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. (40 min... $496... $240.. $240. the amount of fixed costs would be computed as follows: $400...000 units).00 $3... In this instance the fixed component of factory overhead may be estimated using the following reasoning..000 units) variable overhead = $240..000/160..

............ Inc...... Per Unit $1.......... 1997 Solutions Manual... Yes.50 $4........... Variable marketing costs ..... 90......................000 Increase in costs: Direct materials ....00 1..000 Increase in profits .. Using differential analysis...............50 20....000 Direct labor .. 96.. $360..... Chapter 14 417 ....... Variable manufacturing costs .... there will be an increase in profits as follows: Increase in revenue ..... $ 84.000 30...... Profit target...... Required revenue..... (continued) b.......14–20...000 14–21......000 Units $20.......) Differential costs: Pricing decisions: Lucky Locks...000 Factory overhead (probably variable) .000 40........................................000 $90...................00 2........ the order should be accepted..000 © The McGraw-Hill Companies..... 90..... (20 min......

...200 5........ Operating profit...................... which would just cover the variable costs of the ice cream..... $60..000 $ 5.200 20...000 35.000 Operating profits would be higher with the additional order by $200......200 Difference $900 (higher) 400 200 100 700 200 –0– $200 (higher) (higher) (higher) (higher) (higher) (higher) (higher) Sales revenue .....14–22....400 quarts $60.....400 10. 1997 418 Cost Accounting................. a$60.000a 20......000 10. 5/e ............... Variable overhead........000 b$60....... Inc. The lowest price the ice cream could be sold without reducing profits is $1......000 quarts x $3.....00 per quart = (20... Total variable cost ...000 25.000 quarts x $3.... Less fixed costs ......) a... Pricing decisions: Ben & Jerry’s.700 25...... Contribution margin ...75 per quart..900 = 20....000 5. © The McGraw-Hill Companies...900b 20...00 per quart) + (400 quarts x $2.100 35......... Labor. Status Quo 20....000 $ 5.............. Less variable costs: Materials ..25 per quart) b..000 quarts Alternative 20....... (30 min.......000 20.......

$500.....50 .... Salaries. 14–24.. © The McGraw-Hill Companies.....000 Alternative $25 Price Difference $1..000 (higher) $ 30.... Variable costs 10.......... Inc.000.. (25 min..000 780. 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) .............) Differential Customer Analysis: Hillson & Brady......... 1997 Solutions Manual...........000 @ $25 ..... rent.. Status Quo $50 Price Sales revenue 10......... 195.000 @ $19..) Cost analysis pricing decisions: Easton. $305.......... Contribution margin ...50a .000 @ $50 .. (15 min..000 (lower) a$7.......... The total contribution is greater if the lower volume is accepted....... Operating profits........25 x $8) = $19. a......000 $750....000 @ $19...14–23.... Operating costs Cost of services (variable) ..50 per unit............. $580 517 50 567 $ 13 H&B should not drop the Super 6 account in the short run as profits would drop by $18... Inc.....50 + $10 + (.000 (higher) 975.......... and general administration (fixed) .... Total operating costs........ but the loss is less if Easton holds the price at $50 per case...000 50...........000 50... Chapter 14 419 ......... b. Both alternatives result in a net loss.....000 $275....250.

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

.200 d$30. Status Quo Alternative $41.....00 14–29.. Chapter 14 421 ... (15 min.......00 1.............) Special Order: Sam’s Sport Shop.000 c$31..00 1.000 Operating profit .... (10 min... 10.440 1.......2 The highest acceptable manufacturing costs for which Brown’s would be willing to produce the wheels is $5...............200 240 0 $ 240 (higher) (higher) (higher) (higher) Revenues ....14–27.. 30........440 b$40...........000 jerseys × $20) + (80 jerseys × $18) = (2.000 jerseys × $20) = (2. $ 3...000b Variable Costs ..... Price = Highest acceptable costs Costs + 10% $11 = $10............000d Contribution Margin .... 1997 Solutions Manual... 7.000 = (2..) Target Costing and Pricing: Durham Industries..00 a foot..........1 The highest acceptable manufacturing costs for which Durham would be willing to produce the lines is $10.......240 7... © The McGraw-Hill Companies........000 Sam’s should accept the order because it will increase profits by $240 for the period..... (10 min.000 Fixed costs .. $40........) Target Costing and Pricing: Brown’s Wheels..240 Difference $1. Price = Highest acceptable costs Costs + 20% $6..........000 jerseys + 80 jerseys) ($12 + $3) = 2.....000 $ 3.440a 31. Inc......00 = $5.000 jerseys x ($12 + $3) 14–28.200c 10.. a$41.

...82...000) Difference $720. such as excess capacity.200......000b 360.. © The McGraw-Hill Companies....560..... 1997 422 Cost Accounting.. a....000 780..1 c.......... 600..60) 300.000 Fixed costs .10) = Cost-plus price $42(1....... $1.000 (higher) (higher) (lower) (lower) a$1.20 b.. (20 min..40 – $2......000....) Target Costing and Pricing: Marklee Industries. therefore losses will be increased by $60.000a 1.... 780...000 Variable costs .000) Alternative $1.....82 Highest cost acceptable Cost + 10% 1..000 tubes × $2.000 tubes = $(60. so Marklee would not make an acceptable profit...000)..000 Operating profit. future growth in demand. Cost XII (1 + .. The differential costs of the order are greater than the incremental revenues....) Special order: Gilbert Company.....000 b$1.. $ (180.......... b....40) + $1.10) = $46......000 tubes × $2... etc..000 Contribution margin .000 $ (240..60) + $780.... 14-31.000 = (300.....000 60......... The cost of $42 per unit is higher than the highest acceptable cost of $41.560.... 5/e .. 420...000 600.. (20 min..... No.Solutions to Problems 14-30.. However other factors............. could change the decision if included.000 Alternative Solution: ($2... Disagree.200...000 0 $ 60... Inc.. Status Quo Revenue ....920... Price = $46 Price = $46 = $41..000 = (300..920... a..

.......... 88..000 hrs 6.... a$882.. (50 min.. XBP400 Status Quo Revenues ..... 37...... Direct labor = XBP400 Labor Hours per unit Wage Rate $750 = 37.000 hrs Hours available for current sales 6..... $ 32....500 hours to produce 40 units....5 hours per unit $20 37....................... Inc.......5 hours × 40 units = 1........000 hrs – BP041 Labor hrs ($600/$20 = 30 hrs each.000 (higher) (higher) (higher) (higher) $780.000) = 200 units × $3...........000 XBP400 Alternative $882.......000 e$150..... Chapter 14 423 ....000 $190....200* × 40 units) .) Special Order: Marshall’s Electronics.... a..000 d$440.....200 = $750 × 200 units © The McGraw-Hill Companies...900 = (180 units + 60 units) x $2.. Special order hrs 2....000 0 $ 14. Contribution margin .000 Increase in profits ............. Capacity would not need to be expanded to accept the order.......... = 30 hrs × 400 units =) 12...250 hrs = Hours available to XBP400 production 9..000 88.......750 hrs XBP400 hrs – 9..000 c$528....000b 440....000 Differential costs ($2......000 150....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..5 hours × 60 units = 2.... $120. Operating profits.000c 354............. 1997 Solutions Manual.000 Difference $102............200 = 200 units × $2..250 hours to produce 60 units Capacity 21......... Variable costs. b.000 14.000 *Total variable costs per unit..000 = (180 units × $3..000e 150..000 b$780. Fixed costs . Inc.000 $204.000 × 40 units) ....000 hrs......750 Current sales hrs / 37.....000d 340.14-32..000a 528.... Incremental Revenues ($3.900) + (60 units × $3.

the total operating profit would be $221... $17..900) – (20 units × $2.500 If the special order is accepted and current sales maintained.000 + $17... © The McGraw-Hill Companies.000 $14..... 1997 424 Cost Accounting.000 Differential revenues ...... Differential revenues = $3.... Therefore......... (continued) b......5) = 27.000 + $17...500 In (b) we calculated the alternative based on accepting the special order and cutting back current sales at $3.500 DM = 20 units × $550 = 11... $78...000) – (60 units × $2.000 Differential costs ..900 × 20 units = $78. So the 20 units over capacity would be sold at $3.500 Total increase in operating profits for 20 units over capacity ... (continued) Alternative Solution: Special order increase in profits = (60 units × $3..900 per unit. 60....000 = $34..... A total increase of $31....500). accepting the special order plus current production is 20 units over current capacity.200) Lost profits due to cutback of current sales (20 units × $3. As calculated in (b)........000 c..000 Total differential costs of 20 units over capacity $60..500 ($14. the differential costs for the 20 units would be: DLH = 20 units × 37.. Inc...14–32....000 VO = 20 units × $900(1.500).900 per unit....500 ($204. 5/e .200) Total increase in operating profits = $48......5 hrs × $30 = $22....

..800 $ (9.......800 a$50....98) x ........... Contribution on lost sales [2......60 Per Unit $16 $160.. Marketing ..000 + $27.000 + $125.......000 units in lost sales) of $17..800 Fixed costs ($350....00 – $12.....000a) ....70a 1............000 640.000).. a$3.000 b – $7..250.. $2........ Differential Costs 10.................. 1997 Solutions Manual... Chapter 14 425 ... Inc............. Golden Company should not take the special order because overall company profits would fall from $250...000 ($2..) Special order costs: Golden Company.500...000 100.200c) .... ($360.000 units x ($25..........000 Variable marketing costs.....000 + $290.....000 27.800 19.000 125.60) c$7.70 Alternative presentation: Status Quo Alternative Difference (higher) (higher) (higher) Revenue .. $ 250...50 2... 640.....000)........75)(3...000 – $25...............000 units × $3..000 units x $25...200..000 does not exceed the lost contribution margin (for 2.........000 units x (.....000 ($1.800. (30 min.........000 (lower) = 2.610........000 $110.............000 to $240.....800 (= $17.........000 –0– Operating profit .......50 – $3.. The contribution margin from the special order of $8.....000) if the special order is accepted....800) 12.....00 b$27...... costs ................... $2..........78 $ (.............. Thus..............000 17.60 b... Decrease in contribution from special order ... 1..000 379.... © The McGraw-Hill Companies........000 Variable mfg.....000 + $160.....200 $ 9..........500................... Manufacturing ...75 = $2......000 Robes Sales revenue .... a......000 – $50.000 $ 240...250........ 360..000 = 10....800 – $8... profits would decrease by $9....350.....60)] ...... 1.200 = 2........ Less: Variable costs: ....14–33.

.........800 (= $5.200 Differential costs associated with accepting the order are: Sales price.000 Variable overhead ..... $ 1....) Pricing based on costs—multiple choice: Cruizers Unlimited.. 8.000 Direct materials ...000 – $90....000 + $800) © The McGraw-Hill Companies.. Inc.. (4) $1....000 Direct labor ...14–34.... (20 min.. (2) 40% = ($150.... a..000 + $8.....000) ÷ $150....... 5.....200 d.........000 b...... $15. (1) $13... (3) 10% = 25% x 40% (Total overhead application rate times variable percentage from a) c. 1997 426 Cost Accounting... 800 (10% x direct labor) Impact on profit...... 5/e .

...000 units × $2) .............................................. © The McGraw-Hill Companies.450 Other factors must be considered such as the long-run consequences of failing to satisfy standard parts customers...................... rent.....000 units × $7) .....) Special order: R...... New sales (10.... Chapter 14 427 ...............000 units × $3. and the importance of this valued customer.....950 Total Differential Costs .. Net advantage to special units.050 $ 8............500 Differential revenue.... A....... 450 $ 8.000 Costs reduced for standard products Material ... 1997 Solutions Manual. the reliability of the cost estimates.....500 Other .. 36..................................60).... $ 4.... aDifferential cost of the order is: Costs incurred to fill order* Material (10.............14–35..... $49... It is assumed here that the same amount of power will be used in each case........... Ro..... 4......000 Less: standard sales .... $57........ 12..............000 Special overhead ....... (40 min...000 $58...... Differential costsa .. $20. $70..000 Labor (10... Inc...................050 *Depreciation. On the basis of the data in the question it would pay Jackson to accept the order.. Power might be dependent upon the particular requirements of the special units........500 49.000 Labor.................. 2...... and heat and light are not affected by the order..............

000 = ($4 + $2) × 1. (4) $8. a.000 (higher) 6.000 units Fixed costs per unit with the special order ($10.000 units b.000) ÷ 8.00 $0.000 units c..25.000 (higher) $2. (1) $0 Total fixed costs do not change as a result of the special order.14–36.) Special order: Multiple choice—Aggie Enterprises. d.000 + $8.25 2.000) ÷ 9. Inc.000 (higher) $2. (1) Increase. 5/e . (4) Decrease $0. (2) $6. Inc. (40 min. Differential revenues (from (a)) Differential costs (from (b)) Increase in operating profit © The McGraw-Hill Companies. 1997 428 Cost Accounting.000 units Decrease as a result of special order $8.000 = $8 per unit × 1.000 + $8. Fixed costs per unit without the special order ($10.25 e.

...000 1...000 decrease — — $120.......... many students treat the $120 per unit fixed manufacturing overhead and $140 per unit fixed marketing costs as though they were variable costs...... Indeed. Before After Price Price Reduction Reduction Impact Price .000 note equality © The McGraw-Hill Companies... 1997 Solutions Manual......000 175.e... Chapter 14 429 ..000 $ 270. could also affect the decision..... costs . such as the reduction of available capacity and the impact on market share... This problem gives students a good understanding of the fixed/variable cost dichotomy.. $ Quantity .. despite the fact that they are clearly labeled “fixed.) Comprehensive differential costing problem: Garden Bay.. mfg..000 $ 650 3.000 Var. costs . Recommendation: Lowering prices reduces operating profit..500 $ 55....050. 1... costs ... margin ...000 120.. 740 3......000 420.000 360..... 360....000 25..000 Fixed mfg....... allocated to individual units of product) for certain purposes. as can Question d if you postulate a scrap value for the obsolete hoists.. Other factors. $ 390... Inc. and that this allocation procedure may make such costs appear to be variable..000 Cont.... 420..000 Income ...... $2...170....000 1.. Inc. a..275.050.. costs .000 Fixed mktg. (90 min..000 Var...... 150...... Question b can be used in this way.220.000 decrease Revenue ...000 150............ It is worthwhile to emphasize to students that fixed costs may be “unitized” (i.. 900..” This problem can be used to introduce the concept of opportunity cost.............. mktg.14–37...000 $2...

590.460.000 360. (continued) b.000 $245.835.000 Impact $125.000. Mktg.000 175. Costs Fixed Mktg.560.000) + $50.000 360.000.000 — — $100.000 $2.000 1. Costs Var. Recommendation: Don’t accept contract.000 175.000 — $95.000 1. which would reduce revenue to $200.000 — 25.000 decrease decrease revenue 500 x $300 + 1/8($360. Costs Income aGovernment With Government Contract Regular Government Total $2. Inc.000 $780.000 to $260.000 100.200. assuming the government’s “share” of March fixed manufacturing costs is 12.000 fixed manufacturing costs.14–37.000. which would increase revenue from $245.000 = $245.. 1997 .000 1.000 420.000 1. Contract Revenue Var. Costs Contribution Margin Fixed Mfg.050.000 1. Impact: Without Govt.960. Alternatives are to get 1/6 x $360.5% (= 500 units ÷ 4. Mfg.000 200. or get no reimbursement for fixed manufacturing costs.000 $2.000 420.000 $680.000 $1.200.365. 430 © The McGraw-Hill Companies.000 units).000a 150.

.........000P = P d.. Minimum price = variable mfg... At this price per unit.............. Chapter 14 431 .. costs (1/8 x $360..000) c.000) lost Profit from government contract: Fixed fee ....14–37............... (continued) b. (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...000 units = 1....000 = 1..... The manufacturing costs are sunk.. thus the minimum price is $50..... $(100... therefore.......000).....000 gained Differential profit if contract accepted........ 1997 Solutions Manual...000 = $379................. 50......000 P – $375 $4. 500 x $390 = $(195.... 45.000P – $375.... In this case. 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............. 95..000 $379 = 1..... the $379................. (If the instructor wishes to reinforce the concept of opportunity cost....000 $379... any price in excess of the differential costs of selling the hoists will add to income.. Inc.. Some students solve for this price using the break-even formula: F = X P–V $4....000/1.........000 of differential costs caused by the 1......000 unit order will just be recovered. since the hoists are to be sold through regular channels...... which are an opportunity cost of selling the hoists rather than scrapping them..............000 gained Gain ..000 gained Share of fixed mfg. costs + shipping costs + order costs = $300 + $75 + $4........ those differential costs are apparently the $50 per unit variable marketing costs......) © The McGraw-Hill Companies.

.

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

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

Differential costs to make: Direct materials .000 savings could not be achieved............... 120..........000 Labor .00 (= $100.000 (higher) (lower) (lower) (lower) (lower) (higher) 60.....00 Avoidable fixed overhead. (20 min.............. Status Quoa Trice’s offer ...50 Direct labor .. $ 3.000 on 20.000 Alternative presentation.000 $ 10.000 = $60...000 = $60... 300.000b $660... 70.......000 Total costs............000 70.000 Fixed overhead applied ........Solutions to Exercises 15–11.......000....... b($8 – $5) × 20.... $650..000 Variable overhead ............ 1997 Solutions Manual.000/20........ Inc.000 120......... 6... 15. 160.000 – $100....... or $160.......000 units......... The $25......000 100...000 300.. 5.......................... In fact..000 Difference $600........ © The McGraw-Hill Companies.00 Variable overhead..000 aBased Alternative $600.......) Make-or-buy decisions: Dabelles Company.....000 units) $29....... Trice Company’s offer is more expensive than making the part...... Chapter 15 435 ..50 This is less than the $30 purchase price from Trice Company.... $ –0– Materials...

000 $ 10............. Fixed overhead ..000 Cost to buy........000 units × $5 $ 60...000 200.......000 30....) Make-or-buy decisions: Collins.. Total manufacturing costs ........000 x $12 x 2/3 = $40..000 × $44) ..... 1997 436 Cost Accounting........... cost with cont’n ... Make Part # 10541 Direct materials.... Cost to purchase (5....000 units × $10.... Total cost to make ..............000 Buy Part #10541 Difference $180.000 20...000 230.........000 units × $21 It costs $30........000 $390........ It is less costly to buy..000 60.... Inc..... Total. a5........) Make-or-buy decisions: Casio Company........ (20 min.............. 5/e ..000 × ($6 + $22 + $8)]........ Contribution from RAC.15–12.... 20..000a 240............. Fixed overhead ...000 b5.000 $230.... Net mfg... Differential Cost to Make Direct materials ..000 220.. © The McGraw-Hill Companies..000 $ –0– 40....000 80.000 40..000 $180. Direct labor .....000 220........000 (saved) (saved) (saved) (earned) (saved) (incurred) (net saved) x $12 = $60.....000b 40....000 –0– 240.... Variable overhead............... 20...50 20....000 units × $3 20..........000 less to make the part.000 –0– $240. (25 min..000 units × $4 40% × 20. Inc....000 $420.000 10..000 210....000 15–13...000 30........... direct labor and variable overhead [5.

.000]..... He should continue to buy the sails........ The cost of making 1.......... 300 Contribution margin ... (10 min....... 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. 1997 Solutions Manual. $400 Cost of goods sold (variable) .... Sam could save $100 per sail by making the sails rather than buying them............. The cost of buying the sails and renting out the space is $680..............) Make or buy with opportunity costs: Columbus.. (15 min... 40 Marketing and administrative.... Direct labor .......500 sails).......500 sails is $690. increase book sales Status Quo Sales revenue .... Status Quo (Buy) Cost to buy . Direct material .. Campus Bookstore Comparison of Three Alternatives (in thousands) Alternative 1: Drop general merchandise Alternative 2: Drop general merchandise.......000 [($560 × 1........) Dropping product lines: Campus Bookstore....500 sails) – $160..... (20 min..15–14.....000 (= $460 × 1. Chapter 15 437 ... Inc.......... Variable OH......... 100 Less fixed costs Rent ........................... 15–16...... $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...........................) Make or buy decisions: Columbus.. No.....

260 = $35.... Operating Profit. Inc..600 (77.. 1997 438 Cost Accounting.15–17.600) $ 16... (30 min.200) $ 8.400 (5.260) $ 13. $253......200 (201.140 Status Quo Revenue .340) $ 3...200) $ 43.......800 (35..400) $ 51..) Dropping product lines: Sierra Ski Company.060 Sierra Ski Company should keep cross-country skis because the loss of its contribution margin is greater than the reduction in fixed costs.600 × . Less Fixed Costs . 5/e . a$30.. Contribution Margin .85 © The McGraw-Hill Companies. Less Variable Costs .600 (124. Drop CrossCountry Skis $167..............400 a (30..200 Difference (all lower under the alternative) $85...

.000 + $600..000i $ 363..325....000 165.. and consulting Alternative 1: Drop consulting Alternative 2: Drop consulting.000 + $600.....000) g $1..45 × $500.000 b$ = $300..000 Alternative 1 $1...100.000 = (1..000f $ 285.000) © The McGraw-Hill Companies.000b Contribution margin .000 + (...000 + $ 80..2 × $60.000) + $600. tax..000 d $1....000 e $ 650...000 h $ 785.5 × $50....45 × $300...000 = $ 50.....) Dropping product lines: Cliff & Bassman.000 I $ 177... $ 310.000 177.000 c $ 190....000 Fixed costs . Status quo: Keep all three services....000 + $350. Inc.000c Operating profit ..000 = $500.000 + $300..000a Variable costs.... (20 min.....000 900... increase tax Status Quo Sales revenue .000 + $ 60.000 = $190.. 900.000) + $350...400. $1.. 1997 Solutions Manual.000 + $350.. audit...000h 540.000 + $500.000g 785..400...... 500.. Chapter 15 439 .000d 650.000e 450..000 = $300....000 worst Alternative 2 $1....325..15–18.100..000 = (1...... 190.000) + $80...000 = (1....000 best a $1....000 = $250....000 f $ 165.....000 – (50% × $50.......

.50 $11........) The role of accounting data: Burnett. Compute the contribution from each product............00 0...00 3. 3........25 Variable administrative .. 2..50 5..... B $20 3..75 Total Contribution Margin = $4....... 5/e .. Inc.......... (15 min...75 0...50 3.50 $ 8. Inc.............50 Variable overhead ...50 Direct labor .. $ 4.25 Contribution ..50 A Selling price .. 0.. $10...75C © The McGraw-Hill Companies....... 2..50 Variable marketing .00 3.50 3... 1997 440 Cost Accounting.$15 Manufacturing costs: Materials...50 1..75A + $8..50 $16.75 Maximize C $25 3.50 Total variable costs ... 1...25 $ 8.15–19.50B + $8...

000 2.300 b.25 $10 = $33.33 0. © The McGraw-Hill Companies. a.5 per hour = 240 units Profit = (240 units x $20/unit) – $2..) The role of accounting data: Quicksilver Corporation.3 Maximum Profit Obtainable Contribution Less fixed costs Profit Contribution Less fixed costs Profit Contribution Less fixed costs Profit $40 x 120 = $ 4. Contribution per Unit of Machining Time Necklaces $20 = $40./.5 $15 = $60.33 x 120 = $ 4.00 0.00 0.700 $33.500 = $2.500 Bracelets Rings The maximum profit obtainable is $4. Chapter 15 441 . Necklace production = 120 hrs.15–20.500 $ 4.800 2.500 $ 1.700. 1997 Solutions Manual.300 $60 x 120 = $ 7. Inc.200 2. (30 min. which is obtained by producing and selling bracelets exclusively.500 $ 2.

000 (20.000) $ 2. No.000) 15–22. No.15–21.) Theory of constraints: Bud’s Bakery. Inc.000 (10.) Theory of constraints: Racketeer. (30 min.000 (as shown below).000) (8. Differential revenues ($100 × 200) Differential costs: Fixed Variable ($40 × 200) Net differential operating profit (loss) $20. Differential revenues ($9 × 10) Differential costs: Fixed Variable ($4 × 10) Net differential operating profit $90 (40) (40) $ 10 © The McGraw-Hill Companies. a.000) (8. Inc. Operating profit would decrease by $50. Differential revenues ($100 × 200 units) Differential costs: Fixed Variable ($40 × 200 units) Net differential operating profit $20. Yes.000 (as shown below).000 b. Differential revenues ($9 × 10 units) Differential costs: Fixed Variable ($4 × 10 units) Net differential operating profit (loss) $90 (100) (40) $ (50) b. a.000) $ (8. Yes.. Operating profit would increase by $2. Operating profit would increase by $10. 1997 442 Cost Accounting. (30 min. Operating profit would decrease by $8. 5/e .

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

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

15–35.47 Plastic b.200 Paper + 0.000 Total Contribution Marginb –0– $100.000 = 130.200 $28.000 = 10.04 = 10.88 per labor hour = $35. Inc.000* $80.000 hrs. the optimal product mix is to produce 250.000) Paper bTotal a0.08(60. 1997 458 Cost Accounting.04 Paper + 0. (continued) Critical Points (a) (b) ( c) (d) *Optimal Solution Produce & Sell Paper Plastic –0– –0– 250.40 Paper + $0.) versus plastic containers ($5. and (2) limited direct materials to produce plastic containers (enough for 60.000a –0– 60.000 60.000 containers)..250 ÷ 6. Thus.000 hrs. Paper containers provide the highest contribution margin per scarce resource of $10 per labor hour ($40.000 –0– a 130.08 Plastic Plastic Solving simultaneously: 0. The optimal product mix is calculated given two constraints: (1) maximum labor hours available of 10.000 = 60.000 Contribution Margin = $0.000 ÷ 4.). 5/e . © The McGraw-Hill Companies.000 units of paper containers and 0 units of plastic containers.000.

000 6. 1997 Solutions Manual.000 gallons.000 12. The total use of D must be less than 16.4X2 ≤ 16.000 18. The company wants to maximize its total contribution margin. Constraint: . The answer is (5).000 26.000 16. Inc. Maximize $5X1 + $4X2 = Total contribution margin b.000 18.000 © The McGraw-Hill Companies.000 14.000 2.000 8. The answer is (3).000 4.000 gallons d. Gamma is X2. The answer is (5)..000 14.6X2 ≤ 6.000 34.000 30.) Multiple choice.000 22. The answer is (4).000 10. (25 min.2X1 + . The total use of K must be less than 6.000 22. Chapter 15 459 . Alpha is X1.000 gallons.000 gallons c.15–36.000 6. Constraint: . a.000 20.000 d 10.000 b c a 2. 24.8X1 + .

000 –0– 18.000 Total Contribution Margin –0– $140. 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 = 6.000 *Optimal Solution a5X + 4X = Total contribution margin 1 2 b . Since the constraints do not change.000* $90.000 –0– 10.000b –0– X2 –0– –0– 4.000 Substitute X2 back into equation 8X1 + .000b 10.8X1 + –(4)(. 5/e .000 4.000 Total Contribution Margina –0– $100..000* $40.000 $162.4(4.400 X1 = 18. Inc. the possible optimal solutions remain the same.4X2 .000) = –8. 1997 460 Cost Accounting. The answer is (4).000 e.000) = 16. (continued) d.000 8X1 = 14.000 $106.000 *Optimal solution © The McGraw-Hill Companies.000 = 4.2X1 + 0 .6 X2 –2X2 X2 = 16.15–36. (continued) Produce Point a b c d X1 –0– 20.000 18.

. 1997 Solutions Manual.......... Inc.000 Deluxe = $50...200 Avoidable fixed costs: Average = $45... $ 83 $110 Problem formulation: Maximize: Total Contribution Margin = $83 Average + $110 Deluxe Subject to: 10 Average + 15 Deluxe ≤ 22. $40 = $32... $50 = $40.000 a$200 = $160. Contribution per unit is first computed: Average Deluxea Revenues .000/800 units... (27) (40) Contribution Margin ........ (25) (50) Marketing ...000/800..... © The McGraw-Hill Companies. $135 $200 Variable Costs: Manufacturing ...) Analyze alternative actions with multiple products: Essen Corporation. Chapter 15 461 ....000/800....800 Average Deluxe ≤ 1....15–37....000 ≤ 1. (35 min.....

15–37.. 1997 462 Cost Accounting. 5/e . (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.

000 = 267 = 22.200) Average cTotal d contribution margin = $83 Average + $110 Deluxe Relevant Unavoidable Profit = Total Contribution – Administrative – Margin Fixed Costs Fixed Costs © The McGraw-Hill Companies.200b –0– 1.400 $178. Chapter 15 463 .770 $165.200 $37.000 = 400 Average + 15 Deluxe Deluxe 10 Average + 15(1.800 267a 400b 1.770 $25.000 = 1. Inc.200 Total Contribution Margin c –0– $149.000 = 1.000 Profitd –$45. 1997 Solutions Manual.000 $59.200 $132.15–37.000 *Optimal Solution Average + 15 Deluxe Average Solving simultaneously: 10(1.800) + 15 Deluxe Deluxe b10 a10 = 22. (continued) Critical Point a b c d e Produce & Sell Average Deluxe –0– –0– 1.200 = 22..800 = 22.800 –0– a 1.400* $38.

.20(12.200a $326...200 b$211... 1997 464 Cost Accounting.. Let X be the break-even number of units.. $35....600 = $52.000) Touring $80.800 = $9..600d Edmonton will choose to produce the Mountaineering model.400)b $ 9.....400 – $316..800.000) = $326. Production Alternatives: Produce & Sell Mountaineering Touring 6.400 – $316.80 Contribution Margin .20(12.20 Production Alternatives: Produce & Sell Mountaineering Touring 12.00 Variable Costs .200 – $369.800 6.....600 Edmonton will choose to produce the Touring model. © The McGraw-Hill Companies. $35.....600 b$422.. (30 min.. Inc.20(6..400 c$27..20X $8.600.000) = $326....00X X = = = = $27..600 = –$158.000 –0– –0– 12.400 a$35.400c Operating Profit $52....... 5/e .20X – $316...000 = $422.600 units.800 $369..800 = $9.400a $326..20 Contribution Margin $422. Model Mountaineering Selling Price.00 52.800 $52.15–38. earning an operating profit of $9. Analyze alternative products with differential fixed costs: Edmonton Company....) a.600 $35.20X – $369. b.. earning an operating profit of $52. $88..000 a$35.20(12.400 – $369..20X – $27.600 d = $211.800 c$27.400 d$326..600 units Edmonton will be indifferent at 6.000) Contribution Margin $211.400 d$326.400c Operating Profit ($158. c.800b $ 9.80 $27.600 – $316.000 –0– –0– 12. 52...

00 $35.. Variable costs. Inc. 3.00 = = = 4. Objective function: Maximize: $16..15–39.. 1997 Solutions Manual.0B Subject to: Direct Material 4A + 2B ≤ 1..50 50....9167 hr @ $6 Contribution margin .00 © The McGraw-Hill Companies.... 1. 1 1/4 hr @ $8 Variable overhead ..... 4 lb @ $12 Direct labor Department 1 . b. The constraint on the machine time in the two departments was not recognized. The errors in the formulation of the linear programming equations are: 1.... not the full cost of each product.5A + $35.00 73...00 8. a.. Let B = number of units of Y-12. 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). Let A = number of units of X-10.00 12..00 10. Inc.. The objective function should relate to the maximization of profit (that is.50 $16...50 2 lb @ $12 = $24....00 = $48. 2/3 hr @ $6 Department 2 .00 11.00 Y-12 $85..00 1 hr @ $6 = 1 hr @ $8 = 2 hr @ $6 = 6. 2. $90.800 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. (35 min.) Formulate and solve linear program: Baxter... Direct material .. Chapter 15 465 . contribution to profit) not the minimization of costs....

.....5009 25...2501 Constraints Material Labor (1) Labor (2) Machine (1) Machine (2) 600.....800 < 400 < 600 < 250 < 300 Note: The following answers may differ due to rounding of the constraint Labor (1) for variable A. 0....66667A Labor (2) .... 4. Inc. + + + + 2. 1997 466 Cost Accounting......50A Machine (2) ...975 Objective Function Coefficient Ranges Variable A B Allowable Increase 6....15–39..00A Labor (1) .00B < 1..50B 1.....0030 — 112.00B 0...00B 1.. Variables A B Summary of Problem Value Reduced Value 149. 5/e ..25 Current Coefficient 16. 0..5 35 © The McGraw-Hill Companies....5 10.25A Machine (1) .0000 — Shadow Price — $24.0004 — Optimal Value of Solution is $12..50A + $35.83 Infinity Allowable Decrease 16..9993 — 300.... (continued) c..00B Constraints: Material .. Initial Table Objective function: Maximize $16..7499 — — 10.00B 1....... 1.

Inc. © The McGraw-Hill Companies. 2 lbs.50 – 0 = $4. 4 lbs. Machine (2) 100 Allowable Increase 600 100 112. Labor (1) 33 Labor (2) Inf.800 400 600 250 300 Looking at the ranges of objective function coefficients. Machine (1) Inf. For Product B.15–39. (continued) Right Hand Side Ranges Allowable Constraint Decrease Material Inf. then the optimal product mix will change. 1997 Solutions Manual. The increase in the price of direct materials that would be required to change the product mix is: $16.00 – $24.. then the mix will change.125/lb. The required materials price change would be: $35. (continued) c. we find that if the contribution margin of A drops to $0. Chapter 15 467 .75. if the contribution margin drops to $24.5 25 100 Current RHS 1.125/lb.75 = $5.

.

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). 16–7. 16–4. The quality-based view holds that high quality leads to loyal. then there is no need to inspect defect-free goods. 16–6. The three factors that relate to meeting customer requirements are defined below. functionality.) and intangible features (courtesy of salespeople. knowledge of salespeople. 1) Service: A product’s tangible features (performance. on-time deliveries. repeat customers. Chapter 16 469 . and number of on-time deliveries. Quality refers to the company’s ability to meet or exceed customer expectations of the product’s features. 16–3. See text or glossary at the end of the book. 2) Quality: The organization’s ability to deliver on its service commitments (i. 3) Cost: The company’s ability to efficiently use resources to obtain its objectives—and to provide a competitive price to its customers. The quality-based view holds that if quality is established prior to inspections. Inc. to meet or exceed customer expectations). Service refers to the product’s features (both tangible and intangible) including performance. The traditional view is that product inspections are the only way to ensure quality. functionality.e. 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). etc.). etc. thus maximizing long-run profits. 16–2.Chapter 16 Managing Quality and Time Solutions to Review Questions 16–1. © The McGraw-Hill Companies.. 1997 Solutions Manual. 16–5.

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

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

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

200..450.200......000 . (20 min.... quality training.... Prevention: Preventive maintenance....16–24. Appraisal $164.8% 7.000 . Year 1 16.......3% 2.... Internal failure $188...500/$2.. Appraisal: Field testing....200.) Costs of quality: Vedral Industries...450.3% 6.. Internal failure: Scrap..800/$2. $82... materials inspection. $194.........000 . External failure: Customer complaints.9% 3.000 ..450...300/$2.. $204.. rework... b..000 ..9% Year 2 13... Chapter 16 473 ....000/$2.. Prevention $414.7% 8. a.450.. testing equipment.000/$2.... warranty repairs.7% © The McGraw-Hill Companies...000/$2..000 ..000 .......000/$2... Inc....7% 9. 1997 Solutions Manual..200. $291.500/$2. External failure $71......000 .. process inspection.

a. 1997 474 Cost Accounting......000 . 6...960.000 .. 8.500/$1.960.500/$1...960...760....... Prevention: Process inspection. rework..000 .. 5/e ...3% External failure $56..9% $234....000 ... quality training.7% © The McGraw-Hill Companies.. customer complaints. (20 min. External failure: Warranty repairs.... Prevention $331...800/$1. 2.8% Internal failure $150.7% $163.200/$1........ field testing..... Appraisal: Testing equipment... 9...760.7% $155....760.) Costs of quality: Owenborrogh Corporation..000/$1.9% $65... 13.000 ..000/$1.000 . 3.. 7. Internal failure: Scrap. 16.16–25.000/$1. preventive maintenance... materials inspection. Inc.760.3% Appraisal $131.200/$1.000 . Year 1 Year 2 b.960...000 .

..000/$3.. Appraisal: Testing equipment.....000 ..9% $129.7% $225. External failure $114. Prevention: Process inspection..4% 3. 6..520.000 .16–26..520. External failure: Customer complaints...000 ...000 .......... Internal failure: Rework. Scrap. warranty repairs. quality training...000/$3.. 2.... 16. a..800/$3. Year 1 Prevention $656.400/$3..8% $315.920...920.. (15 min..200/$3.. preventive maintenance.7% © The McGraw-Hill Companies. materials inspection...000/$3. Appraisal $265.000 .920. Inc...7% $477..920.. 7.100/$3.9% 6..520.. Year 2 13...6% 8..520.. Internal failure $300..500/$3...000 .000 . field testing.000 ..... Chapter 16 475 .) Costs of quality: Ramirez Corporation.. 1997 Solutions Manual. b.

.......................000 Materials inspection .................. 71...000 Total prevention costs........... 414......000 Total Costs of Quality ....................000 $ 772........................000 70.000 Warranty repairs..... 188.........................7 8.................500 Rework .....8 7.500 Quality training ......300 34.................. 135.....7 35..... 170............100 % 16...............800 130...2% 3.....000 Total external failure costs: ....000 Total internal failure costs ..............3% 6................ Inc...........000 % Year 2 $2........ 5/e ..................500 Appraisal costs: Field testing .........9% 13.............. 164.....000 95.................1% © The McGraw-Hill Companies....000 Internal failure costs: Scrap .9 34....000 Total appraisal costs .... 198......200..... 1997 476 Cost Accounting........7 9........000 Testing equipment....................000 Process inspection .....450........ $ 838.......) Trading off costs of quality: Vedral Industries...... 94.... VEDRAL INDUSTRIES Cost of Quality Report Year 1 Sales ........ 18...... 16.................................500 External failure costs: Customer complaints ....000 82.. 28...000 18....................................... 43.. 65.......... 70........000 204..........................16–27..............000 48........3 2......000 48....000 Prevention costs: Preventive maintenance...800 124....................000 19.................. (15 min...... $2.......000 194.............................000 291..300 185......

....... 108.................................500 148..... Chapter 16 477 ...960...2% 3................000 Prevention: Process inspection.......................800 Rework .......760....000 Quality training......... $1.....000 Total internal failure costs .....................200 65...000 27.................200 Appraisal: Field testing ...................7 8...000 38.........) Trading off costs of quality: Owenborrogh Corp...... 150.... 131.........000 99... 22...............9% 13..................... 56.800 External failure: Warranty repairs .............................................700 % 16......000 Customer complaints .................. Inc..000 15..............500 38.............7 9..............000 Testing equipment .500 Total Costs of Quality ........................ 52.000 163...........000 155.................. $ 669..16–28....... 56...........200 $ 617...200 Preventive maintenance ..... 1997 Solutions Manual...... 13..................000 Total appraisal costs ..............3 2... 14.........000 234......3% 6.7 35.....000 76. 136.............................000 Total prevention costs ............000 105........000 56.000 15....................................500 Total external failure costs ..... OWENBORROGH CORPORATION Cost of Quality Report Year 1 Sales ...8 7..............000 Materials inspection ..1% © The McGraw-Hill Companies.................000 Internal failure: Scrap ............ 75...................................................9 34....................... 331. (15 min...500 % Year 2 $1..... 158. 34..........................

...........400 Appraisal: Testing equipment...... 44.....200 129.................400 Quality training .....1% 3............ 220...........000 Field testing .............000 152..300 % 16................800 External failure: Warranty repairs....000 115....920..........000 Internal failure: Scrap ..........................................100 75.......... RAMIREZ CORPORATION Costs of Quality Report Year 1 Sales ........ 265....000 Total prevention costs.........000 75........... 105........... $1. $3.......7% 13..... 28.........000 30...................................500 Total Costs of Quality .........4 2............200 $1........................................500 Total external failure costs ........ 305.............000 54.000 220....000 Materials inspection ................................ 26... 300.....16–29...000 30.........................000 Total appraisal costs .....7 32... Inc.... 115................. 1997 478 Cost Accounting.....................................800 Rework ......000 Prevention: Process inspection ...336...000 Customer complaints ..000 200........ 114...6% © The McGraw-Hill Companies.........7 6........................8 8... 656.700 % Year 2 $3.100 195..........000 Preventive maintenance.............000 225.............000 Total internal failure costs ....... 5/e .............6% 6.520.... (15 min.................................. 150.....................000 477..........9 34.... 70................146......... 272..) Trading-off costs of quality: Ramirez Corporation..............000 315....9 7.......

...............) Quality versus costs: Hillman Industries...... $5.....000 500 4........ (20 min.......................500 700 2...000 Lost business..............500 $6....500 3..000 Costs: Waste .......000 $7......500 3......500 Hillman should lease the new mix regulator since this approach is the least costly... Canadian would likely hire an additional employee to manually monitor the existing regulator since this approach is the least costly... Inc. 3... Present New Mix Regulator $1......000 Lost business.....500 1....700 Costs: Waste ............. $8...500 1.. 2.500 Lease .000 $5... 1997 Solutions Manual............. © The McGraw-Hill Companies..... $3.500 Lease ...500 Additional Employee $2. Chapter 16 479 .. Total ..16–30..500 Additional Employee $1................. $5..500 Canadian is indifferent between maintaining the status quo and leasing the new mix regulator.) Quality versus costs: Canadian Seltzers. Present New Mix Regulator $1..... 16–31..500 $4.. Wages .............. Total ........ Wages ..... (20 min.

........ $4........ $3.................500 $5. 1.. Wages . 16–33...000 Lost business ......500 500 3......... (10 min.000 Costs: Waste .... = Investment + Time period from approval Annual discounted cash flow to providing product = $300 million + 3 years $125 million = 2.500 Lease ..... 1997 480 Cost Accounting... (20 min.... 5/e .... Present New Welder $1......) Quality versus costs: Carlson Corporation..4 years + 3 years = 5.......000 $4.16–32... Total....500 Additional Employee $ 500 500 3.............500 Carlson should hire an additional employee since this approach is the least costly.. Inc.) Break-even time Break-even time: Dallas Oil Company.4 years © The McGraw-Hill Companies...

1997 Solutions Manual.000 = 2.000 + 2 years $200. Chapter 16 481 .33 years + 2 years = 7..5 years + 2 years = 4.) Break-even time Break-even time: Peugeot Corporation.) Break-even time Break-even time: Nugget Company.5 years = 16–35.5 million = 5. (10 min. = Investment Time period from approval + Annual discounted cash flow to providing product $500. Inc.16–34. (10 min.33 years = © The McGraw-Hill Companies. = Investment + Time period from approval Annual discounted cash flow to providing product $8 million + 2 years $1.

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

some generalities may be: The Neptune appears to have random variation within the limits and should not be investigated. Chapter 16 483 . However.16–41. © The McGraw-Hill Companies. a. and the difficulty in identifying the cause of changes in costs (price per gallon and/or gallons per trip). a. 1997 Solutions Manual. b. Inc. The disadvantages may include different people being responsible for usage and purchasing. 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.. (50 min. The Orcas has three occurrences of fuel usage above the control limit. 16–42. The advantage of using dollar fuel costs is that it focuses on a primary concern of top managers (operating costs). Rapid technological changes might make the product obsolete after a four year period.) Quality control: Norsk Ferries. (25 min. Investigating the cause would be appropriate. Tiju might make such a policy because of the short product life cycle.) Break-even time. The Sea Quill has one fuel usage above the upper control limit. 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. Investigating the cause would be appropriate. working backward: Tiju Instruments. b.

............. d.....000 85......... Inc. 350....000 3.000)....000 (higher) (lower) (higher) (higher) The benefit is the difference between the present and the alternative $300. 1997 484 Cost Accounting..000 units) $5..............000 Costs: Design .000 (= $3. b.......000 units) Alternative (New material) Difference (100.......... Improved quality will enhance Billington’s reputation with customers and make the company more competitive with its industry counterparts.000 New material ($2 each) .. 85.......150..............16–43.....500....000 200......000 Scrap ($35 each) ... c..000 $300.....000 0 200.. $ 695.000 220...... a.. Yes.000.....000 $ 995... © The McGraw-Hill Companies........... Present (90... (40 min..000 Inspection . 220........... Billington should spend the additional $200..000 Manufacturing ($35 each) ...000 (higher) Sales ($50 each) ...000 350.500.000 350..495. $4....... Billington should consider other benefits of improving quality. 5/e ............195......000 – $3......000 on new materials as this would increase operating profits by $300...000 $500. $2 increase in direct materials costs. 0 Operating profit .) Quality improvement: Billington Corporation....... 3....000..........

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

This would minimize the differences between the timing of cash outflows for materials purchases. in a governmental setting. production and income levels. 17–9. Solutions to Critical Analysis and Discussion Questions 17–8. The budget plan represents next year’s operating plan. employees will be more likely to support a plan that they have participated in preparing. In addition. and the time when the related costs are recognized in the production budget. It is expressed in a greater level of detail than the strategic plan. Therefore. 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. Behavioral studies indicate that when the budget is an upper limit on expenditures.. Strategic plans are long-run targets for a company. They are usually expressed in very highly aggregated levels. In addition. Zero-base budgeting requires that all expenditures be justified as if the company or division is new. Most other budgeting practices only require that incremental expenditures be justified. By relating sales forecasts to production activities it is possible to reduce the likelihood of over or under production. Each one year budget plan may be viewed as a step in achieving the long-run strategic plans of the company. Thus. employees throughout the organization generally are perceived to prefer some input into organization decisions. Indeed. First there is an incentive for members of various subunits to overestimate costs in order to achieve bonus awards. 17–11. employees will have a strong incentive to create budget slack. there may be no problem with this executive’s approach. Inc. 17–12. They usually include targeted sales. we would expect a strong incentive to overestimate costs to provide a cushion for future expenditures. 1997 486 Cost Accounting. 4/e . Of course. the timing of purchases would be closer to the time of production. © The McGraw-Hill Companies. Guidelines are set for administrative and selling departments so that their costs are commensurate with the company’s income and output goals. 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. As long as the employees are willing to have all direction come down from above. 17–7.17–6. if the targets are set so tight that they cannot be reasonably achieved then there may be a problem for the entire incentive system. 17–10. work in process and finished goods. Budgeting aids in coordination in a number of ways. However. the budget process is used to make certain that adequate cash is on hand to finance company activities for the coming period. there may be a disincentive to increase sales if it means increasing costs. inputs from the lower ranks may improve organization operations because plans will be based on better information. In addition.

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

..600 17–16..... Portfolio Amount Interest Rate 11% 16 8 Income $2....85 x ..... Market size last year = 225......210...2 Market size next year = 1........90 x 1..000 units = 1....125.) Estimate sales revenues: Orcutt & Daughter.500 units Sales revenue = 283.181.250 units Company share = 24% x 1.........90 = number of trades in the coming year (as a percent of last year) 1. 17 million Securities ..... (15 min..350 © The McGraw-Hill Companies......10 per unit = $595. Inc...500 units x $2...) Estimate sales revenues: Jackson City Bank..20 = average commission per trade in the coming year (as a percent of last year) 60. (15 min.........000 Commercial loans ...) Estimate sales revenues: Reiser Co.720. 17–17..125.117....000 units = 1.05 x 1......000 $5...090... $19 million Consumer loans.000 trades x $220 per trade x . (15 min.Solutions to Exercises 17–15..20 = $12. .250 units = 283. 4/e ... 1997 488 Cost Accounting.85 = market volume in the coming year (as a percent of last year) . 5 million Total.000 units ..181..000 400.000 2..............

.............000 units Add: Desired ending inventory of finished goods 2 months x 960......................000 units ( ) © The McGraw-Hill Companies..120......... 52..........) Estimate production levels: Cordelias Corporation..000 Less: Beginning inventory of finished goods ............000 + 160.....000 units Alternative method: BB + P = Sales + EB 52......................000) 12 P = 960..... 1997 Solutions Manual.... 960.........068...........000 Units to be produced .. Inc.... (15 min...........000 12 months 160..000 + 2 (960........000 – 52................ 1........ ( Cordelias Corporation Production Budget For the Year Ended December 31 (in units) Expected Sales .......068......... Chapter 17 489 .....000 = 1... 1..........000 + P = 960...17–18.000 ) Total needs ...............

.......400....000 Less: Beginning inventory of finished goods....000 + P = 320.000 Units to be produced.... Direct Materials Requirements For the Year Ended December 31 (in units) Units to be produced.....000 units at the end of this year): BB + P = Sales + EB 80.000)(5 ft) 12 P = 1......600.............. ( ) © The McGraw-Hill Companies.. 1997 490 Cost Accounting................. 40................................. Inc.................. Visions.......................................000) + 3 (320.................... 1... Production Budget For the Year Ended December 31 (in units) Expected Sales .......000 + P = (5)(280......800...................................000 units) ................. 80..........000 feet Alternative Method Production (assumes finished goods in inventory reduced to 40.... Inc..............000 ft.17–19............000 feet Add: Desired ending inventory 3 months x 320..000 units Add: Desired ending inventory of finished goods.................. (25 min.................. 280.... 1..000 Total needs ................................... 280............... 320.................000 – 200..........000 Direct materials needed per unit .......... 4/e ...............000 units Materials Requirements: BB + P = Usage + EB 200.......................000 = 1..... 200..........000 + 40..................................... 5 feet Total production needs (amount per unit times 280. Inc.....000 units Visions........................ Inc.........................600......400..000 Direct materials to be purchased .............................. 1.......................000 Less: Beginning inventory of materials ...000 x 5 12 months 400...............000 P = 280........) Estimate production and materials requirements: Visions.............. 360..000 ( ) Total direct materials needs.000 + 400..................

..17–20.........500 Total merchandise needs .... 21.........900 18........................70 $4..........800 $. 1997 Solutions Manual........900 + 6....100 x $...700 x $.700 4.600 15...70 $4... $.....600 11................... (25 min.700 Estimated cost per unit . 15. $5..) a.......900 13...500 7...970 August 6....70 Total estimated cost of merchandise .... 14...600) – 14.................200 + (8.. Estimate purchases and cash disbursements: Lazarus Company...70 $3. 7.. 6.390 = 7.....100 $.... Chapter 17 491 ...700 units July 8..........970 = 7.....70 $3...100 = September production requirements August purchases = 4..500 13....... Cash required: June: July: August: $5.390 Alternative method: June purchases: P = Sales + EB – BB = 6...000 Merchandise to be purchased ..000 = 7....700 Less: Beginning inventory.. Inc.800 x $...... Lazarus Company Merchandise Purchases Budget For the Period Ended August 31 (in units) June Estimated sales....360 = 4.200 Add: Estimated sales inventory.......700 22...360 July purchases = 7..800 = October production requirements.70 © The McGraw-Hill Companies.. b....

.......600 – 8.000) + 7......322.000 = 15..169.....322.. 2..000 + 7..400 units.....600c March $1..) a...17–21....000 $1...600 units.......000 15....... 1997 492 Cost Accounting....400 March: 7..600 = 40% x $290 x 7. Inc.. Oleander Products Merchandise Purchase Budget For the Period Ended May 31 (in units) February Estimated sales .... Merchandise to be purchased ..400 7....... Estimate purchases and cash disbursements: Oleander Products.......600 8..600 + 7.600d February . Payments for these purchases are made as follows: Month of Payment Total January Month of Delivery February $1.200 a$1...492.600 7.. = 60% x $290 x 7...400 © The McGraw-Hill Companies.... d$1..000a = 40% x $290 x 10...... b$1.600 = 60% x $290 x 7..600 = February purchases 8.000 = 7..160.... 4/e . Less: Beginning inventory ... Add: Estimated ending inventory..000 7.........400b 881.160..600 March 7... (25 min..600 units..400 March .000 – 7....400 P = 7.... Total merchandise needs ..000 units....000 + P = 8. $2..000 7...400 14........400 = March purchases = April sales b.287....287. c$881.400 P = (7.000 + P = 7.000 7.......... Alternative method: Purchases are as follows: February: BB + P = Sales + EB 8...............

.............................000 June sales ..000 May purchases ............. (15 min..........) Estimate cash collections: 47th Street Company.......... $342........... $ 10..... 154... (15 min..) Estimate cash disbursements: Walsh Company.... June 1...000 = $220................ $ 32.......... Inc....000 b$100................................... Walsh Company Schedule of Cash Disbursements For the Period Ended May 31 Month May Beginning accounts receivable.......000a July sales .. 55............000a Total cash disbursements ........ $210................. 100.000 47th Street Company Schedule of Cash Collections For the Month Ended July 31 Month July Beginning accounts receivable.000 × 70% 17–23.........000 a$154..............000 x 70% = $400....... The correct answer is (4): $342..........17–22...................000 April sales............000 = $300.....000 a$210.......................... Chapter 17 493 .. 1997 Solutions Manual.........000b Total cash collections ....... $219... April 1 ...000 x 25% © The McGraw-Hill Companies...

.. 1997 494 Cost Accounting..650.000 = $90..... Kingstons Products Schedule of Cash Collections For the Month Ended September 30 Month September June sales.800 $ 2.. The correct answer is (3): $89.................000d $89...................... 4/e ..............650 = $95...) Estimate cash collections: Kingstons Products.000 x 6% c$54..... September sales .. a$2...000 x 60% d$28... Inc.....000 x 3% = $80... August sales .850 b$4....................................000 = $100..................850a 4..000c 28...............17–24....000 x 28% © The McGraw-Hill Companies......... Total cash collections .......... July sales .............800b 54...... (20 min..

640 $ 3.200 $3.200 $3.....000 $9..800 $16....600 x 50% c$1.....280 = $6..280c April sales . 1.. (30 min. Total cash collections $10...880 = 16........200 $3.880 3................. © The McGraw-Hill Companies. a.200 $11......... 1997 Solutions Manual....800 b$4.000 $35. Inc..040 $18..800b March sales .200 $3..400 $12..560 $ 1... Revenues are as follows: January February March April May June $16.. May sales...000 7..880 a$4...800 April Total Cash Receipts for Period $ 4..600 $6...400 3. $ 4.. Chapter 17 495 ......200 2...680 6....840 8.200 b.920 $2......000 x 30% = $9..200 $3.....800 11..400 12.. 4....... June sales.......) Estimate cash receipts: Bride To Be....800 7.200 7.. Cash receipts are as follows: Bride to Be Multiperiod Schedule of Cash Receipts Cash Receipts in Month of: January February March January sales.17–25...200 = 5 weddings = 3 weddings = 2 weddings = 4 weddings = 5 weddings = 11 weddings x x x x x x $3.400 x 20% This pattern is repeated for subsequent months..920 6...520 $8....800a February sales .040 $49..

..680c $ 4... 4/e .012 $8.5 calls 1.212 19........400 33..680 = 20% x $23.....340 24.....000 4..800 = = = = = = ..600b 4..000 4...17–26... 1997 496 Cost Accounting.....080 14......600 Total Cash Receipts for Period $450 4.600 = 60% x $6.2 calls 2.000 30.. Revenues are as follows: March April May June July August $2.940 18......040 6......680 22... April sales . © The McGraw-Hill Companies........ a$450 Cash Receipts in Month of: June July August $ 1.....000 23..0 call 1.....760 $89..760 $28..000 c$4..........162 $ 450a 3........ Inc.......720 $ 5.700 = 18% x $2..500 b$3.............8 calls 2......730 $21... June sales .500 6.......800 6....) Estimate cash receipts: Water Works. July sales. May sales .936 32. (30 min..000 $30.000 23.....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 ....... Total cash collections.....0 calls 1......... a....... August sales ..400 This pattern is repeated for subsequent months.

....242 (1.398 (.........720) Maintenance and repair ......7) x $50 Less manufacturing costs: Variable costs ................... 2.......... $17......72 August: 280 x 1............................ Inc.......72 © The McGraw-Hill Companies...............056 Operating profit .........................7 = 476 Ratio = .........17–27......200 (no change) Total manufacturing costs .............................05 x $2.......300) Total marketing and administrative costs ..............................500) Administrative (fixed) ... 3.......72 = 342.800 (...72/476 or Ratio = ............... Water Works Budgeted Income Statement For the Month of September Calculations Revenues ................................7) = 342.72a x $4....... Chapter 17 497 .72a x $2...................216 Total costs .......080 aRatio of September to August volume: September: (90% x 280) x (80% x 1....................01 x $4. 1....... 4. 9. 1997 Solutions Manual.136 (90% x 280) x (80% x 1................ $ 3................... $14...... Prepare budgeted financial statements: Water Works... 4...200) Depreciation ...416 (1.840 Marketing and administrative: Marketing (variable) .... 2....80 x .90 = ........

.....829 ($4................ $15...499 ($3....... 21. $27. Inc.................. Inc......................................... 1997 498 Cost Accounting..176 Less: Marketing and Administrative Fixed costs (cash) ............. $5........000 ($25....90) Less Manufacturing costs: Variable ..824 Gross profit margin ................................000 x 1..... Year 2 Calculations Revenues (120 units @ $225/unit) ............20 x ............................... Inc......................504 Operating profits ........ 1.. Budgeted Income Statement For the Year.................................. 5... 4..20 x 1............10) Depreciation (fixed) ........... Hampton...... 4/e ...640 x 1.......... 4........ 675 (unchanged) Total marketing and administrative costs ...325 (unchanged) Total manufacturing costs........672 © The McGraw-Hill Companies............390 x 1..... Prepare budgeted financial statements: Hampton......17–28.............03) Depreciation (fixed) .

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

.. Administrative depreciation .......18 unchanged $127..................738 743.....18 x .................168 85...... cash) ......725a 45...246 $ 69....... Operating profits ............... (30 min.... 4/e ................................................Solutions to Problems 17–30.............700 320.......725 $812. Total marketing and administrative costs ................................600 x ...........595 41. Marketing depreciation .........) Prepare budgeted financial statements: Parker Products.......479 Calculations $725.............................25 per unit) © The McGraw-Hill Companies........... Parker Products Budgeted Income Statement For Year 2 Revenues......900 x 1...... Total manufacturing costs...... Total costs ......... 1997 500 Cost Accounting............92 x 1................... a$812........10 unchanged = 118.030 18... cash) ..98 x 1.......95 $42... Inc.508 124........ Fixed cash costs . Other variable costs .............000 x 1............ Manufacturing costs: Materials.05 unchanged $105. Depreciation (fixed) ....................... Marketing and administrative costs: Marketing (variable.............000 x .750 422..................18 $35...............000 units x (..... Administrative (fixed..300 x 1.................95 x $7..600 x 1.................................995 249......608 37..........400 140..........18 $81..

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

....08 Administrative depreciation ..... 22......... 66...10 Variable cash costs ............ cash) . 753........................... $885.........................000 Total manufacturing costs.................000 x 1................ 4/e ..12 Marketing depreciation .....000 x ..... 163..........................000 – $9....... (30 min............339 Operating profits ......12 x ...319 $90.700 + $14.......960 $72.........................................000 x 1........ Quinn Electronics Budgeted Income Statement For Year Ended XXX Calculations Revenues........ 234..................06 Manufacturing costs: Materials....93 Depreciation (fixed) .....900 x 1.400 $95..............300 $89.......................96 Fixed cash costs .... $132....................................... $518........651 $746...312 © The McGraw-Hill Companies............504 $180........... 97...................620 Marketing and administrative costs: Marketing (variable......719 Total costs ...................17–32.... Inc..........110 x 1...............12 x 1. 93......... 194. 1997 502 Cost Accounting.......................12 x 1......600 unchanged Administrative (fixed....000 x 1.400 unchanged Total marketing and administrative costs .......) Prepare budgeted financial statements: Quinn Electronics......856 $133. 106.... cash) ... 8....

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

..... 1997 504 Cost Accounting.......000 x $......... 4/e ..................000 x $.............360 $45... Inc........80 x 1........000 units 7....130 © The McGraw-Hill Companies...000 25.000 x 1/4 hr...... $8.............000 + 3..........470 Equipment costs.........36 ...............000 x $....... 21.800 Total overhead...................520 Indirect materials... Less: Beginning inventory of finished goods....150 18.............400 36..10....60 ............. Inc..000 x 1 lb..12 ............... 7.... Vasa finish 21.....000 4... x $..................17–34. compute the estimated production: P = Sales + EB – BB P = Sales + (7.........000 – 4...000 21.000 x $...000 units Next estimate the costs: Direct materials Z-A styrene 21............ x $.......40 ........03 . Total needs ....... Production Budget For the Year Ended December 31 (in units) Expected Sales ..........200 Building occupancy ............ $15.960 $45............... 21.........000) = 18... (25 min........ 2....07 .......) Prepare a production budget: Sevi...... Add: Desired ending inventory of finished goods..... 21................................ Inc............................ Units to be produced.............000 units Overhead: Indirect labor .. 20..................... 630 Power ................000 x $....... $106.. Direct labor: 21.... x $8................................................. Sevi. 3........19 ......620 Total budgeted manufacturing costs .... Alternative method: First.. 1... 20.... Total direct materials..000 x 2 lbs....000 = 21..............

900 x 1/10) Marketing consultants .) Sales expense budget: Gemini Corporation..371 20.08 x 1.. –0– x $35... 12..000 x 1.. 4...12 Packaging & delivery...000 x 1....592 28........05 Building lease payment .690 35... 20...04 Telephone & mailing . © The McGraw-Hill Companies.05 Depreciation ...17–35.... Chapter 17 505 .100 x 1..05 x 1....770 12...628 Sales commissions....000 $308... light & water .....000 4.........400 x 1..... 32.500 + ($1...925 33.....000 none Heat...200 x 1....000 Total budgeted costs ... Item January Adjustments = = = = = = = = Budgeted Typical Month $155...... Inc. 27...... (25 min.. 16.10 Sales staff salaries . $135...280 18.. 1997 Solutions Manual....

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

.) Profit variance analysis: Davidson.....000 U 2...400 units x $5 f18.000 Sales revenue .000 $ 74.560d Contribution margin ... 54.760 F $2... $223..90 e18....560a Less: Variable manufacturing costs ..000f 126.. Inc..15 units x $12 c18...000e 128..000c 90...800 Activity Variance $4.. 1997 ...800 F units x $12.000 a18.........800 F 2...560 U Manufacturing Variances Flexible Budget (18. 108...800b 92.400 Units) Sales Price Variance $2.....000 units x $12 d18...800 F Master Budget (18.400 units x $5.....000 Operating profits .. (30 min......800 54....000 units x $5 520 © The McGraw-Hill Companies. $ 61.560 U 16.760 F $16.. Inc........... Actual (18.........000 $ 72.000 Less: Fixed manufacturing costs ..760 F $16..000 54.....000 Units) $216..400 Units) $220......560 U $2.. 115.....400 b18...400 2....18–16....

$1.000 $200..250....000 x 23.. Fixed costs .....500............000 300....725.... Costs: Professional salaries.......000 Revenue .... Other variable costs..../20.500 $750...500 U 82... 862.......000 x 23.500 Department profit ....000 $1..... 230. Costs: Professional salaries................... $1..000 hrs..392.. Department profit ......500 F Master Budget (based on budgeted 20...500.000 x 23.500 $ 332...000 Budget 20. 300...725.......... Fixed costs .......000 750. (45 min............. Total costs.....) Sales activity variance—Service organization: Wright & Allen.000 862...... Chapter 18 521 .. $ 332. 1997 Solutions Manual.392.../20...500 U 30...000 $ 250. Flexible Budget (based on actual of 23....000 Wright & Allen Flexible Budget Billable Hours Calculations Revenue ...) Flexible budgeting—Service organization: Wright & Allen.000 300..000 hrs........000 F 112...................../20.........000 Total costs..000 hrs...500 18–18..000 hours) Sales Activity Variance 225.500 230.... Actual 23.000 hrs.000 U 142....000 1....... Other variable costs.....000 1...........18–17.. 1.500 © The McGraw-Hill Companies.... (20 min...000 hours) $1...000 hrs. Inc..000 200.000 hrs..

000c 300..650. $1......000 hrs.. b c 522 © The McGraw-Hill Companies.500 U 17....500 a $75.000 300...000 hrs.725.000 $ 332..18–19. x $200.000 hrs......000 Department profit .000 U (4) Flexible Budget (23...) $1....000 F 112....000 U (3) Price Variances $75.. Inc..000 hrs.000a 862.500 Fixed costs ..000 U 23.. $ 222.... 1997 ...000 200. 23..000 20....000 hrs....500 (5) Sales Activity Variance $225..000 Revenue ..000 750.......) Profit variance analysis: Wright & Allen.000 hrs.. x $750.000 hrs.500 U 30. (1) Actual (23.000 20..500 F (6) Master Budget (20.000 $250.000 Professional salaries ...... 212.500b 230.500 F 10.000 hrs......000 hrs...000 20.........000 F $35...) (2) Cost Variances $62.) $1.....500. (30 min. x 1..000 Other variable costs ..000 U $ 82. 290. 23.. 925.500.

000.000 + ($32 x 100.000 units c.000.200. $8.400. $2.000 – $2. Chapter 18 523 . Inc.000 units) d.) a.000 + ($32 x 200.000 units) © The McGraw-Hill Companies.. $5. VC = (TC – FC)/X = ($6.000.000.000)/125. 1997 Solutions Manual.000 b. (20 min.000 TC = F + VX = $2.18–20. $32 per unit Flexible budget.000.000 TC = F + VX = $2.

500 Fill in amounts on flexible budget graph. Inc.000 Slope = contribution margin per unit = $5. 1997 524 Cost Accounting.) $ Flexible budget operating profit = $22.000 $5.000 X = $72.80X = $22.000 = $5.500 + $50. Flexible budget line Master budget operating profit = $8.80 (a) Computations: (a) Profit = (P – V)X – FC $8.80 per unit a = 10.500 = $5. 5/e .500 units $5.000 units (b) $22.000 0 Master budget activity level = 10.500 = 12.000 units) – $50.80X – $50.500 units (b) Fixed costs = $50.000 $58.80 © The McGraw-Hill Companies. (25 min.18–21..000 units Units sold Flexible budget activity level = 12.000 = (a)(10.

000 $8X = $36.) $ Master budget operating profit = $36.000 Flexible budget 0 operating profit (loss) = ($6. Inc. 1997 Solutions Manual.000 = 8.000) Flexible budget. Flexible budget line (a) (b) (b) = Master budget activity level = 13.000 Computations: (a) Profit = (P – V)X – FC –$6.18–22.000 + $70.000 units $8 (b) $36.000 = $8X – $70..250 units Units sold (a) = Flexible budget activity level = 8.000 units Slope = contribution margin per unit = $8.000 = $8X – $70.000 X = $64. Chapter 18 525 .000 $8X = –$6.000 + $70. (25 min.250 units $8 © The McGraw-Hill Companies.00 Fixed costs = $70.000 = 13.000 X = $106.

........................... Inc...............000 520....... Total variable costs .........000 $1......000 $1..................000...000 units) Calculations (000 omitted for units) $4....................000 240.....190.... Variable costs: Blank disks .. Variable overhead ....000 © The McGraw-Hill Companies..000 400.. 1997 526 Cost Accounting............550..18–23....... (35 min.. Operating profits .....000 x x x x 850/800 850/800 850/800 850/800 Sales revenue .. Direct labor ....000 $ 510.......... Fixed costs: Manufacturing overhead ................................000 280.......... 5/e ........................................000 $2.....) Prepare flexible budget: Graphix......................... Inc.........000 1................250........200............ Total fixed costs ... Administrative . Marketing ......500 425..........000 150......................700....000 $ 800..500 552.................................... Flexible Budget (based on actual of 850...................000 x 850/800 1........275...... Variable marketing and administrative ........000 297.... Contribution margin ........ $4.......

.......600...000 units) Master Budget (based on budgeted 800....190........18–24..000 $ 800.000 150.....................................000 1.... Marketing .....000 400.............. Total fixed costs ....250...... 1997 Solutions Manual.........................000 520..000 — — — $100..... Variable costs: Blank disks..............000 $1......700.) Sales activity variance: Graphix..............000 © The McGraw-Hill Companies....................500 552...400.. (45 min.000 280.............000 $2......000 $150......500 32...190....000 240.........000 297..000 150.......... Operating profits ......000 240........ Total variable costs .....000 $1...............000 17.....200... Variable marketing and administrative.. Variable overhead ...550..............000 $1.. Administrative ..............................................275........ Inc........... Chapter 18 527 .........000 $100................. Direct labor .000 F U U U U U F Sales revenue ....000 $ 800...000 Sales Activity Variance $250........ Flexible Budget (based on actual of 850................000 $ 510.. Contribution margin ..............500 25.000 F 75... $4.. Fixed costs: Manufacturing overhead .....000 $2...000 1.......000 $1....000 $ 410.......000......000 units) $4...... Inc.500 425......

000 400.......000 units) $4....400.. Variable Marketing and 410....000 F 24..000 U Sales Activity Variance $250......442..500 U 74.....000 units) Sales revenue .000 U $150. 478.000 150....000 800.000 240. $1....000 F 24.700. Inc.000 administrative ..000 Direct labor .....000 U $1.. Administrative .....000 528 © The McGraw-Hill Companies......000 Operating profits . 1.000 240. 776. 1.000 F 20.....000 $2....000 F $15.500 425..000 1. (30 min.000 1......000 240.....000 F $141. 1997 .. Total variable costs ....146.....000 units) $4..000 F $117........................000 280.000 U $100...000 $2..500 F Marketing and Administrative Variances Sales Price Variance $390..000 $ 510....500 U 25....000 -0$390........000 Contribution margin..000 520................000 $15......000 800.000 Fixed costs: Manufacturing Overhead .... Marketing. Inc.....000 $ 410..500 552....000 F Actual (based on 850.. $2........000 150..000 1......000 297.....000 U 17.000 F Total fixed costs..000 $390.190.000 F $117...000 Manufacturing Variances 75.000 -0$100.190.418.. $3....500 U 32...000 $1...250..........000 U 1.600....... Flexible Budget (based on 850.275.....000 F Master Budget (based on 800......000 330.550........000 Blank disks ..200.000 130..000...000 F 32.....000 F $35.. $ 296.200.18–25...000 Variable Manufacturing ..000 F $15.860.......000 F 75..000 F -020.) Profit variance analysis: Graphix..

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

.000 $108.... Operating profit ....000 (given) $2 x 108..........000 54......000 units x $5 $540.. (30 min. $540....Solutions to Problems 18–28.000 106... Master Budget Sales volume .............000 216........ Inc..... Contribution margin ............. 5/e .... Marketing and administrative .............000 units © The McGraw-Hill Companies.....................000 – $216. Marketing and administrative .........000 380...000 $1 x 108..... Variable costs: Manufacturing ........000 56.... Fixed costs: Manufacturing ...000 units $380....000 10% x $540..) a.000 – $108..000 Computations 108...000 units Sales revenue ..... 108.. 1997 530 Cost Accounting.000 – $54...................... Solve for master budget given actual results: Kentron Enterprises....000 – $380..

. $672.000 x 120. 147.. 531 © The McGraw-Hill Companies.222 F Master Budget (108.. (continued) b.000 F $18....... $117..778d 60..000 54.......778 U 6. 113...000 Units) $540.......400 U 72......222b 216....000a 117..000 F 11... $145..000 U 42.. Actual (120. 205.000 Units) Sales revenue .. Inc. and variable marketing and administrative.......000 Variable costs: Manufacturing ..000 380.422 U 29.......000 units..000 b Manufacturing Variances Marketing and Administrative Variances Sales Price Variance $72........18–28......200 Marketing and administrative ...000 216.....000c 422..600 U $72..000 x 120...... 463. 1997 . contribution margin....778 = $106..000 $150..000 dSolved after determining flexible budget sales revenue.222 F — — $42....000 F units x $5 $380... Also.000 F Flexible Budget (120.000 $29.200 Operating profit .400 Contribution margin . 61..200 U $58...422 U 57......422 U 11.400 Fixed costs: Manufacturing ....000 106.000 Marketing and administrative .400 U 1.....000 F $ 1...000 56....222 Sales Activity Variance $60......000 units 108.000 units/108.000 56.....000 Units) $600..200 a120.000 units c10% x $600...000 $108...

..160 (g) 608 240 (q) $1.. (30 min...(h) Contribution margin.............312 (m) $25 F Note: See computations on next page.230 Actual (750 Units) Sales revenue .......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....) Find missing data for profit variance analysis. Marketing & Administrative Variance Flexible Budget ((a) 750 Units) (f) (i) (l) $60 F $25 F (n) $75 U (j) (o) $2. $1..18–29.025 570 225 $1........(e) Variable marketing and 200 administrative ..... 1997 ............ $1.........950 510 Variable manufacturing costs .... Inc...... 532 © The McGraw-Hill Companies..................

76 x 750 units = $570 (f) (= $38/$135 x $2. 1997 Solutions Manual. Flexible budget marketing and administrative costs = $.70 x 800 units = $2.76 x 800 units = $608 (g) (= $38/$135 x $2.. (p). (i). Chapter 18 533 .160). Master budget = $2. Master budget variable manufacturing costs = $.025 – $1.70. (f). (d) Budgeted sales price per unit = $2.30. Budgeted variable manufacturing cost per unit = $38/(800 – 750 units) = Flexible budget variable manufacturing costs = $.025 = $135 U (c).30 x 50 units = $15 F (k) = $240 – $225. Marketing and administrative cost variance = $225 – $200 = $25 F (i).160 – $2. and (q) are column totals.025).950. (n).160 (d).76.18–29. (l). (g) $. (o).30 x 750 units = $225 (j).240 = $200. (m). (h) Variable marketing and administrative costs = $1. (e). (continued) Additional computations for Problem 18-29: (a) 750 units from actual column. (k) Budgeted variable marketing and administrative costs per unit = $240/800 units = $. Inc. (b) $75 U = $2. (j). (c).025/750 units = $2. costs that are part of the activity variance = $.950 – $510 – $1. Variable marketing and admin. Activity variance = $2. Actual variable manufacturing costs = $570 – $60 = $510 (e). © The McGraw-Hill Companies.

.....000 U 10. (t) $ 30..000 $ 20..000 U $18.000 Less: Variable manufacturing costs .. Inc..000 $150..000 (u) $7..000 Note: See computations on next page...000 Actual (based on actual sales volume) Units .....000 F (o) $9...400 (w) $ 600 U (f) $ 10..000 Sales Activity Variance 2..........000 (p) $2...400 Manufacturing Variance Marketing and Administrative Variance Sales Price Variance $18. (a) 12.000 F 24. Master Budget (based on budgeted sales volume) 10.000 Operating profits ..........000 (k) 4..000 (l) $10.....000 18.. 71...000 U (s) 2.. (n) 105.000 (j) 16. (r) Fixed marketing and administrative costs ...) Find data for profit variance analysis......000 Variable marketing and administrative costs ........000 F (e) 15...........000 23.18–30.000 F (c) 20. (40 min... (g) $198.000 50....000 (h) $180. (q) Less: Fixed manufacturing costs ........ 534 © The McGraw-Hill Companies.400 F (x) 18........... 1997 ........000 U (v) 3. 21....400 F 9.000 60.................000 U 80..000 F (m) 25...000 F (i) $30..000 U 96..000 F Flexible Budget (based on actual sales volume) (b) 12.000 (d) 25.600 Contribution margin.000 Sales revenue ..000 F 15..000 2.

600 $198.000 $9.000 units.000 – $2.000 units Alternative computation: $96.000 Same as p.000/10.000 U $600 U $18.000 – $21.) Total manufacturing variance on the contribution margin line $24.000 U Same as k. $30. $71.000 $60.000 units x $150.) – $23. (continued) Calculations: a. $50.400 $7.000 F j.000 F $18.000 units + 2.000 U Sales price variance f.) + $18.000 $96. $10. $10.000 Alternative computation: $30.000 + $9. e. Fixed costs in flexible budget are the same as the fixed costs in the master budget.000 (from h.000 – $15.000 $2.000 – $21.000 F l.400 F $71.000 U $2.000 $25.000 $2. 1997 Solutions Manual.000 – $150.000 $9.000 – $80..000 F – $16.000 – $20.000 – $80.000 $180. p. b. n.000 U – $2.000 F © The McGraw-Hill Companies.400 F $30.000 Same as m.000 $180.000 – $25.000 – $15.000 – $50. d.000 12.000 Alternative computation: 2. 10.000 $105. Chapter 18 535 .000 $15. $16. m.000 – $105. x.000 Same as b. s.000 i.000 U k. o.000 – $15.000 units x $15 $96.000 g.000 + $60.600 $25.000 units $150. 12.000 + $24.000 units. $198.) – $18. t.000 (r.18–30. r.000 U $3.400 – $3.000 h. Inc.400 (q.000 F $25. q. c.000 – $50. $20. u. $180.400 $23. $10.000 U – $4. $60.000 (from o. v. w. 12.

1997 536 Cost Accounting.18–31. she should communicate her performance truthfully. 5/e . point out the conflict. anything she can do to increase next year’s profit will help her get a bonus next year. Revenues and expenses must be matched to the correct period to which they belong. Since she has reached a plateau on this year’s bonus. Mary must perform her professional duties with competence. This is an unethical practice. She should meet with her superiors. Inc. 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 is trying to improve the profit on next year’s income statement. and try to change the incentive system. (20 min. Mary faces a conflict of interest between communicating information fairly and objectively and achieving high bonuses..) Ethical issues in managing reported profits: Herald Co. © The McGraw-Hill Companies. She must prepare reports in accordance with technical standards and generally accepted accounting principles.

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

.... Inc. $9.. Variable overhead ............000 1.............000 U Sales revenue ......... 5/e ........260 900 540 450 $4.......... (45 min..000 $2......500 $4.... Total fixed costs ....500 $2.....18–33....000 600 500 $ 5...500 500 1...000 500 1.500 $ 2.....000 $ 2...000 1.. Less fixed costs: Manufacturing .400 1......000 $ 5. Flexible Budget (based on actual of 90 units) Master Budget (based on budgeted 100 units) $10..) Sales activity variance: Ishima Corporation..000 Sales Activity Variance $1.............. Administrative ... Contribution margin .. Marketing .............000 1.........350 1.... Administrative ............................ Total variable costs ........500 1....000 150 F 140 F 100 F 60 F 50 F 500 U -0-0-0-0$ 500 U 1. Marketing ............. Less variable costs: Manufacturing costs: Direct labor ..500 © The McGraw-Hill Companies... Materials . 1997 538 Cost Accounting. Operating profits ..

...18–34..000 U Master Budget (100 Units) $10........... Administrative ..200 Manufacturing Variance Sales Price Variance $200 F Sales Activity Variance $1.... Fixed costs: Manufacturing ..000 150 F 140 F 100 F 60 F 50 F 500 U — — — $ 500 U 1...350 1...000 600 500 5...500 $85 F 40 U 5F $75 U $200 F 539 © The McGraw-Hill Companies.... Marketing .400 1........ Overhead .... Administrative ........000 1.. Operating profit .000 $2.......000 1. 1997 ..........000 $2...040 995 $2.......... Inc.. Marketing & Administrative Variance Flexible Budget (90 Units) $9..500 1.420 1.. Contribution margin ...000 1.200 820 530 500 4......) Profit variance analysis: Ishima Corporation......210 $70 F 60 F 80 F $10 F 50 U 40 U 70 F 15 F 200 F 1.....500 500 1. Marketing ...260 900 540 450 4.000 Actual (90 Units) Sales revenue ..730 485 1...000 500 1... Materials..... (30 min........ Variable costs: Manufacturing Direct labor ... $9.

.650.7286 $43. there are significant variances. The number of trips increased by 2. Hint: Use last month’s actual as master budget..) Derive amounts for profit variance analysis: Checker Cab Co.650a 43.650 = $10.7857 x 16.650.100. Contribution margin ..200/14.650 U Flexible Budget (based on actual activity of 16...500 $430 F $430 F $21.200 $112.000 38..720 Sales Activity Variance $22. 540 © The McGraw-Hill Companies.500 $108.100 trips) $173.100 trips Although the two months’ contribution margins are similar. which increased profit by $22.441). Less: Variable costs .100 trips) Sales revenue ..7857 14.000 trips) $151.000 trips $173.7286 x 16. and other factors may offset each other. the average price per trip decreased by $1. However..730 U $16. Actual (based on actual activity of 16.. a Variable Cost Variance Sales Price Variance $21.920 F Master Budget (based on a prediction of 14.000 trips = $2.. 1997 .930b $129..930 = $2.000 = $10. prices...800 $152. This illustrates the need to consider variance analysis even if bottom-line dollar amounts are similar to budget.. (20 min.. which decreased profit by $21....100 trips bLast month unit variable cost = $38.000 43.650 F 5.650 U Last month price = $151.7857 less $9.3447 ($10.18–35.... but individually be significant. Activity levels.. Inc..

(3) $378 $2 over $300 x (63.780 b.500 + $2.18–36.000 miles].1518. (4) $2. this is a fixed cost.7% of the total decrease from $0.085 per mile for 63.000 x (63. d..) = $378 c.200)/50. Assuming that insurance./50. Chapter 18 541 . Inc.104 per mile [($500 + $2. salaries and benefits. 1997 Solutions Manual. and depreciation are fixed costs./50.000 miles for costs that vary per mile. (20 min.) = $3.000 mi. Flexible budget is based on actual activity of 63.500 equal to budget The assumption is that. within the relevant range.000 mi. a.1745 to $0.000 mi.019. which is a drop of $0. This is 83.000 mi.) Flexible budget—multiple choice: The City of Dixon. (4) $3. the budgeted amount is $0. © The McGraw-Hill Companies. The actual amount is $0. (1) Decreased unit fixed costs.780 $20 over $3.000 actual miles.

..............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.. 30 Salaries ........ 76 Total variable costs...........................000 © The McGraw-Hill Companies.............200 $1.............. 780 Hourly wages ........................ 952 Contribution margin ............................200 $1............. b $600 x $1.000 c $50 x $1........... $ 38 $1............ 210 Operating profit........... 36 Utilities ...........200 Variable costs: Purchases .. Inc. 50 Lease ........... 100 Depreciation............................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........ (in thousands) Marketing & Purchases Administrative Flexible Actual Variances Variances Budget Sales revenuea ... 1997 . $1. (40 min......) Analyze performance for a restaurant: Arbuckles.....200 $1.. 30 Total fixed costs.............000 d $30 x $1................... Hint for working the problem: Use sales revenue as the basis for measuring volume..... Advertising ...... 248 Fixed costs: ........... 60 Franchise fee .200 $1......000 e $70 x $1...............18–37.....

(30 min. 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. 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. Inc. © The McGraw-Hill Companies.. performances of similar divisions and plants. 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. production and sales reports.) Analyze budget planning process–Behavioral issues: RV Industries. Chapter 18 543 . Sources of information that top management can use to monitor divisional budget estimates include: • • • • industry and trade association sales projections and performance data.* a. The reward/penalty system encourages this action. *CMA adapted. prior year performance by reporting units as measured by their financial.Solutions to Integrative Cases 18–38. • • b. regional and national leading economic indicators and trends in consumer preference and demand. 1997 Solutions Manual.

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

The approved activity may be considered the equivalent of master budget activity.. and all the actual costs must have been for an earlier phase... Analysis can then be carried out as follows: (in thousands) Cost Variances Actuala Direct costs: Project 4–1........170 aEach Flexible Budget $ 20 300 -0300 200 -0820 50 110 $980 Activity Variance -0-0100 F -0.160 figure in the approved activity and actual cost columns in the problem include the pro rata share of the indirect costs.. bPhase cThese dThese *CMA adapted © The McGraw-Hill Companies. each cost should $1.. For the approved activity (master budget).. they do not signal a favorable outcome for the year.000 50 110 $1........ 300 8–2 .. each cost should be multiplied by ($1..000.170 – $170)..160 – $160).. Chapter 18 545 . to separate these variances caused by no activity from the other cost variances. 4) .. For the actual column.F -0.. 118 $1.F 80 F 180 F —F —F $180 F Master Budgeta $ c $ 20 U 140 U -0..000 Indirect costs: Administrationd ...160 be multiplied by ($1..$ 40 5–3 (ph.. 1997 Solutions Manual.... Activity achieved would be the equivalent of the flexible budget.... costs are likely to be fixed..... costs are “favorable” only in the sense that they were not incurred......... Since the work was also not done. It is important. 440 (ph.... -0Total direct costs ...... -08–1 ......... the remaining part of the budget. 1.... nevertheless.. 52 Facilitiesd .... $1.) Adapt budget control concepts to research organization: Argo Co.. Therefore....... Inc...... 220 8–3 ....U 20 U -0.. 3)b ..18–39.170 4 was budgeted for $100.. but no work was performed....U 180 U 2U 8U $190 U 20 300 100 300 200 80 1... These costs must be removed in order to evaluate the individual projects....... (40 min.

210 F — $21.290c 26.000 b c ( ( ( $32... (1..200 (1..384 U Actual Equivalent units. 24....000 3. 2.. 3.100 Total costs .000 Direct labor .100 units $14..... Inc.161b 10....200 2....200 x 2.200 Fixed overhead...200 400 3.500 27.. 24......... Equivalent unit computations: Actual Units 200 Master Budget Units 500 To complete beginning inventory ..18–40.900 a Flexible Budget 2....... 5/e ..910 U 1... 2...516 Activity Variance $9..000 $78.......... 1997 546 Cost Accounting... a. Inc........ 16....600 Variable overhead ....065a 19.100 units $27..935 U 5..000 $100.......839 F 4..100 b.100 $32....900 F $16.200 © The McGraw-Hill Companies......200 Direct materials....484 F Master Budget 3........439 U 5...500 26.435 F 7........ Equivalent units this period .... $94...500 500 2..000) To start ending inventory......000 14.......200 x 2...100 units ) ) ) x 2. $30.500 Less: beginning inventory.. (30 min..200 $23.000) 1... Analysis of differences between actual and master budget: Manufacturing Cost Variances $6..........500 3.........500 3. Started and completed: Completed ...) Analyze activity variances—FIFO process costing: Fellite.

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

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

Since the sum is fixed. management captures any difference between actual materials cost and the standard costs as reflected in the budget as those costs are incurred. but rather only that we produced more or less than expected.. 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. The variances are also recorded as incurred. This could be a substantial time delay. 19–14. the better the opportunities to react to the information. Hence. If decisions need to be made to compensate for the effect of materials price changes. Inc. 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. 19–15.19–13. the production volume variance does not tell us whether we spent more or less. Chapter 19 549 . Overhead costs are applied to production on the basis of units of output. the cash outflows associated with the fixed costs will be unchanged regardless of the amount or direction of the production volume variance. If the price variance is not reflected until the time of use. 1997 Solutions Manual. © The McGraw-Hill Companies. By recognizing the materials price variance at the time of purchase. Labor and material costs are entered into production as incurred. 19–16. The variances are computed at the end of the period when the applied costs are reconciled with actual costs. 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.

Inc.500 $700 F $500 U Efficiency Variance Flexible Budget (Standard Allowed) $5 x 2 hrs.500 $300 U Variable cost variances: Eagle Air Charters.20 © The McGraw-Hill Companies. Inc.) Actual Costs Variable cost variances: Nugget.000 x $6.400 $1. 5/e .000 Efficiency Variance Flexible Budget (Standard Allowed) $15..900 units = $19.200 F $15.Solutions to Exercises 19–17.600 U $14.40 = $51.400 Variable Overhead $44.600 = $86.800 Variable cost variances.400 F $3.200 $2. Price Variance Actual Inputs at Standard Prices $6.800 10) 19–18.) Actual Costs $44. (20 min.) Actual Costs $18.600 F Efficiency Variance Flexible Budget (Standard Allowed) $6.20a = $93.000 units = $46.400 F $6. (15 min. 1997 550 Cost Accounting.40 = $47. x 1. Price Variance Actual Inputs at Standard Prices $5 x 3.000 x $3.200 aStandard labor wage rate = (Actual Direct Labor – Direct Labor Price Variance)/ Actual hours worked ($88.000 19–19.600 $3. Price Variance Actual Inputs at Standard Prices $88.50 x (72.000 Direct labor $88.800 $1. (10 min.800 hours = $44.400 – $1.600) / 14.000 hours x $3.900 hours = $19.50 x 6.000 hrs. = $6.

000 Energy $20.700 unfavorable.19–20.400 U $6.000) = $15. x 5.400) and the use of more units than expected ($6.500 hours = $21. = $10.000 hours = $14.000 F $1. Price Variance Actual Inputs at Standard Prices $4.000 Indirect Labor $14. (30 min.300 U Efficiency Variance Flexible Budget (Standard Allowed) = $119.000) = $10. This variance was caused by higher than expected prices ($5. x 5.000 units of output) $1 x (2 min.300). Chapter 19 551 .000 Variances from activity based costs: Crucible Company. 19–21.000 F $1 x (3 hrs..000) = $20.000 $1.000 min. (15 min.700 Report to management: The total variance from the flexible budget is $11.000 Efficiency Variance Flexible Budget (Standard allowed for 5. x 5.) Actual Costs Quality Testing $10.000 $5.) Actual Costs $131.000 units = $126. Price Variance Actual Inputs at Standard Prices $1 x 10.400 Variable cost variances: Almay Corporation.000 $2 x (2 hrs.000 $200 U $1.20 x 30.000 U $1 x 14. Inc.200 © The McGraw-Hill Companies. 1997 Solutions Manual.000 0 0 $2 x 10.

Price Variance Actual Inputs at Standard Cost $57.000 F $9. 5/e .31 = $36.19–22.200 ounces = $108.000 19–23.158 Efficiency Variance Flexible Budget (Standard Allowed) © The McGraw-Hill Companies.000 Variable cost variances: Blarney Chemicals.000 U Efficiency Variance Flexible Budget (Standard Allowed) $90 x 1.) Variable cost variances where materials purchased and used are not equal: Durango Company. (20 min.340 $1.680 Actual Cost of Purchases $58.) Actual Costs $103.660 U 28. 1997 552 Cost Accounting.000 units x $1. (15 min. Price Variance Actual Inputs at Standard Prices $90 x 1.100 ounces = $99. Inc..000 $5.510 $648 U $38.

Price Variance Production Volume Variance Budget $33.930 Applied $35.000 Budget $246.270 F $2.. Price Variance Production Volume Variance Overhead Applied $240.) Fixed cost variances: Cramden Co.645 F a$35. (20 min.000 units x $2. Chapter 19 553 .20 © The McGraw-Hill Companies.000 $11.375 F $1.19–24.200 = 16.000 U 19–25.555 $1. (20 min.) Actual Costs Fixed cost variances: Mahalo Corporation. 1997 Solutions Manual. Inc.200a $32.000 $6.000 U $17.000 U Actual Costs $257.

000 F $10 x 10..500 U Direct Labor $110.000.000 F $9.000 Efficiency Variance Flexible Production Budget (SP x SQ) $2 x 230.000 = $380 per tire 2.000 pounds = $460.160 Variable Overhead $30.800 $8. Actual (AP x AQ) Direct Materials $1. 1997 554 Cost Accounting.800 U $10 x 10.20 x 44.19–26.500 $4.040 F $984. Fixed overhead variances: Price Variance Production Volume Variance Actual Fixed $1.) a.000 Applied* = $380 x 2.000 $48.000 U $9 x 46.000 hours = $414.160 U $946.000 Price Variance Actual Inputs at Standard (SP x AQ) $2 x 240.500 $6. Variable cost: Comprehensive cost variance analysis: Miller.000 hours = $396.800 hours = $108.000 hours = $404.000 $20.000 U *Fixed overhead rate = $950.000 $18.000 $2. Inc.540 F b.960 Total variable manufacturing cost variances $37.000 U $76. 5/e .000 pounds = $432.000 pounds = $480.80 x 240.500 tires © The McGraw-Hill Companies.500 U $977. (45 min.300 tires = $874.000 Overhead Budget $950. Inc.000 $9 x 44.000 $50.350 hours = $103.

.19–27.000 Actual Budgeted (Estimated) Activity Activity Monthly Activity © The McGraw-Hill Companies.000 U Production Volume Variance $6.000 U Budgeted Costs 240. (15 min. Inc.000 } } Price Variance $11. Chapter 19 555 . 257. 1997 Solutions Manual.000 Application line 246.) $ Fixed cost variances: Cramden Co.

000 hours = $1.) Comprehensive cost variance analysis: Bryce.000 U a66.680.925. 1997 556 Cost Accounting. (30 min.19–28.000 $300. a.000 U $15 x 120.000 hours = $1.700.000 aFixed overhead rate = $360.000/90.667 b75.000 F a Applied $4 x 100.000 U $4.000 Price Variance Actual Inputs at Standard (SP x AQ) $36 x 75.000 Efficiency Variance $225. Inc.000 $14.000 (rounded) = 4/6 hours x 100.500.000 exams = $400.000 F Total variable cost variances $4.000 hoursb = $2.000 exams (rounded) = 45/60 hours x 100.000 U $4. Variable cost variances: Flexible Production Budget (based on 50.000 $40.800.050.000 hoursb services = $2.000 $120.000 $450.000 exams b.605. Inc.000 Actual (AP x AQ) Direct $39 optometrist x 75.000 U Variable overhead and support $14 x 120.000 U $150.667 hoursa = $2.400.650. Fixed overhead variances: Actual $374.000 hours = $1.000 U Budget $360.000 $15 x 110.000 $555.000 exams) (SP x SQ) $36 x 66.000 exams = $4 per exam © The McGraw-Hill Companies. 5/e .000 $105..

000 fittings = $520.00 x 46.000 U $10.00 x 31..000 $30.000 purchases = $92.000 purchases = $100.000 U $5.000 U $80. (30 min.000 F $5. 1997 Solutions Manual.000 pairs of lenses = $155.000 F Actual Costs Efficiency Variance Flexible Budget (Standard allowed for 50.00 x (0. Price Variance Actual Inputs at Standard Prices $2.000 © The McGraw-Hill Companies.000 $8.00 x 50.6 x 50.000 Purchasing $100.000) = $600.000 F $8.000 exams) $2.000) = $150.000 $5.2 x 50.19–29.000 Support Staff Labor $550.000 $10. Chapter 19 557 .) Variances from activity based costs: Klien’s. Inc.00 x (1.00 x 52.000 Special Contact Lenses $145.000 $10.

000 F c.. a..... b.....000 U $2. Inc.800..000 (= $1.050...000 variable + $360.160....000 (= $1..054.054..000 Budget $2.......000 Underapplied ...000 ($16....19–30.) Two-way and three-way overhead variances (Appendix B):Bryce.000 Overhead applied: Variable....000 $40..010.650.........000 $40...650.00 x 100..000 $44... 400..000 U Efficiency Variance Budget $2..000 variable $360... Actual Costs Price Variance Actual Inputs at Standard Prices $2. Actual overhead . 5/e ..000 exams) Total overhead applied ....000 F © The McGraw-Hill Companies......050..000 fixed) $106.. $2. $2.010...000 fixed) Production Volume Variance Applied $2.650.....000 exams) Fixed ........ Actual Costs Spending Variance Production Volume Variance $4. 1997 558 Cost Accounting....054.. (20 min.........000 (= $1.050.....000 $2..000 ($4..000 variable + $360. 1.....000 fixed) Applied $2. Inc.50 x 100.000 F $150.

800 $200 F © The McGraw-Hill Companies. Inc.19–31.300 hours = $19.000 Fixed Overhead Actual Costs $7. 1997 Solutions Manual.200 F Efficiency Variance Flexible Budget (Standard Allowed) $6 x 3.000 Variable Overhead $19. (20 min.600 Price Variance Budget $7.500 hours = $21. Actual Costs Price Variance Actual Inputs at Standard Prices $6 x 3.800 $800 F $1. Chapter 19 559 .) Overhead variances: Jasper Corporation..

. 1997 560 Cost Accounting... $30.100 Overapplied ....300 F © The McGraw-Hill Companies... 9...........800 fixed) Production Volume Variance Applied $26. Price Variance Actual Inputs at Standard Prices $27....600 $2.60 = $7..200 F $30. Spending Variance Production Volume Variance Actual Budget $28.100 $1........800 fixed) $1.......800 budgeted cost 3... $26.......100 ($2....000 F $1...........19–32...800 variable + $7...200 F Actual Efficiency Variance Budget $28.....000 budgeted hours b.300 F c..60a x 3.600 (= $19.800 (= $21... 21..... 5/e .000 variable + $7...800 fixed) Applied $26...500 a $2...... (30 min......... a..) Two-way and three-way overhead variances (Appendix B): Jasper Corporation...100 $1...000 variable + $7.000 ($6 x 3... $3. Inc.....600 $30..500 hours) Total applied .500) Fixed . Actual overhead .......800 (= $21....600 Overhead applied: Variable.

......563 (= $13..050) + ($27.118 © The McGraw-Hill Companies.. Actual overhead ....588 $5........217 U $4.....19–33.........70 x 2..180 Budget $29.. Two-way analysis Budgeted hours = 2....70 x 2. Inc.....963 Applied $89.180 $84.000) = $84....70 x 2.....118 Underapplied ..... 1997 Solutions Manual..75 x 2.....180 Overhead applied: Variable .. Actual Costs Price Variance Actual Inputs at Standard Prices ($13.. a..75 x 2....563 + ($27. $62 b..000) = $83...... $89. 29.....375 F Efficiency Variance Budget Production Volume Variance Applied $89.....150) Total applied." Spending Variance Production Volume Variance Actual $89..555 (= $27.592 U $1.... $89..... Chapter 19 561 .118 $4...150) Fixed .. 59..155 F $89...963 $4...155 F c.....000 = "normal workload..) Two-way and three-way overhead variances (Appendix B): Indio Company......... (30 min.

......000 Materials Price Variance............ Cost of Goods Sold ..........................920 29..................) Standard materials costs: Armadillo Corporation........... 3.......000 58. (35 min.............................000 Accounts Payable . Eff.......500 Work in Process Inventory –0– 49......000 and to record the transfer to Materials Inventory at the standard cost of $1......... 2....................900 49...................500 65.......480 Finished Goods Inv..... 29.000 Mat..30 per unit.....................000 units of material from Materials Inventory and to charge Work in Process Inventory with the standard usage of 48.......................... 5................. To record the materials component of the transfer of 80% of the finished units from Work in Process to Finished Goods Inventory................952 Mat. 49........000 6..... Variance 3......................................000 units..... 1.......... Finished Goods Inventory ..500 3.... 1997 562 Cost Accounting........ To record the requisition of 45... –0– 29...... Price Variance 5...920 Work in Process Inventory ........... 62.................000 Materials Inventory –0– 58....... Materials Inventory ..........952 Finished Goods Inventory .. Materials Efficiency Variance......... 70... 4..................400 12..... To record the purchase of direct materials at an actual cost of $70.......920 19......... Work in Process Inventory.........................................................900 © The McGraw-Hill Companies....................................952 Accounts Payable 70.. To record the materials component of the sale of 60% of the finished units..............................................................19–34. Inc. 5/e .........968 Cost of Goods Sold 29..952 49......920 62......... 65........400 Materials Inventory .

...952 + $2...536 U 2. = 50..900 F Prorate variances: Materials price variance: (1) Cost in Account before Proration $ 6........72 46.... 32. 1997 Solutions Manual. Work in Process .016 F $4.... Materials Efficiency Variance .200 a$4.500 (3.968 29..000 U Account Materials Inventory .......900)a 12........ Prorate variances: Armadillo Corporation Refer to 19–34..... Chapter 19 563 .000 is a favorable variance.344 F 2.. Inc...256 = $29........000 U Materials efficiency variance ... a$3.304 U $5.30 standard price..440 = $12.2 30...... Materials efficiency variance: (1) Cost in Account Account before Proration Work in Process .....900 b$65......968 + $1... $13....504 = $19. $5......536 d$32....480 + $960 c$21..... 21....... b$13... 3...............000b (2) Percent of Total Cost 10 (6) 19......08 100 (3) Variance to be Prorated (Column 2 x $5.......440b Finished Goods Inventory ...952 $65.....................200a) $ 840 F 1.....480 19.....000 units x $1..200 F = $3....... Prorate variances to Ending Inventory and Cost of Goods Sold: Variances: Materials price variance ... Cost of Goods Sold ..19–35.900 favorable variance before proration plus $300 materials price variance prorated to materials efficiency variance......... Finished Goods Inventory .......200 (2) Percent of Total Cost 20 32 48 100 (3) Variance to be Prorated (Column 2 x $4..504c Cost of Goods Sold ..304 © The McGraw-Hill Companies..000) $ 500 U (300) F 960 U 1....256d $67... (The $300 increases the favorable variance).

Inc.O.H. Standard Cost Variances Mat efficiency 540 2. See credit to Standard Cost of Goods Sold for $5.202e 68.202e Various Accounts 38.200 F.000 Mat.O.341 V.000 Production volume Note: Variances and footnotes showing computations are on the next page.19–36.960a 5. b.000c Finished Goods 5. Materials Variable OH Fixed OH Standard Cost of Goods Sold 39. 5/e . a.H.202.131 Var.800 1.500 Mat.672b 148. See following T-accounts and computations. OH efficiency 1. © The McGraw-Hill Companies. (30 min. OH price 2. price Var.) Standard costing in a just-in-time environment: Otter Co. 69.800 Fixed OH price 2. 143. 1997 564 Cost Accounting..

800 actual units/15.000 SP & AQ $1.202 = (300 units/14.000 = $40.500 F Variable Overhead $69.19–36.000 F a$39.000 = $10 x 14.800 F $2.960 b$68.800 U Fixed Overhead Actual $143.000) © The McGraw-Hill Companies.672 x $1.800 units x 2 units of material x $1.472 = $68.672 + $148.000 c $2.800 actual units d$70.800 eAdjustment from Cost of Goods Sold to Finished Goods Inventory for remaining 300 units: $5.200 Price Variance Budget $146.000 Production Volume Variance Applied $148.600 x 14.960 a $2.960 + $68.472c $540 U $68.35 = $69.672 b $1.341 $1. Inc.131 F $70. (continued) Variance Calculations: Price Variance Efficiency Variance AP & AQ Materials $38.000 budgeted units c$148. Chapter 19 565 ..500 SP x SQ $39.800 units) x ($39.672 = 14. 1997 Solutions Manual.35 x 30.

480 e To WIP 19. Var.900 c Materials efficiency a$65.000) x $1.500 = $1.30 x 50.000 x $1.19–37.500 WIP 12.480 Finished Goods 19.480 = 20% x (48.30) f$19.000 a 6.) b$6.500b Materials 12.000 = $1.480) © The McGraw-Hill Companies.968 Mat. 1997 566 Cost Accounting.000 e$12.000d 3.968 = 40% x ($62.968 f To FG Materials Inventory 6.000) c$3.000 – $65. 5/e .) Standard costing in a just-in-time environment: Armadillo Co.900 Standard Cost Variances Expense Materials price 5.30 d$5.900 = (48.000 united purchased. Inc. 3.. Eff.000 = $70.400 – $12. (Note: The materials price variance is already out of the materials debit to Cost of Goods Sold.30 x (50.000 – 45. Standard Cost of Goods Sold 65. (30 min.000 – 45.

000) = $52.08 = $3.5b x ($27.100 = $51. © The McGraw-Hill Companies.555 b0. (30 min.500 Applied $52..) Nonmanufacturing cost variances: Seattle Financial. Incidental office costs comprise the variable costs.900 Budget 0.839 Flexible Budget (Standard Allowed) $3.000 + $58. Chapter 19 567 . the production volume variance would be Budget $52. Salaries and the fixed office costs are all fixed.Solutions to Problems 19–38.300 Production Volume Variance $2.800 F a$3.555 x 1. Variance analysis for the two classes of overhead is as follows: Variable costs: Actual Costs $3. represents one-half year. Inc.000 + $20.555a Combined Price and Efficiency Variances $284 U Actual $23.500 Price (Spending) Variance $600 F Optional: If computed. 1997 Solutions Manual.500 x (79/75) = $55.800 + $28.5 = 79 loans x $45 per loan.

300 AQ = $10.300/$7.900 19–40.800 + $500 unfavorable efficiency variance = $10.) Direct materials: Stanley Company.20 x AQ Labor Price Variance Actual Inputs at Standard Price $7.594 – $10.900 AP = $337.00 x 1.950 Actual Input at Standard Prices $345 x 420 ounces = $144.98 $2. Actual Costs AP x 420 ounces $2. (20 min.950 = $141.20 x 1471. Set up variance model: Actual Inputs at Actual Prices $7.00 x AQ = $10. 5/e . (20 min..19–39.300 Labor price variance = $294 U © The McGraw-Hill Companies.400 hours = $9. 1997 568 Cost Accounting.4 hours Solve for labor price variance: Labor price variance = ($7. Inc.) Solve for direct labor hours: Harrison Co.300 = $10.00 x AQ Flexible Budget (Standard Allowed) Efficiency Variance $500 U $7.00 AQ = 1471.950 F 420 x AP = $144.800 Solve for actual input at standard prices: $9.300.4 hours) – $10. Solve for AQ: $7.

900a Overhead $580 U Budget $4.800 Price Variance Efficiency Variance Flexible Budget (Standard Allowed) $3 x 3. Chapter 19 569 . Inc.800 © The McGraw-Hill Companies. Actual Inputs at Standard Prices $3 x 3.) Overhead variances: Cyclaris.300 hours = $9.320 a$4. (20 min.900 $100 F $600 F Actual Variable Overhead $9. 1997 Solutions Manual.700 – $9.19–41..500 Actual Fixed $4.900 = $14. Inc.500 hours = $10.

100 kilograms = $2.200 U $4 x 3.200 hours = $16.900 units = $15. (40 min.900 units = $3.700 Direct Labor $5 x 3.800 © The McGraw-Hill Companies. Inc.300 U $1 x 3..200 hours = $3.200 Variable Overhead $4.200 hours = $12. Actual Costs Price Variance Actual Inputs at Standard Prices $1 x 3.100 $200 U $1 x 1.90 x 3.800 $2.19–42.900 kilograms = $1.000 $300 F $1 x 2. 5/e .) Manufacturing variances: Adiamo Co.000 $3. 1997 570 Cost Accounting.000 kilograms = $2.900 Efficiency Variance Flexible Budget (Standard Allowed) Direct Materials $.500 $1.400 F $4 x 2 hours x 1.200 $600 F $1 x 2 hours x 1.000 kilograms = $3.

1997 Solutions Manual.000 F $3. Chapter 19 571 .900 units = $19. Inc.40625a x 3.544 U $1 x 3.900 units = $15.500 $844 F $1.800 aActual variable overhead = $4. (30 min.800 hours = $5.40625 Actual direct hours 3.200 hours © The McGraw-Hill Companies.40625a x 3. Actual Costs Efficiency Variance Actual Prices at Standard Input Quantities $5 x 2 hours x 1.800 hours = $3.200 hours = $4..800 U Price Variance Flexible Budget (Standard Allowed) $4 x 2 hours x 1.500 = $1.) Alternative variance calculations (Appendix C): Adiamo Co.344 $1.000 $3.19–43.000 Variable Overhead $1.200 Direct Labor $5 x 3.200 hours = $16.

700 hours b$22. 5/e .000 $2 = 11.000 hours a © The McGraw-Hill Companies.800 Efficiency Variance Flexible Budget (Standard Allowed) $32.500 – $500 U price variance.500 = $54.) Overhead cost and variance relationships: Sparkle Company.19–44. 1997 572 Cost Accounting.850 $50 U Price Variance Actual Inputs at Standard Prices 10.. Actual Costs Variable Overhead $31.500b $500 U Price Variance Budget $22.350 – $31.700 hours x $2 per hourd = $21. a.400 $600 U $3 = $32.000c Production Volume Variance Applied Fixed Overhead 10. (40 min. Inc. d $22.000 = $22.600 hours x $3 per houra = $31. Actual Costs Fixed Overhead $22.850 c$22.100 flexible budget 10.100 $300 F b.

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

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

Chapter 19 575 .875 + $3.90 = $16.) Comprehensive variance problem: Soundex Manufacturing Company.000) 600 units x $5b = $3.200 $360 U 500 units x 20 meters/unit x $.600 $600 U 500 units x 4 hours x $6/hour = $12.100 hours x $6/hour = $12.19–49.000 meters x $. Price Variance Actual Inputs at Standard Prices 18.000 meters x $.10 = $12.560 Efficiency Variance Flexible Budget 9.000 $450 F Actual Costs Direct Materials 18.000 Production Volume Variance Applied Fixed Overhead 500 units x $5 = $2. (40 min.810 $210 U 2. 1997 Solutions Manual. The total overhead price variance = $225 U = $11.000 Variable Overhead ? 2..500 $500 U a$3.100 actual ($7.500 Fixed Overhead ? Budget The variable overhead price and fixed overhead price variances cannot be computed.75a = $7. Inc.92 = $16.500 meters x $.875 $375 U 500 units x $15 = $7.90/meter = $9.100 hours x $3.100 hours x $6.75/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$5.00/unit = $20 times 1/4 (ratio of fixed costs to total overhead) © The McGraw-Hill Companies.90 = $8.550 Direct Labor 2.

000 fixed = $10.) © The McGraw-Hill Companies.19–49. 1997 576 Cost Accounting.000 $11.500 variable + $3. Three-way variance for overhead: Actual Costs Price Variance Actual Inputs at Standard Prices $7. (continued) Note: If Appendix B has been assigned.000 fixed = $10. 5/e .875 $225 U $375 U Efficiency Variance Flexible Budget $7. efficiency..500 Production Volume Variance Applied $20 x 500 = $10.875 variable + $3. Inc. then the three-way overhead variance (price. and production volume variances) can be computed.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.

Overhead: Actual Costs $12.300 $1.000 units x $4 = $16. 1997 Solutions Manual.000 U 4. Inc. Actual Costs (AP x AQ) Direct Materials Price Variance Actual Inputs at Standard Prices (SP x AQ) 26.000 + $500 = $12.200 + $760 = $15.000 $800 = $15.300 U $24.000 units x 6 kg x $1/kg = $24.200 $800 F 4.19–50. Find actual and budget amounts from variances: Nintendo. Chapter 19 577 .) a..000 b.000 Direct Labor $15.960 $760 U $16.000 $1. (25 min.000 kilograms (kg) @ $1/kg = $26.500 $500 U Total Variance Applied Overhead 4.000 © The McGraw-Hill Companies.000 units x $3 = $12.000 Efficiency Variance Flexible Budget (Standard Allowed) (SP x SQ) $27.000 = $25.000 +$1.

000 pounds = $188.) Variance computations with missing data: Paramount Company. (40 min.440 $2.950 F $14 x .000 units =$84..85a x 102.890 F $11.65 x 5 pounds x 21.700 hours = $127.000c Production Volume Variance Applied $4d x 21.400 U Direct Labor $13.000 units = $147.700 Price Variance Efficiency Variance Flexible Budget (Standard Allowed) (SP x SQ) $1.950 $2.800 F Variable Overhead $4.800 U $11. Note: The calculation of the fixed overhead budget amount makes this a challenging problem. 1997 578 Cost Accounting.65 x 102.700 hours = $149.560 Price Variance Budget $80.5 hours x 21.000 = $79.800 61% x $204.000 pounds = $168.300 $20.000 = $124.000 units = $173.000 $2. Actual Inputs at Standard Prices (SP x AQ) $1.90 x 10.380 U Actual Costs (AP x AQ) Direct Materials $1.90 x . 5/e .084b x 10.000 $440 F $4. Inc.5 hours x 21.330 Actual Fixed Overhead 39% x $204.000 units = $124.19–51.700 hours = $140.000 $9.000 F (Footnotes on next page) © The McGraw-Hill Companies.250 $14 x 10.

000 units in the master production budget. This means the master budget variable overhead amount is $119.25 = 20.700 hours b $13.00 x .5 hours) = $140.000 pounds $140.000 ÷ ($1.000 – $119.700 102.000 ÷ $7 = 20. computed by dividing total master budget costs by standard unit cost as follows: Materials: $165.000 10.000 units.000 budget 20. 1997 Solutions Manual.000. Chapter 19 579 .19–51.000 units.65 x 5 pounds) = $165.000 units © The McGraw-Hill Companies. (continued) a $1. Inc.000 = $199.000 ÷ ($14.000 ÷ $8. d cThere $4 = $80.084 = are 20.000 = $11.90 x . So the fixed overhead budget is $80.000 units.85 = $188.5 hours x 20.. Labor: $140.

000 x 5 x $3.100 x $.000 Price Variance Actual Inputs at Standard Prices 3.000 x 3 x $1 = $3.930 Budget $22. (50 min.90 = $2.000 = $19.440 $1.845 $245 U Variable Overhead 4.356 Applied ($22.20 = $15.680 $490 U $320 F 4.000 $100 U 1. Florimene a.600 $400 F 1. 1997 580 Cost Accounting.) Comprehensive variance problem: Flintco Company.150) x 1.900 x $3. Inc.19–52.426 F $2.170 b.356/1. Actual Costs Direct Materials 3.100 Efficiency Variance Flexible Budget 1.000 x 5 x $4 = $20.000 $16.916 U © The McGraw-Hill Companies.20 = $16. 5/e .900 x $4.900 x $4 = $19. Price Variance Production Volume Variance Actual Fixed Overhead $20.790 $310 F Direct Labor 4..05 = $19.100 x $1 = $3.

400 x $3. 1997 Solutions Manual.10 = $5. Actual Costs Direct Materials 4.520 Production Volume Variance Applied ($26.50 = $25.405 $235 U Direct Labor 7.200 Price Variance Actual Inputs at Standard Prices 4.280 $110 F 1..400 $120 F Price Variance Budget $26.234 $666 F 7.400 x $5.900 $700 U 7.520/1.170 Efficiency Variance Flexible Budget 1.19–52.400 x $5 = $37.200 = $24.480 $2.10 = $37. Chapter 19 581 .040 U © The McGraw-Hill Companies.300) x 1. (continued) Glyoxide a.200 x 6 x $3.700 x $1.740 $740 U Variable $25.50 = $25.200 x 4 x $1.700 x $1.000 U 1. Actual Fixed Overhead $26.000 $1.200 x 6 x $5 = $36. Inc.15 = $5.000 b.10 = $5.

170 variable + $20.20 + $3.000 variable + $22.) Two-way.680 variable + $22. Note: Refer to Problem 19-52 for calculations.170 variable + $20.000 variable + $22. 5/e .356 Applied 1. Inc.440 $2.440 $1.. 1997 582 Cost Accounting.356 fixed = $38.916 U © The McGraw-Hill Companies.356 fixed = $38.256 F $2.888) = $35. three-way and four-way overhead variances (Appendix B): Flintco Co.100 Efficiency Variance Budget $16.930 fixed = $37.100 Budget $16.19–53.356 Production Volume Variance Applied $1.20 + $3.000 x 5 x ($3.888) = $35.356 fixed = $38.000 x 5 x ($3. Florimene Two-way variance: Spending Variance Production Volume Variance Actual $16.916 U Three-way variance: Price Variance Actual Inputs at Standard Prices $15. (50 min.930 fixed = $37.036 $936 F $320 F Actual $16.

Chapter 19 583 .000 Production Volume Variance Applied Fixed $20.680 $490 U $320 F 1.520) = $786 F.040 U Three-way variance: Price variance = $51.200 variable + $26.520 fixed = $51. Efficiency variance = $700 U (see problem 19–52).888 = $19.19–53. Inc.916 U Actual Variable $16.900 + $26.40) = $49.930 $1.440 $2.170 Efficiency Variance Budget $16. 1997 Solutions Manual.426 F $22.356 Glyoxide Two-way variance: Spending Variance Production Volume Variance Actual $25.200 x 6 x ($3. Production volume variance = $2.234 variable + $26.400 fixed = $51.634 – ($25.000 x 5 x $3. © The McGraw-Hill Companies. Four-way variance: Same as three-way except price variance is divided into $666 F for variable overhead and $120 F for fixed overhead.. (continued) Florimene Four-way variance: Price Variance Actual Inputs at Standard Prices $15.50 + $3.040 U.720 Applied 1.634 Budget $25.680 $86 F $2.

600 Activity Variance Master Production Budget 5.002a = $24. (30 min.200 $300 U $22.000 $12.800 x $72 = $345. Inc.600 $2.100.000 x $72 = $360.000 x .800.400 F $10.002 = $2 per $1.002a = $21.600 U Policy Maintenance $23.300 F $14.19–54.200 $1.400 Price Variance Actual Inputs at Standard Prices (ignored) Efficiency Variance Flexible Budget 4. 1997 .000 face amount of insurance 584 © The McGraw-Hill Companies. Item New Policies Actual Costs $358.800 U $12..) Performance evaluation in service industries: Safe-City Insurance Co.900 a.000 x .

25c per hour x 25.25 Materials = $123.750 U $4 per hour x 25.250 $900 F $5. Inc.600 U Price Variance Actual Inputs at Standard Prices 11.000a kilograms x $10 = $100.000 hours = $31. Inc.300b units = $82. 1997 Solutions Manual. Chapter 19 585 .000 Efficiency Variance Flexible Budget (Standard Allowed) 10. (35 min.000 kilograms Direct x $11.Solutions to Integrative Cases 19–55.000 hours = $100.000 kilograms x $10 = $110. © The McGraw-Hill Companies.) Process costing variances: Cornwell..000 $10.350 $25.500 U $17.000 $5.575 U $1.575 Variable Overhead $30.400 Direct Labor $105. Note: Equivalent unit computations can be handed out in advance if students have not covered equivalent units. Actual Costs 11.750 $13.000 U $4 per hour x 2 hours x 10.750 Footnotes on next page.

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

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

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

.440 Contribution Margin ...440 F 589 © The McGraw-Hill Companies..000 37.....760 3......... 3........022 U 50 U $1......500 19............000 F 7...19–56.......... $20..............760 7.392 Overhead ............000 15...........940 Actual Sales ... 37......178 Less Fixed Costs: Manufacturing .......000 30.......990 Labor .440 F Master Budget $72. $90..200 1. 19....810 Selling and Administrative ..168 Activity Variance $18.................200 Operating Profit ..072 U –0– –0– $300 F $300 F –0– $ 6.... 1997 .. 31..........040 25....000 1....500 U 3.. 7..200 3.. (continued) Exhibit A Comparison of Master Budget to Actual Results.........500 $ 490 U 392 U 140 U 1......760 7. Inc.. Manufacturing Variance Selling and Administrative Variance –0– Sales Price Variance –0– Flexible Budget $90.500 $14...........800 U 260 U 6..000 Less Variable Costs: Materials .....................500 $20..300 32..... 1...

125 x 7. (continued) Exhibit B Manufacturing Cost Variances.000 x 20 x $.47 x 7.025 = $4.000 x $5.60 = $8.375 $875 F 7.47 x 8.900 7..03) = $910 900 x $9.365 -0Skilled Labor 900 x $9.704 $196 F 7.400 Price Variance Actual Inputs at Standard Prices 175.000 = $3.000 = $3.03 = $5.760 Production Volume Variance Applied $. Inc.872 $168 U Variable Overhead Total variable overhead variance $140 U 840 x $5.19–56.640 $240 U .000 x $.10 + $.200 $1.15 = $22. Actual Costs String 175.050 Frames $1.100 x $3.050 U 7.250 Efficiency Variance Flexible Budget 7.15 = $22.365 $315 U .60 = $4.80 = $8.000 x ($.000 x $3. 1997 590 Cost Accounting.810 Price Variance Budget $.80 = $4.60 = $8.820 $180 U Unskilled Labor 840 x $5.03 = $4.000 x $9.000 x $. 5/e .125 x 7.15 = $22.290 $50 U $470 U © The McGraw-Hill Companies.050 Actual Fixed Overhead $3.60 = $4.100 x $3.

while the unskilled are spending less? Finally. Inc. © The McGraw-Hill Companies.19–56. 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. 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. (continued) The variance breakdown in Exhibits A and B highlights the areas that Elmo and Otto should research. Chapter 19 591 . One area involves the strings.. the relationship between labor efficiency and materials efficiency variances is worth investigating. Why are the skilled workers spending more time than budgeted. because use of substandard materials may result in an unfavorable labor efficiency variance. 1997 Solutions Manual. These are the types of questions that should be raised as a result of this variance analysis.

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

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

20–17. 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. Managers will tend to focus on short-run performance. 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. If the division can rent and the rent does not have to be capitalized for inclusion in the investment base. 1997 Solutions Manual. Since the two measures are not comparable.. trying to relate the two will not be meaningful. 20–15. while the cost of capital is a measure which does consider the time value of money. Quality tends to be sacrificed for quantity. 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. Chapter 20 595 . Differences between ROI and the cost of capital are likely when assets have different lives or are purchased at different times. In practice. Using ROI as the sole performance measurement index will tend to discourage new investment and innovation. However. 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.g. properly ignored. the residual income will increase so long as the income from the asset exceeds the lease payment. the “jury” is out on the issue.20–14.. ROI does not take the time value of money into account. It would seem reasonable that the influence of an outside party (e. 20–16. hence. Inc. There are a number of cases which can be used to illustrate both approaches in both types of situations. the FASB) should be limited in these situations. it seems that lenders tend to ignore such changes while Boards of Directors tend to pay incentive bonuses based on revised income numbers. © The McGraw-Hill Companies.

$600.000 – (25% x Base) ($22.000 50.14($2.000 (a) ROI $68. Inc.Solutions to Exercises 20–18.000 20–19. $600. 5/e .400.000) = $264. (25 min. (10 min.400.000* 288.) ROI versus residual income. 1997 596 Cost Accounting.000 = $68.) a.9% 23.000 216. Compute residual income and ROI: PlainsfieldDivision.000 – Year 1 2 3 4 5 Investment Base $360.000) (4. $360.000 – .6% 31.2% 94.000 5 Annual income = $140..000 32.4% (b) Residual Income $68.000) 14.000 72.000/Base 18.5% 47.000 144.000 © The McGraw-Hill Companies.000 *Base decreases by annual depreciation of $72.000 b.000 = 25% $2.

a.6% $1.500a = 28.300.000 – [ $225.000 = 35% West: $195.000 b.500 = $84.000) = $15.500 *Indicates division with “better” performance.000) = $7. 1997 Solutions Manual. ROI after: $390. Inc.000 – (25% x $750. Yes. *East: $35.300. (10 min.000 West: $195. ROI before: Impact of new project on performance measures. $390.000 – (20% x $100.000) = $45.000 b..000 *West: $195.000 = 30% $1. Using return on investment measures: *East: $35.000 + $225. (10 min.000 $750. Chapter 20 597 .) Compare alternative measures of division performance.000) = $10.000 $100.000 = 26% Using residual income: East: $35.000 – (25% x $100. 20–21.20–20.000 + $46.) a.000 – (20% x $750.000 a $46.000 6 ] © The McGraw-Hill Companies.

000 b.000 + $84.000 © The McGraw-Hill Companies.2($225.2($1..300.300.000 6 ) – .2($1.000) = $130. $130.000 or ($390.8% $1.000 – $74. (10 min. $390.000. the incremental income is the operating cash flow minus the lease payment or $10. a.000 – $225. 1997 598 Cost Accounting.500 c. (15 min. Inc.000 + $10. With the lease.000 – $74.) Impact of leasing on performance measures.000 + $84. $130.000 + $225.000) – .20–22.000 + $84.000 – $225.500 6 or ( $390.000 20–23.) Residual income measures and new project consideration.300.000) = $131.000 – $74.000 – .000 + $84.000 = $140.000) = $140.2($1. The new ROI is: $390.000 = 30.300. 5/e .000) = $131.000 – .000 = $84.

000. a Net Book Value b Gross Book Value ($1.000 = 25% $2.000 – (3 x $400.000 – $400.000 – (4 x $400.000 = 18.000.000 = 15% $4.000 Year 2 ($1.000.000 Year 1 ($1.000.000.) Compare historical cost.000) $4.000 – $400.000.000)] = $600.200. Inc.000 = $600.000) [$4.000 = $600.000.000.000)] = $600.000 – $400.000 © The McGraw-Hill Companies.000 = 15% $4.600. (25 min.000 = 21..8% $3.000) $4.000) = $600.800.000.000) $4.4% $2.000 – $400.000 Year 4 ($1.000.000.000) $4.000 ($1.000.000 ($1.000 = 15% $4.000.000 – $400.400.000.000 = 16.000)] = $600.000 – $400.000.000.000 = $600.000 – (2 x $400.000 ($1.000) ($4.000) [$4.000.20–24.000 – $400.000 – $400.000. net book value to gross book value: Oracle Division. Chapter 20 599 .000.7% $3. 1997 Solutions Manual.000 Year 3 ($1.000) [$4.000 = 15% $4.000 – $400.000.000 = $600.

000.000 – $400.000 = 21.000 – (2 x $400. there is no change under the gross book value method.000) $4.000 – $400.000.000.000.000.000) [$4.8% $3.000..20–25.000) $4.000.000.000 – $400.000. 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 – $400.000 = $600. Of course.000.000.000)] = $600. 5/e .000. 1997 600 Cost Accounting.000 – $400.000 ($1.600.000.000 = 15% $4.000 = $600.000 Year 1 ($1. Inc.000 = 16.000.000) $4.000 ($1.000.000 = 15% $4. The end-of-year value is the next year’s beginning-of-year value.000 – $400.000 c.000 Year 4 ($1.000 = $600.800.200.000 – $400.000.7% $3.000) = $600. © The McGraw-Hill Companies.000 = $600. (25 min. With the net method.000)] = $600.4% $2.000 = 15% $4. This is to be expected.000.000.000) ($4.000) $4.) Compare ROI using net book and gross book values: Oracle Division.000 = 18.000 = 15% $4.000.000 – (3 x $400.000 = 15% $4.000 – $400.000 ($1.000) $4.000.000 – $400.000 Year 2 ($1.000.000 = $600. a Net Book Value b Gross Book Value ($1.000) [$4.000 Year 3 ($1.

129.000 x 1.597.20–26.000 x 1.1 = $2..000 – $2.936.400.000 $1.000 x 1. 1997 . 601 © The McGraw-Hill Companies.600. (30 min.000 $1.200 $2.640 (3) Total Depreciation Years of life (1) times 4 years $1.342.760.000 $484.000 $532.560 x 4/4 = $2.000.000 salvage value = $1.342.) Compare current cost to historical cost: Oracle Division.000.129.600.600 $2.000 x 2/4 = $968. (1) Gross Depreciable Asset Value a Year 1 Year 2 Year 3 Year 4 aStart (2) Yearly Depreciation (1) x 25% $440.760.560 $1.1 = $2.000 x 1/4 = $440.936.1 = $1.760.000 $1.1 = $1.600 x 1.342.560 with gross assets = $4.600 x 3/4 = $1. Parts c and d can be solved easier if one first sets up a table showing the change in value of the depreciable assets.129.000 $2.400 $585.936. Inc.

000 – (2 x $400.000 = 20.000)] = $931.000 © The McGraw-Hill Companies. 1997 602 Cost Accounting.100 – $400.000.100 = 44.600.000) $4.20–26.000 = $1.000 = 23.000 = 25.000) [$4.000) [$4.800.331.000) $4.5% $4.000 – $400.464.000 ($1.100.000.000 = $931.000.000. (continued) a Historical Cost Gross Book Value Year 1 ($1.000) $4.064.200.000 Year 2 ($1.000 b.000 – $400.000.064.3% $3.3% $2.100.000 = $700.400. 5/e .210.000 Year 4 ($1.000) = $810.000.3% $4.000 – (4 x $400.000.000 – $400. Historical Cost Net Book Value ($1..3% $4.100 = 26. Inc.000 Year 3 ($1.331.000 = 33.464.3% $2.000 – $400.000.000 – $400.000 – $400.000 = 19.000)] = $1.000 = 17.210.000) $4.000.000.6% $4.000 – (3 x $400.000 ($1.100 – $400.000.000 ($1.000) = $700.000) ($4.000 = $810.000.000) [$4.4% $3.000 – $400.

210.400) ($5.400.100.460 = 25% $3.856.856.400 © The McGraw-Hill Companies.000 = $16.560) = $878.100 – $585.856.000) = $726.7% $3.000) $4.840 Year 4 ($1.000 ($1.000 – $440.000 – $484.600 = 15% $5.342.000 – $532.324.000 – $484.960.000 = $726.840.000) = $660.000 Year 3 ($1. Chapter 20 603 .400.100.8% $3.400.4% $3.726.000 = 15% $4.800 ($1.200) = $798. Inc.000 = $660.000 – $968.000 = 15% $4.460 = 15% $5.331.640) $5.20–26.000) ($4.000 – $440.840.100 – $585.210.840.000 – $1.000 Year 2 ($1.324.872.513. 1997 Solutions Manual. (continued) c Current Cost Gross Book Value Year 1 ($1..324.000 = 18.000 – $440.400 – $2.597.640) ($5.000 ($4.464.000 = $798.000 d.464.400 = $878.400) $5.000 – $532.000 ($1.331.600 = 21. Current Cost Net Book Value ($1.000) $4.

000 = 5.100 $133.000 – (.0% $100.0% $100. 1997 604 Cost Accounting. (25 min.000 – (.000) = $6.000 $100.000 $110.000) $13.000 $100.25 x $133.000) $5.25 x $100.25 x $110.000 $40.000 – (.1% $133.000 – (.0% $100. a.000 – (.25 x $100.000 $34.000 $38.100 © The McGraw-Hill Companies.000 – (.000 $38.0% $100.000 $100.000) = $5.9% $110.750 = 6.000 = = 15.25 x $121.) Effects of current cost on performance measures: Otter Division.25 x $100.000 $40.000 b.000 $100.000 $121.25 x $100. Year 1 Year 2 Year 3 Year 4 ROI $30.000 $100.000 = = 5.000 – (.000) $15.000 = = 9.000) $9.725 = 5.4% $121.000 = = 13. Inc.0% $100.20–27.000 $34.000 – (. Year 1 Year 2 Year 3 Year 4 ROI $30.000) = $7.. 5/e .25 x $100.500 = 5.100) = $6.

000*** Revenues.300.300..000 – $100..000 – $300.000.. 440. 1997 Solutions Manual.... (30 min....000 + $1.7% $800.. Inc.000 depreciation.520....000) + $1.....000 + $1.......000 – $400.000 = ( $1.... 400.000 $1. $750.8% $800.000 **Net income: ***$400..000 – $250..000 *Loss on old equipment equal to its $1 million cost less $300....000 (up 10%) Fixed.... Equipment replacement and performance measures: Juneau.......... $1...425.000** = 83.. c..000 (up 10%) Costs: Variable .. Inc.....Solutions to Problems 20–28...005.. 1...000 (down 5%) Depreciation: Equipment .000 – (2 x $250. $750..000*** Other .. Chapter 20 605 .000* = 2...000 3 years ) © The McGraw-Hill Companies...) a.000 b.000 – $250.000 – $700...005. 250.300.......000 = 60% $800. $3..

then the return on investment for this year would be the 60% as indicated in Problem 20–28.000 – $465.000) + $1. However.000 = $240. (20 min.15 $1. part a. 5/e . Inc.000 = $1.000 + $400. 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 For the company.000 x 1.330.000 = 18.495.000 $465. 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. For the coming year.000 assuming that the new equipment is bought at the beginning of the year.0% $800.000 = $1..000 $1.000 – $100.495.495.000 = 3 years $700. 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. 1997 606 Cost Accounting. Where: $1.20–29. a. b.005. For the manager. © The McGraw-Hill Companies.000 – $465.000 = loss on disposal of the old equipment $940.300.000 – (2 x $250. the ROI would be: $940. 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. If the manager waits until next year. Inc.000 – $700.) Evaluate trade-offs in return measurement: Juneau.

Year 3 would appear favorable if only the divisional residual income figure were considered. However.e. 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. The maintenance and repair costs implied in the budget and probably needed have not been incurred. Chapter 20 607 . In this respect. © The McGraw-Hill Companies. A good division performance measurement should present the performance of the manager unobscured by extraneous items that are not subject to the D. Fixed divisional costs should be so identified and subtracted from a divisional contribution margin. b. Ashwood’s divisional management is solely responsible for the production and distribution of corporate products.20-30. 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.* a. those things that are specifically controllable by the D. The actual residual income is well above the nine month budgeted figure. An evaluation of the performance of Patric Anderson for the nine months ending September.) responsibilities (i. While these costs should have no effect on the performance of this division.M. Budgeted additions to plant fixed assets have not been made. or to reduce the investment base. 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. In this instance. Allocated corporate fixed costs are below budget. 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.M.) Analyze performance report for decentralized organization: Ashwood. Inc.. is held accountable). Corporate policy dictates that division managers minimize their investment in inventories and maintain control over plant fixed assets. 1997 Solutions Manual. its inclusion in the report does affect the residual income figure. *CMA adapted.M.M. and for which the D. (40 min..’s control. A performance evaluation system should reflect the division manager’s (D.

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

) ROI and management behavior: Thain Corporation. the postponement of capital investments makes the divisional asset base smaller for the calculation of division ROI. 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. such as rejecting an investment below its ROI but above the corporation ROI. (40 min. Factors other than ROI also should be included in the policy.20–31. b. Chapter 20 609 . Improving the division ROI does not automatically lead to improved corporate ROI. 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. Inc. The changes should be two-fold in character. c. The emphasis on a single measure for performance evaluation should be eliminated.* a. One approach would be to establish a target ROI which would include allowances for start-up costs of long-term projects. *CMA adapted © The McGraw-Hill Companies. division managers are indifferent as to the amount and timing of cash flows because cash is not part of the division’s investment base. Certain actions could be taken by a division which would improve its ROI. 1997 Solutions Manual. The company could consider the residual profits concept of divisional performance measurement. 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). new manufacturing technology. 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. but would not necessarily improve corporate ROI. Further. Additionally. improvement in sales volume and/or market share. The division managers have the responsibility to recommend investment opportunities for their divisions. the corporation is not indifferent to cash flow because it has to invest the cash. Additional factors important to division and corporate goals should be included.. 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. In addition. However. Thain’s corporate goals and goals for its divisions are not congruent. The long-run success of the company requires attention to such items as: • • • • new products and/or new markets. cost efficiency.

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

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.. © The McGraw-Hill Companies. Yes Corporation Volumes Cases ..... 19.....21–25. $ 5....400 $ 8.600 Profit.. 5/e .....900 Cost. 2....000 4.. Based on a marketbased transfer price... 1997 624 Cost Accounting..........000 $45.... Inc. (continued) 3.000 volume and the cologne division is most profitable at the 4.600 $63..600 37.. The corporation achieves maximum profit based on the selling price to outsiders relative to the total cost of making the product.....000 $ 8........300 The bottle division and the corporation are the most profitable at the 6...........600 55.000 Revenue..000....000 6..000 volume.. $25...... (continued) b.000..

.....75 $ ........750....................... Transfer ..... © The McGraw-Hill Companies.........................000 which is $4...................................................... Less: Outside costs.. Total costs ...... Co-op (TMC)....................000..........000 minus $2..................... $4 3 7 5 5 $2 x ......... a.........................5 $4....................15 Dock Service Co..........900..................4 Item Outside revenue ..... Total revenue ................ Operating profit before tax (Revenue-costs) .......75 $2........20 $ 1.................. b....... Transfer price ............................. $ 4 8 12 5 $ 5 $ 7 x .................................. Shipping Company $26 26 17 8 $25 $ 1 x ..... Total revenue ... Operating profit before tax (Revenues-costs) . Chapter 21 625 .............75 $ 4...) All $ in millions. Great Britain basis for transfer price: Shipping Company $26 26 17 3 20 $ 6 x ....................................150.......... Tax rate..9 Dock Service Co. Transfer .......21–26........ Income taxes ................. International transfer prices: Tilden Merchant. Malaysian basis for transfer price: Item Revenue: Outside revenue ........20 $ ............. Tax rate..... Total costs ............ 1997 Solutions Manual...... (40 min..............4 The difference in taxes is $2............. Income taxes............ Less: Outside costs...... Total taxes ....... Transfer price..................................................... Total taxes ........ Inc........................................................

Conversion cost in N $8 x 120...000 units transferred @ $18..... If L sold 120.......... © The McGraw-Hill Companies...000 Sales by N to outside (120.000 Division N $5..............400...000 x 2)] ÷ 2......244..000 @ $16.240..000 units to N.000 x 2........ a.....240.000 $2.332....000) x $18....000 Labor costs 400...000 $2.400..000 Sales by L to N ....400.... (100....... 1997 626 Cost Accounting.000 b.....000 $8...... 864..000 $2..000 Leftover DLH [400. Cost of units purchased from outside by N (120. Inc... 48..104.......000 800.000 Company $2.000 Cost of units transferred to N .....000 – (120..000.000). Units transferred 120.960.. Cost of labor in L ....000 2...000 hrs.. 2.... If L sells to outside Contributions to L Outside sales 140......00 864.240...000 – $2......160.. 5/e ..000 Division L Sales by L to outside .000 hrs ÷ 2) x 16 Labor costs Contribution margin c.840.......000 2... Leftover DLH 400......5 = 48....400.400...000 1.000 5...000 864..000 @ $18....000 864............160......000....000 $3. @ $6 2...000 1.a 3 $2......000 x $45) .. and d....000 aThis is based on the optimal company policy.........50 .....00 $2...... $ 704.... Total sales ..000 – $960.....5) = 100.. Company contributions would be only $2..504.000...000 960..... N’s contribution if 120...000 – (140.000....400... Inc..948........) Analyze transfer pricing data: Notewon.000 – 48.000 960.....400..000 864.......21–27... L’s total contribution would be $560. (60 min.. $2........280...... Contribution ......000 units were transferred to it would be $2.000 $ 560.....332....000 (= $5..000 Contribution margin $ 704.000...........

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. Then the organization structure is inappropriate for the situation.50 – $5. If Jaydee is having difficulties. In the short run there is an advantage to Lillard of transferring the fitting at the $5. it should be willing to try this. It may. The management performance of Delaware is measured by return on investment and dollar profits. 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.50 ($7. 1997 Solutions Manual.) Transfer pricing—performance evaluation issues: Lillard Corporation * a.00) for each fitting sold to Jaydee. If such action were necessary on a regular basis the decentralized decision making inherent in the divisionalized organization would be a sham.. This action would be counter to the purposes of decentralized decision making. the solution does not lie with temporary help at the expense of another division but with a more substantive course of action.21–28. Assuming the $8.50. Delaware operates at capacity. the result will be to enhance Jaydee’s operating results at the expense of Delaware.50 in cash flow for each fitting sold to Jaydee but gain $8. if Delaware supplied Jaydee the fitting for $5. (40 min. In order to make this happen.00 per unit would adversely affect those performance measures. In this case. Jaydee does not. it can pay Delaware (or a competitor) $7.50 for the part and still arrive at a total cost of $49.50 plus mark-up. Lillard would be $5. © The McGraw-Hill Companies. it appears that Delaware and Jaydee serve different markets and do not represent closely related operating units. the Lillard controller should recommend that each division should be free to act in accordance with its best interests. Inc. In the case at hand. in the short run. c. Delaware should not supply Jaydee with fitting 1726 for the $5. Delaware is operating at capacity and would lose $2. Therefore.00 per unit price.00 plus mark-up from each brake unit sold by Jaydee. b. Lillard would lose $2.00 and the brake unit was sold for $49. Lillard will have to overrule the decision of the Delaware management. selling to Jaydee at $5. create problems with division managements. On the other hand if this is an occurrence of relative infrequency.50.00. Chapter 21 627 . if Lillard management requires that the fitting be transferred at $5. however. In that case. *CMA adapted.50 better off.50 per unit. the intervention of corporate management will not indicate inadequate organization structure. Because it is not operating at capacity.00 per unit for fixed overhead and administration represents an allocation of cost Jaydee incurs regardless of the brake unit order. The company is better served in the long run if Delaware is permitted to continue dealing with its regular customers at the market price. no mention is made of any other interdivisional business.

* a.) Evaluate transfer price system: Tri-City. Imposing corporate restrictions will adversely affect the current management evaluation system because division management would no longer have complete control of profits. Negotiation between the two divisions is the best method to settle on a transfer price. *CMA adapted. b. 5/e . 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. 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. 1997 628 Cost Accounting. Inc. Top management supports the continuation of the decentralized management concept. No. Both parties are free to buy and sell outside the corporation.21–29. is organized on a highly decentralized basis and each of the four conditions necessary for negotiated transfer prices exist. These conditions are: • • • • An outside market exists that provides both parties with an alternative. Tri-City. the addition of corporate restrictions could have a negative impact on division management who are accustomed to an autonomous working environment. Inc. c. Both parties have access to market price information. the management of Tri-City should not become involved in this controversy. In addition. The company is organized on a highly decentralized basis which top management must believe will maximize long-term profits. © The McGraw-Hill Companies. At the time when all existing capacity is being used. Inc. 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.. (40 min.

and avoid the higher-tax rate of 70% in France. U. Inc. As illustrated below this is due to the difference in tax rates between the U. = $19. Transfer Price Variable Cost Profit Tax @ 40% Profit after tax $60 25 35 14 $21 Div.S. = $21 + $9 = $30/unit © The McGraw-Hill Companies. Y.) Transfer prices and tax regulations: Hellena. Transfer Price Variable Cost Profit $25 25 $ 0 Div.S. Y. Shipping costs Processing costs Tax @ 70% Profit after tax $115 $60 15 10 85 30 21 $ 9 Total profit after tax for Hellena Inc. France Selling Price Transfers from U. is $60 per unit.S. France Selling Price Transfers from U.5 $ 19. and France.X. Shipping costs Processing costs Tax @ 70% Profit after tax $115 $25 15 10 50 65 45. (25 min.50/unit Profit after tax at the transfer price of $60/unit Div. 1997 Solutions Manual.21–30.S.S. X. It would thus be advantageous to Hellena to charge as high a transfer price as possible so as to generate income in the U.. The transfer price economically optimal for Hellena Inc.5 Total Profit after tax for Hellena Inc. Inc. U. Chapter 21 629 .S. Profit after tax at the transfer price of $25/unit Div.

..... $157 Frequent stayer coupons.... 5/e ....21–31.............. ($ millions) Segment reporting: Tyejon Corp....................................... Auto ......... Inc............ Auto coupons ........ $181 Operating profits ............. Travel commissions: Airline .... 26 Auto discounts (airline) ......................... Frequent stayer ................... Crew lodging . Airline Outside revenue . $271 Outside costs..... 1997 630 Cost Accounting........ $ 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. Operating profits (b) ................................ Total costs .................................................... Auto .................................... 7 Auto discounts (hotel) ............. Hotel ....... Crew lodging .............................. Adjust the operating profits in part (a........) for the changed transfer prices........................... Airline $90 (21) 6 $75 Hotel $17 21 $38 Auto Rental $32 (6) $26 Travel Services $9 $9 © The McGraw-Hill Companies............................................. Total revenues................................................................. Auto discounts (hotel) ............................................ Auto discounts (airline) .......) a............ Operating profits (a) .......... 4 Hotel ............. $245 Frequent stayer coupons........................ 13 Travel commissions: Airline ....................................... (40 min..........

....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... 1997 Solutions Manual........ 13....... © The McGraw-Hill Companies.......................97 Airline ........ The transfer pricing method chosen does have an effect on the ROI-based rankings............ Chapter 21 631 ............ 4......85% Hotel .....42 For (b): Travel services ......................... Divide the operating profits in (a................87 Auto rental ..................85% Auto rental ......10 Airline ......................) and (b.......) by division assets: For (a): Travel services .. Inc...42 Hotel . (continued) c.. 9............ 8...... 7.............21–31............................... while the airline and auto rentals each drop in ranking. 9...... 13................. 9..................

......................... Differential + Opportunity Cost of = Transfer Outlay Cost Transferring Internally Price If the seller (the division supplying the goods or services) has idle capacity ................ $ 62 Total Company Cost........... 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. ($155 x 60%) ................... 1997 632 Cost Accounting................. (60 min................... Inc....21–32.................) . $175 $175 + + $ 0 = $35 = ($210 selling price – $175 variable cost) $175 $210 © The McGraw-Hill Companies............ See detail calculations below.... a......................... 93 ($175 – $155) . Operating Profit (Cost) .............. 5/e . Custom Freight Systems is $72 (= $185 – $113) better off if the Logistics division uses the Forwarders division for this contract............. If the seller has no idle capacity.. Option I: Pruchase Internally Air Cargo Division Sales .. (Given) ...... The Logistics Division should accept the bid from Forwarders Division................... then the question arises as to the appropriate transfer price... If we assume it is optimal for the transfer to be made internally......... Forwarders Division $ 210 Logistics Division –0– 20 155 $ 35 ($113) $210 ($210) Option II: Purchase externally (United Systems) Total Company Cost = ($185) b.............................) Custom Freight Systems (A): Transfer Pricing........... (From Forwarders Div... $155 Variable Costs ....................

Chapter 21 633 . 1997 Solutions Manual.21–32. © The McGraw-Hill Companies. it might be better to sub-optimize for this transaction and obtain more general benefits from decentralizing. (continued) c. Espinosa could simply do nothing and let the managers maintain their autonomy. • • • d. This would not be in the best interests of Custom Freight Systems. Espinosa could reorganize the company combining the divisions into one operating company. Each has advantages and disadvantages. 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. Inc. However. 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. Espinosa has many alternatives to intervention or to forcing the manager of the Forwarders division to lower his price below $210. • Espinosa must trade-off the benefits of intervention on this particular transaction against the impact of intervention on decentralization as a policy.. 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. Custom Freight Systems would lose all of the benefits of decentralization. Too much intervention by Espinosa will eliminate the benefits of decentralization. However.

..... Emphasize that even though World’s bid is $10 per hundred pounds higher than United’s.............. Operating Profit/(Cost) ............................ (From Forwarders Div........ (30 min......... 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 ........................... Air Cargo Division $155 93 $ 62 Forwarders Division –0– –0– ($133) Logistics Division –0– $195 ($195) © The McGraw-Hill Companies............. Operating Profit (Cost) ............ (Given) ......... However.... See detailed calculations below................ the Logistics Division should accept the bid from the Forwarders Division.................................. Total Company Cost... 1997 634 Cost Accounting................................................ if we eliminate the Forwarders Division from the bidding process............. 5/e ......... the overall cost to Custom Freight Systems is lower because other divisions of Customer Freight Systems are included in the bid.................... Variable Costs ....... the bid from World should be accepted.... Variable Costs ........ Total Company Cost................. ($175 – $155) .... Option I: (from 21–32) Purchase internally Sales .................... ($155 x 60%) .....................) .....................................................21–33......) Custom Freight Systems (B): Transfer Pricing. Similar to Case A.. Inc.

1997 Solutions Manual. 22–3. and implementation of. its responsibilities to stakeholders. Nonfinancial performance measures direct employees’ attention to the organization’s objectives and focus on the measures that are controllable by each employee. Stakeholders are groups or individuals who have a stake in what an organization does. Competitive benchmarking involves the search for. Chapter 22 635 . Critical success factors are the factors that are important to the organization’s success. © The McGraw-Hill Companies. such as employees. 22–6. 22–4. and the community. proprietary technology or established distribution channels.Chapter 22 Nonfinancial Performance Measures Solutions to Review Questions 22–1.. Inc. the best way to do something as practiced in other organizations. 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. 22–2. suppliers. studies its process. 22–8. and then utlizes that process. An organization’s mission statement should communicate the organization’s values. Benchmarking identifies an activity that needs to be improved. 22–5. Performance measures are most effective when they relate to what people at different levels control. shareholders. and the major strategies the organization plans to use to meet its commitments. customers. People at different levels in the organization have different responsibilities. For example. finds an organization that is the most efficient at the activity. 22–7.

Customer satisfaction measures reflect the performance of the organization on several factors. 22–13. Delivery performance measures indicate how proficient the organization is at delivering goods or services when promised to the customer. See Illustration 22. Manufacturing cycle efficiency measures the efficiency of the total manufacturing cycle (the most efficient companies have a measure of 1). 22–10. 22–11. 1997 636 Cost Accounting. 3) Workers are able to use their skills and knowledge to further develop and to improve the organization’s performance. This measure is important to most companies because gains in efficiency generally improve company profitability. 2) Workers are able to be responsive at all levels if empowered with decision-making responsibilities. Worker involvement is important for three reasons: 1) Increased worker involvement often translates to an increased commitment to the organization. 5/e . Poor delivery performance will likely negatively impact an organization’s profitability as repeat business declines.. Inc. 22–12. including quality control and delivery performance.22–9. © The McGraw-Hill Companies.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. 22–18. 22–17. Answers will vary. employees. publishers. For instance.. 1997 Solutions Manual. authors. if positions are not filled internally it may be because the employees are not performing well enough to be promoted. then this percentage measures the proportion of company employees who meet the criteria. Chapter 22 637 . © The McGraw-Hill Companies. If awards are based on effective worker involvement and commitment (i. but should include: Stakeholders—students. this is the criteria for the awards). 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.e. It may also indicate employee commitment by the quality of employee performance. Answers will vary. 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..Solutions to Critical Analysis and Discussion Questions 22–14. professors. Inc. 22–15. Critical success factors—sufficient inventory and accurate class/text information. and regents.

© The McGraw-Hill Companies. (20 min. Support performance.. (45 min.) Benchmarks. but should include the following: The balanced scorecard focuses on company-wide objectives. d. 22–20.) Performance measures. Employee performance. Product performance. Percentage defective raw materials. then establish objectives for production which are related to the production level employees and on which they can focus. 1997 638 Cost Accounting. Number of employee sick days. b. 3. a.) Benchmarks. a. Product performance. 1. b. Maintenance response time. d. c. 22–22. 2. On-time delivery to customer. 4. (20 min. Employee turnover. Percentage defective units. They would not be able to relate the competing objectives to what they are doing on a daily basis. 1. c. Answers will vary.) Balanced scorecard. but may include any of the performance measures listed in the illustrations. Answers will vary. 2. 22–21. The balanced scorecard should be used by upper mnagement to make trade-offs between competing wants.Solutions to Exercises 22–19. 3. Time to generate reports. Supplier performance. Employee performance. 5/e . Supplier performance. Inc. Support performance. (20 min. 4. many of which are not under the control of production level employees. On-time delivery of materials.

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. (30 min. Percentage of workers applying for promotions—used to measure worker recruitment. 2 days . Answers will vary.75 days Manufacturing Cycle Efficiency = = = 26% © The McGraw-Hill Companies. 22–24. 6 hrs.) Functional measures. + 6 hrs.22–23.) Manufacturing Cycle Time and Efficiency. Chapter 22 639 . 33 hrs. (20 min) Manufacturing Cycle Time and Efficiency. 22–26. + 1 hr.5 days + 2 days + . (20 min. 2 hrs. Inc. (20 min.. Examples are as follows: Percentage of managers active in continuing education—used to measure worker development. Manufacturing Cycle Efficiency = = = 18%. Answers will vary.) Worker involvement. Percentage of workers acting as mentors—used to measure worker empowerment. 6 hrs. 1997 Solutions Manual. + 24 hrs.25 days + 5 days 2 days 7.

5/e .Solutions to Problems 22–27. doctors. and community) and state how the company intends to add value to each group. This can be measured by the average number of days it takes to process a loan. 1997 640 Cost Accounting. Answers will vary. but should identify the stakeholders (patients. Answers will vary. but may include the following: • • • • Number of customer complaints for every 100 cars sold. such as Chevrolet. they would have a clear incentive to shorten the loan processing time.3.. Number of defects for every car sold. (20 min. staff. Although this information may be difficult to obtain from competitors. Performance measures.) Answers will vary.) Benchmarks. Answers will vary. but may include any of the functional measures shown in Illustration 22. (45 min. but also to its customers. (20 min. The following is one example. If employees are evaluated based on this measure. 22–28. but this information is only useful if the other GM divisions are doing better than the Saturn Division. Customer satisfaction on a scale of 1 to 10. Inc. An important critical success factor for many banks is the efficiency in which the bank can process loans. It would be easier to get this information from other General Motors divisions. (45 min) Mission statement.) Functional measures. 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. Dollar amount of warranty repairs for every car sold. 22–30. By using this measure. © The McGraw-Hill Companies.

(40 min. Employees may be so pushed that they have a bad attitude about work so they get sloppy. you may want to know what caused the improvements shown by all three measures. (40 min. As a manager of the company. but should address the following points: • • • Percentage of manufacturing cycle efficiency has improved steadily from 85% in week 1 to 90% in week 6. in which case hiring more employees may alleviate the problem. Inc. Recalibrating the machines may solve the problem. Did employees have incentives to make these improvements? Were additional costs incurred to improve on all three measures?..22–31. However. © The McGraw-Hill Companies. 22–32. The number of late deliveries does not appear to be related to the increase in production. Answers will vary. The equipment being used is not designed to handle this level of production or may be out of adjustment. Answers may include: Production almost doubled from January to June. a.) Answers will vary. the month of May should be investigated to determine the cause of the high number of late deliveries. Chapter 22 641 . 1997 Solutions Manual. Performance measures. b. Percentage of on-time deliveries has improved steadily from 94% in week 1 to 99% in week 6. b. as production increased. (45 min. Number of customer complaints has decreased significantly from 40 in week 1 to 11 in week 6. 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. a. 22–33. etc.) Operational performance measures. However. the number of defective units produced and delivered increased in greater proportion than production.) Operational performance measures: Kenston Corporation.

.

This problem arises because the tax shield is based on the original cost of the assets. 23–4. 23–2. © The McGraw-Hill Companies. Chapter 23 643 . 23–5. The net present value of the project will usually be lower after adjusting for inflation. The timing is important because cash received earlier has a greater economic value than cash received later. unless future cash flows from the project are expected to increase more rapidly than the rate of inflation. the net present value of the capital investment is increased.Chapter 23 Capital Investment Decisions Solutions to Review Questions 23–1. 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. There is an opportunity cost and risk involved by having funds tied up in capital investment projects. Determining the amount is important in estimating the future cash flows. 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.. The timing and amount together are used to determine the economic value of the project. 23–3. The term (1 + r) operates to discount the dollars for the time value of money effects. 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. and the tax deductibility of nominal interest rates may offset some of the tax disadvantages of historical cost depreciation. Inc. As a result. 1997 Solutions Manual. This effect may be reflected in lower asset prices. 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.

The $160. A better investment might be to liquidate the division. Once the timing and amount of cash flows has been determined. 23–9. © The McGraw-Hill Companies. the tax shield which arises from depreciation deductions for tax purposes is a cash flow item and is included. The four types of cash flows are: (1) investment cash flows. 23–8.000 reduction in the operating loss is a cost savings. If the equipment lasts for more than a few years. the net present value of each project should be determined. they should be discounted to the present by determining and applying appropriate discount rates. 23–7. In addition. However. Depreciation is not a cash flow item. project should be approved. (3) depreciation tax shield. 1997 644 Cost Accounting. 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. Audits often lead to more accurate cash flow analyses. We consider them separately because each type of flow results from different activities and gives rise to different tax consequences. No. (2) periodic operating flows. Inc. 5/e . the company will receive the tax shield from depreciation of the new equipment. if either.. it appears to be a good investment. and (4) disinvestment flows.Solutions to Critical Analysis and Discussion Questions 23–6. 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. 23–10. To determine which.

Inc. an accelerated depreciation method will result in greater net present value simply because the deductions are taken sooner. 1997 Solutions Manual. 23–13. 23–12. Chapter 23 645 . Replacement costs of inventory are included as period cash outflows. 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.. Deductions that can be taken sooner have a greater net present value in the presence of constant tax rates. Therefore. The relevant costs for any decision are the differential costs. © The McGraw-Hill Companies. If some portion of fixed costs are allocated to new projects then the new projects are subsidizing the existing operations.23–11. The primary concern is not the amount of the deduction but the timing of the deduction. Inventory values will not change if a given quantity was initially procured and the inventory level remains the same. Allocated costs should not be used for decision making.

............. 1997 646 Cost Accounting... Net cash flow .....800.000) Initiation costs ........ (20 min...... Construction costs ... $(100.......000) PV factor for 10%.......000) $(400... $(100.....Solutions to Exercises For purposes of presentation all PV factors have been rounded to three places.400) 2 © The McGraw-Hill Companies........... 5/e ...........909 $(363.950..................... Year 1 $(400.....600) $(1.....) Present value of cash flows.....000) ......800...486......826 $(1.000 Present values .800) 0 Engineering studies ........ 23–14.. 1.. $(100.............000) .....000) Project net present value: $(1.....000) $(1.......... Inc..

($200..000 ..960 4 $80.850 Year 3 $80.000 ... 1..000 . ($200..482 $38.700 Year 3 $80.000 . 1..880 5 $100.000 .000 ...000 ..... $ 22. ($ 23. At 20% Present value of cash flows: Tribure City. ($200.) a.660 2 $50.000) Net PV of project..694 $34.402 $ 40.....000 Present values .560 5 $100.860 Net PV of project..320 4 $80..000 PV factor (12%)....567 $ 56.833 $16. 1997 Solutions Manual..200 Time 0 1 2 $50..712 $56.700 Net cash flow ...000) PV factor (20%)...000) $17. At 12% 1 $20.250 © The McGraw-Hill Companies. Inc.... Chapter 23 647 .000 ..636 $50..23–15..000 .893 Present values .. (20 min.. ($200..000 .579 $46..000) $20.. Time 0 Net cash flow .560) b.....797 $39..

© The McGraw-Hill Companies.. 5/e .. 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 = 23.500 .864 Net PV of project. b..000 PV factor (23.2%) ..128 .352 $ 56..052 .535 $ 56.000) $17..812 Present values ..225 aAssumes inflation affects cash flows at the rate of 10% per year.000) $22. ($200.. ($200.... a. 1997 648 Cost Accounting.12)(1 + ..967 4 $117...434 $ 50... 1..2% Year 0 1 2 $60.) Effects of inflation: Tribure City..23–16.870 3 $106. $ 22.659 $39. Inc...480 .. Inflation adjusted discount rate: (1 + r)(1 + i) –1 = d (1 + .834 5 $161... (15 min...000 .690 Net cash flowa .

200 ....579 $ 695 $1..) a. $ b...23–17. Inc....500) PV factor (20%). Present value of cash flows: Titantic Entertainment..756 $653 $643 $1..200 .... 1. Chapter 23 649 ..000 $600 $1. $(2.500) Net PV of project.482 .. Total cash flows ... $(2. $(2.....870 ...694 $625 $590 $1......000 Present values ..000 $600 ... $(2.....000 Present values ..658 $ 790 $1.497 $ 572 $298 © The McGraw-Hill Companies... $(2. (30 min. $ 456 1 ($000 omitted) Year 2 3 4 5 $750 $850 $750 $850 ...........500) Operating flows: Net cash flows ........200 $1.402 $ 482 $241 Time 0 Investment flows: Investment.............200 $1.833 . 1997 Solutions Manual.. $(2.............000 $600 . Total cash flows . 1......... Time 0 Investment flows: Investment..500) Net PV of project...000 $600 $1....500) PV factor (15%).. 133 1 ($000 omitted) Year 2 3 4 5 $750 $850 $750 $850 ............500) Operating flows: Net cash flows ..572 ..

..673 $652 $643 $1....219 = 21...) © The McGraw-Hill Companies... 1997 650 Cost Accounting.. (30 min. 5/e ....06) etc.. The net present value of the project... Time 0 Year 3 1 2 4 5 Investment flows: Investment. (Compare NPV in part b of 23–17 to NPV in 23-18 [$1 difference is due to rounding].. $(2.500) PV factor (21. That would be the case here.263 $803 $1....453 . 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.9% 23–19.820 . Nominal rate = (1 + . 1.06) – 1 = .06 2 $955 = $850 x (1. $(2..... $(2.500) Net PV of project.429 $1..23–18..15) x (1 + .263 $803 ...429 .... using the inflation adjusted discount rate...552 $ 789 $1......9%) . Effects of inflation on cash flows: Titantic Entertainment...000 Present values .) Effects of inflation on cash flows: Titantic Entertainment.. $ Calculations: 455 $795 $955 $795 $955 .....372 $ 572 $299 $795 = $750 x 1.. Total cash flows .. Inc.500) Operating flows: Net cash flows .....

000 48.000 PV Factor (18%) .200 The present value of the tax shield is $157.000 120.000 36.656 34.924 18.576 15.847 .000 90.516 . Inc.312 21.000 210. © The McGraw-Hill Companies.000 $600.437 Present Value $ 40.096 The present value of the tax shield is $150.516 .000 120.000 36.976 $150.847 .000 $600. Year 1 2 3 4 5 Depreciation $120.718 .000 120.000 36.232 24.437 Present Value $ 40.096.000 48. Compute present value of tax shield: Limbo Corporation..000 Tax Shield at 40% $ 48. but the timing under accelerated methods increase the present value of the tax shield over the straight-line method.464 29. Chapter 23 651 .000 48.000 90.000 $240.000 90. (25 min.) a.732 $157.656 60. Year 1 2 3 4 5 Depreciation $120.200 b.609 .000 Tax Shield at 40% $ 48.000 120.23–20. 1997 Solutions Manual.000 48.609 . Note the total depreciation taken is the same under straight-line and accelerated.718 .768 20.000 84.000 PV Factor (18%) .000 $240.

000 90.572 b.512 43.000 90.23–21.000 36.) Present value of depreciation tax shield under inflation: Limbo Corp.000 36.952 9.22) – 1 = 31.000 $240. 5/e .517 .332 .000 84.759 .000 36.732 11.000 Tax Shield at 40% $ 48.000 90.000 $240.000 PV Factor (31.000 $600.000 210.. 1997 652 Cost Accounting. At 14% inflation: Nominal Interest Rate = (1.267 .76%) .14)(1.392 9.000 90.000 84.000 36.000 36. (25 min.252 Present Value $ 36. Inc. a.612 6.76% Year 1 2 3 4 5 Depreciation $120. The net present value of the tax shield decreases as the inflation rate increases.072 $121.08)(1.000 Tax Shield at 40% $ 48.428 13.000 90.432 48.576 .000 210.372 .719 .000 90. © The McGraw-Hill Companies.22) – 1 = 39.384 15.000 PV Factor .08% Year 1 2 3 4 5 Depreciation $120.000 36.192 Present Value $ 34. At 8% inflation: Nominal Interest Rate = (1.912 $107.000 $600.856 c.437 .

9% a.909 23–23.000 150. Nominal Interest Rate = (1.000 80.016 13.333 8.000 28.005 35.135 5.000 80.000 28.250 52.000 45. L.916 $93.658 0.750 15.424 16.690 10.026 © The McGraw-Hill Companies. At 6% inflation: Year 1 2 3 4 5 Depreciation $115.000 45.364 9.552 0.500 15.750 15.870 0.9%) 0.673 0.000 80.750 $140. Tax Shield at 35% $28.828 $101. L. Corporation.750 15.756 0.820 0.018 39. L. Corporation.884 23–24.000 $140.000 28.000 80.23–22. (30 min.000 Year 1 2 3 4 5 Depreciation $ 80.250 52.) Present value of tax shield: C.000 PV Factor (21. (20 min.009 7.06)(1.000 45.168 18.750 $140.000 150. Corporation.870 0.000 Year 1 2 3 4 5 Depreciation $115.500 15.000 28.000 Tax Shield at 35% $ 40. 1997 Solutions Manual. (30 min.000 45.000 $400.000 $400.497 Present Value $ 35.658 0. Chapter 23 653 .000 45.750 15.000 PV Factor (15%) 0.000 PV Factor (15%) 0.572 0.756 0.859 $90.453 0.) Present value of tax shield under inflation: C.000 45.360 21.) Present value of tax shield: C.497 Present Value $24. Tax Shield at 35% $ 40.15) – 1 = 21..572 0.372 Present Value $33.694 7.000 $400. Inc.

000) Operating flows: Cash flowsa .160 $80.320 ..000 x 22% x 40% $20.160 $88... (30 min...200 21... $(240.000) $57.000) $48.360 .23–25.360 .160 $63...160 = $240.000 .08) x (1 + ...400 Total cash flows .857 $55.308 $43... 1997 654 Cost Accounting..96% Time 0 Investment flows: New equipment Operating flows: a Cash flows Tax shield: Depreciation Total cash flows PV factor (20.12) – 1 = ....169 Present values Net PV of project a$43....200 $43.681 $43.000 .160 $96.. At 12% inflation Nominal Rate = (1 + .922 $ (12.467 $41..000) $53.338 Net PV of project.. $(240. 5/e .136 ...) a..160 $63..384 14.310 .148 8..200 x (1. 14.200 x 1..000 x 21% x 40% b..683 $51.570 $43.735 $46.692 20...294 .784 1.. 1..827 $(240...160 $63...852 .160 $76. © The McGraw-Hill Companies.200 Tax shield: Depreciationb. Present value of cash flows under inflation: Kentron Products..386 $37...486 = (1 – 40%) x $72.2096 = 20.000) $51.190 21. Time 0 Year 3 1 2 4 5 Investment flows: New equipment .190 = $48...000) $62...12) etc.000 b$14.. Inc..200 20.....926 Present values .437 $60.794 $50.200 20.384 = $43..631) $54.600 PV factor (8%) .12 2 $54..400 = $240..134 20.200 20. $(240..976 20..000 x 15% x 40% $21...120 $75.681 $67...565 $45. $43.384 x 1.12 or $43..360 .400 $(240.120 $64.122 $43.96%) 1 2 Year 3 4 5 $(240. $ a$43.120 = $240.

000.400.....600 $ 956.. 655 © The McGraw-Hill Companies...507 ..200.) Present value analysis in nonprofit organizations: Goldberg Research Organization.000 $1...893 .. $1..000) (200.... Year 0 1 2 3 4 5 6 7 Investment flows .000 $1.600 Yes..000 ...200.400.400 $ 763..000) Periodic operating flows: $1...071..200.000 Annual cash savings .000 $1. (200.600.400 $ 723..567 . Inc...000 $1.000 $1. 1.....000 Disinvestment flows ..797 .400 $ 608....200.. $(4.....000 $1.. 1997 .000 $1..200.400...452 Present value ... the hospital should buy the equipment.000) Additional cash outflow ...000 $1.000 PV factor 12% ...... Net annual cash flow ...712 .200.400...000 $1...400..636 .000) (200...000 $1..000 $1. $(4...000) $1.....400..400.200 Net present value ...000) (200. $(4....400 $ 854..000) (200..000 $1.000) (200.23–26..657... 400.000) (200.000.200 $ 680. (30 min.000.000) $1.

742.827 ....000.919 flowa ......23–27.118 b .000 $1. 1..08)n..319 .904.593 $ 607.....000) $1. Year 0 1 2 3 4 5 6 7 Net annual cash $(4.680 $1.656.654 $1..08)(1..000 .467 .296.632....456 $ 723.586 $1.. 1997 . Net present value ....399.. 656 © The McGraw-Hill Companies. then the equipment should still be bought..12) – 1..194 $1.244 If inflation is considered......981 $ 854. $1... Inc.000..418 $ 680... aCash flows from Exercise 23–26 times (1.264 PV factor 20.386 ..071...000) $1.683 ..250 $2. $(4..96% Present value .. where n is the year of the cash flow.511...763. b20.... (20 min.085 $ 762...) Impact of inflation on net present value in nonprofit organizations: Goldberg Research Organization.792 $ 955...565 .96% = (1..

However.000) 0 0 0 600 600 600 600 ($1.16–4 + 1.924)c (4%) = ($3.000 2.16–5 + 1. the project does not meet the company’s hurdle rate.16–6 + 1. 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. © The McGraw-Hill Companies.16–4 + 1..000 2.400 1.000 2.000) + $1. (35 min.400 1. the project’s internal rate of return is 20%. 1997 Solutions Manual.000) 0 0 0 2.000 x (1.16–5 + 1. under the best case.000) 0 0 0 1.400 ($ 490)b 12% Worst Case ($3.16–7) b($490) = ($3.400 x (1.23–28. Therefore.16–6 + 1.000) + $600 x (1.16–7) Under the expected scenario. Inc. it would probably be rejected. 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. Chapter 23 657 .924) = ($3.400 1.16–4 + 1.16–5 + 1.) Sensitivity analysis in capital investment decisions: Hearld Manufacturing.000 $ 586a 20% Expected ($3.16–6 + 1.000) + $2.16–7) c($1.

481 $ 48 Project A Cash Flows............ $ (300) Net Present Value ... $ 10 Net Present Value Index 5.... 1997 658 Cost Accounting........ $ (200) Net Present Value .. $ (300) Present Values @ 20% .......... Year (in thousands) 1 2 $ 50 .0% (= $10/$200) Project B Cash Flows.............. $ (200) 20% PV Factors ............ 250/300 x $39) 0 $85 © The McGraw-Hill Companies....23–29........ 5/e ........ — Present Value .. (20 min.. $ 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......... $ (350) Net Present Value ...... $ 52 $ 80 $ 67 $190 $132 $250 $145 $120 $ 58 Net Present Value Index 15% (= $52/$350) Project C Cash Flows ............ Inc............694 $ 62 Item 0 3 $100 ............e.) Net present value index..833 $ 42 $ 90 ........579 $ 58 4 $100 ......... $ (350) Present Values @ 20% ..

.. (900) $0 $0 $0 $0 Net present value...870 $57 2 $65 0.......... Software Designs.....658 $43 4 $250 0.....572 Present values .... 1997 .............000 0... 0...........432 $108 7 $250 0..........756 0.........658 0.........000 0...............................) Net present value: Morris and Associates....572 $143 5 $250 0. $(900) $0 $0 $0 $0 PV factor (15%)...... $ 68 Net present value index 12% = $68/$550 1 $65 0.....870 0..376 $ 376 Year 0 B.......................497 $ 497 6 $1....376 $94 659 © The McGraw-Hill Companies.432 $ 432 7 $1......756 $49 3 $65 0......................) ($000 omitted) Year 0 1 2 3 4 A..... $(550) PV factor (15%).... Inc. Calculate net present value index..................... (Answers may differ somewhat due to rounding... a.............. Sunset Mall ...23–30....... (550) Net present value.............497 $124 6 $250 0........ (40 min..... $405 Net present value index 45% = $405/$900 5 $1........000 0.. Present values .

..........000 project investment) interest in Marvin Gardens.432 $108 7 $250 0...... ($650) Net present value.497 $30 6 $60 0... These are the first and second ranked in terms of net present value index.870 $217 2 $250 0.756 $189 3 $250 0.........432 $26 7 $60 0.............. The net present value from this investment plan would be $538...... ($850) PV factor (15%)......572 $143 5 $250 0...6% (= $600...376 $94 b.. Nutri-care .......... 660 © The McGraw-Hill Companies..706 x 189. With no constraints..................870 $226 2 $260 0.....000 in Software Designs and would purchase 70...... Morris and Associates would invest $900......658 $164 4 $250 0....... $57 Net present value index 9% = $57/$650 1 $260 0. Present values ...... $189 Net present value index 22% = $189/$850 1 $250 0...000 remaining ÷ $850..................000). ($650) PV factor (15%)......... Marvin Gardens ....... ($850) Net present value................. (continued) Year 0 C.........658 $171 4 $60 0.........572 $34 5 $60 0..........23–30............................497 $124 6 $250 0. Inc.............000 = $405......376 $23 Year 0 D.. Present values ........................756 $197 3 $260 0.. 1997 ...000 + (....

) Alternative project evaluation measures: Farm Fresh Corporation.40)] [ ] [ $20.) Alternative project evaluation measures: No discounting: Quintana Co. Investment $300.75 years Annual cash flow $80.000 = $2.23–31.125 = 32% c.400 = 24% $10.125 years $4.000)(1 – .800 + $1.000 – $4.000 + $8. (20 min. Investment cost Annual cash returns (after tax) + Depreciation tax shield = $20.4) 5 ] = $20.000 © The McGraw-Hill Companies. Chapter 23 661 .000 23–32.600 b..000 x (1 – .000 = = 3. 1997 Solutions Manual.000 (. (15 min. a. (Cash flow – Depreciation)(1 – Tax rate) = ($8.000 = 3.40) Average investment 1/2 x $20. 1 3. Inc.

.000 120............... $(900.000 400.000 120.........000 50.. Tax on gain .... Disinvestment: Salvage ..... 1997 662 Cost Accounting.000 = ... After tax operating flows .000 $400..000 b....000 3 $800........... Incremental rent (12.........) Assess capital investment project with alternative measures: Baxter Co..........000 $480....Solutions to Problems 23–33. labor & variable overhead............000 Balance (900.....000 $ 800.... 5/e ................. Net before taxes ...000 $ 480.............. Tax shield ($900.000 $ 330.000 350.....................000 180..000 600.000 120...40 ......000...000 Payback = 1.... a.......000 50... (45 min...000) $468.......000) (450. Year 0 Investment flows: Equipment. Net cash flows .000 (72.000) 1 2 3 $330.. Payback period is less than two years......000 $240....000) 150..600..........000) Annual operating flows (see schedule below) .. $(900.................000 Year 2 $1..... Yes.. Material.000 750.000 $450........000 $450......000 $ 550.........000/3) x .........75 $600.....000 $240..000 $600........75 years......000 Sales ....... Year 0 1 2 Cash Flow 0 450.500 @ $4) .... 1 $1......000 50.. © The McGraw-Hill Companies. Inc.

..500 + $232.000 = 13....1%).... $(900...000 ...500 / $900.....000 + $180..972 © The McGraw-Hill Companies..000) PV factors @ 20% .....694 $416...000 .. (continued) c.. Present values .. 1997 Solutions Manual. Inc..500 = = 21.....000 (If the calculation is based on initial investment instead of average investment...... the result is $117.........833 $374.579 $270.500) = Average investment 1/2($900....23-33..... Yes..... Year 0 Net cash flows (see part a..) ...000) $117. Average accounting income 1/3($103...........000) Net present value.400 3 $468..222 1 $450.8% $540... The calculation assumes rent and assigned overhead are allocated to this product according to the problem....500 + $16...850 2 $600. d.. $(900. Chapter 23 663 .000 .... $ 162..

...000 in Year 1..000 = 40% x $200..000 ......000) 200.000) 160..000) Net present value......... $(1..............000 240..000) = 40% x ($1.. 15% x $2... based on the negative NPV...... 400........000... Inc.....000 – $500..000......23–34... 5/e ...000) Present value factors . 25% x $2...... Depreciation tax shield c on new machine ..000.) New machine decision: TCY...... e Tax on gain ...000 in Years 2...000)a Operating cash flows: Variable cost savings ....000 (144....000... Cost savings times 40% tax rate......000 1...... Inc.. Tax effects of cost b savings .....000) 120...000) 80..........000 .... Fixed cost savings........632. $80..000 (144.........000 = $320..000 .600..... Tax shield = 40% x $320.. Old machine is being depreciated $320...000 – 400....000 Tax on gain on sale of old machine ......176......000 (128...000 $1....0 Present values .......000 – $320..... $ (216.000 240......... 20% x $1.. Do not purchase the new machine.......136) a b c d e f 1 Year 2 3 120...000 (= 20% x $1..000 (144.....000 240. Forgone depreciation tax d shield on old machine . Tax on gain = 40% x ($400...600...616 Old machine has been depreciated to 20% of its original cost...000.... $(1........ ($80.751 $ 833....... Disinvestment cash flows: Salvage of new machine . Net cash flows .000 x 40% = $120...632..000) in Year 1 (its 5th year). f Tax on gain ...826 $343.000 – $300...000).072 $416..... (40 min... (32...909 $189.000) Sale of old machine...000 x 40% = $200....000 x 40% = $160............ (2.......000.000...000 120..... 20% x $2..... 1997 664 Cost Accounting.000.000 in Year 3....000 = $128.000...000) (200.......000) 120... Time 0 Investment: New machine ..000) = $32.176 $208... © The McGraw-Hill Companies........... 1.000 (80...... Forgone salvage of old machine .000...

and disclose fully all relevant information that would influence an intended user’s understanding. Helen Dodge’s first revision of the proposal was unethical if she did not also disclose that estimates were remote possibilities. a. that is to the vice president of finance. If the situation still remains unresolved after exhausting all levels of internal review. She needs to avoid conflicts of interest. and advise all parties of such potential conflicts. She should take her problem to the next higher level of authority. Helen should refrain from discussing this with authorities or individuals not employed or engaged by the organization. it is not necessary to discuss this issue with him any further. Helen should resign and submit an informative memorandum to the appropriate official in the organization. will help to clarify the concepts of the issues at hand. Always investigate to see if there is an existing policy within the company for resolving ethical conflicts. which is not the case here. Inc. He has a duty to communicate both favorable and unfavorable information. is involved. She should communicate information fairly and objectively. His conduct was definitely unethical. Unless there is a legal obligation. Otherwise.23–35. Follow this policy if it does exist. (25 min. c. such as using realistic estimates in his net present value analysis. Dodge’s superior. He must avoid conflicts of interest. Chapter 23 665 . (Note: The IMA has an 800 hotline for discussing ethical dilemmas. for example a peer. If she fails to get a satisfactory solution she should take her problem to the Audit Committee or to the Board of Directors. as well as professional judgements and opinions. and to refrain from subverting the attainment of the organization’s legitimate and ethical objectives. Perhaps seeking the advice of a confidential objective advisor. 1997 Solutions Manual.) © The McGraw-Hill Companies. b.) Ethical Issues: Ishima Company. since George Watson. Watson has the responsibility to perform his professional duties in accordance with relevant standards..

883 7.000 30.000 30.497 Present Value $15.500 13. Equipment removal net of tax effects = $2.000 31. Gain from salvage of new equipment: $33.000 30.756 .000 $200.000 x (1 – 45%) e.722 6.45 tax rate f. 1997 666 Cost Accounting. Depreciation schedule: Year 1 2 3 4 5 Totals Depreciation $ 40. b. Differential cash flows (years 1 – 10): $18. a.500 13. Forgone tax benefits: $4.000 = $60.000 70. 5/e .750 = $5.572 . Inc.500 $90.500 13.814 8.789 c.658 .660 23.000 = ($100.000 Tax Shield at 45% $18.000 + $48.000 x 45% 10 years d.000 salvage value) x .000)] x (1 – 45%) © The McGraw-Hill Companies.000 + $20.000) – ($25.150 = [($30.23–36.. (1 hour) Compute net present value: Wright Corporation.710 $62.000 x (1 – 45%).870 . Tax benefit arising from loss on old equipment: $27.500 = $100.000 book value – $40.000 Present Value Factor (15%) .

.530 $13...150 $18...500) 60.....523 3. $4..500 Years 3–5 ...000 Tax benefit—sale 27....897 $ 5.......500) (4..500) (4...150 $27..650 ......572 ... 13....150 $18.....150 $18....464 $ 3.500 13.$(135..500) (4...650 $13.$(135.. Inc......000 Year 1 . Disinvestment: Proceeds of disposal . 40....750) Removal ..150 $27.......500) (4. 31..150 flows ...500) (4.150 $18......284 PV factor at 15% . Tax shield from depreciation: New equipment: 18..133 $17...536 $34..150 $18.870 ....650 $13.150 $18.....23–36...877 Present values . 667 © The McGraw-Hill Companies.... Old equipment (4..500 Year 2 ...500) (4.650 $13...756 ....150 $18..750) $27.. Tax on gain . Total cash flows ....432 ..500) (4.865 $15.$ $18.150 $18...497 ... 0 1 2 3 4 Year 5 6 7 8 9 10 Investment flows: Equipment cost .150 $13...247 $11....132 Net present value ..500 13.........$(200.....650 $45.701 Note: Your answer may vary slightly due to rounding of PV factor.. (continued) g.327 .500) (forgone) ..494 $ 5.000) $46.000 of old equipment Periodic operating $18..150 (4...376 ...500) (4.000) (2...658 ............750) $31..000 (27..... Salvage of old equipment ..650 ... 1997 .150 $27.

5/e .15 x 1.. a.219 = 21. Nominal interest rate = (1.150 x 1. Inc.150 x 1. 1997 668 Cost Accounting.393 = $21.23–37. Annual operating flows under inflation Year Operating flow x inflation factor 1 $18.06) – 1 = .063 etc.062 3 $18.061 2 $18. (45 min.9% b.150 x 1.) Impact of inflation on net present values: Wright Corporation. (see schedule in part c) = = $19.239 = $20.617 © The McGraw-Hill Companies.

....500 (4.617 $31.....750) $32......914 $33....500) (4..617 $22... Tax shield–new: Year 1 .....750) $26.289 $25......250 0.500) (4..246 $22..23–37........820 Present value .500) (4. Time 0 Investment flows: Equipment ............. Year 2 ......455 1.......500) 13....500) 100.....$(135.500) 13..239 $20..... 1997 ...................393 $21. Tax benefit—sale of old equipment ...480 $ 5...138 $31......007 $ 4......396 $11..901 $14.......... Tax on gain ....504 18.....9%).205 0..........164 $83..305 0..393 $30...500) (4..698 $ 5.500) (4.000 $19...500 13.....500) (4.......291 $28...453 0.......004 0.... Salvage of old equipment..289 $21......914 $24..... 669 © The McGraw-Hill Companies..846 Net present value ....... $ (231) ) Note: Your answer may vary slightly due to rounding of PV factor....000 27..000 0.428 $26...... Year 1 2 3 4 5 6 7 8 9 10 (2.....739 Discount factor (21..... Taxshield—old equipment (forgone) ......372 0..673 0..664 $32....... Inc....791 $24..552 0......457 $12.. (continued) c...928 $30.000) $47.... Disinvestment: Proceeds of disposal........750) 40.. Total cash flows.......500) (4.500 (4...........$(200...746 $27.168 0..$(135... Periodic operating flows ...000) Removal ..... Years 3–5 ..000 (45.895 $16....500 (4.384 $ 6..000 31..

.....23–38... © The McGraw-Hill Companies..... Inc... 275 Gross savings . $1. Inc. 5/e ....................... (25 min................40)] (3. The new training should be purchased........045 After tax of 40%... the new training should be purchased.) Assess net present value of training costs: Zigfield.... $ 627 Present value of $627 per year for 10 years at 12%: 5........ $ 770 Reduction in other expenses...... The support calculations follow: (000’s omitted) Cost savings due to training: Reduction in direct labor .............543 After tax training costs [$5.000) Net present value of training $ 543 Thus.. 1997 670 Cost Accounting.........650 x $627 = $3.....000 x (1 – .......

000 3. Corp. Inc.000 ($2.20–1 + 1..20–3 + 1.20–1 + 1. 1997 Solutions Manual.20–4 )] + [$2.000 x (1.20–7)] c($2. the company would be likely to invest in this project.187)c 2% = ($3.000 3.000 3. Chapter 23 671 .000 x (1.500) – [$500 x (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 1.000 1.500) (500) (500) 1.000 2.500 1.20–5] + [$3.000 1. © The McGraw-Hill Companies.20–4)] + [$3.20–2 )] + [$1.20–7)] Since the expected net present value is greater than zero.500) + [$1. However.000 3.20–5 + 1.20–6 + 1.000 1.23–39.20–3 + 1.500 x (1.500 3.) Sensitivity analysis in capital investment decisions: Octagon.000 1.000 $207b 21% Worst Case ($3.187) = ($3.000 1.20–7)] b$207 = ($3. the alternative scenarios need to be considered when making the decision.500) + [$500 x (1.20–6 + 1.20–6 + 1.20–3 + 1.000 $1.000 x (1. (40 min.20–5 + 1.903a 33% Expected ($3.903 Best Case ($3.20–2)] + [$1.000 x 1.500) 0 0 1.20–4 + 1.000 x (1.

319 $11..264 $10. aAnnual bYear operating flows = (1 – 40%) x ($50..800 4.... 1997 .091 $41.003 .000) x (1 + i) n = $22..467 $16.000 a .... $(80..094 .000 – $3.08)n 1 2 3 4 5 cNominal Depreciation tax shield 40% x $16. $ 8.238 $38.200 4..08) – 1] = 20...800 $32.047 $38....444 $35.513 $30...619 4..000) $31.683 $25.800 rate = [(1.000 = 40% x $28.000 – $10.615 $25..386 $14.......827 Present values.000 = 40% x $12.. Annual operating flows 23.000) Investment tax credit ....894 11............000) $38........800 $37....419 ...200 x (1.229 .......12)(1..091 .800 $35.218 $ 8.737 Net present value . Depreciation tax shield 6...96% .. $(80. (40 min.000 = Tax shield $ 6..) Capital investment analysis under inflation with investment tax credit: Norton Company....044 $41...400 11... $ 56.....766 .958 Note: Your answer may vary slightly due to rounding of NPV factor. Inc..229 $35..203 4..047 .. $(80.376 c PV factor at 20....000 = 40% x $12...000 = 40% x $12.966 4.96% 672 © The McGraw-Hill Companies.976 b .... 0 1 2 3 Year 4 5 6 7 8 Investment flows: Machine ....200 $37.565 $18...346 $32.400 Total cash flows....335 $27.....800 4......23–40........... .

At the start of the cycle there are Q units on hand. Fire insurance on inventory h. Fire insurance on warehouse i. Funds that are invested in inventory could. Salary of purchasing supervisor c. The economic order quantity model seeks to minimize the sum of carrying costs plus order costs for the working inventory. the division.Chapter 24 Inventory Management Solutions to Review Questions 24–1. 24–4. the opportunity to obtain earnings on other investments must be forgone.5). Costs to audit purchase orders and invoices d. discussions of inventory models take the costs as given. Inc. If this assumption is seriously violated. Shipping costs per shipment (C) (N) (P) (C) (P) (C) (C) (N) (C) (P) © The McGraw-Hill Companies. Taxes on inventory e. their areas of expertise do not extend to the evaluation of the differential costs for the inventory models. Since the working inventory is assumed to behave in a sawtooth pattern (see Illustration 24. while at the end there are zero units on hand. Generally. some other cost function may be required. Although the inventory models are developed by operations researchers. It is the role of the accountant to determine which costs are appropriate for inclusion in an inventory model. It is more likely that these funds would be invested in more profitable assets. There is an assumption of steady usage rates in the EOQ model. a. Obsolescence costs on inventory j. 1997 Solutions Manual. however. Hourly fee for inventory audit b. be earning short-term interest rates if invested in market securities. there is an opportunity cost involved in having resources invested in a specific asset. at least. the inventory carrying cost would be the costs associated with the average quantity of inventory on hand. Stockout costs f. 24–3. Therefore. hence. Chapter 24 673 . so long as the funds are tied up in inventory. The average of these two numbers (Q + 0) is equal to Q/2. statisticians and computer specialists.. 24–2. As with other investments. Storage costs charged per unit in inventory g.

by definition.2 with the imposition of constraints at various values of Q will confirm this visually. we can never obtain a lower cost solution than Q*. 1997 674 Cost Accounting. © The McGraw-Hill Companies. Stockout Solutions to Critical Analysis and Discussion Questions 24–7. That is likely to happen equally as often as a demand over lead time of less than the expected value. If the constraint is irrelevant (that is. Any restriction other than those adjacent to Q* will necessarily be at a higher cost than the adjacent restrictions. For safety-stock determination. In the case of inventory policy. Since the carrying costs exceed the order cost.24–5. and the exposure to stockout. Q* is.1 shows that the carrying cost function is greater than the order cost function when the actual Q is greater than Q*. Inspection of Illustration 24. Any cost which varies with either of these factors would be relevant to the economic lot size decision. it would appear that the actual Q is in excess of Q*. a. 5/e . The latter term is determined by the frequency of ordering. 24–9. The expected stockout costs are affected by the probability of a stockout. then the next best solution will be at an adjacent constraint either greater than or lower than Q*. 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. 24–8. Q* is still feasible) then Q* is the least cost solution. the decision variables are either order quantities or safety-stock levels. so one would expect a stockout 50% of the time. 24–6. Reorder point c. the costs of a given stockout. the relevant costs are the carrying cost of the safety stock plus the expected annual stockout costs. In the case of order quantities. Order quantity b. Safety stock d. With constraints. If Q* is not feasible.. A symmetrical distribution implies equal probabilities on either side of the expected value. An inspection of illustration 24. A stockout would occur any time the demand over lead time exceeded the expected value. Recall that at Q* the two costs are equal (in simple cases) or generally close to equal. This occurs because the total cost function is decreasing until it reaches Q* and then increasing after. the optimal solution in the absence of constraints. Differential relevant costs are defined as those that change with a change in the decision variable. and in the absence of constraints. 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. Inc.

Companies that use just-in-time production might have a shortage of product if demand increases unexpectedly. Chapter 24 675 . but rather the minimization of the costs associated with maintaining inventories. since LIFO can result in a significant tax penalty if LIFO inventories are reduced in quantity. However. Optimal inventory policy is related to expected future costs. However. Thus.24–10. large order sizes will not eliminate the exposure to a stockout. The appropriate criterion for inventory policy is not avoidance of a stockout. Just-in-time eliminates inventory where spoiled goods and defects can be stored. the costs of avoiding the tax liability on LIFO inventory liquidation. it can expect one stockout (i. supplier disruptions (for example. ordering 5. and it places two orders a year. if a company has concluded that a . © The McGraw-Hill Companies. This reduces the need for inventories. 24–11.e. 2 x . In the first place. However. For example. Inc. If a department is making defective products. 24–12. 1997 Solutions Manual. not the past costs on which LIFO or FIFO data are based.5).000 units with 75 in stock and a demand over the lead time of 800 units will result in a stockout. as implied in the comment. if it places fifty orders a year then 25 stockouts can be expected. with JIT it must correct the problem before the products are transferred to the next department. Safety stock will. namely. Flexible manufacturing enables companies to change from production of product A to product B quickly. there can be an additional cost to consider in management of LIFO inventories.. However. 24–13.5 probability of a stockout is acceptable. that problem is different from the material discussed here and usually relates to an aggregate inventory rather than to a specific item in inventory. with minimal setup time. The method of accounting for financial reporting or tax purposes will not directly affect the optimal inventory policy. worker strikes) may cause an interruption in the receipt of materials and parts necessary to complete production. reducing the number of orders per year will reduce the expected frequency of a stockout. Also.. 24–14.

(15 min. A = 40.60 + (18% x $80.075.000 = 1.600.) Compute EOQ: Sonoma Technology Inc. 5/e .Solutions to Exercises 24–15.00 = 1.) Compute EOQ. Inc.40 = $24.00 Q* = 2 x 40.000 x $620 $125 EOQ = = 3.754 units © The McGraw-Hill Companies.000 x $480.00) = $9.00 $24. 1997 676 Cost Accounting..60 + $14.00 P = $480. (15 min. 2 x 310.265 units 24–16.200 = 1.000 S = $9.

2I 2 x 3.50 $3.24-17.250.875.250.80+ .80 + . and letting the unknown inventory cost be denoted “I” we obtain: 3.500 x 20 x $306.500 = Squaring both sides: 12.2I) = $42.000 / 12.50 – $0..000 $0.) Find missing data for EOQ: Errantos Corporation.25 $0.2I .80 + .250.80 + .50 42. 1997 Solutions Manual.2I I = = = = = $42. (35 min.80 + .000 $3.70 $13. Given the equation.000 = and: 12.000 x ($0.000 then $0.875.875.000 = Collecting terms: 12.80 $2.25 $0. Inc. Q* = 2AP S substituting in the knowns from the exercise.2I 2 x 3.250. This problem requires solving for an unknown in the EOQ equation.2I .2I © The McGraw-Hill Companies.500 x 20 x $306.2I $0. Chapter 24 677 .80+ .

200 = 2 x 160.000 x $100 $.000 units per run © The McGraw-Hill Companies. There are 4. EOQ-multiple choice..) a. The answer is 3.000 x $300 $400 b. The answer is 2. 5/e .000 units per year = –––––––––––––––––––– 4. 1997 678 Cost Accounting. (15 min.000 x $54 $12 48. 1.24–18. 600 = 2 x 240.60 Therefore. The answer is 1.000 units in the optimal production run: 4.000 = 2 x 48. Inc. Fong should make 12 production runs per year: 12 c.

633 Q 3.000 x $325 $25 = 4.000 units: Carrying costs: QS = 2.000 units.000 Total costs $56.000 x $25 = = $37. © The McGraw-Hill Companies. At 2.) Orders in round lots: Loggins Corporation. (35 min.133 It is optimal to order 2.000 2 2 Order costs: AP = 172.000 x $25 = $25.000 units and 3. Inc.950 Q 2.000 x $325 = $18.000 units.472.000 = 2.000 Total costs $52. The optimal order quantity without regard to the order restrictions is: Q* = Q*= 2xAxP S 2 x 172.500 2 2 Order costs: AP = 172. Chapter 24 679 .000 x $325 = $27.115 units Given the restrictions. it is necessary to evaluate the costs at the adjacent order quantities of 2.24–19.950 At 3. 1997 Solutions Manual.000 units: Carrying costs: QS 3..

Inc.000 $35. Order Quantity 42 Carrying Cost 42 x $450 2 = $9.600 810 x $1.150 zero -0- Total Costs $67.) Impact of quantity discounts on order quantity: Folsom Company. 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.700 Foregone Discount 810 x $1. (35 min.693 80 80 x $450 2 = $18. 5/e ..450 Order Cost 810 x $500 42 = $9.500 x (6% – 2%) = $48.24–20.450 © The McGraw-Hill Companies.063 810 x $500 150 = $2.643 810 x $500 80 = $5.500 x (6% – 5%) = $12. 1997 680 Cost Accounting.213 Optimal 150 150 x $450 2 = $33.750 $36.

) Impact of constraints on optimal order: Folsom Company. not the 50 unit restriction. Chapter 24 681 . This may be found by comparing the total cost at 42 units given in exercise 24-20 as $67.693 with the following costs at 50 units.100 Foregone Discount 810 x $1. If there were a restriction on the storage capacity. 1997 Solutions Manual. Carrying Cost 50 x $450 2 = $11.250 Order Cost 810 x $500 50 = $8.950 © The McGraw-Hill Companies. then the optimal order size would be 42 units.. (20 min.500 x (6% x 2%) = $48.600 Total Costs $67.24–21. Inc.

000 Expected Stockout Costs a x $3.900 .300 = $ 3. 39..300 = $ 1.600 b 250 x $32.e. Based on these computations. 1997 682 Cost Accounting.300 = $ 9.2 x 15a x $3..6 x 15 .08 x 15a x $3. bIt should be evident that at this level the carrying costs alone exceed the total costs at a safety stock of 175 units. 5/e .200 175 x $32.960 .700 13.300 = $29. a15 © The McGraw-Hill Companies.700 .000/2.980 Total Costs $29. it is not possible for this or any safety-stock level larger than 250 to be less costly than 175 units. Inc.24–22.04 x 15a x $3.560 (optimal) 9. there are 15 orders placed a year (i. The carrying cost will be $32. we prepare the following schedule: Safety Stock 0 100 175 250 Carrying Costs of Safety Stock 0 100 x $32.100 9.00 = $3. Therefore. (25 min.00 for each unit in safety stock. With the given order size.) 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.00 = $8.00 = $5.600 = 15).980 Additional computations: is the number of orders per year.

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. The answer is 1. The answer is 4. (20 min.) a. 1997 Solutions Manual. 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. Chapter 24 683 .24–23. Safety stock–multiple choice..

.....................90 © The McGraw-Hill Companies.........50 per unit Total carrying cost = (25% x $198) cost of capital + $9............60 Inventory tax .....................................................$195 Insurance on shipment . $5.90 (= $195 x 2%) Total ................30 Costs to arrange for the shipment ...$198 Costs that vary with the average number of units in inventory: Inventory insurance ......................... Costs that vary with the number of units purchased: Purchase price ..... (30 min.00 Total ...... $862.............. 244........................ Inc.....50 = $49............. Inc........................ 160................ $403...........................................20 Unloading ............ 1997 684 Cost Accounting...50 = $59 ..... 3 Total .............) Differential costs of inventory policy: Souds..............50 + $9. Order costs: Shipping permit ..........40 Stockout costs .................24–24..... 3.......................... 55......... 5/e ... $9....

Carrying costs: QS 500 x $138.. Chapter 24 685 .226.80 Q 250 Total $53.964.130. © The McGraw-Hill Companies.514 = 262 units $138.40 = = $34.00 2 2 Order costs: AP = 5.24–25.400 x $878 = $18.) Differential costs of inventory policy.400 x $878 = $18.40 = $75 + 20% x $317 = $138.400 x $878 = 68.80 b.40 2 2 Order costs: AP = 5.40 = = $18. 1997 Solutions Manual.58 The company could save money by changing its order size to the optimal quantity. Inc.600. Order costs = Insurance + Other order costs P = $860 + $18 = $878 Carrying Out-of-pocket Cost of capital = + costs costs on inventory S a. Economic order quantity: Q* = 2 x 5.18 Q 262 Total $36.564.096.40 Carrying costs: QS 262 x $138. (30 min.

5/e .010 9 x {[.15 x (8 – 5 – 2)]} x $4.340 9 x [.2) x $4.15 x (8 – 5 – 1)]} x $4. Inc.20 x (6 – 5)]} x $4.130 9 x {[.200 = 9 x (.200 = $32.300 200 x $22 = $4.Solutions to Problems 24–26.890 none -0- Total Costs $32. 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 = $17.190 200 $ 4.200 = $ 1.) Determine optimal safety-stock levels: Estatic. 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. That is.200 150 150 x $22 = $3.45 + .100 100 100 x $22 = $2.. 1997 686 Cost Accounting. Inc.2 + .130 50 50 x $22 = $1.400 Optimal © The McGraw-Hill Companies.05 x (9 – 5 – 1)] + [.05 x (9 – 5 – 1)] + [. 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. Exposure to a stockout is based on the nine orders per year. 270 working days times 50 units per day all divided by the 1. This latter amount is simply the safety stock divided by the usage rate (50 units per day).05 x (9 – 5 – 3)] + $4.500 units ordered at one time. (40 min.200 = $11.400 $18.540 $ 5.05 x (9 – 5)] + [.15 x (8 – 5)] + [.110 $13.

24–27............00 183................................94 ($32............92 1............ the carrying cost... Totals .......... Processing order documents...... $41........... Shipping charges............) Inventory policy cost evaluation: Wilson.......................65 (net of refund) 1...................... Inc................... a.......... Unloading operations .63 222... (60 min........... Liability insurance................... Inventory record maintenance....60 ($.....................5 kg) 1...92 ..... $41........80 2....00 $ 2..........................................................00a $1.................. Expected stockout costs..00 415...................................76 Carrying Cost Order Cost $ 640. Invoice price .......400 x 2% With these data........... First it is necessary to compute the cost of each unit...05 . 687 © The McGraw-Hill Companies.60 Cost of capital.....92 x 15%) $10.6 x 22%) $19...............00 $5............. Inventory insurance ..60 ________________________ a Investment Cost $32................................. Rental of unloading equipment....00 $1.............. it is possible to answer the questions in the problem....98 108...........82 Inspect and count for annual inventory ......... Estimated obsolescence costs .... ...99 ($32........................................40 x 1.15 ($41....35 .........568.... Inc.............. Inventory tax.......................... Casualty insurance......... Tax on each unit..... 1997 .. Special packaging ....83 9......................92 x 3%) 4.....00 1..................................... Sub-totals . and the order cost from the data supplied in the problem................................568.............................

170. 568.835 $289. These are as follow: Carrying costs: Safety stock = {25.163. (continued) b.710 = 54.568 $19.934. The costs of the current inventory policy include the carrying costs of the working inventory and safety stock.98 = Working inventory QS = (350..107 $6.000/4 orders per year)$19. Inc. 5/e . the order costs and the expected annual stockout costs.272 $874.98 = 2 2 Total carrying costs Order costs: 4 orders per year x $1.00 = Expected annual stockout costs (included in the order costs) Total costs c. Costs of optimal order policy: (1) Determine Q* ignoring restrictions on order size: Q* = Q*= 2 AP S 2 x 350.412 © The McGraw-Hill Companies.000/300)]} x $19.125 $1.935 = 7.500 units x $19. 1997 688 Cost Accounting.98 $1.000 x $1.24–27.000 units – [9 x (350.98 = [(reorder point) – (demand over lead time)] x carrying cost per unit = 14.

01 x $5.860b 279.000 21.710 = $ 54.500 $421.729 x $19.000 units: Carrying costs: QS 5. 4.500 35a x .1 x $5.000 a35 Carrying Cost zero $139.000 14.000 units) Total cost = $ 99.000 determined in (2) above.24–27. thus the maximum cost-effective safety stock would be 4.000 Usage over lead time + safety stock = ––––––– x 9 + 0 = 10.400 = $ 1. 1997 Solutions Manual.950 2 2 Order costs: AP 350. (continued) (2) Determine the lowest cost from the adjacent feasible order sizes: At 5..500 (i. Inc.780 35a x .900 35a x .000 x $1.e. bIt should be evident that the cost of carrying 7.780 Optimal Optimal safety stock level is found by evaluating the annual costs at each different safety stock amount.400 = $94. To carry 4. d.580 Expected Annual Stockout Cost 35a x .000 or more units of safety stock is greater than the stockout costs at no units of safety stock. Reorder point: 350.890 Total Costs $ 94.02 x $5.5 x $5.98 = = $ 49.880 $154.760 Q 5.568 = = $109.000 units) Order costs: (half that for 5.720 419.000 x $19.000 Total costs At 10.500 Optimal $158.500 units 300 © The McGraw-Hill Companies. Chapter 24 689 .400 = $ 3.000 units: Carrying costs: (double that for 5.. Safety Stock 0 7.98).000/10.400 = $18.729 units would cost $94.760 $283.729 units and this would only be economic if the expected stockout costs were reduced to zero.900 $159.470 = number of orders per year = 350.

085.777 Q 1. Q* = 2 AP = S 2 x 80.2 x $275) = 2. And the total costs under this policy: Carrying costs: QS = $1. Carrying costs: QS 1. = 1202 .000 x $808 = $53.00 = $44.. a.) Sensitivity of EOQ computations to changes in cost estimates: Wildridge. Inc.764 2 2 Order costs: AP = 80. The new Q* is computed: Q* = 2 AP = S 2 x 80. b.3 x $275) = 1444. 5/e .161 = 1444 . 1997 690 Cost Accounting.000 x $808 $7 + (.000 x $808 = $44.202 x [$7 + (.202 Total costs $82.775 c.15 x $275)] = = $28.444 Total costs $89.469 . (40 min.529 © The McGraw-Hill Companies.444 x $62.000 x $808 $7 + (.24-28. Inc.765 Q 1.998 2 2 Order costs: AP = 80.

Since 2.80 price for ordering 2. the maximum discount would be based on the $3. Chapter 24 691 .500 units).. the possibilities become unmanageable. That is. 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 2.2) + (180 x .9)] 24–30. To study the problem.500 units. if one orders 2. Otherwise. the next order could be larger. © The McGraw-Hill Companies. 1997 Solutions Manual. alternative thoughts are likely to arise. a. Knowing the cost of a 500 shirt order policy vs. The focus of the discussion should be on the alternative costs of each order policy as suggested by the problem. (60 min. 420 = 200 x [(3 weeks x . However.500 units is the maximum order. The answer is 4. (280 x . The answer is 2.8) = 200 units b. the Committee will have to make a decision based on very sketchy evidence.) Alternative order policy costs: Save the Whales. This problem is likely to result in a significant amount of discussion. a 2.500 shirts and finds they are not selling well. if one decides to order 500 shirts at a time and finds they are selling at a much greater rate. The two relevant costs are order costs (the $100.500 shirt order policy would at least provide the Committee with some economic basis for a trade-off between the returns and risks. Inc. as in the real world. hence. there is no opportunity to avoid the loss that might arise from unsold shirts.24–29 (20 min. There is no single solution to the problem and.) Inventory cycle analysis–multiple choice: Retem & Company. 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.00 set-up charge) and the forgone discount.1) + (2 weeks x .

500 Costs of 2. there is no discount forgone. ___________ aIf only 500 were sold.700.000 shirts at $3.00 $7.00 3.00 -0$3. Based on the sales level for the 500 units.500 unit order policy The committee must. (continued) Quantity Ordered 500 500 Shirts Set-up costs: $ 100..00 Differential Costs with Sales of 2. © The McGraw-Hill Companies. 1. 5/e .00 Forgone discount: a -0Unsold shirt costs: -0$ 100. therefore. There was no opportunity to gain from ordering more shirts.00 to gain information on the rate of sales. It may be best to order 500 units.00 $ 100.500. 1997 692 Cost Accounting.500 Shirts $ 500. 750. consider the tradeoff between the lost discounts and higher ordering costs of ordering 500 at a time versus the potential loss from unsold shirts.00 Forgone discount: -0Unsold shirt costs: b 7.000 or 2. the next order (if there is one) could be for 500.000. Inc. even though full price was paid for the shirts.80 each.24–30. incurring an incremental set-up cost of $100.00 -0-0$ 100.000 units as indicated by the new information.500 x ($5.00 – $3.00 Set-up costs: $ 100.600.00 (5 orders @ $100) [2.80)] Costs of 500 unit order policy 2. b2.

..............00 $519....... a full five hours of cost are assigned to the set-up cost. They are not relevant costs of this cost assignment..25 ........... 68...75 Variable overhead—machine hour base (1 x $5) ......) Overhead application and inventory management costs: Commercial Furniture Inc...... 5................ • 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. Explanation of costs: • The full cost of the maintenance men’s salary and employee benefits is included because the $10.............. Production department costs: Salaries (5 x 5 x $7. therefore..80 incurred per man hour is incurred solely for the purpose of affecting the changeover.........00 Direct materials ($200 x $50) .80) ........ then the full amount would not be charged to set-up.................00 261.... Chapter 24 693 $108.......... therefore......Solution to Integrative Case 24–31.......... If the workers could have been assigned to other jobs during the changeover...... 187.....75) ........ *CMA adapted © The McGraw-Hill Companies.... (60 min......25 150...... Inc... • 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.......... An estimate of Commercial Furniture’s set-up is as follows: Maintenance department costs: Salaries (2 x 5 x $10........50 Variable overhead––labor base (5 x 5 x $2. • 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......* a. 1997 Solutions Manual.. • 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......... one hour is assigned to set-up cost for the one hour the machinery is used in testing.. Total .. • 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.......... • The variable overhead costs of the production department applied on the direct labor base are incurred as a function of the direct labor hours...........50) ..

the opportunity cost for the funds committed to the investment in inventory. Inc. © The McGraw-Hill Companies.24–31. 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.. 1997 694 Cost Accounting. 5/e . (continued) b. warehouse wages..e. insurance and other costs which vary in amount by the number of items stored).

Chapter 25 Management Ethics and Financial Fraud Solutions to Review Questions 25–1. Chapter 25 695 . 25–5 Without internal control regulations. 1997 Solutions Manual. it increases the risk that someone will “blow the whistle” on the fraud. Often. 25–7. 25–6. and (2) the misstatement must be material to the financial statements. “Tone at the top” refers to the tone that top management sets in dealing with ethical issues. Materiality is difficult to define in practice because it is hard to know what amount is important to a decision maker. Common examples of fraudulent financial reporting are failure to write down obsolete inventory. Separation of duties helps prevent financial fraud because it limits the opportunity to commit the fraud. 25–2. the physical presence of a watchful internal auditor can deter fraud. Inc. the misstatement must be important. The increased risk of revealing fraud makes it less likely that fraud will occur. Internal auditors deter fraud by reviewing and testing controls and by assuring that controls are in place and working well. To be material. The two key concepts in the definition of fraudulent financial reporting are (1) the conduct must be intentional or reckless. When a separation of duties exists. Internal auditors detect fraud by employing special fraud examiners or investigators whose job is to identify fraud. 25–4. top management is able to use the excuse that they did not know about bribes made by lower level managers. Fraudulent financial reporting is intentional conduct that results in materially misleading financial statements.. Materiality. © The McGraw-Hill Companies. refers to the magnitude of the misstatement. The internal controls requirement forces top management to be aware of the bribery or face charges that the controls were insufficient. While collusion can and does occur. two or more individuals must engage in collusion to commit fraud. Simply stated. and recognizing revenue before the sale has been made. The tone is critical because top management’s actions have a great impact on ethics at lower levels of management. in our setting. the magnitude of the misstatement must be large enough that it would likely affect the judgment of a reasonable person relying on the information. 25–3.

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. cost of goods sold. 25–11. No. The clerk’s actions could easily be unintentional if the clerk thought the inventory was not obsolete. For Year 2. the individuals involved sign consent decrees in which they neither admit nor deny guilt. sales. particularly if the auditee went bankrupt. Generally. 25–14. Inc. For Year 1. Early revenue recognition in Year 1 often leads to early revenue recognition in Year 2 and so on. 25–16. cost of goods sold. only to have the bottom fall out in Year 2. 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. though. gross margin. 25–13. accounting for the stolen items as spoilage would be financial fraud if the item is material and the cover-up is intentional. Also accounting firms are a source of funds where investors can collect for damages. 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. the income statement shows the opposite effects of Year 1—sales. The error in recording is not intentional. © The McGraw-Hill Companies.25–8. See question 25-10. so someone in accounting will eventually be held responsible if the inventory is not written off. accounts receivable is overstated and inventory is understated. These managers probably expected the false numbers and the correct numbers to converge someday. if someone in operations told the clerk the inventory was not obsolete. 25–10. Early revenue recognition is an example of unethical behavior that sends a message that unethical behavior is normal practice. 25–12. 5/e . performance in Year 1. 1997 696 Cost Accounting. Generally. Unintentional errors in preparing financial statements are not fraudulent financial reporting. Year 1. but they agree not to commit certain acts or do certain things in the future. None of these cases went to trial. In addition. 25–15. Answering this question requires some speculation. planning. At December 31. but fictitious. it is not financial fraud. Financial fraud was not proved in these cases. Fraudulent financial reporting is not embezzlement or theft. Solutions to Critical Analysis and Discussion Questions 25–9. Accounting people have the responsibility to record assets and transactions properly. and profit amounts are overstated.. and control. gross margin and profit amounts are understated. early sales sometimes are fictitious when customers change their mind before the sale has been finalized. assuming the revenue exceeded the cost of goods sold. for example.

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. she would begin looking for a new job. and Year 2 would be overstated even more to improve apparent earnings above the actual level. but not until after several years of defending herself against the charges. 1997 Solutions Manual. top management may expect more from a division than operating and market conditions allow. The Treadway Commission listed the pressures to achieve unrealistically high. The problem gets larger and larger each year if managers or accountants continue the illusion. If her inquiries were ignored. Year 2 revenue “must” be overstated just to bring Year 2 back to actual. 25–20. however. top management may choose to knowingly expect unrealistic results. The perpetrator of the fraud may be promoted before the negative consequences of the fraud are revealed. she would avoid accusing someone of misbehavior before she had proof of wrongdoing. but would inquire as to the propriety of their actions in view of the company’s accounting and sales policies. The approach does not encourage or reward innovation and superior performance. On the other hand. and that they may be too zealous regarding the company’s profit potential. it also minimizes incentives for superior performance. the perpetrator of fraud may believe he or she will be fired if the short-run targets are not met. The “friend” was among those charged with the fraud because she knew about it and was suspected to be involved.25–17. Combined. thinking that attempts to achieve the results will produce better results than if expectations were lower. In this way. Her initial contact would not accuse the alleged perpetrators of committing fraud. 25–21. In the actual case. so he or she has little to lose by committing fraud to meet the targets. top management is usually not involved with the details of local operations. This incentive approach minimizes incentives to commit financial fraud. She lost her job.” Overstating revenue by early revenue recognition in Year 1 automatically understates revenue in Year 2. Alternatively. Committing financial fraud in the current period may seem to outweigh future problems that the fraud may cause. and she spent a lot of time defending herself. she says she would immediately inform the head of the accounting department. and at least two other people in the organization who were higher than her boss. If she were faced with similar circumstances again. 25–19. The situation in this question is based on an actual case. She was eventually cleared of wrongdoing. © The McGraw-Hill Companies. Therefore.. Chapter 25 697 . the two factors produce an environment that is highly conducive to fraud. Inc. 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. 25–18. Two explanations for the existence of unrealistic profit objectives for division managers are that upper management may be uninformed about the division. short-term financial results and incentive systems that focus on short-term financial results as examples of factors that may produce financial fraud. 25–22. Unwittingly. In decentralized and widely dispersed companies.

People with big egos often want to make a big splash without concern for the consequences. Miniscribe’s management may have placed too much emphasis on the short run.. Fraudsters who end up in prison relish the opportunity to share their many illegal experiences. 5/e . 4) Hire people who have good reputations. even if they eventually get caught. Also. Both rewards and punishments were based on the achievement of unrealistically high profit objectives. Promote people with integrity to top management positions. 2) Provide an ombudsman with whom employees can discuss questionable activities in confidence. Four compensating factors may be of assistance: 1) The internal audit department should assume a “watch-dog” role. 25–25. 25–24.25–23. 3) Top management should convey a “tone at the top” regarding ethics that encourages excellence in ethics. people with big egos may believe they would never get caught! © The McGraw-Hill Companies. They appear to enjoy getting away with something in the short-run. thus reducing the opportunity to commit fraud. 1997 698 Cost Accounting. Inc.

100 $ CGS .) a. try the following: • Confirm accounts receivable with customers....... Accounts Receivable and Revenue would be overstated... physically. Chapter 25 699 ...................... (25 min........ To find the errors...... Determine whether year-end Accounts Receivable are unusually high....... Inc............... then the company’s records may be wrong.... Year 1 (actual) Revenue ...... • • © The McGraw-Hill Companies..... which may indicate customers do not owe the money. 50 Gross Profit ..Solutions to Problems 25–26....... 50 $ b. 50 $ Year 2 (actual) Year 1 (fraud) $120 60 $ 60 Year 2 (assuming no additional fraud) $ 80 40 $ 40 Revenue ..... 100 $ CGS ............. If customers say they did not owe the money or purchase the goods as of the end of the year........ 50 Gross Profit ................ Inventory would be understated because goods that are still in inventory would be reported to be sold.... Cost of Goods Sold would be overstated. Count the inventory.. The physical count should reveal inventory on hand that has been reported to be sold as of the end of the year. 1997 Solutions Manual................ Example Explain early revenue recognition.............. Analyze the accounts to see if Accounts Receivable are old..

If the inventory turnover ratio (inventory turnover = cost of goods sold/inventory) goes down over time. • © The McGraw-Hill Companies. 5/e .. thus leaving on the books an asset that should be expensed.25–27. Inc. Have people who have technical expertise (e. (25 min. and make sure the inventory that is reported is actually on hand. or is low compared to other similar divisions. thus overstating inventory and overstating profits.1. for example. Analyze the inventory levels and the relation of inventory to cost of goods sold. Inventory is often overstated by not writing off obsolete inventory. In the PepsiCo case. Inventory may also be overstated by reporting inflated ending inventory values as at Doughties’ Foods. Inventory overstatements can be found as follows: • • Count the inventory accurately (not like Doughties’ Foods). 1997 700 Cost Accounting.g. obsolete and broken bottles were not written off. inventory may be overstated..) Explain inventory overstatement. b. engineers) check both the physical inventory and the records to find obsolete inventory (particularly important in high-tech fields). See Illustration 25. a.

25–28. Hanley was responsible for both counting and reporting inventory levels. Hanley was apparently trying to avoid the criticism of top management. The auditors did not question or explore the irregular actions that Hanley committed during the audit. There appeared to be no internal audit presence to monitor controls. Further.) Causes of fraudulent financial reporting: Doughties’ Foods. Doughties’ Foods did not have proper internal controls. b. © The McGraw-Hill Companies. A thorough examination of the inventories and irregularities may have identified the fraud earlier. 1997 Solutions Manual. his reports were not sufficiently verified for accuracy. such as separation of duties. d. Chapter 25 701 . 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. he would also be helping his employment and promotion prospects if he could show better financial results. Presumably. By committing financial fraud. c. 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.. Inc. Top management had poor internal controls to monitor potential fraudulent activities and other division managers seemed to engage in financial fraud. It is possible that while top management demanded high performance. (30 min.

In this case. The SEC did not file a complaint against the independent auditors. internal controls may have been fairly good. which provided an incentive for division managers to commit financial fraud. b.. If they operate as consultants. The company was relying on the division to provide the financial performance needed for corporate debt restructuring. 25–30. © The McGraw-Hill Companies. the language difference. and the role of internal audit as “consultants” instead of watchdogs. d. Problems with the rest of the company caused top management at Ronson to focus on the success of the aerospace division. Top managers were distressed to learn about the fraud. presumably because the auditors’ work complied with Generally Accepted Auditing Standards. highly motivated managers who achieved superior levels of performance. The false sales and invoice documentation involved the help of individuals in sales and accounting. While we do not know which specific controls were lacking. Internal auditors monitor internal controls and check to see if they are working. we know from the autonomy given to division managers. but the fraud involved collusion of a variety of individuals.) Causes of fraudulent financial reporting: PepsiCo. and they too were misled by division managers. 5/e . c. they lose the skepticism and element of surprise that helps find situations in which internal controls are not working. the distance from headquarters. d. 1997 702 Cost Accounting. provided a lot of autonomy and trusted the division managers. Pressure was continually applied in order to make the division perform even better. there was opportunity for division managers to design the control system to their own ends. (30 min. Top management focused on short-term performance. a.25–29. Inc. but the collusion occurred such that the internal controls were inadequate to prevent financial fraud. b. (30 min. Perhaps.) Causes of fraudulent financial reporting: Ronson Corp. The movement of the unfinished jobs that were recorded as sales involved the help of workers on the floor of the plant. PepsiCo rewarded aggressive. c. suggesting they thought they had set an ethical tone in the company. a.

the bonus plan adds fuel to a highly flammable mixture of factors that encourage fraud. The bonus plan provided a strong incentive for the CFO and COO to commit financial fraud. b. First. Profits would be overstated for the period to which the invoices were backdated. 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. On the other hand. (25 min.) Top management awareness of fraud: Leslie Fay. and are central to the internal control process. access by lower level financial employees to the CFO’s superior was reduced. If profits would fall just shy of $16 million. The profits would be understated in the following period unless the fraud was continued. Chapter 25 703 . c. a. Given that these two individuals have a major role concerning the tone at the top. The CEO apparently supported a compensation plan that was heavily weighted towards short-run performance. 25–32. who had a strong motive to achieve specific short-run results. © The McGraw-Hill Companies. Inc. 1997 Solutions Manual. Second. 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. the tone at the top was strongly influenced by the CFO. the CEO apparently did not commit the 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. and Cost of Goods Sold would be overstated. encouraged unethical behavior. Third. It could be argued that the CEO neither intentionally. Inventory would be understated. providing the opportunity for fraud.25-31. nor through reckless actions. (25 min. The plan was an all or nothing plan.. This made “whistle blowing” far more difficult.) Effect of bonus plan on financial fraud: Leslie Fay. internal controls were weakened because the CFO was apparently not being supervised. It could be argued that the CEO is responsible because he helped to create an environment that was conducive to financial fraud. The CFO and the CFO’s staff were given considerable autonomy. Accounts Receivable. Revenues.

The chief executive was willing to resign not because he participated in the fraud. his/her concerns should be put in writing. His statement implies that unethical behavior is acceptable as long as it cannot be detected.25–33. A student responds as follows: The previous participation should not influence how my friend should act in the future.) Top management’s responsibility for fraud: NBC News. the previous participation in the fraud is similar to a sunk cost.. was followed by an opposite action by his superior. © The McGraw-Hill Companies. 5/e . I would recommend that my friend resign rather than continue to participate in the fraud. the President’s tone is more likely to be conveyed to the rest of the organization. but because he had failed to prevent the fraud. His action. Additionally. As a result. Two tones were set by the actions of the NBC News chief executive and the President of NBC. I recommend he/she report the fraud. Given that the President of NBC remained at NBC while the news chief executive did not. As such. 25–34. 1997 704 Cost Accounting. proceed to a higher level. Inc. however. the president of NBC. (25 min. If a superior was involved. I understand that such an action would be difficult. The NBC News chief executive’s resignation suggested that NBC intended to uphold the highest of ethical standards. consequently I would be willing to help my friend through the transition.) Taking action in the face of fraud. (20 min. The president of NBC set a tone that accepted unethical behavior. If no action is taken.

..) Motives and opportunities for fraud: H....... 50 Optg....... Examples will vary...$ 30 Year 1 (fraud) $100 50 30 $ 20 Year 2 (fraud) $100 50 10 $ 40 b............ top management may not believe it should audit the results............. Inc....... a....... 20 Optg. The example should be similar to the following: Year 1 (actual) Revenue .... the divisions created an income cushion that would allow for future manipulation of profits... it should be indicated that participatory budgeting can help to mitigate the us-versus-them problem... as long as the divisional profit objectives are met..... 50 Optg.. Further... In a sense..... d.. This kept both headquarters and the divisions content. Profit........$100 CGS ... Heinz Co.........$ 30 Year 2 (actual) Revenue . top management generally finds it difficult to determine whether income is being shifted or not............. Without an understanding of divisional operations.... the divisions were able to gain greater control over achieving the profit objectives sent down by corporate headquarters.... In effect...... Profit objectives originated at corporate headquarters with inadequate regard to the division’s ability to achieve them.. J... Profit.. © The McGraw-Hill Companies..... 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... financial fraud made life easier for everybody.... the profit objectives were not developed with an indepth understanding of the divisions’ operations.......... The divisions developed operating procedures which allowed them to report the numbers that headquarters wanted to see and..$100 CGS ... at the same time... Expenses ... By transferring income from period to period... Expenses .... 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....... As in many decentralized companies.... Chapter 25 705 ............. 20 Optg.. c..... 1997 Solutions Manual.Solution to Integrative Case 25–35.

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Efficiencies can be realized for costs only. Inc.Chapter 26 Revenue. It may be very useful to learn about the mix variance because if the mix is changing. 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. a mix variance can arise even if the net effect of all variances is zero. unfortunately. We want to isolate the cause of the variance separately for price changes and cost changes. and Yield Variances Solutions to Review Questions 26–1. The industry volume variance measures the impact of differences between actual and expected industry sales volume on the company’s sales activity variance. we can isolate the effect of price changes. 26–4. Mix. Chapter 26 707 .. 26–3.S. The costs are then analyzed separately. 26–2. If a company has two or more products. The U. 26–5. automobile industry was facing rising revenues and rising volumes but. there were falling profits because buyers were purchasing smaller cars that had lower profit margins for the manufacturers. 1997 Solutions Manual. By holding the costs at standard when analyzing revenue variances. 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.

In this situation the company is really selling just one product so a mix variance would not be meaningful. In a CPA firm.. If. 26–7. a staff accountant’s time is billed at a lower rate than a partner’s time. partners make more than junior accountants). the signal that the marketing manager has received is misleading– variable costs must be incurred to achieve the higher revenue levels. 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. While this occurs infrequently. 26–10.. and. © The McGraw-Hill Companies. as in other professional firms. 26–8. marketing was unable to sell the production then the production manager’s assertions have merit. 26–9. billing rates vary with the level of the professional person performing services. most likely in profits as well). 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. It could be that the variance the marketing manager refers to is a revenue variance alone and not a contribution margin variance. 5e . 1997 708 Cost Accounting. However. hence.g. Salary rates vary according to the classification of the professionals in the firm (e.g.Solutions to Critical Analysis and Discussion Questions 26–6. An unfavorable mix variance would suggest that partners were doing work that juniors should have done. If so. it is worthy of investigation when allegations arise such as those stated by the production manager. Even though the volume of hours billed may be the same. production) may arise due to activities in other departments. Hence. if production were operating inefficiently and. Thus. a labor mix variance can be calculated to show if the appropriate personnel were used on that engagement.. Inc. on each engagement. 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. The point of the question is that variances in one department (e. indeed.

000 units x ($9.000 U Price variance 26–12.65) = $1.) $53.111. Actual 190. Inc.65) = $1.000 "Flexible Budget" 220.95) = $1. 1997 . (10 min.00 $3.500 Master Budget 200.000 U Price variance 709 $176.000 x ($9 $3.00 $3. Inc. (10 min.016.000 $95.500 U Activity variance Sales price and activity variances: Creative Towels.Solutions to Exercises 26–11.. Inc.500 Flexible Budget 190.250 $220.65) = $921.) Sales price and activity variances: Creative Towels.00 $3.750 F Activity variance © The McGraw-Hill Companies.000 units x ($9.070.000 x ($9 $3.000 Alternative 2 185. Alternative 1 220.95) = $891.50 $3.000 units x ($8.95) = $934.000 x (8.

(15 min.000 $125.000 = $54.26–13. (20 min..000 Actual 125. 1997 .000 x $38 = $5.000 x $38 = $4.000 = $72.000 F Industry volume variance (SP – SV) x SQ $3 x 20.750.000 $18. Standard contribution margin times budgeted market share percentage times actual industry volume Master Budget Flexible Budget (SP – SV) x AQ $3 x 18.) Industry volume and market share variances: Placer Hills Products.700.) Sales price and activity variances: Sakata.000 U Activity variance 710 © The McGraw-Hill Companies.000 U Activity variance 26–14.000 $12. $3 x 20% x 120.000 U Price variance $950. Inc. Inc.625.000 = $60.000 Master Budget 150.000 x $37 = $4.000 drums x ($48 – $10) = 150.000 Flexible Budget 125.000 x ($47 – $10) = 125.000 U Market share variance $6.

1997 .000 x $38 = $3.26–15.700.) Industry volume and market share variances: Sakata. (15 min.000 711 © The McGraw-Hill Companies.800..000 U Industry volume variance (SP – SV) x SQ 10% x 1.000 x $38 = $4.500.750.000 $1.5% x 1. Flexible Budget Standard contribution margin times budgeted market share percentage times actual industry volume Master Budget (SP – SV) x AQ 12.000 x $38 = $5.000. Inc.000 U Activity variance 10% x 1.000 $950.000 F Market share variance $950.900. Inc.000.

000 units 26–17. 2.000 x ($24.95 – $10.) Industry volume and market share variances–missing data.) a.95 – $5.775.000 – (b)] x 10% = 1. Inc. Activity variance Sales mix and quantity variances: Fit-Right Gloves.00) + 200. (20 min. 10% d.. a.00) + 180. 70.000 Activity Variance Master Budget 400.000 x ($10. 1997 712 Cost Accounting.000 b.000 = 1.95 – $10.000 U © The McGraw-Hill Companies.400 + 1.00) = 4.00) = $5. [(d) – 10%] x 70. 60.000 $296.95 – $5. Flexible Budget 300. (20 min.000 x ($24. 5e .400 units = 1. [70.26–16. 12%.071.000 units.000 units c.000 x ($10.400 units e.

95 – $5.95 – $10.00000000.95 – $10.071..552 400. 1997 . + 500.00) + 180.775.26–17.95 – $5.95 – $5.00) 580.000 x –––––– x ($24.000 U Activity Variance $699.371.0000000000 300.00) 180.000 = $5.000 x ($24.000 x ($24. = $4.000 $403.000000000. Inc.000 x ($10.95 – $10.00) 580.448 F $296.00) Quantity Variance Master Budget (SP – SV) x SQ = $4.000 x ––––––– x ($10. (continued) b.448 U 713 © The McGraw-Hill Companies.000 x ($10. Mix and quantity variances Flexible Budget (SP – SV) x AQ Mix Variance (SP – SV) x ASQ 400.00) + 200.0000000000 500.

000.068.000 $76.000 $200.26–18.000 U Total variances $56.000 F $100.000 $300.000 units x $150 = $5.000 units x $150 = $6.000 F Material B: 38.000 F 714 © The McGraw-Hill Companies. Materials mix and yield variances: Rosette Industries.000 $132.000.000 units x $94 = $2.000 Price Variance Actual Inputs at Standard Prices 22.000 units x $100 = $2. (35 min) a.000 units x $152 = $5.200.700.000 units x $100 = $2..000 U 20 x 2.000 Efficiency Variance Flexible Budget (Standard Allowed) 10 x 2. Actual Costs Material A: 22.000 F 38. Inc. 1997 .776.

Actual Inputs at Standard Prices Material A 22.26–18. (continued) b.000.000 $ –0– 2/3a x 60.000 Yield Variance Flexible Budget 10 x 2..000 $ –0– $ –0– 20 x 2.000 units x $150 = $5.000 + 38.000 = 60.000.000 F $100.000 units x $100 = $2.000 x $150 = $6.000 x $100 = $2.000 F $100.000.000 units 715 © The McGraw-Hill Companies.000 $300.000 Material A: 10/(10 + 20) = 1/3 Material B: 20/(10 + 20) = 2/3 units used: 22.000 F aProportions: bTotal Mix Variance SP x ASQ 1/3a x 60.700.200.000 $200. Inc.000 U Material B 38.000b units x $150 = $6.000b units x $100 = $2.000. 1997 .

000 U a(AP $92. (20 min.) Sales price and activity variances: Chapman.150. Price Variance a Actual (AP – SV) x AQ $2.039.000).000) + $2. 716 © The McGraw-Hill Companies.160.000 = $2.500 + $1.000 – ($35 x 34.000 + ($65 – $35) x 34.650 = $1.232.26–19.180. Inc.000 Flexible Budget (SP – SV) x AQ ($275 – $130) x 8.110.000 + $1. and Pollock.272. which equals $2.150.500 + ($65 – $35) x 34.000 – ($130 x 8.000 – ($130 x 8.035.000) = $1.000 $35. Krueger.000 U – SV) x AQ equals (AP x AQ) – (SV x AQ).000 = $1.500 = $2.000 Activity Variance Master Budget ($275 – $130) x 8.020.000 + $1.000 = $2. 1997 .145.225..

500 ($145 x –––––– x 42.500 hrs.180. + 34.000 *Alternative calculation: Weighted-average contribution: $2.150 = $2.653534 8.000 x 145) + (34.650 + ($30 x –––––– x 42.) Sales mix and quantity variances: Chapman.272.552U Quantity Variance Flexible Budget (SP – SV) x AQ Master Budget (SP – SV) x SQ (8.26–20.650 x $30) = $2.150 34. 42.000 U Activity Variance $60. (25 min. Krueger. Inc.000 (8. and Pollock.000 x $30) = $2.448 U Mix Variance $92.000) 43.211.6535 = $2.650 hrs.448* $31.000) 43. (SP – SV) x ASQ 8.448 717 © The McGraw-Hill Companies.000 x $52.211.272.500 x $145) + (34. 1997 ..000 = $52.

800 hours = $18. Inc.900 $2.600 F $4.040 F Unskilled Labor $33. (35 min..060 U $6.30 x 1.600 hours = $29.540 Efficiency Variance Flexible Budget (Standard Allowed) $10.000 hoursa = $20. 718 © The McGraw-Hill Companies. Actual Costs Skilled Labor $17.000 $3.500 Price Variance Actual Inputs at Standard Prices $10.50 x 4. 1997 . Labor mix and yield variances: Speedy Burrito.060 F $6.500 $2.000 hoursb = $32.26–21.100 U $2.50 x 5.30 x 2.660 F Note: See footnotes on page after part (b).) a.600 $1.

30 x 1.540 $294 F Unskilled Labor $6.000 hours = $20.30 x 4/14 x 6.800 hours = $18.766 F $6. Actual Inputs at Standard Prices Skilled Labor $10.000 hours = $32.26–21.50 x 10/14 x 6.714 $2.500 Note: See footnotes on next page.786 F $4. (continued) b.600 hours = $29.600 $1. 1997 .660 F $6.834 Yield Variance Flexible Budget (Standard Allowed) $10.30 x 2.50 x 5.. 719 © The McGraw-Hill Companies.50 x 4.400 hoursc = $18.400 hoursc = $29.552 F Mix Variance SP x ASQ $10. Inc.900 $186 U $108 F $4.

0833 per equivalent meal $1.600 minutes per equivalent meal x 30.500 hours: 1.0833 x 30.. 14 10 min.000 equivalent meals = 300.000 minutes = 5. 5e .000 equivalent meals = 120.800 + 4.6867 per equivalent meal $.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. + 10 min. 14 © The McGraw-Hill Companies.50 = $1. Proportions: Skilled: Unskilled: 4 min.000 hours The alternative method: ( cTotal 10 minutes 60 minutes ) x $6. = 10 4 min. 4 = 4 min.30 per hour = $.400 hours.000 meals = $20. (continued) aThe flexible budget hours are calculated as follows: 4 minutes per equivalent meal x 30.6867 x 30.000 minutes or 2. + 10 min.600 = 6.000 equivalent meals = $32. Inc.26–21. 1997 720 Cost Accounting.

Sales price and activity variances.000 ] [ + 1.400 a Unit contribution margins calculated from master budget panel as follows: Unit margin = Contribution margin/Sales units. Both alternatives are given on the following page. Two solutions are possible when calculating the market share variance. In this situation. another way to solve the problem would be to use the standard price times the actual quantities at the standard mix.000 ] b.235 b $6.810 – $4.000 – $4.000 x $. (30 min.300 2. Flexible budget (SP – SV) x AQ (800 x $. depending upon the figure used for the left column. However.30 ) + (1.100 x $. Chapter 26 721 .000 ] [ + 2.35) = $1.Solutions to Problems 26–22. The examples in the text use the flexible budget amount.000 x $1.40) + (2.600 1.. © The McGraw-Hill Companies. (AP – SV) x AQ Master budget (SP – SV) x SQ $5.575 = $1.) Revenue analysis using industry data and multiple product lines: In-n-Out Carpet Co. those examples involve only one product. Inc.600 = $1.375 $140 U Sales price variance $25 U Sales activity variance a a. b [ 800 x $700 1. and therefore a mix issue is present. whereas this problem has two products.100 x $2. 1997 Solutions Manual.

a ( 1..900 x ––––– x ––––– 4.330 $70 U Industry Variance $35 U Quantity Variance Master Budget $1.000 1.000 –––––– x $1.000 1.400 40.330 $70 U $25 U Activity Variance Master Budget $1.900 rolls x ($1. 3.000 $700 3.365a $35 F Market Share Variance Industry Effect 38. 1997 .375 $45 F Industry Effect $1.000 $400 3.900 x ––––– x ––––– 4. (continued) Contribution margin variance Actual Quantities at Standard Mix and Standard Prices $1.000 2.26–22.000 = $1.000 rolls) = $1.000 ) = $1.000 $300 3.400 The $10 difference in the market share variance is explained by the difference in the mix. Inc.000 ) ( + 2.400/4.365 A shortcut is to multiply the actual number of rolls times the average contribution margin per roll in the master budget.365.000 ) ( + 1. (continued) b.400 Flexible Budget $1.900 x ––––– x ––––– 4. 722 © The McGraw-Hill Companies.

900 x 1.900 x 2.000 3.375 Master Budget (SP – SV) x SQ (1. (20 min.000 3.000 x $.100 x $.400 + + ( ( ( 3.000 x $.30) + (1.35) = $1.) Sales mix and quantity variances: In-n-Out Carpet Co.900 x 1.000 x $.35 4. Mix Variance (SP – SV) x ASQ Quantity Variance Flexible Budget (SP – SV) x AQ (800 x $.26–23.40) + (2. Inc.40) + (2.000 = $1..40 4.30) + (1.30 4.000 x $.000 x $.000 x $.35) = $1. 1997 .000 x $.365 ) ) ) $35 U $10 F $25 U Activity Variance 723 © The McGraw-Hill Companies.

and mix variances: Sea Air Airlines.26–24. Standard Variable Cost..560 million favorable variances (7% x $8 million master budget = $.129 million F Price variance $.729 million Flexible Budget 43 million x 20¢ = $8.3¢ – 10¢) = $8.6 million Industry Adjusted Budget (40 million x 20¢) x 1. 1997 .560 million). the seven percent industry improvement translates into $. (20 min.56 million Master Budget 40 million x 20¢ = $8 million $. 724 © The McGraw-Hill Companies. Actual Quantity (AP – SV) x AQ 43 million x (30. industry volume.07 = $8.560 million F Industry a variance $.04 million F Market share variance $.) Sales price. Actual Price. Inc.600 million F Activity variance a From another perspective.

360 a Product ZR-7: + $11.80 = . mix and quantity variances: Eccentric Inc.000 = $9.080 c Quantity Variance Master Budget $1.000 b Contribution margins: $6.80 b + 5.360 2. (AP – SV) x AQ Price Mix Variance Flexible Budget Variance a SP x ASQ 8.400 x 2. 2. 6.800 x $1.) Sales price.040 F Activity Variance a Standard variable cost per unit times actual volume: AR-10: ZR-7: $2.75 x $1. 6. (30 min. 2.360.000 $6.400 x .600.000 .000 – 2. 8.000 ..560 – $3.000 x 5.000 ZR-7: ZR-7: .000 AR-10: .80 c + 8.26–25.00 = $12.80 x 2.00 = $10.25 = .760 – $5. 8.75 = 6.600 x $1.000 + $1 x 6.000 © The McGraw-Hill Companies.25 x $1. 1997 725 .00 = $10.000 $1.800 = $3.600 = $5.600 Total: = $10.400 x .000 – 6.600 Product AR-10: $ 7.000 c Budgeted mix: 2.640 $280 U $560 F b $480F $1. Inc.400 AR-10: $1.

20 $799.000 Total Variances $2.308.75 x 24.000 gal. = 24.) x 300 gal.854 F $1 x 18.) Materials mix and yield variances: Duo Co. c (40.480 gallons = $16.480 + 25. = 18. ÷ 500 gal.000 gal.000 $710.20 U $1 x 52.000 gal.900 $100.540 gallons = $18.200 + 18.) x 225 gal.540 $1 x 18.799.710.) x 100 gal.960 $249. 1997 .220 gal.60 U $2 x 8.220 gallons 225 x 625 = $18. (40. (30 min.384 $424 U $2 x 8.75 x 52.220 gallons 300 x 625 = $18.20 U $2.80 U $.540 a b 726 © The McGraw-Hill Companies. = 8.20 F $91..40 U Salex $17.640 $1.000 gal.799.400 U Efficiency Variance $799.220d gallons 100 x 625 = $16.200 gallons = $18.000 Cralyn $16.690 F (40. ÷ 500 gal.000b gallons = $18. = 8.40 Maxan $17.000 gal. d 52.20 U $2.000a gallons = $16.000c gallons = $18. 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 52.75 x 25.000 gal. Inc. ÷ 500 gal.80 U $.20 $259.686 $1.260 F $.26–26.

500 Yield Flexible Budget 500 x $8 + 500 x $7 + 500 x $5 = $10.000 Direct (550 x $8.. Inc.) Labor mix and yield variances: Rock Solid Engineering.26–27.575 x 1/3 x $7 + 1.40) = $11. (30 min.50) + (375 x $5.825 $750 U $325 U Mix SP x ASQ 1.50) Labor + (650 x $7. 1997 .575 x 1/3 x $8 + 1. Actual Price Actual Inputs at Standard Prices (550 x $8) + (650 x $7) + (375 x $5) = $10.575 x 1/3 x $5 = $10.575 $500 U $825 U 727 © The McGraw-Hill Companies.

$64. g $30.000) c $240.000) + ($5 x 25.26–28.000 + $300. = $630.06 [($10 x 60.000 units x budgeted contribution margin of $2 ( ( ( ( )) )) 728 © The McGraw-Hill Companies. $300.000 = .000 b 100.000)]. etc. Revenue minus standard variable manufacturing costs by product: Flexible (AP – SV) x AQ Price Budget Mix Plastic Metal Variable Marketing f Costs: Contribution Margin $150.000 125.000 (52.200 F Price Variance g a (SP – SV) x ASQ Quantity Master Budget $100.06 ($630.000/75.000 (54.000 – 400.000/75.500 F Quantity Variance $6. 1997 .000). Inc.000 = ($2 x 50.000 budgeted units e $240..000 U Mix Variance $176.000/75.000.500 U Activity Variance a b $500.000 x 80.000 budgeted units d20.200 $28.000 x 80.000 (55. (30 min.000 x 80.00)].000) + ($15 x 50.800 = . $54.000) e $166.800) $194.) Contribution margin variances: Paulette Division. c60.000 revenue price variance for the Plastic Model minus six percent variable marketing costs.000 (64.000 – 250.000) f Based on six percent of sales dollars.000 = .06 [($10 x 25.000 units x budgeted contribution margin of $5 = $375.000. $55.500 $120.000 d 100.000 $10.000/75.000 25.000) + ($15 x 20.500) $172.000 $3.000 x 80.000 50.000 – $200.000 – $480.

1997 Solutions Manual. Budget adjusted for 10% industry increase $172.750 $23. Inc.500 x 1..26–29. © The McGraw-Hill Companies.500a aFrom Problem 26-28.000a $172.1 = $189.750 U Market Share Variance $6.) Analyze industry effects on contribution margins: Paulette Division. Chapter 26 729 .500 U Activity variance $17.250 F Industry Variance Flexible Budget Master Budget $166. (20 min.

40) 12 oz (50.200 13.000 712.500 $494.35) (110.15) $208.000 261.000 x $0.000 x $5..40) (60.000 x $1.800 © The McGraw-Hill Companies.Solutions to Integrative Case 26–30.17) Total Fixed Costs Total Costs Operating Profit Budget $432.000 x $4. 5e . Inc.16) 12 oz (50.80) $378.500 147.200 $234.000 x $0.800 11. 1997 730 Cost Accounting.000 $250.000 x $0.98) (60.000 x $0.500 (70.22) (110.500 336.100 175.300 $224.22) 10 oz (120. (60 min.80) Total Variable Manufacturing Costs: 48 oz (80. mix variances.000 x $2.65) (110.000 x $0.000 $947.100 (70.) Comprehensive review of variances.700 43. Actual Revenues: 48 oz (80.000 x $5.000 x $2.125) 12 oz (50.000 126.000 x $1.600 $535.000 x $0.200 18.16) (60.400 44.17) $ 11. analysis of differences between budget and actual: Sip-Fizz Bottling Co.200 (70.000 x $3.000 x $2.000 $985.23) Total Variable Marketing Costs: 48 oz (80.000 x $2.75) 10 oz (120.000 x $2. a.000 308.000 217.100 $ 12.200 182.600 159.000 137.000 x $4.35) 10 oz (120.000 20.000 761.

800 © The McGraw-Hill Companies.125 + .483) $234.383 7..000 x ($3.87 + 120.000 x $1.000 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 $224.23 + .17) = $579.000 x $3.000 x $2.000 x ($1.000 x $2.14 + 50.000 $7.16) + 50.32 = $553.000 x ($2. (continued) b.35 + 120.26–30. Variance computations (analysis runs across this page and the next page) Revenues Actual 80.458) (6. 1997 Solutions Manual.000 x $5.75 + .300 $26.000 x $4.80 = $985.200 22.200 U 80.500 -0- Variable Costs 80.100 Fixed Costs $182.22) + 120.40 + 50. Chapter 26 731 .000 (39.200 958 26.000 U $175. Inc.500 Price Variance Flexible Budget $985.

000 x ––––––– x $4.000 + 250.000 + 250.26–30. such as increasing the number of 10 ounce bottles sold.000 +110.14 240.000 60.000 x ––––––– x $3.000 Quantity Variance Master Budget 70.32 = $537.000 + 60.000 x ––––––– x $2.000 + 250. Inc. such as substituting one labor class for another.000 x $5.87 240.000 x $3.000 = $986.000 +110. (continued) Mix Variance 250..40 x $4.32 240.35 x $2.483 F a aDo not confuse this mix variance with the mix variance calculated for manufacturing costs.35 240.87 x $1. This mix variance measures changes in costs incurred because of a change in the mix of outputs.000 110.000 110.80 240.14 x $2. © The McGraw-Hill Companies.000 + 250.80 = $947.000 + 60.000 x ––––––– x $2. 5e .000 x ––––––– x $1.200 SP x ASQ 70.383 U $175.000 = $559. 1997 732 Cost Accounting. (continued) b.40 240.000 60. That variance measured the changes in costs incurred because of a change in the mix of inputs.000 x ––––––– x $5.458 F 250.000 70.458 $958 U $6.000 70.583 $22.000 $39.

458 514..896g 559.383 U Master Budget $947.000 x 240.000 ––––––– x $.300 406.000 60.796 U 22.16) + (60.000 x $2.000 x $.687d 44.875 175.000 x $3.26–30.15) d 250.200 Manufacturing Cost Variance $26.98) + (60.200 U 26.000 x $2.000 ( ––––––– 110.400 175.000 x $.075 F 409.22) + (110.000 110.000 x $.65 ) ) + 240.200 U 26.100 Mix Variance $ 958 U 5.800 175.000 x $2. (continued) Revenue Variable Costs: Manufacturing Marketing and Administrative Total Variable Costs Contribution Margin Fixed Costs Operating Profit a Alternative Solution Sales Price Actual Variance $985.000 $257.15) (80.000 h (70.000 x $.400 5.000 [( ––––––– 70.000 x $1. 1997 Solutions Manual.458 F 20.22) + (120.200 U i 7.000 x $2.525 F 426.22 + ––––––– x $.075 F –– $17.000 494.98 ) ) + 240.500 508.000 x $.200 182. (continued) b.75) + (120.23) c (80.100b 44.100h 537.16 + ––––––– x $.000 x $2. 250.000 x $1.000 ( ––––––– 60.15 )] )] e f (70.16) + (50.000 x $1.000 x $2.000 240.200 -0- -0-0a b 432.17) i insufficient information is given to classify this as a manufacturing cost variance or a marketing and administrative variance.787 F 696 F 6.000 x $2.500 -0535. Chapter 26 733 . Inc.583 Quantity Variance $39.65) + (110.98) + (50.000 x $.875 17.000 U $33.17 240.200 U -0-0- Marketing and Administrative Variance Flexible Budget $985. (80.525 F –– $5.000 x $1.100e 43.000 240.000 $224.200f 553.17) g 70.900c 44.200f 579.000 x [( ( ( © The McGraw-Hill Companies.000 $234.587 U 1.000 $251.800 calculated the same way as in the primary solution to requirement b.483 F Actual Quantities at Standard Mix and Standard Price $986.125) + (50.65) + (120.

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