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rl i :

I
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I
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 Tnblgof Conrerur

Part l-Costs: ConceptsandObjectives

t. Management,theController,
andCostAccounting
2. CostConceptsandthe Costaccounting
lnformation
System l3
3. CostBehavior
Analysis 25

Partl-Cost Accumulation

4. CostSystemsandCostAccumulation.... 6|
5. JobOrderCosting 80
6. Process
Costing 102
7. TheCostof QualityandAccounting Losses
forProduction 145
8. Costing
By-ProductsandJointProducts 178

Part3-PlanningandControlof Costs

Ma te ri a C
l s:o n tro l l i nCgo,sti ng,
andPlanning ... ... . ' 203
Just-in-Time andBackflushing . Dg
Labor:Controlling andAccounting forCosts. )45
Factory Overhead: Planned, Actual,andApplied )7 |
FactoryOverhead: Departmentalization 288
ActivityAccounting: Activity-Based Costing
a n d A c t i v i t y - B a s e d M a n a.g. .e m e n t 319

Part4-BudgetingandStandard
Costs

15. Budgeting:Profits, Costs,andExpenses

Sales, 340
16. Budgeting:Capital Research
Expenditures, and
Development andCash:PERT/Cost
Expenditures, 385
t 7 . ResponsibilityAccounting
andReporting... 410
1 8 . Standard
Costing:Setting
StandardsandAnalyzing ....
Variances 443
t9. Standard Costing:lncorporating
Standards
into theAccountingRecords 488

-lll-
Part 5-Analyris of Costsand Profits

DirectCostingandCost-Volume-Profit
Analysis 5t3
DifferentialCostAnalysis 543
Planning
for CapitalExpenditures... 588
EconomicEvaluationof CapitalExpenditures
.... 6r8
Decision-Making
underUncertainty 65)
ProfitPerformance
I
Measurements and
lntracompanyTransferPricing 688

-.1
I

-lv-
 CHAPTER 1
DtscusstoN OUESTIONS
Ot-1. Plrnnhg ir hl drvobprnrnt of e cqrrirron rl
by
of eglbnr. taaoutc.tr md mer'ur'm'ntt
of obi'cilivtt cm b'
which thr lchirvrmrnt
Pbnnhg trkor hto eccornl thr irtrr'
a.r.$.d
Etitlt botwren thr orgrni:atkxr errd itr rnvi'
tqln nl ir whrt'l|r b b br donr'
Cqrtrol ir thr preolr by which trlrnrg"r
grutl lhrt rr6urcrr rta obtrir'd rnd urd in
rn ollbbnt and .ttactiw ttlrnn.r !o crtty ot',l ttrt
pbn rnd rccornglirh thl orgrnizeti'cri'! obi'c'
tivor. Cotrtrol inpliot thrt prrlocnrrc' 'tr{lut..
tn.ntr rto rrvilwod to drt.rmin. if corrrctivo
rtbn ir nquircd
Plennirg rnd cantrol rn htrnrbt'd' Canttol
out wilhh thr ortlblirhrd plrnnhg
ir crrrird
tnrnrworl elrd rrrrrr !o ovrludo enfqnrrrcr
obieclivor rto
b th. Phn rc ttrd o,Fnirrtisd
rfiirwd.
Of -2. Shod.rrrge plenr ucully d.d with r plrird of e
qu.ttar or I y..1, while long[nga plmr ururlly
covrr thr.. to livo yern. Shon'rrngr Pbnt |''
d.tdl.d rnangh b prrmit pnprntin of e csn'
Pl.l. l.l of finrnchl rtrt.moritt u cf r lulun
dd., tiilb bng'nngo plenr cubnindr h r wry
turnrnrrizrd rt ol lrpoc{rd ruultr or t hw
qurrditie<! obiostivtr, lrdr u firrtcld rdbr.
Ol-3. Lorg.rrngr plrnl contrh quenlitalive rtlultt'
wtrilr rtrdogtc ptrnr rn tfir l..|t quryltiti.bl. cil
r.[ pbnr. Lary'nngr plrnr urudty lrlrnd lhrco
to tivo yorn hto tho futsrc, wtrib rlntogb pbnr
tily csrlomPbta thodar fi much longnr prri'
odr. tmgFrrngr plrnr covrrirg r throo'lofivr'
yo|r poricd would br ytgr'd.vrty lht.. lo
fivo yln, or might br ryrtrrnrlialty updetrd
reclr you lo mdnlrh I compbtr pbn, wtrilo
rtntrgic plrnr rrc lofirrbt.d rl inrgub irlrr'
vrb by en crmtLlly myrtrmrtic Prcort.
01-4. Accounlebility ir klmticrl with ruPonribilily
rccounling. Accosntrbilily dmlr with lhr dir'
c|rrtgo of gr irdivitulr rrrponrltility to echirvr
urignrd otrirctivu wibh hr e*l md .rP.ns'
.. dbrd fot.ito prdonnmcr end egrord to by
thr irdivilll
01 .5. Thr cqfrolbr 6o nct ccnllol. bst ri! lh. csr'
trol tut of tht mrnrgorirl lovrll by irruing
' ttpodt pohthg out dcvielisc lrqn thl prcdctlr'
min d courta oa &iim.
Ol€. Thr st d.plrtrnoflt ko.pt d.teil.d ncordr ol
.nattrdr. lrbor, lrsfory ovorhoad, |rld m..k.t'
hg rnd tdnhrttntiva axpon3.t: analyrs tirrr
corlr: irturr cgrtrol taPortt; Ptaprt.t cort
dudier tor plrnnhg end d*irbn tridhg; rnd
coordinrt.t cott rnd budgrt drte wilh olhrr
cr.trylnril.
O1.7. F Pdrrct roorrdr rnd derign, thr rrrnufr'
Urhg cbperirr|.ntr nord ortinrtd cl nrlrrirl.
hbor, rnd rtrrdlirr PtE.3l] str; lor m.'ruting
srd officirncy ol rchrduling. producing. rnd
htP.siing pmductr, tho drprrtm.ntt n'od lo
bd |ha codt irun d. Thr plr:anrl drprrr'
tnlrt rrrpplba mpfoyror'wrg. r.1.3- Thr trs'
|Ury dfrytm-t n..dt rccounting, budg.lrlg.
rd nhtrd rlgo.tr h rhrduling culr roqur'
tnatrtl. Tho rnrrtothg dlgertmrnl n.'dt cott
irlsnrtirr h riting prE.t. Tho ptblic rrblitu
qr Ptc... r'F'.
dagrtltn-n nreir'hfornrtbn
PtoaL, end divUrndr h sdrr to infotm thl puts
Ia Tha Lgal'dapstrnrnt noods st hfo'mrtbn
br frqirg rrny dteirs ol thr snpany h can'
b.mfy wlh lhr lrw.
Ol€. ltodrm trctlrluor h csrrnunrcatlcnt giv. th'
contrdbr end rntf lh. m.ant to tnnttnil hfor'
mdin in thr torrn cl cruttr. sutye.t. end foo'
crtto in r wry ntvrr bdorr poriblr' Profit
o P P o r t u n i t i a ro r c o n l r o l . c l i o n t h l v o b o l n
drbyrd or misrd rntiroly bxaurr ttn'ly hfot'
tilli*1 thrt mi!fit frrvr imprw.d lh' cosl 'nd
prolit poitbn of thr cornpeny w.s poorty cdtl'
mr,'rEsiad.
Ol-9. Thr budgot ir rn oclonlbt colt plennrng tool
brcaser it (r) lupplilr hfonnation and lrrvrl
rl e rtrlderd of prrlormarc. lor c€t cdtttol by
thr luprrviroc rciponriOto lor cg (b) ptwitor
Jr ..tt mrthod for enticipeting prolitr rt rn
$ticiPlt.d nlor'bvol; (c) hrlpr in foncarling
trbl, cotl3. rrponra3. and pro{ils lor t pricd
of orc Yorr or rrlr. h rdYs'tc..
Ol-tO. Thlr dendudr rill not nocr*arily bo rbb lo
pt.vonl rilntg.m.nt ftrud' but th'y do give
inttnrrl accounbtrtt scnr guilanct on how lo
preerd il thry rncountar ! qu'stiaublr prr'
ticr.
or
01-ll. CASB rtandard$ (l) rnuncialr a principlr
pnrriy'rl lo b. lollow.'{ (b) Glablbh Prtdictt
is 5rj rpptiod; (c) rpcfy crilrrie to br ornpbyrd
h rlcthg lrqrr allrnretivr principbr rnd prl:'
t!.! in orlinrting rccutnubtng, end rcporrr'g
cgltrrst cosb. Th. tttndatds at' btcktd tsf lho
lutt torc. trld .l{.ct ol thr tew.
 Chapter 1

. EXERCISES

Ei-1 The exerciserequiresturo examplesof the inseparabilityof planningand

contnol.Thrce are listed here, and the third one gives two illustrations:
The most obviouserample of the inseparabilityof planningand con-
trot is found in the definition of control: managementbslrstematic effort
to achieve objectives by comparing performanceto plans and taking
appropriateagtion to correct important differences.The definition shows
that the specific results of planning anean essential input to the control
phenoinenon;there cannot be any such thing as a control effort without
reference to some set of plans.
A second examplaof the inseparabilityof planningand control
results from the fact that they are simultaneous'In practice, the imple-
mentation of the first steps of a plan, and any control action needed in
those steps, are begun before all parts of planningare complete.Early
results and the early findings of control activity can then be used in final-
izing later parts of the same plan. An exampleis that a single annual
budget is usuallynot completelyfinalizedbeforecustomer orders begin
to be receivedlor that year, and considerationof the number of these
actual customer orders may point to trends that need to be considered in
of the early weeks and
finalizing the budget. Even actual financial results'establistring ' . q
months of the year can provide a basis for better the budget
for the later portion of the year. a
The most elegantexampleof the inseparabilityof planningand con-
trol results fronr'the fact that both planningand control are complex
humanactivities,and almost all complexhumanactivitiesare planned
activitiesand also controlledactivities.In other words, planningcan be
so compler that the planningeffort is itself controlled(and planned),and
control can be so compler that control activities are themselves planned
{and controlled}.T\,rro illustrations of this are provided as follows:
(t) A case in which planningis itself plannedand controlledis when a
complieatedbudget (plan)is to be prepared.To facilitate the cre-
ation of the budget,a detailedweeklyschedule(anotherplan)is
first agreed upon, showing which steps in the preparationof the
budget are to be carried out during each week. Because it is
desired that the creation of the budget not be allowed to fall far
behind schedule,the responsiblemanagerwill exercise control by
making comparisonsbetween (a)the actual progress made on the
budget each week and (b) the schedule.The managerwill also take
some correctiveaction if the differencebetweenthe scheduleand
the actual progressis consideredirnportant.
(21 A case in which control is itself plannedis when a managerdecides
what kinds of control reports will be usedto compareactuat resutts
with plons in each future period of businessoperations.That deci-
sion, any efforts made to acquirea supplyof preprintedreport
forms to be filled in each period, and any changes in the design of
ChaPter t

El-1 (Concluded)
the cost accountingsystemto captureand compilethe neededinforma-
tion about actuat results representevidencethat the future.controlactiv-
lty is being Planned.

El-2
(11 B
(21 A
(3) c
(41 A
(51 c
iOi
. B - although the time frame involved in this kind of plan may be
extremely long, there is nothing strategic about this kind of plan or deci-
sion. ln flcti the plan and obligation to pay off the bonds when they
come due is so routine that management would not consciously
aPProach it as a decision.

E1-3
(11 paragraph (bl comes closest to describing the kind of control used in
maniging a business, atthough it is described in a nonbusiness setting.
There is I plan lormutated in advance, there is a measure of actual
resutts, there is a decision maker who compares actual results with
plans, ihere is a selection of a corrective action to bring results closer in
periodic con-
line with tae plan, and there is a foreshadowing of repeated
trol activities (the remaining quizzes)'
The fact ifrat ilre measures of ptanning and actual performance ane
nonfinancial measures is not the governing consideration. Much planned
and actual information used in controtling a business is non-financial'
including some cost accounting infor:mationsuch as the number of units
produced, the percentage of units that were defective, and the percent-
age of available machine time that was utilized'
(21 R-ragraph (a) is a perfect example of an engineering control' rather than
the kind of control managers use in business. The simple device
described, which is founi in any home bathroom, is the kind of control
to
device deiigned to monitor a physical condition, and so it is analogous
"industrial controls." of
; th;r;;;Jt or any of a varieiy of devices called
course, devices of tnis kind art used in manufacturing and other busi-
the
nesses, but they do not possess the essential attributes of control in
sense used in business and in cost accounting. The device achieves a
continuous monitoring of the results, rather than a periodic comparison
of results with plans, ihere is no human decision maker who selects a
corrective action to be taken. A human decision maker is probably-the
salient attribute of control in managing a business that is missing in
paragraph (al.
 Chaoter 1

E1-3 ( G o n c l u d e d )

Paragraph(c}couldbeinterpretedasanexa
though n n i n"con-
f p | aword
m p | e othe g,butit
"ontiolGven
tackssom! essentiarinntfris'ot rn"-te is no periodic comparisonof
-moairyins
trol,,is used in its tast senili""i. the treatment
provisioi ioi
actuarresuttswith plan" ;;;';; "r-".ple, the contractrequiresfive treat-
basedon periodicresuttsleor are visible' The actions taken
are
ments each year, even it no;";dt
"r.r*J::l"jxtlil',";efers
to the conceptof controrthat appriesto porice
ot being abtetophvsicallvdeter-
work and mititaryscienc;: ti;;;sts tocaiion-and being able to
prevent
mine each event ttrat ocJu; il iot" pot""li"i use of coetcive fotee' which
rn"
certain events from o""rJring. kind of
alwayspreient in achievingthis
is very ctear in paragraprrrot, i, no inOi""tion tft"t resutts weneperiodi-
control. ln paragraph(d),ti;;'r" i"
cattycompanedwithprans.lru|ethatsays.'obtaintheobiectiveatany
cost"issometimesassociatedwiththeseactivities'

- F
Chater t

CASES.

cl-1
( 1 } Y e s , W i | | i a m s h a s a-itanaards
n e t h i c a | r e s p o n s i b i l i t y t o t states
a k e a cthat
t i o nmanase-
.
d;'nilis of Ethicat Conducl
to these standards nor
ment accountantst'shall not commit acts contrary others within their
shall they condonethe commissionof such acts by
organizations.tt
ask which standardshave been violated' but'
- ' r a t hffhe
,l2l p p l ynot
h i c h o n e s adoes
e r r wrequirement toW lliams'situation')
Managementaccountantshaveanesponsibilityto:
cori-"i"n"": perform their professionalduties in accordancewith
(Dumpingtoxic
relevant 6n s, tegulations; and technical-standards'
wastes in a residential landfill is generally a violation of law.)
Confidentiatitv:Refrain from disclosing confidential information
""quffieoftheirworkexceptwhenauthorize.d.,u.n|ess
tegitly obtigatedto do so (Williamsm€y be legallyobligatedto take
action and make certain disclosures'!
fnteqritv:Refrain from either actively or passivelysubverting the \
attainmeffi the organizationb legitimate and ethical objectives'
(Williams,avoidancJot the issue woutd passivelysubvert attainmentof
ethical obiectives.)
Comm-unicate unfavorableas well as favorable information and pro-
fessionatjudgmentsor opinions.(Williamsis obligatedto report his unfa-
vorable tindings to appropriatepersons')
Retr?il tion, engagingin or supporting any activity that would dis-
credit the professionl(lflitlia1ns'sitence would provide support to the
dumping activity and, ihus, could discredit the profession')
'Obiectivitvi
Disclose fully all relevant information that could reason-
aory G eilffid to influ"ncJan intended usefs understandingof the
reportS,comments,and recommendationspresented'(Witliamsshould
disclose his lindings to the'appropriatepersons')
(31 Atternative(a|,to seek ttre adiice of his immediate superior, is appropri-
ate. This is itri first step he is reguiredto take, unless the superior is
involved.
Atternative(bl, communicationof confidential information to per-
aons outsidethe company,such as the local newspaper,is inappropriate
unlessthere is a legai obiigationto do so. lf reguiredby laq Williams
should contactthe proper authorities.
Alternative(c), contacting a member of the board of directors, would
be inappropriateat this time. Williamsshould report the problemto suc-
cessiveiytrigherlevels within the companyand turn to the board of
directorsonly if the problemis not resolvedat lower levels.
 -l

Chaoter t

C1-1 (Concluded)
-
(4) Wliams should follow the company'sestablishedpoliciesfor resolving
such issues,if such policieserist. lf the issue is not resolvedthrough
eristing policies,he shoutd reportthe problemto successivelyhigher
levels within the company until it is resolved.ffilliams is not required to
report this action to his superior if his superior appeani to be involved in
the conflict. He is not to disclosethe matter to persons outside the orga-
nization,untess required by taw.)During these steps' Wlliams may clarify
relevantconcepts by confidential discussionwith an obiective advisor to
obtain an understandingof possiblecourses of action. lf tfie conflict is
not resolvedafter erhausting all these coursiesof action' VWlliamsmay
have no other recoursethan to resignand submit an informativememo-
randum to an appropriate representativeof the olganization. Consultation
with one's personalattorneyis also appropriate.
c1-2
(i ) 61herequirement does not ask which standards have been violated' but'
rather,which ones apply to the CFO'Sbehavior.)
Management accountants have a' nesponsibilityto: ' F

CompLtgnce:Perform their professionalduties.in accordance with

relevanttawC,regulations,and technical standards. ffhe CFO has asked
Deerlingto account for informatlonin a way that is not in accordance
with generatlllacceptedaccountingprinciples.)
Preparecomptete and clear reports and recommendationsafter
appropriateanalysesof relevantand reliable informatlon. [The CFob
restrictions on disclosure will resutt in incomplete reports.)
Confidentialitv:Refrain lrom using or appearingto use confidential
informationacquired in the course of their work for unethlcal or illegal
advantage,either personallyor through third parties. (The CFO is
attemptingto use confidential informationto protect the fob security and
bonusesof top management.|
Inteqriw; Avoid astual or apparent conflicts of intercst and advise
atl appropriateparties of any potential conflict. fThe CFO has failed to
avoid a conflict of interest and has not informed the stockholders of the
conflict.)
Refuseany gift, favor, or hospitalitythat would influence or would
appearto influencetheir actions.[TheGFO'sbonus appearsto be an !
:
influenceon his actions.)
Refrainfrom either activelyor passivelysubvertingthe attainment
of the organization'slegitimateand ethical objectives.(The CFOhas sub-
verted the attainment of the organization'slegitimate objective, profit for
stockholders,by pursuing,instead,the job security and bonusesof top
management.)
Communicateunfavorableas well as favorableinformationand pro-
fessionaliudgmentsor opinions.fl'he CFOis attemptingto restrict dis-
closureof informationaboutthe acquisition.|
Chaptor t

C1-2 (Continued)
Refrainfrom engagingin or supportingany activity that would dis-
credit the profession.fihe CFO'sactions could discreditthe profession.)
Obiectivitv: Communicateinformation fairly and obiectively. ffhe
CFO is attetnpting to unfairly control the information reported, resulting
in a rePort that is not obiective.)
Disclose futty all relevant information that could reasonably be
expectedto inftuencean intendeduserb understandingof the reports'
comments,and recommendationspresented.ffhe CFO is attempting to
restrist disclosure of relevant information.l
(21 fthe requirementdoes not ask which standardshave been violated' but'
r:rther,which ones apply to Deerling'ssituation.)
Managementaccountantshave a nesponsibility to:
Comoltence: Perform their professional duties in accordancewith
relevantlaws, regulations,and technicalstandards. (Deerling is being
asked to violate generaltyacceptedaccountingprinciples.)
Preparecomplete and clear reports and recommendationsafter
appropriate analysesof relevantand reliable information. (Deerling is
being asked to piepare an incomplete report.i
ggg1iEe$bt6i Refrain from using or appearing to use confidential
information acquireOin the course of their work for unethical or illegal
advantageeither personallyor through third parties.(Deerlingmust not
use the confidentialinformationabout the possibletakeoverto his own
advantageor to that of the person(s)mounting the takeover attempt.)
lnteqriw: Refuseany gift, favor,or hospitalitythat would influence
or woutd appearto influencetheir actions.fihe last sentence of the case
suggeststhat Deerlingis considereda memberof the top management
gnouprso he may be eligiblefor a bonus.)
Refrain from either actively or passivelysubverting the attainment
of the organization'slegitimateand ethical objectives.(Deerlingis being
asked to subvert the attainment of the organization'slegitimate obiec-
tive, profit for stockholders,by pursuing instead the iob security and
bonusesof top management.)
Gommunicateunfavorableas well as favorableinformationand pro-
fessionaljudgmentsor opinions.(Deerlingis being asked to restrict dis-
closure of information about the acquisition.)
Refrainfrom engagingin or supportingany activitythat would dis-
credit the profession.(Deerlingis being askedto take actions that could
discredit the profession.)
Obiectivitv:Communicateinformationfairly and objectively.
(Deerlingis being askedto preparea report that is not obiective.)
Disclosefutly atl relevantinformationthat could reasonablybe
expectedto influencean intendeduser's understandingof the reports'
comments,and recommendations presented.(Deerlingis being askedto
restrict disclosureof relevantinformation.)
 Chaoter 1

C1-2 (Concluded)
(31 tf the company has esta-blishedpolicies for dealing with such issues,
Deerlingshouia first follow tAese policies.lf such policiesdo not erist'
or if they aneunsuccessfulin resolvingthe problem,Deerlingshould pre-
sent the problemto the chairmanof the board.Deerlingb immediate
superioris involved,so he need not be informed of this action. lf the
matter remainsunnesolved,Deerlingshould report to the audit commit-
tee, the board of directors, and finally the maiority owners. During these
steps, Deerling may ctarify retevant concepts by confidential discussion
with an objective advisor to obtain an understandingof possible courses
of action. lf the conftict is not resolvedafter erhausting all these counses
of action, Deerling may have no other necoursethan to rcsign and'submit
an informative memoriandumto an appnrpriate repnesentativeof the
organization.Consultationwith one's personalattomeyis also appropriate.
(4) The primary nesponsibilitytho company must tulfill betore taking defen-
sive actions is its fiduciary nesponsibilityto stockholdens. Other respon-
sibilities inctude the effects that the takeover and defensiveactions
would have on creditors, bondholders,empfoyees,customers' and the 3
community.The company also has a nesponsibilityto inform its external
auditorsand legal counselto avoid putting them in a compromisingposi-
tion.

c1-3
(f l ffhe requirementdoes not ask which standardshave been violated' but'
rather, which ones apply to Dixon's behavior.)
Managementaccountantshave a responsibilityto:
Comoetence:Maintainan appropriatelevel of professionalcompe-
tence by ongoingdevelopmentof their knowledgeand skills. (By system-
atically rejecting all minority applicants, Dixon is ieopardizingthe level of
competenceamong the staff.)
Performtheir professionalduties in accordancewith relevant laws,
regulations,and technical standards. (Equafopportunity in employment
is required by law.)
Inteqritv:Avoid actual or apparent conflicts of interest and advise
all appropriateparties of any potential conflict. (Dixon'spreiudice is in
conflict with the company's legat obligatibn to provide equal opportunity
employment,and with the companyfsneed for the most competentstaff
regardlessof race.)
Refrainfrom either activelyor passivelysubvertingthe attainment
of the organizationblegitimateand ethical objectives.ffhe company's
obiectiveof equal opportunityemploymentis being subveded by Dixon's
prejudice.!
'l

L
!
l>

I
l> Chaptert

fL
Cl-3 (Concluded)
would dis-
Refrainfrom engagingin or supportingany activity that
in hir-
I credit the profession.(Such peristent, systematic discrimination
!
ing coutddiscreditthe profession')
have been violated' but
(21 ff[e requirementdoes not ask which standards Because management
I iather, which on"" apply to Foxworthtssituation.)
\'
accountantsmay noi condone the commission of unethical acts by the
,l ;ihd *ig,in ttreir organizations,all of the responsibilitieslisted in
solutionto requirement(1) also applyto Foxworth'ssituation.
b
In addition,the followingaPPIY:
Managementaccountants have a responsibi|ityto:
ConfiJentialitv:Refrain from disclosing confidential information
I
I

b
acquiredin the couor of their work exceptwhen authorizedrunless
legallyobligatedto do so. (Foxworth'ssuspicionsabout Dixon'sbehavior
\ should not be disclosedinappropriately'See requirement(3)).
b gbiectivitv: Communicateinformation fairly and objectively'
(poxworttris oOtigatedto make obiective hiring recommendationsto
I
I biron, in spite oitris belief that Dixonwill be prejudicedin acting on
b
them.)
(3) Alternative(a),discussionwith the director of personnel, who is one of
Dixonb peets, is inappropriateat this time. lf, however,Foxworth
betievesthe directoi bt personnel is an obiective pafty, Foxworth may
discuss the matter with the director, confidentialln to clarify the relevant
I conceptsand to obtain an understandingof possiblecoursesof action.
b Alternative(b), informal discussionwith a group of MAD senior man-
agement accountants,is inappropriate.
I Alternative(cl, piivate discussionwith the CFO,Dixon's superior, is
E appropriate.BecauseFoxworthhas atreadyapproachedhis immediate
superior,Dixon,who is invotvedin the conflict, it is not necessaryfor
I Foxworthto inform him of this action.
l- (41 Fonarorthshouldfollow the company'sestablishedpoliciesfor dealing
with this type of conflict, if such policies exist. lf policies do not exist' or
II if they are-unsuccessfutin resolvingthe conflict, Foxworth should dis-
E cuss ihe issue with the CFO.tf the matter remains unresolved,discus-
sions with successivelyhigher levels of management,includingthe audit
i committee and the board of directors, should follow. During these steps'
l- Foxurorthmay discuss the matter confidentiallywith an obiective advisor
to clarifythe relevantconceptsand to obtain an understandingof possi-
I ble coursesof action. lf the matter remainsunresolvedafter exhausting
\. all of these steps, Foxworthmay have no recourseother than to resign
and submit an informativememorandumto an appropriaterepresentative
I of the company.Consultationwith one's personalattomeyis also appropriate.
 t0 Chagter 1

c1-4 ,
{1) ffhe requirement does not ask lor a list of responsibllities Rodriguezhas
viotated, merely which of the fifteen responsibilitiesapply to his
situation.)
Managementaccountants have a nesponsibilityto :
Comoetence:Perform their professionalduties in accordance with
relevant laws, regulations,and technical standards. ffhe figures
Hodriguel is being asked to preparemight amount to fraud in the loan
application.)
Preparecomplete and clear reports and recommendationsafter
appropriateanalysesof relevant and reliable information. flhe reliability
of the information is in doubt, and the fact that certain sales figures are
or are not sufficient to justify the bank loan are not relevant to prepara-
tion of the budget)
lnteoritv: Refrain from either actively or passively subverting the
attainment of the organization'slegitimate and ethical objectives. (There
is a push to subvert legitimate objectives to the immediate need for a
bank loan.)
Recognizeand communicate professionallimitations or other con-
straints that would preclude responsiblejudgement or successful per-
formance of an activity. (Rodriguezhas not expressedto Czeistathe con-
flict between his desire to be a team player and his ethical responsibili-
ties.)
Communicateunfavorableas well as favorable information and pro-
fessional judgements or opinions. (Rodriguezis being asked to report
information that reflects so favorably on the company that lt may not be
justifiable.)
Refrain from engaging in or supporting any activity that woutd dis-
credit the profession.(Preparinga deliberately misleading budget as
' part of a loan application could amount to obtaining mon-y by iraud.)
Obiectivitv: Communicate information fairly and objecfivety.
(Rodriguezfeels pnessunedto abandon his objectivity in preparing the
budget.)
Disclosefully all relevant information that could reasonablybe
expected to influence an intended user's understandingof the reports,
commentsrand recommendationspresented. (A comparison of the new
targeted sales figure with the actual sales of tlre coresponding periods
of past years would be likely to influence the bank's understanding
just how large an increase in sares of
is being portrayed.)
12) Rodriguezcoutd have clearly stated his concerns to
Czeisla at each
stage of the budget's creation and revision. He could
with the marketingmanagerand productionmanager.i have consulted
rather than only upon receivingthe initial budget "r.ry stage,
olata.He coutd present
the budget,or a summa ry of it, in a comparative form to highlight
differences between each guarterts budget and the the
actual resutts of the
coresponding quarter of the preceding year, and
he could even
I
I

I
I

I\- Chapter t
t t

I
i C1-4 (Concluded)
calcutate the percentage increase being budgeted and compare it with
l>

actual perceniage increases that were achievedannually in the past. He

I could have conJulted with his staff superior at the headquartersof
Norttrwestern(the parent company)- Gzeislais his line superior'
L

I
according to the second sentence of the case'
I

b
(31 In addition to his ethical responsibiliUesto CD, Rodriquezhas ethical
responsibiliUesto:
(a) The banks
I (b) The managementaccounting profession
b

cl-5
I (1) ffhe requirement does not ask for a list of responsibilitiesJones has vio-
: iated, merely which of the flfteen responslbilitiesapply to his situation.)
Managementaccountants have a responsibi||tyto:
I ConfiJentialitv: Refrain from disclosingconfidentlal information
! acquirEAin the counseof their work except when authorized, unless
legally obligated to do so. (lf Jones accepts the consulting engagement
I with Crimson, lt is tikely she will be asked to disclose confidential SMI
b information about the desired computer system')'
Refrain from using or appearingto use confidential information
I acquired in the counseof their work for unethical or illegal advantage
L
either personalty or through third parties, [The size of the consulting fee
suggests Grimson is seeking to buy confidential information to help win
I the job.)-
It lnteqritv: Avoid actual or apparent conflicts of interest and advise
all approptiate parties of any potentiat conflict. (The consulting iob would
I constitute an apparent conflict of interest and probablyan actual one'
! because Jones has been named to the SMI committee that will evaluate
and rank all the proposats,inctuding Crimson'sproposal,which she
would have helped to write.)
b
Refrain from engaging in any activity that would preiudice their abil-
ity to carry out their duUes ethically. (The consulting iob with Crimson
would preiudice Jones'ability to evaluateand rank the proposalsfor
SMl, because one of the proposatswould be Jones' own work.)
Refuse any gift, favor, or hospitalitythat would influence or would
I appear to influence their actlons. (Regardlessof wbether the size of the
b
consulting fee is construed as being a gift or favor, lt Is likely that other
gifts, favors, or hospitality will be extendedto Jones by Grimson during
l the counseof the consulting engagement)
lb
Refrain from either actively or passivelysubvertingthe attainment
of the organization'slegitimate and ethical objectives.(SMl'slegitimate
obiective of obtaining the best computer system at the best price would
be subvertedto Jones' personatneed for money,as a result of Jones'
disctosingcrucial informationfor Crimsonto include in its proposal,
especialty if Crimson might not deliver a system with the crucial
attributes.)
 chaDrcrt
12

C1-5 (Concluded)
or other con-
Recognizeand communicate professionallimitations
or sucoessful perfor-
straints that would precluJ" *=ponsible iudgmen-twould preclude
mance of an activity. (Accepting-tfieconsutungiob proposalsfor SMI; on
the
responsibteiudgment in .rlfu"ting and ranking at SMI would
the otheirr-anu,Lthicatllmitations-of Jones' employment for
preclude successful performance of the consulting engagement lnforma-
leveal crucial
Crimson,Liplcially li Crimson does expect her to prevent her from
tion to fr"lp Lin ttre ioU-her ethical duty to SMI would
delivering what Crimson is paying for)' dis-
Refiin from engagin! in or supporting any activity-that would
to a vendor
credit ttre profession.(Sellingconfidential SMI information
would be a discreditable act) (Jones
Obiectivitv:Gommunicaie information fairly and obiectively.
proposals lf
would Ue unliLely to communicate obiective evaluationsof
she had tretpeawrite one of ttrem')
Disclosefully all relevant information that could reasonably be
expected to influence an intended useCs understandingof the reports'
the
comments, and recommendaUonspresented. (JoneslPtt ln writing
use of her eval-
Crimson pioposat would be relevant information in SMlts
uations oi pioPosals.)
or
(21 Jones might have disclosed, either orally or on her personal vita sheet I

SMI task force and

iob application,the extent of her involvementon the
the committee.
(3) Jones could have first investigatedall her caneeropportunities with firms
that presented no potential conflict of interest of this kind, but for the
sake of the arE,ument,it is reasonableto assume she did exactly that
belore applyin! for a position at Crimson. Knowing that Crimson ls a sup-
plier of computer systems, Jones might have revised her personal vita
sheet and the wording of her application for this one iob interview to
lessen the chances of Grimsonisbeing tempted to pursue an unethical
plan. (Of course, her invotvementin SMt's upcoming purchase might have
become known to Grimson anryay, or it might have been known to
Grimsonfrom other sources before her interview or even before her
application for the position.)
(41 In addition to her ethical responsibilitiesto SMI (and her financial
responsibitityto the hospltal that provides treatment for her child)' Jones
has ethical responsibilitiesto:
(a) her family
(b) the managementaccountingprofession
(c) Crimson
I
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I
I
I
S.
II
L
I CHAPTER 2
l-
DrscussloN ouEsTloNs
I
o2-1. (r) CGt it lha curnnt nrnetary Yaluoc' @'
I nqnic tatou.cet givon uP or to bo givcn
S (a) Orgattizatirr ccls arc tlnse cqsts that
up in obtaining goodr and !'rvices'
Ecgrqnb toloulE.! tnay bo given up by
trandening cash or othcr propcrty, bsuitg
I fiod ss a rsrcurcnt asset. When lherc is
b capital stoih prrloming rrvbe, or ircur-
ring liabilttbt.
Coclc rrc classifird er unexpirod or
I expired. Uncxpired sl! at. aslet! and
apply to tho produclict cl fulure r.venues.
b
Erarnplet of uncrpired @sts at. invenlo-
rira, prepaH exPent.E, plant and equip'
I ment. and invcstmcnts. Expircd corls'
\, s'hi$ ngl costl bosnc eventually, are
thosc that er. not applbable to tho pro'
dus{bn ol luturr rcvonuos and are dodud-
I
rd lrom curtanl tevonues or charged
! agohst retahrd oamings.
E:grncr in its broadesl gense hcludes
all expired catr; i.r., costl $'hich do not
I havc any polential futurc cqlofiiic bene-
b a2-2. Cost objrts are unils for wlrich atr arrangement
lil A mar prrcire ddinition linits thc use
cil the tcrm'axpcnlc'!o lhe et9ired cosls
ariring from uring or con3uming goods
and srrviccr in tho preesa ol oblaining
b
rcvenuss: o.g.. co3l of goods sold and
markelhg and adrninistrativeexpenses.
l Ib) (t) Cost of 9oo& soH is an cxpired cosl
: and may bc rclorred to ss atr erpensc in
tho broad t.n!o of thc tcrm. On the
incqnr stal.m.nt. it b most sften Uenti'
i
ficd ar e co!|. lnvrnlory held lor sale
: which is destroyed by an abnotmal casual'
ty strould be dssitied as a loss.
(2) Urnollectble accounts exp€nse is usu'
I ally classilied as an exPenso. Howevcr,
! some aulhorilicr belicvc thal it is more
desirablc to clasrify uncolleclibleaccounls
as a direct reductiqr of sales revenuc (an
I oflset to rrvcnue). An uncollectible
\' accounl whi:h was nct proviJod for in the
annual adiustmcnt, such as bankruptcy of
I a maior drbtor, may be classified as a
bes.
\. (3) Dcprccialion .xpen!c lor planl
rnachhcry is a corrpooent o{ factory over-
\t head ard r.presrnts thc rectassifbationof
a portlcn od thc mEdrinory cqsl to product
l-
cct (hventory). Whcn the producl ir sold,
lho doprcciation bccomes a part of lho
co$ ol gods rold which is an oxponso.
Deprccbtian cl pbnt m*hinery durhg an
unplannedatd unptoductive perir:dcl iCle-
ncss, suctr as during a slriko, should be
classified as a lcs. The torm 'expense'
13
shouH preferably be avoided rr'hon rnak'
hg relcrmce to Productbn coss-
benefil the lirm for its entire perird ol exs'
tcncs and aro most approprbtely classi'
hilbl evijence that a firm's life is limiled'
thc orgranizatbncosts Crould be allocalcd
ovor the firm's lile a! an expeneo ot
should bc amortized as a losg whrn a
going conccm foresees terminalion. In
praclice, however, orgranizalbn costs are
oftcn writlen ofl in the early years of a
firm's eristence.
(5) Spoiled gods reaulling from normal
menulacluring preessing shoub be lreal'
cd as a cost of the prodwr rnanulastured.
Whcn thc Producl is sold' tho cosl
becomes an expongs. SPoiled goods
rcrulling from an abnormal occurrenco
shouldbe clrssilied as a kr-ss.
is mede lo accumulate and measure cosl. They
are imporlant because ol thc need lor multiple
dimensians ct dats (c.9., by produci' csltrasl" or
departtnent) to accornplishthe varbus PutPoses
of cost accounling, including cosl fhding' pbn'
ning, ard contrcl.
02-3. (a) To ctassily costs as direst or indirct. the
colt accounlanl musl lirst know lhe
-Directly traced
answensto lhe questlcns
to what?' and'lndirectly identified wilh
what?' Olherwise, there is no way lo
assess the direct or indirect nature ol a
cost. lt is the choice ol a cost obiecl lhat
answers lhose lwo qugstbns.
(b) For erample, lhe cost of a department's
manager's salary cannot be cbssified as
direct or indirecl without lelecting the cosl
object first. lf the cost obiect is a prcduct
unit produced in the manager's deparl'
ment, thon the sabry is indirect. ll the cct
object ir the departmonl, lhe salary is
direcl.
Q24. (a) The product unil, batch, or b is tho cost
obiect. (8e careful about the lack cl cbrily
of the term the product' when it is nol
known whether il is intended to meen (a) a
single unil, batch. or lol ol a Ptoducl. Bs
oppced lo (b) any large number ol benti'
cal unils. lt couH easily bc laken to meatr.
say, Product 1321, as oPPosedto somo
other item in the cornpany's catalog' ancl
that could suggost the grand total ol ali
identical pieces ol t321 produced during

14
lhc onliro product lilc eycb. Thr rignili'
csnc. o{ lhb dbthstion it thal sstr. cGls.
eucn s! product dceign' Ptotoqping, 8nd
hilial worker trahhg' arc dincl codr with
rosPccl to th. tolal of all unitc tvct pto-
ducod, bul ero indirccl with tocPesl to e
eingle uil, bdch' or bl')
(b) A diaaggrcaatkrnof ovcrhcad would be
uselul for lny ltudy of lpw to brttlr rnan'
age cost!. or ol what cau!'s €tl l'o b'
incurrrd. Rolalivrly lrw ol lho coele
incurrod.,ina factory arc causld by lhe
rqrthe proargin ol ale npre unit of qte
producl.
(c) (l) A bstch of Henlical vnits'
(2) Th. rum o{ all Uenlical unils cver po-
duced.
(3) An activity or proco3s carried out in
prroduclicr.
(4) A gtoup or 'ccll' ol machinos and
workerc wilhin a d.Parimont-
(5) A departmcnt in which production
GUnS.
(6) A plant or clher produclion facility.
(7) A etratcgic Aoal ol lhe firm (1.9.'
inprovod qualny).
O2-5. A cost system ir a combinalim of prcedures
and rccordc dnignrd to providc the various
types of informEtiqr reguired in thr conducl o{
the enterprise;includingcosl lhdhg, planning,
and cqllrol.
02€. A gnod hformatinn rystem_reguires lhe crtab'
lighment of (a) long.rangr obicclivcr; (b) an
organizationphn rhoing dclegated rreponsibil'
itier in dotail; (c) ddailcd phns for luture opera'
tbna, botr bng and rhod-lem; 8nd (d) pree-
dures for implomcnlingand controllinglhese
plans.
A2-7. A charl of accountr ia ncccraary to clarrify
accounthg data, ro that thr data may bc uni-'
formly rccordrd in irumals and posted to lhe
ledger accountr.
02€. Advantagcr of tho rlectronic data processing
lyllem for rccord keeping are: spced. larger
!torag., ringb rntry ol mulliplo transaclions.
aulomalic conlrol flaturel, and f lexibility in
r.port lonrlats.
O2-9. Thc ldbrrhg poceived weaknessos wore mon-
lined h lh. text
(a) Tnditionel m.rrur.r ettompl to rcrvc
rniny purp€rg, arrd ar a rcault lhey arc
not univorrslly rcanrdcd ar srrving any
qt. purp6. iJcally.
( b ) T r e d i t i o n a lm e a . u r . l a r o r l l e c t c d b y
accannting ctroicor that arc rrl ahrayr rol-
cvant to lh. purpo.. al hard; cramples od
thrsr clrobcs aro c6l flow agsumptisrs
and arbhraryfircd et allocatixrs.
(c) Traditionalmeesuro! arr calculated by
sy3lcns lhat aro ueually sbw to rospond
to cfnn ging srditiorrs.
Chapter 2
(d) Tndhbnal m.lrurot of plenl uliliz'atton
c8n t .m lo ancourago orrrrutilizatbn of
caPritY'
(e) Traditional m.ltuto! of officirncy err
cilton rcPorted b bl.. ato t@ 899m9ai-
.4 lrd rt. .rry b mbhlrrPrct-
02-10. Nqtthancbt pcrlonnerrr rn aaur.t rr. basod
an rinplr count! or clh.r phyrical date rathor
tun dlocat.d eunlhg dala. thry !n uncql-
nocird to tho grnrral fhrrcial rccounlirg rys-
trn, and thoy en cfrorn to rrflcl me sPecifb
alp-t ol Prdorrnrncr.
O2-11. Four rrampbr ol nonlinancial prrlormancc
mcasunrs givcn h tho lort and the a.rpects of
portonnancr hry mi1t'tl b. ustd lo nsrits, an
(a) rcrap woighl .s r p.tc.nlag. of lolel
shppcd wcigfiB lo rnslitot cffbiency of a
- prs.s, pariicr.rlarlycllbioncy of matcrial
u8a€l
(b) proccring limo er r p.rc.ntaP of total
timc; to nsrita qade etlicicnry or inv.nte
rY vclcitY
(c) dbtancc rrcvcd by a unil while insUc thr
plant to nutitc rinplifbalbn of a prarrs
(d) ruggcrlicnr P.r y.rt P.r cmployoe: lo
rrr itor rnPryea ilotvrmrnl
O2-12- Tht cfiallcngr poscd by lhr ircrrasod inlcrcrl h
' nqrfinanciel pldornam maarBurcsir to defho
thc cost accountanl't rob broadly cnough lo
irctude rEr. rnasuror that arr nol preceded by
dolhr signs and thst at ncl thi lo the financial
eccqlnting !)rrlsn.
Q2-13. Cctr an most co,lutbnly claroified borrd st
lhcir rcbtictshP to
(a) thc produci (a ahgb bstch' lctt' or unit of
tho gmdorrrubo);
(b) thc Yolurnr od Elivity;
(c) tho manulacturing dcparlmcnts, Ptsca!-
.t. o6t c||ltoili s othcr aubdivbixts:
(d) thc accounthg Pctii;
(e) a Propecd decbirr, Elitn, or cvalualbn.
O2-t4. lrdircct rnstedab an thco rnslorials nroded for
tho csnplotion of lhc product bul whorc con'
aumptict is eithcr so amall or rc cornplex that
thcir trestment ar dirccl nralorialr would no( bc
foasible. For eramplo, nailr uerd lo mako the
product arc irdirccl malorialr.
02.15. lndirrt labor. in csltrasl to direct labor, b labor
rrponded lhat doo not efbc{ thr cqrrtrustiqt
or thr snpoilion of tho lhirhrd Produc.t.For
orarnple. thc labor of custodians ie indirct labor. :
02-16. (a) A cervicr dcpartmont ir onc that ir not
diroc'tly cngngod in production, brtrlrrndrra
a partbular t!rp. of rrybo for the bonolit
od otrcr drpartmcntr. Erarmhr cf rorvbo
dopartmonl! aro rrceiving, ltor.rooms,
mainlenancc, timekeeping,payroll, and
calelcria-
(b) Produchg dcparimentr clauify thcir aharo
of rorvice departmrnl .xpcnr.t ar indi-
rccl ovorhoadcp.nac8.
L
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L

L Cluptar 2
t5

@-17. (r) Cepital expcndilunr are irdended lo beno.
I lil nprt Oran ql. accounting pcricd. Thr
! (c) Tho basic critrrkxt for classifying eutbys
oxprndiluru rhould lhoroforr br rccordrd
by e cfrargr to an ac!.t ac@snt for dls'
I
tin !o thc periodt bcncfiled.
I
Fbvrnuo cxprnditurcr brncfil thr
L oporationc of |hr cunrnt perird mly. Thry
rhould bo rocordrd by chargrr lo thr
I appmprialr ctp.ilta accounts.
i
! (b) It e ccpilal elgcndituro ir irnproperty clar'
rifird ar .n axpantc' 8tlelr, rrtainrd
oamings, and hcsnr for thl perird will bo
Is undrrstEted. In future pcrids, hqnr will
br overstaled by any arnount thst would
havr bcen arrpdiecd had thc epcndiluro
born proprrly capitalizrd. Anrtr and
I rrtained eamings will bo undersialod st
tr tulurc balanc. !h..13 by ruccoraivrly
rrnaller amounts unlil the erct ha! becn
fulty countebalrnced.
arnounlr until thc improperty capilalized
ilom has bocn canplelely writlcn ofl.
er rovonu. or capital cxpondituros is the
prriod of brncfit. Thr amount ot detail
n.cossary lo mairnah subsUiary rccotds.
tfu rratcriality of lho ctgrnditurcs, and thc
canrirtrncy wilh which vari<rur crprndi'
turu roc'rrtftun period lo pcriod arc dtlr
crileria generally eqrridered in ertablish'
h9 a capitalizatbn poli;Y.
Firmr lnqurntty ortablirh ctt stbiltary
rrnount bckrw wtrich all oxpendilurrts ate
oxpenscd, inespectivr ol their period ol
benefiL Thr level at which thb arnount b
rot b dctrmined by itr materiality h rrb'
tirr to the rizr of hr firm. The obirtivr o{
sucfi a policy is to avoid lho rxpcnso ol
maintaining exccssivcly detailed sub'
rUiary rccordc. E:genditurer for iternt thal

L lf a rovenuo elgonditurc ie improprrty

capilali:ed, asset!. rclained earninS' and
incqno for lhc period will br overstaled.
tall belnw th. lot snlounl but a't tnatorbl
in thc aggregale shouH be cePitalized, il
tctal expenditureslor these items vary sig'
lrsnc will bo underslated in subrcquent nificantly lrom period to period. A capilal'
I periodr as the impropedy c.Fitalized ilerrt ization policy lhat roasonably applies
! lhcsc criteria, although il disreganls the
b cfiarged to thr goratbns of thoc peri'
ods. Agsets and retained earnings will pedod cl benefil and is thsrefore bcking in
I cqrlinuc to be ov.rstatod in subscqucnt thooreticaljustification, will not signilicantty
I
balance sheots by succesrively smaller misstatr periodic incomo.
b

II
!

t
I
\,

I
b

II
t-
 Chaotar 2
t6

gERCISES

E,.-l (rl 38 + 33 = 39 Prime cost

convet:ion cost
l2l Sg .31 = 94 variable cost
(3) S * Si . ir = $io variable manufacturing
(4) ii,oob fired + (Slo r 5oo)= $6'0oo

co'st
E2-2 ',({} $1o + $15 + 38 = $?1 convorcion
izi $32 + $t o = $42 Primc cost
i - i 3 3 2 + i . i o * i r s i $ 3 = $ 6+$5)
0 v axr 12'ooo)
iab|ecost
ioi (($sz+ ${o +g{5 + $6
i 1ssx 8,ooo)= $8{6'000+ $ 24'ooo.
= $84O'OOOtotal cost incurred with 12'OOO
units Produced and 8,OOOunits sold

E2-3 First Method: s16,957,500

Sa|es(tilg'95o'ooox85o/o|...............x.........
Lcsr: variablecosts(irrrizr,o00 x 85chl"'$9'q1?'1?o
7t623tOOO 17r458,350
FiXgd COSTS...""tr"tt""t"t""t!t"t""tt"t'
s (5OO,85O)
OperaUngloss.-...

SecondMethod:
Variable costs s l 1 , 5 7 l ,O o o = .59 variable cost ratio
l st S ta p :
l 9 A sales s l 9 , 9 5 O , O O O

2nd Step:
$16 ,957,500
Salgg (tlt9r95orooo I 857o)..'........o"""""""
L.ass: variable costs (sl6195715OOr .58).'... s9r835'350
17 14581350-
Firgd costs .............,.............,.............!1623 |AOO
s (500,8501
-
OpgraUng loSs """"t""t"'o"""t'tor"""""""o"

E24 1 . d
2 . b
3 . b
4 . 4
5 . t
g . c
7. c
8. I
l_
I

I 17
I Clppter2
L

is sloo'ooo' calculated as follows:

I E2i5 The cost of direct labor Par computer
L '
-"t--l'rina aac:l---- $6ootooo Givgn)
Total manufacturing cost"""'o""""""""'"""'
3OOtOOo(giVen)
!
I
L,gssprimocost.....r...............o.........""""
! EquaIsovorheadGoSt....................t.........$3oo'o09

I $4OOtOOO (giVgn)
COnVgfSiOn COSt...............................""""
b 3OOtooo (calculated abovel
Less overtlgad cost..,'...................o.....""
SIOOtOOO
l EqUatS difgCt 1abOf ,..,....-o........-...............
b

is calculated as fol-
E24 Ttre amount of factory overhead cost per blade 93O0,
: lows:

Total manufacturing cost'.'.""""t"""""" 3l,OOO ( givenf

4OO (givenl
Lgss convgrsion cost"""'o"""""""'o"""'
Equals dirgct matgrial cost.""""""""""' Lee
b
Direst labor cost = 116of direet material cost
= 1t6 x 3600 = $1OO

Convgrsion costtt"tttt"t""""tttt"ttttt"ott""
s400 (givenl
Lgss dirggt labor C(13t"""""""""r"o"""" l o o (calculatedabove|
1

b Equatrsove.fieadcost.............................. sitoo

as follows:
E2-7 The direct labor cost per system is S200' calculated

Total manufagturing costs """""""""""' S1,00O (givenl

Lgss prime Cost """""t""t"t"tt""""tt""t'
8oO (givenl
Equals overfi gad GoSt""""""""""""""" s 200
!
gAoO (given|
ConYgrsion cost.........t"""'i"to"t"""t"t""
Lgss overhgad cost o'..""'r"'o'o"""""'o""' 2OO (calculatedabovel
! Equals dirgct tabor cosl..'.......r..."""""" Szoo
I

\,

I
 Chaoter 2
t8

Ez-g The ampunt of faetory oyerheadcost per machino is $1'5OO'calculated \-

as follows:

Total manuf-acturing c95t......,....r....'.......r S3TOOO (given) L

Lgss conversion cost..,.......r.......,.,.......... 2,.OOO(given)
Equatsdircctmatgrialcost......-.-'."......... SITOOO

Direst lalor Gost = 112 oI direet material cost

= 1 1 2r $ l '0O0 = 95OO

Conversioncost.. .... $2'OOO (given)

Lgss dirgct labor cost.............................. 5OO (calculated above|
E q u a l so vg rh g a d co S t.........i.......r ............ Sl15OO

E2-9
(1) The.rclevantcost obiects are:
(a) An item of mErchandise. t
(bl The use of a bank credit catd'

(21 lt implies that cash-payingcustomers are paying a part of the cost of the
banks'fees for processingcredit card transactionsrbscause these fees
are paid by the merchant who then necover€them in the form of slightly
higher prices for all melchandise,

(3) The competitive implications anathat the prices paid by cash customens
are too high to be competitive with the prices chargad by merchants who
deal only in cash, and the prices paid by customensusing bank credit
cards arp too low to reflect all the costs of a credit sala.
(4) The raason lor not reducing all prices and charging extra for the use of a
credit card is because of the psychological effect of an extra charge. To
customsrs, lt sounds like a penalty,as If the merchant wants to discour-
age the use of bank credit cards. A discount for cash customers has a
positive connotation,even if prices marked on menchandiseare higher to v
begin with. Raisingall prices and offering a cash discount yields the
aame net rsvenue as leaving prices alone and charging extra for using a '
bank credlt card, but the former method feels better to the customer -
than the latter.
>

I
\-

lt- Cluplx2
t9

L E2.-1O,

(f l Thc rolovant cost obfecta arr:

It (al A repalr.
(b) A PlckuPand daflvery
I
I l1l JTRSb r€palr pricor Include an sllocaUonof thc cost of picking up and
t dallvering traAors, ln addlUonto thc cost of thc rtpainl' administraUvo
coata, markeUng costs, end profll CompeUtont rcpair prices raflect only
L- tic cost of the llpalrs, adminlgtrstlve snd marko$ng costs' and profit.
GompeUtort 8hould bc ablc to prlcc thclr rcpalr rcrvlces lower, because
tSey do not have to reflect plckup and dellvery costs in repair prices.
I
I
bt

F2-11
L (11 Dlrect lebor s
Variable factory overh ead
L Fifed faCtOfy
Gonvemioncogt..
OVgfh gad...............o......o....o.o..ro.........o............."r
aaaaaoaaataa $11
q

I sl2
(21 Dlrect matoriaf 0umberf
L DirOgt 1abOf...o..r...o......r..r.......rrr.r......r..o.........o.o.....ot.......t..to..t 2
Prime GOSI...............r.............. a aa laaaoal a a s14
L (3) sl2
2
1
5
It
sle

b
I
(4) Dlrect material 0umberl ...'.........o'....... sl2
Dlroct labor 2
Variablg factory ovgrfieSd .........o.........r.............'..........oo.......'. 5
I
Variablemarkoting aaataaaaaaa 1
\'
Total variable cost. s20
I
I
lE

I
I
I
 Chaoter2
20

E2-11 (Goncluded)

(5) Total cost = total variable manufacturing cost

+total variable marketing cost
+ total fixed cost
2,OOOr($12+32+$51
+lrgOOr$1
+ 2,OOO'x ($4 + $3.50)

= $ 3 8 ,OOo+ $ l '9Oo + ${ 5' 0oo

= 55419OO
r The volume used here to catculatetotal fixed cost is the 2'OOo-unitvot-
ume levol that was used originallyto calculate the amounts of fixed
costs per unit, as stated in the data given in the exercise.The 2'OOO-
unit tevel of production stated in requirement (5) is not the reasonthat
2,OOO is used here to calculate total fixed cost'

(6) The data indicatethe bookcasesare made of lumber,and some examples

of the indirect materials used in making wooden bookcaseswould be
glue, sandpaperrand nails.

rr) An estimate of costs referred to in the answer to requirement(6! would ;

be inctudedin the variablefactory overheadof 55 per unit.

E2-12 Factory overhead = 113 x prime cost, so:

Total
manufacturing = prime cost + factory overhead
cost
= prime cost + (113x Prime cost)
= 4i:3 r prime cosl;
muftiplyingboth sides by 314gives:
Total
314 x manufacturing = 314x 413x prime cost
cost
3 l 4 xS 2 O,OOO = 1 x pr ime cost
$ 1 5 ,OOO = pr im e cost.
Prime cost ..................... s15,OOO
Less direct material cost....... 12,OOO(given)
Diroct labor cost....... s 3,ooo
i
'
S

II
L

L
2l

L Ctuotar2

CASES
L c2-1

L (11 The percentage profit margin will be 82.5oh,calculated as

follows:
Rgvenugs (92 r 4)..............,,o........................
s€!.o0
s.80
Cost of iuice (S2o r 4| .....'....""""t"'r"""""
I t .60 1.40
I Cost of ong de|ivery """""""""x""""""t""
!
Profit ...............ro....,......................o.......r.......
s6.60
= 8.2'5oh'
I
I
Percentage profit margin = 36'60 profit divided by SB revenue
b
(21 The percentage profit margin will be 6ooh,calculated as follows:
I
Revenues(S2r 1! s2.o0
!
Cost of iuice (S.2or 1) .....'....-............'o""o"' s.20
.60 .80
Gost of ono dglivery ..'...""'o""""o"""'o"""o'
sl.20
L PrOfi t ..o................."'o""'r""""""""""t"'e""'
= 609/o'
Percentago profit margin = $1.2Oprofit divided by s2 revenue

! (3) The manageris treating the menu item as the cost obiect, for erample'
one glass of orangeiuice.

L (41 The rpfinement of the definition of cost obiect that would result in
ptanned profit margin is the use of two different kinds of cost
the
obiect' the
Item and the detivJry,which can be priced separatelyat S.8Oand $2'4O'
respectively.
!

I
 Chaoter2
z

C2-l (Concluded)
profit margin
(5) For an order consistingof four gtassesof orangeiuice, the
will be 75e/otcalculatedas follows:
Revenues: ($.8OX 4).........'... s3.20
+ (92.4O X 1)..tt"tt""""'i""""t"t"""t""t"'o"'
2 .40
$5.60

Cost of iuicg ($.2OI 4) ."""""""""""t""""' 9.80

Gost of ong dglivgry .........--....-..........o...o.r."' .60 1.40
PrOfit ...t....aaa......a....a.t""t""""t"t""""t"o""t'
9{.20

Percentage profit margin = 90.2o profit divided by $5.oo nevenue = 75oh.

For an order consisting of one glass of orange iuice, the profit margin will
afso be 75oh,calculated as follows:

RgVgnUgS: ($.8O X'l)............r............r.o....................ot' $ .80

+ ($2.4O X 1) ..............................................t.. 2.40
$3.20

COSt Of !uice ........................t...........o.."o""tt' 9.20

Cost of ong delivery .............................o......' .60 .80
PrOfit ........o....t........ s2.40
Percentage profit margin = $2.4O profit divided by $3.2o nevenue = 75oh.

(6) The food seryice managerb plan allocates the delivery costs over an
arbitrarily selected number of items (two). This plan would result in high-
or-than-planned pnofit margin pencentageson noom servico orders that
contain more than two items, as demonstrated in the answer to require-
ment (t). Prices on these olde6 would be higher than those of a Gom-
petitor wlro traces costs mone carefully to cost obiects and sets prices
sccordingty. The plan would also result in lower-than-planned profit mar-
gins on room service orders containinE only one item, as demonstrated
in the answer to requirement (21.Prices on these orders would be lower
than what is needed to achieve the target profitability.
 I
L

l
t-

I
I Clppter2 23

I
c2-2,
l-
(il The cost objectstor which somo amountof cost is identified in the case,
l and tho amountof cost idenUliedlor each' ate:
b (al A new productvariationr Zsggo (whichmeans all units of Zeggo ever
to be producodl'S25O'OOO.
(bl A batch of Zeggo'S1'OOO.
L (cl A unlt of Zeggo,$5 + $1O= $15. (Notlcethe $1o indirect cost
amountIncludesall Indireetproductioncostsr so it must include the
I , $1 amountstated in the problem,alongwith an allocation or averag-
! ing of the $1r0Oo-perbatchsetup costs,a shar€ of the S25O,OOO
cost amount,and a sharo of any other indirect manufacturingcosts.
l It would be double-counUngto add the $1 and arrive at a total of
b $16 per unil|
(21 The other items mentionedin the caso that could serve as cost obiects,
L and a purposoeach one could sorv€rano:
(al CCNCompany,which is the relevantcost obiect when external
financial statements are prepared.
L (bl The assemblyline on which Zeggoand other products are to be pro-
duced.This cost object would be relevantin a decision on whether
to discontinueproductionof all the products producedon the par-
I
L
ticular line, or a decisionto shut down the line and shift its produc-
tion to other lines due to a redustionin customer orders.
t
L (31 The totat "o.t erpected to result from producingthe first batch of 3oo
unlts of Zeggois:
I
Cost accounted for as direct cost of a unit....,..... $ 5
E
Cost treated as indirect by the CCN s1ctem........ 1
I S o
l-
x 3OO units
s1,8OO
Add: setup cost ...r..o.r.......r..tr....... 1 tOOO

\, Total Co*.....r........r...................r.........o....r.....rr.rr. s2,8oo

I (41 The cost erpected to result from producing ono mone unit of Zeggo is 35
b
+$1=36.

I (5) For the first batch of 3OOunits, the CCN cost accounting system will
report a cost of:
(35 direct cost + $1o indirect cost allocation)x 3oO units = S15 r 3OO=
s4,5OO
i
t-
L
I CHAPTER 3
L
DISCUSSIONQUESTIONS
i- O3-l . The total dollar amount of a fixed cost is con-
stant at difrerentlevels of acttvity within the rele-
vant range, but fixed cosl per unit ot activity
varies. In confasl the total amount of a variable
L cost varies al differeil levels ol acwity, but the
variable cost p€r unit remains consEnt wilhin lhe
relevant range. A semivariablecost contains
both frxedand variableelements.Consequently,
L both total semivariablecost and semivariable
cost per unil vary with changes in activity.
Q3-2. The relevant range is the range of activity over
I which a fixed cost remainsconstantin tolal or a
I variablecost remainsconstantper unit of activi-
! ty. The underlyingassumptionsabout the rela-
tionshipof the activityand lhe incunenceot cosl
change oulside the relevanl range of activity.
L Consequently,the amount of fixed cost or the
variable cost rate musl be recomputedfor aclivi-
ty above or below the relevant range.
O3-3. The fixed and variable componenlsol a semi-
L variable cost should be segregatedin order to
plan, analyze, control, measure. and evaluate
costs at difterent levels of actMty. Separationol
I
the fixed and variable componenlsof semivari-
b ablecost is necessarylo:
(a) compute precleterminedtactory overhead
ratesand analyzevariances:
(b) prepareflexiblebudgetsand anatyzevari-
t ances;
(c) analyze direct cost and lhe contribution
margin;
I (d) determinelhe break-evenooint and ana-
v lyze the etfect ot volume on cost and prof-
rt;
(e) compule differentialcost and make com-
I
parative cost analyses;
L (f) ma(imize short-run protits and minimize
short-rundosts;
(S) budget capital expenditures;
I
(h) analyze marketing profitabilityby terrilo-
S
nes. proclusts,and customers.
O3-4. The obvious advanlage to using managerial
I
iudgement lo separato fixed and variable costs
! is expediency,i.e., il requires less time and is,
theretore. less cos0y than the use of any of the
three computational methods. The disadvantage
I is that the use of managerialjudgementto sepl_
t
b rate fixed and variable cosls otlen results in
unreliableestimatG qt cost. Cost behavior is nol
always readily apparenl lrom casual observa-
tron.As a conseguence,managersotlen err in
determiningwhelher a cost is fixeclor variable
and frequenily ignore the possibilitythat some
costs are semivariable.
O3-5. The three computationalmethods availablelor
separattngthe ftxed and variable componentsof
25
semivariablecosts are: (1) the high and low
points melhort: (2) lhe statistacalscanergraph
method; and (3) the method of least sguares.
03€. The high and low points method has the advan-
lage ol being simple to compute, but it has the
disadvantageol using only two data points in O|e
computation, thereby resulting in a signilicant
potential lor bias and inaccuracy in cosl esti-
mates. The scanergraphhas the aclvantageot
using all of the availabledata. but it has the dis-
advantage of determiningthe fixed and vanable
componentson the basis of a line drawn by vGu.
al inspection tirough a plot ot the data, thereby
resulting in bias and inaccuracy in cost esli-
males. The method of leasl squares has the
a d v a n t a g e o l a c c u r a t e l yd e s c r i b i n ga l i n e
through all the availabledata, thereby resulting
in unbiased estimatesof the fixed and variable
elements ol cost. but il has the increased disad-
vantage of computationalcomplexity.
03-7. The $2OOin.lhe equation,referred to as the y
inlercept, is an estimateol the tixed portion of
indirect supplies cost. The $4 in the equation,
referreclto as the slope of the regression equa-
tion, is an estimateol the variablecost a:isociat-
ed with a unit change in machine hours. These
estimates may not be perlectly accurate
because they were derived lrom a sample ol
data that may not be entirely representativeof
the universe population,and because activities
n o t i n c l u d e di n t h e r e g r e s s i o ne q u a t i o nm a y
have some influenceon the cost being predict-
ed.
o3-8. The coefficienlol correlation,denoted r, is a
measure of the extentto which two variables are
related linearly. lt is a measure of lhe covariation
of the dependentand indepenctentvariables.
and its sign indicates whether the independent
variable has a posiliveor negative relaUorshipto
the dependent variable.The coeffcient ot dster-
mination is the square of the coeffici€nt of corre-
lation and is denoted F. fne coefficientof d6ter-
mination is a more easity interpretsd measure ot
the covariation than b the coefficient of conela-
lion, because il represents the percentago of
variation in the dependent variable explained by
the independentvariable.
O3-9. The standard enor of ihe estimate is defined as
the standard deviationabout the regression line.
tt is essentially a measure ol the variability of the
aclual observationsof the dependenl varaable
from the points predictedon the regression line.
A small value lor the standard eror ol the esti-
mate indicates a good fit. A standatd errcr ol
zero would indicate a pertect ft, i.e., afi sctual
observationswould be on the regressionline.
26
03.10. Hotuoscodssttcitymcrn:i t|d tha distibulbn ol
observationsaroundthc rogrcrsionlinc is not
unilormlor dl valuesof thc indcpcndonlvari-
able. tf hetaroscedasticityb prcocnt. thc den-
rlard eror of tp Blimde and confdcnct intlr'
val catitnd63,btsed on thc Etmdsrd 3fior, lre
unreliabhtnolsuros.
03-11. Serialconeladonmourt thd rdtcr tlun bcing
random,the obsenralionsarcundthc rcgresion
line are conelatedn'l$ onc ltlcfficr. ll ecrid col'
relationb prssctlt thc stlrrtttd cnor of t|c 6ti'
Chapter 3
malt tnd coflfidcncc intervai cstimltes. blsed
on thc Etandlrd olrotr atc unrcliabb molsuros.
O$12. Muldcollinaarity moatrs f|at two or moro of tho
Indcpendent veriables in a mutliple regrassion
andFb aro conohed witfi one anodtor. When
thc degrcc of multicollinearityis high. the rela.
lionship bctlloon onc or moro of tho corrol8led
indcpcndont vadables and the depondonl vati
ablc may be obscured. However, this circum'
clt lcc would normdly not aflecl the astimate of
cost
I
I
L

I
t-

Clppter 3
L I
z/

E)GRCISES
L E3-1
s]ivitvlgv"l Cost
L High ........ aata aaraa a taaa aaaaa a 21600 hours
2,1OO
s1,3OO
1, 1 O O
hours 9__399
L variable nate:s2oo -r 5o0 machine hours = $.40 per machine hour
_5Og

!
L High Low
TOtal COSI......................... $1,30O sl,1OO
Variablecost:
I
L $.4o x a6o0 hours ....,....,..... I,O4O
$.40 x 2rl O0 houns ...............r.........r............. 840

L Fixgd cost...'.......r..........r.'..rr.......r.r'...r'........r....... s 260 s 260

E3-2

L $lroo0
s900

IL F
Saoo
o 3700
o
(,
i 3000
t o
lrf 3500
J
G $400
i g
L 3
o 3300
!3200
I

$100
l-
30
I 800
l-

I $757.s0
l-
350.O0
$407.50
S4O7.5O average totat variable cost
5,87s total direct tauorffi = 5.6936 variable cost
p", direct labor hour
 Chapter 3
28

E3-3
- -
r - x ( x r x ) ( v r Y ) _ 8 7 , o o o_ s 6 o
g - -

x(xr - r)2 1'450

a - 9 - b, - $1o,ooo- (Soox 125) - $z,5oo

Travef and entertainment expense tor 2OOaales calls would be:
!i'-a + b x r - $ 2 , 5 0 0 + ( $ 6 0 x 2 O O c a l l s -) S 1 4 ' 5 O O

E3-4
(1) (3)
(21 (4) (5) (6)
v v-n x F-A (x -i)2 a -nv-n
Electriclty Gost Machlne ActMty
Gost Deviation Hourc Devlatlon (!l-squared (a)x (21
Janu3fl..'... $ 1 , 6 0 0 tg0 ?,790 190 36,1O0 19,OOO
February.... 1r510 to 2,68O 80 6,4OO 800
MSFCh'........ 1 ,5 O0 o 2160O o . o o
April ...'....o.. 1 ,4 5 0 Fo) 2,50O (1oo) IO'OOO 5,OOO
M?!.......r.... 11460 (40) 2F1O (e0) 8,10O 3,6OO
Jllll€........... 1r52O 20 2161O 10 100 200
JUI!............ 1 r5 7 O 70 2r750 150 22r5OO 1O,5OO
A u g u s t . ..,... 1r53O 30 2,7OO too to,ooo 3,OOO
September. 1,48O (20) 2,53O rfo) 4r9OO I,4OO
October.,'... 1r47O (30) 2r52O (80) 6,4OO 2r4OO
N o v e m b e r.. 1 ,4 5 0 (50) 2r49O (1ro) 12r1OO 515OO
D e c e m b e r.. 1 ,4 6 0 (40) 2r52O (801 6,4OO 3r2OO
T(ltal ....." _sl8,oo9 o 31.200 0 !e3.0oo s,600

, - 2 y + n - $ 1 8 r o o o* 1 2 - $ 1 r 5 0 o

, - X x + n - 3 1 r 2 O O* 1 2 - 2 , 6 0 O

:(x - rXY - t) c o t u m no t o t a t 54'600 - g.4.4

Variable rate (b) -
r(x - i)2 Column 5 total 123' OOO

F i x e d c o st (a \ - y - b x
= $1,5OO- (S.44X2'6OO)
= *t56
 29
Ctwpter3

E3-s
x(rr -x)(vr -y) '-ffi-'92
1,5ff_
f -
ffi-y)' J(sso)(s'ooo;
r2 -(.g2)z -.8464

E3-6
(11 l2l (31 (4) (51 (81 ct)
v ly-n x F -a I -712 V -AV -tl tv -r12
ailpplng Expcnrc Sdcr ActtvttY
Month Erpcmc Dcvlrtlonr Bcvcntr Dcrvlrttonr (4}Squrrsd (a) x F) (2lSquared
Jenuary-. I 600 (40) 3 201600 (3rEOO) 12i2j,O,OOO I4O,OOO l1600
Fcbnnry - OOO o 3O,OOO o o
Mtl.rch -..... COO o 20rooo (lrOOO) ITOOO,0OO o o
Aprll...-....., 680 (201 2qooo (aooo) 4,oo0rooo 40,ooo 400
Mry.*......., 570 (301 27,OOO (3,OOO) 0,OO0,oO0 0o,ooo 900
Juoa---.. 6ltO (60) 25,^5OO (+5OO) 2O'25O,OOO ?'2SrOOO 2,5o,o,
July..--.-... 600 (r0) 30,OOO 0 roo
Augurt --- OIO to 33r0OO SrOOO I,OO0TOOO 3OTOOO loo
Scptcmbcr. GsO 50 35,OOO 5,OOO Z,,OOOTOOO 25O,OOO 2,50O
Ogtobor--.. G2O 20 3aooo IOOO 4TOOOTOOO 4OTOOO 4(,0
Novcmbcr.. 6il0 30 30,5OO 500 2!lgr@0 l5,ooo 000
Elccambor.. 640 .lo glr50O 3,500 12,25,O,O0O laOrOOO 1,OOO
Totel --.. 373OO o 8t]60.ooo o 07.ooo.ooo 97o,ooo t 1.o(x)

j'-Iy- + f t - $ 7 r 2 O O+ 1 2 - $ 6 O O

i - xx + n - $3601000 + 12 - $3o,ooo
97O,OOO -.939
J:(r t - i)'z(y, - Y)' Xl lrooo)
[9?"ooo,ooo

rz - (.9 3 9 )2 - .8 8 2
30 Clpoter 3

E3-7
(11
>(rr - i)(v t - y l 2,1OO
l t =.96
x ( r r - ; ) z z ( vt .',/(
e,zsoX I,ooo)

rz=(.98Y=.9216

l2l
x ( r r- i X v r - 9 ) 2r4OO tt,384 varlable malntenance
b -
x(rr - i)' 6,250 cost per machlno hour

(3) | -\r1+tl - t35Or0OO* | o - $5 'O0O

i'XXl +Jl - 4 O ' O 0 0+ 1 O - 4'OOOhouru

Slnce 9 - a + bi, then:

a-g_bX
a - $5rO00 ($.sar)(4,ooo
)
a - tl5rooO $ 1 ,5 3 6
a - $31464

E3-8

(1) For elsctrlclty cost and dlrost labor hours:

I(xr -r)(vr -y) 5,7OO
f t . |oH -.e4e7
(rt -i)'z(yr -y)'

ra = (.9497F =.9O19

(21 For electrlclty cost and machlne hours:

x(rr -i)(vt -v)
l t
7,OOO
- +f33-.88o5
x(:r - i)'z(yt - v)' )(r,264)
J(so,o0o
ra=(.880512=.7753

(3) ln ttrlr e88€, dlrest labor hours shoutd be chosen as the approprlate
acthrtty meaauno to be used In predletlng electrlclty cost because the
cocfilclent of determlnatlon (ts = .9O19)lc hlgher than that for machlne
hours pa = .77531.
Cluptor3 31

E3-8 (Goncluded)
>(r, -x)(vt -y) _
5r7OO
- $.2O
variable electriclty
(4) b'
x(:r - X)' 28,5OO cost rate

Slnce I - a + bi and 7 - ZYr + n and f - X x t + n r t h e n :

a ' ( z f t * n ) - D ( x rt * n )
s - (42,ooo+ zo) - (.zo)(rao,ooo
+ 2o)
a - 2t1O0- (.ZOx9,OOO )
? - 2tlOO - 1,8OO- $300 flxed electriclty cost

E3-9
(rl l2l (3) (4) (s)
X1 It lyi=a+bx) th- vil lh - til2
Astual Predicted Predlctlon
.Labor tltlllty UUllty Error (4)
Month Hourc Cost Cost (2) - (3) Squared
January .........r........ 2,65O $ 3,600 $ 3,650 (sol $ 2,5OO
February ..r.............t 3rOOO 4rOOO 4rOOO o o
March ..........r.......r.. 2r9OO 4,OOO 3,9OO 100 l O,OOO
AFd1........................ 2,8OO 3r8OO 3,8OO o o
May.. 2r7OO 3r7OO 3r70O o o
JUng ......r.r.......r...... 2,55O . 3r5OO 3,55O (so) 215OO
JUI!...............r..r..r... 3,OOO 3r9OO 4rOOO (1oo) 1O,OOO
AUgu8t ......r............. 3r3OO 4,1OO 413OO (2oo) 4O,OOO
SeptembrBl...,.......... 3r5OO 4,5OO 4,5OO o o
OctObor ............r..... 3r2OO 4r2OO 4r2OO o o
l{ovombgl ..r............ 3r05O 4r30O 4,05O 250 62,500
Docgmbg1............,.. 3r35O 4,40O 4,35O 50 2,500
TOtal ....r.........r...! 36,OOO $4g,OOO $48,OOO o $13O,OOO

>(y,-y',)' Column 5 total /$l30,ooo - G

"'- 5 11 4 . O 1 8
{ n-2 11 10
 Chapter:
32

E3rlO

il(v r - y'r)'
6 t -
n -2

The g0 percent conlldencelntervalestimate at the 1'SOo-hourlevel of

activlty would be:

.;- r ( x r- , ) '
Y t - t m X S r i l + :n
I >(x,-i)t

. . (t'uotlu;#?oo
)'
ssoo=(t.tztXsoz
){, #
S5oo- (1.771X$ez)ffi '.
35oO; (1.771X$62
X1.1547)
$ 5 O Or $ 1 2 6 . 7 9
 33
Ctvptar3

lb
PROBLEMS

P3-l

(r) Coefllclent of corrtation and co€fnclent of determlnation between:

{a) TFaveloxpsnses 8nd lho numb€r of calls made:
L
ll) l2l (31 ({) {5) (6) m -
V-n x F -a g --rf F -49 -D tu-#
v
Travcl Erponro Cellr Aemty
ilonth Erpcnro DevlaUonr iladc Dcvlrdonr ({l Squarcd (A)r (21 €l-Squt-d
Jrnutty---. 3 3rOOO 12oo) 410 (301 900 6,000 aO,OOO
Fobnlry.-.... 3'2OO o 120 tm) 400 o o
Hfrch-F€-. 2'8OO (.too) 380 (60) 3rOOO 2{'OOO tOOTOOO
Apdl*---. 3rOO 200 400 20 400 4,OOO 40 OOO
il!f-- qtOO (1oo) 430 lro) 100 1,O@ IO'UOO
Juno -- qzOO o 450 10 100 o o
July...-....--. agOO (3ool 390 (50) a5oo l5,ooo 0orooo
Arilu.t.*-. 3F3OO loo a70 30 900 3'OOO lorooo
Scptrmbor.-. 3'5OO 300 .180 & l1600 12,OOO 9O,OOO
C)GtoboJ---. 3r.fOO 200 .l90 60 2r5OO l0,ooo 40,ooo
Nolrrnbor..-.. 3'2OO o 40 o o o o
Dccamber...... 3r4OO 200 aoo 20 .loo 4,OOO 4OTOOO

Tltll ......-- E3&l!99 o :6.280 : 0 _l-g,4oo : 79.OOO

: 520,OOO

x(xr-x)(vt -r) 6 total

l -
x ( x r - , ) ' z t yt Column 5 total )(Cotumn 7 total )

7 9 ,OOO 79' OOO

J(tg,4oox52o,ooo) i6'968'OOO'OOO
79.OOO
, ' -.9464
d5;7u
fz - .8957
 34
Chap@r 3

P3-1 (Concluded)

(b) Travel expenses and otderc neceived:

(r) t2l (31 (4) (s) (6) ttl
v u-n x F- i) tx --xf tr -rw -h tr --y*
Tnavcl Erpsnsc Ordcrr Achrtty
Erpensc Deviations Rcceived Dcviatons {4) Squarcd (41x (2) (2)Squared
January...... 3 3,OOO (200) tt 53,OOO (t3,oool l69,OOO,OOO 2,600,000 4o,ooo
February.... 3,eOO o 65,OOO (t,ooo) ITOOOTO0O 0 O
Marlh...-,.. aSOO (4ool 48,OOO (r8,o0ol 324'OOO'OOO7,2OO,OOOl60'000
April ...-.--. 3r4OO 200 73,OOO TrOOO 4g,ooorooo 1,40O,(X)O 4O,OOO
May....-..-. 3,1o0 (ro0) oaooo (4,OOO) I6,000'000 4OO,OOO lo,ooo
June........... 3'2OO 0 67,OOO I,OOO I,OOO,OOO O O
Ju|y..,......-. 2,gOO (3Oo) 60TOOO (6,OO0l 30,oooro0o lrSoorooo go,ooo
August....-. 3,3OO 100 76rOOO lO,OOO too,ooo,ooo I,OOO,OOO lO,OOO
Septembcr. 3,SOO 300 82rOOO torooo 2sETOOOTOOO
4,goo,ooo 9O,OOO
Octobcr...... 3,400 200 6210OO (4,O00) t6,000,000 (goo,ooo) 4O,OOO
Xovembor.. 3eOO o 64rOOO (2,OOO) 4,O0O,OOO o o
Dccember.. 3r4OO 200 80,OOO t4,ooo tg6,ooo,qoo 2,8OO,OOO 40,OOO
Total.-... g?8.40O o s7s2o99 -9 1..'168,000.000
2t,2oo0gg g3o,oog

x(xr- tXvr - y)
6
J:(',-;f;G:ry
l -
Golumn 5 total)(Colurnn 7 total
)
G -
2Tr2OO|OOO
r /( l ,r6 8 ,OOO,OOO
X 5 2 O,OOO
)
r--8GO2
21,2OO,OOO
24 16441675
)
r' - .7399

(2' Perfect direct corretation would be evidenced

by a
of one' The coefficient of .94il neyealed in (lXa) coretation coefficient
is closer to one than the
coefficient of .8602 in (l)(b). This means
trat the variabte portion of t'v-
el expense Yaries mone directly with mov.-"nt"
in the number of calls
made than with the value of orfoers received.
To exptain this further, the
relative coefficients of determination
are obtained by squaring the coeffi_
cients of correration and expressing
the ""=*.i.s a pencentage in each
case. The coefficients of determinalion
are ag,ii oh torcarts made and
only 73'99o/o tor ordens received. This
mea"= irt"t approximately goohot
the movements in the variable portion of
travel "tp"r=" are retated to
fluctuations in the number of ca[s made,
,no itr" remaining 1o% of the
moyements are related to other factors.
I
L

t- Clnpter 3 35

IL P3-2
(1) (r) (21 (3) (41 (51 {6) cr)
v v-n x F-a tr'itz E - r W - n ly-rP
L Month
Suppllcr
Co.t
Cost
Dcvlrdonr
L-abor
Houn
Acdvlty
Dcvlatonr {a} Squared (alr P) (2) Squarsd
SrOOO 0 0 o 23
L January.-... 31r5O5
Fcbruary....
Mrrth --....
l'395
1't65
5
(ro5l
olt
4r6OO
Srtoo
{4o0}
180
160,000
25rEO0
42,OOO
1O,4OO
111025
4r2i25
Aprll --...-.; tr5l5 t5 Srtoo 100 lo,ooo lrSoo 225
I
L Moy............ f r45 Fq 4'a30 (1701 28r9OO 9r350 3,025
Junc..-....... tralS (851 41750 (250) c2?5OO 21',25O 7,2J25
July-.-..--. 1rf65 (351 4r9OO (roo) 1O,OOO 3'5OO 7,2i25
L Arguet.--. IFOS
Scp,tcmbcr. 1'576
5
75
6,O80
5'2OO
80
200
I/roo
aorooo
.loo
l5'OOO
25
5,O25
Octobcr...-. 11535 35 61130 130 t61900 4r550 1,2ir5
L NoYombcr - f i6OO
Dcccmbcr.,__-!f99
o
80
4r05O
513OO
(50)
300
z'5,OO
0orooo 24,OOO
o
g,40o
o

Totel......9!8,rU o 6O,OOO o 452.800 131.950 40.250

L y - 7.y + fr - $181000 * 12 - $11500

L i - Xx + tr -601000 + 12 - 5r00O
:(x-*)(v-l) 131,950
l t - .977
L ffi J(*sz,BooX40,250)'

I
12 - (.grz)z -.gss
!

l-

I
I
I
l-
 !.

I 37
!
Ctnpter 3

i
I
I
L P3-3 1

(1) (1) t2l (3) {4} (5) {6) rt)

I
I
v v-n x F-a lt -rP (x-7W -h v -rtz
b
ElcclrlclU Cott Lrbor ActvttY
Dovb0onr (a) Squercd (4) x {2} (2) Sguared
Cort Dcvirtiorr
@
L Jrnulty.'-.. 3 t'OOO 20
(rol
13oo
4,OOO
(30)
(230)
900
62r0(x)
(600)
2,3OO
4Oo
too
Fcbrue4y.... 1$7O
30 4,3OO t3O tor0oo 3,9OO 9OO
Merch....,-. I'ClO
I
(30) 4,OOO (2301 52r900 6,900 9OO
E Aprll -...,..-. 1r35O
(501 4,050 (r8ol 32,400 I,OO0 2,500
May---.-... t'530
Juna--....- 1r.640 (40) 4,too (l3o) lG'9OO 5r2O0 11600
b
i July.-.*.-.. 11620 (ool 4,t60 -(8Ol 6r4OO 4r8OO 3,600
(60) +2n 20 .lOO (l'OOO) 2,5OO
Augurt...- f F3O
Soptcmbar. 1'580 o 4,tEO l8o) 0t'fOO o o
i 1'O5O 70 4FOO tto 710OO 18,900 4r9OO
b OctobGr..-..
11660 80 4,OOO 37O t3o,9oo 29,600 6140O
NoYcmbcr..
Dcccmbcr.. IrO2O 40 4/rOO 17O 28r9OO orSoo lrooo
i 0 424.800 85.800 25.400
b Total...... tl&OOO O ::50.700 :

, - 2 y + rr - $ 1 8 1 9 6 0 + 12 - 31r 58o
x - xx + n - 5 0 1 7 6 0 + 12 - 4,30
I x(x-r)(v-r) 85,8OO -.826
!
. / > ( t- r ) ' z ( v - 7 ) ' (-*za,soo
X25,4oo)
I
. )
L r- - (.826)- -.682

I
 u Cllopter3

Pg-3 (Concludcd)

(r) el f3) (4) (5) (c) trl

v u --n x F -if lx --rr2 tr -iw -h tv-tF
Elcctrlctty Cort f,lrchlnc AEdYttt
Hotr$ Co.t Dadrdonr Hourt Dadedonc {!l_squrt* (.) x 12) {21Squrrcd
Jlurery-..- E I'EOO 20 2,goo o .o o .lOO
Fobrurry.... f r57O Irol 1760 (r60) z2,5AO t'5oo too
Mlch..--. lr6tO 30 244oo too IO'OOO t ooo D|00
Aptl!-....-- tr660 (301 2.2& (60) 4N tr8oo 900
Hry--..,.-. tF63O (to) 2r7CO (r.o) tgrcoo TrOOO asoo
Junr..-.-.- f rAfO (40) 2J4o lco) trc@ 11OO I'OOO
Juty-.---- f r52O lcol 1r80 lr20) ta/aOO rr2!,O SrOOO
Arrlturt..-- f r.B3O t60l 1r7O (tso) ror0oo c'aoo z6,0o
Sopilcmbcr. f 1680 o 42fi (401 I'COO 0 o
Oc{ob.r,-. f rttO 70 4&O no aorooo t+ooo 4190O
Novrmbcr.. Ir0co 80 2W 2& 67,600 r0'2oo 6"lOO
Dcccmbcr- IrC2O 40 2t4tj{) 160 zAEo{, c,ooo I'GOO
Totrl....- Ig.gg9 o 27,COO O 2rt.200 oa.aoo 25.aOO

y - 8 + f r - $ 1 8 1 9 6 0+ 1 2 - 3 1 r 5 8 O

i - Xr + tr - 271600 + 12 - 2r3OO
: ( r -- xrr(y
) ( v - yy)' ) e8,3oo -.93t1
x ( x - r)':( v - -v)z (zt'l,2oo)(zs,4oo)

r z - ( . g 3 3) 2 - . g l o

(21 Slnce the coefllclent of determlnaUonfor electrlclty coat and machlno

houneQe= .a7Q le grestor than the coetficlent of determlnaUonfor elcc-
trlclty cost and labor hourape =.682), machlnohours should be used as
the barls for estlmaUngelectrlclty cost. Machlne hours explsln morp of
the varlanco In electrlclty cost thsn do labor houlr,
(3) Wtth machine houru a8 tfio bagls for predictlng elesffcltlr cost, the l|red
cogt and Orevarlable cogt rato can be determlned by the method of least
squanosae followrr:
iXY I Y) C o l u m n 6 t o t a l _ 6 8 , 3 0 0 -_ G
r a r e ( t ,') - . x ( r :
variabte $' 32339
X (x - i ) ' G o f u m n5 t o t a r ' m
Fired
cost(a)
- ($'3233e
,.2'3oo)
t ilfi:
 I

I
I 39
L
Clwter 3

I P34 , Malntenance Machine

(11 Gost Hours
I
t s2,290 2r7OO
aa.ataaaaattttt"tt""tt""t"""rttt"""tt"tttt"t"tt"
! Hlgh
2,OOO 2,OOO
LOsf ...... aaaaaoaataaaoat aa" "tt"t"l'

Dlffelonce.'. a aa aa aa aa"t ttttt' 3 2s0 700

i
aaaaaaa

b
per machine hour
Varfabfe rate = 3290 + 7OOhour:s = 3'4142857
I Hlgh Low
b
$2t290t00 $2,OOO.OO
Total cG,Et...........r.r.............................r.r.........
l tl 18'57 828.57
Total variable crogt..,.r.'...........................r..'...'
br $1 .1 71 .19 $ 1 . 1 7 1. 4 3
Average ffxgd c(tSt ............................'...'.......r
(5) (6) rt} -
l2l (1) l2l ';;
{31 {4}
I
vt ln-h ui-a lou-# tot-lwt-h tu-vf
E
Malntcnancc Cott Machlnc ActtvttY
Houre Dcyilqgn! (4) Squercd (4) r (2) Q93urrl!
Cod DevlaUon
I
2r5OO 100 torooo 4rOOO I'COO
! Janualy'..-. I2'2OO 40
(50) 2r5OO 1,5OO 000
Fcbruary '... 2r130 (30) a35O
2rOOO (roo) 2rOOO (.o0) lOO,OOO 04,ooo 25rOOO
March -.--.
t0 2r4OO 0 o o too
Apfi1 ........... 117O
Mry-....-.'.. 2,O50 (rrol 211OO 13oo) 9OTOOO st,ooo 12r'loo
oo 2rOOO 200 40,OOo 12,OOO 3rOOO
Juno-......... 2,220
I
(101 2r*5O 60 215OO (5Oo) loo
b Ju|y..,........' 2r750
00 2r55O lEO 22'5,OO 13r5OO Irloo
Atgud....... 2r25O
2,7o/0 3{}0 90TOOO 39,(XX) 16,9()0
Soptcmbcr. 2r20O 130
I
I
Oclobcr...... (r0) a45O 50 2,5OO (5oo) l oo
&160
!
llovcmbcr.' 2'21O 50 2rlOO o o o 15'OO
Dccombcr.. 2rlOO {o0l 2,3OO (roo) lorotx, 6,OOO _g€99
28.800 o 430.OOO 172.OOO 76,200
Totrl.-.. E25,920 O

I , - I ; Y t + fl - $ 2 5 r9 2 O + 1 2 - $2J6O
b
, - X x , + o - 2 8 r8 OO* 7 2 ' 2t4GO

I ( x - r ) ( v - i ) - Column 6 total - 172'ooo - 3.40 Yariabtecost rate

b -
x(x - i)2 6lu;;;-5-GGf 4it0,oo0
I
I
SlnceY -8+bXt then:
a -yt-bt
a - 3 2 ' 1 6 0 - ( $ . e o) ( 2 , 4 O O
)
a - t12,160 s960-
a - $1'2O0
 10 Chapter 3

P3-4 (Concluded)

(31 l -
x(:-z)(v-9.) Column 6 total
v:(x 1 - i)t:( yt - ilz ./(column5 total )potumn i totat I
172,OOO 172,OOO
f t _ ' 1 172,OOO
W, - . 9a 5 6 5
@ - @
. . ,
1 2 - '(.9585)- - .91489

(41 (r) t2l (31 (4t (s)

X1 It lyi=a+br, lh - v'l Ut - t'12
Actual Prodlstcd Predlctlon
Machlntr Malntonancc Malntenence Errpr (4)
Month Hourt Cort Cost (21- (31 Sguarsd
Janualy...... 2r50O $ 2,2OO $ 2,2OO 8 0 $ o
Februaty.... 2r3li0 2r130 2r140 (ro) 10 0
M8hCh......... 2,ooo 2rOOO 2rO(X' o o
Aprll r.......... 2r4OO 2rl7O 2r160 lo too
M8!.........r.. 2,1(x) 2,O50 2t04o to 100
Jlllte..r.....'.. 2,600 2r2,2O 2r2tn (201 400
Jlll!....'....... 2r4EO 2rl60 2r18f. (301 900
AugU8t....... 2,550 2rzf',O 2r2i2o .30 900
September. 2,7AO 2CoO 2r2g0 to 100
Octobor...... 2,45O 2r150 2rl80 (30) 900
llovembor.. 2,4AO 2121O 2rt60 50 2r5OO
Decgmbor.. 2,3OO
Tot81....... 28,800
2rtoo ztl20 _e9) 400
:
-^!
Ety-Y
::
A^A
t125,920 9_e $6,4Ot)

8 t - Column 5 total -
12-2 !+ff - sz'.zs*22

(5) The 95% confidenco tnterval for matntenancecost 8t the 2r5OOmachtno

hour level of acdvlty lr

mn
Y ' * t p ; s x s ' . 1 1+ i +
\--' -'f
:
! x(r, -r)'
s.|,2oo*(s.eo)(e,soo)'(z.zz8X?5.2g822){'-+"-w

3 2 '2 OO = $ 5 9 .29
 I

I
It Ctnpter 3
41

I P3-5
L 1
(1) (a) The method of least sguanct:
I
!
(1 1 l2l (3) (41 (s) (6) Ct)
vt tn-f, \ Fl-it tn-xr2 h-rui-h ln-iF
I Dtllcrcncc Dlllcrcncc
! frorn From
Avrngc of Avcragn of t2l
\ 3F0o K) Squared {4}r (2} Squarcd
I
t tToo
E Ebc{rlclty Elcctrlclly Orrcrt OuGtt (OOOI (OOOs (oOOs
Co.t Drvladon Dryr Dryl omtttcd)- omtttedl omlttedl
I
I
Jenuery.-.. $ 4OO g3OO) I,OOO (21600) ar2,,,o 3 750 seo
! 400 40
Fcbruery-. 5oo (2o0) 1F0O l2'Ooo) 4rOOO
March --- 600 (2OOl 2,500 (trOOO) I'OOO 200 40
I
Aprll--.-.., 7OO O 3,OOO {5O0} EO o o
b
M{-..-.-... 600 (tOO) 2'5OO (1'OOO) I'OOO 100 to
I
Juns--.-... 8OO lOO aFoo I,ooo lr0oo 100 lo
Juty-..-.-... I'OOO 3OO o'5oo 3,ooo IrOOO 900 90
! 2r5oo
Au!tt3t..-... 9OO 2go o,ooo G'25O 500 40
Scptcmbcr. gOO 2OO 6FOO 2,OO0 arooo 400 40
Octobor.-- 7OO O 3,O0O l5o0l 250 o o
Novcmbcr - 600 lroo) 21600 (1,000) trooo 100 10
Dccambor.. 8OO to o 3'5OO o o lo
I
I Total...... E8.4OO O 42.OOO 0 34.000 . lxl.450 gtao
tt

I
:(tr -r)(v, -y) Column 6 total - tl3'45o - 3.1015 variable rate
' b -
! x(r, - i)' Golumn 5 total 34,OOO

I
Slncef - a+bil then:
! S T O O- a+(tl.tOl5 x3'5OO)
a - $7OO -$355
I
e - $345 llxed coat por month
!

I
l-

I
I
E
 Clupter 3
12

P3-5 (Contlnue{)

(b) The hlgh and low Points method:

Electrictty Guest
Gost Datrs
Hlgh ..r.......... ataaaaaatlaaataa aaaaaaaa aa alaaa aa aaaataaaa aa aaaaa $1,OOo 6r5O0
Low... 400 l,OOO
D1ffergnc18..r...r.....r.....................r...........'..'..t $ 600 5,500

Varlable nate - #= - $.1091 per guast day

5r5t)O

Fired cost = $1,OOO- (61500x $.1091)

= $1'OO0- $7Og
= 3291
OR
Fixedcost = S400- (1,OO0x ll.1091l
= 9{OO- StOg
= Szet
(c) A scattergraph wlth trend llne fltted by Inspectlon:
s1,1OO
st,ooo
tE s900
lu
o,
F :8800
o
o 3700
o tl-
3600
>2
=o r3500
9E
IE 3400
F
o 3300
ul
J
lll 3200
8r00
$o
o t,o o o 2,OOO 3,OOO /3rOO0 S'OOO crooo 7r00o
GUEST DAYS PER MONTH
Fixed cost per month
detormlnecl by
I nspcctlort ............_SSSO 3s50 $.1O variable cost
3r5OO avorlge guest days per guest day
Averago cc'61......,..,.. SZOO
Less llrcd cost......... g5O
variablo rGrolt......,.....G
:
t_
t- Clpoter 3 43

I P3-5 (Continued)
S
(Zl The coefflclent of coretatlon (r) and tlre coefficlent of determination (rz)'
t
I
uslng data from the requiromcnt (lXa) answen
x(r, - ,)(v, - Y)
!

- -
c o t u m n6 t o t a l
I r - x)'>(v, - y)' . ' / ( c o t u m n5 . t o t a l ) ( c o t u m n7 total )
E
l:(t
3'45o'ooo -@
.l 72r92Or0OOrO0OrOOo
L 3r+50,O00 '
'9598
I 3r5g4 r44g
b r2 - .9212

I
I
b
(3) The standard error of the estlmate:

I (11 (21 (3) (4) (s)

I
b
X1 YI Vi=e+Dx1) th-vl th-vF
Predistion
Error
Astual Predlcted Predlction Squared
Guest Electriclty Electrlctty Error (4)
I
Month Days Cost Cost (2) - (3t Squared
January......
' g 2,209
t
L I 'OOO $ 4oo $ u 7 9(47)
Fobrualy .... 1r5OO 500 4f'7 3 I
l Ma1ch......... 2,5OO 500 599 (ee) 9r8O1
I
L
4pr11.......,.r. 3,O00 700 650 50 2,5OO
M8!............ 2,5O0 600 599 1 I
I
J ltJlo .........r. 4,5OO 800 ao2 l2l 4
!
J lll! ......'..... 6,50O I' OOO 1,OO5 (51 25
August .,,.... 6rOO0 900 9S (sl 2,916
September, 5r5OO 900 903 (3) I
I Octobor.,....
b
3rOOO 700 650 50 2r5OO
NoYember., 2,50O 600 599 I I
Decembgr.. 3150O 800 700 100 1O ,O00
!
b Total ....... 42.OOO sg.4oo 39.405' s (5)' s29,975
'roundlng eror
I
I
I
b
5'-
iZU t - y ' r ) ' j Golumn 5 total
- v s2 ,gg7.5 - $54.75
n -2 1 2- 2
I
 chapter 3
1

r3-5 (Goncluded) ,

4)The9o%conffdence|nterua|fore|ectr|c}tycosilsat2'oooguestdays
would be:

ooo - 3,5oo)2
)f * #,
(t.atzX330.75 * tz, 34,OOO,OOO
))
(sg{s+ ($.tor5X2,ooo !

t3548 )(r.ozz)
(t,atzX3s4.zs
3318 t $106.35

P3-6

(1) (a) The hlgh and low polnts method: Cost 4stlYttY
:1500 2r4OO
Hlgh aa..ta..""t"ttt"""""t"ttttttt'lt"tt"tttttt"t"ttt"t""'
400 l,4oo
LOW aaaaaaa"lt"ttt"t""t""t"""tt""""""tt"lt"""ltt"l"
Sloo l.ooo
Dlfigrcnc9 .tttttttttttttt"""t"""tt'lt""t"t""ttr"t""'rt"

=
Varlable rate = $f OO+ I;OOOBllletr $lO
= 3260
Flred cost = $5Oo- Sl'1o r2r4OOBlllets)
or = $260
Flxed cost = $4OO- (!l'lO x l,4OO Bllletr)
I
I
b.

45
!
!
ChsPwS

I
P3-6 (Qontinued)
a trend line fitted by insPection:
(b) A scattergraph wlth
L
t500
Il
b

:oo
L F
9300
I
E
l-
o
ul $200
J
lll

$too

30 I
trOOO
BILLETS

= $260
Fixed cost detormlned by Inspection
cogt + 12 months = $46O
Average cogt = S5t52O total
= 2'OOO
total Blllets + 12 months
Average aetlvtty = 24,OOO

V a r|a b l e co a t=(g 4 6 0aver iagecost- s26ofixedcost) + 29oooave ftl ge

agtlvl$ = $.1O Per Blllet

I
I
g

I
 Chapter 3

P3-6 (Continued)

(c) (r) l2l f3) (4) (5) (6) rt)

y V-n x F-;l lx-if lx-rv-tl lv-tr
Elccrriclty Cost llumbcr Activity (a) (21
uonth Cost DcviaUonr of Bllletr Devletionr Squrrcd (4) r (21 Sguarcd
Jenurry,,.... 3455 (51 2,OOO O O O 25
Fcbrury.... 450 ll0l 1'8OO (2OO) 4O'OOO 2'OOO tOO
Mrrch........ {35 (251 1,900 (l00l t0'O0O 2'5OO 625
Aprf1....,.,.... 4S5 25 2,2OO 2OO 4O'O0O 5,OOO 625
1fry............ 4?O 10 2,1oO tOO IO'OOO I'OOO lOO
Junc........... 475 t5 2,OOO O O O 2i25
Ju1y........,... 4OO (60) l,4OO (8OOl . 3EO'OOO 36'000 3'8OO
August....... 450 (f O) l,9OO (f O0l i0'OOO I'OOO 'lOO
Scptamber. 4:t5 l25l 1,8OO (2OO) tlO'OOO 5'OOO c,25
Octobcr....,. 5OO 40 2,4OO .lOO 160'000 iO'OOO 1'600
ilovambcr.. 495 35 2r3OO 3OO g0rOOO 1O'5OO 1r2i25
Decomber.. 47O lO 2,2OO 2OO .3O,OOO 2'OOO loo
Total...... 35.529 _9 _?!.OOO ___9 -999,099 gr.OOO _8.950

f - zy + n - $5r52o + 12 - $460
i - L x + f t - 2 4 1 0 0 0 *1 2 - 2 rOO0

:(x - rXv.: f) - c o t u m n
rate(b)-
variabte Sq9 s tloFl -6dd;66d'$'10125
*7)' x(x o t a t il9
F i x e d c o s t (a ) - y - b i
- ($.rolzs Xz,ooo)
- $ 2 5 7 .5 0

(21 The coefficient of correlation (rl and the coofffclent of determlnation (F),
using data from the answer in requlrement (lXcl tollow:

ftxr - x)ly, _ V)
- l - \ / - \

- -
81'099-- - .957
V : ( xr - i ) ' z ( y , - y ) ' J ( 8 o o ' o oXo8 ' e 5 o)
1 2 - 1 . s s z ) 2- . 9 1 6
 I
I
L

I
L
Ct8pr( 3 47

t P3-O (Concluded)
!

(3)
I
t (r) (21 (3) (4) (5)
L
v x ly'=a+Dx) lv - v'l U-vT
Actual Number Estimated
It Electrlclty of Eleetriclty (4)
L Month Gost Blllets Cost (1) - (3) Squarsd
J8nuary.r.... $ 4{ts 2,O00 $ 460 (s) 25
I
Februaly.... 4lto 1r 8OO #o 10 100
L M8J1Oh.r......' 4{ls 11900 4{to (1s) ?25
Aprll r.......... 485 2r2OO 480 5 25
i
I M8!.r.....r.r.. 470 2rlOO 470 o o
!
J1tJ|9........... 475 2rO00 460 15 225
Jlll!............ 400 1r4O0 399 1 I
I Au$ust....... 450 l r9OO 450 o o
- September 4it5 1r8O0 #o (5) 25
October...... 500 214OO 501 (r) 1
I
I NoYember.. 495 213O0 490 5 25
b Decamber.. 470 2r2AO 480 '(10) 100
Total..,..'. 35.520 24,OOO t15.520 o 752

lcolumn 5 total gt52

g' - - $8.672
i 12-2 lo
\,
The 9506 conlldsnce Interval level for electrlclty costs at the 2r2OO
I
i Blllets level of agttylty would O" 0","--
!

( t - f) ' =
a + D x * tesst"' .,/.t* * *
I
Y " >(r-i)'
b

$257.5o+ ($.rorzs)(z,zoo)' (2.?2s)($a.eze

)
b

I $48o.25 * (2.zza)($e,ozz)(t.oos)
$48O .25 * $2O.58

or between a low of 3459.G7 and a high of SSOO.83,

 48 Chapter 3

P3-7

(1) (1) t2l (3) (4) (61 (6) rr)

vi rl'.1-91 xi Fi-i) lq -|12 lry rWi -h
- rq - vlz
Dlffcroncr Dlflcrencc
Frctory lrom Dirrct from Averagc
Overhead Avcragc lrbor of 1'80O (41 l2l
'(4)
Month Coctr of 37,900 Hourr Hours Squrrrd r (2) Squarcd
'{
20A
J!ll.'....... 3 81600 ooo 2rOOO 200 4O,OOO |2O,OOO 360,000
Fcb....-... gr9O0 2r0oo 2,4O0 600 S60'000 l'2OO,OOO 4TOOOTOOO
ll!1...-... 81050 1,060 2r2OO 400 t0orooo {2oro0o Irt02,5oo
APt- '..-... grOOO I rloo 2,3OO 500 2SO'OOO S5O'OOO tr2lOrOOO
lhy--.., I'160 25O 2rOOO 200 4OTOOO 5O,OO0 62,500
Juno.--. 7'550 {3so) lr0oo ro0 IO'OOO f3SrOOOl 72i2,5OO
July --... 7,050 (8s0) lr4OO (4oo) too,ooo 34o,ooo 72t2)5oo
Aug....-... 61450 (1/450) I'OOO (8oo) 640'000 lrl6OrOOO 2tlO2rSOO
Scp......... 6'900 (t,0ool l'2oo {600} 360,000 OOO,O0O ITOOO,OOO
OcL........ 7'5OO (4oo) lr7OO lro0) to,ooo 4o,ooo 160,000
NoY.-.-... 7rl50 frso) I'COO (2oo) ao,ooo tSorooo 5o2,5oo
Dcc...--. 7'8OO (roo) lr9OO 100 torooo (lorooo) to,ooo
4p
Jan.....,... 8r7OO 800 2,1O0 300 90,ooo 2/3O,O0O 84O,OOO
Fcb.-...... 9,3OO lr4oo 2FOO 500 250rO0O - TOOr0Oo I,060,000
Mrr......... 9'.iOO lr4OO 2.,.OO aoo t6o,ooo 680,000 1,060,000
Apa........ 8,7OO 800 2',,OO 4(}0 tSo,ooo S2orooo o4o,ooo
ifry,..--. 8,OOO loo 2rOOO 200 4O,OOO 2OTOOO IOTOOO
June.....- 71650 (2rol trSoo o o 0 c2r6oo
July........ 61760 (t,tgol tr2oo (oo0l 360,000 C9OTOOO tr322,5OO
Aug....--. TrtOO (8ool tr3oo (5oo) 25O,OOO 4{tOrOOO 640,000
Scp......... 71350 (6s01 r'5oo (3oo) 0o,ooo l6li,ooo 3o2"5oo
OcL........ Tr25,O (cs0l 'tr7oo (ro0) l0,ooo 85,ooo 122,soo
!lov..,-... TrtOO (8ool rr5oo f3oo) 9O,OOO 24O,OOo C4OTOOO
Dcc..-.-. TpOO (4ool lr8OO o o o tbo,ooo
20c
Jrn......... 81600 700 2rOOO 200 .3O,OO0 !4O'OOO a9O'OOO
Fcb...,..... g,3OO lraoo 2poo 500 25O,OOO 7O0,OOO 1,9OO,OOO
Mer......... gr4OO 1Foo 2r3OO 600 25O,OOO 75O,OOO 235O,OOO
Apr....-... 8r7OO 800 2,.OO aoo t6o,ooo 320,ooo c4o,ooo
_ llty..-.... SrtOO 200 2,OOO 200 4O,OOO 4O,OOO 4O,OOO
Juno....... ?1600 (3oo) t,8oo o o 0 9o,ooo
July -...... Z'OOO (eoo) lr3OO (5oo) 25O'OOO 45O,OOO 81O,OOO
Aug.-...... 6,900 (1,OOO) 1,2O0 (0oo) 360,000 OOOTOOO ITOOO'OOO
sop......... ?rloo (8o0) lr3oo (5o0) 25O,OOO 4OO,OO0 84O,OOO
OsL........ Z,EOO (4oo) 1,800 o o 0 t8o,ooo
Nov......... Z,OOO (ooo) 1,500 (3oo) 9O,OOO 27O,OO0 81O,OOO
Dcc........ Z,OOO (3Oo) 1 , 9 O O 100 l O,OOO (3O,OO0) 9O,OOO
Total....... S2g4.4Oo o 64.800 o 5.280,OO0 11,625.000 29.lA5.OOO
iL

L
I (9
I
lL
qww3

t- P3-7 (Continued)
z ( x t - x ) ( v t- l ) Column 6 total 11'625'000 32.20 variable
p - t -

51280,0O0 cost rate

Golumn 5 total
I
b
x (x r - x ) '
Slnce j - a + biand t ' I;yt * n and i ' Xr 1 t rtt t h e n :
I, (Sesa,4oo * 36)
+ 36) -, + ($z.zo)(o*'aoo
\, tz ' eoo
: 3.tlfdT:.t cost
ovelhaad
,
L (21 The coefficlent of correlation and the coefficient of determination' using
I data from the regulnement(1) answen
i
b
x(r, - 7)(y, - Y) c o t u m n6 t o t a t
I
!

11r025,OO0 11rA?S'@9- 1 11625,O0O - . 9 3 7 0

' - :
. v 1 5 3 , 9 3 8 , 4 O O , O O O , O O O 12r4O7 1191
I @)
b

12 -(.ggzo)2 -..8280

I
Lr

I
 chspttir3
fi

P3-7 (Continued)
(3) The standard omor of thc cstimate:
(r) l2l (3) (4) (5)
x1 lr luj= ?.+.brJ) Ui-vl tvi- vF
Actlsl Predlcted Prediction
Dlract Factory Factory Prudlction Error
Labor Overhead Overhead Emor Squared
Houns Gosts Costs (21- (3) (Cl_Squarea
Month
g
JanualY...... 2rO00 8r5OO $ 8,340 It 160 $ 25,600
2'd,oo 9,9OO 9]2i2O 680 462,4OO
FobruSrY'.'. 170 28,9OO
M8FCh.r....... 2r2OO 8,95O 8r780
APrll ..........t 2,3(X) I,OO0 I,OOO o o
M8! r........... 2,OOO 8 rl 50 8r34O (1eo) 36,1OO
1,9O0 71550 81120 (5701 324,9OO
J11JIo...........
Jlll! .....'...... 1,4(X) 7rO5O 7'p,zo 30 900
August....... I,OOO 6,45O 6rl40 3lo 96,1O O
September. l,2oo 6,900 6r58O 320 to2,40o
OCtobOl...... 1 r7 O0 7,500 71680 (r 80) 32,4OO
November.. 1 ,6 0 0 7 rl 50 7 1460 (31o) 96,1O0
December.. 1 ,9 O0 7,80O 81120 (320) 1O2,4O0
ry 140 19,600
JanuatY...... 2r1O0 8,70o 8,5O0
2,30O 9,3OO I,OOO 300 9O,OO0
Feblarary....
MdFGh,.....". 2r2OO 9,300 8,78O 520 27Or4OA
2r2OO 8,7OO 8r78O (80) 6,4OO
Aprll ...........
M 8 ! . . . ' . . . . . , .. 2,OOO 8,0oo 8,34O (34o) I l5,600
JUll€ '.......... lr8OO 7,650 7,9OO (250) 62,5OO
Jlrl! '........... 1 ,2 O0 6,75O 6,58O 170 28,9OO
August....... lr3oo 7 rl OO 6,8OO 300 9O,O0O
September. lrSoo 7,3lio 7 t24O 110 12,lO O
Ogtobor....,. l,7oo 7r?So 7,680 (43o) 184,9OO
November.. 1,5OO 7,10o 71244 (r40) l91600
Decembgr.. 1,8O0 7r5OO 7r9OO (4oo) l60,000
20c
January...... 2,OOO 8,60O 8,34O 260 67,600
February.... 2,3OO 9r3OO I,OO0 300 9O,OOo
MihCh..'...... 2,3OO 9,4O0 I,OOO 400 16O,O(x)
Aprll ...'..o.... 2,2OO 8,70O 8,780 (80) 6,4O0
M8!............ 2,OOO 8 ,1OO 8,340 (240) 571600
Jung..,........ 1 ,8 OO 7r60O 7r9Oo (3o0) 90rooo
Ju|y.,.......... l r3 OO 7,OOO 6,8OO 200 40rooo
A u g u s t . . . . . .. I,2 0 0 6,9OO 6,580 320 1O2|4AO
September. 1 r3 O0 7,1OO 6,8OO 300 90,OOO
October...... 1,8O0 7,500 7,9OO (4o0) 160,OOO
N o v e m b e r .. 1,5OO TrOOO 7,24O (240) 57,6OO
December.. l r9OO 7,600 _ 8,120 (s20) 27O,4OO
Total ff,800 s284.400 E284.4O9 o |x1.580.200
 I
I
iL

I
I 5t
! chtPrer 3

l_ Ps-T(concluded)
i > ( y , - y - ' , 1 2- , @ - ; $ i l , 5 6 o ' 2 o o- - [ r g a - z t 2 -s324
= -- '\-6:z 34
\
b i It-2

= zgsYoand the confi'

| (4) Slncc a large sample ls usod In thls probtem, tgS%
r dcnce lnterval ls:
Y't i zesyr9'
i
)) t (t.eoo)($sze
I
I
b
(sspm * ($z.eo)(z,zoo )
l38, 78O t $635
t
I

tt

I
I
L

I
I
b

II
E ,

!t

)
b

I
 Cnsgter3

52

P3-8
(5) (6) tt)
(3) (4)
(r) (1) (2)
Fr-t) ui-7f Vt-7Wr-h til-h"
vt ru-h xi
(4)
(2)
[.abor ActlvltY Squarsd
Maintenancc Coct Squarrd
Dovlrdon jloto Dovlation
Cost 82r94O 8i1796
Ug1!r (2e0) 84,1@
(286) 950 78,84O 133)225
.lan, ZOe '.-.$'l'l05 (210) 46,656
(365) 1rO24 t1,921 8128t
Feb.,2OA ,... l'110 (13r) l7,l6l
Pf) 1rlo0 zo4 I,O24
fnar., 2OA ... tt39O 'l,l€ (02) 8,{d
F2) to,o0t 18,769
Oot., tOO.... l'449 73 61329
t37 1r313 921 11936
May, 2OA.'.' ItGtS 21 u1
U 1,.C1 c4..:72 12143'6
.tune,2OA .. lF?5 312 97rg
2Oo 11552 22FOB 2AF81
JulY, 2OA -.. 1'687 132 17,121
169 11372 r4,304 121996
Arg.r 2OA ... I;OSO 128 16}876
ll/f t,360 41r?to 37,636
Sep., ZOI ... f 1595 216 4,Sl?,l5
104 11455 1t4/4 6t776
o"t., ZOI .... 1t675 (ro) 3C1
tt6) tpl 20'7OO 52,90O
not.,2OA ... 1,405
IrlSo (eo) 8,loo
2811961
o""., 2OA.." 1125.1 1230) 68108t 1271''71
(cgr) 009 (24r) 93r636
.,;;:;io" ..' eso (2r8) 471324 06'708
I'175 (3oc) 1)Oz2
aoo Irl20 3r136
;;;:, ro",.,. 1po 1zo) c,25
"' 1/;?5 158) 11849 I1076
"".,2O8 r}283 43
"" r'5oo 25 eBOr 12$73 t3rt29
;;;:;ro' 127 r,&?9 00 23F84
I'COB loo 1'72O
""r, aOt "" r'260 lo 37,6;:!6
.. l'6s3 172 40,OOO 38,8OO
,;;,2o8 lr44O 200
1'675 tg4 t2'150 60,o49
,rit,'to" "" r}20o 60 2"oo '
1'724 243 t3r776 21rO?5
;;;; 2oB "' 05 9rO25
145 r1335 8rgl6
;;;.,2oB "' 1'626
ct6) 51776 ct,t+0)
1]576 04 Irl64 2i2,876 zfF84
O",.r rO" "" 1$73 133 17,689
l'633 172 T,3S 3r9O9
*;".;2oB "' (1ro) 13,456 <
t,/tt' (63) 11124
;".: 2oB ..'
2,.JCO J 543.682 G51.300 34€ee
Totsl.-..$$ J
-v - I y t + n - 335,54{
+24 - $11481
7 - !X,j *n - ?9,760+24'11240

x ( x r- t X v , - i ) eolum4
ffitumn 5 total Column 7
f - -r2
total )
x ( x r- f ) " x ( v r - Y ) -
651,30o
651,300 - fr|sfr
651,3OO - .8707 25
. E59798,983 ' 092
Xt'o
-J(ss3,682
06)

r2 - (,ezotzs )z - .758162
I

t 53
I
!

Cnagterg
l
S
P3-B (Cohtinued) (6) rD
({) (5) jf
I

(r) (2) F)
v,-il' V- xW'rt v-(2)
trl -i)
I

b
vt ru-f, -.-:! (4)
ion Machlnc ActivttY (4) r (2) Souarcd
Mtlnttnanct Squrrod
I
t *" Dcvladon ry!91!gn 76,076 8rJe6
i Uontf,, . ry
(2so) 8oo (2o0) 7oJ56
120,8t5 $332s
,I',-r0o....31'195 (3:lr) to9r50r 8,'81
(365) 7u 8roo8
I
;;;:; too,,'. r'116 ' (88) 7r7U 1'o24
i'3eo Pl) ?tt 7;t+4 21816
- ;;20A... e87 (88) l8'769
ttas t32) 12,321 15.r2O7
ior- ioo-.. I'186 ttt 11936
I'018 197 a,|1 3,a76
t mty, tO",... 70 42,436
u 44,4S
! ,;;;, 2oA.. t,EE l'ltn
1391 214 a8,650 2,.FO1
1'087 2Oo 23FOe 27F17
]",r,'ro"-. 1'2u, 163 12'996
t,6o loe 121521 12,A31
;;;.,20A... Itl86 tll 37'Gi:l6
I
1t4 2',3l1 33,174
! Sep., 2OA... 1'595 171 6J76
194 t,l$ 51928
l'675 oro84
oct.,2OA*
f'O) 997 rrsl 641753 53,82O 52'9OO
Nov.,2OA'.. l'4O5 841 t234.l 28t'0ol
I
(23O) 328r38 304,203
Dec., 2OA..' 1331 60'2 (573) 93'636
95o ($r) 116,964 1041652
Jan.r 2oB '.' (342) 3'136
1'175 (306) 73tl
a25 (s4ol
Feb.,2OB.'. 16 . o,25
FO) 3,ooo lFOo
Mar., 2o8... 1,4?5 1'O* oo t0'129
Apr.,2OB...r.rfo 25 1't* 00 0r8Ol 121573
127 1'174 N,112 z?.F84
MaY,2OB ..' I'OOB 171 29,l1
I
172 36'665 37'336
June, 2o8.. I'O53 :2* 189 9,721
!
t94 1,.oA oo,,:0, 59'o49
July,2oB'-. ,,izo 13,23 28 01r5O4
21,p25
1t124 28 '155 21tQ?s n1476
Aug., 2O8... 8p3O
145 133x) 8'4OO
SeP., 2OB '.. 1'026 00 Irloo
94 l'1S 27r8* 2aF84
Oct.r 2OB... 11675 l02 26,44
172 \A7 2F20 3,S9
Nov.,2oB'.. 1'653 (10) l,600
(O3) I'O35
Dec.,2oB.- 1118 I,013.8?9 lol0'600
b
25'8oo J J.o35349
Totll..-.€5.!!!l J
- $1,481
, - x Y t + f t - s 3 s r $ & + 24
- Iro75
, - f ' 2 5 r 8 O 0 * 24
Columq
z tout )
- -
-Y)
'
Cofumn 5 total (Golumn
1ir(xt-x)'x(rr
1,o13,826 -ffi -'ee1176
1,O13,826
ffi46@366'o88
@,506)
- .982430
r? - (.991126 )2
 v

chaotar 3
54

P3-B- (Contlnued)'
' cxpcnee should be
i2l Th; activlty moa3uro us9-dto predlct-maintenanco cstlmates:
cost
machlne h6urs, nrhlch wlll result In ttre following
x ( : - t ) ( v - Y ) Cotumn 6 total - 1 ,O l 3 , 8 2 6 - 3 . 9 7 9 2 1 3
b - Column 5 total mEim variablerate
:(x-f)2
as follows:
slnco y r a + bi rthen the estlmated fixed cost ls determlned
t r j --blx
r r s1,481- (3,e2e213
x1'O75)
t - $l'481 -31'052.65
e r 3428.35
(3) (r) l2l (31 (41 (5)
x1 rt Ui= 1.+-bx! ln -vil tq -viF
Actiral Predleted Pmdlctlon
Machine Malntenance Malntenance Ertor (4)
Months ]lours Cogt Cogt (2) - (31 Squared
Jan., 2OA.... 809 s I,195 3 1&21 q26) 3 676
Feb.r 2OA ... 7# I,l l6 1r157 (4r) 11681
Mar., 2O4... 987 1,39O 1,395 (s) 25
Apr., 2OA.... 9,87 lr4d.g 1,395 54 2,916
May, 2OA,.. 1,186 1,618 1r 59O 2A 7U
June, 2OA ,. 1r154 1r5,?S 11558 (33) IrO89
July,2OA,... -11291 11687 1,693 (0) 36
Aug., 2O4... 11238 1,650 11641 I 8t
Sep., 2OA... 11186 1r5fi5 1,59O 5 . 25
Oct.r 20A,... 11246 I,675 11648 27 729
Nov., 2O4... 997 1,4o5 1,4O5 o o
Dec., z0n.... 841 1r?J5',l 1r?52 (r) . 1
Jan., 2O8... . 502 950 920 30 900
Feb., 2O8... 733 11175 Ir l46 29 841
Mar., 2O8... I,O9 O 1r4?S 11496 ('tl) 5r041
Apr., 208,... I,135 1,506 1r54O (34) I,156
May, 2OB ... 1;174 1 ,6 0 8 11578 30 900
June, 2O8.. 11246 1165!l 11648 5 25
July, 2O8... 1126,. 11675 1,666 I 81
Aug., 2O8.." 1,323 1?724 11724 o o
Sep., 2.O8... 1,23O 11626 11633 rt) 49
Oct., 2O8.,. 1,165 1 ,5 7 5 1,569 6 36
Nov.,2O8.., 11237 11653 1,ffO i 3 ' 169
Dec., 20-Et... I,O35 I,418 1r 4f.2 lze'1 576
Tot81....... 39.8gg sss.5!{ €g€{z' E-lg)' sl zsr 7
'rounding error
jt(" t - v')2 1317,817
"'- IColumn - 52 total - ,
- S2B.4sBlo3
\ n - 2 \ 24 \fr-
lF

I
I

>

!
I 55
+ Clqter 3

I! P3-8 (Cgncluded)

(a) costat the1'1oomachine

lor maintenance
r
b
ffirfflffi:;|;ffi,T:"t""'
-tl
{rr - xl
t
{
II r ' -* -t 'gc;vs' *-S ' . , i 1+
Y I +
b n t(r, -x)'
\
II
i -__-^-. i r (trtoo-1,o75)2
I
t 9028.3tt+ (s.ezezl3)(r,1oo)r (e.ozl)(ze.rcarm)! , * * - r,agsff
31,505.48 * $80.26
I

I
tt

I
I

! :

\,

1
>

I
 Cnapter 3
56

CASES
c3-1
(r) W =a+bS
= 5.062 + (.023)(1'20O)
= 5.062 + 27.6
= 32.662 or about 33 total workens
33
Total workgl.s negdgd ....,.........rr...............................r.
10
LeSS pgnnanent WOfkgllS......'......................t"""""""
23
Number of temporaryworkers needed'
tzl Regression 2 appoars to be better than Regrcsslon 1 because:
excluded' thereby nemov'
i"i- O"t outside the rclevant r.tnge have been
ing anYbias.
(b) fhe standard error of the estimate (s') for Regrcssion 2Js smaller
than the standard error of the estimate for Begression 1 (.432 com'
pared to 2.012).
(c) The coefficieni of determinatlon (r2) ls hlgher for Regrcsslon 2 tfian
the coefficient of determinatlon for Regrcssion t (.998 compared to
.962).
(3) Jim Locter can use the legression in his plannlngfor tempolary workers
lf the foltowing condltlons exist:
(a) The forecasted dally shlpments are greater than 3oo and do rrot
deviate too much from the agtual shlpments.
(b) The amount of work to be done is dependentonly on the number of
shipmentsto be made and does not change from shipment to shlp-
ment.
(c) Worlier productlvlty is erpected to remain approximately the same
as that experienced during the period used to develop the negnes-
sion.
(d) A strong cause and effect relationship exists between the depen-
dent variableand the Independentvariable.
(e) The time frame for a forecast ls short'term'
(4) The regression could be improved by the following:
(a) Redeveloplngthe regressionusing the number of hours worked as
the dependentvariable.
(b) Performlng another analysis ll rush orders or deviations of actual
otderc fiom forecasts occur wlth any degree of ragularlty.
(c) tnvestigating the historical data used as a basis for the regrcssion
to determine lf there aFeany further unusual circumstances that
should be temoved from the data set.
td) Redoingthe regressionafter a period of tlme' such as four to slx
months,to discover lf thens have been any changes In the relatlon-
shlp between the dependent and the Independent varlables.
l
-

I
I

t
Clnpter3

c3-2

( 1 ) T h e | n c t o a s e | n y a s s owtti-J;ilin
c i a t e d w l t haa6'O'unitln"t"t"e
un|tJncneasein 11'2 l . 2 , Tinh ye r e f o r
x l sx. 5O0)
Soo-untttn"r""i" tn x
rsspurious'rhe
rfthecorrararon
unreriable
(2) [:i"T,::riJ"i?,1P."rr.
' a s s u m p t i o n i s t t r a t 1 ; # i " " powgr
] o g i * rand
. L i "dirsct
i i " " s hlabor'
ipbetweenoutput
and the use of efee#c undsr ii" "onattions at the time of th
(b) rrre equa$onmay b; Ji"ble
studv,butfconOltiJns-tt'"ng"'theresultsmaybeunreliable' unlts.
(c) D"tj;;;;;- limitJ i" " l'ige of 5oO.2'ooo
(d}rts-assumeatrratastralght-||neassumption|sva||d.
good-
(e)rrrecoemcbntofcorrelat|onlg"'""",'"ofttreextenttowhich
ars ,;;i;ttiearty. n i" t t"railve m€asuneof
two varlables ln yi" ttpl"lned by ora rugrcssion
ness of fit. More or iil"-""tiatlon than'ior elbctrfc Powenthat ls' the
egua*onfor direct f,rl]o,nours ts a uJtt"r flt ttan the equatlonfor
esuatlonfor dlrsct ffi;; iiouo
elecilric Power'
( 0 T h e s t a n d a r d e r o r o f t h e e s t l m a t e . l "tlon"
s a m e att" e o t v a r | adlstrlbuted
s u nnot-alty t|onfrom
the regrcsstonltne.li il; ;;t tne sGndarderrcr can be lnterpret-
aboutthe regrc"",on.qu"ii*, The stsndard entr ls
ed ln tllresame r"y'", it " "t"no"tu-i-"'r"uon'
the case ;id;; i"Uo' f'o'u-otft"n In trs caso of elestric
gruater In
power' wtttr permisslon
GGA-canada(adapted).Reprint

vari-
of Alternative A ls that using time-as an IndePendent
(1) An advantage posslble factors
il; ;;;;ideqtlon all
abte is a conyenl""i*"V to take Juring each period of
that may be lnfluencing the depeidtnfvartaUrc rclation-
A rs that there ls no loglcal
time. A disadvantageof Alternatire
shlp between years and rental expense'
b-ts that this method ls loglcal because
An advantage of Atternatf"e
and, thus, rsntal exPense
as rovenu"" tnciase, the stgryi lnrr""r", 6 t" that an estimate of ruv-
lncreases. A di;-d';tage of eliernatfv"
.n""il"J#[l; c is thatthe mathematicar carcurationr
of Arternative disadvantag
mc-thod ls easy to underctand' A
are relailvely eaiy and the .rr-r"9" rs an oversrmptfica*on
of arternativ,diJ.ffi il; arnrrm"t.
rchilonship between varlables'
that does ,rot *r"oi;;;';;t
 OuPter 3

C3-3 (Concluded)

" ,"nt"l .;;;;;b ioglcal' the coefficient of

|2|MotorcoGor?orationshouldse|ectA|ternativeBbecau.sethere|ation-
rhtp between neyan,r" riJt} ls low'
tt"ndard eqor of the estimate
corrslafion ls hlgh, rnaiii" for es*matins rental
(3) A "t"ti#;iirr[iiq* i" "'n-"pp-priati-ieirtoa attto Parts'A statistical
cxpensebetorpi[otorro-;;ft.d"iTi'il;["
"o'"iation betweentre variables
ttrt
tcchnigueattemptsto--"""r- "nA ttftA rclatlonshlp'and such
a
pnesumeO to fral]IE"it
trat aru
appea* to "iriiiirti" "ttuauon' of cout:e' Motorco ls con'
relailonship
any neratl-J"iiJs tnat-.rr=t in *re hrstorrcardata wttt
lssumrng that Management mav-wantto adiust the
tlnue ln ttre ftrturewnnout-ln;ig"' *irr"t"iu6 and Motorcomay wish
to
variabtesfor chang".
-oit'tt i;i rr"ip*tt
i ntroouc-e qJantltative variables'

c3-4
,,-gle""ion provides a rclational statement nther than a
(r) The phraso
that reg;"ion analysls ls used to determine a
causal statementn means
relationshlp, but not nt"""sarffyi cause-and'etfect relationship' A spe'
not imply that the lndepen-
clftc value for a negnession cosfficlent does
d e n t v a r | a b |e (s1 ca -u se sa ch a ngeinthedependentvar iab|e.
basic formula for a tegression
l2l The meaning of each of the "VtJb;i" in tt i
oquatlon follows:
the dependent variable'
y'r = estlmateJ value of the lth observation of
a=they.axls|nterceptorconstantterm(9.9.,thefiredportionofa
semivariable exPense)'
to the Independent vari-
b = the rcgrcsston coefficient corresponding
ab|er(e.g.gthevariabtecostelementassociatedwithaoneunit
change in actlvlty r).
varlable.
x1 = the tth ou""r""tibn-of the first Independent lndependent vari'
to the
c = the regrcsslon coefficlenl iott""ponding
ab|ez(e.9.,thevariab|ecoste|ementassociatedw}thaoneun|t
change ln activity:).
variable.
21 = the lth observatibn of the second independent
with the lth observation.
d = the error term associated for goodness of flt
(3) Statistical factors used to test a negrcssion equation
include:
the portion of
(a) The coefficient of determination,;2, which lndicates
by the lndepen-
the varian"" i" the dependent variable erplained
approaching I lndi-
dent variabtes. A coefficieni of determination
cates a good llt.
I

lv

I
L.

l
b
59
Clapter3
I
lb l -

C3-4 (Concluded)
I
|-
(b) The standard orror of the estimate which measures the dispersion
of the observed points about the regressionline. A standard error of
I the estimate approaching zeno Indicates a good flt.
b
(4) (a) The term "linearl$l wlthln a relevant ranget'means that in a specific
sltuation, a straight-line relationshipbetween the dependent vari-
L able and the independentvariablescan be assumed only within the
range of historically observedvalues.
(b) The term rconstant variance (homoscedasticltyl"means that the
t, distrlbution of the observations about the regression line is unlform
for all values ol the independentvarlableswithin the observed
rrangeof values.
I
!
(c) The term "serial correlation" refensto the lack of independence in a
geries of successlve observations oyer tlme. The deviation of a
value from the regressionline should be unrelated to the deviation
L (d)
of any other point from this line.
The term 'normality" means that the ioint probabllity disHbution of
Ure variables ls normally distributed (multlvariate normal). The fre-
quency of the observatlonsshould approximatea norrnal curve.
(e) The term smultlcolllnearlty' refers to tfie correlatlon of lndependent
I
I
variables. When Independent variables are hlghly correlated wltfl
! each other, the relationshlp(s)between the Independentvzrlablee
may obscure the relationshipbetween the lndependentvarlables(s)
l and the dependent variable.
!
c3-5
l
: (1) (a) D = (2.455+(.188X1,5OO,O0O 1 *O 0 1 O 0 0 ) )1xO , O O 0 u n l t s
= (2.455 + 2,821x 1O,0OOunlts
= 5.275 x 1O,OO0unlts
b = 82,750 unlts
(bl D = (2,491 + (.441(12,OOO,OOO + 1,O0O1OO0)) r IO,OOOunlts
\ = 12,491+ 5.28| x IO,OOOunlts
\ = 7 ,7 7 1 r l O,OOOunlts
= 77,71O unlts
I
I
tzl The 5o7o confidence interval for demand is calculated as follows:
:, D = 104,160 unlts= {.59X,922x 10,OOOuntts)
= 1 O4 r1 6 Ou n l ts * 6 ,361.8 unlts
or between 97,798 unlts and 1 10,522 unlts.
 Cl?€.pter3
&

c3-5 (Concluded)
(3) Eguation 4 ls the best The coefficient of correlatlon and the coefficient
of determination arp the hlghest of ttre four equatlons. The coefficient of
determination Indlcates that 70.3ohof the sample variance of automoblle
sales ls explalned by the rcgrcssion. For predigtlve purposesr the stan-
dard arror gf the estlmate a|.922 is also tfie lowest of tfie four models'
giving the tlghtest (smallestl phyrsicalconfidence Interval of any of the
equatlons.
(4) Equation 3 assumes that factory rebates (R) are dependent on advertls-
ing funds (A).The rcsuJtsof the analysls show that factoly rcbates and
advertlsing funds are almost totally independent andr ttrereforc' cannot
be used to predict each othea The rcsults of Equatlon 3 lend credlblllty
to the use of A and R ln Equatlon4. The Independenceof A and R
leduces ttte posslble negative aspects of colllnearlty'
I
!
S
CHAPTER 4
QUESTIONS
DISCUSSION
O4-1. The five Partsarc:
(a) Direct nraterblg reqtbn
(b) Direct lsbor ceclbn
(c) Frlory ovefiead
(O Work h Pr@oer hventories
I 3tatcmentsb morc rignilinnt in iudghg eaming
(c) Fhbhed grood hvmtorbr
iho bahnc" rhoet ir t 3tal.ment ct finsncbl
*2.
pcrttbt; the hcqrr ctBternont b a dalement of
sttYity. The incqne lbtement is ccnplementary
to thc babnce sheet, munthg in padicubr for
tho ctrange in hr prcprietary equrty Bs a resull
of operatims during the year. In |hat respecl' the
incornc atatemenl ir eeaentiallynothing more
than a major rection of the retained eamings
accounl. Thereforc, tht rsvenue and expense
accounls in the income 3talemont have been
lcrmed'cxplanatoqf ac@unl3, explainingthe
cbb and lkrw of r.YcnueE and cxpensee lhat
bod to thc new hcqno (or bce) and to the new
rrtahed camhgs balancc h the balance sheet.
O4-3. Thr ordinary babncr rhecl and incqne slate-
menl aro htended to ptwkJe hlormalist as lo
financial peilion and resulb of operation of a
burinesl, in sctordancc wilh several assump'
liqs that arc made h preparhg |he stalements.
Frqn the standpoinl cil the criticisms rnade, the
most important cil these assumptions are lhal
cocl lost appropdale arnortization of cost mea'
rurca unelgired cct, and that a business mey
bo a$umod lo bc gohg to conlinue operatbns
indclinilely into lhe future. Accountingstate-
mcntg sre usually prepared on lhe heory lhal a
cale or gome other definite event is essenlial
bcfore revenur is recognized.Basically,the
aseot sUe of a balancc aheet coctaha a preson-
tstbn o{ the anrounts cl cost incurred, which can
b c p r e s u m e d l o b e n c fi t f u t u r e p e r i o d s . ' A n
incornc slalement presents the srnounl of rov-
cnue recognizedas having been realized during
thc period, less the podioo cl all cosls incuned
thsl doe3 not appear to be lairly delerrablelo
'I ftnurc perinds.
Thc ircome staternonl is prirrnrity a m€asure
cd what lres been camcd, and not a measure of
'camhg power.'
For plant assots, the balance
rheot b pdnarily a rnasure cl accountabilityfor
cxp.nditureE,rhowing acguisitioncosls lees
codr sllocalod to past operatbns. This rneasure
of accounlability may br quile diflerent from
1rur velue.'
To hcreese ilg usefuhess as one elemerd in
judChC eaming porver, the ircsne stalement is
picparcd with a dietinclion between operating
and nonoperaling items. For the samo roason,
c.rtain iterns may be climinoled frorn the incorne
slstomenl and shown in the statemont ol
nrtained eemings. However, the effec-tof nmre'
curring and nonoperaling transaclions is not
entirelYeliminated.
lnfonnalion revoaled by a serios of income
power than informatbn revcaled by ane hcqnc
statcmstl. The incqne of a bushess rnay folbw
or .Yen exaggetat€ the ups and downs ol the
bueinesgcyclo and, therefore, lhe inccne of any
crc year will ncl representeaming powor.
Changes in law or local zoning ordinances
may result in a marked change in lhe eaming
powerol a bushess. Ukewise,changesin public
taste, devebpment of new prodtrts' apPgarance
ol new conrpetilion, acquisition ol subsiJiaries'
changes in management and lhe like, all may
change earning power and yet not be clearly
rellecled, il reflected at all, ir one incorne stale'
menl.
The accounting use of historical. rather lhan
curront, dollars in measuring depreciation and
cost of goods sold may resull in distoding any
view of earning power obtained frorn a single
incorne statemenl.
ln regnrd to plant ass€ls, il can be said lhat
their value to a going concetn is usually depen'
dent uPon the eaming power of the business.
Such s value is not necessarilythe same as lQ'
uidation value, cost, cost legs amortization.
repbcement value, or any other kind of value'
The phrase.true value'has no definileconnota'
tion.
O4-4. Actusldescribes the way cosls are measured.
i.e., at actual historical arnounts; /ull absaption
describos which elemenis of cost are allocaled
to hvenlory accounls, i,e., all elements of rnanu-
lacluring cost are fully allocated to hventories;
p/ootss describes how cqsl infonnation is accu'
mubted, i.e., costs are accumulatedfor each
procossor deparlment in the laclory.
O4-5. Prime costing systems albcate only lhe prime
costs, direct material and direcl bbor, lo hvento-
ry accounts. Direct costing syst€ms, abo called
variable costing syslems, albcale the variable
manulacluringccts, direcl materbl, direci labor,
and variable factory overhead lo lhe inventory
accounts.Absorpticn costing systems albcate lo
Ilvenlories parl or all of tixed frtory overhead,
in addiliooto all varlrble manufacluringcosts.
04€. Actual costing m€asuros product costs at actual
hislorical arnounts, while standard ceting mea-
sures product costs by ueing predetermined
arnountsol resourceg to be coosurrnedand pre-
determinedpriceso{ those resources.

62
Q,4-7. Preess costing aicumulates costs fot oach
pt@olts or department in the ladory end rnah'
tains detailcd recordr and calculationr of the
cotl of *ork h preest. Job order cting accu-
mulales cotr lor oach irb, lc', balcfi' or contrasl
and mEhtains detBilsd records and calculalbng
od tho cost! of tork in prceas. BacHlush €st'
ing accumulal.r coltr by working backwards
through ihc availablc inlormatiqr afler produc-
ticn is cornpleted (i.e., at the end of the accounl'
hg pori<rd)and rnahtahr no detailed records ol
lhe costs cl ttPrk ir Prcesr.
O.4€. Actual cosihg il more cornmon lhan standard
coothg in defense'rebted industries,while stan'
dard cosiing ic adnewhat more cornmon else'
where.
O4-9. Super'full absorpfbn or suPer absorption refers
to tho income lax requiremenl thal some pur'
chasing and storage costs be allocatedto inven'
tory ac@unts.
O4-lO. Job order costing would be colrlmon in repair
shops. buiHhg cotslructicr, and prhting; and in
servicc bushesse€ guclr as medical, legal' archi-
leclurat, corutrucliqr engineering,accounling'
and consulling lirms, as mentioned in the lexl'
Other examples include shipbuilding.bridge
building, tool and die manufacturing,arl and
antique resloratirn, and contracl rossarch'
o4-1 1. As mentixred h tho text, Pr66!ts costingwould
be common in thc milling, brewing,chemical'
and textile industries;in sirnpleassemblyoP€ra-
tions: and in seryice businessegserving large
numbers o( cuglorners simultanrcusly, ruch as
airlhes. Other erampleg includepetroleumrefin-
ing, basic food preessing, and manufacture of
ChaPter 4
low*ost @nsumor products such as toys, dis'
posable Pens,na:ronr'and lighters.
04-12. Aspecls cqrtrnon lo icb order and prccess cost-
ing are:
(a) They can be used by rervice organiza'
tbns.
(b) They requin cqrsiderablo detail to calcu'
late tho cost ol *ork h Procells.
(c) The wprk h process accotnl in the gener'
al lcdgcr ir lupported by subsidiary
t€cordg.
O4-13. A blended cthg method uee irb order ccting
lo accumulate soflrc clement(s) ol cost and
prcces3 ccthg to accumulaleofien-
O4-14. Flcxible manufacluring 3yslems consisl of an
integrated collection ol automated production
pnocesges,autornatedrnaterialsrpvemonl, and
cornputerizedsystetn csttrob lo utilize facilities
ln etticientlyrnanulacturinga highly flerible vari-
ety cl Products.
Q4-15. The adnantagesof a llexble nranufacturingsys'
le.n over the cther systems include shorl (near-
zero) setuPlimes, lhe absence of a learning
curve, lflet lead times to chipmont' lower diresl
labor cost per unil, lower direct labor cost in
total, and bwer work in prccess invenlories.
O4-16. Thc hilial cost of creathg a flerible rnanufactur'
ing system is much higher than lhat of olher
rngnufasturingsystoms.
O4-17. l,lanufacturingsetthg suiied for bacHlush cosl'
ing are distinguishedby very fasl processing
speeds, which rernovesboth the incentiveand
the opportunilyto track the detailed costs of
work in Pr@ess'
l-

I
t

L Chaptor I 63

I EXERCISES
\- .
E4-1 Calculation of cost of goods sold (in thousands):
I
b
TOtal manUfaCtUfingCOSt...........'................r.r.....t sl 10
Add work in process inventory beginning """"" 80
I $1eo
b
Less work in process inventory ending.r..........". 90

I Cost of goods manufacturgdr.......o.r.-........'....r..'., $t oo

S Add finished goods inventory beginning ........!.... 150
GOSI Of gOOdS ayaitablg fOf Sa|g...........o......oo....... $250
Less finished goods inventory, ending ...o......'...... 60
I
b
Cost of goods sotd .....'. .-,....................'.. $.11D
I
S
E4-2 Calculation of cost of goods sold (in thousands):
I
b DirgCt matgrials used.....................r...,...r,...'........ $so
DifgCt 1abOf .......................'.r....................r........... 60
FaCtOfy Ovgfh gad .o...'..r..........r............................. 80
Total manufaCtUring COSt ........r..............o............. $230
Add work in process inventory beginning ........'.. 250
I $480
b
Less work in process inventory,ending 210
G o st o f g o o d s ma n u fa c tur ed....... $27o'
A d d fi n i sh e d g o o d s i n ventor y beginning........' .... 340
Gostofgoodsavai|abteforsa|e.............. $610
Less finished goods inventory ending..............,.. 27fJ
Gost of goods sold .......o............. ..t......'.. s340

I
Clpptcrl 65

E44 (Goncluded)
(21 Gost of goods manufactured:
Stores,April 30.......'.'........r.,.. .....--..----. s 1O,25O
PUfChaSgS.................rr.............rr.......................................r..... 105,OOO
sl15,250
LoSS: StOrtSt May 3t ro....rr...........r.................r....o......r..o....or.... 12r7AO
Dirgct matgrials sl 02,550
COnSUmgd '......"............rr........t..r....o...........r.
Dirgct tabor used (4r25O x5221..r,.....,.........o.,............r.,...o...... 93,500
FaCtOfy OYefhead .......r.....r...........o..........r...........'.....r.......'..... 77.390
Total manufacturingcost 5273r4/,O
Add work in process, beginning inventory 61.420
s334,86O
Loss wgrk in process,endinginventory................r.....,...........52,80O
COSIOf gOOdS manUfaCtUngd....'.....'.........r......................'.......
s282,O60

(31 Endingbalanceof finishedgoods:

Finished Cost of Finished Cost of
goods, + goods goods, = goods
April 30 manufactured May 31 s ol d
S 4 5 , 6 0 2 + $ 2 8 2 r O g O X = s28O,OOO
X = $ 47,662
Therefore,the finished goods ending balancesis $47,662.
E4€ (al *",i135";;;;;il..:::.::::::.::::::::::::::-::::::
35,ooo
35,OOO
(b) Work in Process............ t...........r.... 33'OOO
Factory olrgrhead Gontro| ..o............r...,........ 21000
Matgrials .or..r.....'r.r......................r.r......o. 35,OOO
(c) Payroll 4O,OOO
Accrugd Payro11.....,....,.r,.r..,.....r....,...r..., 4O,OOO
(d, Accrugd Payroll .r................,......,...,.............. 4OTOOO
CaSh....rr........r........o.r...r.........r.........or.... 4O,OOO
(el Work in Procgss .................r....o,...,.,..r.......... g2rOOO
Factory Overhead control,.. S'OOO
Payroll .......... 4O,OOO
(0 Factory gverhead Control 4,OOO
C a sh 4,OOO
 Chapter4
ffi

E4-S(Concluded)
(g) FactoryOverheadControl.."""'r""""""""" l8,ooo _
AccountsPayable...........,.............."""" 18,OOO

(hl FactoryOverheadGontrol.....-.................'."' 4,130

AccumulatedDepreciation...................'. 2,1OO
PrepaidExpenses....r,....,-...........-.......... 780
AccruedPropertyTaxes.,..,........r........"' 11254

(il WOfk in PfOCeSS ........................r.................. 36,130

Factory Overhead Control 36,130

o 92,OOO
F i n i s h g d GOOd S ........,......,..........................,..
92,OOO
W o rk i n P ro ce ss..........................
(k) A c c o un ts R g ce i va b l €..............,..................." 8 O , O O O
Sa l e s .............. 8O,O0O

G a s h...........r................ 4O,OOO
Acco u n ts R e cg i va b l € ............................" 4O,OoO
:
C o s t of Go o d s S o 1 d ........................!........""" 60,000
Fi n i sh e dGo o d s ..r................' ...,...,.,"""" 6Ot000

E4-6 (al 13,50O

Acco u n ts P a ya b l e 13' 5oo

(bl 17,5OO
' 17,5OO

(c) 1,800
1,800

(d) 27,OOO
Accrued Payroll.....,.'...... 27 |OOO

Work in Procgss ......................'...............,..,. 1 7 , 0 O O

Factory Ovgrhead Control .r....r..,r.'.............,. 2,000
Marketing Expenses Control ........-............... 5,000
Administrative Expenses Control 3,000
Pa yro l l ...........,.. 27,OOO

(e) Factory Overhead Control 2r5OB :

C a sh .............. 2,5O8

(0 Factory Overhead Control 8,5OO

Accounts PaYable B,5OO

(gl W o r k i n P ro ce ss .....-.-..-. 14,8O8

14,BOB
Factory Overhead Gontrol
60,1OO
(h) F i n i s h e d Go o d s..'.
60,1OO
Wo rk i n P ro ce ss" " " " " "
Chaptor I 67

E4-O(poncluded)
O Accounts R9cgivab18.............o...............oo'.... 8O,OOO
Sa 8O,OOO
Cost of GoodsSold' 6O,OOO
FinishedGoods
'sl5,ooo 60,o00
-$1s,roo= $8o,ooo
+ $oo,roo

E4-7 WALLACE INDUSTRIES

Cost of Goods Manufactured Statement
For M ay
( in thousands of dollar s)
Direct materials:
Direct materials, April 30, 20A.........o $ zs,
Purchases......,...,. s5f o
Freight ill ...........r............r.....r....r.r...t.. t5 525
Direct materials availablefor use.....t. sss3
Less direct materials,May.31r 2OA... 23
Dirgct materials consumed.......... s s30
DirgCt tabOr.........roo........i..r.......o., 260
Factory overhead:
Indirect factory labor ..............,...r....... $eo
Utilities ($f gs r go o/o).............,..,...o..r.. 108
Propefi t?,if,..........r.....,.............r......... 60
lnsuranco ($2Ox gO%1..r...,...............r. 12
Depreciation Sl2O + $3O)..... 50
Total factory ovgrhgad,r...r..r.r....... 320
Total manufacturing coSt..........o....r............ $t,t1o
Add work in process, April 30, 2OA,... 150
$1,28O
Less work in process, May 31, 20A.,. 210
Cost of goods manufactured $ { . 0 50
:
 ChaptorI
ffi

E+8 cll{l{ABAR 69ffiplMf

Statement of Cost of GoodsSold
For Year Ended December 31
Raw materials:
Purchase3 .........'." $40o,ooo
Less dlgcounts on raw
materials Punchagod ."" 4,2OO $ggs,goo
Lesg raw materials on handt
Dgcgmbgr 3{ e 2OA.........""t 24,0O0
Cost of raw materials consumod s371'8OO
Dirgct labor ...........o."""""""""""r'
lEo,ooo
Factory overheads
Factory maintena!1co"............... s?8,4OO
Factory suppllgs used ....""'t""' 22t4AO
Powgr and hgat-factofl ......'...' 19,400
lnsuranco erpense-factorY
buildingand equiPrllollt...." 4,8OO
Depreciation-factory bullding
and eqUipmgnt..""""""""" l7,5OO
Factory superintendence.......... 1O0,000
tndirgct factory |abor.........."""' 20,OO0
Total factory overhead........ 222,5AO
Total manufacturingcosts-,....--.....-.-. $774,3OO
. 84,OOO
Add work in Process,January 1r 2OA
$858,30O
Less work in Process,December31t
3O,OOO
204
Cost of goods manufacturgd....-........ $828,3OO
37,5OO
Add finishedgoods,Jbnuary1r2OA.
Cost of goods availablefor sale o....-.. s865,80o
Less finished goodsrDecember3l'
2OA'.....................o.....t......"t""" . 7O.OQ0
Cost of goods sold ....................o....... szggJsq
CGA-Canada(adaptedl.Reprintwith permission'
ChaptorI 69

PROBLEMS

P4-1

(rl BRTDGEWELL COMPANY

Gost of Goods Sold Statement
For Month Ended July 31
(in thousands)

Direct materials consumed,...,....... .....r......r...,. s16

DirgCt 24
1abOf........r.r.r.................r..........r...................r..rr.r.o....'r..r..r
FactOryovgrhgad ................'.....................................'.....r............
20
Total manufacturing cost (a)...............................rr..,....,............ s60
Add work in process inventory July 1.......,......,.....,............,........ 1 5
s7s
Lgss work in processinventory,July 3'l ..........,.......................,...25
Cost of goods manufacturgdr.....,........r..,r....r...,........o..........,....... 55O
Add finished goods invgntory, July I (b) .............r....................... 20
Cost of goods availablg for salg r........r............,.,..........,.....o......... S?O
Lgss finishgd goods inventory, July 31(G) ................_.-.-.u.r.......... 15
Cost of goods sotd ........,.........'......r.r....................,..,.....,...r......,..
G
Calculations:
(a) Costofgoodsmanufactured.......,.............,..
$50
Add work in process,ending 25
s75
L e ss w o rk i n pr ocess, beginning.....,.......- .,... l 5
E q u a l sto ta l m anufactur ingcost.................. _999

(b) Cost of goods available for sa|e.,.,......,..r...o. $ZO

L e ss co st o f goods m anufactur ed...,.,......,... 50
E q u a l s fi n i shed goods, beginning......,....,,,.. 14

(c) Go st o f g o o ds availablefor safe................... $ZO

L e ss co st o f goods so|d........ 55
Equals finished goods, ending gg
'70 Chapter4

P4-1(Concluded)
(al Matefia1S.o..r..........................o..........o...........
25,OOO
l2l 25,OOO
AccountsPayable.....................t.|..........
(b) Work In Process a aa aa aa a aaaa a aa a aa aaal a 16,OOO
2,OOO
FactoryOvgrhgadGontrol....."""""""""""' 18,OOO
Matgrials...............r'........"""""""""""'
+$5'OOO)"""""""""""t""' 29,OOO
(cl Payrolt ($ZCrOoO
gd """"""""tr"""""D"""'r' 29,OOO
Accru Payro11
(dl work in Procgss ..............r....r.....................'. 24rOOO
Factory Ovgrhgad Gontrol r""""""""""t"o" 5,O00
PayrOll t......."t"""""""t"t""rt"""""""t"
29'0oo
5O,OOO
(e) Finished Goods aaaaaaataaaaaaaaaaaaaa'

5O,OOO
Work in ProcesS"""t"""""""""""""""
(0 AccountsRgceivabte"""""""""""""""""" 105,O00
"""' 105,0OO
Sales ($60'000 + (75o/oof $6O10O0))
55,OOO
cost of Goodsso1d............................,..o.......
FinishgdGoods"""""""""""""'r""""" 55r O0o
 Chapten4

P4-2
(11 SCOTTSBURGCOMPANY
Cost of Goods Sold Statement
For Month Ended June 3O
( in thousands)
Direct materials:
Materialsinventory June 1 ........................ sls
Purchases........................., .......... 33
Materialsavailablefor use... ........ s48
Less: Indirectmaterialsused.................... S 1
MaterialsinventoryJune 30........... 19 ZO
s,
t,

$ 1
7
17
2
13 4
Totalmanufacturingcost (b)........ sl1
Add work in processinventoryJune 1.................. 4
s1
Lesswork in processinventoryJune 30............... 3
Cost of goodsmanufactured...... sl2
Add finishedgoodsinventoryJune 1 (c)............,. 7
Cost of goods available for sale., sl9
Less finished goods inventory,June 30 (d)..........:. 3
C o st o f g o o d s so |d ....... sls
Galculations:
(a) indirect labor + direct labor = $4g
indirect labor + (indirect labor x 6) = $49
indirectlaborxT=949
indirect labor = 37
directlabor=6x$7=942
(b) C o s t o f g o o d s m a n u f a c t u r e d . . , . . . . . . . . . . . . . . . , . . .$. .1 2 0
Add work in process, ending gO
sl 50
L e ss w o rk in pr ocess, beginning......... 40
E q u a l sto tal m anufactur ingcost. Sl iO
(c) C o s t o f g o o d s a v a i l a b l ef o r s a l e S19O
L e ss co st of goods manufactur ed....... 12O
E q u a l sf i n i s h e dg o o d s ,b e g i n n i n g S ?O
72 Chapter4

P4-2 (Concluded)
(d) Cost of goodsavailablefor saler......'..""""' $ 1 9 0
Lgss cost of goodsso1d......................,......,..{ 5 5
Equalsfinishedgoods,ending...............""" s 3 5

(al Matgfials ..............r........r...........r...,.........,.... 33,O0O

l2l 33,OOO
Accounts Payable ...,......r.....,.........o..,....
(b) Work in Procgss .........tr....tt'otr""""""""t'r"' 28,OOO
Factory Ovgrhgad Gontrol ............................ I,OOO
Matgrials ........t........'t"""""""""t""t""' 29,0OO

(c) Payroll ....o................""""tttt"t"t""tt"""""t" 49,OOO

Accru gd Payro11...t..r..""""""""""""""' 49,OOO

(d) WOfk in PfOCgSS ...,..............r.....'.....r.,o..r...... 42rOOO

Factory Ovgrhgad Control ....t..r......""""""" 7,OOO
Payroll...............""""""""""""""""""' 49,OOO

(e) Finishgd GOOdS....,rr,.......r....,...,.......o..r......... 12O,OOO

Work in ProcgsS......'.....""r"""o""""""' 120,OOO

n Accounts Rgcgivabl€........"........"""""tt"""
+ (50%ot $14o'o00))...
21O,O0O
210,OOO
Sales($14o,ooo
{55,OOO
Cost of Goods So1d...................,....,..ro..........
Fi n i sh g d Go o d s ...'.........."""""""""""' 155,OOO
 73
- ChaPtarI

P4-3 ,

(11 MADEIRACOMPANY
Scheduleof Cost of GoodsManufactured
For Month Ended March 31
work in process,March I .............r.......r,....... s 4o,o0o
Productioncosts:
$lo4rooo tr
Dirgctmatgriats.....................................
"""""""" ttt
l6otooo
r Direct labor....r.-....."
Factory overhead ..............,......""""""" 8or999 *tt -344t009
s384,000
Lgss work in procgss,March31 ............."""' 36,000
Cost of goodsmanufacturgd..-.'....,...............' $a8,@'

+ endingfinished goods inventory

r Cost of goods sold ($345,O0O)
($tos,ooo)- beginningfinishedgoodsinventory(slo2,ooo)= s348r000.
'rpurchases of materialsduringMarch ($l tO,OOO)
+ beginningmaterials
inventory(S2O,OOO)- endingmaterialsinventory($26'000)= SlO4'OOO.
r.' production costs for March ($gCC,OOO) =
- direct materials ($t Oe'OOO1
direct labor and factory overhead($24O'0Oo).

Letx = directlabor
1.5r = S24O,OOO
x = $l60'000 direct labor
.5x = $8O,OOO factory overhead

(21 Prime cost:

Direct materials(requirement(1)).........,..r.o........,SlO4r0gO
l6OIOOO
(1))....:....,.....................
Dirgct labor (requiremgnt
_9261poo
(31 Conversioncost:
(1))'......r.....,.................
Directtabor(requirement $160rO0O
Factoryoverhead(requirement(1)1.............,.....,.. 80'0OO
_9240,999
 Chaptor 4

P4-4

CompanYA: s4,oo0,ooo
Salgs """"t"""""t"tt""ttt"tt""t"""ttt"""""t"

Cost ol goods sold:

Finishedgoods inventory Janualy i """ S 600,000
Gost of goods manutactlli9d""""""""" 3,80O,OOO
Gostof goodsavailablolor sa|e""""""' $4,4oO,ooo
Finishedgoods Inventory December3l lr2OO'OOO
3,20O,OOO
. Cost of goods Sold tt""t'o""t""""t"""t"'
Gross profit l2oo/oOf Sales).o......'..............r.....
s Soo,ooo

GompanY
' B:
ctst of goods availablgtor 3a1o.,..r.........,......5 1 , 5 {o.ooo
O,OOO
Less finished goods ending inventory"""""" _ 2'l
COSI Of gOods Sold "tt""t""""""""""r"""""' slJggJoo

CompanYC: S 429,ooo
Sal eS ..."""t"'rt"t"'ot""t"""""""o"t1""""""t"

Cost of goods sold:

Cost ol goods manufacttlrl9d""""""""" $ 34O,OOO
Add bsginning finished goods inventory 45,OOO
Cost of goods availablolor 8a1e""""""' $ 385,OOO
Less ending finished goods inventory"" 52,OOO
333,OOO
Cost of goods Sold """"'o"""""""""""'
$ 96,000
Gross profit """"t""""'r""""""""""""""""'

P4-5
FinishedGoods Work in Process
35O,OO0 Beg. 7,0oo 346,OOO
Beg. 34,0OO
(41 348r00O M 5O,OOO
38Ct,o(to L(2) 20O,OOO
End.3O,W FOH loo,0oo
357,W
End.17,@

Materialsand Supplies Accnred PaYroll

2O,OOO (8) 259,OOO Beg. 13,OOO
2O,OOO
65,OOO (11 5O,OOO 55,OOO
85,O@ 70,O@ 2OO,OOO
268,N
End.7S,OOQ
End.9,Ooo
Chapter 4 75

P4-5 (Concluded)

Accounts Receivable Accounts Payable

5 4 ,0 0 0 (7) 532,OOO (6) 77,OOO Beg. 18,OOO
5OO,OOO 65,OOO
554,OOO 83,OOO
End.22,OOO End.6,00O

,Factory Overhead Gontrol Sales

2 O,0 0 0 (3) lOO,OOO
5 5 ,0 0 0
10,00o
2 ,OOO
13,OOO
lOO,AOO

Payroll Cost of Goods Sold

5 5 ,0 0 O 55,000 (5) 350,OOO
2 0 O,OOO 2OO,OOO
255,OOO 255,OAO

(11 Materials issued to production' 55O'OOO

l2l Direct labor, $2OO,000
(3) Total factory overhead' $1OO'0OO
(41 Gost of goods manufactured, $346'OOO
(51 Cost of goods sold, S35O,OOO
(61 Payment of accounts payable' 577'0OO
rtl C o l l e cti o n o f a cco u nts r eceivable,5532,OOO
(81 Payment of Payroll' S259'0OO

GGA-Ganada(adapted).Reprint with Permission.

 t

1
,<

Chapter 4
76

P4-6
84,OOO
Work in Process laaaata

Material8... 84,OOO

Cost ol gOodg SOld ttt"tt""t"""""t""tt"" $14o,ooo

Add finished goods inventoq/ incl€ase" l7,ooo
Cost of goods manufactllhod..'...'...r..""' s157,OOO
Add work in process inventory increase 2,OOO
Total manufagturing cost -....--.-...........o" s159,OOO
Less : Factory overhead.t..... $35'OOO
Dirgct t:lbor.......,....o... 4OTOOO 75rOOO
Materials used in manufacturing .,.r,...... l_84,OOO
..........t.....t...t"""t"""ttttt"t"tt"tttt"
91,OOO
Materials
Accounts Payablg.....'..""""""""""""" 9l,ooo
Materials ussd in manufacturing
(from above| .........o...."r""""""'rt"""' $ 84,OOO
Add materials inventoryincrease....'..... 7,OOO
Matgrialspunchasgd".........""""'r""""' $ er,ooo
Payroll .....'.'....... a ata-aaaa aaa 40,ooo
Accnrgd Paytoll.......'.........""""""""to"'
4O,OOO

Work in ProcgsS ........................tt""t"""tttrt'

4O,OOO
Payroll .........r..........""t""t"""""""""t'
4O,OOO

Factory Overhgad Gontrcl ......r'.r.t,,.....""""' 35,OOO

Vari o u s C rgd its.'........"' t " " "" " " "r'r t " " "' 35,OOO

Work in Procgs3 ..............'.t""t'o"t"t"ttt"r"'tr

35,0OO
35,OOO
Factory Ovgrhgad Control o..r........ro""""
Finished Goods (12'OOO+ 84'OOO+ 4O'OOO+
35tOOO- 1 4tOOO)............."""""""""t t57,0oo
Work in ProcgsS .............'...r"""""r""""
t57,OOO

Cost of GoodsSold (28'000+ 157'O0O-

45tOOOl .........................'.."t""t"t""t"' l40,ooo
Finished Goods .............. l4o,ooo

GGA-Canada (adapted). Reprint with permission'

 n

92,OOO

26,530
(c) Payroll... 86,000
''
Accrued Payroll .............. 86,000
Work in Process....................r.............................6Or5OO
Factory Overhgad Contro|..........,.,....,...........,..... 1215OO
Marketing Expenses Control ,..............t............., IrOOO
Administrative Expenses Gontrol 5,OOO
86,OOO

47,33O

188,OOO

241,150

185,5OO
(hl Cash !........,r.........,......,.. ZOSrGO2
Sales Discounts,........... ...,...... 4r2ig
Accounts Receivable........... 212rg2}
(i) Marketing ExpensesControl ...,............ 18,ooo
Administrative F.xpensesControl 12,OOO
Accounts Payable 3O,OOO
0 A cco u n ts P a ya b l e 1O4,OOO
Cash 1O4,OOO

rt
78 Chapter 4

P4-7 (Gontinued)
Cash Materials
l/l Bal' 20,O0O (c) 88,25O 111Bal. 1o'oooI (d) 9O,8OO
(hl 2O8,662 0l l04,o0o (a) 92,OOO
't92,250 102,OOO
2i28,662
36,412 t7,2OO

Accounts Receivable Machinery

l/ 1 B a l ' 25,O0O (hl 212,924 1/1 Bal. 4O' OOO
(gl 241,15O
26art50
53J,3O

Finished Goods Accumulated DePreciation

1 t 7 Bal. 9r5OO (g) 1B5,5oO 111 Bal. 1O,OOO
(0 l 8 8 , OOO
,97,5OO

Work in Process AccountsPayable

t/l Bal. 4,50O 1 8 8 ,O0 O 104,OOO 1/l Bal. 15,5OO
(c) 6O,5OO (a) 92,OOO
(dt 82,50O (b) 26,53O
(e) 47,330 (i) 3O,OOO
(q4,>e3<t ,64\030

Accrued Payroll RetainedEarnings

88,25O 111 Bal. 2,25O 111 Bal. 21,25O
(c) 8 6 ,OOO

Sales Cost of GoodsSold

241,15O (g) 1 8 5 , 5 OIO
Sales Discounts Payroll
I
(c) 86,0O0 | (c) 86,OOO
LL
L
I\ Clppterl 79

P4-7 (Concluded)
t_ CommonStock Factory Overhead Control
I (b)
(cl
26,53O (e) 47,330
! l2r 5OO
(d) 8r3OO
I 47,33tO
!

Administrative ExpensesGontrol Marketing ExpensesControf

I
I (cl 5,O0O (cl 810oo
!
(il 1 2 ,OOO (i) 'l8,0oo
17,AOO 2l,ooct
b

(31 HOPKINS& WHITECOMPANY

ThialBalance
January 31

CSSh '........ $ 36,412

AcCOuntS RgCgivabl€...tr..............r............................r...... 53,23O
Finished GOOdS......r...........r.o....'..r..r......r...r'..........r......r. 12,OOO
WOrk ln PrOCgSS.........'.o,.r.,.....,..r'.......r.'....'.rr.'.....r........t 6,830
Materfals aaa aaa aroaaa aaaaaaattaaaa 11r2OO
aa aaaa a a

Machine 4O,OOO
Accounts Papble a aaaa aaa a aa aoaaaaaa aa taaaaaatta aal aa s 60,030
Accumulatgd Depreciation....,...,......,,.,.....,....,................ l O,OOO
Common Stock..,. at 6O,0OO
Retained Earnin a araotaaaaaaaaa aataaa a 21r25O
Sales 241,15O
Salgs Discounts,...,.. 4,258
185,5OO
26,OOO
l7' OOO
1993,430 _$3e2,499

l
 CHAPTER5
DISCUSSIONQUESTIONS
' The unit ccts by cost category as well as lotal
O5-1. The cost attached to 8 Producl il an amount
assigned by the costing melhods uled-an
amounl controlled by the citcumstancer,
assumptions' and limitations ol lha melhod
under which il was ccrnfiled' Product cosb ato
cornposiles ol historbal outlay thal have, per'
haps, been modifki by estlnateo or slandards,
by processer assigning or proratlng expendi'
tures to periods, or by lracing the direct costs
and allocating the indirect cosls lo particular
producls so thal the total period outby b spread
over the aggr€gatt or'ipli. Despile these shorl-
comings, product costs aro uselul in cosling
invenlories, cornpaling prices and tolal unit cost'
measuringcurrent profil or loss, and indicating
the rninimumcosl below which a sales price
cannot go in the long run. Sorne confusion will
result al times in usitlg cosl intonnatbn h mak'
ing management decisions unless informatioo
relevant only to the decisbo is used.
O5-2. The primary obiectivc h irb order costing is lo
determine the cost ol materiats,labor, and faclo'
ry overhead used to produce a specific otder or
conltact. Cost estimatss ato made when the
order is taken, and the iob order praeduros ate
d e s i g n e dl o r e v e a l c o s l s a s l h e o r d e r g o e s
through prodrrction,thereby giving an opportuni'
ty lo controlcosts.
O5-3. The typ€ of cost accumulaiionmelhod used by a
cotrlpany will be determinedby the tlpe ct man'
ufacturingoperatbns pedormed.A rnanufactur'
ing companyshoulduso Processc6l accumub-
tion lor product ccthg putpos€3when like units
are continuoustynrass Produced;when cuslorn'
rnade or unQue gpods are produced' icb order
costing would be more aPProPriale.Process
costing is otten used in industriessuch as chem-
icals, food processing,oil, mining, rubber, and
electrical appliances. With a continuous mass
produclianol like units,lhe cenler ol atlenllcn is
the individualprocess (usuallya dopartmonl)'
unil cct lor each Ptocess (deparrment)are nec'
e3sarylor product cosling PutPosss'
O5-4. A icb order cost sheet is used:
("i to keep track of the direct rnaterials and
direct labor used on a icb plus atl aPPro-
Priateshare cl frtorY overhead;
(b) to comPara actual cost3 to estimaled
cqsts:
(c) as a subsidiary ledger for the work in
procoss accounl.
O5-5. The work in procesr accounl is a conlrol account
i n t h e g e n e r a l l e d g e r , r e f l e c t i n gl o l a l c o s l s
assigned or applied to jobs. The individualiob
cgst shoots lorm the work in process acco{'nt's
subsidiary ledger, indicathg the direct malerbls'
direct labor, and factory overhead charged to
each irb.
05€. Job order cosl sheets serve a control funclion'
Comparisonsare made between estimates ol
pb cosrs and cosls actually accumulated lor lhe
job. ln addition, cost control is enhanced by
accumulatingdirecl materials and labor as well
as factory overhead co3l3 by cost cenlers or
departments,and by comparinglhe aclual cosls
to cGt conterbudgets.
O5-7. Actual lactory overhead consisls of the day'by'
day cosls that ato actuatly experienced and
incurred by the cornpany. Applied lactory over-
head is the overhead charged to pbs based on
the predelerminedfactory overhead rate. This
rale is crealed by divirJingtotal €stirnated over'
head by toial estimatednurnberol units (or any
other appropriatebase). ThE dilference between
aclual and applied factory overhead is lhe ovet-
or underaPPliedfaclory overhead,
05€. The characteristicof a service business lhal
rnakes likelythe use ol job order costing is lhat
all jobs are not alike and cost informationfor
each iob is desired.
 8l
Chapter5

s24,07O
221832
1OrO24
s56,926

S 4,420
2,600
2,OOO
s 9,o2o

E5-3

(1) T h e a mo u n t o f d i re ct labor in finished goods:

Finishgd gOOdS..,............o,...o..,.... .............tt..'.'...t'..... s37,5OO
Ma te ri a l s i n ctu d e d i n finished goods { $15' 5OO- 93' 2OO} ........ 12,30O
Direct labor and lactory overhead in finished goods """"""" s25,2OO

Factoryoverheadchargedto work in process sl1,80O

= - = a
d
Direct labor chargedto work in process sl4 ,75O

L e t X = d i re ct l a b o r in finished goods
1 .8 X = $ 2 5 ,2 OOd i rect labor and factor y over head in finished g oods
X = 5 1 4 'o o o d i rect labor in finished goods

l2l The amount of factory overhead in finished goods:

X = $ 1 4 ,OOO
.8X = .8 ($14,000)
.8 X = $ 1 1 ,2 OOfa ctor y over headin finished goods

E5-4

(1) D e ce mb e rma te ri a l sused:

Materials inventory, Decembei 1 .......................'. $ I,OOO
Ma te ri a l sp u rch a se d............ s84,OOO
Freight-in 1 , 5 O O 85,5O0
Materials available $94,5OO
Materials inventory,December 31 ....... 4,5OO
$9O,OOO
 Chapter5
82

E5-4 (Concluded)

l2l Work in Process, December 3l:

Per
Unit
Directmaterials.......r.. $2.4o
Dirgct tabor-.r.,-.......--. .8O
, i?.2o r 2,ooo units = $6,4OO
Factoryoverhead.....'..32machine hrs' @$t OO= 312OO
$9,6OO

(31 Dscembercost ol goods manufactured:

Materials used (direct)(requirement(1))"""""t""""""t""""' s 9O,O0O
1abOf ....rrrr............r.........r..'......Dr..................'t"""""""'
3O,OOO
Dif|'Ct
(}SlO0)"""'t""""tt""" 6O,0OO
Factory overhead (600 machine hours
TOtal manUfaCtUfing COSt..........or............'................t.""""""'
sl80,OOO
December1:
Addwork in Process,
DirectMaterial'S2.4ox 3'ooo = s7,2Oo
DirectLabor,$.8o r 3'ooo = 2r4OO
Overhead, $t0o r 48 machine hours= 4,8OO l4,4OO
s194,40O
Less work in process,December31 (requirement(2))""'r""" 9'600
s184,8OO

(4) F i n i s h e dg o o d s, D e ce mb e r 3 1 :
DifgCt matgfialS.,.r..,....'..,................,.....,...........r...... s 5,ooo
3,OOO
DifgCt tabOf ..........................r..r.....r......r..rr..........o..t..."r"""tt"
OO)""'r""""""""t'r' 6,OOO
Factory overhead (60 machine hours CDSl
$ 14,OOO

(sl Decembercost of goods sold:

Cost of goodsmanufactured(requirement(3))"""""""""""" s184,80O
Add finishedgoods,December1'-.............""""""""""""""' 12,00O
Cost of goodsavailablefor sale'............' """"""""" s196,800
Less finishedgoods,December 31 (requirement(4))""""""" 14,OOO
9l_93,8oo
CGA-Canada (adapted). Reprint with permission.
 83
Chapter5

E5-5 Materials:
Beginning inventory $75 """"
PUrChaSgS ttttttttttt"""'o"""rt""""""""""""'
336 (1)
Materials avaitabte for usg """""""""""""' $411
LeSS ending inVentOry.....r..........r......r.......... 85
Matgrials us€d..,r....r...........,..............r.......... 9geo
225 l2l
Directlabor(($gaO- $s201'r 1'61""""o"""""""" 135
Factoryoverhead(S225x '6)""""""""""""""""
'i

TOtal manUtaCtUfing COSt.....................,...t"""""o

s586
80
Add work in process, beginning inventof """""'
s766
Less work in process, ending inventory
30
Gost of goods manufactured ""'r"""""' s736 (3)
Add tinished goods, beginning inventot] """"""' 90
cost of goods availablg for sa19........,.,..............o. s826
Less finished goodsr ending inventory""""""""' 125
C o st o f g o o d s so l d ..............' .....r .......' ."""' t"""t"
s701 (4)

E5-6

(rl Materials ....'r"""" s13,OOO

DifeCt 1abOf ....r..........,......,...r.....'.....'.........t...tt"""""""""""'
15,OOO
Factory overhead:
Mo l d i n g (1 ,OOO DLH x $2.70)...' .......,....,""""""""""""" 2,7OO
Decorating ($6,OOOx 35oh1............... 2,1OO
Estimated cost to produce -........-..........,.."""""""" s32,8OO

(21 Matgrials aa.......r..o..o...rr.r..r....r.............t.a..r....a....ar............ra.ro4ar $13,000

DifeCt 1abOf..r....r..r..........r.r..r..r.....r.........r.r.r.....o.......r.o.t.......j1
15,000
E s t i m a t g d p r i m e C O S t . . . . . . . . . . . . . . . . . . . . . , . . . . . . . r . . . . . . r . . . . . . . . . . . . . . . . " " " r "s28,009

(31 DireCt 1abOf.............,.........r.........r............r.o......'...r...........,."'t s15,0oo

Factoryovgrhead($zrzoo+ $2rl ool...........'....o..............""""' 4,8O0
Estimatgdconvgrsioncost................' """""""""""' s19,8OO

(4) E sti ma te dco st to p roduce ( r equir ement( 1) ) ......' ,...... S 32'8OO

Markup ($32,8OOx 45'hl 14'760
Bid price S4?F6o
a Chaoter5

I
E5-7

(r) WADSWOBTH MACHINEWORKS

Job Order Cost Sheet-.Job 9O9

Dlrgct Materlalt Dlreet l,.abor Appllcd Factory Orerhead

Datc Datc Datc
lgsucd gt(ryO Houn Rata Cogt (Weeko0 Houn Bate Cost

9114 t OOO sl20 90 3s.20 3 558 sl20 10 s80 s800

sl20 331 9126 70 7.30 511
9122 200
st,13l 31,060 s800
:

(2) sales price of Job 9o9, contracteda markup of Soohof cost:

DifgCtmatgfia1S............,......o..............r....'.... S1tt31
DirgCt labOr ........r.r......'...r........'..............o..'. I tO69
Appligd factory ovgrhead'.r..'..'.,.........""'D"' 800
Total factory CoSt...'........t...t.."""""'o"'o"""' s3,OOO
Markup SOohof cost 1,5OO
SalgS pfiCg.....................................!......o..'... S4r500
:

E5-8
Debit Credit
(f ) Work in Process (35'OOO+ 45'OOO+54'OOO)........ 134,OOO
Matgfials ...........r......rrr.........or................tt....
134,OOO

(2) Work in Process (45rOOO+ 4O'OOO+ 35r0OO)."...., 12O,O0O

Payroll ........'..."""""tt'r""""tt"t""""t"t"""'
l2o,oQo

(3) Work in Process (36'000 + 32,000 + 28'O0O)....1." 96,O0O

Factory Ovgrhgad Control ..'o'......r........."""' 96,OOO

(4) Finished Goods (156'000+ 132'O00)........'-'...-.o.,. 288,OOO

WOrk in PfOCeSS ..............rr....r..r............'...... 288,OO0
I

I
I Chapter 5 85

I E5-9, (a) 35,OOO

- , 35,OOO

I (b) 8,OOO
b 2,OOO
10,000
I
I (cl 9,4OO
! 9,4OO
I
7,6OO
b
1,8OO
9,4O0
(d) 1r2OO
L

1,2OO

b
(e) 1r22O
1,22O
4,5OO
4,5O0
(0 1r25O
1,25O
(g) 6,10O
6,10O
4,50O
4,5OO

E5-10
Materials Work in Process
Inv. 1 O,0 OOwtP 11 O , O O O lnv. 3OO,OOO
Purch. 138,O0O Materials I 1 O , O O O
,48,OOO Factory
overhead 90,000
Labor 18O,OOO
41O,OOO
11O,OOO

F i n i sh e dGo o d s Cost of Goods Sold

:
Inv. 5O,OOO CGS 2OO,OOO FG 2OO,OOO
wtP 3OO,OOO
35O,OOO
tSo,ooo
GGA-Canada(adapted).Reprint with permission.
 Chapter5

Es-tI
(fl WOfk in PrcC€ISS......'...'...........................o......r.t... 1 9 , 11 2 . 5 O
Matgfials ............r.............................'........rr.
gr25O.OO
PayfOll ...........or....r...o....r...r......................t.... 3r945.0O
AppliedFactoryOverhead................"""""" 5r gl7.5O

(21 Finishgd GOOdS.r......................................r..r..r.....

1 9 , 11 2 . 5 O
WOfk in PfOCBSS ...........................r............... 19,{ t 2.5O
I,

I
l>
Chapter 5 87

I
I
b PROBLEM S

I Ps-1
:'
(1) Total cost of work put into Process:
MatgrialS.r..........o..r....................'......r.....'........ S 6OtOOO
\, Labon Grinding t8r00Ohrs. x S5.60l ...............,...o.......... 441800
Ma ch i n i n g( 4,600hr s. x $6) .................' .". 27'600
I
Factory overhead: Grinding (8,ooo hrs. x $6) .........'..,... 48'ooo
b
M achining( 4,60Ohr s. x S8) ............. 36 ,800
s31l,2oo
(21 Cost of goodsmanufactured:
Totalcost of work put into process(from requirement(1)l s217,2OO
Workin Process,beginninginventory........ 15,OOO
s232,2OO
Workin process,endinginventory......r,....., 17,600
s21_1,699
(3) Cost of goods sold:
Cost of goods manufactured (from requirement (2))....... s 2 1 4 , 6 0 0
F i n i sh g dg o o d srb e ginninginvgntor y....,' .- ..,.' ............' .... 22rOOO
s236.600
F i n i sh e dg o o d s, e n ding inventor y ..,......r .......,.... 2 1 . 0 0 0
52{5.600

(4) Gonversioncost:
L a b o n Gri n d i n g(8 r OOO hr s. x S5.60l...............r r r .........'$.. 4418OO
M a c h i n i n g ( 4 , 6 o O h r s . x S O ) . . . . . . . . , . . . . . . , . . . . . . . . . . . . . .2. 7. 1 6 0 0
F a cto ry o ve rh e a d : Gr inding( 8,OOO hr s. x $6) ................ 48 r OOo
Machining( 4,6OOhr s. x $8) ...........' . 36'800
g!_qz'209
(s) Cost of materialspurchased:
Ma te ri a l s p u t i n to p r ocess ............... ....,.....r .o...o$ 60,000
A d d ma te ri a l s,e n d i ng inventor y 18,000
I
$ 78,OoO
L e s s m a t e r i a l s ,b e g i n n i n gi n v e n t o r y , . . . . . . . . . . . . . . . . , . . . . . . ! . . . , .2O
, . ,OOO
s_99p99
 .t

Chapter 5
I

P5-2

(r) Materials
411 2r75O lndirect
Purchases t l'5OO Material 2r790
14'"250 Direct
Material gr7o5 |
1,755
114s5

r $9,7OS= $2r45O + S97O + 36'285

(Job 2O7) (Job 2O4) (Jobs 2O2,2O3,2O5, & 206l

work in process ending inventory consists of iobg 2o3 & 206:

Job 203 Job 206 Total

Dirgct matgria|s.........................r..... (Slr48O + $ 555) + S t ' 9 8 O s 4,015

( I rOOO+ 115OO)+ I ' O O O 3,5OO
DifgCt |abOf .,...r............................... 2,8OO
( SoOr+ 14991 + 8OO
Appliedoverhead.....'.,.'.........-.........
Total ...r....r......r..,..................F3,.280 " #-S-l + S3'78O $ 1 o , g ts
'Applied overhead is 80% of direct labor cost'

WorkinProcess....o.....,................. 4,85O
l2l 1r25O
Materials ...t..""t"""t""'t""tt"""t"""""""tr'
2,OOO
Payroll """"r"""tt"t""""""""""t'r""""r""'t
I,600
Applied Overhgad....""""""""""'t"""""""'
" 9,550
Finishad Goods (4'7OO+ 1r25O+ 2,OOO+ 116OO)
9,55O
work in Procgss ..........r..........r,.....,........r.....
9,55O
COst of GoodSSo1d"""t""""""'o""""""t""""""'
9,550
Finishgd Goods................................r.'..........
ACCOUntS RgCgiVab18............".......o.......'........'.""
14,325
141325
Salg3tttttt""tt"ttt"t"tt"ttttt"'r""t"ttt"tt"'r"t""'
I
I

I
I
L.

I
! 89
Chaoter5

t- P5-2 (Concluded)

i (31 Cost ol goods manufactured = cost of iobs finished in April'

E Job 2O5:
Dirgct matgrial ........'........ $ 2,5OO
I
I Dirgct 1abor......".........'.o.. 2,7OO (l 05 direct labor hours x S2Ol
! Applied overhead'....,.o'.... I,O8O (105 direct labor hours x 516)
' Total Job 205...'......'.... $ 6,280
Job 2O2.........r.r...r'....t.........""t 9,550 (see requirement (2))
Job 204 r....t.......t.........t...'r"""' 6193O
I
JOb 2O7'..................'.'..r..'...."'t 5,87O
! Tota|...r..,,............,.'...... S28rO3O

(4) Actuat overhead (1'375 + 2,5OO+ 2r7OO+ 2r790l. s 9,365

Applied overhead:
Jobs 2O2' 2O3, 2O5' 2Og (330r hours x $16!. s 5,280
Job 207 .'........'.... .........'.."""'r"""' 1r52O
-
Job 2O4 ($l rZgO 5960l.r..'.r.......t..........".." 800
Total appligd ovgrhgadr...'........r-........r..... 7,6OO
Undefapplied.'....'..D........'.'r............r.'.r...'......'...... 91t99
'1OO+75+105+5O

(5) Jobs 2O1r 2O2,and 205 wene sold. Their costs are S8'45O + S9,55O +
56'280 = S24'28O.
Sales (524,280x 1.5) $36,420
Cost of goods sold ....... 124,2801
Underappligd ovgrh€3d......'..........'.........r..r..'...... , ( 1 , 7 6 s )
Gross profit for April .'....r...r....' $1O,375

P5-3

Finished Goods Work in Process

Bal. 8O,OOO 36O,OOO Bal 20,OOOl(il 32O,OOO
(i) 32O,OOO (c) 15O,OOO
40O,OOO (e) go,ooo
l OO,OOO'
35O,OOO
3OrCnO
'$?3o,ooo
- SSo,ooo- $25o,ooo direct labor and factory overhead.
Factory overhead is l50% of direct labo6 thereforo, direct labor is
sl oo,ooo
 ChwterS
90
I

P5-3 (Concluded|
Materials Cost of Goods Sold
Bal. l5'OOO 8O,O(X) 360,OOO
(b) loo,ooo 12,OOO
tt',NO 92,W
29,N

Factory OverheadGontrol Applied Factory Overhead

6OTOOO l5o,ooo
l 2 ' OOO
75,OOO
147,N

Accounts Payable Accrued Payroll

1 O 2 ,O0 O Bal. TrOOO t72,OOO Bal. I I,OOO
loo,ooo 175,OOO
707,N l8o,@o
5rW

Accounts Receivable Sales

Bal. 45,OOO 480,OOO
(a) 5OO,OOO
g5,o@
65,AOO
"Cost
of goods sold is 72% of sales (r0o% - 28ohl.

(1t Materialspurchased-$l oo'ooo

l2l Cost ol goods sold-$360'OOO
t3) Finishedgoods ending inventoryt4O,OOO
(4) Work in process ending invento4;-$3O'O00
(5) Direct labor cost-$l o0,00o
(6) Applied factory overhead-$l 5O'OOO
rr) Ovep or underappliedfactory overhead-$3,OOOoverapplied
(8) Glosedout to the cost of goods sold account

GGA-Canada (adapted). Reprint with permission-

 Chaptor 5 9l

l
P5-4

(1) COLUMBUSCOMPA}TY
Cost of GoodsSold Statement
For Month Ended October 3{
Materials:
Materialsand supplies inventory,OcL I s4O,7OO
24,8OO
PurghaseS .........'..r.........o........r................................t
Materialsand suppliesavailablefor ]|so......,..........,. sgs,5O0
Less: Factorysuppliesused.......r...r........$ 3195O
Materialsand supplies inventory
OcL 31 31,75O 35r7OO
Materialsconsumed s29,8OO
DirgCt labOr .........rr..r..........'...r.'. 18,600
Applied factory ovgrh€ad.....r.,r.....,.........D,.....rt............... 27,45O
Total manufacturing cost........o..o............r.......r.......r........ s75,850
Add work in process invgntory Oct 1................,........o,.. 4,O7O
s79,920
Less work in process inventory Oct 31 4,44O
Gostof goodsmanufactunad o.r.,........o..................r........., $75,480
Add finishedgoodsinventory Oct 1.,..,..............r......,.... g,g0o
Cost of goodsavailablefor salg .............r........o..,....o....... s85,280
Less finished goods inventory,Oct 31 (2,500 units x
53.7O)r................r....................................................... 9,250
Cost of goods so!d...................... .............r....,.... s 76,03O

rCalculations:
Units in finished goods inventory, OcL 1 2,8OO
Units manufactured 20,4OO
Units sold (2Or7OOl (3oo)
Units in finished goods inventory, OcL 31 _3's09
Cost of goods manufactured s75,480
-t- - '1-.-.- -
= Sif .7O
Units manufactured 20,4OO
 92
ChapterS
I

P5-4 (Concluded)

tzl COLUMBUSCOMPANY
IncomeStatement
For Month Ended October 3{
Sales t alaaa aaa a a aaaa a a aa a a a aa ar a aa a a a a ar a a aa o a a
s144,9OO
Less safesreturns and allowances...................... 1,3OO
Ngt sa|gs...........r...t....o.....r...............r....r........rr....
$143,600
Lgss cost of goods so1d...,...,.........,................,.r.r. 76,03O
Gtpss profit........r......r..r..............r..r....r...r....r.......
$ 67,5 70
Less commercialexpenses:
Marketing expens€r............ $25,O5O
Depreclation-building....,......... 30
Depreciation-office equipment 16 $25,O96
Administrativgexpense.....r....... $ 1 9 , 7 O O
Depreciation-building.............. 20
Depreciation-officeequipment 24 19,744 44,940
Incomg bgforg incomg t?x..........r...r.. $ 22,730

(3t Amount of over- or underapptied factory overhead:

Actual factory overhead:
Factory overhgad paid,.............r $2O,1OO
Indirect materiafs ..,...,............... 3,95O
Depreciation-building .....r.....r.. 150
Depreciation-machinery and
g g u i p me n t.............,.............r . 800
Indirgct 1abor.,.......r...,...,....,...r.. 4,4OO .s29,40O
Applied factory overhgad ..........,......, 27,45O
Underappfied factory overhead......... $ 1,950
\' Chapter
5 93

- " P5-5'

(11 CANNINGCOMPANY
MORRISVILLE
Balancesheet
December 31, 208
Assets
-
Current assets:
CaSh...'......................r........r....r....D......... $1 9tOOO
Accounts receivablG!............................... 1O,OOO
lnventories:
Finishgd goods .........,......r............r.. S4rooo
Wo rki n p ro ce ss............r .......r .r ........ lr 0O0
M atgria lS..'.'....r......'....o........r..........' 2tOOO 7t OOO
Prgpaid expensgs....r....'..........o.........o.... 5OO
v s36,5OO
Property,
;[:1:lllTll,lr',i?",";ffiil::::.::.:::: 26,00O
TOtal aSSgtS t....r..'.............,...............'........... s63,599
- Liabilities
Currgnt liabilitigs............,..rr..r...'.r...........r.r.. sl7,5oo
Stockholders' Eguity
C o m m o n sto ck',...'..'..'........' ..!...,r s3o,ooo
R e t a i n e d e a rn i n g s,..........,................. 15,OOO
Total stockholders' equity ............ 45,000
Total liabilities and stockholders' equity...... s 62,5OO
94 Chagter5

P5-5 (Concludedf

l2l MORRISVILLE CANNINGCOMPANY

lncome Statement
For Year Ended December 31, 2OB
S3l esaraaaaaaa...aaaaraaaar..aaa.aaaaaa.a.aa araaaa.a. aaaaataaaa aaaa aaaaaar aaa a aaaaaaa s60,000
Gost of goods sold:
Materials:
tnvgntOryrJanuary1.....'......r...'..'..........'............$ 4tOOO
PUrchaS gS ....r....................r....r......r.....'....t..o.t..t.. I 5t O OO

Matgrials avai|ab|gforuser.........................'...... $lgrOOO

LgsSlnventOryrDeCgmbgf3l...'........'................ 2rOOO
Matgrials consumod....'........o..........r..........'.......SIZpOO
DirgCt 13bOf .......o..rr..........................r.........o.............. ITOOO
Appfied factoly overhead r.,....... I,O0O
Total manufagturing GoSt.....,........,.......,...ro.............. 335rOOO
Add work In process Inventoryr Januafl I ......'..r,..... jrOOO
s37,DDO
Less work in process inventoryr December 3l ...o.o... I'OOO
Cost of goods manutactllrr8d...........o....r.....r.........r.... S36r,OOO
Add finished goods inventory Januafl't ........o........o 6'000
Cost of goods availabtoforsale..'.'...oo................o'..r-$.02rOOO
Less finished goods inventory, December 3'l .....-..... 4rOOO
Gost of goods 30ld...'..'...r...........'rr.......o.........'r...tt.tt $38^OOO
Add underappllodfactoryoverhgad.,...,.................... 2t999
COSI Of gOOdS SOld-adiUStgd ............,..o..'.....o.,....r... 4O,OOO
Gross profit aaa ataaa aat aa aaaaaa aa a a ataaa. aa aa aaa aa aaa a t ttt " ' $2O,OOO
Less commencial expenses:
Markgting expgns(0..........,,..............'...'..'.....'...'....r..$ 6rOOO
Administrativg gxpensg...'....o......'............,..'..,.,......t 9t9OO 15tOOO
lncOmg bgfOrg inCOmg t8X.'..,.J.........'..................'r.....'.... s 5,ooo
Chagler 5 9:

P5-6

(1) and (2) TROPEZINC.

Job OrderCost SheetsTo Post BeginningInventoryData
March 1, 19-

Job 621 Job 622 J ob 623

Matgrials .,.........r,r....r.. $ 2,8OO $ g,4oo s 1,800
LIlbOr............r...r..rrr..... 2r1OO 2r7OO 1,350
FactoryOverhead......., 1 , 6 8 0 2,160 I,O8O
TOtal .D..........r".....r. $ 6,580 $ 8,260 s 4,230
(bl M ............,....... 5,30O 7r4OO 5,9OO
(cl M..,......., (4oo)
(f} 6r42O
L...r.....'...r....... 8r160 6,32O
(hl oH ......,.........,. 5 1 1 3 6 6,528 5,056
Total .............r........ s23,436 s29,e49 s21,s99
0l Completedand transferred Completed and trans- Still in
to warehouse ferred to warehouse pnocess
(21 Dr. Cr.
(a) 22,OOO.OO
22,OOO.OO
(b) 18,6OO.OO
2,4OO.OO
Materials 21,OOO.OO
u
(c) 600.0o
400.oo
200.00
(d) 800.o0
800.oo
(e) 38,OOO,O0
38,OOO.OO
(0 2O,9OO,OO
7,6OO.OO
5,7OO.OO
3,8OO.OO
38,OOO.OO
(gl 9,404.5O
7,154.5O

B u i l d i n g & Equipm ent....,.... 2,OOO.OO

P re p a i d In su r ance 250.0o
 .t

_ t l

Chatsr 5
96

P5-6 (Concluded) Dr. Cr.

16,720.OO
(h) Work in ProcgsS""""t""'r"""""ott"t"'t"""""""'
Faaory OverheadControl (or Applied 16,720.O0
Factoryoverhead)...'.....................'.....|t...
53,384.OO
Finishgd GoodStt""r""""'ot'or""""t""""t"""""o'
{il 53,384.OO
Work' in PrcCess """"""""""""""""t"""""
741738.OO'
nl
Y' AccountS Rgceivab16.............o.."""tto""""""""' 74,738.O0
S3l9stttttt"""""tttt"""""t"""t""tt"t""tt1t"""
53,384.OO
GostofGoodsSo|d..............t...........|.t................ 53,384.00
Finishgd GoodS"""""""""'r""""""""t""""
69,45O.OO
(k) CaSh t"trtt""'t""'rttt"tt"t"tt"""""""t"t""ttt"tttt"'
69,450.O0
AccountsReceivabIo'...'........................t......
'
(s53,384 r 4oohl+ $53,384 = $74'738
Work in Process
Materials
2 1 rOO0 3/1 Bal. 19,O7O (c) 400
3 1 1Ba l . t 4 ' 0 0 0 (b)
800 (bl t8,600 (i) 53,384
(a) 22,OOO (d)
(c) 600 2t,8oo (0 20,9OO 53,784
(h) 16,720
38,600
753X)
14,8N
27,506

F i n i sh e dGo o d s
3/1 Bal' 15,000 5 3 ,3 8 4
0) 53,384
68,3U
| 5,OOO

(31 TROPEZINC.
Schedute of lnventories, March 31
s14,8OO
21,506
15,OOO
s51,306
Chapter 5 97

P5-7 '

(r) and (3)

Accounts Receivable Materials
I 1 7 ,5 OO.OO 3/1 Bal. 65,000.00 (dl 53,73O.O0
(al 42,3OO.OO
(bi s,aoo.oo'
tt3,loo.ao
59,37O.OO

Finished Goods AccountsPayable

311 Bal. 78,83O.OO (g) 94,5O1.65 (al 42,3O0.O0
(g) 9 4 ,5 O1 .6 5 (b) 5 ,8OO.OO
173,331.65 48,tOO.OO
78,83O.U'

Work in Process Accrued Payroll

3/1 Bal. 2921627.OO(g) 94,501.65 ( c) I 1 1,364.00
(cl 98'884.00
(d) 53,73O.0O
(0 3o,2OO.l5
475,435.15
380,933.50

Gost of Goods Sold Payroll

94,5O1.65 (c) 1 1 1 , 3 6 4 , 0 0| ( c l 1 11 , 3 6 4 . 0 0

FactoryOverheadControl Applied Factory Overhead

(cl 1 2 , 4 8 O . O O (f) 3O,2OO.15 3O,20O.15 30,2OO.l 5
(e) 281467.87 (3) 1O,741.72
40,941.87 40,941.87

Over.or Underapplied
VariousCredits FactoryOverhead
281461.87 (31
1,558.28

Sales
(g) 117,50o.oo
.S5I8OOcould also be posted directly to the work in process accountr reducing
entry (d) to $47,930.
 Chapter 5
98

P5.-T(Concluded)

l2lThetotalcostoteachfobattheendofMarch:
Job 2O4 Job 2O5 Job 2OO Job 207 Total

Drrcct rtlill:ll
matcrrarr.,.. t 4or4lio 3 OO,875.OO slO,O4O
11r32O lo,49o.oo 5,800 $170,285.00

Dlrcct labor......-.... 21'4alO.OO 33,24O 43,800.O0

26,844.OO a2t750 28,920.00 2O'37O 210,414.OO

FactorloYerhosd.. l3'8OO.0O 22137O 19,388.00

7,717.65 ' 7'375 9,314.50 0,893 85,736.15

$94,501.65 $159,605 3171,825.50 $49'503 3475'495j 5

Total CogL

The balancdin the work in processaccount

(JObS 2O5, 206, an d 207)....'...........o'.........r.......,....'.. s38O,933,50

' 3,355.5hours r sz.go = $7r717.65

P5-8

(21 Dr. Cr.

(a) M at g fi a 1S.......r.r..r....r..r..........,...... r.......... '.... r.r... I 114,52O
Accounts Payable......-'.-...... 114,520

(b) PayrO11...........D.t..."t""t'rt'r""""t""""'r"r"t"t"""'
I I O,OOo
ACCrugd PayfOll ..r....r..'..........................'."... 11O,OOO

(c) Work in Process 78rOOO

FaCtOry OVgfhgad COntlOJ...'..........................'..'. 12,00O
Marketingand AdministrativeExpenses"""""" 2O,0OO
11 O , O O O
Payroll .......tt"t"t""tt""t"t"t"""t"tt""'ttt"""'

(d) Work in Proc8sS..........."""""""""""""""""'t"' I08,175

FaCtOryOVgfhgadCOnttO1.........r.....'.............,,... 7 r52O
Matgfials ................................r..................'., 115,695

(e) W O f k i n P f O C 9 S S . . . . . . . . . . . . . . . . . . . . . . . . . r . . . . . . . . r . . r ' . . . . r . ' . . . . 42t75,0

Applied Factory Overhead..........,.....""""""
421750

(0 Cost of Goods Sold'....-.,...r.........r....,'..""""r""" 190,35O

19O,350
Work in Procgss ...i.-..........'......r"'
Chapter 5 99

P5-B (Continued)

(sl Gash aaa a aa aa a a aaa aa aoattt at a a a 247 |OOO

SalgS DiSCOUntS ......r....r.r...o...........r....r...........r... 13,OOO
AccountsRgcgivablo .....................o....r......... 260,000
(hl Marketingand AdministrativeExpenses...........- l5,ooo
FactoryOvgrhgadGontrol........'.....r........'.....'-..r, 24,68O
a
CaSh a.aaa.a..aaa......r..r..a....rr...r........4...............o. 37,68O
AccumuIated Deprec i ati on{tl ac hi nery ....... 2,O0O
(il ACCOUntS Payablg'.r..r....r......,.".......r.r................ 85,O0O
CaSh ...........r................rr..r.................t........t. 85,OOO

0) Applied Factory Ovgrhead ............'.....,..........--... 421750

Factory Ovgrhead Gontrol .....r..r'.....'...'r..-.-r. 42,750
GOSI Of GOOdSSOld ....'...............'........................ 1,45O
Fagtory Ovgrhgad Control .....,......'...,.....r..-.' 1,450

(11and (3) GENERALLEDGER

Gash Materials
1/1 Bal. 47,0OO (hl 371680 1/1 Bal. 22'oOO (dl 11 5 , 6 9 5
(g) 247rOOO (i) 85,OOO (al 114,520
294,OOO 122,680 138,52O
l7't,32O

Accounts Receivable M achiner y

1 t 1 Bal. 5O,00o (gl 26O,OOO 1/1 Bal. 45,3OOI
(0 255,OOO
3O5,OOO Accu mulated DePreciation-
Machinery
111 Bal. lO,OOO
Finished Goods (h) 2,OOO
1/1 Bal. 32,5OO
I 12,OOO

Work in Process Accounts Payable

1 t 7 Bal. 7,5OO 19O,35O 85,OOO 111 Bal. 59,375
(c) 78,OOO (al 114,520
(dl 108,175 173,895
(e) 421750
236,425
 IN Chapter 5

P5-8 (Continuedl

Accrued Payroll Sales

lor 11O,OO0 lrn zss,ooo
Palroll Factory Overhead Gontrol
(cl l2,o0o 42,750
(dl 7,52O 1,45O
RetainedEarnings (ht 241680 u,2oo
It/'r e"r. g4,gzs 41t 200

SalesDiscounts Applied Factory Overhead

(gl (t) 42,7so l(e) 42,750

13,OOO
I
Cost of Goods Sold
Marketing and Administrative
Expenses
19O,35O
2OTOOO
1,45O
15,OOO
79r,goo
35,OOO
Common Stock
1 1 1B a l . 1 0 0 ,0 00

WORK IN PROCESSSUBSIDIARYLEDGER
Job loi Job 1O3
1/1 Bal.-MaL (cl Labor 18,0oo
1/1 Baf.-[lb. (dl Materiala 14,575
1/1 Bel.-OH (e) Overhoad 13,5Oo
(c) Labor 16,O75
(d) Materialc
(e) otrerhead

Job l02
1/l Bal.-Mat 600
1/l Bal.-L.b 1,OOO
1/l Bal.-OH 400
(c) Labor 4O,000
(d) Materlalr 42,OOO
(e) Overhead 18,OOO
to4@o
 Chapter 5 101

P 5 - 8 ,(C o n cl u d e d )

(4) MID.STATECOMPANY
Trial Balance
January 31
171,32O
45,OOO
32,5OO
46,O75
20,925
45,3OO
12,OOO
88,895
11O,OOO
lOO,OOO
34,925
35,OOO
255,000
13,OOO
191,8OO
600,820 600,820

(sl MID.STATECOMPANY
Cost of GoodsSoldStatement
For Month Ended January 3{
$l08,175
78,OOO
42,750
s228,925
7,5qO
$236,425
Lesswork in processinventoryJanuary31 46,O75
C o s t o f g o o d s so 1 d ...................,....r .t.....r ...r . s190,350
Add underapplied factory overhead.........,,.... 1,45O
Cost of goods sold-adjusted...... s191,8O0
 CHAPTER6
DtscussloN
ouEsTloNs
06-1. The basic obiective ol process costing is lo
determine the costs of the products manufac'
tured by the conrpany. Determinhg the cost of
the productr manutacturedis necessary h order
to properly cost ending invenlories for exlemal
reporting Purpo3o! (i'e., teporting to credilors
and ownen of thd company, lhe SEC' and the
IRS) and lo evalual. the ptofilabilityof the man'
ulacturing ac-tivity.In order to cost products, the
costs musl be determinedfor malerials, labor,
and taclory ovefiead used to process each unit
of producl lhtough eaclr deparlmenl.
06-2. The products rnanufacturedwilhh a departmenl
(or cost center) during the period can be helero-
geneousil pb order costingis used,but musl be
honrogeneous if process costing is used. In icb
order cosling, producls are accounted lor in
batches. The cost cil each unil ol product manu-
factuted on a pb is determinedby dividing lhe
total cost charged to the pb by the number ol
unils produced on the iob. Since the nranufactur'
ing cosl ol each iob is accountedfor sepamtely'
accuralo and uselul product cosl can be deter'
mined even when the producls rnanulac{uradon
dilferent ircbsare substantiallydiflerent' By con'
trast, in procesr cosling, all nranulacturingcostg
are charged to the departrnent,and the unit cost
is determinedby dividingthe cost chargedto the
deparlmentby the numberol units produced'As
a consequence,the unils ol producl manufac-
tured within a departmentmusl be essentially
alike in order tor the cost allaated to each unil
lo be meaningrtul(i.e., to reasonablyreflectthe
actualc6l of the resourcesused to manulacture
the prcducl).
06-3. (a) Process
(b) Process,unlesssignilicantlyditferentrnod'
els are manulactured
(c) Process
(d) Job order
(e) Process
(t) Process
(S) Job order
(h) Process,unless dillerent fabrics are used
l o r d i f f e r e n tm o d e l s , i n w h i c h c a s o t h e
conversioncosls may be accounledfor
using proce*s, but the materialsusing iob
order
06-4. Three productfkrw fonnats are: sequential,par'
allel,ard seleclive,
Seouentialmaans that the producl flows or is
m a n u l a c t u t o di n a n u n c h a n g i n gf i x e d s e t o l
oporalions,9oin9 lrom one d€parlmsntto tho
nen.
Parallelmoans that certainoperationalphases
take place simultaneouslyin othor departments
and the partiallycompletedunils or Parls atg
broughttogethetin subsequenldeparlments'
Selective refers to the fact that a product does
not necossatily rnove through every dopatiment'
DependinguPon the characler or shape of the
fhal product, ditlerent deparlments are angagecl
in ccnptethg the desired Prcduct
06-5. Materials Costs-{n irb order costhg, rnaterials
nrade to
fiuisitbnr are uged and charges are
jobs; in procoss costing, charges for malerials
isgued to productinn are rnade to departmenls'
with inlrequentusc of rnaterbls requisilians'
LaborCosts-Time ticketsare used h iob oder
-osting lo accumulatelabor costs for each job; in
p r o c e s sc o s t i n g , l a b o r c o s l s a t s c h a r g o d l o
d e p a r t m e n t s ,a n d , t h e r e f o r e , d e l a i l e d l i m e
racordsarg nol nocossary.
Factorv Overhead-Job order costing requires
l h o u s e o f p r e d e l e r m i n a dr a t e s f o r c h a r g i n g
overhead to jobs; in process costing, actual
overhead may be used. (However, predeter'
minEd rales are otten used in order lo smooth
ovefiead that is not hcurred at the sarne rata a3
productior activity to the products manulactured
throughoulthe Year.)
SummarizinoCosts-A iob order cosl sheet is
*Ja to accumulatelhe costs of an order in iob
ordercosting;a cct of productionrePorlis usod
in processcosting.In iob order costing,costs
aro summarizedon completionof the job; in
processcosting,costs charged to lhe depart-
menl and cosls accountedfor are summarizedin
the cost of productionreport each month (or
sornetimeseach week).
06€. Predeterminedoverhead tatos can and should
be used if the pattem of overhEadcost incur'
rence does not follow the pattern of produclion
activity.Some items of overhead are fixed and
not responsiveto changes in production aclivity'
It production volume varies each month, then
predeterminedoverhead rates should be used'
Some items of overheadare incurredonly at
cerlaintimes duringthe year, but benefilproduc-
t i o n t h r o u g h o u t h e y e a r ( e ' 9 . , p a y r o l lt a x o s ,
insurance,propertytaxes, vacalion pay, eic')'
These items can be recordedas prepaid
oxpensesand amortizedunilormlyto each
rnonth it actual overhead is charged to produc'
tion. Altematively,estimatesof such costs can
be includedin the predeterminedovefiead rale'
and the actualcosi chargedto overheadwhen
incurred.The use of predeterminsd ralesis often
s i m p l e rt h a n t h e a l l o c a t i o no l a c l u a l c o s t s
b e c a u s ea s i n g l ep r e d e l e r m i n e rda l e r e q u i r e s
only one overheadcharge to aach department
each monlh. ln contrast.the capitalizalbnand
l5,
I
I
L,
I Clppter6
!
arnorli:alion of .ach itcm ol astual ovcrhead
I
nogld rcquirc nurrr.,orr. chargcr rach rnoth.
t OO-7. A sl of prodtgtioh npod b an offetivo rnqth-
ly (c wookly) ourynary of tho cod of rnatorbb,
labor, ard overhcad consrrm.d by eadr deparl-
I rrJrl or cocl c.nl.r, abng with a rrcord cl tho
b
guenlity ol productr menufrclurcd. ll providor
hfsnnlbn necrslary lo col prodrctr, prep.r.
irumel .nlrier lo rccord lhr trandcr of coslr
bolwecn departmcnlr, end cmtrol cob.
\,
06€. The rectbns ccnnurly lound in a cocl of pro
ducttn reporl arc: (a) e quantity achcdub incJi-
calhg thc soursr and dispeitim oil thr unib of
producl, (b) a cel charged lo the departrnent
t clbn, indicathg the cost h total and pcr unil
for lho c€l lrenlf.rrod in from tho procoding
dopartmont, as woll as rnatcriab, labor and ovcr-
hoad cfnrgod lo the depadrnent, and (c) a el
eounled for seclisr indicalhg the anpunt of
cod assigned to thr unitr tranderred oti c/ the
143
dsparfnml, as well as tho eet of ending hven-
tory.
06-9. Scparalo deparlmenlal cosl of production
ropgrtt arc uced to accumulalo costs more
accuralely and to prwUe rnore detailed data lor
c6t cqrtrol purpooo. than a planl-wUe cct of
;roductbn rcport couki prwirto. In sornc ceses
(c.9., a msnuteglurhg plant tul hss a sel*live
prodwtim flow for its producta), a planl-wide
c6t of prcduclirn reporl cannot bo us€d.
06-10. An cquivalenl unit cil produclicr ir thc anrornt cil
a nrsounco(r.9, malcrbb, labof, or ovrfiead)
lhat wouH bc required to csnplcto qrr unit of
thr producl with respecl to thc cost clemenl
behg cansidered- Thc lolal number of equiva-
lonl unite. with rcspecl to a particular elementof
cod, ropresonlslhe number ol unils of the prcd-
usl lhal could have been cornpletod with lhe
resource3used durhg the perird.
 Chaptar 6
ta1

EXERCISES

E6-1
(11 Cort from
Precedlng Factory
Department Materlalr labor Overhead
2O,OOO 20,OOO
Equivalentunits transferred out """""" 2O,OOO 2O,OOO
Equivalentunits !n ending inventorln
Cost from PnicedingdePartment
(1OO%r 5rO0Ol"'t"""""r'r""""' 5r00o
Materials (l00oh r 5'OOO) """"""""' 5,O0O
Labor (60% r 5rOOO)"""""""o't"""" 3,OOO

Factory overhead (4O% x 5'OOO) """ 2,OOO

l5,oo9 __?!,ooo23,OOO 22,AOO
Total equivalent units...'.,..........."'r""""

Cost from
l2l Factory
Precedlng
Department Materialg Overhead

Cost in beginning inventory.....""""""" o o o o

Cost added during current period'."""" $4o,ooosl5,ooos 9,200 st5,4oo
Total cost to be accounted fot'.....,.......'. $4o,0ooS15,OOO s 9,200 sls,4oo
Divided by total equivalent units......,.'... 25,OO0 25,OOO 23,OOO 22,AOO
Cos t p e r e q u i v a le n tu n i t........

E6-2
5O,0OO
WOfk in PfOCgSS-Depaftmgnt X'......"..................t.."""'
4O,OOO
WOfk in PfOCgSS-Depaftmgnt Y .............r........'..,"""""'
9O,OOO
Matgria1s..r..........rr...............................................
8O,OOO
WOfk in PfOCgSS-Depaftmgnt X......'..'..r...........t""""""
WOfk in PfOCgSS-Depaftmgnt Y.........................."""t""
70,00o
Payro11 ...........""t""'i""t""tt""ttt"t""tt""tt""tt"t"
l5o,ooo

WOfk in PfOCeSS-Depaftment X............r................,....." 18O,OOO

WOfk in PfOCgSS-Depaftmgnt Y .................'..o.,.............. 7O,OOO
FaCtOry OVgfhgad ..r...................,.r....................."'
25O,OOO

WOrk in PTOCSSS-Depaftment Y .................'................r.. 31O,0OO

Work in Process-Department X'.....""""""""""
31O,OOO

Finished Goods lnventory 476,OOO

Y .."""""""""""" 476,OOO
Work in Process-Department
 \
L.

I
l> ClppterO 105

:
I E6-3 Tlndol FabricatorEInc.
b
Cutting and Forming DePartment
' of Produstion RePort
Cost
For November

QusnUVSchcdub i/lst rbb Labor Overhcad QuanUty

BcglnnlnglnvrntotY 800
l-
!'ttrt d h proccg thb Prrlod 3"20O
a,ooo
Tnnrfcrrrd to Aromblhg Dopertmrnt 3/lOO
End h g lnvcntoty..,...'.........'.......'..--. 7l4r 1gY. EV. ooo
4,OOO

Cost Chargcd to DePartmcnt Total Equlvalent Unlt

Eeglnnlng Inventory: Cort Unlta' Cost"
Matcrlafr 171923
Labor 2rJ52
Fsdory ovcrhced 3l8OO
Totel cort h bcglnnhg hvcntory ..otso'-...'..'....Fo.. t 21',07|'
Cort rddcd durlng currcnt Pcrlod:
-
Matarlalr .......oo...'...r...'.F......'.'. t 08,025 3,85O t22,4a
[.:bor 14r75|, 3rO4O a,70
Frctory 29190O 3,55O 9.52
Totel coot eddcd durlng currcnt pcdod......*-.- 3113,377
3137,452
Total coct chargcd to deparbnct|t.......................'....'..,.'...,. s36.70

Vt
Cort Accountcd tor ar Followr Unltr Gompleta Unlt Cogt Total Cogt
Tnnrlrrrcd to Arrembllng Dcprrtmcnt 3/|OO too% 336.70 3124,780
Wort In Prccclr, cndlng hvcntory
Metrrlelr @o 75t/. 3U2A8 3 1 0 , 1 IO
Labor ooo &.h 1.70 1,128
Factory ovcrhcad ooo at.h 0.52 11428 12,f,72
Total coct accounted tor t137,452

.Total number of cquhralent unltr roqulrcd In thc coot accounted tor rccUon detormlned ar tol'
lorvr:
Mrt rlsb Lebor Orcrhcad
Equtvebnt unttr tranrfrrrcd o9t...... 34oo 3/fOO 3/0OO
I
Equlvelent unttr h ondlng Inventory alro 240 150
Total cqulvalent unltr - 3,8!tO 3rO4O 3,55O
:

- Total cort
0,c., thc cort In beglnnlng Invcntory plur thc cort edded durlng thc curront pcrlod)
t

dtvlded by thc total number ol cqulvalent unltr requlred ln thc cost accountod lor ractlon
ta6 Chagtor6

E6-4 SonoraManufacturingGomPanY
MoldingDePartment
Cost of ProductionRePort
For August

Quantlty Scheduls Materiatr L:bor Overhead Quantity

Beglnning InventorY I'OOO
Started In procesa thlr per|od........... 0,ooo
lOrO0O
Transferred to Flnlshlng Department 9,200
Endlng inventory,................., 75% 25o/o 25o/o 800
I O,OoO

Cost Charged to Department Total Equlvalent Unit

Beginning inventonn Gost Unlts' Cost"
Materials S 4,120
522
Factory overhead 9El
Total cost In beginnlng inventorY 3 5,603
Cost added during current period:
Materials 344,880 9,800 s5.00
[abor.... 12,638 9,400 1,40
Factory overhead 18 r779 -!9,400 2.10
Total cost added durlng
Total cost charged to department :::::::::::::::
:::::::::ll ffi :
$e.so

o/o

Cost Accounted for as Followr Unlts Complete Unit Cost Iotaf Coet
Transterred to Flnlshlng Departmcnt 9r200 lOOo/t s8.50 378,200
Work In Process, endlng Inventory:
Materials 800 750h 35.00 33,ooo
labor........ 800 25o/c 1,40 280
Factory overhead 800 25% 2.10 42O 3,700
Total cost accounted for',..-,............. s81,900

Total number ol equivalent unlts required In the cost accounted for section determlned
follows:
Materials Labor Overhead
Equivalent units transferred out.... 9r2OO 9,200 9,200
Equivalentunits in ending inventory 800 200 200
Total equivalent units 9,800 9,400 9,400

T o t a l c o s t ( 1 . e . ,t h e c o s t i n b e g i n n i n g i n v e n t o r y p t u s t h e c o s t a d d e d d u r i n g t f i e c u r r e n t p e r i o d )
divided by the total number of equivalent units required in the cost accounted for section
L
\--

I
L
ChapterG

I
L E6-5 HypertecCorPoration
FormingDePartment
Cost of ProductionRePort
I

b
For SePtember
Materialr Labor Overhead QuantitY
QuantitYSchedulc
1r4OO
I Beglnnlng InYentotY.. 4,600
Received from Cutting Departmcnt"'
6,000
5,0oo
Trangfcrred to Paintlng DepartmenL' 1,000
80o/. 3Oo/n 300h
Endlng InventorY
I,OO0

Coat Chargedto Departmcnt Total Equivalent Unit

Cost Units' Cost"
EeginnlnglnventorY:
t 21,120
Cost from precedlng department"""
5,880
Materials
2,914
5,228
FactorYoverhead
g 34,U2
Total cost In beglnnlnglnventory """'t""""""""
Coatadded during curent Period: o,0oo s15.25
Cost from precedlng department"""""""' 3 70,380
20,Uo 5,800 4.70
Matarialr ....."...-....-. 5,300 3.80
1...............o......r.......ro......r.....-......o...o...................
17,526
Llbo
35,052 5,30O 7.60
Factory overhcad .""'t"""""
Total cost addcd durlng crrrcnt period"""' tl43,398
3178,24O 331.35
Total cost charged to departmcnt..""""'
ch
Total Cost
Coat Accountcd for as Follows Unlts ComPlete Unlt Cost
5rOoO 1000h $31.35 s156,750
Tranrtcrrcd to PainUng Dcpartmcnl.
Work lrr Proccssl cndlng InventorY:
IrO0O lAOo/. sl5.25 sl5,25O
Gort from preccding dcPartrncnt 2,82O
1r00o 8go/o 4.79
Matorlalr ........o.......'.. 1,140
I,O0O 3ooh 3.gO
[.abor........ 21,49O
1,00O 30,h 7.60 2,28O
Factory overhead
s178,240
Total cost accounted for ...-.'....-..-..

eecuon determined as
Total number of cqulvalent unlts required In ths cost accounted tor
followg:
I
Prior DePL
Gost Materials Labor Overhead
Equlval ent unitc transf erred out.... 5'OOO 5,000 5rOO0 5,000
Equlvalent unlts In ending Inventory 1 , O O O O O O 3 0 0 3O0
Total equivalent units 6,O0o 5,OoO 5,300 5,300

- Total cost (i.e., tJre cost in beginning inventory plus the cost added during the current period)
dlvlded by thc total numbcr of cqulvalent'unlts required ln thc cost accounted for gecUon
 \

1@ Chapter 6

' RamirezCorporation
E6-o
AssemblyDePartment
Cost of ProducUonRePort
For February

Quantlty Schedub Materlalr l.abor Overhcad QuanUty

BeglnnlngInventorY 400
Recahvedlrom Cuttlng Departmcnt.- aloo
2,5O0
Trangferrcd to Flnlghcd Goodg..-..... Fooo
Endln g Inven tory..,..........,..r....,....8.... 8Oo/, EO'/o 8Oo/o 50O
2r5OO

Cost Charged to Departmcnt Totat Equhralent Unlt

Beginning inventory: Coat Unlts' Cost"
Cost from precedlng deparbnent.............,. . $ 12'590
Materials 4,OOO
Labor. 1,20O
Factory ove 2,49O
Total cost In beglnnlngInven 3 20,190
Costaddedduring eurrentperlodl
Cort from precedingdepartment. s 67,410 2,500 s32.00
Materlala 21,200 2,400 10.50
l:bor 171060 2r3OO 8.2O
Factory overhead 35,320 2,3OO 18.40
Totat cost added durlng current perlod..,.... 8141,59o
:-
Total cost charged to department sl81,78O s67.10
.h
Cost Accounted tor ag Follory! Unltg Complcta Unlt Cort WI
Transferred to Finlshed Goodr..,....... 2,000 l00th 387.10 si34,20o
Work In Process, cndlng Invcntory:
'
Cost from preceding department 500 lOOc/, S32.OO 316'000
Materia1s....,............ 8O'/, 'l O.5O 4,2OO
500
[abor....,... 500 $Oc/o a.2O 2,460
Factoryoverhesd
Totalcost accountedfor................... s191,780

' Total number of equlvalent unlts requlred In the cost accounted for gectlon determined as
follows:
Prlor DepL
Cost Materialg labor Overhead
Equivalent unlts transferred out.... 2,0OO 2,OOO 2,OOO 2,OOO
Equivalentunits In ending lnventory 5O0 4O0 3OO 3OO
Total equivalent unlts Z"SoO Z*C}O Z,SOO ,"3OO
: : : :
- Total cost (1.e.,the cost In beginnlng inventory plus the coat added during thc current period)
divided by thc total numbcr ol equtvalent unlts rcqulrcd In thc cost accounted tor secUon
L.
IL 109
Clppter6

L E&7 Zupton Manufacturing Corporation

Formlng DePartmant
Cost of Pmduction RePort
I
For June
I
Matcrbl A Materbl B Labor Overhead QuanUtY
QuanUVtlchsdulc
o00
I Boglnnlng hvcntorr...m'o..--....c. 31000
Recolvcd fl.,omCutdng Drpartmont-.
I
Lt
4,500
4,loo
Tranrlerrrd to Fhlrtrlng Departmcnt a00
b End lng lnvcntory...-'..--...o..0-......6.. 100% o% 30% 300h
4'50O

Cort Chargcd to DePartmcnt Total Equlvalent Unlt

i-
Cost Unltr' Coct"
Beglnnlng lnventorY:
Cort trom praccdlng dcpartmcnt......-"'-"""""""""" J 4A22
I
*letarbl A.--..**...,.'.'..-o-oo 2,805
I 0
lletrrld 8........*..--........'.-.6.-6'Fts
1,25O
|.e bor....'.....'..........D...................
1.875
Frctory ovcrhcad
Total cogt ln beglnnhg hventorY :3 1 0 . 3 s 2
@et addcd durlng curcnt Perlod:
3 29,32E 4,5OO 3 7.50
Cort from precedlngdepartment...........""
19,695 4,5OO 5.00
Matsrlal 4..-.....................,......
14,350 4,1OO 3.50
151630 4,2i2O 4.00
23.4a5 4,2J20 o.00
Fectory ovcrhcad
'fotat cori rdded durlng csrent porlod"""' JtOZ.tt$
rl_1_?@o 326.O0
Total cort charged to department..-'.--'--
V'
Unltr Gompletc Unlt Coot Total Cogt
Cort Aceounted tor r Followr
Trandrrrod to Flnlrtrlng Doparbncnt 4rloO 100% 326.00 3100,000
Work h Proccgr cndhtg hvontorY;
Cort from procsdlng dePartmcnt 400 100.h 97'50 $!l,ooo
Matsrlal A -.-.-* 400 lOOc/. 5.00 2rOOO
Matsrlal I 400 Ot/o 3.50 o
Lebor 400 3Oc/o 4,OO 4ao
Fectort ovcrhcad r....-................ 400 3004 o.oo 720. o,200
Totrl cort eccountod for ..-....,...-*.. sl12,800

' Tottl numbor of rqutvelent unltr rcqulrcd In the cost eccounted tor rccUon dctormlncd ar
followr:
Prlor DepL
Coot A l''abor Overhead
{ttttbt Utt.t"li
Equhralcnt unltr tranctcrcd out.... 4,1OO 4rl oo 4rl oo 4,1OO 4,1OO
Equtvalent unltr In cndlng Inventory 4oO 4 0 0 o 120 120
Total cqulvatent unltr I,5OO 4,1OO 4,220 1,220.
-4 , 5 O O
- Total cort (1,c.,thc coct In beglnnlng Invcntory ptur thc coct added durlng thc current porlod)
dtvlded by thc total numbcr of cqulvalont unltr requlrcd ln thc cogt accountod for rcctlon
 .l

__

110 Chaoter6

E6-8 Pop Cola Company

CarbonationDepartment
Cost of ProductlonReport
For October

QuanUtySchcdulo Hatcrllb L^abor ry QuenUtY

Beglnnln g lnvcntotT -x..o'd"""-"'-o".*tr" IrOOO
Recelved from gyn rp Depe rtm c J1t....."""'-'-' 2,OOO
Addcd to grocou ln CarbonsUon Departrncnt c,ooo
e,ooo
Tranrferrod to BotUlng Dcpertmcnt -......-..... 7"8OO
End In g brventory...osso....F.r-.-......h"'!"il' 100% 25% 25V. 13OO
0,ooo

Cogt Chargcd to Dsprrtmcnt Totrl Equlvelcnt Unlt

Beginnlng hvcntorY: Co.t Unltt' Cocti'
Coat f mm prcccd In g departmcnt..............- 31,120
lvlaterlalr 190
Labor oo
Fectory 120
Total colt ln boglnnhg hvcntory t f/a90
Coatadded durlng curcnt Pcrlod:
Cort from prrcrdlng doptrtmcnt 3 o,oao o,ooo tl.20
1,O1O 9rOOO 20
Matorlelr
[abor lFEo 8,loo .20
3,120 8,1OO AO
Factory ovcrhced
Total coct addcd during current pcrlod....-.,"""'t 315,e7O
Total coet chargcd to deparhnent.........-- 3t7/|60 32.0O
x
Unltr Complctr Unlt Cct Totel Cort
Cort Accountcd for r Followr
Tranrforrcd to Botdlng Dcpertrnrnt - 7'800 100% SrLOO il5,ooo
Wort In Ploceur cndlng lnvcntoryl
Cort from pncedlng dcPartrncnt l S oo 1oo% 31:O 31t€O
Matsr1a1r,...........,...... 11200 100% 20 2AO
Labor 1'3,OO 25.h .20 co
1,200 25.h AO 120 lBOO
Factory ovcrhcad -..............'......
Total cort eccounted for -'.-...-.*. 317,400

. Total numbcr of rquhutlcnt unltrr rcqulrod ln thr cort eccountod tor locUm dctcrmlncd I
followr:
Prlor DcpL
Coct Matcrlab Lrbor Ovcficed
Equlvelcntunltt trenrfcrcd out ... TBoo TBoo 7,8oO TBoo
Equlvalentunltr h cndlng lnventory l,2OO 1'200 3OO 3OO
Total cqulvalsnt unttr I'o99 JrL99 81199
!'099
* Totat coet (1.r.,tfir cg4t ln bcalnnlng Invcntoryplur thc colt addod durlng tlro currcnt perlod)
dhvldsdby thr total numbcr oi oqulwlcnt unltr rcqulrcd ln thc coat eccountedfor rcctlon
 Chapter6 111

E6-9, Donegal Chemical Company

Blending Department
Cost of Production Report
For Mar ch

Quantlty Schedule Materials Labor Overhead QuanUty

Beglnnlng lnventory,. 5,0o0
Recelyed trom Reflnlng Department............,.. 2O,0OO
Added !o process In Blending Department..,.. 5,000
3O,0OO
Tranaterrcd to Fin lsh In g Departmen t ............. 26,OO0
Endlng lnventory.. 100ah gooh goeh 4,OO0
99'o99
Cogt Charged to Department Total Equivalent Unlt
Beglnning lnventory: Cost Units' Costtt
Cost trom precedlng department 3 4,750
21375
180
7fJ7
Total cost In beglnnlng Inventory I 8,072
Gost added during current period:
Cost from preceding department............... s25,25O 3O,O0O s 1.o0
Materlale ...a...a.aaaaa _12,A25 3O,O0O .50
Labor 2r740 29,2OO ,to
Factory overhead 8,113 29,600 .30
Total cost added during current period....... 94,8,728
Total cost charged to department........... 956,80O $1.eo
c/o
Cost Accounted for as Foltowt Unlts Complete Unlt Gost Total Cost
Transferred to Finlshing Department 29,000 '1000h
91.90 $49,40O
Worl In Process, endlng Inventory:
Cost from preceding department 4,000 1000h $1.oo $4,OOo
Materials 4,000 1000h .50 2,0oo
Labor........ 4,0o0 aoeh .10 320
Factory overhead 4,00o sooh .30 1,08O 7,4OO
Total cost accounted for ......._.......... 358,80O
r Total number
of equlvatent units required In the cost accounted for gecUon determlned aa
follorrs:
Prior DepL
Cost Materials Labor Overhead
Equivalent u nits transferred out.... 28,000 26,000 26,OOO 28rOOO
Equivalentunits In ending inventory 4,OOO 4,OOO 3,20O 3,OOO
Total equivalentunits 3 O , 0 O O 3 O , O O O 29,2OO 29,600
" Tgtal cost (i.e., the
cost in beginning inventory plus the cost added during the current perlod)
divided by the totat number of equivalent units reguired In the cost accounted for aectlon
 t

Chapter 6
112

E6.10APPENDIX BrimhallManufachlrlngGomPanY
Cuttlng Departrncnt
Cort of ProducUonReoort
For JulY
Matertalr onerhead QuanUtY
euanUVSchedulc ry 100
AOoh 2O'h 2Oo/o
Bcginnlng Invcntory....""""'o"""''"- 000
Starbd ln Procesr thle Perlod
I,OOO
\ 850
Transferred to Assgmbly Department 5Oolt 150
lOOo/. 50'/o
Endlng lnventorY'.
I,OOO

Total Equlnalent Unit

Cogt Gharged to Department Costt'
Gost Unlts'
Beginning inventorln
$ 2,940
Materlall 390
Labor 585
Factory overhead
3 3,915
Total cost In beglnning InventolY
Cost added during current Period: 940 349.50
340,530
Materlala ..............-...... 905 20.00
t8,100
Labor...'... 27r15O 905 30.oo
Factory overhead t....................................................t.'
.
Totat cost added during current period'-'-""o""'
39t,78o
See.5o
Totat cost charged to department"""""""' :395,895
Total Cost
Cogt Accounted for aa Followr Unltc CurentT. Unit Gost
Transferred to Assembly Departments 33,915
Beginnlng inventolY.
Gost to complete: 1,98O
Materialg.- 100 40ch t4e.so
too 8Ac/o 20.o0 1,600
Labor 2,4O0 $ 9,895
100 sooh 30.o0
Factory overhead """"
99,50 74,A25
Started and comPleted this Period 750 100.h
Total cost transferred to Assembly s84,520
DePartment ....'..........
Work in Process, ending inventorY: 87,425
150 lOOo/c $49.50
Materlals.. 1,50O
150 3Oo/. 20.00
Labor........ 2,25O 111175
t50 5Oo/o 3O.OO
FactorY overhead
s95'695
Total cost accounted tor ..............'..'.
as follows:
. Number of equivalent units of cost added during ttro current period determined
Materials l:bor Overhead
40 80 80
To complete beginnlng inventory..
7so 750 750
Started and completed this Period
150 75 75
Ending Inventory..
940 905 9 05
Total equivalent unlts
of cost added
- Cost added during thc current period divided by the number of equivatent units
durlng thc currcnt Perlod
 113
Chapter 6

E6.11.APPENDIX

KanduToolGomPanY
AssemblyDePartment
Cost of ProductionReport
For November
QuanUtySchodulc Materlals l.abor Overhead QuanUty
Beglnnlng InventorY 5Oolo 4ooh 4Oolo 1r2OO
Becelved from Cutung Department... 2,80O
4,00O

Transferred to Finished Goods 3,O0O

gooh gooh 1,000
EndlnglnventorY.. 9Oo/.
4,O00

Coet Chargedto Department Total Equivalent Unit

BeginnlngInventory: Cost Units' Cost"
Cost trom precoding department..........'.... 17,28O
Materlals ................. 5,55O
Labor 2,4OO
Factory overhead 3,8OO
Total cost In beginning inventorY s 28,830
Cost added durlng current period:
Cost from preceding d epartment."..........................,...s 40,600 2r8OO 314.50
30,89O 3,300 9.30
1A,932 3,320 5.10
Factory overhead 25 398 3,320 7.65
Total cost added during current period....... I_1_3,610
Total cost charged to department........... s142,450 s36.55
ll1 Chagter 6

E6-1I APPENDIX (Concluded|

Coat Accountcd tor ar Followa Unltr Currcnt'/o Unlt Coot Total Cott

Tranctcrrcd to Finlghed Ooodg:

Beginn ing Inventoty """""""""' 328,&tO
Cost to comPlete:
Materlall.- 1,200 3Ot/t 3 e.30 5,39O
Labor.....'.. 1,20O sooh 5.10 3,A72
Factg-rYove rh ca d ...'.... 1,20O 60.h 7.85 5,508 3 {3,590
Started and comPlatcd thll Pcrlod I,8OO 1OOV. 36.55 o5,79O
Total cogt transferrcd to Flnlshcd Goodr 3100,380
Work In Proce3s, cndlng InventorY:
Cogt trom Preceding dePartment 1,00o 100.h 314.50 314,500
Materialc.. 1,00o 00.h 0.30 8,37O
L:bor .................-. 1r000 80e/o 5.10 4,08O
Factory overhead 1,00o 800h 7.85 a,12O 3:!,070
Total cogt accounted tol .......-.-...'.... s142,45O

. Number of equlvalent unlts of cogt added during the current perlod determlncd ar totlow::

Prlor DepL
Cott Materialr Labor Overhced
To complete beginning inventorY - o EOO 720 720
Started and completed thil Porlod 1,800 1,800 1,80O 1,80O
Endin g inventory............................ 1,000 900 800 800

Total equlvalent unlts -2'800 -9'399 -3'339 -3'329

Cost added during thc current pcrlod dlylded by thc numbcr ol cquivalent unitr of colt added
during thc current period
 Chapter 6 1t5

E6-12 APPENDIX

NortheasternChemicalCorporation
BlendingDepartment
Cost of ProductionRoport
For May
QuanUty Schcdulc Materlals Labor Overhead Quantity
Beglnnlng lnvcntory 100.h 20ch 4OV. 2rOOO
Recelvedfrom RetinlngDepartment..,..........- 5,000
Added to proceaeIn BlendlngDepartment.,... 5,0o0
12,0O0
Transtered to Flnlshed Goods 1O,5O0
Endlng Inventory.. lOOo/t 800h gooh 1,5OO
12,0OO

Coat Charged to Department Total Equivalent Unit

Beginnlng lnventory: Cost Units' Cost"
Cost from preceding department 3 2,490
Materlals ........,....., 500
L:bor........ 150
Factoryoverhead 600
Total cost In beginnlng Inventory $ 3,71O
Cost added during current perlod:
Cost lrom procedlng departnrant;, s12,5OO 1O,O0O s1.25
Materlals... 2,500 10,o00 ,25
l.abor 3,3OO 11,OOO ,30
Factory overhead 7163O 1O,9OO .70
Total cost added during current period,...... $25,930
Total cost charged to department......... 32.50
_s29,64O
n6 Chagter 6

Ef-l 2 APPENDIX (Concluded)

Unltr Curcnwl Unlt Coct Totel Cort
Cort Accountcd lor er FollorYr
frz-"tf-"tt"a to Flnlrhcd Ooodr:
t3,71O
Bcglnnln g Invcntory """""""''-
Cogt to complcta: n
Matcrlrlr """""""""""" 2,OoO ooh 3 .25
Itbol."*- 2,00o 8.0ch .30 480
Fecto rI oYcrh4ad............ 2,00O aoch .70 840 3 5,030
8,50O 100% 2.50 21,25O
Started and comPleted thla Perlod
Total coat trancferrcd to Flnlshcd
Ooods s26,28O
Work ln Proces!, cndlng InventorY:
Cost from Prsccdlng dePartment 1,5OO 100ch 31.25 31,875
Matedalr...... 1,50O 1000h .25 375
Labor............... 1,5OO 6Oc/c .30 270
Factory overhead 1,5O0 80o/c .70 840 3,360

Total coat accountsd lor ................... s20,640

, Number of equlvalent unltr of coct added during thc cutzent perlod detsrmlned aa followg:

Prlor Dept.
Coat Materlalt L:bor Ovarhoad
To complete beginning inventory.. 0 0 1,000 1,200
Started and completcd thla Perlod 8,500 8,50O 8,500 8,500
Endlng InventorY.. 1,500 1,500 900 1,200
l O,OOO 'l O,OOO 1 l,Ooo 1O,9oO
Total equlvalent unltr :

Cost added durlng thc currcnt pcrlod dhldad by thc numbcr of cqulvalcnt unltr of cost added
during thc current perlod
Chagter 6 117

1 PROBLEMS
P6-1

(1) Modern Cabinet ComPanY

Cutting Department
Cost ol Production BePort
For August
QuanUV Schedulc Materlalr Labor Overhead QuanUty
Beglnnlng InventorY.. 200
Startgd In proceso this Perlod 800
800
Transf erred to Assembly Department 650
Ending Inventoty gooh 60ch 600h 150
800

Cost Charged _toDepartment Total Equivalent Unlt

Beglnnlng Inventorp Cost Units' Cost"
Materlals S 5,385
labor... 530
Factory overhead 795
Total cost in beginning inventory....'...-......'...-.r... s 6,890
Cost added during current period:
Materlals s28,035 7A5 3f0.oo
[.abor 8,35O 740 12.O0
Factory overhead 12,323 740 18.OO
Total cost added during current period-.-.-.. $48,91O
Total cost charged to department........... s53,6O0 s70.o0

%
Cost Accountedfor as Follows Unlts 0omplete Unlt Cost rot"l C*!
Transferred to Assembly Department 050 lO0o/c 970.00 s45,50O
Work in Process, ending inventory:
Materials 150 900h s40.00 35,4O0
l-abor 150 gooh 12.OO 1r08O
Factory overhead 150 6Ao/c 18.00 1,620 8,10O
Total cost accounted for ................... s53,000

' Total number of equivalent unlts required in the cost accounted for section determined as
follows:
Materials Labor Overhead
Eguhralentunlts transferred out............ 05O 05O 85o
Equlvalentunits in ending inventory.. 135 90 90
Total equivatent unlts _JE _J79 _Jl9

- Total cost (1.e.,the cost in beginning inventoryplus the cost added during the current periodl
divided by the totat number of equivalentunits required in the cost accounted for aecUon
 Chaptar 6
1t8

P6-1(Continuedi
Modern Cabinet ComPanY
AssemblYDePartment
Cost of ProductionRePort
For August

Matcrialr l:bor Overhead Quantlty

QuanUV Schcdulc \
250
Beglnnin g Inventory.-,........""""'-'d 050
Racelved from Cuttlng Departmsnt"'
900
800
Tranaferred to Finiahed Goodr ""'-'- 100
4ooh 2Oo/o 20t/.
End in g Inventoty..-..'...-.....'...
900

Total Equivalent Unit

Coat Charsed to DcPartmcnt
Cost Unlts' Cosf'
Beginnlng InvcntorY:
Coct trom precedlng d epartnrent""""""""""""""""' 3 17,41O
3,451
Materlala
3,811
Labor
3,011

Total cost ln beginnlng Inventory 3 28,083

Cost added durlng curtent Pcrlod: 900 $ 69.eO
' 3 45'5oo
Cogt from pt ""oiiJ departrnent"""""""' 940 20.10
13'43:l
Materlall 820 30.o0
20'989
tabor......'. 820 30.00
20'989
Factory ovefiead
Total cost addcd durlng curent perlod"""' sl oo,911
$128,994 s150.00
Totat cost charged to department"""""'
 fi9
Chapter6

P6-1 (Goncluded)
%
Unlts Complete Unlt Cost Total Cost
Coat Accounted tor as Follows
Trangferred to Finlshed Goods....-.... 800 100% s'|50.00 sl20,ooo
Work ln Process, endlng lnventorY:
Cogt from Preccdlng department 100 1000h I 69.90 36,99O
100 4Ao/. 20.10 804
Materlala-
labor 100 20o/c 30.00 soo
100 200h 30.00 600 8,994
FactorY overhead
Total cost accounted for.....'.......-..... s128,994

' Total number of equivalent units reguired tn the cost accounted for section determined as
followr:

Prior Dept.
Cost Materials Labor Overhead
800 800 800 800
Equlvalentunlts transterred out....
In ending Inventory 1 0 0 40 20 20
Equtvalentunlts
Total equivalentunlts 900 840 420

* Totat cost (i.e.,the cost in beginninginventoryplus the cost addedduring t*te current periodl
dividedby the total numberoi equivalentunits requiredin the cost accountedlor section

(21 Work in Process-Cutting Department""""' 26,O35

Work in Process-AssemblyDepartment 13,433
Matgfials ...................'.........r..r...r..r......'....t.. 39,468

Work in Process-Gutting Depattment""""' 8,35O

Work in Process-Assembly Department 2O,989
Payroll ..'........'......."....r.. 29,339

Work in Process-Gutting Department ........ 121525

Work in Process-Assembly Department 2O,989
A p p l i e d F a cto ry Over head' ,......,..... 33,514

Work in Process-Assembly Department 45,5O0

Work in Process-Cutting Depanment......." 45,50O

Finished Goods Inventory 120,OOO

Work in Process-Assembly Department ...,' 12O,OOO
 ChaDter6
120

P0.2

(rl RathboneTool GorPoration

Casting DePartment
Cost of ProductionReport
For December
Materialg Labor Onerhead QuanUty
QuanUty Schedulc
I,OOO
Beglnnlng Invcntory-""""n"'xo""'r" 8,OOO
StartcO In Prcccg thlc Perlod
0rooo
7150O
Trancf errod to Flnlghlng Department 1,5O0
1000h 80% 8Oa/c
Endlng lnventoty.
-9'ooo
Total Equlvalent Unlt
Coat Charged to DePartment
Cogt Unltsr Cost"
Beglnnlng InventorY:
$ ots
Materlalr 60
90

Total cost In beglnn Ing lnventofl ...........-......t..."'

s 1,085
Cost addcd durlng current Perlod: I,OOO 32.0O
sl7,085
Materialr 8r7OO .50
4,29O
6,435 817OO .75
FactorYoverhead
Total cost added during current period""-' s27,81O
s28,875 s3.25
Total cost charged to department...

.h
Unltg Completa Unlt Cost TotalCost
Cogt Accounted for aa Followg
7r5oo 100eh $3.25 324,375
Transferred to Flnlshlng Department
Work In Proceal, cndlng inventory:
1,500 l0Oc/o 32.00 $3,OOO
Materlals 600
11500 gO./o .50
labor........ 900 4,500
1,500 ggoh .75
Factory overhead
s28,875
Total cost accounted for ..'....--..........

for gecUondeterminedas
Total number of equivalentunits requlred ln the cost accounted
followg:
Materials Labor Overhead
7,5O0 7,5OO 7,5OO
Equivalent unlts transferred out...........
1 , 5 O O 1,2OO 1,2OO
Equivalentunltr in ending inventory..
9,ooo 8,7OO 8'7OO
Total equivalent units

period)
- Total coat (i.e.,the cost in beginning inventoryplus the cost added during the current
cost accounted for secgon
divided by thc total number of equivaient units required In the
 - ClpPter6 121

- . P6-2(Continued|
RathboneTool Corporation
FinishingDePartment
Cost of ProductionRcport
For December

QtrenUV 9chcdulc l-abor Ovcrhced QuantitY

Bcglnnlng Inventory.. 1,50O
- RccelvcdfromCastlngDcpartmcnt.............-. 715OO
9,00o
Tnnrforred to Finirhed Goodr 7,00O
- Endlng lnventory.. 4O.h 'o.h 2,0oo
I,OOO

Cogt Charged to Departnent Totel Equivalent Unh

Bcginnlng Inventorp Cort Unttr' Cort"
Cort from praccding departmcnt...............r.r....oo6.ooeoor. 3 a'78!i
[.abor-. 291
Factory ovcrhead 555
Total cost ln beginning inventory 3 5,54l
Cort edded during currcnt pcrlod:
Cost from prccedlng departmmt 324,375 I,OOO 3324
[-abor.-.- 2,130 TBOO .30
Faetory overhcad 3,18 A,OOO AA
Totel cst rddcd durlng current period....... 32r"g3,
Totrl cct charged to dcpertmcnt-.-........ 335,180 9r.oo
 t2 Crtcplcr 6

P&2 (Goncluded)

%
Cort &countod tor er Followr Unltr Compbtr Unlt Cqt Totrt Cort
Tnnrferrrd to FhLh.d Ooodt.--.- 7,000 1o0% 3t.oo 328,OOO
Work ln Ptpcs, oodlng hvrotorn
Cort trom pncrdlng dcprrtrnrnt 2,O0O lOO% 33.2a $S/38O
2,OOO /30L 30 21O
Fretory ovrr.hord 2,0OO 30.A .U 4CO 7,i8O
Totrl cot eccountrd tor,.......--.-- t35,180

' Totel numbcr of rqulvelcnt unttt ruqulrcd In thr cqt rccountcd for rocUon dotcrmlncd er
followr:

Prlor DrpL
Cort t-abor Ovcrhcad
Equlvrlcnt unltr tnnrfcrrcd out........... 7,000 7,OOO T'OOO
Equlvelcnt unttr h rndlng Invontory.. 2,OOO 8OO I,OOO
Totel cqutvrlcnt un|tr..........-..... g,0OO 7€OO 8,0OO

- Totel coet 0.1., tfrr cort In bcalnnhg lnvcntory plur tfrr cort rddod durlng llrr currant pcrlodl '
dlyldod by t|rr totrl numbrr of rqulvrlcnt unltr nqulrrd h tho cort rccountcd for rocUon

l2l Work in Process--Casting Department | 7,085

Matgrials ......,....,.,,..........,..,............. 17,085

Work In Process--Casting Departmont....o........... 4r29O

Work In Process-Flnlshlng Department... 2,139 -
Payroll ..'o....o.......r........... ...........r.. 6,429

Work in Proces!-Casting Department................ 6,435

Work in Process-FlnlshingDepartment.............. 3,125
ApplledFactoryOverhead ....,......... cg lr J vEYA A

_
WorkinProcess-FinishingDepartment........,..... 241375
Work In Process-Castlng Departmont........ 24.375

FinishedGoodslnventory-.................,................. 28rOOO
Work In Process-FlnishlngDepartment...... 28,OOO
 Ctpptcr 6
123

P€.3

(11 Jettcr Engine Corporation

Gasting Departnrent
Cost of Production Report
For February
gchodub
--chrtnUty Hrt rbb bbor orlrrhcrd QuenUty
Beglnnlng lnirrnbry
500
atrrt d h procrs thb porfoa
3,OOO
35OO
Tnnctrrr.d to Anmbly Dcprrtnmt
Endhg Lrvrntory-E*_Ea
2,7oo
too!a 80'. 90% aoo
3"5OO
Coct Chrrpcd to Dc?rrtnrrt
- Totrl Equtvrhnt Unlt
Beetnntngh;;t"m
Cost Unltr' CotF
Mltarbb --..-EE----H-E*-8..-
bbof
t 1O,9?S
-*..s--.E..-*_
Frctory ovcrtrced ssa
2.&?9
Totrl cqt h beghnhg trvcntory
3 ta,1o2
Cort eddrd durlng currurt prrlod:
Hetrrlelr b&8,
I ^L _-
Itbof ---.----.,
H.-.-__
*_c_aa
s1.0575 3,5OO 345.OO
Ftelory ovcrhotd
D---aa-aa-gFa_
to,3E2 3r3ao 5,OO
4a/aEl 3lzo t5.oo
Totrl cort rddcd durlng currrnt p.riod_.._
3211'398
Totrl cst clrergad to rlcprrtmont_.._..-
s23g5og 305.o0

Co.t A€€orrntrd for rr Folbwr %

Unltr Compbtr Unlt Cct Total Cort
Tnnrfrrrrd to Arrmbty Olptrtnrnt -
2r7OO loo% sas.oo
Wort_h Proce, rndbrj hyrntorrl 3r75^5OO
Hetrrletr *F.-_.-.€ aoo 100% 845.OO 33E,OOO
bbor-_.,_ 800 80% 5.OO 33OO
Fr ctory ovcrft ced,......8_..,.rts,.. 800 go.h 15.00 IO,SOO 50,oo0
Totrl cct rccountad for.__.**.
3225,5O0
'
of rqulvlbnt unltr rogulrcd In thc cct
A;*mbrr rccountad tor rocuon dctarmlncd er

Mrtarbb Lebor OYcrhced

Equlnbnt unttt trenrtrrrrd
out.. 17oo
Egulnhnt unttr h rndtng rnvcntory-:*.*. 2,7oo 2,7OO
aoo G40 720
Totel rgutvelcnt unltr
35OO 3,340 3r42O
- Totel
cct (lr- thr.cort In bcainnlng brvcntory
dhddcd by thr totrl numbct plur thc cor-t edded durrng $rc current pertod)
-r.oo-"ii"l'n
";;;;bnt unti t,,a cort rccountod tor rccuon
 Chaoter 6
121
l

P8-3 (ConUnued) Jetter EngineCorPoration

AssemblYDePartment
Cost of Production RePort
For February

Matcrials tabor Orerhead QuanUty

QuanUty Schcdulc
I'OOO
Bcglnnlng Invcntqtt-
2,7OO
Rccclvrd from CerUng DcPartment -
3,700

Trendcrrcd to Flnlrhlng Dcparlrnent 2,9O0

Endlng lnvcntolY- 7Ot/. 3oth 3Ot/t 800
3,70O

Cort Charged to Dcpartmcnt Total Equivalcnt Unit

Cost Units' Cost-
Beginning lnvcntoDn
3 ql,l50
Cost trom prcccding departmcnt.*.-...
Matcrlalr... 40',28
[:bor.......- 12'426
Factory ovcrhcad 12,424
Totel coet h bcginnlng 3128,260
Cost added durlng current Pcrlod:
Cost from praccdlng dcparlrncnt -..*-... 3175,5OO 3,7OO 3 04.50
119,480 3,49O 45.30
I'latcrialr
44r4O8 3,'t4O 18.10
1:bor
44,4O8 3,140 18.10
Factory ovcrhead
Total coct added durlng current period"""' 3380'798
Totat cct charged to departnent.-.--...... €t"ttg s146.OO

c/o

Coat Accountcd for ar Followr Units ComPlete Unit Cct Tottl Cosl
Transf crrcd to Flnlshln g Dcpartmcnt 2,90O 10c.h s't40.oo t423'4OO
Worl in Ptlceca, cnding invcntorY
Cost from prcceding dePartmant 800 10o.h s 84.50 351,600
Materlalr 800 70.h 45.30 25,368
[:bor 800 30.h 18.10 41344
't 8.10 4t3'44 85,65O
Fectory ovcrheed 800 30ch
Total cct accounted for .'................. 3509,058

' Total numbcr ol cquivalent units required in the cost accounted for secUon determined as
followr:
Prior DepL
Cost Mate rials Labor Overhead
Equhralentunltr transferred out.... 2,900 2,9O0 2,9O0 2,9OO
Equivatant unlts ln cnding inventory 800 s 6 0 240 24o
Total oquhrelent unlts 3,7OO 3,400 3,140 3 , ' t4 0

- Totel coct (k., thr cort ln bcglnning invcntory plus ttrc cost added during thc current period)
dMdcd by tho total numbcr of cqutvetcnt unlts requlred In the cost accountcd for rccdon
 125
A189ter 6

P 6 - 3 ( C o n ti n u e d ) Je tter Engine Cor Por ation

FinishingDePar tment
Cost of Production Report
For February

Lrbor Ovcrhcad QuanUty

QurnUtY Schcdulc
300
Bcglnnlng InvantorY..
2,9O0
Rccclvcd from Ascmbty Dcpaftment ."""""""'
3,200

Tnnctorcd to Finlshcd Ooodl 2,8O0

Endlng lnvcntotT.. 50% 50.h ao0
3,2O0

Cort Charged to Department Total Equlvalent Unlt

Beglnnlng lnventory: Cort Unlts' Cost"
Cort lrom p recedin g d epartment.'.............. I 42,840
l-abor 2,78 0
Factory overhcad ...............'. 4,140
Total cost in beginning inventorY 3 49,740
Cort added during current period:
Coat f rom p recedin g d epartm ent.....'.......... 9423,4O0 3,200 3145.70
Labor... 12,240 3,OOO 5.00
Fectory overfrcad 18,300 3,00o 7.30
-
Total cost addeddurlng current pcriod...............'agj,ooo
Totel coct chargedto department..,,....... 3503,740 3158.20

.h
Cort Accountod lor ar Followr Units Complete Unlt Cost Total Cost
Tnnslcrrcd to Flnlched Goods 2,8O9 100ch 3158.20 34f2,9O0
Work ln Proceu, endlng Inventory:
Cost trom preceding department 400 100ch s145.70 858,280
Labor........ 400 50cL 5.O0 1,O00
Factory overhead 400 5Oc/c 7.5O 1,50O oo,78o
Total coct accountcd for ................... 35O3'74O

' Total number ol squivalant unlts required in the cost accounted lor gection determlned al
lollowg:
Prior Dept.
Cost Labor Ovefiead
Equlvalentunlts transterred out............ 2,800 2,8OO 2,BOO
Egulvalentunlts ln ending lnventory.. 400 200 200
Total oqulvalentunltr 3,200 3,OO0 g,ogg

- Total coat (1.o.,

t h c c o s t l n b e g i n n i n g i n v e n t o r y p l u s t h e c o s t a d d e d durlng thc current Perlod)
d M d c d b y t h e t o t a l n u m b e r o l e q u i v a l e n t u n l t s r e q u i r e d I n t h e c o s t accountcd lor recuon
 haoter6
tfi

P6-3 (Concluded|
Work in Process-4asting DepartmeJlt"""""""" 148,575
(21
Work in Process-Assembly Departmellt """"""' 11 6 , 4 8 0
263,055
Matgrials ..o......,................o.,.........................
16,362
Work in Process.-Casting Department """"""""
44,4O8
WorkinProcess-Assemb|yDepartmetlt.............
12,240
Work in Prccess-Finishing Department""""""" 73,OlO
Payroll" "" "" """ """""" """"" ""

Work in Process.-GastingDepartmont".."""""" 48,461

Work in Pttcess-Assembty Department"o""""" 44,4O8
Work i n Process-Finish i ng Department""""""o' 18,360
111,229
AppliedFactoryOverhead....""""""""""""

Work in Process-Assembly Department""""""' 175,5OO

175,5 OO
Work in Process'-Casting Department

WorkinProcess-FinishingDepartmellt.............. 423,4OO 423r4OA

Work in Process-Assembly Departttlgrlt ""'
442,960
FinishedGoods Inventory'......-.'. 442,960
Work in Process-Finishing Depalt[lellt """
s Ctnptar6 127

P6-4 ,

(11 PersonaCologneCompany
BlendingDepartment
Cost of ProductionRoport
For June

- Quandtf Schcdulc Materlalg Labor Overhead QuanUty

1rO0O
Startad In procegs thls period 8r000
7,00o
Transterrodto FlnlshlngDepartment 6,4OO
Endlng hventory.. 6Oc/t 2oth %'/. ooo
7,OOO

Cogt Chargcd to Department Total Equlvalent Unlt

Beglnnlng Invcntory: Cost Unlts' Cogt"
Materlalc $ 19,620
tabor 9U
Factory ovcrhead 2,375
Total cost In beglnning inventory....o..,................. 3 22,939
Coat added durlng current perlod:
Matcrlall .to..........'.r....................................i.......-.........
$129rloo 61760 S22.oo
l,.abor o,88O 01520 120
Factory oycrhcad ..r.............. 29,005 E'55O /3.80
Total coct addcd durlng current perlod...,... SlO5,o45
Total cort chtrged to department......... ...... 3187,984 328.OO

oh
Cort Accountad tor ar Foltowe Unlts Complete Unlt Coat Total Cort
Traneforad to Finlshlng Department 0,400 lOOc/o 328.00 s179,200
Work ln Pmcess, cndlng Inventoryn
Mater|a|r.,..o......,,....................... 600 6ooh $22.00 $7,920
Iabor..........,....... 600 200h 1.20 1U
Factory overhead,...................... OOO 25% 4.8O 72o 817&4
Total cocteccounted for"""""""""' 3187'984

' Total number

of equlvalent unlts required In the cost accounted for secUon detarmlned ae
, lollowr:
- Materlals Labor Overhaad
Equlvalent units transferred out........,.. 6,400 O,4OO 6,400
Equtvalentunlts In endtng Inventory.. 360 1?:O 15O
Total| cqulvalent
cqulvalent unltg
SISS _q,*9 li?gg
_
" Total cost (1.e.,
thc cost in beglnning inventory plus the cost added durlng the currsnt pcrlod)
. dtvidod by tho total number of equivalent units required In thc coet eccountcd for rcsuon
 ChWter6
128

P&,4(Continued)
PelsonaCologneComPanY
FlnishingDepartment
Gost of Production RePort
For June
Hrt rbb lrbor Ovrrhoed Quan0V
thranUty Schcdub
rroo
Beglnn Ing Invcntoty..F--.o.'--E-o.*@'F 6,.1o0
Rccclvcd from Bbndlng Dcpartmcflt*--'-".- 10,2O0
Added to proccta h FlnbhlnO Dcprrtmont '."""
27IOOO
20,OOO
Transferrcd to Flnlsh.d Ooodr I,OOO
100% 70% 70%
EndlngInvcntory
27,OOO

Coat Chargcd to DePartrncnt Tote! Equlvalcnt Unlt

Cort Unltr' ColF
BeginnlngInvcntorY:
Coat frpm pnccodln g d cpartmcnt.-..-.--.---..-F.*.-.- i g/aso
Matsrlalr 11395
L-cbor... 100
Factory ovcrhced 050
Total cot h bcglnnlng lnventorY t to,61o
Cogteddod durlni currcnt Pcrlod:
Cort f ro m p nccd In g d epertnrcnt --.---.-.-.'-.. 317e'2OO 27,OOO 36.e5
Matsrlalr z'r605 27t OO t.oo
1g,elo 2Q,7OO .75
t-abor
oo,75l 2gr7OO 2.30
Factory
Totat coot rddcd durlng curront pcrlod-..-....-... 3245/a75
chergc'd to dcPrrtmcnt 329O,O85 311.OO
Total cst
 129
Clppter 6

P€-,4(Concluded)
Vr
Unlt Coct Total Cost
Cort Accountadfor er Follon Unltr Gomplctr
Tnnrf rrrrd to Flnlrficd Ooodt.-....- 2OTOOO 100% tt 1.oo 3280,ooO
Work br Proccr' rndlng lnventorY:
Cort from PncccdlngdcPartmcnt I'OOO 100% 3 6.e5 t8,950
lletcrlrlr- I'OOO 100% 1.OO I rOOO
lrbot 1,000 7OY. .74 525
Fectory ovcrhcad I 'OOO 70% 230 1,81O 1O,O85
Totrl cott rccounted for .....--.-..--- 329O,O85

. Totel numbcr ol equlvalent unltt rsqulrcd In thc cot accountod for rocUon determlned er
lollorvr:
Prlor DepL
Cort Matsrhlr Labor Overhead
Equhralentunltr transfered out.... 20,0OO 28rO0O 26,0OO 26,OOo
Egutvalcntunltr In cndlng lnvcntory lr0oo I'OOO 700 700
Totel rquhnlcnt unltr ..................., 27',0OO 27IOOO 26,7OO 26t7OO

il Total cort 0,c., thc cort In beglnnlng lnvcntory plur thc cort addcd durlng tlrc curront perlod)
dMded by thc total number of cquhyalent unltr reguirsd ln thc cort accounted for recUon

(21 Wo rki n P ro ce ss-B l endingDepar tm ent...r .....r ...o l29,1OO

Work in Process-Finishing Department'............. 25r605
Matgrials ..."........".....-...'.'-. 1541705

Work i n Process-Blen ding Departmellt ...'.....'.... 6r88O

Work i n Process-Finish ing Department .............' 19,919
PayfOll .......'.....r.....................'........r............. 26,799

Work i n Process-8len din g Department ...r..'...,r.' 29,O65

Work in Process-Finishing Department..........'." 6O,751
Appli gd Factory Ovgrhgad.'.....o..'......'.....r"" 89,816

Work in Process-Finish ing Department...'.......o.. 179,2O4

Work in Process-Blending Department ..'... . 17g,2OO

Finishgd GoOdsInventory.........,....,....................'. 286,OOO

Work in Process-Finishing Departmont.-'... 286'0oo
 Chaptor 6
tfr

P6-5

(rl Hytest ChemicalCorPoraUon

ReltningDePartment
Cost of Production RePort
For March

*btrrLrb Labor Otrcrhcad Quentty

ol-nnEhr Uchcduh
800
Beglnn ln g Invrntory --....-'-"""''d"'d---.*
7r2OO
Startod ln procccl thb prrlod """"""'d""-'s
8,OOO
T'OOO
Trenctcrrad to B|cndIng Dcpartmont'*""""'-- 50}| 1,O00
100rA 75i*
Endlng lnvrntort
8,O0O

Coct Chargcd to DaPartrncnt Totel Equlvalcnt Unh

Cort Unltr' CorF
Beglnnlng InvcntorY:
Matorlelr 3 725
30
L-abor
00
Fa gtort ovcrhced ....""r"-".-'D-t'-F""""n'-""""-o

Total coet ln bcglnnlng lnvcntory 818

Cort rddcd durlng cunrnt Pcrlod: 8,OOO 31.00

Matcrlrlr ......E....-'-r""-"--"'--""-"'Do'-'-'--oF , 7,272
".-'F' 1,920 7r75O 20
[:bor..'--..---Mo"h"""""*---H"'E'F
4*O 7,5OO ,10
Factoryovcrhcrd...-....o8....'.|..g.-'.........-...-....9...d
1o1t1 6oct rddcd durtng curcnt perlod 311,732
tl2,550 31.60
Total coct chargcd to departmcnt....--...

x
Unltr Complotr Unlt Coet Total Cort
Coct Accountcd tor ta Followf
7r0oo 100% ll.ao il1,200
Tranglerred to Blcndlng Dcpartncnt.
Work In Procc.r, rndlng lnvcntorY:
Materlalr I'OOO 100% 31,00 t1,ooo
Labor........,... I,OOO 73.h .20 150
lr0o0 50% AO 200 1,350
Fastory
312,550
Total cot rccountcd for.-..--**

ll
Totel numbor of oqutvtlcnt unltr rrqulrod ln tfir colt rccountrd for lccUon dctarmlncd
followr:
Mrt rbb Lebor Ovcrhcad
EquhraIcnt unttr trandcrrcd out........... T'OOO 7,OoO 7,OOo
Equlvalcnt unltr ln rndlng Invcnto:y.. I,OOO 75O 50o
Total cqulvalcnt unltt 8,OOO 7,75O 7,5OO

- Total coct (1.r., ttrr cort ln bcalnnhg lnvcntory plur thc cort added during thc currcnt pcrlodl
rccuon
dhyldcd by thr total numbcr oi rgulvatcnt unltr rcqutrcd !n thc cort eccountcd for
Chaptor6 131

P6-5 (Continuedl

HytestChemicalCorporation
BlendingDepartment
Cost of ProductionRoPort
For March

Quandty t]chedulc Matcrlalr Labor Overhcad QuanUty

Beglnnlng 1r4O0
Recclvcd from Refinlng Dcpartmottt ........-..--. 7'Oo0
Addcd to proccrr ln Blendlng Departmcnt.....-- 1,80O
10,20o
Transferred to Finlshed Gooda 9,20o
Ending InventorY.. 89t/t 40ch 40o/c 1,O0O
10,200

Cogt Charged to Departtnent Total Equlualent Unlt

Beglnnlng Inventory: Cort Unlts' Cogt"
Cort fro m p rcccdln g d epa rtment'......'........ $ t,7sl
Materlala 420
labor 88
Factory overhead 100
Total cost ln beglnning lnventorY t 2,602
Coat addad durlng curront porlod:
Goat from precedlng department 911,200 10r2OO s1.27
Materlalr 4,380 10,000 .50
Labor.....,. 3rloo 9,6OO .33
Factory overhead SrOOO I,OO0 .60
Total cost added during current pcrlod 924,280
Total cost charged to department........... t?n
 Chapter 6
t32

P6-5 (Goncludeil)
%
Complctc Unlt Cost Total Cost
Cort Accountcd for ar Followa
0,200. 100% s2.70 s24,840
Tnngfcrrcd to FlnlghedGood3"""""
Worlt In Proccar, cndlng InventorY:
Cort from PrPcedlngdepartmcnt I'OOO 1OO'/o 91.27 sl,270
'l,0oo gooh .50 400
Materlala
1,OoO 49o/c .33 132
Labor
10o/o .60 240 2rO42
Factory overh gad ..""""""""""' I 'OOO
Total cogt accounted for .........-..---
s26,882

as
Total number of egulvalent units required in the cost accounted for secuon determined
followa:
Prior Dept.
Cost Materials Labor Overhead

Equlvalentunib transferred out..'. g,2oo g,2oo 9,20O 9,200

l r ooo 800 400 400
Eguivalentunits In ending Inventory
9r8OO 9r60O
Total equivalentunlts.......:..........-. 1 O , 2 O O 1 O , O o o

- Totat coct (1.c.,the cogt tn beginning Inventory plus the cogt added during t|re current period)
tor sectlon
dlvlded by thc totat number oi equivatent unlts requlred In the cost accounted

WorkinProcess-RefiningDepartment...,'.""""' 7 1272
l2l
Work in Process-BlendingDepartment....,""""' 4,38O
Matgrials ....'.."""""""'t"t'r""""""" 11,652

Work in Process-Refining Department'......'t""" I,520

Work in Process-Blending Department """"""" 3,1O0
Payroll .t...."t"""t""t""""""t"'r""""""""""
41620

Work in Process-Refining Department """' r"""' 2r940

Work in Process-Blending Department 5,6OO
A p p ti e d F a cto ry Ove rh e ad' ..,...............""""' 8,54O

Work in Process-Blending Department r.......""" 11,2OO

Work in Process-Refining Department """' 11r2OO

F i n i s h e dGo o d s 1 n ve n to ry.......,..' ................,.........241844

Work in Process-Blending Department """ 24,84O
Chapter6 t33

P6.6 APPENDIX

(1t Upton ManufasturingCompanY

Cuftlng Department
Cost of ProductionRoport
For October

Cluand(ySchcdub H.trrbb Labor Orerhead Ouantlty

Beglnnlng 00t6 1AV. 20Vr I,OOO
Stsrtrd h proccs thb pcrlod..-.'.-. 0,ooo
1O,OOO
Tranrf rrrrd to Asrombly Dopertmont 8,5O0
80% 'loo.h 1,50O
Endhg lnvrntory........--x..€. 100%
lO,OOO

Cort Chargcd to Dcpertmrnt Totel Equivalont Unlt

BeglnnlngInvcntory: Coet Unltr' Cogt"'
8,01O
l-abor 1,750
Factoryoverhcad 790
Total cct h beglnnlng hventory .'...... $ 10'550
Cort rddrd durlng currcnt pcrlod:
Matarlelr 3 81,900 9,1OO $ 9.oo
l.bor 18,OOO or3oo 2.00
Fectory ovcrhcrd 3930O 9r800 4.00
Totrl coct rddrd durlng currcrit pcrlod-.'..' 3130'7oo
1o61 sot chergcd to depertrncnt -... 3150J250 3l5.OO

Cort Accountcd for rr Followr Unltr Current'A Unlt Cogt Total Cogt
Transtcrrrd to Arocmbty Dcpartmcnts
Ecglnnlnglnvcntoty.s.-6* 310,550
Colt to complctr:
Metcrlelt- I,OOO 10.h 3 c.oo ooo
[rbor-*.- I 'OOO go.h LOO 1r2OO
Frctory ovrrhred ---- l,OOO 80% 4.OO 3,2OO 3 15,850
Strrt d end complct d thb pcrlod 7,5OO 100.h 15.O0 112,500
Totrl coet trenrfrrnd to Ascmbly
Doprrtmcnt --*. 3128,35O
fVork ln Proccs, rndlng hvcntory:
Metcdelr 1,50O 100ch t c.oo 313,50O
l.ebor 1,50O aooh 2.OO 2,4OO
Factory ovcrhced l r5OO 1O0'/. 4.OO orooo 21,9O0
Total colt eccountcd tor ................... $15O,250
 Chapter 6
134

P6-6 APPENDTX(Contin ued)

ar follows:
. llumbcr of equlvalent unltr ol colt added durlng thc c'urant perlod detsrmined

Materlab Labor Overhead

100 000
To comptetc bcglnn|ng Invontory"""o'D,""'o" 7'5OO
7r5OO 71500
Startod end complgtad thlr perlod o'D'-oo"o-" 1r500
1,500 1r2OO
Endlng lnventorY
e,1o0 o,3oo e,8oo
Total cqulvalont unltr

- cogt addsd durlng thc current perlod dtvldedby thc numbor ol cqulvalent unlts of cost addod
durlng the current Perlod
i-.'<--

Clwtor6 t35

P6-6 +PPENDIX (Gontinued)

UptonManufacturingCompany
AssemblyDepartment
Cost of ProductionRepod
For October

QuanUty Schedulc Materials labor Overhead QuanUty

Beglnnlng Inventory 75% $Oo/t 8Oo/o 2,OOO
Rccetvedtrom Cuttlng Department... 8,50O
'lo,5oo
Tranctcrred to Finished Goods Inventory 915OO
Endlng lnventory.. 60c/c 4Oo/t 40ch 1,OOO
1O,5OO

Cort Chargedto Department Total Equivalent Unlt

Bcglnnlng Inventory: Cost Units' Cost"
Coetfrom precedingdepartment.................................
$ 4,000
Matcrialr 400
lsbor 800
Factory overhead 1,800
Total cost In beglnnlng Inventory $ 0,800
Coatadded durlng current period:
Cort from preccdlng department...,........,....................
3128,350 8,50O 315.10
Matorlalr... 30,100 81600 3.50
Labor.......... 21,315 8,7OO 2.43
Factory overhead 30,015 8,7OO 3.45
Total cost added during current perlod....... $2O9,78O
Total cogt charged to department,.......... s216,58O s24,50

Cort Accounted tor as Followr Units Current % Unlt Cost Total Cost
Trangtarrad to Finlshed Goods:
Beglnning inventory,. $ 6,800
Cost to completc:
Materials.. 2,000 2s% s 3.50 1,750
Labor........ 2,OOO 40% 2.43 1,960
Factory overhead ........ 2,00o 40% 3.45 2,760 g 13,270
Started and completed this period 7,5O0 1000h 24,50 18:t,75O
Total cost transferred to Finished
Ooods 3197'o2o
Work In Process, ending Inventory:
Cost from preceding departrnent 1,0oo 1000h 315.10 $15,1OO
Materlals 1,OOO 600h 3.50 2.1OO
Labor........ 1,OOO 400h 2.45 980
Factory overhead 1,OOO 400h 3.45 1,38O 19,590
Total cost accounted for .,.................
93:l'599
t6 Chapter 6

P6-6 APPENDIX'(Concluded)
. llumber of equhralentunlts of cort added during thc current perlod determlned as follows:

Prlor DepL
Cort Materlale Labor Overhead
7o completc beglnnlng Inventory.. 0 500 800 800
tltartsd and completsd thlc pcrlod 7,500 71500 7,500 71500
Endlng Inventoly-r.-...................t.. 1,000 Eoo 400 4oo
'8,500 8,60O 8,7OO 8,700
Total equlvalent unltr

- Coatadded durlng thc current perlod dtvldedby the numberof equlnalentunlts ol cost added
durlng ttre currpnt perlod

tzl Work in Process-Cutti ng Department'................ 81,900

Work in Process-Assembly Departm ent ....--....-'. 30,1OO
Matgrials r......r..r... r.........'..'...r........ 1 12,O OO

Work in Process-Guttin g Depa rtm 8f1t......'.......... 18,600

Work in Process-Assembly Departme nt ....."..'.o. 21,315
Payroll .......r.....t.....................t"t""t"""t"tt"' 39,915

Work in Process-Cutti n g Departm gflt'................ 39,20O

Work in Process-Assem bly Departm ent ........'..,. 3O,Ot5
Applied Factory Ovgrhgad ......"..............'..... 69,215

Work in Process-Assembly Department....r.....r.. 128,350

Work i n Proc ess-Cutti n g Departm gllt'........ 128r35O

Finishgd Goods 1nventory...,....o......"........',..r.......197rO2O

Work in Process-Assembly Department ..,.. 197,02O
 Chapter 6 137

P6.7 APPENDIX

(rl Marston Manufacturing GompanY

Fabricating Department
Cost of Production Report
For August

QuanUty Schedulc Materiala Labor Overhead QuanUty

Beglnnlng Inventory 1OO'/. 4och 80o/o 400
Stlrtod In process thls perlod 1,2OO
1,600
Tranrfered to FinlshlngDepartmcnt 1,100
EndlngInvcntory.. 1OO'h 8oo/c 9Oo/o 5OO
y
-1f99
Coet Charged to Department Total Equivalent Unlt
- Beglnnlng Inventory: Cost Units' Cost"
Materlals .. $ 29,280
1,900
Factoryoverhead 11,80O
Total cost in beglnning inventory I 42,980
Coat added during current period:
Materlalc... .a...aaaa aaaaaa $ 9O,OOO 1,2OO $ 75.OO
l.abor 1O,o8O 1,340 I2'OO
Factory overhcad 48,740 1,230 38.00
Total cost added durlng current period....... S152,820
Total cost charged to department........... !199f99 s125.OO
 Chaptar 6
,g

P8-7 APPENDIX{Continued}
Unitg Current 7r Unlt Cost Total Coet
Cort Accountodfor ar!g!!ow:
f-rtf"-.a to FlnlshlngDepartment:
942,980
Bcglnnlnglnventory.'
Cort to complste: o
Materlalr.. 400 och 3 75.00
400 aoch 12.0O 2,880
l-abor..-.--. 31040 g 48,900
FactotYoverhead"""" 400 2Oolc 38.00
700 lOAo/" 125.OO 87,500
Startcd and completedthlr Perlod
Total coct transfcrrsd to Finlshlng $130,4O0
Dcpertmont
Work tn Procesr, ending Inventory:
500 1000h I 75,00 $37,500
Materlale..
500 800h 12.OO 4,800
Labor........ 59,4OO
' Factory overhead 500 9Oo/o 38'00 17,10O
$195,8OO
Total coat accounted for ...-.--.-..........

. llumber ol equlvatent units of cost added during the current period determined ac follows:

Materials Labor Overhead

To completc beglnnlng Inventory o 240 80

700 700 700
Startad and completed thls Perlod
500 400 450
Endlng InvcntotY..
1.200 1,340 1,230
Total equlvalent unltg : : :

- Cost added during the current period divided by the number of equivatent units of cost added
durlng the current Perlod
 CluptcrG 139

7g--7 APPENDX (Contlnuod|

Marston ManufasturingCompany
FinlshlngDepartrtent
Cost ol ProdustionReport
For August

* Or||nuU&hodub llrt rbb lrbor Ovrrhcrd Quentfu

tnV. 20V. 3gYr ooo
Rocrlvod from Frbrbrtlng D.p.rbnltt 1,1OO
1,7OO
Tnnrfrrrrd to Flnlrhed Ooodr hvrntory l r3OO
Endhg lnvrntory...,.o..m..F6.os,,o IOO% oo?6 oof)6 .3OO
1,700

Cort Chrrg.d to Dopertm.ot Totel Egulvelent Unlt

Boglnnlng Invrntory: Co.t Unltr' CorF'
Cort from pncrdlng dcprrtnont --*...n...-.,...,. t 74'OOO
lbtarfrb-es.e..-F..F= An
t bot I,OOO
Frctory 2,52O
Total coct h bcglnnlng hvcntory s 78r3!to
Cort rddrd durfng curnrnt pcrlod:
Cort from pncodlng drprrtmmt---...-,......,,.....,. 3130/a0o lrloo 3124.00
HltarhbH*ed-nare 2r02O 1r4OO LOO
trbor 19,880 1t12O 14.00
Frctory ovrrhred 20,42o 1l2O 21.O0
Totrf coet rddrd durlng currrnt p.r|od....... ti80,020
Totel cct clrtrgcd to dcprrbncnt.,.*.- 3267,37O 3101.00

Cort Accountod tor rr Followt Unltr Currrnt 16 Unlt Cort Totel Cort
Tnnrfrmrd to Fhlrhcd Ooodr:
Boglnnlng Invcntory .-.-..-F.,-.- t78,&5O
Cort to complctr:
Mattrlalr.-F.-.*nE oo0 ao.h s 2-oo 720
bbor.--€.*ffi oo0 w.A 14.OO Q1720
Frctory oyrrftlad -* ooo w% 2t.oo lOrO8O 3 95p7O
Ettrt d end complrt d trb p.rfod 700 100% 101.00 112t7OO
Totrl cort trrnrfrrnd to Flnbhcd
Omdt Hhs.* 3208"570
Wort h Procan, ondlng hvrntory:
C;ort from pncrdlng dapertnrrnt 400 100% sl24.00 3{9,OOO
Httorletr _ F.....r........ .fOO 100cA 2-oo aoo
L^abor .3OO o o.h 14.OO 3,3OO
Fectory ovcrhcad 400 6O.h 21.OO 5,O4O 58r8OO
Totel coct tccountcd tor ................... 3267,370
 Chapter 6
140

P6-7APPENDIX,(Goncluded)
. llumbcr of cqulvalent unlta of coct added durlng t{rc curent perlod determlned al follows:

Prlor DepL
Coct Materlalr Labor Overhead

To compteto beglnnlng lnvanto4y" o 380 4ao 480

700 700 700 700
st *.0-"nd comPletcd thlt Perlod
Endlng InventorY 400 400 240 240
1,46O 1,42O 1,42O
Total equlvalent uhltl

ft Coat added durlng the current perlod dlvided by the number of equlvalent unltc of cost added
durlng tlrc currtnt Perlod

l2l Work in Process-Fabricating Department""""" 9O,O0O

Work in Process-FinishingDepartment......'...'... 21920
Matgrials .............. ...........-.........,'..r 921920

Work in Process-Fabricating Departmeflt.......... 16,080

Work in Process-FinishingDepartment....'..o.r.... 1 9 r 8 8 0
PayfOll .............r....r..............rtr................t.t.r. 35, 960

Work in Process-Fabricating Departmellt .'........ 46,740

Work in Process-Finishing Department ..'.-....,..'. 29,82O
ApFliedFactoryOverhead......-.........'......,.... 76, 56O

Work in Process-FinishingDepartment........r...., 1 3 6 , 4 0 0
Work in Process-FabricatingDepartment" 136,4OO

Finished Goods Inventory 208,570-

Work in Process-Finishing Department.....' 208, 57O
 141
ClvgtorO

P6.8 APPENDIX

(1) TWonkaBeverageGomPanY
MashingDePartment
Cost of ProductionRePort
For SePtember

Matcrlalr [.abor gvcrhead QuanUtY

QrranUVSchcdulc
9Oc/, 60oh 30o/c 800
BcglnnlnglnventorY
3,OOO
Strrtld In Proccsc thla Pcrlod
3,6OO

Trandcrrcd to Bl ending Departmant.

3rloo
Endlng hvcntory 00% 400h 20c/o 500
3,600

Cort Ghargcd to DePartmcnt Total Equivalent Unlt

Beglnnlng Inventory: Cost Units' Cost"
Matarlals 3 1,088
l^abor 172
Factory overhead... 172
Total cost In beginning inventory...........'..'..,....... 3 1,432
Coat added during current Pcrlod:
Materlalr 3 O,O0g 2,84O 32.10
1.47O 2r94O -50
Factory 3,020 3,020 1.O0
Total cort addcd durlng currcnt period....-.. 310'496
Total cogt charged to department............ 3t1i93g 33.60
 Chaptor 6
112

P6-8 APPENDIXf0ontinued)
Cort Accountrd for al Followr Untts Currant7o Unit Cost Total Cort

Tnnrtcrad to EtendlngDepartment
BeglnnlngInvontory.......,..."""" $1,4i12
Cogt to comPlete:
Matgrialg...""""""""" 800 10% s2.10 126
labor.-..,... 600 40o/o .50 120
Factory overhcad """" 600 7Oo/" 1 .00 420 I 2,098
'loooh 3.60 IrOOO
Stsrtad and comptetedthls Perlod 2,5OO
Total coct trancterred to Blending
Departn ent .....'.................. 311,008
Work ln Proccct, cndlng Inventory:
Materlalr.. 500 8Oo/. $2,10 t 6:10
l-abor........ 500 400h .50 100
Factoryoverhead 500 200h 1.00 100 830
Total cost accountedfor....,.............. sl1,928

. Humbcr ol equlvalent units of cost added during the current period determined ar tollows:

Materials Labor Overhead

To completc beglnnlng Inventory 60 240 420
Startod and completed th lg period ................. 2,500 2,500 2,500
Endlng Inventory 300 200 100
Total cqulvalent unltr 2,890 2,940 3,020

Coat added during the current period divided by the number of equivalent units of cost added
during tfie currrnt period
 Chapter 6 143)

Po-8 APPENDIX(Gontinued)

Twonka Beverage Company

Blending Department
Gost of Production Report
For September

QuanUty Schedule Matarlala Labor Overhcad QuenUty

eeglnnlFg Inycntoty.......,..r.,.........r........,............ 50ch 20.h 2otlo I 'OO0
Recclvcd from Mashlng Department.................. 3,1OO
Added to process In Blending Department......... 3,1O0
73OO

Transterred to Finished Goods Inventory 6,40O

Endln g lnventory.......... 1000h 6Oc/o 60o/c 800

J-,n9
Coat Charged to Department Total Equlvalent Unlt
Beginnlng inventory: Cost Unlts' Cogt"
Cost trom precedlng department................ $ 1r77O
Materlals 100
Labor 55
Factory overhead 74
Total cost in beginning inventorY s 1,999
Cost added during current period: -lt
Cort from precedlng d epartment...........'... t,ogg 6,2OO $1.70
Materials 1r4O7 g,7oo 21
2,OO4 o1680 .30
Factory overhead 2,''72 6,ego .40
Total cost added during current period....... $17,181
Total cogt charged to department........... $19,180 $2.70

Coat Accounted for ss Follows Units Current7n Unlt Cost Total Cost
Transferred to Finished Goods:
Beginning inventory.. si,999
Cost to complete:
Materials.. 1,000 500h 3 .21 105
l,-abor........ 1,00o 800h .30 240,
Factory overhead ........ 1,000 sooh ,40 320 s 2,664
Started and completed this period 5,400 1000h 2.70 14,580
Total coat transferrcd to Finished
Goods 317,244
Work In Process, ending inventory:
Cogt from preceding department goo 1000h s1.79 s1,432
Materlals 'loooh
800 .21 168
l:bor........ soo 600h .30 144
Factory overhead gooh .40 '192 1,930
BOO
Total cost accounted for ................... 319,180
 ,41
Chapter 6 .
P6-8 APPENDIX(Gonctuded|
' Xumbcr
of cquhrafent unltr of cogt added
during thc current period determlned
as foftows:
Prlor DepL
Cogt Materlab Labor
To completc beglnnfng Inventory.. Overhead
gt"rt"d and comptetad thlc perl;d
o 5OO 8OO 800
5,400 5,400 5,400
Endln g Inven toly..-,F.F.........,......., 5,40o
800 800 480
Total cqulvalent unltr 480
6,20o 6,700 9.880 6,ogo
"
perlod
divlded
bvthenumber
orequivarent
ff:;ffi'"HlllSil;t"'t unitsorcostadded
(21 Workinprocess_MashingDepartment...............
Work in process_BtendingDepartment,o............ 6,O06
7,4O7
Matgrials'r""".....-...r....r...-...-.r..........r.....r....
7,413
Work in process_Mashing Department
Work in pro.cess_Blending Depa ...........r,.. 1r47O
rtment .....r..,.,... 2rOO4
Payroll "r""r"""rrr""r...--....r...rr.........rr-.r.-.....
31474
Workin tT:
::s_!l-ashi1 g Departm€nt,......,.......
Workin process_AlenOini 3,O2O
Departmelt.............. 21672
Applie d Factory Ovgrirgad r.................,......rD.
5,692
Work in process-B_lending
Department ............,. I 1,Ogg
work process_rraainini
in oepart-;;f::.:::: 1l,oeg
Finished Goods Inventory..............
......... I1Tr244
t 'z'rq
work in process-Biending oepatt.;;i::::::
12,244
I

CHAPTER7
QUESTIONS
DTSCUSSION
O7-1. Ot slity cost! rnay be groupcd hto the folbwing enl orgnnizationalunits along with man'
three classifications: agers who have authority to take the nec-
1. Preventicn costs are the ccts hcurred lo essary actbn lo solve Prcblems.
5. The company places a high value on its
Ptcvent product failure. They include the
cdt ct designinghigh quality productr and empbyees and proviCescqrtinuous train-
prcductbn rystenrs, irrludhg thc coett o{ ing, ar well as recognitionfor achieve'
implementingand maintainingsuch sys' ment. Employees perform besl wfien they
' lems. are well lrained, and they have the greal'
2. Appraisal coots ate the coets incuned to est capacily to contribute when lhey are
detecl producl failure. They includelhe hightYeducaled.
cet of inspccting and testing malerials, Q7-4. The concept cl continuousquality improvement
hspecting produc'tsduring prodwlion, and ditlers frorn the cmcept ol quality optimizationin
thr cogt d obtahhg hlonnatinn lrqn cus' that csrtinuous quality improvemenl is a dynam-
lorners aborn product salisfastiqt. b processof change under lhe assumptionthat
3. Failure ccts ato the cosls incuned when the iCealis not an abrclute loown value;where'
a product tails, ard may occur inlemallyor as, quality optimizationis a slalic approach to
externally. Intsmal failure cosls are those fhding the best solutbn to a given set of fixed
that occur duringthe manufacluringgr Pro- and knorvnconstraints.
ductbn procoss(e'g., scrap,spoilage'and O7-5. The first problemwith trying to inspectqualily
rework), and external failure cosls aro into the productis that il delects inlemallailures
t h o s e t h a t o c c u r a t l s f t h e P r o d u c th a s only afler coosiderablecost has been incurred.
b e e n s o l d ( e ' g . , w a r r a n l y r e p a i r sa n d The second problem is that the rnagniludeol the
r e p l a c e m e n t s3 , a l € s r e f u n d s ,h a n d l i n g cost of the internalfailures,delecled by inspec-
cuslom€r cornplaints,and bsl sales result' lion, is rarelymeasuredand typicallyignored.
hg frorn PoorProduclqualtty). Q7€. Cornpaniesshould concEntraletheir eflorls on
preventhg poor gualily rather than on lrying lo
Q7-2. TOM stands for total quality nwragemenl' which
b a cornpany'wirCe approach to quality improve' inspectit into the Process,because il will result
menl in all processesand activities.TOM is a in less total qualitycost. The approachis found'
pervasive philosophyol doing business thal ed on the belief ihat by increasingprevention
appliesto all funstionalareas of the company c o s t s , t h e c o s l o f i n t e r n a ll a i l u r e s - s u c h a s
and to ail personnel. s c r a p , s p o i l a g e ,r e w o r k ,a n d d o w n t i m e - w i l l
Q7-3. Five characteristicsof TQM syslems are: decline by a larger amount than the increasein
1. The company'sobiectivelor all business preventioncosls'
activily is to serve ils cuslorners'The term O7-7. Oualitycosts should be measuredand reported
product' is extendedto includeservices lo managemenlin orderto provideincenliveand
as well as groods,and'custorner'hcludes d i r e c t i o nf o r i m p r o v i n gq u a l i l y . L a r g e q u a l i t y
htemal usors as well as those outsideof costs indicate large opportunitiesfor improve-
the cornpanywho purctrasethe company's menl. Also, moasurem€ntsprovidea basis lor
products.Each empbyee's activityis ori' moniloringthe cosl of quality and evaluating
entodto provirCing serviceto the cuslorner. improvemenls.
2. Top marngementprcvlCesan aclive lead- 07€. S c r a p i n c l u d e s( 1 ) t h e f i l i n g s a n d t r i m m i n g s
ership role in the qualily improvemenl remainingaller processingnraterials'(2) defec'
rnovoment. live materbls that cannot be used or returnedlo
3. A l l e m p l o y e e sa r e a c l i v e l y i n v o l v e di n the vendor, and (3) broken parts resultingtrorn
quslity improvement.Employeesaro nol employee€rrors or machine failures' Spoiled
only asked to contributeideas,but also lo goods differ lrom scrap in that they are parlially
lind batter ways of doing lhings- or fully completedunits lhat are in some way
Involvemenlcan be successlulonly when delective and are not econornicallyor physically
there is oncourago.neoland an open and conectable. Spoiled goods rnay be unils of the
honest environmentcl trust. product or componont Parts, and they may of
4. Thc cornpany has a sysiem of idenlifying may not have a salvagevalue. Bework is lhe
q u a l i l y p r o b l e m s ,d e v e l o p i n gs o l u t i o n s , p r o c € s so l c o r r e c t i n gd e l e c t i v em a n u f a c l u r e d
a n d s e t t i n gq u a l i l y i m p r o v e m e not b j e c - gooos.
t i v e s . T h i s t y p i c a l l yi n v o l v e so r g a n i z i n g Q7-9, Tho cost of scrap, spcilage,and rework shouH
empbyees lrorn all ranks and lrom dilfer- nol be ignored,because such costs are oflen

145
 Chapter 7
,16

quit. high and ofton re3ult trom hternal failures nal failure.ll spoilageor reworkis the resultcl a
tirat can Uc elimihatod lgnoringlhe cosl of these custorner requiremenl,lhe unrecoverablecosl
shoutd be charged to the trb. On lhe other hand,
htemd failures s€nds a signal to rnanagerslhal
il the spoilage o rework is thc cutsequerrc o{
urc*r codr arc acceg,table.Reporling such costr
provido inccntivl tor improvement,particularly an intemal lailuro, lhr unrecovrrabb cocl should
be removed lrom thc iob (i.e., charged lo
il tho cctc are la'rgc'
Factory Ovefiead Control) and reported to
OZIO. tn ordor to know what to do with lhe cosl' the
responsiblemanagomenl
accountant musl know whether lhe spoilage or
rework is caused by thc custorneror by an inler'
 CliwterZ t47

E)GRCISES
I

E7-1

(1) Accounts Rgcgivabl8...'.......o..o..o................."....... 1r8O0

Scrap Salgs (or Other Income)...'.............o.... 1,8OO
l2'l AccountS RgCgivab|o......................r..'.................. I r8O0
Cost of GoodsSofd 1,80O
(31 ' ACCOUnIS
RgCgivablg."...'."...'......'r.....".'...'.....'.'. 1r8O0
Factory Ovgrhgad Gontrof ..r....'.....r..r........... 1,800
(4) AccountS RgCgivab19........................'................... I ,8OO
Work in Procgss ........,.,.,,,.r....................r..,.. 1,800

E7-2 Spoiled Goods Inventory.,...,.r....,..ro...,................. 12o

Factory Overhgad Control ......,.........,..........o........ 152
Work in Process.........,.. 272

E7-3 $27,OOOtotal iob cosVl,00O chairs = $27 cost per chair

S p o i l e d Go o d s l n ventor y ( $g x 1OOchair s) ,......,... 9OO

Factory Overhead Control ((,$zz- $9) x 1Oo)......... 1,80o
Finished Goods Inventory ($22 x gOOchairsl ...,... 24,3oo
Work in Process...................,.,..r. 2TTOAO

E 7 - 4 S p o i l e d g o o d s In ve ntor y( $9o x 1OO' units) ............ 9,OOO

Gost of Goods So|d.,...., .r.............,...,r...D. 95.OOO
Work in Procgss ,.....,,.....,,.............o.......o..r,.. l O4'OOO

E7-5 FactoryOvgrhgad Contro1.r..,..,....,............,........,. 700

Ma te ri a l s(1 0 Ounits x $1.5O) .....,.. 150
Payroll (1OOunits x 114 hour r $1O per'hour) 250
Applied Factory Overhead
(1 OOr 1 1 4 hr x $12 r ate).,.,.,........,..r ........ 300
FinishedGoodsInventory.....,........ .,.....,. 6,900
Work in Process 6,80O
 ChapterT
18

8,5OO
E7-6 Work in Pnocess"""""" 1r0oo
Matefials (1 ,OOOUnitS X $1)...r............r,...,,...
unitsx 116hourx $151...........
Payroll(l 'OOO 215OO
ApbtieOFactoryOverhead(l'ooo r 716r $3ol 5,OOO

COSt Of GOOdS SO1d...........................'r...r.........o....

73,50O
Work in Process($651000+ $8r5O0!.....'....... 73,5OO

Accounts Receivable($73r5oor I 5oVo1...........r... I lo,25O

Sal gSt'.....r....r............'.................r...r.........r... 1 1O,25O
ChapterT 149

E7-7 ,

(11 Manx ComPanY

FormingDepartment
Cost of ProductionRePort
For August
Quantlty Schcdulc Matarlalr Labor Otrarhcad QuanUty
Beglnnlng Invenlory I,OOO
Started In procesc thla perlod s......... 9r000

19'009
Transterrcd to Finishlng Department 8,OOO
Ending Inventory............,.....,............. 100% 7,rh 50o/o 1,50O
Spolled In procccr.....x..,,........,.'s..... 100% 100.h 100.h 500
1O,OOO

Gogt Charged to Department Total Equlvalont Unlt

Beginnlng Inventory: Cogt Unlts' Coat"
$ 1,260
L.abor 770
Factory overhead 1,4O0
Total cost In beginnlng lnventorY g 3,430
Cost added durlng curent perlod:
Materliglr $?6,240 1O,O0O s3.75
Labor 10,78O 9,825 1.20
Factory overhcad 21,725 9,25O 2.50
Total cost added during current period-..'... Soa'745
Totaf cost charged to department.......,.., Sry- s7.45

Cost Accounted for ac Follolvl Unltr '/aComplste Unlt Cost f:trt C-!
Transfered to Finlshlng Dcpartmcnt I,O0O 100.h s7.45 s59,OO0
Chargc to Factont Overheod tor gpollage:
Materlialc.... 500 lOgo/. 3S.ZS s1,875
l-abor..... 500 1000h 1.20 800
Factory overh ead ....................... 500 100.h 2.50 1,250 3,725
Work ln Procees, endlng Inventorp
Materials,. 1r500 1000h s3.7s s5,625
Labor.....,.. 1,50O 750h 1.20 1,35O
Factory overhoad 1r500 500h 2.50 1,875 8,850
Total cost accounted for ................... 372,175
 Chapter 7
150

E7-7 (Goncluded|
' lor recuon determlned ar
Totat number of cqulYalcntunltr rsqulred h thc cort eccountod
lollorvr: ovcrhead
Matsrlalr Labor
I,OOO I,OOO I,OoO
EguhraIent u n ltr tranctorrcd out "-""'-"'o"""
1,500 1,125 750
Equlvalentunltr ln cndlng lnventory"
500 500 500
Equlvatent unltr of rpollagc...*."'-"""""':'
Total equlvalontunltf .....'............,.............."" =to,ooo 0$25 :
er?99
a : :

h Total coet fl.c., thc coct In beglnnlng Inventoryplut the coet added durlng Bro currant period)
dlvtdedby the total numbcr of equlnalentunltr requlrad ln tha cogt accounted for section

(Zl Work In Process-Finishing Depattment............., 591600

FactoryOverhgadCOntrol...,,.....,..,.........,.r...'...ro. 3r725
work ln Process-Forming Department.,...., 63'325
ClppterT 151

E7-8 ,

(r) JuniperComPanY
FinishingDepartment
Cost of ProductionReport
For July

QurnU(y Echrdulo Hdrrlrb Lrbor Orcrhcad Quan$ty

500
Rccrlvcd trom CutUng Dcprrtmtnt- 41500
5,000
Trenrfrrrrd to Flnldt.d Ooodr...-* 3,800
Frd hg humtot7...*.-.o.s....'......-r. &Vr 20% 20% 800
8polbd h prccoE.-.m--..,.x.d. 100% 100% 100.h 400
5,OOO

Cort Chrryo'd to Dcprrtmont Total Equlvafent Unlt

Boghnlng hvontory: Colt Unltr' Cst"
Coct from prcccdlng 3 5r5OO
Matcrlalr 1ro5o
L.abor 11180
Frctory ovcrttcad 11770
Total cort In bcglnnlng InventorY s 1o,4oo
Gort rddrd durlng cgrrant prrlo'd:
Coct from prrcodlng dcpr 3 54,500 5,000 31e00
Hrt rlrlt 20,olto 1r52O 5.OO
10.200 ar36O 4.OO
Frctory ovcrhcad 24,39O ar3oo o.oo
Totrl cort eddcd durlng currcnt pcrld.--.. 3115,800
Totrl cort ehargcd to dcpertnrcnt.........- 1126'200 327.0O

Cort Accountcd lor er Followr Unltr %Completr Unlt Cort Total Coat
Tnnrlrrnd to Flnlrhrd O,oodr-..--- 3B0O 100.h $27.00 ti02,000
Trenrtcrrr'd to Spollcd Ooodr krvcntory
rt rahrago vrlur .-s-.....-..*.. 400 510.OO 4,OOO
Ghergr to Ftctory Ovrrhod for rpollrgo:
Cort of complctcd rpolbd unttr 400 100.h s27.oo $1O,80O
l.rrr ratvagr vtlur oil tpotlcd unltr 400 10.oo 4.O00 6,8OO
Work h Proccsr rndkrg brwntorf
Cod from prrcrdlng dcpertnrcnt 800 100.A 31e00 s or6oo
Matrrlelr_ 800 10.h 5.oo 1,600
L-ebor..-.... 800 20ch 4.OO 040
Fectory ovcrhcad 800 29Vr o.oo 000 12,800
Totrl cort rccountcd for 312O,20O
 Chapter 7
152

E7-g(Gonctudedl
. Totat numbcr of rqulvrtent unltr nqulrrd h thr cott tccountcd for rccUon dctcrmlnod r
followr:
Hor
DcoL Gct Metorbb Labor Ovorhced
Equhvalent unltr trandcrrcd ollt -" 3r8OO spoo 3BOO 3BOO
800 320 t8o l8o
Equlyalsntunttr h rndlng lnvcntory aoo
Equbralent unttr o'f rpof bgc....'.*' 400 400 aoo
5,000 15,20 a,3oo 4,3OO
Total equlvalcnt unltr

- Total cort (1.o.,thr coct In bcglnnlng Invcntoryplur thr-colt eddcd durlng llrr currcnt pcrlodl
t1'r cort eccountrd tor rostbn
dtvtdcd by thr toUf i"iUrr oi rquliiini u"ftt rrqutrrd br
1O2t60O
(21 Finishgd Goods Inventory..,,........o...r..'.'......r........
4tOOO
spoiled Goodg Inventory ..'...r...........'..........'....""
FaCtOly OVgfhgad COntfOl .....,r.......t..""""""rtt"" 6t8OO
l13t4OO
Woik in process-finishing Department"""
ChagtarT t53

E7-9 1

(11 CoastalPetroleumInc.
CrackingDepartment
Gost of ProductionRsport
For MaY

QuanUty Schgdulc Matcrbb ConvcrslonCoot QuanUty

Beglnnlng lnventory 5,OOO
Startsd In procer tfilr perlod 55,000
99499
Transfemad to Reflnlng Department 49,000
Endlng 100ch 7O'/. 6,0O0
logt h pnocar 5,00o
60,ooo

Coet Chargcd to Departmant Total Egulvalent Unlt

Beglnnlng Inventory: Coet Unltr' Cogtt'
'l,9oo
.......'.....'..... $
Matcr1a1c..............,.o...........'.....
Convgrrslon cost................,.....,.....................,.o,..F...r... 380
Total cost In beglnnlng Inventory.......'...'.........o... 3 2'280
Cost added durlng current Perlod:
Materials s2o,1oo 55,0OO 3.no
Convenlon colt - 7,420 53,200 .15
Total cort added durlng current perlod.....-..,...... 127,72O
Totel cort charged to department........... _320,989 s.55

Cost Accounted for ar Follorrr Unltr Z. C"-prclc Unlt Cost Total Coat
Trangferrcd to Reflnlng Department 49,OOO 100ch s.55 326,950
Work ln Procesc, ondlng Invontorp
Materlalg o,o0o 7000h ,4O $2,400
Convcrgion coct 9,000 70.h .15 sro 3rO3O
Total cost accounted for s20,980

Total number of equlvalent unlts raqulred ln the cost accounted for lecUon detcrmlncd ae
tollowr:
Materialg Conversion Coat
Equhralent unltr translerred out.... 40,00o 49,OoO
Equlvalent unltr In ending Inventory o,0oo 4r2,OO
Total equlvalent unlts 55,00o 53,2OO

Total cost (1.c.,thc coat In beginnlng Inventory plue the cost added durlng thc currcnt parlodl
divlded by tho total number of equlvalent unlts requlred In the cost accounted for rectlon

(2) Wo rki n P ro ce ss-R e finingDepar tm ent............... 26,95O

Work in Process-Cracking Department...... 26,95O
 Chapter 7
1il

E7.1OAPPENDIX

(r) Sun ValveGompany

Tooling Department
Gost ol ProductlonReport
For March

QuanUV lichcdulr l,lstrrlab Labor Chrerhead QuanUty

l go.h
Beglnnln g InYcntoly',...."""""'€"r"{ lO0t/o 70% 2r0oo
13rO0O
Startod thlr pcriod........"""""""!"-',
15,000
Tranderred to Flnlshlng Dapartment 7r000
Endlng InYcntory........"'t""""""FF -' 100% c0% 10?r, 3r00o
Spolled In proccar.-...................-."'- lOOt/o 9Ot/o 90./, 5,000
15,00o

Coet Chargcd to DePartment Total Equlvalent Unlt

Beglnnlng InventolY: Gogt Unlts' Cost"
3 1,600
Labor 290
Factory overhead .... 950
Total cost ln bcAlnnlng lnventory ..'..........r........- 3 2,&oO
Cogt edded du ring current pcrlod:
Matcrlala 3 0,750 13,OoO 3 ,75
2r32O 'l1,600 .20
Labor
Factory ovcrhcad 0,2oo 11,500 .80
Total cort added durlng currant perlod'...... 821,270
Total coct charged to departmcnt 324,110 s1,7s

Cogt Accounted tor er Follorvr Unltr Currcnt % Unlt Cost Tota! Cost
Transterrcdto Flnlshlng Dcpartmenb
From bcglnnlng lnvcntory---* s2,840
Coatto complatothla perlod:
Materlala,..........F...-d 2,000 o.h 3 .75 o
labor 2,OoO 30'/t .20 120
Factory ovcrhead -....- 2,000 40t/o ,80 640 $ 3,ooo
Startod and completcd thlr pcrlod 5,000 100.h 31.75 8,750
Total cost trangforrsd to Flnlahlng Departmcnt sl2,350
Chargc to Factory Ovartread for apollagc:
Materlalr.. 5,000 lOOt/. $ .zs g?,75O
Labor.-..... 5,00o 9O'/o .20 900
Factory overhead 5,00o 99o/o .80 3,80O 8,25O
Work ln Proccu, cndlng Invantory:
Materlala 3,OOO 1000h t .75 s2,25O
L:bor........ 3,0oo 30c/t 20 300
Factory overhcad 3,OOO 40ch .80 9EO 3,51O
Total cqt tccountod 1or.........-...- 324,1'lO
 ChapterT 155

E7 -1O APPENDIX (Concludedl

' llumbcr of cgutvalcnt unltr o,f coot addcd durlng tlto currsnt perlod determlned as follows:
Matcrialr Lrbor Overhoad
To completo beglnnlng hvcntory,€.*.m.o c o00 800
abrtrd end complctrd thlr pcrlod Em&i 5,OOO 5,OOO 5,OOO
Endlng lnvcntory 3,OOO 1,500 1r2OO
8pollcd unltr 5,000 4,500 4,5O0
Total cqulvalent unltr 't3,ooo 1't,600 11,50O

' Cort added during thc curront period divlded by thc number of cquivalent unlts of cost added
durlng lfic curent perlod

(2'l WorkinProcess-FinishingDepartment............., 12,350

FactoryOvgrhgadControl..........'......r.,,...'......r.... 8,25O
Work in Process-Tooling Departme[t.....,,.. 2O,600
 Chaptar 7
1ffi

E7-1I APPENDIX

(1) Plastico FurnitureComPanY

FinishingDePartment
Cost ol ProductionRePort
For SePtember
Mlterlgls Overhead Quantity
Quantltyllchcdutc ry,4Oc/o 1r2OO
8Oo/' 4O'/o
Beglnnfng InYontoty"""'F""""""""o' . 0,000
naiclvcd-trom Fabrlcatlng Department
7,2OO
5,000
Tranrtercd to Flnlshed Goodg""""" 80% 1,50O
lOOo/o 80.h
Endlng lnvantorY 1000h 700
100% 100.h
Spolled ln Prccer
7,2OO

Total Equivalent Unit

Coat Chargcd to DePartmen!
Cost Units' Cost"
Beginnlng InYcntorY:
i 14,160
Cort from precedlng department """"'
1r21O
1,30O
labor'..............
3,250
Factory overhead
Totat cost In beginning inventorY s 19,920
Costaddoddurtngcurrent Perlod: IrOOO 312.OO
Cort from precedlnf department """""""'
s 72,000 'l.oo
6,24O a,24O
Matcrlalr ......'.""""' 2.OO
12,24f) 8,120
Labor..'...- ...."i""""" 5.OO
30,600 6,120
FactolY ovorhead
Total cost added durlng current period"""' !t r1,o80
3141,0O0 320.O0
Total coct charged to dcpartmet1t """""""""""""""""""'
 157
ChapterT

ET-1 1 APPENDIX (Concluded)

Cort Accountad for lr Followr Unltr Currcnt 116Unlt Cot Total Cort

Trenrfrmd to Flnlsh.d Ooodr:

Frorn boglnnln g lnvontott .-.-..-- 31e,e2o
Coft to complctc thb Pcrlod:
Metr da b.....-o.od-..D. r3oo 20% 3 1.00 2a
Labor 13oO @.h 2-oO 1r4.4o
Factory ovsrftcld ....-.. 1r2OO oo% 5.OO 3,O00 $ 25too
St rt d rnd complctod thb porlod SBOO 100% 3zo,oo 7O,0oo
Tottl cort tranrfcrrod to Flnbhhg Dcprrbncnt tloll2oo
Trenrfcrrod to Spollod Ooodl lnventort
rt uhragn velur rs...'...-.......s.. 7oo 312-OO 8,4OO
Chargo to Factory Ovcrhcad for rpollagc:
Cort of complctrd rpollcd unltr 7Oo 100% 320.00 tlJtr0oo
Lcg ralvagc valuc of rpollsd unltr 7oo 1LOo 8/fOO 5'800
Work h Procaor, cndlng hvcntorn
Cort trom PrccedlngdePartment 1r5OO 100% ilzoo t18,ooo
Matorlalr 1,5OO 10a.h 1.OO 1,5OO
bbor 1,500 80% 2.00 trSoo
Frctory ovorhead ...,.......n-....'..,. I,50O oo% 5.00 4,500 25,80O
Totel cott eccounted tol .......-.......... tl4t,ooo

. Xumber of cqutvatrnt unltt of cct addcd durlng tfio currrnt pcrlod dctrrmlncd .r followr:

Hor
DcpL Coat Materbb Lrbor Ovorhead
To completc beglnnlng lnvontory.. o 240 720 720
atert d end complctcd thb Pcrlod 3FOO 3B0O sBOO 3BOO
Endlng hventory.........'.....-........... 1,5OO 1,500 900 900
Spolled untts 700 700 700 700
Totaf cgulvalent unltr O^0OO 6,rAC' -a'J20 o,120

* Cort tddcd durlng tttr curcnt pcrlod dtvldcd by thc numbcr ol cqulvalont unltr of cort addcd
durlng tlrc currant pcrlod

l2l Finishgd GOOdSInVentOfy.oo..........,.....,.r............... lOlr2OO

Spoilod Goods Inventory .................r.t.o..........r..... 8t4OO
Factory Overhead Gontrol .'...............-'.-..-......-.-... 51600
Work In Proce*s-Finishing Departmetlt.....' 115t20O
 ChaptorT
tfi

E7.12APPENDIX
(1) Local PoPInc'
Cooking DePartment
Cost of ProdustionRePort
For December
Mtt rbt! Labor (hrcrhred QuanUty
ouenutv!c!g!g!: i
7s% At% at% lorooo
BeglnnlngInvcntotY aor0oo
Racclvcd from Mhlng Depertncnt-
60,o99
37,000
Tranrferred to Botulng E)'epartmont- 75V. 8,OOO
End In g lnventory..F.o"o""'o'tr-"-i" 100.h 73.4
......"o"@' 5,OOO
Loat In procotl
5O,O0O

GostChargcdto DePartmcnt Total Equlvalent Unlt

Cort Unltr' Colt"'
BeglnningInventorY:
Cost from Preccdlngdepartmcnt t 2,920
305
Matcrlalr
140
[abor....'.....
210
Factory ovcrhcad
Totel cct In bcgtnnlng lnventory t 3,575
Cogt added du rlng currcnt parlodl
3lo,85O 35,OoO S,31
Cost from prscedlngdcPartment-..'. .04
Materlalr l,5oo 371500
21430 4Or5OO .o6
3,645 40,500 .o9
sl8,425
322,OOO 3-5o
Total coct chargcd to

Unltr Currant 7r Unlt Gost Total Cort

Cost Accountedfor ar Follorvr
Translarred to Bottllng Departmcnt
From beglnnlng lnvcntotY..."* 33,575
Cort to comPlcto thir Psrlod:
Mater1a14.................o.. IOrOOO 25t/o 8.04 too
lOr0OO 75% .0E /gto
Labor........r.'..r""""'..'
FactorY ovcrhcad ...--. 10,ooo 73.h ,oo 673 3 4,8OO
1OO'A 9.50 13,50O
Started and compteted thla pcdod 27.OOO
Total cost transferrad to Flnlshlng Departmant 3't8'3OO
Work ln Procesr, endlng Invcnto4n
Cost lrom preccdlng dcPartment 8,000 100ch 3.31 32,480
Materlalr 8,0oo 100ch .o4 320
l-abor........ 8,ooo 7sch .06 360
I,OOO 7'ch .09 540 3,7OO
Factory overhead
322,OOO
Total cost accounted lor ...-.--....--..
 CtpptorT t59

E7-72 APPENDIX (Concludad|

s ; ' XumUer of rqutvaturt unltr of eort rdd.d durtng ttrc curcnt pcrlod dctarmlncd rl follorvr:

Hor
DcpL Cot tlatcrlab lrbor Ovcrhcrd
To cornplctc bcglnnhg lnvcntory.. O 2FOO 7,5OO 7r5OO
Stlrt d rnd complct d thb pcrlod 27,OOO 27POO 27,OOO 2T,OOO
Endlng 8'OOO 8,OOO O,0OO O,O0O
Totelrquhnlcnt unttr -3s,o09 gFog _lo'5gg JoFgg

" Cost lddod durlng Ott cgrrent pcrlod dtvHcd by thr numbcr of cgulvelent
unltr ol cort tddcd
durlng thr curant pcrbd

(21 Work in Process-Sottling Dopartment................ 1gr3OO

Work in Process-CookingDepartment....... 18,300
 Chagter 7
1ffi

PROBLEMS

P7-1
(1) SpoiledGoodslnventory(2oounits x $2'25)"""" 450
FaCtOry OVgfhead GOntfOl .r............r.................'o.r 1,35O
WOfk in PfOCgSS .................r......r...........t.t..t. 1,80O

Accounts Receivable ($55O+ $450) """""""r""t' Ir O0O

l2l 550
SCfap Sa1eS r.,.....r.............r..r....................t...
Spoiled Goods lnventory t..o....""""""""""" 450

P7-2
S9O,OOOtotal job cost =
(1) S18 per unit
5 ,OOOu n i ts o n j o b

SpoiledGoodstnventory(200units x St5 salvage) 3,00o

FaCtOryOVgfhgad COntfOl...........r..........r..'.'........ 600
Workin Process(2OOunits r $18 cost).."'r" 3,6 O0

COSt Of GOOdSSO1d..................................'....'.t....t 86,4OO

Work in Process(S9or00o- $31600|,.'......,... 86,4 00

AccountsReceivabte (586,400r l 4O%l,.............. 1 2 0 , 9 6 0

Salgs""" """""""' """"" 120,960

{2) Spoiled Goods tnventory (200 units x $15 salvage} 3,OOO

Work in Process .'......'......,..r....r....'....'...'..... 3,OOO
COSt of GOOdSSO1d..........,..,..........r.,...............'..... 87,OOO
Workin Process($90,00o- $3,000).-...-...-... 87,000
AccountsReceivable($azrooor 14a%l,..'.....--r... 1 2 1 , 8 0 O
Salgs'.'... """"""""'o"'r"' 121,8OO
ChaPtarT 161

P7-3

(1) Factory Ovgrhgad Control ,.......,...,.....,...,...,.......,. 2r2oo

Matgrials (1oO units x $4|.....,....,,.,r.....,.,...,.. 400
Payroll (lOO units x 112hr r $12 ratef .......... 600
Applied Factory Overhead
(1OOr 112 hr x $24 ratgl ,.........,.........,...... l 12oo
Cost of Goods Sold.. 2OOTOOO
WOrk in PrOCgSS r.....rr...r...............o.r.o...r......r 20O,OOO
AccountsReceivable($2OO'O0O
x 15O%)..,.......... 3O0,0oo
SalgS...r..r..rr.... ..........'.'...r...r.....or.. 3OO,OOO

l2l Work in Process.,....... 2r2OO

Materials (10O units r $4).....r......,....r,.......... 400
Payroll (lOO units x 112hour r $12 ratel ...,.. 600
Applied Factory Overhead
(1OOr 112hr r $Ze rate)....,..............D....... 1r2OO
Cost of Goods So1d.,.,.....,....r..........,r...rr.....r.........
202,2OO
Work in Process ($200roo0 + $2r20O|,,......... 202,2OO
Accounts Receivable (S2O2.20Ox 150%) ............. 303,3OO
Sa| gS......r......r.......r..............r.r.r.rr......rr...r..... 3O3,3OO
'te Chaptar7 ;

I
P7-4 (1) Overstrost GompanY
Cuttlng Department
Cost of ProduetionRepor
For April
QrandU Schcdub Matcrlrb Labor Orcrlrcrd Quen$ty
Bcglnnlng 5,OOO
tltrrt d ln Procar tlrb Pcrlod 2O,0OO
2!t,ooo
:
Tnnrferrcd to Ascmblln g Dcpartrncnt 18,OOO
Endlng lnvcntorY.' ...-d- 1AO.A OO% 60% a,ooo
too% g0% eo% 3,000
Spolled ln procog
'
25,OOO

Cort Chargcd to DcPertmcnt Total Equhnlcnt Unlt

Be!lnnlng InventorY: Cost Unttr' Cort"
Mate 3 1,260
Labor 780
Factory ovcrhaad lr78O
Total cogt ln beglnning InventorY $ 3,838
Coct added durlng curcnt Pcrlod:
Materialc 330,240 25,OoO 3150
l:bor lo,7ot 23,100 50
Factory ovcrhcad 21,311 23,100 t.OO
Total cort addcd durlng curcnt pcrlod...---..-. $88,312
Total cogt charged to 372,150 ir.oo
Cost Accounted for !t Followt Unltr y.Co.pl"t" Unlt Coat @!
Trangferrcd to Asscmbttng Departmcnt i8,OOO l0O% if'OO $54,OOO
Charga to Factory Ovcrhcad for rpollagc:
Metcrlalr 3,OOO lOO% 3150 34'500
Labor 3'OOO eO'/. 50 1'350
Factory overlrcad u.,...-.-.d.--. 3'OOO g}'h 1.00 2r7OO 8'550
Work In Proccsr, cndlng Invantory:
Materlalr....... a,ooo 1oo'.h $l.so 80'000
l:bor......... a,ooo ao% 50 l'2oo
Factory overhead 4,OOO 6O.h 1.00 2,4OO 9'600
Total coct accountad fof ..........-*... $72,150

. Total number of equlvalent unltc requlred In thc cost accounted tor recUon determlned aa
follorvlr:
Materlalr Labor Ovefioad
Squlvalcnt unltr translerrad out.. 18'oOo 18'o0O 18,OOO
Equlvatent unltg ln cndlng Invcntory'.. 4,OOO 2,4OO 2'4oo
Equlvalent unltr of rpollagc.... 3'OOO 2,7OO 2r7OO
Total cqulvalcnt unltr 3!'099 39'109 -23'199

- Total cort pcrlod)

fl.c., thr cest In bcAtnnlngtnvcntory plur thc cott added durlng thc currant
dtvlded Uy tfrc totat numbcr of cqutvatcnt unlb rcqulrcd ln tho cort accounted tor rcstlon
ClppterT ,63

P7-4 (ConUnued|
Overttreet Gompany
AssembllngDepartment
Cost of ProdustionRoport
For April
CFenU(y Schcduh tletcrtrb Lrbor Otcrhced QuanUty
4'OOO
Rccrlvrd lrom CutUng Dopertm.nt-. 18,OOO
22,099
Tranrtrrrrd to Fhlrhrd Ooodr lnvcntory 17,0O0
Endhg hvrntory 80% 2gYr 20?i', 4,0oo
Epolbd ln proccs 100% 100% 100% IrO0O
22,OO0

Cort Chargcd to Departmcnt Total Equlvalent Unlt

Ecalnnlng hvcntory: Coct Unltr' Cort"
Cort from prcccdlng departmcnt $ 1O,9OO
Matcrlelr 38,028

Totel cort ln bcghnhg lnvcntory t 57pr8

@rt rddrd durlng currrnt prrlod:
Cort from pnctdlng drprrtmont....-..--. t 54,OOO 22,OOO t ze5
lletrrfalt "ll,4.r4g2 21,2OO 9.55
Lrbor 15Aat 18,8O0 1,O0
Fectory ovc 23,1OO 18,8OO 150
Totel cort eddad durlng current pcrlod....... 8257,U2
Total cort chargcd to deparbncnt ..,...,,.........r,....r..............,9314,300 t15,00

Cort Accountcd for g Followr Unltr % Complctc Unlt Colt Totel Cort
Tnndcrrod to Fhlrlrcd Ooodt.....-.. 17,OOO lOO% 315,OO 3255,000
Trenrfcrcd to Spollod Ooodr hvontory
rt rahragc virlur M-o..mo..o... I,OOO $ 5.OO 5,000
Chergc to Fectory Ovcrtrcad lor tpollagc:
Cort ol complctod rpollcd unltt I,OOO 1OO.A 315.00 i15,OOo
bu ralvagc veluc st rpollcd unltl I'O0O 5.OO 5,000 10r00o
Work In Proccr, cndlng Invcntorp
Cort lrom precedlng departmcnt a,ooo 100.4 2.95 311,800
Materlalr.. 4,00o 80.h 0.55 30,560
t^ebor_...... 4,OOO 29Yr 1.00 800
Fectory ovcrhcad. 4,O0O 20ch 1'5o 1'2oo a4,360
Totel cott rccountod lor .......-...---. g?14,3OO
 Chaoter7 .
164

P7-4 (Concluded|
. Total numbcr od rqulvalcnt unltr rrqulnd In t||r cat rccountcd for rocUon dctcrmlncd ar
follom:
Hor
DcpL Cot Mtt rbtt lebor Ovcrhcad
'17'0OO
Equlyalentunltr tranrtorrsd out-.. l7rOOO lTtOOO l7'O0O
Invcntory ''OoO 3,2OO 8oO 8oo
Eiun^i"nt unttr ln ondtng
I'OOO I'OOO I'OOO I'OOO
iiuhralent unttr of ryollagc'-"---
212OO. 't8eo9
Total equlvalentun|tr..r..............r.. 2,OOO. l8po9

- Total coct 0..., thr cort ln bcglnnhg hvcntory ptur thr cort eddrd durhg tfro current pcrlod)
rccdon
dtyldod by thr total numbcr oi rqulvatcnt unltr rcqulrcd h thc colt rccountcd for

Work in Process-Assembting Departmellt."...."' 54IOOO

l2l
Factory Ovgrhgad COntrOt ....ro.,.....r...................... 8t550
Work in Process-Gutting DepartmeJlt......... 621550
FinishedGoodslnventorY.... 255,O00
SpOiled GOOdSInVentOfy ..r....r.....r......'....r............ 5r00O i
FaCtOfyOVgfhgad COntfO|......r........,.................'.. lOr00O
Work In Procegs-AssomblingDepartment.. 27O'OOO
ChapterT 165

P7-5 ,

(11 HometownBreweryComPany
Miring and BrewingDepartment
Cost ol ProductionReport
For January
QuenUU llchcdulc Meterlrb l.ebor Ovcrhcad QuanUty
Bcglnnlng lnvcntory 4rOO0
Startod ln procer thlr perlod 36,OOO
10'9.99
Tranrfrrrrd to CennlngDcpertmrnt 28,0OO
Endlng hvcntory 100% 10.h 1OV. 6,OOO
loet h pnoc..f o,0oo
4O,OOO

Cogt Chergcd to Dcpartmcnt Total Equlvalent Unlt

Beglnnlng lnvcntory: Goot Unlts' Cost"
Matarlalt $ 600
l,.abor 8a
Factory overfiead 124
Total cort h beglnnlng lnventory 3 810
Coct addcd durlng currunt perlod:
Metrrhlr 9{rso 34,0OO $16
Lrbor 8.24 3O,4OO .o3
Frctory ovcrbcrd 1,O88 3O,4OO .o4
Total cott eddcd durlng currcnt pcrlod....... 38,752
Total cort charged to departmcnt........... s7,5O8 s.23

Vr
Cort Accountrd lor tr Followr Unltr Completa Unlt Gogt Total Cost
Tnnrfcrrcd to CannlngDcperbnant 28,000 1OO'/o 3.zs 36,44O
Work h Procor, ondlng hvcntorln
Matrrlelr 6,0oo lOOt/o 3.ro 3960
l^ebor 0,00o 40ch .03 72
Fectory ovorhcad or0oo &ch .04 96 1r1?8
Totel cott tccounted for 37,568

Totel numbcr ol cqutvalcnt unltr requlrcd In tho cogt accounted for recUon determined as
followr:
Materials Labor Overhead
Equhratontunttr trancf orrcd ou t........... 28,OOO 28,OOO 28,OOO
Equhralcntunltr h ondlng Inventory-. o,ooo 2r4OO 2,4OO
Total cqulvalent unltr 34,OOO 3O,4OO 3O,4OO

h Totel cort (1.c.,

thr coot In beglnning lnventory plut thc cort added durlng tho currant perlodl
dtvldcd by thc totat numbcr of cqulvalent unltr roqulred ln tho coet accounted lor tectton
 tffi ChaoterT

P7-S(Continued)

HometownBrewery Company
CanningDepartment
Cost of Production Report
For January

QuanUty Schcdub Mltrr|lb Lebor overhced Quan$ty

,poo
Becelvcd from Mlxlng and
B rewln g Departm4nt.................. 28,000
30,OOO
Translerred b Flnlghed Goodg lnventory 25r000
Endlng lnvantory.. 1OO'/o 30% 50!h 1,OOO
,looc/.
Spolled In procau 800oh ao.a 4rOOO
3O,00o

Cort Charged to Departmcnt Total Equlvalent Unlt

BeginnlngInventory: Cogt Unlts' Coett'
Cost lro m p recedlng d epartment............................'....3 550
190
Labor 75
Factory overhead 150
Total coat ln beglnnlng Inventory 0gtt
Cost added durlng current perlod:
Cogt from precedlng department............... 3 6,440 30,000 $.23:t
Materlalr 1,52O 30,00o .057
[-abor... 786 28,7OO .030
Factory overfrcad ........ 1,572 28,7OO .os0
Total cort addad durlng currcnt pcrlod i1O,318
Total cost charged to departmcnt $11,28dt s.380

V.
Cogt Accounted lor aa Followr Unltr Completc Unlt Coat Total Coat
Trancferrsd to Flnlshed Goodr lnventory25,0OO 100% 3,38o I 9,500
Chargc to Factory Ovcrhcad tor apollagc:
Cost from precedlng departmcnt a,o0o 100.h 3.23:t s932
Matcrlala.. 4,000 100.h .057 228.
Labor...-..- 4,000 ao.h .030 96
Factory overhead 4,000 80t/c .060 192 lr4/.g
Work In Proce8s, endlng Inventory:
Cost from precedlng department 1rOO0 lOOo/. s.233 s233
Matarialt.. 1,O00 lOOo/. .057 57
Labor........ 1,OOO 50ch ,030 15
Factory overhcad 1,OOO 500h .060 30
Total cost accounted for .................- $11,2a3
fuptor7 t67

P7-6 (Concludedf
' Tottl numbrr ol ogulvrbnt unltr nqulrrd In thr cot rccountrd for rcctlon dctarmhed at
blbwrs

Prbr
DopL Co.t lbtrrbb bbor Ovcrhod
Equlvrbnt unltr trenrfrrrcd out* 2tt,OOO 25,OOO ZI,OOO Z,,OOO
Equlyetrnt unltr ln rndlng Invcntory lr0OO 1,OOO 5OO IIOO
Egulnlcnt unltr of lpol!rgo.-.-.. ar000 4,OOO 33OO 3'200
Totrlrqulvdrntunltr-.*...o...-.. 3OrOoO 3OTOOO 2,,r7OO 28!7OO

- Totel coct
S.l.r thr coet In boglnnhg lnvrntory plur the cort rddcd durlng thc cunrnt pcrlodl
dMd.d by tltr totrl numbrr of rqulvelont unltr mqulr.d h thr cort eccountcd for rcctlon

(21 WorkinProcess.-€anningDepartmeJtt..,..........,. 6,44O

Work In Procass-Ittliring and
Brewing DepartmeJlt.......................r........ 6r44O

FlnishedGoods Inventory aataaaaaaaaa 9,5OO

Factory OverheadControl 11448
Work In Process--CanningDepartment ....... 10,948
 Chagter 7
168

P7-AAPPENDD(
(r) HandyTool Gompany
Fabrlcatlng Departmont
Cost of Productlon Report
For April

OuenUtySchrdub l/lrt rbb trbor orrcrhred QurnS(Y

100%?6 7O% 70% 2'OOO
Strrtad thlr pcdod*i..-.rude 3'000
:l-'oo9
Tnndcrnd to Flnbhhg Drplrtnrrt 'aota e'OoO
Endlng hvontory-s-dFs lOO% &* t'5o0
spoilcd In procctrD-...-..-d-.H lOO% 60% COta Eoo
I I,OOO

Cort Cherged to Dcpertrncnt Totel Equhnlcnt Unlt

Beglnnlng Invontory: Cort Unltr' Cort"
-t..--.-.dr,....''..s.--qd*o.*.-is I ItgOO
Hgtafletf
Labor 340
Factoryovcrhcad IrO2O
Totat coct h bcglnnlng lnvcntorY I 33oO
@rt addrd durlng surtrnt Pcrlod: gtt80 gtooO
t 3t'02
Metadalr-.---.F-H6.E*d*-dd-.*s ' I
21125 8r5oo '25
1sbor..........--.r.r..-d.m.._..-Fff.-.....-'.'F.*
C'375 8i5OO '73
Fectory ovcrhord ----6-..tr.--.*.-.r.--..-.*
Totet coet rddcd durlng curont pcrlod-...' 317'O8O
Totaf coct chargcd to dcprrtrncfrt ---.-aimrp..-..,.m 32O'?4O _-t2,o2
ClppterT 169

P7-q APPENDIX (Continued)

@rt Accountcd lor er Follon Unltr Currcnt !6 Unlt Cost Total Cost
Tranrlcrrrd to Flnlrhlng DcprrtmcnE
From bcalnnhg lnvcntoty -........ 33,26O
Cost to complctl thb Pcrtod:
1:bor-*. 2,000 30% t25 150
FactorYovortctd.*- 2rOOO. 3(,% .73 4so 3 3BOO
8trrttd end complctcd thb Prrbd TrOOO 1 0 0 % 3LO2 14,140
Totrl cort trenrtcrrcd to Fktbhlng
Dcpartmont 318,OOO
Chergr to Ftctory Orrcrheadfor rpollagc:
Metorlalr .-.i....-..-.-O 500 100% 31,02 3 slo
labor 500 EOV. .25 75
' AOV' .75 225 810
Factoryovorhcad'.---.1...-........ 500
Work In Proccsr' ondlng InventorF
Matcrlalr 1,5O0 1000h $1.02 91r5:!O
lrbor l"5oo 10ch 25 150
Frctory ovcrhead 1,5OO 10V. .75 450 2,130
Totel cort rccountcd fot ..--..-"...... 32O,94O

r Humbsr of cqulvalent unltr of cott added durlng thc cument perlod determlned ar lollowg:

Materialg Labor Overhead

To completc beglnning lnventory o 600 600
tltrrted end completad thlr perlod TrOOO TrOOO TrOOO
Endlng hvcntory 1r5OO ooo ooo
Spolled unltl-....... a................,...... 500 300 300
Totel rqulvalcnt unltr 9,OOO 8,5OO 8,5OO

- Cort rddcd durlng trc currcnt pcrtod dlvlded by thc number ot oqulvalent unltr of cost added
durhg thc curront pedod
 ;
,70 Chapter 7

P7-6 APPENDX (Continuedl

HandyTool Company
Finlshlng Department
Cost ol ProduetlonReport
For APril
Qurndty tlchcdub Hrt rbb Lrbor otrcftcrd QurnUS
BcglnnlngInvcntorY lO0.A &% /fo?l trOOO
Rccclved trom Febrbrtlng Deplrtnrtt I'OOO
\
12,OOO
Tranctercd to Fhlth.d Ooodl--* er000
Endlnghvcntory-o-sffiH_ l0Ort 2!'?A zr?i 2'OOO
Spollcd ln procar roo% 100% loot6 100
l2,ooo

Coat Chargcd to Dcpertmcnt Total Equlvelcnt Unh

Beglnnlng lnvsntory: Cort Unltr' Cortft
Cort from prccrdlng dcprrtncnt i c,roo
520
Factory 780
Totel cort h beglnnlng hvcntory 310,000
Cort rddcd durlng currrnt prrlod:
Cort from prrcodlng drprrtm lt8,ooo o,ooo Szoo ' '
Metorlelr l0Boo o,ooo 1,;o
l.abor 3,720 eFOo ,A
Fastory 5r38O 0,3OO .3O
Totel colt eddrd durlng curront prrlod-.** :l38,too
Total cot cherpod to dcprrtncnt t4rpoo 3r.,:o
I

t7,
ChapterT

P7 -O APPENDTX (Concludedl
Unltr Curront !6 Unlt Coct Total Cogt
Cort Accountad for r Folbwr
Tnnrforrrd to Flnlthod Ooodr:
From beglnnhg lnvcntort ----. 31O,9OO
Co.t to comPlrtl thb Pcrlod:
3,OOO 60% tro 720
Fectort ovcrhoed .'...... SrOOO 60% .60 1,O8O 312,700
Sttrt d rnd elmplctod $b pcrlod 6'900 100% 3f30 28,980
Total cort trenctcrred to Flnlsh.d Ooodr 3f 1'880
Trrndrrrrd to Spollod Goodr lnvcntory
rt rehregr vrlur ......Fo.o..........xr l OO tl.oo 100
Cfrrrgr to Fectory Orrrhead for rpollrgc:
Cort ol complctcd rpolbd unttr 100 100rA 3l:o 9 .20
Lor relvagc velur of rpollod unltr 100 1.OO 100 320
Work h Procc+ ondhg hvcntorP
Cort trom prcccdlng departmcnt 2,OOO 100% 32OO 3 4,OOO
Mrtrrlelr.- 2,O0O 100% 1.20 2,4OO
lrbo r......................,.. 2,000 %t/. AO 200
Frctory ovarhaad..............-....... 2,OOO %rh ,60 300 6,90O

Total cort eccountedfor .'................. s49,O0O

. llumbcr of qqulvalent unltr of coot edded durlng thc curront perlod determined ar follows:

Prlor
DcpL Cqt Metcrbb Labor Ovcrhcad
To complctr bcglnnlng lnventory.. o o 1,8OO 1,8O0
Strrt d end complet d thb perlod or0oo Greoo 6r00o 8,90O
Endlng lnvcntoly.....o.......-...o......... 2,00o 21000 5oo 500
Spollcd unltr.......-.,..-......-........... 100 100 roo 100
Total rqulvalent unltr ,POo I,OOO 9r3OO 9r3OO

n Cott rddcd durlng lhc currcnt perlod dhlded by thc number of cquivalent unlb of cogt added
durlng trr curront pcrlod

l2l Work in Process-Finishing Departmeflt..'.'......... l8rooo

FactoryOverheadGontrol..o........'....'-.-.......r.-...... 81o
Work in Process-FabricatingDepartment.. 18'810

41r68O
FinishgdGoodstnventory'...........,.....o.......r..........
Spoiled Goods lnventory..'......'.'..o.......r.-......-'.--.r l OO
Factory Overhead Contro|.............. 32O
Work in Process-Finishing Department..-... 42r1OO
 Chapter 7 -
172

P7-7 APPENDD(.
(f l )OO(ChemicalComPanY
DlstillaUonDepartment
Cost of ProdustionReport
ForJune

QuanUty tlchcdub
, M8tortlb l^rbor overhced QuenUty
Beglnnlng lnvcntory.i 1OO% z0.h 20% a,000
Stlrtod thlr pcrlod 1Or00o
20r0OO
Tranrfcrrcd to Rcflnlng Dcpertmtnt . 1{,00o
EndIng Invcntory...,.-*,.-- 1OOV. 80% 80% 2'OOO
l-ot In pnocclr 4,OOO
20,OOO

Coet Charged to Departmcnt Total Equlmlent Unlt

Beglnnlng Inventory: Cost Unltrr Costs'
Matedalr 3 3,824
Labor 90
480
Total coct h beglnnlng lnvcntorY t 4,200
Coct addcd durlng currrnt parlod:
Materlalr sto,8oo 12,ooo 3 ,eO
Labor 1/480 14r8OO .lO i
Factory 7,4OO l4r8OO 50
Total cort addcd durlng currcnt perlod..,,.-.......- 31e1680
Total coot chargcd to dcparbncnt 323,880 $'t.50
 Chapter 7 173

P7-T APPENDIX(Gontinued)
t

Cogt Accountad for ar Followz Unltr Current 7r Unlt Cost Total Cost
Transferrcd to Refl nlng Departnrenb
From bcginning lnventory ......* 94,2OO
Cogt to completa thle perlod:
labor 4'000 BOV. S .10 32O
Factoty overhead........ 4,OOO AOoh .50 1,600 S 6,120
Startsd rnd complstod this period 1O,OOO lOOo/. S1.SO 15,OOO
Total coet transferrsd to Refinlng Department SC1)12O
Work In Proce!1, cndlng Invcntory:
Materlalg 2,OOO l00o/c $ .eO 31,800
Labor 2'000 8Oo/o .10 180
Factory overhead 2,000 Sooh ,50 go! 2,78'0
Total cmt accounted for ..........-..-... 323,880

' Number of equivalent

unlts of cost added during tfie current period determined as tollows:

Materials Labor Overhead

To completebeginninginventory 0 3,200 3,200
Started and completed thts period 1O,OOO IO'OOO IO,OOO
Endlng Inventory 2,OOO lr8OO lrgoo
Total equlvalent unlts .,o..,..,..r 12,OOO 14,800 14"SOO
: :
- Cost added during
the current period divided by the number of eguivalent units of cost added
durlig the current period
t71 Chapter 7

P7-7 APPENDTX
(Continuedl

)OO(ChemicalCompany
RefiningDepartment
Gost of ProductlonReport
For June
QuanUty Schcdulc Matcrblr Labor olrefiead QuanttY
BeglnnlngInventory lOO% 50% iOV. 2'OOO
Bccolved from DlcUllaUon Dcpartment 1a,0oo
:_6,0Og
Trangferred to Flnlghed Goodr lnventory 12'OOO
EndIn g lnventory........-...'ar-......D'-.. 100.h 30ra 30'h 2,ooo
lost In procest 2rOOO
ll'o9.9
Cost Charged to Departmcnt Total Equlvalont UnR
Beginnlng lnventory: Cct Unltr' Cocti'
Coct f rom preccdlng departrnent..,..-............-.-.-.-.--6. I S'SOO
Materlals 240
Labor too
Factory overhead........'.....,.. 9oo
Total coct ln bcolnning InventorY 3 a,8oo
Cost added during curont pcrlod:
Cost lrom precedlng department............... . SZtrtZO 12'O0O 31.7C
Materla lr .......,............ 1,Ua 12,OOO .12
Labor 1,740 1l,600 .15
Factory ovcrhead ..... 1O,t'4 O 1l,600 .9o
Total cost added during currcnt prrlod.--- SSarTaO
Total cost charged to deparbnent 339,540 t2.03

Cost Accounted lor ar Follorw Unltr Current % Unlt Cost Total Gogt
Transferredto FinlshcdGooda:
From beginningInventorlf.....,.... $4,80O
Cost to completethls perlod:
[abor 2'000 5ot/o 3 .15 15O
Factory ovsrficad..-,-. 2,OoO 50% '90 g0O 3 5'850
Started and completed thia pedod 1O,O0O lOO'/t 92.93 20,300
Total coat transferrcd to Flnlshcd
Goodr 335,150
Work In Procest, andlng Inventory:
Cost from precedlng department 2,000 'l00ch 31.76 33,520
Materlalr 2,O0O 1OO.h .12 24O
[abor.... 2,000 30ch .15 90
Factory overhead 2,OOO 3}oh .9O 54O 4'390
Total cost accounted tor .............,..-. 939,540
QEpterT 175

P7-7 APPENDIX(Concluded)
I Xum,brr of equlvalcnt unttr of cot rddcd durlng thc currcnt prrlod dctcrmlncd er lollorrr:

Hor
DcpL Cot Hatcrbb Lebor otrcrhced
To complrta bcglnnhg hvcntory - O O I'0OO I'OOO
tltlrtrd end completod $b perbd lO,OOO lO'OOO 10'OOO 1O'OOO
Endlng 2,000 aooo ooo Goo
Totrl rsulvalentunltr...................,12'999 i2'999 _11'099 l_1499
.l Cort rddcd durlng thr currrnt pcrfod dlvHcd by thr numbor of rqulvalcnt unltr of cort eddcd
durlng llrr currcnt porlod

121 Workin Procegg-Refinlng DepartmeJlt,.......,.,.... 21r12o

Work in Process-Distillation Dopartment... 21,120

Finishgd Goods 1nvOntoryo....o...r...............'......D...o 351150

Work in Process-Refining Departmeflt.,.,... 35r15O
t76 Chapter7

CASES
goal at Star
C7-1 Although improvement in product quality was clearly a stated
Disk Corporatlon, the company's reward structure suggests otherwise.
Employees cannot be expected to put quality first if rewards are dis'
pensed for achieving obiectives that are often in conflict with quality
improvement (i.e., short-run production volume goals). The quality
improvemgnt itto* seems to have been focused solely on manufacturing
aciivity, and the approach taken seems to have been to improve quality
by inspecting it into the product. Such an approach is inadequate,
blcause it waits too late in the pnocess(i.e., after costs have been
incuped in manufacturing defective prcducts, instead of before) and
focuses on only one piece of the problem rather than the whole problem.
In order to turn the problem anound,top management must become
actively involved. The reward structure should be changed to ensune
compatibility with quality goals. Quality teams that include employees
from all business functions (product design as well as manufacturing)
and all levels (labor as well as management)should be created to help
identify quality problems and find ways to solve the identified problems.
Top management should actively participate in these teams in order to
emphasize the importance of quality,coordinate efforts between organi'
zation units, and provide direction. Employeesare more likely to become
motivated when they understandthe importance of qualitg and top man-
agement participation and leadershipunderscore that importance. In
addition, alt employees must refocus their efforts on serving their
respective customers. The data presented in the case suggest that man-
agers frpm the different departments put all their attention on meeting
production volume goals rather than on meeting the needs of their cus-
tomers (i.e.,the department receivingtheir output).
Atthough product inspection should be continued, emphasis should
be shifted to preventing poor quality rather than detecting it. Prevention
should start with product design and extend throughout the entire manu-
facturing process. Some things to be considered include:
(al reducing the number of parts required in the product;
(bl using higher quality materials;
(c) using standardized parts;
( d ) u si n g w e l l -kn o w n p ro ductiontechnologieswher e possible;
(e) minimizing retoolings;
(0 increasing employee training;
(g) reorganizingthe manufacturingfacility from production depart-
ments to manufacturing cells to promote teamwork and decrease
inventory costs;
(h) upgrading or modifying machinery;
(i) installing a statistical process control system to monitor production
q u a l i ty a n d re d u ce p roductionvar iability.
Chaptor7 t77

C7-1 (Concluded)

A few of the biggest and most urgent problems should be identified

and tackled. In order to achieve results, effort should be concentrated on
a lew costly problems that can be solved. Tackling too many problems
results in dispersed efforG and little observable accomplishment.
lmproving guality takes time and never ends. The company and its
employees need some successes to build confidence and create the
momentum needed to turn the quality problem around.

C7-2 Product cost may be increasing as a result of an increasing amount of

scrap, spoilage, and rework. Since the costs of these internal failures are
not measured, management cannot evaluate the significance of the prob-
lem. In addition, since these costs are not measured, employees have no
incentive to reduce or eliminate them. Treating scrapr spoilage, and
rework as a norrnal production cost encourages such waste. As a conse-
quence, overall costs rise. The company's cost accountants should
develop a system of determining the cost of scrap, spoilage, and rework;
implement the system 0.e., begin measuring such costs); and repod
these costs to responsiblemanagers. lf the cost of scrap, spoilage,and
rework is high, management should initiate a guality improvement pro-
gram that concentrates on preventing these internal failures. This may
involve organizing employee quality teams to identify problems and
develop solutions, locating new vendors to obtain higher quality materi-
als, redesigning products to improve quality, modifying or upgrading
manufacturing machinery,training or retraining employees, andlor reor-
ganizingthe production processes.
 CHAPTER8
DISCUSSIONQUESTIONS
Og-1. Joint products represenl lwo or more produds
sepaiatedin the courseol the same processing
operation,with each produci having such rela-
live vatuethat no one produd can be designated
as a maiorProdud.
A by-productis relativelyminor in lerms of
torat vaiue and is derived incidsntallyftom lhe
productionor manufac'ture ol onE or more maior
Producls.
O8-2. Revenue from the sale ol by'producls may be
listed as olhet incoms,addilionalsales revenue.
a deductionfrom the cost ol goods sold of the
main product. or as a deduaion from the cost of
produclionof the main Product-
O8-3. Yes, when by'produclrevenueis deducledfrom
the total productioncost ol ths main product'lhe
unit cost of the main productis reduced;conse'
q u e n t l y ,t h e c o s t o f t h e e n d i n g i n v e n t o r y
changesalso.
O8-4. The r€placementcost methodcan be used in
such cases. In this method,the by'ptoduclsthat
go into makingother unils are valuEdat ths cost
the companywould have to pay il it wete to 90
out on the marketand purchasesuch materials'
O8-5. (a) Ths treatment described tor by'products
may be justitied when, relative to main
products,the revenuegeneratedby lhe
by-produclis insQnilicant;when no clearly
d e l i n e d b a s i s o l i d e n t i f y i n gb y ' p r o d u c t
cosls oxist: or whsn the cosl of more
relinedaccountingwould be disproportion-
ato to lho benelitsteceived.
( b ) T h e t r e a t m e n ld e s c r i b e dh a s s e v e r a l
shortcomings.All gross profil is ascribed
lo maior productsand is incorrscl as a
measure of total gross profit, since the
i n v e n l o r i e so f b y - p r o d u c t st h a t m a y b e
unsoldat the end ol the periodwill have a
zero value. Failureto assign valueslo by'
productsmay well mean lhey are not rsc-
ognizedas inventorissat all. This' in turn.
could lead to their wasls, lheft, or other
mishandling.ll by-productsare sold irregu-
larly and invenloriesare albwed to accu'
mulate,bolh a materialunderstatemontot
invenloriesand a distorlionol reportednet
incomeof suqcessiveperiodsmay rssun.
Q B - 6 .Y e s , s o m e o f l h e i n i t i a lm a n u l a c t u r i n gc o s l s ,
additionalmanufacturing costs (when by'ptod'
ucls aro lurtherprocessedalter separation), and
p e r h a p se v e n m a r k e t i n ga n d a d m i n i s t r a l i v e
expensssmay be chargedto lhe by'produds.
O8-7. Methodsfor allocatingthe total ioint produdion
cosl to joint productsare:
(a) Allocate the pint oost on the basis of the
relative market value of lhe pint producls.
(b) Allocatethe Fint cosl by using an .werage
unit cosl obtained by dMding the tolal joint
manulacturingcost by lhc total number of
units produced.
( c ) A l l o c a t et h e j o i n t c o s l o n t h e b a s i s o l
weight factors such as size' ditficulty ol
manufaciure,ot amount ol materialsused.
(d) Atlocatethe joint cost on the basis of some
u n i t o f m e a s u t e m e n ts u c h a s P o u n d s ,
lons, or gallons. ll lhe ioint products are
mt measuredin the same way' they musl
be converted to I denominator thal is
common to all the unils Produced.
O 8 - 8 .T h e m a r k e t v a l u e m e t h o d c o n s i d e r s t h e
revenuegroducing ability of lhe ioint produds by
assumingthat each shouH be valued according
to ils cost absorptionability. Resulling invenlory
@sts are in harmonywilh revenue producing
abitity and, il the combined joint producls are
profitable,the market value method avoirJsallo-
cating more cosl lo a producl than hs revenue;
thus achieving a neutral elfect. However, this
method may be diflicult to apply if the matket
value al the splitofl point is nol known.
The averageunit cost method,while simplelo
apply when unils are measursd in liks tsrms'
lails to considerthe heterogeneousnatureof tho
individualProducts.
O8-9. Joint costs musl be allocatedto ioint producls
when lhere is invsnloryto be costed.
O8-10. Not exaaly. A new manufadurerwould do well
lo consullthe InternalRevenueServiceaboul
the methodsto be used, so that an IRS agent
can make a decisbn beforethe tax rslutn is pro'
p a r e d . l n o t h e r c a s e s ,w h e r e a n a l l o c a t i o n
method has been apdied consistentlylrom year
to year, to apply for a ruling would not be good
$ralegY.
O8-11. The methodused in cabulatingunil costs pro'
ducesthe same unhcostlor all gradesof lumber
sold. The owner is then led to bolieve thal lhe
same cosls in the sams ratio are attributableto
the low as well as the highgradenumber.
h must also be recognizedthat becauseof lhe
inhotentnalureol thE materialsand the milling
promss, il is not possibleto eliminatelow grade
number. Thus, the profitabilityof the oPeration
can be viewed best by consideringthe aggre-
gale ol tovonue and costs of both the high and
low gradesol lumber,coupledwith conttolsto
assurethat all practicalstsps are laken to obtain
high quality logs and to mill them properly.A
 I

I
I CtuptorB 179

highor prbo lor bgr rf,y b ,utttti.d h tonrr of of h. docitixr. Uaualty, stly co.ts bcywtd thr
r gnclrr erncrnl of ltigh grradolumbor' lplldl ero rebvanl

L 6-1?4 Fq debi'rcrt nnoh,itrg,iinl ab ero inolovanl

rnlo{ thoy arc rlgrslcd b changc !| t r..ui

I
|}
 Chapter I

PGRGISES

E8-l (f l Net revenuo method:

Grogsngvenuolrom sale of by-product.............. $2O,OOO
Productloncogt aftgr soparatioll.......'.............r.. 5,OOO
Ngt rgvgnuefilm sale of by-product'................. glg,ogg
(21 Market yalue (reversalcost) method:
Final market valua $2o,ooo
Less: Profit ($eOrOOOr lOTo)........... $2,ooo
MarkeUngandadministraUveerpetlsos... 2'OOO
Prpductlon cost aftor 8oparaUoJl.............. 5'OOO I,OOO
Jolnt cost allocatedto the by-produGt......'......... s11,OOO

E8-2

(1) Calculation of manufacturing cost betono separation for by-products,

By-Product
A B
Sales. r.............. $61000 $3r5oo

Manufacturing cost gftgr separatioJ|..............,...,....... $trlOo S 9Oo

Marketing and administrafive oxpenses..........,.......... 75O 55O
Profit allowance (A, l5%i B, 12oh1..........,........,,.......r. 9OO 42O
$2,750 $1,87O
Manufacturing cost beforg separation,.......,...r..,..o..,. S3r25O 9I'639
L

I
It' Chapter I t8l

\
E8-2 (Concfuded)

t2l LOGANCOMPAI{Y
I
\>
lncome Statement
For Month EndedApril 3O
II

! Main By-Product
Product A Total
- SalgS ir............r.r.rr..........rrrr.r.....r....r..... $zs,ooo s6,0oo s3,500sg4,soo
Cost of goods sold:
Before separation (requirement (1)). s32,620 s3,250 51,630 s37,5oo
Aftgr se paratiort...,..................,.,.....,1 1,5OO 1,100 9 0 O 13 ,500
s44,12O $4,350 $2,530 $51,000
b
GrOSS p rOfit ....'..............r.................r...... $30,880 $1,650 $ 97O s33,5oo
Less marketingand administrative
gxpgnsgs r............,....r........r,..,.....,....r. 6,000 750 550 7,300
t

S24,ggq
Profit from operationS..........,.........,....r.. s 900 $ 420 s26,200

E8-3 Apportlonmentof
Market Value Joint Production
Product at Split-Off Gost'
tt,
Ul rrrrrrrrrrrr
\t
...........r.. $ 8O,OO0 s 64,000
,4............ 6O,OOO 48,OOO
Y
,
I r a. aaaaar a..a....aaa...r .a
aa .aaa.r.r.aarr..aat 40,OO0 32,000
G rrrerrrorrroaaaaaaaaaaaaaaraaaaaaraaaaaaaaaataaaaarrarrataa,
20,000 16,000
?aaal
I V rCtl orrreo...........r.. ,r..r.... s200,000 $160,000
'9Ln9,00O.
= goo/o
s200,000
E8'4 z : M a rke t va l u g p g r u n tt...r .........,,..,...........,,,.........r ,. $ 6,00
Gross profit, consisting of:
Op e ra ti n gp ro fi t....r......,.. .........,...,...... 31,OO
Ma rke U n g a n d a d ministr ativeexpenses.o.......... 1.OO 2.AO
\ $ 4.00
Further processing cost 2.OO
Value per unit of by-product at split-off.............. $ 2.00
Value of by-product to be credited to joint cost
(2 ,OOO u n i ts x 5 2 )
91'009
r
I
I

Chagter 8
ta
I

E8-4 (Goncludedl
X and Y:
Apportion-
Uttlmate ment ot
Martet Processing Hy?o-
Uttimate Cost theUcal Joint
Valuc
por Units Martet After Markot Production
Value Spllt-Off Value Cost'
Product UnR Produced
318O,OOO $ 4O,OOO $l2o,ooo $ 8O,OOO
x $eo IrOOO
l20,ooo 18O,OOO
Y 25 I O,OOO 25O,OOO 7O,OOO
s4lO,O{)q sllO,OOO- sstoo,ooo $2oorooo'r

' Ratioto allocatecostpriorto separauon:19'999 = 3

$3OO'OOO 3
..$2O4,OOO value of credit for by-producl
cumulatlvefoint cost less $4'OOO

E8-5
Ultlmate Apportion-
{1 } Hypo- ment ol
Mar|cet Processing
Value Ultimate Gost thetical Joint
por Units Market After Market Production
Unit Produced Value Split-Off Value Cost
Product
E $4.3o 3OTOOO $129,OOO $3O,OOO $ 99,OOO $ 6 6 , 0 0 0 '
5O,OOO 2{,OOO 75,0OO
s 6.OO 1 5 ,OOO 99,OOO
5l,ooo 34,OOO
c 6.OO 1 3 ,OOO 78,0OO 27 |OOO
Total 33O8,OOO 991'o09 s225,OOO $15O,OOO

'$15O,OOO r 213= 966'000

2/3; $99,OOO
+ SZ2S'OOO=

Differentlalrevenue(t5rooox ($6.60'$5'25)1"""""""""'t"" $20,25O

l2l 24rOOO
Diffgfgntial COSI...............r..........o....r..r........ttrttt""""""tt'tt"t'

Net eflgct of sgparable processing .""""o""""t $(3,7sO)

the
Conctusion: Based on tho Information given, S should be sold at
split-oft poinL

CGA-Ganada(adapted).Reprint with permission'

f

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I ClvpterS t83
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 ___ __--t\

Chwter I
,u

E8-o(Conctudedi
Product
t2l A B c
Diffgrgntialrevgnueper unit ....,""""""""""""""""' 900 $rs $zs
Differentialcost Per unit:
$25rOOO * 1rO0O............r............r.........................25
360TOOO + 31O0O..r...........r.........r....o....r................ 20
+ 5rOOO.............,............,..,.....................
Sl O5TOOO
27
$1s $ (5) s 4

Conctusion: Only product Bts differential cost exceeds its differential

revenue. Therefore, only product B should be sold at the split-off point.

(3) Yes, because the short-run impact ol further processing of B is then:

Differgntial rcvgnu€................r.........-. $rs

Differential cost: ($60,000- $18rOO0) + 3'OOO...'.""" 14
Bgngfit to furthgr processin$.........,...............'.o""""' _$ r

(ln the long-run decision to invest in the capacity (facilities)needed to

iurther process B, the fixed cost should, of course, be considered.)

(4) No. From part (31, the benefit of further processing is 91 for each of the
-or
3,ooo units of b, $g,OOO.But that must be compared with the benefit
of the alternative use of facilities, $6,000 - $1,OOO= $5'O0Oof short-run
benefit. So it is better in the short-run to selt B at split'off and devote the
facilities (the ones that woutd have been used to do B's further process'
ing) to their alternative use.

CGA-Canada(adapted).Reprint with permission'

E8-7 (1) Average unit cost method:

ooT;*.1:ilf""t Total
units H:,'ffil: Production
Product Produced ProductionCost Split-Off Cost
A 3,OOO $ 30,ooo $ 2o,ooo $ 5o,ooo
B 4,OOO 4O,OOO 3O,OOO 7O,OOO
c 3,OOO 3O,OOO 5O,OOO 8O,OOO
Total sl oo,ooo sl oo,ooo s2oo,ooo
 ChagterB 185

E8-l (concluded)
(21 Marketvaluemethod:
Apportion-
Processing Hypo- ment of
Ultimate Gost thetical Joint Total
Market After Market Production Production
Product Value Split-Off Value Cost Gost
A I 60,000 $ 2o,ooo s 4O,OOO $ 25,OO0' s 45,ooo
11O,OOO 3O,OOO 8O,OOO SOTOOO 8O,OOO
c 9O,OOO 5OTOOO 4O,OOO 25,OOO 75rOOO
Total..... $26q999 s1g9'oog $169,009 sloo,ooo 9?oo,00g
'
$l oorooo* $160,000
= .6zsi$4o,ooox .625= $25,ooo
E8-8
(1) Average unit cost method:

Units Joint Cost Joint

Product Produced Per Unit Cost
K 5,OOO s1.40 s 7,OOO
L 2O,OOO 1.40 28,OOO
M 15,00O 1.40 21,OOO
N 1O,OOO 1.40 14,OOO
_so,o99 s?o,ooo
'
tr|ffi =$1.4o
Joint cost
Total number of units produced per unit

(21 The weighted averagemethod:

Joint
Cost
Per
Units Weighted Weighted Joint
Product Produced x points = Units x Unit' Cost
K 5,OOO 3.0 15,OOO $.so
L
I 7,5oo
2O,OOO 2.O 4O,OOO .50 2O,00o
M 15,0O0 4.O 6O,OOO .50 3O,000
N l O,OOO 2.5 25,OOO .50 12,5O0
14O,OOO $7O,OOo
Joint cost $70.ooo =
Total number of weighteOunits iAopoo S'5o Perweightedunit
 )

Chapter I
186
l

E8-8 (Concludedf

(31 Ttre market value method:

Ultlmate
Market Processing Hy?o-
Value UlUmate Cost thetical Joint
per Units Market After Market Cost
Product Unit Produced Value Split-Off Value Allocation
K s5.50 . SrOOO $ z7,soo $ 1,5OO $ 2o,ooo $18,2OO
L 1.60 2o,ooo 321000 3,OOO 29,OOO 2Or3OO
M 1.50 15,Ooo 22r5OO 2,500 - 20,0O0 l4,oo0
lf 3.OO l O,OOO 30,0oo 5,0oo 25,OO0 17,50O
st t 2.ooo sl2,ooo sl oo'ooo $7o,ooo

Joint cost - $7o'ooo - .7o = Tooh

Hypothetlcal market value $1OO,OOO

E8-g Materials cost:

Matsrlalr Materlalt
Cost pcr Total Cost por
Welghted Welghted Materialg Product Product
product Unlt r Polnta = Unltr Unlt = Coat Unltg Unlt
x lo,ooo 3 30TOOO 32 360,OoO 1O,OOO $6
Y 8,0oo 2 16,00O 2 32,000 8,000 4

40,OOO 392,O00

Gonversioncost
Converslon Converaion
Coct par Total Cogt per
Welghted Wclghtod Convcrrlon Product Product
Product Unlt r Polntr = Unltt Unlt Cort + Unltr = Unlt

x topoo 6 50,OOO 31.5o 3 75,000 1O,O00 37.5o

Y 8,000 1 32,OOO 150 48,O00 8,00o 6.00
82,OOO 3123,O0O
 CtnpterE 187

PROBLEMS
I

P8-t
' (ll Averageunit cost method:
-
Apportionmont Processing Total
Units (kgl of Joint Cost After Production
Product Produced ProductionCost Split-Off Cost
, B. 1OO0O S2O5,OOOr $ 58O,OOO $ 845,OOO
c f o 0oo 2o5,ooo 72qooo 985,OOO
Tot81..,.... 20 00O $53O,OOO slr3OOrOOO gl,83g,ogg
'Jolnt cost of $59O,0OO less $€O,OOO by-product credit ($f S r 4 OOokg) =
SS3O,OOq $S3O,OOQ + 20 OOO kg = $26.5Oper unig $28.50 r 1OOOOkg =
$265,00O.
TotalProduction Units in Finished FinishedGoods
Product Gost per Unit GoodsInventoly Inyentory
B $84.50 I OOOkg $ B4,SOO
c 98.50 5OO 49,250
9193,?sg
(21 Market value mothod:
Apportion-
Processing Hypo- ment of
Ultimate Cost theticat Joint Total
Market After Market production production
Product Value Split-Off Value Gost Cost
B $1,300,ooo $ 580,ooo $ 72o,0oo $318,000 $ 898,OOO
c 1,2OO,OOO 720rO0O 4go,ooo 2l2,ooo 932'OOO
Total...-.-.
$2Ego,ogg 91,3og,ogg$tggg,oog $sgo,ooor$t,B3o,ooo
r Joint cost loss by-product credit * $1,2OO1OOO
SS3O,OOO = .4417; .441T x
$72OrOoO= $318,ro24= 8ppnoximatelyS3l8rOoO; .4417 x $ego,o6o =
$21 2r0i O = approrimately $Zi 2,OOO.
Total Production Cost of
Produst cost per unit Units sold Goods Sold
B agg^Bo , ooo kg $ 8og"?oo
c 93.20 e 5oo 885;4OO
$1,693,6o0
 {
\

tffi Chapter I

P&l (Concluded)
(31 Neitherthe marketvaluEmethod nor averageunit cost method of allo-
catingjoint cost is a more accurateway of determiningioint product
costs. Joint cost, becauseof its nature,cannot be accuratelysplit up
amongioint products,sincs joint cost is incurredto producs ono or all of
the ioint products.That is, ioint cost cannot be reducedby dropping one
of the products.Thus, to make decisionsabout joint productionrone
must look at the revenueand separablecost of each product to deter-
mine whether it ls profitableon the margin.In such decislonsrfoint cost
ls not relevant.The only purposefor allocatingioint costs is to determine
a cost for inventorieson the balancesheet and for cost of goods sold on
the income statement.
For financialstatementpurposes,in most situationsrbetter argu-
ments can be madefor a value-basedallocationbasis rather than a
physically-basedone. At times, the physicalbase can result in absurd
allocationsof costs amongproductsbecauseof the disproportionate
relationshipbetweenthe relativevalue of the joint product and the units
produced,relativeto other ioint products.
ChaptorB 189

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 '_
\
\

190 Chapter 8

P8-3

(rl Ultimate
Market Processing Hypo-
Value Gost thetical Joint
per Units Market After Market Cost
Product Unit Producedl Value Spllt-Oft Value Allocation3
Alp h a . . . . . . $ 5 46,2OO t$zgt,ooo1$ 38'OOO slgs,Ooo $ 44,4OO
t 15ro6oer 23r66O
Gamma'.. 12 4O,OOO 4SOrOOO 1651000 315,OOO 75,600
Tota1......... s726.66O $220,O60 S5OO,OOO $l2O'OOO

rDiagramof Flow of Pounds(not raquiredl $23,660 Alpha

$?8,OOO (41 46,200 pounds
(2) 66,00Opounds
Beta
l9,8OOpounds
$120,OOO
( 1 1 1 1 O,OOOpounds

$ l 6 5 ,OOO Gamma
(3144,OOOPounds
-4'OOOPoundslost
_4O'OOOpounds'

'Computationof poundsof good output of Gamma:

LetX=loodoutput
4 4 , O O-O
.lX =X
{o,ooo =X
zMarket value of Beta (19r80o pounds x $1.2O|...r,................. s23,76O
Less marketing expense of Beta ....r.........."......-...............'... 8,1OO
Ngt rgalizablg ValUe Of Bgta.'....r..............o.....o.........'..r.r......ro $15,660

sThe joint cost is 24oh of the hypothetical market value.

 Chapter I t9l

P8-? (Concluded)
(2'1 BROOKSCORPORATION
Statement of Gross Profit for Alpha
SalgS (38r4O0 poUndS X $5) ...,.r..........r.............'.........r..,. s192,OoO
Productloncosts:
Allocatedjoint cost t a. a ra aa ra a aa a a aaa.a a sl 02,ooo
38,O0O
23,660
Grosscost of productlon s163,660
Lessnet realizablevalue of Beta l5r gOOr
$147,760
Ngt cOSt Of prOduCtlOIl....'..'.......'.....ro.....,.........r.........'...r
Less gnding 2gr552t
inventory.....r.,...............,...........r.,,..............
Cost of goods so1d...........rr.r........ ................,..., 118,208
GfOSS prOfit.'..r..rrr...r.........'..r................r..........r...........rr. s 73,792
'Net realizablevalue of Beta equals the revenue fnom Beta (S24,OOO)
less its
related marketing expense t$erf OO).
nEnding inventoryeguals the net cost of production (S147,760)times 2O%.

P8-4

(11 Jana Reta Total

Sa|es..................... $2OO,OOO $3OO,OOO S50O,0OO
Cost of goods sold:
Joint cost ($236,000- Bynd net revenue
($l1,OOO- $5,000 separablecost))..,. $23O,000
Separable cost ($215,0OO- $5,OOOfor
Bynd) ...rr.......r................. 21O,OOO 2.1O,00O
Total cost ..........r.r....e...rrr............. s44O,OOO
Gross profit (12% of sales).......,o,..... $ 60,000

(21 Total Jana Reta

Ultimate sales va1ue.....,..,r..r.. $5OO,OOO S2OO,OOO$3OO,O0O
Less 72oh gross protit .........t..,....., 6O,OOO 24|AOO 36,000
Total cost..,.................... $44O,OOO $t76,OOO $264,0O0
Separablecost ...................... 21O,OOO 21O,OOO
Joint cost allocation...... $23O,OOO 9176,000 $ S4,OOO

(31 Gross profit for Jana and Reta-see line 2 of requirement (2),
t.
192 Chapter I

P8-5
(ll Ultimate Apportion-
Market Processing HYPo- ment of
Value Uhimate Cost thetical Joint
per units Market After Market Produetion
Product Unit Produced Value Split-Off Value Cost'
spr--g 3o.oo Too,ooo S2,8OO,OOO $ 874,000 $1,926'000 $ 960'000*
psT-4 6.00 35O,OOO 2rlO0rooo 816,000 lr281rO0O 640'000
$4,9OO,0O9
9!,690,009 99,2lO,OOO9!,8OO,OOO
'Joint productioncost ............ $l rTO2rOOO
Less cost assignedto by-Product
RJ-s (f TOrOOOgallonsr (S.7O*S.1O)!....-..... 1O2'OOO
$1,8oo,ooo
"(51,926,000+ s3r2lO,OOOl
rsl,6OO,dOO= $960'000
l2l sPL€ PST-4 RJ-s
$ g6OrOOO $
Jointcosta1toc3tion..................r............ 6401000 $lO2,OOO
Additionalprocessingcost.........r,.......... 8741000 81qr090
Total cost $1,83{,OO0 $1,456,000 $lO2,OOO
Dividedby galtons produced.......,........., TOOIOOO 35OrOOO lTO,OOO
Cost per gallon.... s2.62
: : : :
$4.16 $.go
lnventory costing:
November I inventory (gatlonS)....... l8rOOO 52'OOO 3'OOO
November production 700,ooo 35o,o0o 17o,ooo
7t8,OOO 4O2,OOO t73,OOO
Novembersales 650,000 325,OO0 15O,OOO
November 30 inventoil[.................... 68,000 77rOOO 23rOOO
Cost per ga||on...o.......,.,.................. $2.62 $4.16 $.OO
Cost assigned to November 30
finished goods inventory....,...,.... 9._!-Z91169 $ 32or32o $ l3'8o9

(31 Per gallon sales value beyond the split-off point.,.... $6.00
Per gallon sales value at the split-off point.......,...... 3.8o
--
Diffgrontial salgs value .r......,.........r..r...r.....r,............ 52.20
Additional processing cost per gallon
(S816rOoO+ 35O'OOOgallons).....................r.......... 2.33
Per gallon gain (loss! of turther processinft.............. l_!:!31
Alderon lndustries should selt PST-4at the split-off point, as the difforential
novenueof the sales beyond the split-off point is less than the additional
cost of further processing.
 -T

ChaptorI 193

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 ChapterI
194

P8-O(Continued)

Additional GomPutations:
EquivalentProduction: Labor and Factory Overhead
Process 2 Process 3
oUt "i"""""'r""""""'o"""""r"""""'
9,OOOunits 20'000 units
Transfgffed 'l,000 1,000
Ending inventory (work this period)""""""""""
1O,0OO units 21,OOOunits
Unit costs:
s58,OOO = $1.8125Per unlt
Matgrials,Process1............'...."""""""""" 32,OOO
$30,000 = $ .9375 per unit
Labor and factory overhead,Process 1"""" 32,OOO
$ga,ooo = S2.g00OPer unlt
Totalcost to be accountedfor, Plocess 1 "" 30,ooo
+ $18'0OO=
92,0OO
Labor and factory overhead,Process2.......' $2.0000 Per unit
10,0oo
+ $60'O0O=
i3,OOO
Laborand factory overhead,Process3........ S3.0oooPer unlt
21,OOO
s27,OOO = $2.0769 Per unit
Cost from precedingdepartment, Process2 13,OOO
$74,500 = $3.2391per unit
Cost from preceding department, Process3 23,OOO

Joint cost apportionment:

Process 2 Process 3
Product Product
Salgs price ......t..........t....ttt""""1"t"rtt"t"rt""'t"tt"t""tl"
$10 $1s
Lessprocessingcost subsequentto split-off point r"""' 2 3
:
$ e -$ t e

Hypothetical market value at split'off point:

58 x 1Or00Ounits transferr€d .....'............r"""""""" $8O,ooo
S12 x 20'OOOunits transferlgd ....................""""""' 9240,009

Joint cost allocation:

SSO,OOO x .2625'. s21,OOO
S24O,OOO r .2625 s63,OOO

. S84,OOO-. (S8O,OOO
+ $24O,O00)= -2625
f- Chapter I 195

- P8-6 (Continued)
:
'"ttt?"t",:oo
+ lo,ooo units............o..
. :s2.1o
$691000 + 2o,ooounits s3.15
-

.- Transferred to finished goods storeroom:

Procgss 2.............,r.......,.............r....54.O769 x Iroo0 units = $ 361692
, Pnocess3.........................r............... $6.3864 x 2OTOOO units = S12T.T2Z,
'S6.3864 x 2O,OOO units = $1271728,To avoid a decimal discrepancy,the cost
transferred to finished goods storeroom is computed as follows: $137r5o0 -
s S9,773 cost assigned to ending inventory = 51271727.

*ot[,T":T"";:'-"noins inventory:
r
Cost from preceding department...,.. $2.0769 x 4,OOOunits = Sg,gOB
L a b o r a n d fa cto ry o ve rhead.............. S2.O0OO x l,OOOunits = S 2,OOO
- Process 3:
. Adjusted cost from preceding
. department..............,.....,...,.......,... 53.9864 x 2'OOOunits = $61723
* L a b o r a n d fa cto ry o ve rhead.............. $3.oooo x 1,ooo units = S3,OOO
.
(2t
fii:flTHllSl;:;;;;;;';':::::.::::::::.:::::::::.::::.:.
Work in Process-Process 3 ..,....
"l;BBl
O3,OOO
Work in Process-Process 1........ 8B,OOO
Finished Goods
Wo rk i n P ro ce ss-P rocess 2......,..,...,.....,r ....... 3 6,692
F i n i sh e d Go o d s......,,....... ......... 1Z7.TZ7
Work in Process-Process 3........ 12Z,TZ7
 t96 ChaotorI

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:
\-. Chapter I 197

II
I P8-6 (Continued|

Additional Computations:
E Equivalentproduction:
Labor and Factory Overhead
Process 2 Process3
!
Thanslgrrg d o ltt .................. "..r..... t.......o...t... r't.... I'OOO units 2OTOOOunits
I
Less beginning inventory (all units) r..........r........ 3,OOO 3,OOO
t- Started and finished this period........,.,..........'... 6,000 units 17,OOOunits
Add beginning inventory (work this period)........ 2,OOO 2,OOO
Add ending inventory (work this period)............. l,OOO I,OOO
I,OOO units 2O,OOOunits
Unit costs:
358,ooo = 5 1 . 8 1 2 5p e r u n i t
Matgrials, Process 1......,,......,..'r..................
32,00o
33o,ooo
l-abor and factory overhead, Process 1........ = S .9375per unit
32,00o
$€t4,ooo per uni t
= S2.8OOO
Total cost to be accounted for, Process 1 ....
3O,O0O
$18,OOO
Labor and factory overhead, Process 2........ = $2,oooo per uni t
9r0oo
36O,OoO per unit
Labor and factory overhead, Process 3........ = S.3.OOOO
20,OOO

Joint cost apportionment:

Process 2 Process 3
Product Product
Sales price ,ro,...,........,........... ..........'... slo sl5
Less pnocessingcost subsequentto split-offpoint ........ 2 3
$_g s12

Hypothetical market value at split-off point:

$8 r 1O,OOO units transferred ..... 99o,ooo
$12 r 2OrO0Ounits transferred ..,....,......,.....,,....,.r.... 9319'099
Joint cost allocation:
SSOTOOOr .2625t. ..r..,......... s2lr9oo
x .2625
S24O,OOO 99!'o99
r SB4,OOO
+ (S8O,OOO = .2625
+ S24O,OOO)
 r - l
r
I

Chapter8
tw

P8-6 (Goncluded|

Unit cost: $2.1o

$21 rooo + I Or0oo unitS .....r.......r.............r.....r.o...o'.'..
UnitS r............r...............'......,...."t'
s3.15
$6{lrOOO+ 2OTOOO
4r0oo
t4l
I ' Finished goods.............r.............r.........................
WOfk In PfOC.SS-P.OC.SS 2.,......o.....'-""""""""
21r00o
Work In Process-ProcgSg 3 """"""'t"t"""""""r 63,OOO
g!l!J I ..............t.o"r" "o"' 88,OOO
WOf k I n PfOC oSSl-PfOC

Finishgd Goods ...........f ..rrrrroIrroirr.r...............r...... 36,8OO

38,600
work In Procgss-Procesa 2................'.........r.
Finighed Goods ...........r.............,..........'.,.............727 1860
127$60
work In Procgss-ProcgsS 3......................'.....

CASES
c8-1
in pnopor-
(1) The markot valuo method of ioint cost allocation assigns cost
tion to oa;h productb markel Yaluoto all products as follows:

Market Value of Each

Product at Split-off Joint
x Production
Total Market Valueof Gost
All Products at SPlit'off
sales
lf thera ls no market valuo at split-off, then the value at the first valuo
point, tess separablecost, lg used. lf ioint products have a markot
will
at the split-off point, the margin for ail ioini products at the split-off
be the samo.
(as
The joint cost i3 altocatedin proportionto n8v€nuogensrating ability
contrastodto some quantita*re'measunesnot r€lated to rsvenue)'
Therefore,this accomplishesJim Simpsonb obiective that inventoriabls
cost shoutdbe based on each productb ability to contribute to the recov-
ery ol ioint production cosltt
Chapter I 199

C8-1 (Continued)

(21 (a) Because both main products have a market value at the split-off
point, this value, rather than the tinal sales value, is used to allocate
the ioint cost

Joint productioncost to be allocated..r.t.................. $2,640,000

Net revenuevalue of by-product(24OrOOO x (.55 -.05)) 12O,OOO
Joint cost to be allocatedto main products 93,s20,009
Percentage
Market Value at Split-off
of Total
Product Units Produced Per Unit Total Market Value
Pepco-1......,.r.r..........900r0OOgallons s2.00 s1,800,oo0 62.5o/o
Repke-3............r.,......T20rOOOgallons 1.50 I,080,0OO 37.5
s2,880,OO0 100.0%

Allocationof Joint Cost

November
Pepco-1(s2r5Z0r00O
x .625)........................... s1,575,000
x .375).,...,.......,.....o.........r....... 945,00O
Repke-3($2r52or000
SE-s............ 120,O00
a ata ara ra a aaa aaaaa a a a aa a a a a a

November ioint production cost.... 52,640,000

(b) Pepco-l Repke-3 SE-s

Allocation of joint production
cost....... .,........r..r.. s1,575,0OOs 945,000 s120,000
Additional processingcost
aftgr split-off.....................r'1,800,000 720,OOO
Total manufacturingcost......... s3,375,000 s1,665,000$120,ooo
Divide by gallonsproduced...... 90o,0oo 72O,OO0 24O,O00
Manufacturingcost per gallon. s 3.75 9_23125 g___-99
Inventorycosting:
lnventory November1 .,...... 20,000 40,000 10,000
Novemberproduction........,. 900,000 720,000 24o,ooo
Inventoryavailable..,r.o.......r 920,000 760,000 250,000
Novgmber salgs .................. 800,o0o 70o,o0o 200,000
Inventory, November 30 ...... 120,Ooo 6O,O0O 50,000
Manufacturing cost per gallon. x S3.zs x 52.3125 x $.50
Cost of finished goods
inventory :_glggfoo S13B,ZsO S25,ooO
 T

Chapter I

C8-1 (Gonctuded)

(31 WhenSE-s becomesa main product,the joint productioncost would be

altocatedproportionallyto all three productson the basisof the market
valuo of each product at the split-off point. The net revenueof SE-5 will
no longer be deductedfrom the joint productioncost prior to aflocation
becauseSE-s will no longerbe a by-product.

c8.2

Thereare a number of areasthat appearto be problematicin HayesProducts'

costingand decision-makingpnocesses. Theseareas,which are outlinedbelow,
need to be reviewedand perhaps modified.

(f l The use of the averageunit cost methodfor altocatingjoint product cost.

Units produced,althougha simplemethod of allocation,is not necessari-
ly the best method for apportioningcost acrossjoint products.This
method can distort the cost-valuerelationshipof a joint productand give
an ospeciallymisleadingpictureof the gross marginprovidedby a ioint
producl For example,assumethat in meat processingof cattle, one
producedground beef and steaks.Each pound of groundbeef would be
assignedthe same ioint cost as each poundof steak,yet the sales prices
per pound are quite different.For this reason,it is betterto use some
value-relatedallocationbase,such as the market or salesvalue method,
to allocatecost.

l2l Inclusionof all spoilagecosts in productcost. Spoilagein production

pnocessescan be assessedas normalor abnormal.Whetherspoilageis
normal(expected)or abnormal(unexpected) should guidethe way in
which spoilagecosts are handledin product costing.Normalspoilageis
part of product cost since it is plannedfor in implementatingthe produc-
tion technology.Abnormalspoilageshould be written off as a loss in the
period,and if the amountis materialor the spoilagecontinuesover some
period,the source of spoilageshouldbe found and corrected.Hayes
Productsdoes not seem to be distinguishingclearly betweennormaland
abnormalspoilage.This needsto be studied,and somechangesneedto
be madein the applicationof spoilagecoststo product.
(31 Decisionmakingbasedon fully altocatedcost. Hayesappearsto be
aboutto make a product line decisionon fully allocatedcost data with
ioint cost included.Decisionswith relationto any of the productsshould
be basedon the separablecontributionmarginof products,i.e., separa-
ble revenueless separablevariablecost.This problemneedsto be
lookedat closelysince the allocatedjoint cost figuresshouldbe used
onlyfor financialstatementpurposes.
 Chaptor I 201

cg-3 ,

(1) The market value mothod does not proviile additionaldata for the rlsr-
keUng deeision. Joint cost sllocation is necessarilyarbitrary and'
although used lor financialaccountingpurposes,ls not relevantto the
I
t-
decision to market DMZ-3 and Pestrol, The VDB joint cost is irrelevant to
this decision becauseit ls incurred in both cases, i.e.' the method of cost
altocafionhas no impact on tho differentialprofit. TalorChemical
Gompanyshould calculatethe differential prolit of its alternate choices
by comparing the differential rsvenues and diflerential costs.
L
(21 Talorb analysisis incorrsct becauseit incorporatesallocatedportions of
the joint cost of VDB.The weekly cost of VDB (3246,000)will be incurred
whether or not RllA-2 ia converted through lurther processing. Thus' any
allocation of the ioint cost of VDB is strictly arbitraty and not rslevantto
tho decision to market DMZ-3and Pestrol.Talorb decision not to
pnocessRNA-2further is incorrect The decision results in a loss of
$2O'OOO in profit per week, as indicated by the following analysis:

Revenue'fromfurther processingof RNA-2:

DMZ-$ (4OO'00Or ($57.5O+ 1OO)|,...................,.............. s23O,OOO
Pestrol (40Or00Or ($57.5O+ loO))'...'r.'...................-...... 23O,OOO
Total nBvenuof ro m fulther p rocessin 9...............r.......... s46O,OOO
L8SS ngvgnUg ffOm Sale Of RNA-2,....,......D..............o,r....... 32O,OOO
Diffgfgntial f9V9nU9...........'.........r.........'..r..r..........'. sl4 O,OOO
Differential cost' .'.'...r'.,....r........"... 12O,OOO
Diffgrgntial profit .......,......r........-........,'..'.'.,'. s 2o,ooo
'The cost of VDB is not relevant and, thus, is omitted lrom the solution.

c8-4
(11 [The requirement does not ask for a list of responsibilities Vickery has
violated, but, merely, which of the fifteen responsibilities apply to
Vickeryb situation,)
Management accountants have a responsibility to:
Comoetence: Perform their professional duties in accordance with
relevant laws, regulations, and technical standards. ffhe inventory cost
Vickery is being asked to accept violates accounting principles of con-
gervatism and of matching current cost against current revenue.)
 Chapter 8

c8-4 (Concludedl
preparo comploto and clsar reports 8nd nocommondationsafter .
appropriate analy:et of rolsvant and rsllable information. (Vickery has
coiryinclng evidence that lallure to make the adiustment will misstate the
resulting fi nanclal stataments.|

lnteoritv: Befraln from either actively or passively subverting the

attainmeFt of the organizationb legiUmateand ethical obiectives. fflrere
is prrssurc to subvart legitimateand ethical obiectives to the immediate
need for tavorablefinancial statements.|

Communicate unfavorable,ag welt ag favorable, Informatlon and

professionalfudgmentgor opinions.(Vickeryis being asked to thwart
communlcationof unfavorableinformation.)
Refrainfrom engagingIn or supportingany activity that would
discredit the profession.(Preparingdeliberatelymisleadingfinancial
statements,clearly ls a discredit to the profession')

Obiectivihn Communicateinformationfairly and objectively.

, Mckery would violate this responsibilityif the inventorywete not
restated.)
' -
Discloselutly att relevant informationthat could reasonablybe
erpected to influenco an intended userb understandingof the rtports'
comments,and nocommendationspresented.ffhis material overstate-
ment of inventoryand profit violatesthis ethical responsibility.) -

(21 In addiUonto his ethical responsibilitiesto his company,Vickery has eth-

ical responsibilitiesto:
(al the bank
(bl the companyb stockholders
(cl the managementaccountingprofession
:_
CHAPTER 9
DISCUSSIONOUESTIONS
O9-1. The mosl lreguentlyused documentsin the pro-
curemenl and use ol materials are purchasereg-
uisitions, purchase orders, receivingreports,
materials requisilions,bills ol malerials, and
malerials ledger recods.
O9-2. The invoice shouH be routed to the Accounting
Department immedidely upon receipt.A copy of
lhe purchaseorder and a copy of the receiving
report'with an inspection report should be com-
pared by lhe accountingclerK When lhe invoice
is found lo be correcl in all aspectsor has been
adjusted for errors or rejects, the accounting
clerk approves the invoice, anaches il to the
underlying documents il they are in hard-copy
lorm, and sends these documenls to another
clerk for lhe preparationof the voucher.
O 9 - 3 . I n v e n t o r i a b l ec o s l s h o u l d i n c l u d e a l l c o s t s
incrrred lo get the produc.tready for sale to lhe
customer. lt includesnot only the net purchase
prica bul also the olher associatedcosts, such
as freiThl-in,incurredup to ths lime produclsare
ready for sale to the customer.
Q9-4. No, administrationcosts are assumedto expir€
with lhe passageof time and do not anachlo the
product. Furthermore,administralivecosts do
not relale directlyto inventories,but are incursd
for the benefitof all lunciionsof the business.
O9-5. The three key questionsto anstv€rin designing
an inventorycontrolsyg€m are:
(a) how much to order-economic order
quanlity
(b) when to order-order point
(c) satetystock required
09€. The firm benefilslrom lhese techniquesby hav-
ing a crnsistenl, standardizedapproachto its
inventorymanagsment.lnventorycosts and ser-
vica lo customsrswill be optimallybalanced.
O9-7. The purpose ol an economic ordor quantily
model is to determinethe optimumquantityto
order or producewhen filling inventoryneeds.
The optimumquantilyis delined as lhat quanlity
lhal minimizssthe cost of inventorymanage-
ment.
Q9-8. The decision concerninghow much to order or
produce at a given lime involvesa compromise
belweeninventorycarryingcosts and orderingor
s o l u p c o s l s , E x a m p l e so l i n v e n t o r yc a r r y i n g
c o s t s a r e : i n t e r s s lo n t h e m o n s y i n v e s t e di n
invontoriesthat could have b€en investedelse-
where, propertytar and insurance,warehousing
or slorage, handling,deterioration,and obsoles-
cence.Orderingcosts includeths cost of prepar-
ing the requisilionand purchaseorder,receiving
lhe order, and accounlingfor lhe order.Setup
@sts involvethe costs ol seningup equipment
to make lhe actualproductionruns.For all these
203
costs, only lhose thd vary with adivity are rele-
vant lo the E@ model.
O9-9. The @nsequencos of maintaining inadequare
invenlory levels indude hi;her purcfrasing,han-
dling, and transportation costs, bss ol quantity
discounls, produclion disruptions, inllation-relat-
ed price increases when purchases are
deferred,and bst sales and customer goodwill.
Mgasursmentof the costs of lost orders and
z bst repeat business is not easy because mea-
suremenl may be largely subjective. On the
other hand, the other factors listedcan be mea-
sured with fair certaintyand grealer ease.
09-10. In computingoptimum produaion run size, CO
ropresenlsan estimaleol lhe setup cost and CU
is lhe variablemanulacluringcost per unit.
09-11. (a) The order point is the low poinr ol stock
levef that, when reached,means a replen-
ishingorder shouldbe placed.
(b) Lead time is the intervalbetweenplacingan
order and deliveryof lhe orderedgmds.
(c) Salety stodt is the minimum inventorythar
provides a cushion against reasonably
expecledmaximumdemands and against
varialionsin leadtime.
O 9 - 1 2 . M a t e r i a l sr e g u i r e m e n t sp l a n n i n g ( M R P ) i s a
compuler simulationthat integratoseach prod,
rjct'sbill ol mderials, inventoryslalus, and man-
ufacturingprocess into a feasible production
plan.
09-13. Eftectiveutilizationof capital, which inctudes
inveslmentin inventory,is the responsibility of
g e n e r a lm a n a g € m e n t ;l h e r e l o r e .t h e p r i m a r y
interestis in linancialcontrol.Atthoughgeneral
or top-levelmanagernsnlis inlerestedin provid-
ing customerswith gmd productsand services,
the schedulingof produaioninrolves unit control
primarilyand is the responsibilityof production
and purchasingdepartm€nts.
09-14. ln the control ol materials,the opposingneeds
are the mainlenanceof an inventoryol sufficient
size and diversity lor efficient operations,and
the mainlenanceof an investmenlin inventoryat
a level that will maximizeearningsand minimiza
costs.
O9-15. When a relativelyfew malerialsit€ms account
f o r a c o n s i d e r a b l ep o r l i o n o l t o t a l i n v e n t o r y
investmonl selectivecontrol is indicatod.Hbh.
value ilems would be under tight control,whilu
low-valueitems would be under simple physical
conlrols.
Automaticcontrol refers lo orderingwhen a
malerialsrecordshowsthat lhe balanceon hand
has dropped to the order point.At this time, the
q u a n l i l y t o o r d o r i s a u l o m a l i c ,h a v i n g b e e n
delerminedby balancingthe cost to order with
 (-
_\

2U Chapter 9

the cost lo catry inventory' Aulomatic control is r e c e n l p u r c h a s ep r i c e s . N e t c a s h

mosl ellective ih companieslhat use an EDP inflow is generally increasedbscause
syslem. taxable income is generally
09-16. Appendir The average cost m€lhod assumes decreased, resulting in payment of
that each batch takon ftom the slore' bwer income lax.
room is composed ol uniform quanti' O9.18. AppondixFifo. The higher costs ol the earlier
ties from each shipment in slodt at the purchases would be charyed against
dale of issue. The lilo method is based cosl of goods sold.
on the assumptionthd the firsl goods GGA-Canada (adapted).Beprint with permissbn.
received are the first issued. The lilo
method is based on the assumplion 09-19. Appendix (a) lilo
that lhi latest gds received are lhe (b) filo
lirst issued. (c) fifo
O9-17. Appendir In an inflationary economy' lifo pro' (d) lifo
v i d e s a b e t t e r m a t c h i n go l c u r r e n l (e) lifo
costs with currenl rovenue because (t) lilo
costs ol inventory issued are at mora CGA-Canada(adaptsd).Roprintwith permissbn.
- ChaPter 9 205

EXERCISES
* \
Eg-l
-
(1) Freight allocatedto materialsbased on cost
= = $- 016 Perdoltarof cost
= l=21o=
s17,5O0
PartA: $ 8,600 x S'or0 = $137.60
Part B: 5,060 x .O16 = 80.96
Part C: 3,840 x .016 = 61.44
qlzrsoo s280,oo

(21 Freight allocatedto materialsbasedon shipping weight

s280 = S.20
I 400 kilograms

Part A: 63okg x S'2O = S126

Part B: 49O x .2O = 98
Part C: 28O x .2O = .!!
1:j99kg E289

E9-2 Units
4,2OO
4,400
4,7OO
3,600
Total to be provided ...,........,....... 16,90O
Qu a n ti tyo n h a n d rS eptem ber l,..,..,....' .......' ........o' ..' 4r 4OO
On ordgrfor Septembgr dg1ivgryr....r........................'r 3r600
On ordgr for October delivery,.........,.......................... 4.1OO 12.1OO
Quantity to ordgr for Novgmbgr dgliv€]1|'................... 4.800
 I

Chapter 9
206

E9-3

(1) Forecastusage:
JanUaryttt""t""'ttt"o""t""""tt""ttt'tttt"
4,8OOunlts
February "t"t""""t""""tt"t""tot"tt"""' 5,000
March t"t""""t"t"t"t"t't't""t"ot"t"t"tt"
5,600
15,400 units
Desired March 31 inventory level
(61000 x 80%)""""""""t"t"t"r"""""t" 4,8O0
Total to bg providgd""""t""""r"""'
2O,2OOunlts
Scheduled suPPlY:
January 1 lnvgntoff """"""""o"""""r' 6,000 unlts
On orden
January delivery'.."""""""""""""' 4,1OO
February delivery'r""""'o""""""""' :l,6oo 14.700
5.5OO unlts
Quantity to order for March delivery """'

JanUary 1 inVgntOf] ..........r.....o.r...r.."........."""""'tt"tt'rt""

61000 units
l2l
On order for January and February de|ivery"""""""""""' 8.700
14r7OO units
FOfgCaStUSagg-ranuary and Fgbruar1/.'........""""""t"""' 9.800
(a) MafCh
'l
inVgntOfl ...................o..................t.tt"rtttttt"tt
4r9OO unlts
To order lor March delivery(requirement(1))""""""" 5.500
1O' 4OO units
FOfgCaSt USage-M3lch .........r.r..r...........'........r......'." 5.500
(b) MafCh 31 inVgntofy .......,..................'.......'..........t.......-4eo
units

E9-4

2 x100 x $5
(1) EOQ =
S55 x 15o/o

212,250 x$12 = fiopoo = 3oo Aiets

tzl EOQ =

1,440,000
(3)
,al
EoQ = rl =
r $25
= J5iloob- = 24O units
L
207
Chapter 9

E9-4 (Continuedl

2x25,000 r$20 l,ooorooo

(41 (a) EOQ al J 5OO,O0O
$8 x 25o/o I

= 7O7cartons
I
Annual required units = = 35 order:peryear
S (b)
Economic order quantitY ry
365 days
\- = 10.4 orevery 1O days orders should be placed
35 orders

(s) (a)

= Jl8o,ooo = 424
18J990 =
(b) 42.4sor approxlmately42 orders per year
424
365 days = 8,2 or approximately one order every 9 days
42 orders
- 540,0oo
(c) x 18'000 x S15 -
EOQ = -12
\r| $6 x 2Oo/o LN
= {450,000 = 677

x 1 8 ' 0 0 0x S 1 5 - 540,000 =
(6) (a) EOe = -j2 { 360,OOO
Y 57.50 x 2oo/o
= 600 units
. 6 A A A

(b) # OUU = 30 orders per year

lr

365 days in year 12.767 or approxinrately

=
\ 30 orders per year one order every 12 days

E^A m 54O ' OO0 E---

(c) EL'IJ = ;-= = 11,08O,0OO
Y 52.50 x 2Oo/o ;1i5-
= 1 1 0 3 9u n l ts
 I

Chapter 9
n8

E9-4 (GonUnuedl

(al EoQ =
2 x 4 8 r O O Or $ 1 O lo5-oFdd-
ftl $2O r 12Vo' lJz;lr-
632 dozen baseballs

t'4o + 1oo/oreturn on investment = 12oh

$20

(bl Annualorderingcost = $ffi = 4 8 , O O Or $1O =

$600
800

CUTCCTEOQ
Annual carrying cost = 2
$2O x 12oh r 8OO - 960

Total annual inventorycost to sell 48'OOOdozen

basgbal1s..t..t1..................rittt"""ttttt"t"t"t"t"""t"" sl.560
- r
(8) EoO = -f2 r 5t0oo $Jrooo-
V Sg r 2oo/o

^ / 6 1 2 5 O ' O O O= 2 r 5 O O c o l u m n s

2 r t 2 , O O 0r 5 1 6 384,OOO
(e) (al EOQ =
1.80
$9 r 2ooh
= 462 units
(bl The frequency of order placement:
l2roo0 annualusage =
26 ordersper Year
462 EOQ
365 days
14 days
26 orders

(cl 2r8,OOOr$16 2 5 6 , O O O- .,!Tzg,zgg

EOQ =
$9 r 22oh 1.98

36O units
ChapterI 209

E9-4 (Qoncluded)

(10) (a) EoQ =

2x500x56 =
16,00o
4 l - = 2r4OO = 49 units
$1Ox .25 Y 2.50
$61.22 + $61.25 = $122.47
5OO x $6 $ 1 0 x . 2 5 x 4 9 = total ordering and carrying cost
49 per year
(b) 49 + (49 x.10) = 54 units per order
5ot}9q . = S.5s.56
+ $6z.so= $123.06
Y
The effect is small becausethe total cost curve ls relativelyflat
aroundthe optimum level.
(11) To compare the two alternatives,the carrying cost and the production
initiation cost must be calculatedfor each alternative.These two
amounts are calculated as follows:
Carrying cost = Annual cost of carrying (2OYol x manufacturingcost
(SSO1x averageannual inventory.
Production initiation cost - Numberof runs x cost to initiate a run
(s3oo)
Current situation: 2 production runs of 3,000 units per run
Average inventory: 3,OOOunits + 2 = 1,50O units
Present costs:
Carrying cost (.2Ox $5O x 1,500)..... 51S,O0O
Production initiation cost (2 x $3OO) OOO
s15"600
Proposed situation:
The EOQ formula can be used to determine production run
quantities by substituting cost per order with production ini-
tiation cost
production quantity, x 6-'000 x 9?00
,/2 $5Ox'2
r
3,600,000 =
V360,000 = 60O units

Averageinventory: 6 O O + 2 = 3 0 O u n i t s
Numberof runs: 6,000 + 600 = 10 r uns
Proposedcosts: Carrying cost (.20 x $5O x 300)......,.....,...... E3,ooo
Production iniUation cost (1Ox $3O0) 3,OO0
s6,ooo
Expected annual savings $9,600
2t0 Chapter g

E9-5 -
(11 lzr('tzxl,5oo)rS5o
EOQ=rl-= = t';500,ooo= tin?"u
1 r.4O i3

(21 Lots ol 2,AOOunits should be ordered, based on the following computa-

tions:
QUANTITATIVEDATA
Order size a a. a.a a a a aa a aa
'11225units
aa a a a aa aaa aaa 2r00O units
Number of orders Per Year. '14.7 I
Average inventory ....r...'....'......r..................r.' 612.5 units 1,000 unlts

. COSTDATA
Gost of placingorders at $5o r..........r.....,..r.,r $ 735 $ 4so
Gost of carrying inventory:
612.5 x $3.00 x .40 ..r......r.........'....r........... 735
IrOOOx 92.85 x .4O ..............,........,............ 1,140
Discounts lost (12 x 11500x 33 x .05)..,.....,... 2r7OO
$4.170
Cost to ordgr and carry..'............r.,......r"'o..... $1,590

E9-6

(1) Orderingand carryingcosts under current policy:

(T , $3Bo)*(sr ' #) + $zso= s2,s3o

= s2,2Bo

(21 Economic order quantity and the related ordering and carrying costs:
j2 x 3'ooo t stSo
= \fm-o- = 1,5i0 units
! s l
= $zss + $755 = $1,510 related
i + # x $ 3 8 0 ) . ( t " r y ) orderingand carryingcosts
I

Chapter 9 2li

E9-6,(Concluded)

(3) George should decide to order In quantlties of 3'OOOunlts, based on the

following computations:

DATA
QUANTITATTVE
Order si2g.,............r.....r.....r...r.....r......o......'... 1r510 unlts 3,000 unlts
Numbgr of orders pgr year.....,..........'........'... 1.9868 I
,Averageinventory....................o........r..r......... 755 unlts 1,50Ounlts

COSTDATA
Cost of ptaclng orders at $380 '...'...o.............
$ 755 $ 380
Gost of carrying inventory:
$1 x755...........o...r..........tt.'tr..r.rr.t...t.t....... 755
($f - S.05) x 1r500......'.......t....'o...............or 11425
Discount lost (31000x $5 x .05).................,..o. 750
Gost to ordgr and carryr.o........................r......
$2r260 $1,8 05

CGA€anada (adapted). Reprint with permission.

E9-7 91600 + 24O = 4O units daity usage

Normal lead time usage(2Odays x 4O unlts)...,..................,.... 800
Safety stock ((30 days- 2O days)x 4O unlts)..........,i.o............. 400
Ordgr point.......i...............,.........r..r.....,........................,r......... Le99
E9-8

(1) Ma xi mu mu se p e rd a y................,.........,.,o- ....

6OO unlts
NOrmal usg PgrdS!...'.............r.....................r500
Safety stock (maximum)..........................r.r.... i6-O unlts x 5 days of lgad
tlme = 50O unlts

(21 2,500 unlts

500
3.000 unlts

(3) 3,000 unlts

2,500
500 units
3,500
{0AA units
 Chapter 9
2r2

E9-8 (Concluded)
3tOoO units
(41 Order poiot.........r...........rr.....................o....ttt""""'o""""t"""'
5oo
Minimum'*" Juringleaoii;6 (1OO r 5).....,..o....'..---.'..-.........
"" 60 units
on handst time orderngcgiyod......................................."f'
3'500 UnitS
QUanUty Ofdgfgd ......"..."t""""""r"t""t"t"t"""""""""""""t'
gJQg units
Absolutg marimum inventoly.........................""""""'o"""""'
.cGA-Ganada(adapted}.Reprintwithparmission.

E9-9
2OOunits
(1) Marimum ugo per dS!""""""""""t""o"""""
Normal uso por d8!"t"""""t"""""""""""""
120
6 units r 12 daYsof
Safg$ stock {marimum} """"""""""""""""'
lead time = 960 units
lt44O units
l2l Normaluse per day (120)r daysof lead time (i2!........o......,...96O '
Saf ety stock .r......or....................'......o.............."'tt"t'o"tr""t""'
" & units
order po1t1t............r....t....r........r..........r..............""tt"t""""tt

(31 2r4OO units

pOint....................................................1.........."t"ttttttt"'
Ofdgf
'1 I,44O
HOrmal USedUring lgdd timg (t20 I' 2| .'..'.................'........"'
units
On hand St timg Ofdef t€CeiV€d.........'....,........r'..o..................'960
QUan$ty Ofdefgd r........r...'.........r.o...........r................'.."'r""""
3,OOO
3,960 units
NOfmal madmUm inVentOry...r.....................'.........o..........."'t"

(4) Order poi 2r4OOunits

Minimum uso during lead time (8o r 12) 960

On hand at time ordor t€ceivod......--..r. 1r44O units

Q u a ntity o rd ergd ..r..........o....'....""' 3,OOO
4A4O units
Absofutg marimum inventory.........r...,.................'...o....r.,.......

CGA-Canada(adapted).Reprint with permission'

E9-10 Annual
llafety
Annuel Stock
3efcU Humbcr Probabltl$ ErPcsted Goct Annual Carrylng Annual
Stock Lcvrl of of Annual P.r Stocltout Co.t Ff Comblncd
(Unltel Ordorr x Secr(993 =9tockoutlr gglgt = Coat + pcr unltl = Coct
10 6 . 4 2 3 7 5 3t50.oo 310 3100.oo
20 6 2 1 7 5 75.OO 20 95.OO
40 ! .oa .1 75 30.oo tn 70.oo
80 6 .o4 .2 76 15.OO 8(' c5.oo
The recommendod level of saletY stock is 40 units.
I
!

Chapter I
213

E 9 - 1 1 A P P E N D IX
I
r-
(1) Average costing:
I
I Received lssued Inventory
:,
Quan- Unit Total Quan- Unit Total Quan- Unit
Date tity Cost Cost tity Cost Gost tity Cost Balance
I
! Jan, I 5OO S1.2O S 600
6 200 $1.25 $250 70o 1.21 g5o
I

! 10 400 1.30 520 lr1OO 1.25 1,370

15 560 $1.25 SZOO 54O 1.25 670
25 500 1.40 700 1,040 1.32 1,370
27 400 1.32 528 640 1.32 842
!
el Fifo costing:

Received lssued Inventory

Quan- Unit Total Quan- Unit Total Quan- Unit Total
Date tity Cost Cost tity Cost Cost tity Cost Cost Balance
Jan. 1
500 $1.20 $600 $ 600
6 2OO $1.25 $250 500 1.20 600
200 1.25 250 850
10 400 1.30 520 so0 1.20 600
200 1.25 250
400 1.30 52O 1,370
15 500 s1.20 $OOO 140 1.25 175
50 1.2s 75 400 1.30 520 695
25 500 1 .4 0 700 140 1.25 175
400 1.30 520
50o 1.40 7OO 1 ,395
27 140 1.25 175 140 1 . 3 0 182
260 1.30 338 500 1.40 700 882
 I

214 Chapter g

E9-1 1 APPENDIX (Concluded)

(3) Lifo costing:

Received lssued Inventory

Quan- Unit Total Quan- Unit Total Quan- Unit Total
Date tity Cost Gost tity Gost Gost tity Cost Cost Balance
Jan. 1 s00 $r.zo $600 s 600
6 200 $1.25 $250 500 1.20 600
200 1.25 250 850
10 400 1.30 520 s00 7.20 600
200 1.25 250
400 1.30 52O 1,37O
15 400 $r.go $seo 500 1.20 600
1 6 0 1 . 2 5 200 40 1.25 50 650
25 s00 1.40 700 500 1.20 600
40 7.25 50
500 1.40 7OO 1,350
27 400 1.40 560 500 1.20 600
40 7.25 50
100 1.40 140 790
I

Chapter9
215

PROBLEMS
P9 - 1
Budgeted acquisition cost $18, O0O _ 12.Soh applied acquisition
(1) _
=--- =
Budgeted purchases S144, OOO eosting rate for the month
(21 $148r5O0 net purchases x 12.5o/oapplled
acqulsition = $18,562.50 applled
costing cost added
rate to
materials
purchased
during the
month
(3) The overapplied acquisition eost of $362.50 (Sig,562.50 applied cost _
S18'200 actual cost) should be credited to Cost of Goods Sold or prorat-
ed to Cost of Goods Sold and inventories.

P9-2
(1) E O e = . / 2 x 2 - 4 ' 0 0 Ox $ 1 . 2 0 - 57,600
= 24O units
\l S 1 Ox T O Y o 1
(21 Annual regulrements _ 24.OOO
'W = 100 ordersneededperyear
EOe
(3) E$ (Cartying::"t ) * Annual reguirements fOrderins cost )
z 1 per unrr / EOe ( p", order )
5240 total cost
=ry($rox 1oo/o)
.'hi#o ($r.eo
) =$reo =:t#iltr"ill
+$120
for the year
(41 The next order shoutd be placed in three days. This conctusionis arrived
at as follows:
(a) Number of days' suppty in each orden
Days in year
@=#=3'6daYs
(b) Number of days' supply left in inventory:

UnitsIn inventory Days, supply 6 days'

x, _ 4OOx 3' 6 days - supply
=
f in eachoii"r ffi
left
(c) Days before next order should be placed:
(Days' supply left) - (Delivery lead time) =
6 days _ 3 days = 3
 Chapter9
216

Pg-2 (Gonctuded)
to apply the EoQ
(51 some of the difficulties most firms have in attempting
formuta to Inventory Problems are:
(a) Inventory ls not always used at a_constant rate; the constant usage
assumptlonls lmpllclt in the EOQformula'
(b) fne Ede lormularequires estimates of (1) annual requirements'(2)
orde-ng cos! (3) purchase price per unit, and (4) cost of carrying
lnveritoiies. These estimates may be extremeff difficult to obtain
with accuracy.

P9-3
(1) Normal use per day (2OO)x days of lead time (10) """""""' 2,000 units
Safgty SIOCk..r......r.........r.....r.............o.......o.'...r........r"""ot"
300
Ofdgf pOit1t......r...............r..r........ .........r................. 3i3o9 units

(21 Ofdef
2,300 units
pgint.....r....,..r...r...........r..i........r......'.3...'.r...............t.t
Normal use during lead time (2O0x 1O).....'.."""""""""""' 2,000
On hand at timg Ofdgf fgCgiVed..........,......'.,....r.................. 300 units
QUantity Ofdgfgd..........',.....r.............o..............r.........'o........
4,000
Normal maximum inventory..-......r.... """"""""""' 4.3OO unlts

(3) Ofdgf 2,300 units

point.......r.......................................r.....r...'.r'.'....r.'.""
M i n i m u m u se d u ri n g te a d ti me ( 150 x 10) ............,.""""""" 1 , 5 0 0
On hand at time order received 800 units
Quantity ordered....'.......'. ....'..,...... 4,0o0
Absolute maximum inventory.,.,..............r............'..""""""' 4.800 units

(4) Let S equal cost of storing one unit for one year.

EOQ =
2xRUxCO
CUxGG
x (2oo x 250) x S8o
4 ,' o o 0 = r!2lY> S

8,0o0,o00
4'000 =
g,ooo,ooo
1 6 ' 0 0 0 ' 0 0 O=
s
8,000,ooo = S.5O
S -
1 6 , 0 O O, O O O
GGA-Ganada (adapted). Reprint with permission.
l
Chapter9 217

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I o
ir
o
I
f
o
o
L 3
o
t E 6 o
x o
o o o o F
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: F O N(r|NC{r'-
o
. " .
I
3
b 9 E oo €oNoCoOor 6
tF
|
E 6 {,C ! r r
I u,
E

;fi
I

S. o o o o 0 0
Er.cococo
1
x

3:E
3-"as
ooooocD
EEg tO$c)$lr-

558
I

It
g n l b l

€ ; In n o n | o l o
r . L
otl I

-
,_:_-.
J I
8 o I
b i c - l
S E s (ol ?o( oogo) No uu) )( o
f i ; o l s, F F F

E
o
o lI
tl

fui (')('(?(')(')(l)
0

!t
I
o)
;ir ooooot{)
v-C{C?rClOl{'

o. €:'
 Chapter 9
218

P9.5 APPENDIX

(1) Fifo:

Recelved lssued Inveniory

Quan- Unit Total Quan- Unit Total Ouan- Unit Total

tity Cost Cost tity Cost Cost tity Cost Cost Balance
Date
Marchl 75O 32O.OO$15,OOO $15,OOO

3 40() s19.50 $ 7,800 750 2O.0O 15,0OO

4O0 19.50 7,8OO 22,8OO
5 600 $20.00sl2,ooo 150 20.00 3,000
4O0 19.50 7,8OO 1O,80O
12 a5o 21.50 7,525 150 20.00 3,000
4OO 19.5O 7,8OO
35tO 21.50 7,525 18,325
t5 15O 2O.OO 3,O0O 50 19.50 975
350 19.50 6,825 350 21.50 7,525 8,500

18 s00 22.OO 11,0OO 50 19.so 975

35O 21.50 7,525
5OO 22.OO 11,000 19,500
22 50 19.50 975
350 21.50 7,525 5OO 22.OO 11,OOO I 1 ,OOO

26 550 21.OO 11,55O 500 22.OO 11,000

55O 21.0O 11,550 22,550
28 5OO 22.OO 11,000
150 21.0O 3,150 4OO 21.OO 8,4OO 8,400
31 2AO 20.00 4,OOO 4OO 21.0O 8,4OO
200 20.00 4,000 12,400
 Chapter9 219

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Chaptor 9
n

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 Chapter I 221

\. - P9-6 APPENDIX

(1) Cost of the ending inventory under the fifo method when a periodic
! inventory system is used:

b 3 tll : tl:i33
133'"'o
100 @ 12 = 1,2OO
$4.300

(21 Cost of the ending inventoryunder the lifo method:

(a) When a periodic inventorysystem is used:

20ounits @ $tO = S2,000

100 @ 11 = 1,100
$3,100

(b) When a perpetualinventorysystem is used:

Received lssued lnventory

Quan- Unit Total Quan. Unlt Total Quan- Unlt Total
Date tity Cost Cost tity Cost Cost tity Cost Cost Balance
Jan. I 2OO $rO S2,OOO S2,OOO
12 l OO 3 1I $1,1OO 2AO 10 2,O00
100 1l t,loo 3,1OO
Feb. I 100 9r r $1,1oo
1OO 10 1,000 lOO 10 I,OOO I,OOO
April 16 200 12 2,4OO 100 10 1,000
200 72 2,4OO 3,4OO
May 1 100 12 1,2OO 100 10 1,O00
100 12 1,200 2,2OO
July 15 lOO 14 1,4OO 100 10 1,000
100 12 1,2OO
100 14 1,400 3,600
Nov. 10 100 14 1,4OO 100 10 1,00o
100 72 7r2OO 2,2OO
Dec. 5 100 17 1,700 100 10 1,000
100 72 1,2OO
100 17 l,7oo 3,goo
CGA-Canada(adapted). Reprlnt wlth permlsslon.
 r +

Chapter 9
222

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 .t

Chapter g 223

P9-7,APPENDIX (Continued)

(b) First-in, first-out method:

Received lssued Inventory

Quan- Unlt Total Ouan- Unit Total Quan- Unit Total
Dste tity Cosl Cost tity Cost Cost tity Cost Cost Balance
Jan.2 2,000 s5 310,000 2,000 35 $10,ooo
15 500 s5 $2,500 t,500 5 7,500
31 700 5 3,500 800 5 4,OOO
8OO 5 S e,ooo
Feb.2 1,200 6 7,2OO 1,2OO 6 7,2OO 11,2OO
15 600 5 3,000 20o 5 1,0oo
1,2OO 6 7,2OO g,2oo
28 200 5 1,0oo
700 6 4,2OO s00 6 3,OOO
Mar.2 5OO 6 3,OOO
1,500 8 12,0OO 1,5OO g 12,0OO .ts,(x)o
t5 s00 6 3,000
to0 I 800 1,4OO I 11,2OO
31 800 8 6,40O 600 8 4,800
DOr.2 600 I 4,800
1,900 7 13,3OO l,goo 7 l3,3OO 19,1(X)
15 600 8 4,8OO
100 7 700 1,800 7 t2,6OO
30 700 7 4,900 1 , 1 0 0 7 7,7OO
 rI - tr
t

224 Chapter I

P9-7APPENbIX(Concluded)
(c) Last-in, first.out method:
Received lssued Inventory
Quan- Unit Total Quan- Unit Total Quan- Unit Total
Date tity Cost Cost tity Cost Cost tity Cost Cost Balance
Jan.2 2,000 S5 91O,0OO 2,OOO 35 |S|O,OOO
15 5OO $5 $2,500 1,5OO 5 7,5(X'
31 700 5 3,50O 800 5 4,OOO
8OO 5 S 4,0OO
Feb.2 1,200 6 7,2OO 1,200 6 7,2OO 11,200
15 600 6 3,600 800 5 4,000
600 6 3,600 7,600
28 600 6 3,6OO
300 5 1,5OO s00 5 2,500
500 5 2,5OO
Mar.2 1,5OO g 12,000 1,500 g 12,OOO 14,5OO
15 600 8 4,800 500 5 2,5OO
900 8 7r2OO g,7OO
31 8OO 8 6,400 5OO 5 2,500
100 g 800 3,300
500 5 2,500
100 I 800
Apr.2 t,goo 7 13,300 1,900 7 13,300 16,600
15 7OO 7 4,900 500 5 2,500
100 I 800
7,2OO 7 g,4OO 11,7OO
30 70o 7 4,9OO 500 5 2,500
100 8 800
500 7 3,500 6,900

(21
Average Fifo Lifo
S a l e s ( 5 ,5 0 0 u n i ts @ S IO) s55,000.00 s55,00o $55,oOO
Cost of goods sotd:
Purchases ........,... $42,5OO.O0 $42,500 $42,5OO
Less inventory, Aprit 30.......... 7,805.60 7 r7OO 6,8OO
s34,694.4O s34,gOO s35,7OO
Gross profit s20,305.60 939199 El e,gqg
CGA Canada (adapted). Reprint with permission.
I

Chapter I 225

CASES

c9-1

(1) (a) Topp Desk Gompanywould be attempting to minimize total setup

cost and total carrying cost

(b) Variablemanufacturingcosts per unit

t
DirgCt matgfials.'..............r...........r..................r.t..r.....o... s30
DifgCt 14
|abOf.............................r........'..r..'rr....'.........r.......
Variablg factory overhead..,..........................,.,.,.......*.... 6
Total variable manufacturing cost per unit........ $50
Numbgr of dgsks destroyed,.........,r.,..............,................... x 1 2
Total setup cost..................r..r.r..r....r.,r'..r.......................r... s600

Optimum production run:

=
21,600,000
1 $50' x 10.870

{4F66p6o = 2,ooo desks

rVariablemanufacturingcost per unit

(c) Number of production runs per yean

Annual demand = = 9 Productionruns
Optimumproductionrun €#

(21 (a) The following factors affect the desired size of the safety stock for
any Inventory itemr '
(1) Variabilityof product demand
(21 VariabiliU of lead time
(3) Stockout costs
(4) Carrying costs

(b) The minimum safety stock level that could be maintainedwithout

being worse off than being unable to fill orders equal to an average
daytsdemand is the level at which the safety stock carrying cost
equals the cost of a stockout, i.e.,
Stockout cost s2,295 =ffi
Per unit carrying cost S50 x 1O.B%
=42sdesks
226 Chapter 9

1
c9-2

(1) Equipment MaintenanceDepartmentcosts:

SalafieS (2 X 5 X $91 '.........r......'...............'..!...'..' $ 90.00
Employeebenefits($90x 2O%1.............-..'.......'. 1 8 . 0 0 $108.00
Production department costs:
$rgz.so
Salafigs(5 X 5 X $7.501.....................r........'........
Variablefactory overhead:
Direct labor hours base (25 x $2.75).-..'.....-.... 68.75
Machinghours basg (1 x $5).....,.,-..-............,r. s.00 261.2s
Direct materials($ZOO - $50)....'..........'.............'..r..'.. 150,00
Estlmate of Model JE 40 setup costs...........,..........-,. s519.2s

Explanationof costs:

(a) The full cost of the maintenancesalariesand employeebenefits ls

included becausethe $1o.8o St9.0o+ ($9'00 x20%17incurred per
labor hour is incurred solely for the purpose of effecting the
changeover.
(bl The other costs of the EquipmentMaintenanceDepartmentare not
inctudedin the estimate becausethey are fixed costs of the depart-
ment and will be incurred regardtessof the maintenanceworkers'
activities.
(c) The satariesof the 5 productionworkers for the full 5 hours each
are included in the setup cost becausethey must be in attendance
all of the time, though they are neededonly part of the time. lf the
workers could have been assignedto other iobs during the
changeover,then the full amount would not be charged to setup.
(d) The variablefactory overheadcosts of the production department
applled on the direct tabor hours base are incurred as a function of
the direct labor hours; therefore,a full 25 hours of cost are
assigned to the setup cost.
(e) The variable factory overhead costs of the production department
applied on the machine hours base are incurred as a function of the
operation of the machineryltherefore, I hour is assignedto setup
cost for the t hour the machineryis used in testing.
(0 All production departmentfixed factory overheadcosts (both those
applied on the basis of direct labor and those applied on the basis
of machlne hours) are not included in the setup cost becausethey
would be incurred regardlessof the activity in the departmenL
(g) The net materials cost of $f SOis included because it representsthe
unsalvageable portionof the materialsused for the setup and not
for the production of a salable desk.
I
I
!

-
Chapter 9 227

- C9-2 (Concluded)
(21 The cost items that would be included In an estimate of Pointer Furniture
\, Gompany'scost of carrying desks in inventory include:
'
(a) All costs related to warehousing and handting the desks In Inventory
! that vary in amount by the number of items stored.
The cost of the funds committed to the investment in inventory.
, tb)
b cg-3
'
(11 Circumstancesnecessaryto shift raw materials inventory carrying costs

(a) Reliabilityof the supplier.Will the supplier ship products on a mone

\ rigoroustimetable and be willing to keep inventorywithin its own
storagefacilities?
. lf;:$ff""1H;i*:;iili,g,""""XXiii;i1""ff'il#
traet terms.
(c) Carefulcontrol of inventoryrequirements.Are production schedules
* clearly defined to reduce the potential for stockouts?

(21 Gircumstancesnecessaryto shift finished goods inventory carrying costs

! to the customer include:

> (a) theriskor

i.,?::[FT[il:;:?H'i;ffill=ll?lil?ll#:,'take
(bl Closer production planning.Gan production schedulesbe refined to
such an extent that delays in the sale and distribution of the fin-
b ished inventory are minimized?
(c) Garefulcontrot of inventoryreguirements.Are customer orders
carefully monitoredand anticipatedto reduce the probabilityof fin-
E ished goods stockouts?
 CHAPTER10
DISCUSSIONQUESTIONS
OlO-1. The purpooecil a JIT system is to minimizethe
levelc of raw malerials and work in process
invcntory inverlmcnt!, while improvingthc
werall rnanufacturingpr€oss. Thc htent b to
pull inventory through the syslem mly as il is
required.
010-2. JIT seeks loleliminate all formr of wasle,
including produclion losses such as defects.
Successful reduclion of these problems con-
tribules lo producl guality, and, so, is a part ol
TOM.
010-3. To avcid inventory buildup, the entire JIT sys-
tem shuts down whenaver defecls are found;
so to achieve a good rale of flow, lhe number
of defects must be srnall.
Qt0-4. Theoretbally, h an ideaf JIT system the EOQ
i! o.re; each time nrcre oulput is needed, one
more part or unil is produced.
Ql0-5. Althougha zero inventorylevel is unattainable,
JIT stimulates improvernentin the environmen-
lal condilions lhat cause inventory buildup,
such as long seiup times, high selup costs,
. p@r guliy, and poorly bahnced work loads.
O10€. The relalbnshipbetweenvelocityand WIP lev-
els is an inverse relationship;doubling the
vekrcity m€ans lnlving the WIP level, provided
lhe outpul rate is held constiant.This is sirnilar,
bul not irdentical,to the relationshipexpressed
in lhe familiar inventoqytumover ratio used in
f inancialstatem€ntanalysis.
010-7. The stralegic advantageol improvingvelocity
throughout lhe company, lrom product
researchand devekrpmentto shipping,is that
lhe company can then respond taster to any
changing cuslomer need or to an opportunity
for a new or altered product.
Ql0€. Reducingthe level of WIP also reduceslha
maximum numbsr ol detectives,il the defects
are c{ a kind that will be discoveredal the nexl
work staiion afler lhe unils are held waiting
belween slalions. lf .l00 units are wailing
b€tw€enstations,up to lOO detectivesmight
be producedbefore the problemwould be dis.
228
covered; il 10 units ars heH waiting, no rpr.
than 't0 delectives could b. produced before
lhe prcblem would be discovered.
Q10-9. A blanket purchasc order ir an agreement
between buycr and seller slaling lho total
quanlity exp€cled to be needed over a period
ol three or six rnonthr.
Ot0-10. In many JIT work cells, these distinctionr-
between dirrl and indirecl labor and between
producingdeparlments and ssn6 service lunc-
tions--do nol exist, because the sarne workers
(lhe leam assigned to the cell) perlorm all
these tasks.
Q10-11. In bacldlushcosting,the work in processinven-
lory accounl is not adjusled lhroughoul lhe
period to rellect all lhe cosls of units in
process;thore are no delailed subsidiary
records mainlalned for work in process; and a
single accounl may be used lor both raw male-
rials and work in process.
010-'12. In bacKlush costing, lhe rnaterialsand work in
process inventoryaccounts mighl be cornbined
into a single account because malerials might
be pul irnmedialelyinlo productionwhen lhey
are received.
010-13. Posldedusiionis the sublraslbn lrom the work
in process accounl cil sorne or all elements d
the cosl of completedwork, afler the work is
completed.
Q10-14. The periodicinventorymethodused by many
m e r c h a n d i s i n gc o m p a n i e si s a n a l o g o u sl o
backllushcoslingas used by manufacturers.
010-15. lf a backflushcostingsystemexp€nsesall con-
version costs to the cost of goods sold
account, tho corrgct arnounl of conversion co.sl
is included in hventory accounts by making an
e n d - o l - p e r i o da d j u s t m e n to f t h e i n v e n l o r y
accounts' balances.The oflsetling entry is an
adfustmentof lhe cost of goods sold accounl.
The corracl amounl of sonversioncost to be
includedin each inventoryaccountis estimaled
when invenloriesare physicallycounled.
I

Chapter l0

EXERCISES

b ' Elo'lrhe:::ffi:
tollows:
:llt"ir:1H'""J,rr:ii'.'r'i;l:n',"r'J,'"ll"liiilS
> Carryingcost savings = 2Oohr reduction in averagevariabtecost of Wlp
= ZOohr 3O7ox past averagevariablecost of Wlp
= . 2 x . 3 x ( 1 Or 3 O Ox S B O )
= $14r4o}
Savingsin cost of defects
= $25 x reductionin numberof defectiveunits
\' (reductionin
numberof (numberof out-of-
= S25 x defectiveunits x control conditions
producedper not discovered
undiscovered immediately)
out-of-control
v ondition)
= $25 x l3O%x 3oO x S%l x (1/3 x 600)
= $25 x 4.5 x 2QO
= $22,500

\- ElO-z The average lead time will be 26 days, calculated as follows:

Re d u cti o n o f ve n d o r l ead tim e = 116x 18 days = 3 days
Be ca u seth e ra te o f o utput will be unchanged,a r eduction of W lp to one-
third of its present level will triple the velocity. The average order will
then remain in wlP only one-third as long, saving two-thirds of time
presently being spent in WIP:
Reduction of time in WIP = 213of present time in Wlp
= A3 x i2 days
= g days
New lead time = present lead time - reductions

= 26 days

- IH::iJffx""n.;:H:
:ffs,:Tlillff
:'xiJ":"J3::i:ff'.:il"i,i1
components of total lead time are known, as in this exercise, then the
i ne w l e a d ti me ca n b e calculatedby adding all its components:

( 5 / 6 x 1 8 ) 2+ + ( 1 1 3 x 1 2 ) + 2 + 3= 1 3 + Z + 4 + Z + 3
= 26 days
--
 Chaptor 1O .\-
2g

EIO-3 The expeited annualsavingsis S2,2OO,OOO, calculatedas follows:

Doublingthe velocityof all tasks,from receipt of order to shipmentand
from ordering materialsto issuing materialsto production, will reduce
WIP and materials inventoriesby half' therefore:
. Reductionin materials carryingcosts = Z}ohx materials reduction
= 2Oohx(112 x $3,0O0'OOO)
$3OO'0OO
Reductionin wlP carrying costs = 2oohx wlP reduction
= 2|oh x (712x $5,OOO'O0O}
= $5OO,O0O
This changewill also reducecustomerlead time from eight weeks to
four weeks. Becausecustomersare willing to wait up to five weeks for
shipment,alt shipmentscan then be made-to-order. There will no longer
be a need for finishedgoodsinventory.Oncethe existingfinishedgoods
inventoryis liquidatedby salesor scrapping,the annualsavingsfrom not
carryingfinishedgoodswill be:
Reductionin finishedgoodscarryingcosts
= zloh x finishedgoodsreduction
= zloh x (l OO%x $7'O0O'OOO)
= sl,400,oo0 . -

Totalsavings= s300,000+ s5o0,0oo+ sl,4oo,o0o - $2,200'OOO

flhis exerciseis basedcloselyon an actual case of a partialJIT imple-
mentation.The name of the companyand dollaramountshavebeen
altered.)

E10-4
(1) (al Equivalentproduction= 4,500+ (.5Ot-2gl = 4,51Ounits;
s 3 O O , 7 4 O_
$66.683 per unit
4,51O
st,o9l?oo =
(b)
r-' $i66.067per unit
4r5OO

(c) units started = 4,500 + 2O - 24 = 4,496 units;

s3oo,o0o= 566.726 per unit
4,496

(2) 5 6 6 7 , b eca u se 2 O x .5 Ox 5 6 6 .683 = $666.83.

5 6 6 7 , b eca u se 2 0 x .5 o x 5 6 6 .667 = 5666.67.
S 6 6 7 , b eca u se 2 0 x .5 o x $ 6 6 .726 = $667' 26'
 i -

Chapter l0
231

EIO-4. (Goncluded|
(3) Consideringthat the results of requirement (2) wenethe same (to the
nearest dollar)for all three methods,then method (il (b) would be recom-
mended becauseof its ease and simplicity. Method-tii ttl is a ctose sec-
ond choice,also becauseof easeand simpticity.The detiils of method
(11(al may not be iustifiable in these circumstances.
(41 Prccessingspeed is very fast, with the result that work in processinven-
tory levefsanekept to a very low level-both in absolute terms and in
ielation to totat productionactivity for a month.

Elo-5 JournalentriesinvolvingRrp and/or finishedgoodsare:

Raw and In Procgss............t.r....!..r!.......rr........,....... 456,OOO
Accounts Payable .r......'................,.........r.o...... 456,OOO
A-summary entry for all receipts of raw materials during the period.
when direct materials are used, no entry is needed, be-ause the
materialsremainin RlP.
Finished Goods......t.....,..r....-...,................,...o........r 4SSTOOO
Raw and In Procgss'...'.....'...r'r.................r....,. 455,000
To backflush material cost from Rfp to finished goods. This is a
postdeduction, The calculation is:
Material in May I Rlp ba1ance...,.....,.....,.,.S 19,OOO
Ma te ri a l re ceiveddur ingMay.................... 456;OOO
s475,OOO
Ma te ri a l i n May 31 RIR per physical count 2O,OOO
A mo u n t to b e backflushed.......... $4SSpOO
Co st o f Go o d s S o 1 d ...........................r ..........,...........
461r OOO
F i n i sh g d Go o d s............,......................D..,......... 46i r OOO
To backflush material cost from finished goods to cost of goods
sold. This is a postdeduction. The calcutation is:
Material in May I finished goods r......,....,. S 16,OOO
Material backflushed to finished goods.... 4S5,OOO
:_--
$471,00O
Material in May 31 finished goods, per
physical count..............r..........,............. IOrOOO
A mo u n t to b e b a ckf!ushed.............r ......,..,.......
$461,OOO

L
 , I
i

Chapter l0
232

Eto-5 (Concluddd)
COSI Ol GOOdS SO1d...t..............r......o.............'....t...'. 2,300
300
Raw and In Procgss.....o.....
Finlsh gd Good3.....tt.t...........t""t""ttt"t""ttt"tt' 2,OOO

Conversioncost in RIP is adiusted trom the $2,3OOof May I to the

$2'OOOosgmato at May 31. bonvsrsion cost In finished goods is
aOjusteJtrom ttre $Sr5bOof May t to the $4'5Oo estimate at May
3i. The offsettlng ontry ls made to the cost ol goods sold account'
where all conve*ion costs weno charged during May.

El0-6 The Journalentries InvolvingRIP and/or finished good! 8r1o:

Baw and ln Ptlc8ss.........o......' '...... 222'OOO
Accounts Payablg.....t""'r""'ot"""o"""""""""
222,OOO

A gummaryontry for all receipts ol raw materials during tho period.

When direct maierials atu used, no entry is needed, becausethe
materialsnBmainIn BlP.
Finishgd GOOd3...r..r.r...............r........r....r....r......."r.. 221r5OO
RaW and In PfOCSSS..............i....'........r..o.....'.!. 221 ,5OO

To backflush material cost from BIP to finished goods. This is'a

postdeduction.The calculationls:
MatgriatIn Jung I RIPbalanceo..'....r......i.I I O,5O0
MatgrialrBcEirgdduringJune r...............'. 222,AOO
$232,5O0
Material In June 30 RIR per physicalcount 11,OOO
Amount to bg backflushlgd...........'.......""' s22t,5OO
Cost of Goods Sotd.............................-..............r.tt.. 223t5OA
Finishgd Goods....r.....o...........i.....................'... 223r5OO

To backflush materlal cost from finished goods to cost of goods

sold. This ls a postdeduction. Tho calculation is:
Material in Juna I finished goods............' $ 8rO00
MaterialbackflushedfromRlP.""""""""' 221r5oo
s229,500
Materialin June 30 finishedgoods' per
physical cou!1t.......,....r,..............r....'.-.'. o,ooo
Amount to be backflushed ..........'....o..r'...' s223,5OO
II
!

Clppter 1O
2s3

Elo-O (Concluded|
Raw and In Process..........r.....................................r 500
Finishgd Goods.....................D........r...r,.....r...... 300
Gost of Goods Sold ;..........,.,..................,.!....r..
200
Gonversloncost In Rtp ls adjusted lrom tho $lr2oo of June I to the
$lrT0oostimate at Juno 3o. convorsion cost in finished goods is
adjustedfrom the 94rooogt June I to the $3rzoo estima.-te"i .1u""
3o. The offsettingentry la made to the cost of goods sofd account,
nfiero all conversioncosts wero charged durini June.
Elo'7 Journal ontriss Involvingthe Rlp accounta arl':
Raw and in Procgssr................r....................r..........
20O,OO0
Accounts Payable .r....'......r............r...r,,or.......,. 2OO,O0O

A-summaryentry for all receipts of raw materials during the period.

when dlrect materiafsaro used, no entry is needed,belausJtrrev
remaina part of RlP.

Finlshed Good8....................r..........r.........o.....o........ 199,8OO

Raw and in Process rt aa ao aaaaaaaaa aa 199,8O0

To backflushmaterialcost from Rtp to FinishedGoods.This is a

postdedugtion.The calcutationis:

Material in March I RIP balance s I,OOO

Materiaf rcceived during March,..........,..., 2OO,OOO
s2O9,OOO
Material in March 31 RIR per physical count 9,2OO
Amountto be backflushed.,.....,...,,,........,. Si99,gOO

Raw and in Procgss...........................................o...o, 3OO

Cost of Goods So1d............,.......,........,.......,..,. gOO

conversion cost in RIP is adjusted from the $1,ooo of March 1 to

the $lr3OO estimate at March 31, The offisetting entry is made to the
cost of goods sold account, where all conversion costs wene
charged during March.
 rI
I
I
I

Y - )
- . 1
I
:. ;
!

ChapterlO . e

El0-8 Journalehtriesinvolvingthe RIPaccountsare:

Raw and in Process............ 367'000
AgcountsPayab|e.r............,.,........................... 367rO0O
A summaryentry for all receipts of raw materialsduring the period.
When direct materialsare used, no entry is needed,becausethey .'
remain a part of RlP.
365r4O0
Finishgd GOOdS,..............'.......o..........r................o....
Raw and in Process..,.. aaaaaa a aoaa at 365,4OO
To backflush material cost from RIP to Finished Goods' This is a
post-deduction. The calculation is:
Material in April I RIP ba1ance..................$ 291600
Ma te ri a l re ce i ve d d u ringApr il.........,.r ....... 36710OO
$396,6O0
Material in April 30 RIR per physical sount 31,2OO
A mo u n tto b e b a ckf|u s hed........................
S365,4OO
:
Raw and in Process..........,...r,........,.. 4OO y
Cost of Goods So|d.,..... .........,.......... 4OO
Conversion cost in RIP is adjusted from the $1,4OOof April I to the
S1,8OOestimate at April 30. The offsetting entry is made to the cost
of goods sold account, where all conversion costs wene charged
during April. '
_,
EIO-9 Journal entries involving the BIP accounts are:
R a w a n d i n P ro ce ss............ 246.000
Accounts Payable .............. 246,OOO
A summary entry for all receipts of raw materials during the period.
When direct materials are used, no entry is needed, because they
remain a part of RlP.
Cost of Goods So1d...................... ,........o...,. 24Z.OOO
Raw and in Process........,.,. 247r0OO
To backflush material cost from RIP to Cost of Goods Sold. This is a
postdeduction. The calculation is: v
Ma te ri a l i n Ma y 1 R IP balance., $ 11,000
Material received during May........ 246,000
$257,OOO
Ma te ri a l i n Ma y 3 1 R IR per physicalcount lO,OOO
A m o u n tt o b e b a c k f l u s h e d . . . . . . . . . . S24Z,OOO
 l
,/t
t-

1
)
V

I Chapter 10
>- 235

I EIO-9 (Concluded|
I
' Raw and in Process ,..........,...,.r. 800
Cost of Goods So1d....,.......o,....... 800
1
conversion cost in RtP is adjustedfrom the $lr3oo of May I to the
$2'1oo estimate at May 3r. The offsetting entry is madetb the cost
of goods sold account,where all convercioncosts were charged
during May.

Elo-lo
(1) The most recent purchaseinvolveda quantity greater than the total
materialsin ending inventories,and that purchasegives a cost of materi-
als of $42o'o0o/l,4oo, or $3oo per unit of output; t6erefore,
Materialscost of finishedgoodsendinginventory
= 50 units x $3OOper unit = $15'OOO
(21 The conversioncost per unit is calculatedby dividingthe total GoDV€r-
sion cost by (al the number of units startedrlb) the number "o.pl"t"d, or
(cl the number completedplus the number oi partially "onu"tt"i units in
the RIP ending inventory(not an equivalentunits calculation|:
(l) $eSOrlSO + 3,OOO = $96.72conversioncost per unit
(Ot $29Orl6O-r grlOO= 993.60conversioncost per unit
(c) s29o'l6o + t,f 2o = $g3.ooconversioncost per unit
(3) The three possibleamountsfor the conversioncost of the 5Ounits in fin-
ishedgoodsendinginventoryare:
5O units @$96.22= $4,93Oof conversioncost
5Ounits @$93.60= $4,690of conversioncost
5O units @S93.OO= $4,650of conversioncost
(41 L-owest= g15,OOO materials+ g4,650conversion= $19,650
Highest= $l5,OOomaterials+ $4,g36conversion= btg,ggb
Dollardifference= $19,936- $19,650= $1gO
Difference,to nearestl/1O percent= $1gO* $19,650= O.9%

b
 7-1-

2ffi Chapter lO

810-1| r

(f l A $3OOmaterialscost per unit was calculatedin requirement(lf of the

pneviousexercise; therefore,
Materialscost of RIP ending inventory= 22Ounits x S3OOFer unit =
$66,OoO
\
(21 The three possibleamountsfor the conversioncost of the RIP ending
lnventoly ol 20 units, SAohconverted,are:
2O units x SOohx $96.72 = $967.2Oof conversioncost
20 units r SOTor $gg.0O= $9gOof conversioncost
2O units x SOohx $93.00 = 9990 of conversioncost
It seems inconsistentto assign 50% conversioncosts to RIPwhen the
units in RIPlyere countedas whole physicalunits in the denominatorof
the conversioncost per unit calculationin requirement2(c)of EIO-IO, y
and when they were not countedat all in the denominatorof the calcula-
Uon in requirement2(b)of El0-10. But the total dollardifference
assignedto RIP is immaterial.Whateverthe amount of conversioncosts \d
assignedto RIPand finished goods,the remainderof total conver':sion
costs simplyremainsin cost of goodssold.
- t s
(3) Lowest = $66,000 materials + S93Oconversion = $66,930
Highest = $66,OOOmaterials + $S0Z conversion = $66,967
Dollar difference = 566,967 - $66,93o = $37 --
Difference, to nearest 1/1O percent = $37 + $66,930 =.1oh
I
\-

L
1 Clpptsl0
l>

PROBLEMS
t
Pto-l
I (11 The erpected annual savings 8no$72OrooO,consisting of $gg4,ooo csny-
t
Ing costs savings and $336'O00savings in the cost of defects, calculateb
I
ag follour:
- Carrying cogt savings = 30% r redustlon In avoriagovariable cost of Wlp
= 3Oohr 4Ao/or past avoriagovariable cost of Wp
= ,3 r .4 x (4Or 2OOr $lOO1
b = $384,0OO
Savingsin cost of delects
= $60 r rsdustion in number of defeetive units
!
(reduction in number
= $6O x of defective units x (numberof flaws not
produced per discoveredimmediately|
undiscovered flaw)
= $60 r (4O%r 2OOr 2Oo/ol x (114r 1,4o0l
= $60r 19r350
= $33610OO
(2', Likely benefits that are not assessablefrom the information given
includs the following:
(al Faster cycle time resulting from the higher velocity of VUlp.(Because
the rate of final output will not change,velocity wiil change'inverse-
ly with the changein WIP levets.)The faster cytle time will imptove
the speedwith which orders can be filled, thul increasingcusio;ne1.
saUsfacUonand perhapsincreasingperceivedprcduct value so that
prices can be raised(or price cuts delayedoravoided|.
(bl lf, as a rasult of the shorter cycle time, total lead Ume becomes
less
than the Ume customensare willing to urait for an order, then the
companywould no longer need to maintain a linished goods inven-
tory. This possibilitywoutd resutt in additionalsavings in ffoor spaco
and other Inventorycarryingcosts.
flhe value of the floor spacg ireJo up by eliminating 4o7oof Wlp storage
lc not an addltional benofig Inventory cirrying cosfi includa etorage
costs, so the valua of the floor space is incluoed in the cirrying
Ingr calculatedIn requiroment1i;.| cJst s""-
(31 Costs and other negativesto be comparsd with
(al Tho Increasedliketihoodof shutdowns duethe savings inctude:
gtarved for WIP; lower WIP levels at to work l6cations being
each staiion nepnesentlower
safety stocks, so stockouts are monelikely at all toca-Uons,
(bl The cost
uon, which9f -startinga larger nu-u"iof baiches oi lot" into produq-
incrudesthe iost of processing.o* ;;* orderc, pro_
 Chapter l0 -
2fi .-

Plo-l (Concluded) : -
duction orders,and material requisitions.flo reduce averageWIP
size, either smaller batches must be started at shorter intervals, or
protracted stockouts must be allowed to occu6 otherwise, the
averagssize of WIP will not drop.l "
(c) The cost of handlingmore loads of materials.lf lot sizes are small
enoughto require only one load per lot both before and after the
chanCe,then a larger number of lots will result in a largertotal
numberof loads.
(dl The cost of performinga larger number ol setups to permit running
a larger number of batches or lots of smaller size. ldeally,as part of
the JtT implementation,setup cost will be driven down to eliminate
this problem.
Pl0-2
(1) Protechcould achievean averageleadtime on these ordersof 42 days'
calculatedas follows:
Reductionof time in WIP = 314of presenttime in WIP
= 314r (360 days + I O!
= 314x 36 days
= 27 days
Reductionof vendor lead time = 113r27 days= 9 days
New lead time = presentlead Ume- reductions
= 78 days - 127days + 9 days)
= 42 days
Note: lt is not stated that Protechdefines WIP and WIP turnover in a way
that excludesthe two days spent in receivingand the three days spent
in linal inspection.To check that the averagecycle time of 360 days/lO,
or 36 dalrs,does excludEthose steps (sothat there is no double-count-
ing), note that a cycle time of 36 days,when added to the other intervals
mentioned,givesthe stated total lead time of 78 days: 6 + 27 + 2 + 36 +
3+4=78.
(21 The advantagesof shorter lead time inctude:
(al The value of the floor space freed up by eliminatingthree-foudhs of
WIP storage,
(b) lmprovementin the speed with which orders can be filled, which :
should increasecustomer satisfactionand perhapsincreaseper-
ceived product value so that prices can be raised (or price cuts
delayedor avoided).
(c) lf the new 42-daytotal lead time is less than the time customers
are willing to wait for an order,ttren the companywould no longer
need to maintaina finishedgoodsinventory.This possibilitywould
resuJtin additionalsavingsin floor spaceand other inventorycarry-
ing costs
 -T

I I
i

dnpW'10
I
rc

Plo-2lConcludcd|
t3l Costs and other negatlver to bc compatrd rxlth Ste savlngs Includa:
(al The Incrsaged llkellhood of rhutdonmr duc to work tocations belng
gtaryed for WIB lower WIP levelg rt cach ctatlon repnosontlower
safety rtockr, so stockoutr erc mort llkely at alf locaUom.
(bl Tha co;t of startlng r larger numbcr of bgtchee or totr Into produc-
Uon,wlrlch.lncludcr thr cort of pmccedng moncwork ordera, pro-
ductlon ordan, and mgtorlal nqulgldonr (Beduclng averagc WIP
rlza generally rcqulrca rtartlng rmaller batcher gt ghorter Intervals.)
(cl Thc cogt of hendling morr loadr ol materlalr. ll lot sizac arc srnall
enoughto rcqulra only onc load pcr fot both befgrc and after the
change,then a larger number of lotr wlfl rosult ln a larger total
numberol loads.
(d) The cost of performlng e larger numbcr of eetups to permlt running
a larger number ol batchcc, or lo'tr, ol rmaller 3lze. ldeatly, as part
ol the JIT lmpfementatlon,lotup cogt wlll be driven do*m to elimi-
natc thlr problem.
(el The tmc and eftort that may bc rcqulrcd to Induce yendors to
reducc thelr lead Umc by onc-tlrlrd.
Pt o€
(1) (a) RawandIn Procasg 85O,OOO
AccOunts Payable ........o........................r.......r. 8so;ooo
A summary entry lor all receipts of raw materials during the
perlod.When dlrect materlalsaro used, no entry ls needed,
becausethey rrmaln a psrt of RlP.
(bl FastoryOverheadGontrol l3,ooo
Supplles ,..or....... 13,OOO
lndirest materials ara rccorded as used.
(c) Pa1rro11...........r.D....o..r...........D.rr..............o....o........
4OO,OOO
AcCru gd Payroll ................r...o.........r.....r......... 4OO,OOO
ACCrugd Payrott .o...................r..r......................... 4OO,OOO
Gash r.ro....r...r....r-...r....r..oo.r........r.o..aa.............. 4OO,OOO
(d) cost ol Goods sold -......r.r........oo............o...,,.,.....
6O,OOO
\ Factory overhead contro|.....D....o..,,,................... 120,OOO
MarkeUng Erpenses Control ..................o.....o...o. l3orooo
Admlnlstrauvg Expensgg contro|,.o............o.,.,... 9OTOOO
P81rO11...............ro.rr..,...
4OO,OOO
Dirost labor ls crpenaed to thc cost of goods gold accounL
(e) Factory Overhead Gontrot......r........,.....t....,..r..,..6gi'OOO
Accumulated DepreclaUon.,.....D..........,...r...... Oggrooo
Prepald In9urance...............................o........,.. t3'OOO
 r
I

24) Chaptor l0

PlO€ (Continuedl
(fl FactoryOverheadContro1.o,................,......'. 83,OOO
Cash 54,OOO
AcCountsPayab1e................o.................... 29,OOO
bl CoStof GoodsSo1d.............. 897,OOO
FaetoryOverheadGontrol 897,OOO
Overheadls erpensed to the cost of goods sold account.
(hl FinlshedGoods 844,OOO
Raw and In Process......r.. 844,OOO
To backflush material cost lrom RIP to finished goods. This is a
postdedustion. The calculatlon ls:
Materlal in Juno 1 RIP balance '.'r.......r.. $ 4OTOOO
M a te ri a l re ce i ve d d u ri n gJune............... S5Or OOO
$89O,oOO
Material In June 30 RIR per phyaical
COUllt....r................r........o....... 46r OO0
Amounttobebackflushod.........'...........S844.OOO
(il Gost of GoodsSo|d,...........,..............'..r....,..' tt**
Finishgd Good3......oo....o...................o...t..'t 852IOOO

To backflush material cost from FinishedGoodsto Gost of Goods

Sold. The calculation ls:
Materialin June I FinishedGoods.,r....o $ lgor0oo
Material cost transferred trom RlP..'..... 844'OOO
slr034,OOO
Materialin June 3Ofinishedgoods,per
physical CoUtlt.....'r'......r.................'... I 82tOOO
Amount to be backflush€d'......'..'.......... 3 852'Ooo

0l Raw and in Procgs3...o.....,...o..r.....r.....,......... 3oo

Cost of Goods So1d...,,....r..t......'..r..r..r........... 2r7OO
Finishgd Goods.....'....!..........r...r.....".....r.. 3IOOO
Conversion costs In tho inventoly accounts are adiusted to the
estimates made in ths June 3O physical counl For RIR the adiust-
ment is from the $11600of June I to $1r9OOon June 3Q for
Finlshed Goods, the adiustment is from the $18O,OOO of Juno I to
$177'OOOonJune 3O. The offsetting entry is made to the cost of
goods sold account, where all conversion costs were charged dur-
ing June.
 :v \_/

-
. 242 Chapter 10 .

P1o-4 (Continued) . -

(gl Gost of Goods So1d..,.,.....,........... 656,000

Factory Overhgad Control ....,...................... 656'000
Overheadis expensed to the cost of goods sold account.
(hl 6t 5rooo
Finished Goods........rt..........................r....,....'.
Raw and In Process................o.................... 615rooo
To backflush material cost from RIP to Finished Goods. This is a
post-deduction.The calculation is:
Ma te ri a l i n Ma y 1 R IP ba1ance.,...........r .,o.. $ SO,OOO
Ma te ri a l re ce i ve d d u ri ngMay..............,..... 620r OOO
!
5650,000
Ma te ri a l i n Ma y 3 1 R IR per physicalcount 35,OOO
A mo u n t to b e b a ckfl u shed.......... S615,OOO
:
(i) C o s t o f Go o d sS o |d ....... 605,000
F i ni sh e dGo o d s................... ,.......r . 605,000
To backllush material cost from Finished Goods to Cost of Goods
S o ld . T h e ca l cu l a ti o ni s:
Ma te ri a l i n Ma y 1 F i n i shedGoods.........,,.. S15O,0OO r v
Material cost transferred from RIP ........... 615,OOO
$765,O0O
Ma te ri a l i n Ma y 3 1 F i n ishedGoods,Fer
p h ysi ca lco u n t..... 160,000
A mo u n t to b e b a ckfl u shed.......... $605,000

0) R a w a n d In P ro cg ss........,..............,.,....r ....,..... 800

F i n i s he dGo o d s.... 4,OOO
C o s t o f Go o d sS o |d ....... 4,8OO
Conversion costs in the inventory accounts are adjusted to the
estimates made in the May 31 physical count. For BIR the adjust-
m e nt i s fro m th e $ 1 ,3 0 Oof May 1 to $2,10Oon May 31; for
Finished Goods, the adjustment is from the S13O,OOO of May 1 to
S134,OOO on May 31. The offsetting entry is made to the cost of
goods sold account, where all conversion costs were changed i
during May.
 Chaptar l0 24a

I P l O -4 (Go n cl u d e d )

(21 The three completed accounts are

Raw and in Process Finished Goods
5t1 3lr3OO (h) 615,OOO 511 28O,OOO (i) 605,000
(al 62O,OOO (h) 6i5,OOO
(r) 800 0 4,OOO
5/31 37,1OO 5/31 294,OOO
Gost of Goods Sold
511 -O-
(d) 50,000
(g) 656,000
(i) 605,000
5/31 1,306,200

Plo-5

(f ) Contribution margin of lost sales (2O,OOO units):

R e ve n u e($ 1O,g OO - 900 units) ........,......,...........,....... s 12.OO
Variable costs:
Gost of sales (S4r050+ 9O0),.............................,.... s4.50
Marketing and administrative($gOO- 9O0).,.,........ 1.OO
T o ta lva ri a b l gcost ...,.....,.............,.,,....r .....,......., $5.50
U n i t co n tri b u ti o nmar gin..........,....r .,,........................., $6.50
V o l u meo f l o st sa l e s ...,,. r 2O,OOO
Total contribution margin of lost sales,...,.....,........ s(l3O,000)
Overtime premiums (overtimecost is less than the.
additional contribution margin of tost sales):
1 5 ,OOO x $ 6 .5 0 = 597,500 > $4O,OOO s (4O,OOO'
R g n ta lsa vi n g s...,r..,............................r ...............,....,.. 6O,OO0
Rental income from owned warehouse
(12 ,0 0 0 x .7 5 x S 1 .50)...,.................r ...,..,.,.,......,..... 13,5OO
Elimination of insurance and property taxes 14,OOO
Opportunity cost of funds released from inventory
I
investment:
Investment in inventory $6OO,OOO
'1 . 2 0 1 20,000
I In te re st b e l o re ta x i .tz
I
\ 1-.40/
Estimated before-tax dollar savings
I
I
9_q2tr9_
t>
 v

*
Chapter tO .

PIO-S(Goncluded) : -

l2l Conditionsthat shouldexist in order for a companyto installjust-in-time

inventorysuccessfullyincludethe following: -
(al Top managementmust be committedand providethe necessary
leadershipsupportin orderto ensurea company-wide,coordinated
effort.
(bl A deQiled systemfor integratingthe sequentialoperationsof the
manufacturingprocessneedsto be developedand implemented.
Raw materialsmust arrivewhen neededfor each subassembly, so
that the productionpnocesstunctionssmoothly.
(cl Accuratesalesforecastsare neededfor effectivefinishedgoods
planningand productionscheduling. s
. (dl Productsshouldbe designedto use standardizedparts to reduce
manufacturingtime and reducecosts,
(el Reliablevendorswho can deliverqualityraw materialson time with
minimumleadtime must be obtained.
I

CHAPTER11
L
DISCUSSIONQUESTIONS
I
Ol 1-'1. Yes, lo lhe exlentthat il is practicalto m€asure
! the r,ralueadded or the productivityof a worker.
However, msasurement of lhe cootribution of
each individualis never exacl. Also, a business
cannot pay more for materials or labor than the
sales price will recover.Materials,workers,and
machines produce products and services.
,l There must be a differencebelween revenue
irnd oosts consumed;othenrvise, lhe business
b cannol sun/ive.
Otl-2. Productivitymay be defined as the measure-
menl of produclion performanceusing the
expenditureof hurnanelfort as a yardstick.ln a
broadersense,it may be describedas the etfi.
ciencywith which resourcasare converledinto
cornmoditiesancVorservicesthat people wanl.
Ql 1-3. Productivityis importantto a lirm becausehigh
productivityreducesthe unit cost ol the outpul
a n d m a k e s i h e f i r m m o r e c o m p e l i t i v et.t i s
importantto workersbecauselheir real earn-
ings should be increasedwhen productivityis
h i g h . P r o d u c t i v i t yi s i m p o r t a n l t o s o c i e t y
bEcauseincreasedproductivityenablessociety
to gel moro and better oulput from the basic
resourcesof lhe econorny.
Ql 1-4. To measurelabor efficiency,it is necessaryto
e s l a b l i s ha s t a n d a r do f p e r f o r m a n c e T . his
means determininghow much a workershould
be able to produce,or how much a worKcr6w
should be able lo produce.The standardis
delerminedby time and motionstudy,lest runs
by skilledworkers,and averagesoi past per-
formanceby skilledworkers.
Q11-5. The purposeof an incentivswage plan is to
inducea workerlo producemore,iesultingin a
higher wage and reducedconversioncosl oe,
unit. Freguenily,machineoutpul is limitedby
worker performance.lt employeeperlormance
can be increased,machinecost per unit of pro-
duclion will decreasa.An incentivewage ptan
m a y a t s o r e d u c el o a f i n g ,i n d i f f e r e n c ea, n d
carelessness, and may generatea cost.con-
sciouslaborforce.
Ql 1-6. Generally,hourly earnings go
up with
increasedproduction,and laborco.-st per unit ol
outpul is reduced.High productionrates also
reduceoverheadcosl per unit of output,which
is oftenthe mostsignificant
_ savings.
Ql 1-7. (a) Duringperiodsol curfailejactivity,
it is
iust as n€cessaryto keepcosls down as
i t i s w h e n o p e r a t i n ga l f u l l c a p a c r t y ,
Assumingthat the incenlivewage plan
r e s u l t e di n g r e a l e rl a b o re f f i c i e n c a
yno
lowercoslsper unit at full capacily,than
the laborcost per unitshouldbe lowerin
a slackperiodif the incentive wagescate
is conlinued, A shdrter workweek or
sorne other syslem of sharing lhe work
wouH be indicated.
(b) Ordinarity,it is not a propiliour tine to hi-
tiato an hcentive wagr ptan wtrena phnt
is operating far below capacity,because
the worker is alreadyfearful d sornething
less than full employrnent.ll a ,eason-
able day's work is being receivedfor the
going rate ol pay, po.stponementof the
. incenlive plan is indicated. However,
there is a nalural tendencyfor workerslo
reduce output durhg such perlgds,there-
by increasingcosls, wilh a lendencylo
bring about further reductionin the vol-
ume lhat can be soH. With luft e4plana-
lion and underslandhg of thc situation,
the incentivewage could be htroduced
- with a planl operatingat 6006capacity.
O11-8. In the straightpieceworkplan, each worker is
paiC a certain amount for eadr unit produced,
while being guaranteeda base hourlywage.ln
the 100% bonus plan, €ach workor L pai<Jfor
the standardtime to cornpletethe job or unils if
the job or units are finished in slandardtime or
less. In the group bonus plan, workersin i
group are paid lheir standard hourlywage. lf
the group produces unils in oxc€ss of the stan-
dard, lhe workers are paid for the time saved.
Q11-9. An organizational or gainsharingincentiveplan
is designed to provide incentive pay to all
employeesby way of an organization-wide
plan thal rewardsfor improvedproductivity.
01 1-1O. The basicconceplunderlyingthe relatbnship
involvedin the cumulativeaveragelime learn.
ing curve modetis that everytime the cumula.
live quantity of unils produced is doubled, the
cumuhliveaveragslim€ per unil is reducedby
a givenpgrcentage.
0 1 1 - 1 1 The
. learning curve lheory is used to solve
.problemssuch as determininglabor
costs in
bids for governmenl conlracls, determhing bt
costs tor various slagos ol production runs,
predictinglabor-hourrequirements,permitting
lhe calculationsof slandard labor cost varil
ances,assistingin lhe evalualionof a manag-
er's performance,and providinga basis for
cost control.
Q1 1-12. The financial accounting aspecl is concemed
wilh a record of earnings of each employee
and payment of the workers. Financiat
accounting records income, FICA, and other
payroll laxes and deductions wilhheld; proviCer
lor disbursing lunds lo workers and to taxing
and other agencies; reporls io each employee
al least annually the arriount ol wages eamed

245
246
and tho arnountl withheld for various PurP€'
es; and recordgthe payroll liability and pay'
ment each PaYrollPeriod
Thc cost accannting8sP€cl is concemod with
time worked oo each Fb or h each cost conlet,
in order to detetminethe labor houn and bbor
cosil ol Ptoduclion.
Ot1-13. tui eflbient labor force beghs with the design
ol the producl gnd en analysir of produclion
teclrnQuceand i9b reguiremenls.Wi|h he per'
sonnel departmentadeqtntely informed aboul
job specifications,it is lhe lunclion ol this
deportneot !o locura the pcrsanel qualiliedlo
do each iob. The produclion planning deparl'
menl keeps the work llowing smoothly. Ths
timekeeping, payroll, and cost accounting
departmentscontributeto lhe lotal elficiencyby
accountingfor the time purchasedand by rnak'
ing paymentlor the work as well as charging
the cost to lhe proper dePartmentand producl.
Q11-14. (a) Delermininglabor hours worked by each
empbyee is prirnaritylor payroll PurPo3-
es and linancialaccounting,
(b) Determinatirn ol labot hourc consumed
on each irb or h a department is a part
ol cosl determinalion for a job or
pnocoss.lt shouH also be a measure of
labor efliciency,since hours consumed
and productiveoutput can be cornpared.
Ol 1-15. (a) The cbck card showgthe amounlol time
an employeespenl in lhe plant €ach day
ol a payrollperiod. lt is evidence that lhe
empbyee'stime has been purchased.
(b) The time ticket shows tho amounl ol lime
an employee spends each daY on 6ach
icb or in each department. ll is an ilem'
ized invoice ol the time thal the employ'
ee selb to lhe empbyer.
01 1-16. Since the clock cards show the time employ'
oes are h the pbnt, the lirst step is to make
sure no error exists on the time tickets. lf the
total time shown on the time tickets is cortecl,
trren the workers speot time in the phnt when
nol working or not assigned lo specific'jobs ot
dopartments,gr when assigned lo mainte-
nance or repairwork For the time thal is idle or
assignedto indirect bbor, a chargo is made to
FactoryOverhead.
Chapter 11
01 1-17. Bar codes are symbols thal can be processed
electronicallyto identifynumbers,letlers, or
special characlers. Bar-codedempbyee idenlF
lication cards or badges, and lask identilica-
tbns can be used to replace clock cards and
time tickets to collect payroll data ard to mea'
sure worker activitY.
Q11-18. AppendixOne method would be lo charge the
premium costs directly to lho Prod'
usts in thc same rtrarne, as straighl'
lime labor cosls. This would be
a P p r o P r i a t ew h e n P a r t i c u l a ri o b s
have to be rushed to ccnPlelbn. A
secmd method woub be to tr€at the
ptgmium as an ovefiead elem€nt lo
be ctrarged to all ptoduclirxt through
the allocationol overhead. lt would
be appropriatewhen lho ovatlim€ is
a recurring condilion normally inci'
dsnt to the levelof oPeratiens'
011-19. AppendixThebonus and vacationpay should
be accruedovet the benefitedtime
period.When the bonus and vaca-
tinn pay are pairJ,the accrued liabilily
account is debited and the cash and
withholdingaccounls are crediled.
Ol 1-20. AppendixThe recornmendedmethod in com'
puting costs under a pension plan is
to detemine aciuariatlylhe eventual
pensionpaymenlslo covered empkry'
ees and to cfrargethese luture pay'
menls as a cost gt curt€ntproduction
over the exPectedgeriodof aclive
serviceof coveredemployees'Costs
based on Past services should be
writlen oll over some reasonable
period on a systematicand rational
basis that doos not distorl the operat'
ing resultsof anY one Year.These
costs are incurred in contemplation
of lhe presenland lutureseryicesnol
only of the individualemployee'bul
also ol lhe organi:ationas a whole'
Benefits ol the Plan-such as
improvedmorale. removalof super'
annuated employees'and attraction
o f m o r e d e s i r a b l eP e r s o n n e l - a r e
exPecledlo imProvethe oPerating
etficiencYof a comPanY.
I

Chapts ll 217

EXERGISES

El 1-1
ORANGECITY CA"I{NINGCOMPANY
t^aborSchedule for Terry Paco
For First Week in June

40
Units producod ara a. a aa aao a ara.a. aa aa...a r. ar 1,32O
1r2OA
110o/o
S9
9396
s9.90
s.30

E11-2

(11 Tuesday Wednesday

U9"d"y
Hoursx hourly ratg............ $64.00 s64.OO s64.OO
Unlts abovestandard. o to l5
Hours saved............r.......... .50 .75
Value of tlme gavgd....o...o.. s 4.OO $ 6.00
SOohof value of Ume saved $ 3.20 s 4.80
Earninga............................ s64.OO s67.20 $68.80 s200.oo

(21 Efficiency ratio: -860

= lo7,50h
800

Earnings: 1O7.sohr $8 hourly rate r 4O hours = $344

(31 Earnings: ($8 hourly rate + 5Ycrate increase) r 24 hours =

S8.4Ox 24 hours s $2O1.EO

!
 I
I

248 Chapter 11

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II
I

ChWtar ll
219

Ell\5 19A productivityratio =

' 194 standardhours for
work done *
19A total actuardirsct and Indirect rabor hours =
943,823 + | $251324 = .422089

Hours neededfor i 98 productionat l gA productivityratio =

198 standard hours for work done -r i 9A productivity ratio =
558t51o + t422o89 ..r.rr.........o.....r.r....o.....o............................... 113231204
Less l9B total actual direct and indirect labor hourt,...,....:.-, 1r2g4rgg3
Hours savgd ............-...o...........r...........r..r...r.r.......
38'227

Valueof wagessaved= hours savedr lgB

svoriagehourly pay plus labor fringe benefits =
38,221r $i4.7O = $561,949

Employeegainsharingincentivetotaf =
vafue of wagessavedr 5OZo=
S561,849x SOoh = $28O,g24.5O
Gainsharingincentiveper employee=
total gainsharingincentiver- number
of eligible employees=
$28Or924.5O + 755 employees= $?Z2.Og
Ef l-6 I batch ...r....,.....,.....,..t.,.............o..........
$60rooo
2 batches..........,...,...........,.............,..,.,,
$lgroOO
4 batchgs..o.r.......................r.r................ lgo%of $6Oroogf
Sggrcoo igorhor Scgroooi
8 batches....................,..........r...,.r.......,.
$gorzzo
16 batches............r.,..........,........r............ iaoy" or $grcooi
$zorszg igow of $3or72o)
E11-7
Bridge Cumulative Average
Number x Required Weeks per Bridge
I 100
2 BO (1OOweeks r 8O%l
4 64 (8Oweeks r 8O%f
I 57.2 (64 weeks x 8O%)
7 additional bridges must be buitt in order
to bring the cumulative BVB'-
age below 52 weeks.

I
 Y
I
I

Chapter | 1

Ell-8

(f l The schedule below demonstrates the 8O7olearning curve that the com-
pany expects to experienco in producing the time devices:

Cumulative
Cumulative Average Cumulative
Lots x Time = Time
I 9O.OO hours 9O.OOhours
2 72.OO 144.OO
4 57.60 230.40
8 46.08 368.64

At an SOoh learningfactor,the cumulativetime to produce 8 lots

' should be 368.64 hours.At a standardlabor rate of $9 per direct
tabor hour,the standardamount for total direct labor cost should be
set at $3,317.76(368.64x S9).

l2l The companyshoutdestabtishthe standardfor direct labor time equal to

the marginaldirect labor time requiredto producethe eighth lot' provid-
ing steady-stateproductionoccurc after the eighth lot. To assurethat
this standardtime will be accurate,the companyshould:
(al Keep accurate recordsthrough the first I tots to determine if an
EOohlearningfactor is experienced.
(bl Continueto keep accurate recordsfor each successiveproduction
lot to providea basis for:
1. Conformanceto expectationsabout labor time (i.e.'steady
state productionafter 8 lots)' or
2. Determiningwhen steady-stateproductiondoes occur.

E11-9 APPENDIX

(1) Overtimepremiumchargedto productionworked on duringthe overtime

hours:
Work in ProcgsS...,......,.....,..............,,.......,.................495
Payroll (4Ohours x $91 + (1Ohours x 1.5 x $9)..,,..,. 495

(21 Overtime premium charged to factory overhead:

Work in Process (5Ohours x $91........,....,..,......o......... 450
Factory Overhead Control (1Ohours x.5 x S9)........... 45
Payroll.... .........,..... 495
I
I

I
Chagter ll
25r

E11-1O APPENDIX
Subsidiary
Record Dr. Cr.
FactoryOvgrheadControt.........,................. 201.60
Bonus Pg1|..................,....,.r.................l34.4Ot
VaCatiOn P8f.......r........r...r.............o.... G7.ZOz
l- Liability for 8onus..........r............r,........r.
134.40
Liability for Vacation Pay .....o.r..........;.....
67.20
" (9lO + g32l x 40 hours r 4 weeks = S6'Z20 + 5O weeks =
b
2 ($fO + $32) x 4O hours x 2 weeks = g?,36O + 5134 .4O
5O weeks = 67.20
EI 1.' 1 APPENDIX
Factory Overhead Controt lgeS,OOox 2gTo1...,.... 9,8OO
Marketing Expenses Gontrol (SgrOOO x Zg;/o1...... 2124O
AdministraUve Erpenses Control ($7,ooo x 2a./"1 1,960
Liability for Pensions (S5OTOOO r T.go/o1..,...,,- 3r go0
Liability for Other postretirement Benefits
($5o,ooo x 2.3o/o1.....r.r.,,...r......,......
1,150
FfCA Tax Payable (950,O0O r T.S%1..........,... 3,750
Federal Unemployment Tax payable
($50,ooOx .g/ol ....r,....r.......r.....................
400
State Unemployment Tar payable
($SO,OOOx 4.6Tol...,..........ro...............,....., 2r3OO
Workerst Compensation Insurance payable
($5o,ooo
r l%1.,.,.......,... .....,...... 500
Medical Insurance payable ($SO,OOO
x 4%1.. 2,OOO
GGA-Canada(Adapted).Reprint with permission.
El 1 . 1 2 A P P E N D IX
tl) The entry to record the payrollliabilitp
Payroll ...t..........r.....r....,..................
26r7OO.OO
Employees Federal Income Tar payable ..........
2,5OO.OO
EmployeesState Income Tax payaL|o.......,......
Employees City Wage Tax payable .......,.,...,,....
500.oo
267.OO
llCA Tax Payab18....................,..... 2rOA2.5O
Accrued Payroll!.,...,,......
2 1,430.50
(21 The entry to distribute the payroll:
Work in Process,....................,......,..,,........
18,OOO.OO
fac-tory Overhead Control ..,............
Marketing Erpenses Control ............................r... 3,OOO.OO
l

Administrative ExpensesControl.............,....,..,... 4r2OO.OO

1,5OO.OO
Payroll
26,7OO.OO
l-
 _\

252 Chagter | 1

E11-12APPENOfi (Concluded)
(31 The entry to record the employer'spayrolltaxes:
2,394,OO
FactoryOvgrhgadGontrol....................'...........--..
Markgting EXpenSgSCOntrOl........'....................... 478.80
AdministrativeExpensesControl ............or'.......... 1 7 1 . 0 0
FICA TaI Payab19........'..r......'o.'................r....... 2,O02.5O
'
TaxPayab|g...............,..,.
State Udemptoyment 854.40
FederalUnemploymentTaxPayabl€....'."......... 186.90
IL

I ChWter tt 253

L PROBLEMS

P rl - 1
I
I
(fl Present cost
I
I
!
Direct labor per hour $10
Factoryoverheadper dirrct labor hour... 12
$22 -r 5 units per hour =
t $4.4Oconversioncost per
unit
l
I
! PcrWorkcr por 8-Hour Dey
unltrlrromblcd Plccowort Dlrcct Fectory Totaf convcrzlon Convcnbn Cal
pcr &Hour Day Rrt Labor Ovcrhead Coot pcr Unlt
10 szoo 3 80.oo rs9s.oo 3176.00 Sf.4o
4ft 2.12 05,40 eo.00 101,40 1.8
50 z.2o 110.00 06.00 20s.00 1.12
55 e.3o 12650 00.00 222.50 .3.05
80 z4o 144.00 03.00 240.00 a.oo
(21 lf a producuon rate above 4o units per employeo per g-hour day is
noasonablyattainable by the worksr, the employeo oarnings wili increase
under the pleceworkproposal,Since convercioncost per-unit decreases
with increasedoutput, managementshould favor the
proposal. iiecework

b
P11-2
(t)
Boguhr Worksoot lncrndyo lflagr Plan
Totrl Incrntlvr Pay Totrl
Hourty Worl- l'bor Boe Pay (Unltr Producrd r
Employoe Lrbor
Rrtr Work Cort (Boo Frtr r Wort Hourr) + InconUvo prrmlum) r Coel
Clrnct D--...- !O.OO r 4O hn, E 32a0 lc.go r 4o hn = 't.to lO5 r $t,OO= 3to!t t OO5
l,,ukon, T.--..- B.OO r ,3Oh.!. r 320 5.5O r 4O hn - 2t2O iO5 r l.OO= t0tt 3S!t
&hott, J...-..... I.0O r aO hrr e 280 4.5O r 4O hn = 18O 105 r l.0O = t0tl O45
Totrl dnct hbor._._._.
_t&ao Totrl dlnct lebor -
tl,ql5

flrclt - t8.fo r llog hbor oori Incroor Proot: = 2g.2% trborcort Incro'r
#*

b
254 Chaptor | | '

Pl1-2(Gonctudedl

l2l To assess properly the effectiveness of the new plan, it is nocessaryto

anallze lts eftect on convorslon costs and not just on direct labor costs.
Although dlrect labor cost per unit may rise, this Increase may be moro
than offset by distributlng the overheadover a larger Yolume.

A comparisonol the two pay plans and their effects on convsrsioncost

per unit shows:
Totrl lrbor Tctrl Totrl Unlt
bbor Cort Frctory Ovorlrerd Convotrlon Corwonlon
Cort prr Ur*t orrorhod por Unlt Cott Cott

tncsntlvc wagc plan tl,o35 tA.Zt tlr2Oo J|ZZ t2,235 $1355r

Stnfght hourly ratc 84O 5,OO IJIOO 8.OO 2,O4O 13.002
Dtflcrcncc t .o7 l.El 9_1.09)nct
decrearc

152,235+165=$13.55
2 $2,O4O
+ 150 = $i3.OO

The decreasoIn conversioncost is minimat;however,the fact that cus-

tomels can be s€ryed sooner might be worth additionallabor cost.
Based on learningcuryo theory the productivityof the worker might
increase sufficientlyto reach a more satisfactoryoutput and cost level.
I
t
I
L Chapter 11
255

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 -1

256 Chaptar l1

Pl l-3 (ConcludeUf

Hours worked 40
.aaaraaaaaaaa

Units produced 855

Standardprodugtion(20 units x 4O hours|..-.............. 800
Efficiency ratlo (855 + SOOI 1.06875
Basewageper hour $9.0o
Basewage plus bonus (1.O6875r $91...............o.....,..$9.91975
Wggklyearnings($9.9t975 r 4o hou1s1........r.............$384.75
Unit cost ($384.75 + 855 unltsl ..or.......t.....r....,....,r.o... $.45
(_

Clpptor l1 257

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o
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ul

siltFF$s r 8lo
=:15
5 Fl--
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 - i

Chapter | 1
2fi

P11-5
Straight Piecework
Dodd Hare Lowo
400 410 370
Units produced-regular tlme .O6
$ .66 $ .66 I
Piecework rate
PigCgWOfk p3!r.......r.o.......................r........t..r....t..t.... $264.00 $270.eo 9244.20
30.oo o 24'OO
DowntimoPaY aaaaataaaaaaaaaa

o 54.OOr 36'00
OVgftime p8!....r...........r....r....rr........r...r........o...........

Total l\r3$lB3 .......ttt""""tt""to"""'rttt""tt"""t"'ttt"""'

s294.OO$aZc,oo $304.20
WaggS por bookstt"ttt"ttt""ttt""rt"tt"'r"to""tt"t""""'
284.OO 277.2A 302.20
U n d efp aym OJ1t...............r......r.....i....o.r.. r.....o...........r.. $ IO.OO$ 47.40 $ 2.99
: = - z :

t6.r $6 x 15ooh= $54

Percentage Bonus Plan

Ober RuPP
250 180
UnitS pfOdUCgd,o..r..r.........................'r....'.....'r.........'...."'
200 200
Standafd pfOdUCtiOtl................'..o......'.......o......r.............. gooh
fatiO.o.....,o.r....rr...........r'......r....r..r...r.......t.."'r'
125o/o
EffiCignCy
RegUlaf Wa993.......r.o..........D...................o..r..r...t....tr....t"'
s240.oo S2oo.oo
8OnUS.................oo...r...r..r...........rr....r.r.......r....r..........""
60.oo1 o
TOtal wageS .........................t""ttrtt"t""t'tt't""t"tt""""t"o $3OO.OO $2oo.oo
pef bOOkS ..r.........r..r.........r...r..r.o.........r..o.r....r...t..
280.OO l71.OO
WageS

UndefpaymO;.1t......r...r.....r........r..r...r..............ro...r............
$
=:
20.oo s::z: 29.OO
r25oh pnemiumx $24O regular wage = $60
or S6.00 hourly rate
x .25 pnemium
51.5O bonus pay
S1,5O x 4O hours = $60
I

I
Chaptar 11 259

E
I
Pl l-5 (Concluded)

Emerson Efficienca System

b Suggs Ward
Unitg produced..t.........r.. 240 590
Standard production 300 5701
Efficigncy ratio.......... 80o/o 103.5%
BOnUS lillt8 .......r..,.,....r............... 20o/o 450h
Rggular wago.r...or............r..........,......r..................r... 5224,oo2 s2l2.go3
Bon us'uraff o ...............r.r......r.....r.r...r...................r.r... $ 44.90 95.76
Downtime pay (2 houra x 35.60}. 11.20
Totalwages............,..... aataoaaaaaaaaaaaraaaaa
s268,8O S319.76
b Wages por books........r........,., 233.20 2go.o0
:----
Un d erp aym (!Dt....r..rr".........r........,.r.r.....r.r...... i.......... $ 35.60 $ sg.zo
t
6OOunits (standardproductionfor 4O hours
) = 15 units per hour

15 units per hour r 38 productivehours = 57O units (standardproduction for 3g

hours)
z4Ohours x $5.60 = $Z24,OO
s38 hoursx $5.60 = S2i2.gO

P11-6
(1) Hoursworked (5 workersr 4Ohours)................,,.r...,,.........,... 200
Regularwage (2OOhoursr $61.........,.......... s1,2OO
Units produced...........r...........r...........r.....D......,..r......r....r...r....
45.2
Bonus ""t'ot'rtaDtaaaa.aaaaataaaaraa.aaaa.arraaaaaaaaaa..aaaaoaaaaraarr.....aa.aaaaaaor.a.

garnings.o....r......rr........r...................,...........,..o.......r... s52r
we-ekly
unit
$i,252
labor cost Gtl1252 + 452),.....,.,..........r.....,...o........o..r....,..$2.7699
Unit factory overhead ($f r4O6 * 452).............r..r..,...,...o.r..,.r..,
b $.?.0973
Unit convgrsion coSt....'...................r..r......rr.......r.....r..r.......r..
$5.8672
t

l-
452 unlts produced
4OO units standard
_52 units abovestandard
52 units x $i workersrshare = $S2 bonus

b
 I
I

Chaptor | |

P11 - 6 ( C o n c l u d e d )

Unltl-...'......-.. 72 8t 95 102 102 152

Standardhoun
for unltt.--..-.. 361 nrn 171t2 5t 5l 22A
Actual houn..- . , 4 & 10 ao 40 200
Bonurr to r
houn ttvcd..- 3 s trs f06 foo 3 t8o2
Total carnlngr. 3zlo 32'til 328!t 3soo 3300 31,380
Unit labor cort. 333333 Sr.oooo 33,0000 ir.oooo 33.OOOO $3.Os31
Unlt factory
ovgrhcad ,....,.{ *r.8e8e 33.45A8 32.9471 327451 3Z74nl 33.0073
Unlt convcnion
coat ,............,.- glzaul toJ508 35.947a 35.74tn 35.74tt1 30.1504
t 4Oounits per 40 hours= 10 units per hour
1Ounits per hour + 5 workerc= 2 units per hour
72 units produced+ 2 units per hour = 36 hoursstandardtime
z lf the group bonus is computedfor the week, rather than daily' the bonus
would be 36 x 2o hours saved,or $156. Then,$1,356+ 432 units = $3 unit
labor cost. Overheadcost would be S1,4OO + 452 units, or 9?.O973per unit.

P11 - 7
(1) THOMAS INC.
Quarterly Bonus Allotment
At End of March

Points
Employees Allowed for Total Shara Total
Participating Each Employee Points per Point Share
1 Works managgr....r...... 250 250 s3.125r s 781.25
2 Produstion engineers., 200 400 3.725 1,25O,00
5 Shop supervisot'tg......... 200 l,0oo 3.125 3,125.0O
1 Storgkgopor.,.,..,....r...,. loo 100 3.125 312.50
5 Factory office clerks ... 10 50 3.725 156.25
l5O Factoty workefs ...... 20 3,O0O 3.125 9,375.0O
4,8OO 9!9'o99.09
ra
2 7 O , O O Ounits actual production
2 4 O , O O Ounits normal production
3 O , O O Ounits excess ovor normal
3 O , O O Ou n i t s r $ 5 O = $ 1 5 , O o O
s 1 5 , O O O+ 4,8OOpoints = 33.125 qer point
 '
fl
I

Chapter | 1

Pl1-8
(rl
-Cumulative Time in Hours
Gumulative
Number Numberof Units Cumulative
of Lots (Lot Size = 50) Average Time Per Unit Cumulative Time
I 50 4.0000
2 lo0 3.6000 (4.oooo x.9l 360.00 (3.6000 x 1oo)
4 2OO 3.24OO(3.60OOx .9! 648.00 (3.24OOx 2OO)
I 4 OO 2 .9 1 60 ( 3.240Ox.9l 1' 166.40 ( 2.9f 6O r 4OO)
16 8OO 2.6244 (2.916Ox .9) 2rO99.52 12.6244x 8OO)

DireCt tabOr hOUrS reqUired tO prOdUCethe firSt 8OO UnitS r..,............... 2tO99.52
Direct labor hours required to produce the first 2OO units .......'....o'...., 648.00
DireCt fabOr hoUrS feqUired tO prOduCethe next Ordet'.....,................... :11457.52
Numbgr of units in thg ngxt ordgt'....,.....................,............'......r......o...
--- 600
DirectlaborhOUrsper unit for the nextorder(1'451.52 + 600).'.......... 2.4192

CatonicPart NumberPGB-31
Unit Costsand Pricesfor RexEngineeringCompany
Estimates
Incorporating
a 9oohLearning
Gurve
Materials S18O.OO
La b o r a n d e m p l o ye eb e n e fi ts (2 ,4 1 9x $ 20) .,,.,............r ........, 48.38
Varia b l oo v e r h e a d(5 O%o f l a b o r),.......,,.......,............. 24.19
Total variabtg coSt.,.......r,..r....i................,,..,....'..r...... 5252-5|
Fi x g do v g r h e a d. . . ..................'..................,...' ....r ....r 4O.0O
Fult cost. .....!........ SZSZ.SZ
Profit contribution (1Oohof full cost) .,...........,...,.... . 29.26
Estimated contract price...........,.,. S321.83

l2l The implications of an 80% learning curve as opposed to a gOohlearning

curye are:
(a) An 80% learning cunre indicates a greater effect of experience on
efficiency.

(b) Most of the increase in efficiency (decreasein time and cost per
unit) due to an SOohlearning curve occurs early in the production
r u n ; t h u s, sa tu ra ti o ni n l e a rningis achievedear lier with an AOoh
l e a r n in g cu n e .
 '
fl
I

Chapter | 1

Pl1-8
(rl
-Cumulative Time in Hours
Gumulative
Number Numberof Units Cumulative
of Lots (Lot Size = 50) Average Time Per Unit Cumulative Time
I 50 4.0000
2 lo0 3.6000 (4.oooo x.9l 360.00 (3.6000 x 1oo)
4 2OO 3.24OO(3.60OOx .9! 648.00 (3.24OOx 2OO)
I 4 OO 2 .9 1 60 ( 3.240Ox.9l 1' 166.40 ( 2.9f 6O r 4OO)
16 8OO 2.6244 (2.916Ox .9) 2rO99.52 12.6244x 8OO)

DireCt tabOr hOUrS reqUired tO prOdUCethe firSt 8OO UnitS r..,............... 2tO99.52
Direct labor hours required to produce the first 2OO units .......'....o'...., 648.00
DireCt fabOr hoUrS feqUired tO prOduCethe next Ordet'.....,................... :11457.52
Numbgr of units in thg ngxt ordgt'....,.....................,............'......r......o...
--- 600
DirectlaborhOUrsper unit for the nextorder(1'451.52 + 600).'.......... 2.4192

CatonicPart NumberPGB-31
Unit Costsand Pricesfor RexEngineeringCompany
Estimates
Incorporating
a 9oohLearning
Gurve
Materials S18O.OO
La b o r a n d e m p l o ye eb e n e fi ts (2 ,4 1 9x $ 20) .,,.,............r ........, 48.38
Varia b l oo v e r h e a d(5 O%o f l a b o r),.......,,.......,............. 24.19
Total variabtg coSt.,.......r,..r....i................,,..,....'..r...... 5252-5|
Fi x g do v g r h e a d. . . ..................'..................,...' ....r ....r 4O.0O
Fult cost. .....!........ SZSZ.SZ
Profit contribution (1Oohof full cost) .,...........,...,.... . 29.26
Estimated contract price...........,.,. S321.83

l2l The implications of an 80% learning curve as opposed to a gOohlearning

curye are:
(a) An 80% learning cunre indicates a greater effect of experience on
efficiency.

(b) Most of the increase in efficiency (decreasein time and cost per
unit) due to an SOohlearning curve occurs early in the production
r u n ; t h u s, sa tu ra ti o ni n l e a rningis achievedear lier with an AOoh
l e a r n in g cu n e .
 I

Chapter | 1

P11-a (Goncluded)
'
(31 The degree of tearning that takes place in an industrial operation would
be reduced by
(al a low proportion of assembly labor to machine labor;
(bl an operation ol low complerity;
(cl high employoe turnoveq
(dl tedium;
(el poor working conditions.
Pl 1-9 APPENDIX
(11 Charge to work-in-pnocoss:
Normal working houns = 40 houra r 2 = 80 hours
LetX=overtimehours
sr,r4o-(8or$r2)
X =
($lz r r.5)
X = 10 hours
Therefore, charge to work in process = gO r $lZ = $l,OgO
l2l Factory overhead charge for Emptoyee tloTl:
Gompany benefits paid by employer....,, $273.20
Overtimg premium t............oo.................. 6O.O!t ($trf 40 _ Slrogol
s."9€9
(31 The cost of idlenessshould be chargedto the departmentaffactory over-
headaccount
PI I.I O APPENDIX
(l) Apr. 7 Payroll,..,.......... ........,....r. 5,8gO.OO
Accrugd Payro|1......r.....r...rr..................r. 4,888.70
Employees lncome Tar payable (9.5olo).. 559.55
FICA Tar payable (2.5|.,.....,....r..r,..,........ 441.75
14 Payro11........................,..r....,......... 4,92O.OO
Accrugd Pa1rclt.'..........r...............r......,.. 4r083.6O
Employees Income Tar payabfe ..,....,...,. 467.4A
FICA Tar payable ..,...,.......,.....,..,....,,..... 36g.OO
21 Payroll ......o...r..................,.t......,...............rsrgoo.oo
Accrugd Pa1ro11......r.........r............r........
4rggZ.OO
Employees Income Tar payabts.............
560.50
FlcA Tar payabto.............:..................... 44z.so
I
2A Payro!|.......r.......r........,..r. ...r.....,. 4rggo.oo
l- Accnred payroll.... ,................... 4,O5O.4O
Employeeslnco^meTar payabfo.............
463.60
FlcA Tar payable .............:.....................
366.00
264 Chapter l1

Pl l-1 OAPPENDD((Goncluded|
t2l
Subsidiary
Record Dr. Cr.
Apa 3O Work In Procgss ..r........r..............o..... 16,400
Factory Overhgad Gontrcl'...,....'....... 5,6OO
lndirgct Labor .'.......r.........'..... 5,6OO
Payro|1 tt...............................t........ 22rOOO
Apa 30 Factory Ovgrhgad Gontrol ................. 4r4eB
FlcA TaxlS22rOOOr 7.5o/o1.,.... 1 r 6 5 0
Federal Unemploymont Tax
($22rOOOx'8oh1..................... 17f,
State Unemployment Tar
($2ZrOOOx 4oh1...,.................. 880
Vacation Pay l922rOOOx 8o/o1.. 1 , 7 6 0
FICA Tax Payab19"..................r..... 1,65O
Federal Unemployment Tar Payable 176
State Unemployment Tar Payable 880
Liability for Vacation Pay.......,...... 1,760

(31 Payroll Accnred Payroll

Apr. 7 5189O Apr. I 2r23O Apa I 2r23O.OO Mar.31 Bal.2,23O.OO
14 4rg20 30 22rOAO 7 4r888.7O Apr. 7 4r888,7O
21 5,9OO 24J,sO 14 4,O83.60 14 4,083.60
28 4188O 21 4r897,OO 21 4r897.OO
30 2164(, 28 4,O5O.4O 2A 4'O5O.4O
24.23O 20,149.7O 30 2,04O.0O
2e789.74
2,840.OO

2,640
2,640
I

I
Chapter 11 265

b
CASES
I

ct 1-l
b
(1) Arguments used by each proponent:
I
(a) 1,00O-pieces-per-hour-rate:
!
{1} Studies show that machines can be operated at this rate.
(21 Variances determined by this output rate will measure the inef-
''
fective use of the machines.
(3) This rate can be a target level to be strived for, and the chang-
ing variances will show pnognesstoward this ta4get.
(4) A goal of this natute will motivate the supervisor, and thereby
E
the workers, to reach this rate of output.
(b) 750-pieces-per-hour-rate;
(1) This rate of output has been attained by some workers.
(21 The IroOo-pieces-per-hour rate has not been attained, nor has
any rate near to it been attained.
(3) The 6oo-pieces-per-hour rate is an average of actual perfor-
!
mance and does not represent good economical performance.
(4) The standard cost should reflect production rates that can be
t
attained when good economical performance occurs. The 75O-
E .
pieces-per-hour rate, capable of being achieved by some workers,
would seem to be such a per{ormance.
. (5) The variances would measunethe extent by which this economi-
cal levef has been exceeded or the extent to which it has not been
met.
(6) lt should provide motivation for the supervisor to improve on the
60o-pieces-per-hour cunent rate and in turn motivate the employ-
ees to improve their performance.
(c) 6OO-pieces-per-hourrate:
(1) This rate has been achieved by the departments as a whole. The
standard costs should be set to reflect the ability of the whole
department.
l2l The variances from standard cost based upon the 6Oo-pieces-
per-hour rate would measure the departures, favorabte and unfavor-
able, from the current effective level of operations.
(31 For two thirds of the workers, the 75O-pieces-per-hour rate
would be dlfficult lo attain and would tend to frustrate them, thus
making even the present 6oo-pieces-per-hour rate difficutt to main-
tain. For all workens, the 1r0Oo-pieces-per-hourrate could not be
attained' thus lowering the morale of the department and probably
lowering output below current levels.
b (4) The 6oo-pieces-per-hour-rate, when passed down to the pro-
duction worker, wourd be an appropriate goal for those three
employees who are producing fewer than 6oo pieces per hour.
266 Chapter | |

C11-1(Concluded)
l2l The purposeof standardcosts and standardcost reporting is to measure
the performanceof a departmentagainsta level of cost incurrencethat
nepnesents attainablegood economicalperformance.The variancesindi-
cate the periods when the performancevaried (favorablyor unfavorably)
from this acceptablelevel.
To be used effectively,the rate to motivatethe supervisorand, thereby,
the worker,sto improveperformancewould depend upon the perceptions
as to what is attainable.lt would also dependupon the reward structures
within the firm. Other variableswould also affect what output rate would
motivate improvedperformances.
The value picked(e,9.,ir00o, T5o,or 600)must be a compromise
betweenthe level that witt havethe most effectivemotivationalresult
and that which will be an effectiverepresentation of the costswhen the
departmentis operatingat an acceptabteeconomicaflevel.The 1,OOO-
pieces-per-hour rate shouldbe reiectedbecauseit does not providethe
basisfor a measureof an acceptablecost tevel.lt woutd also be of ques-
tionablevaluefrom a motivationalpoint of view,becauseit appearsto be
unattainableby the productionworkers.
The 75o-pieces-per-hour rate is a possiblechoice.lt is capabteof being
achievedby some workers and as such may providemotivationto the
supervisorto bring other workers up to that level,thus achievinga
departmentaloutput of 750 piecesper hour.tt also may representthe
appropriatebasisfor a standardcost becauseit is a possibleacceptable
level of performance.tt may also be a suitabledepartmentaltarget
establishedin connectionwith the introductionof the standardcost sys-
tem.
The 6oO-pieces-per-hour rate is also a possibtecandidate.The Punch
PressDepartmenthas achievedthis tevef,and three of the six employees
have been ableto achieveit. lt is, however,the currentlevel of ouiput
and that may make it ineffectivein motivatingthe departmentand its
workers to improvethe level of output.As the basis for standardcosts, it
coufdrepresentan acceptablelevel of output;but it does not incorporate
the possibleimprovementtikelyto be obtainedin connectionwith an
introductionof a cost system.
The 75o-pieces-per-hour rate seemsto be the best choice of the three
alternatives.More informationaboutthe conditionsunder which the
engineeringstudieswere done,the trainingand experienceof the work-
ers' and the trend of worker and departmentoutput in recent periods
would be necessarybeforethe numbercould bs chosenwith some
assurancethat it would meet the statedobjectives.
 ;I
Chapter 11 267

I
I c11-2
S
(1) ' An advantage of the new payroll incentive plan is that it recognizes a
problem' which should improve employee motivation. Action taken by
I
b management will be perceived as a positive effort to resotve a problem,
and employees may feel more a part of the group and behave as team
members.
t Some disadvantages,which could lower employee motivation, are that
employees' files are open to scrutiny by peers, and that employees may
!
feel that they have to be a part of the "in groupttto be assured-recogni-
l> tion for wage increases.The plan could degenerate into a popularity con-
test.

\,
(21 some advantagesthat should improve employee productivity are the
incentives the plan provides for employees to perform efficilnt|y and
effectively,and the beneficial competition it promotes among employees,
as long as it is in harmony with corporate goals.
A disadvantagethat could lower employee productivity is that the plan
could lead to collusion among groups of employees to keep productivity
levels artificialty low. Employeescould approve each otherb'wage
requests without appropriate merit. The plan also coutd resutt in ineffi-
ciencies, because employeeswho have had their wage increases turned
down may not work up to capacity due to a loss of inierest.

(3) some advantagesthat shoutd improve goal congruence between the

employee and the company are that the plan indicates the company's
interest in the needs of the employees,and that the plan may result in
increased profit through improved productivity,which may lead to
employees earning a larger income through increases in wages.
S o me d i sa d va n ta g esthat could lower goal congr uencear e that e m pl oy - .
e e s ma y mi stru st a w age plan suggestedand implementedby m anage-
ment, and that there may be an overemphasison a limited range of per-
formance measures.

(41 Some advantagesthat should improve administration of the plan are that
procedures for requesting a wage increase and for its
approvat are clear
and unambiguous,and the plan allows for relatively quick positive feed-
ba ck a n d p e e r re co g nition.
Some disadvantagesthat could hamper plan administration are that
a
there is a limited amount of management input and control,
and that
there will be additional record-keepingresponsibilities
associated with
the voting procedures and maintenanJe ot'empiov"" productivity
records
an d p e rso n n e lfi te s.
I
t
 r
I

2ffi Chpter 1l

cl1-3 I

(rl The basic premiseof the learningcurve is increasedproductivityas

experienceis gainedin the performanceof repetitivetasks. Various
lnputs to the productionprocessmay be used more efficienily as cumu-
lative output increases,but in most productionprocessesthe maiority of
cost savingsassociatedwith a learningphenomenoninvolvethe use of
human labor.
( s , z o o+ 2 , 2 4 o ) + 1 6
l2l = = BSohtearninsrate
3,200 + 8 ;;3
(31 With a learning rate up to cumulativeoutput of 32 units, averagedirect
labor hours usedto producethese 32 units shouldequal gs% of the
averagedirect labor hours usedto producethe first 16 units. tn short,
averagehours employedfor each unit when 32 units are completed
shouldequal:
340 x .85 = 289 hoursper unit.
This impliesa total of 289 x 32 = 9,249hoursused in the productionof
the first 32 units, or
91248 - 3,200 - 2,240 = 31808 hours
usgd in the productionof units lz through 32.lf the averagehours per
unit in this productionbatch is taken as the direct laborstandard,the
standardper unit becomes:
3 ,8 O8 h o u rs
238 hour s per unit
16 units
(41 Bid price on order of 96 units:
s 1,500
5,95O
9,52O
16,97O
5,091
22rO61
x 9 6

(5)
FoT" applications of the tearning curve in the planning and controlling of
business operations are setting performance siandardi, preparing cost
estimates in competitive bidding, determining budget ailowances for
l a b o r a n d l a b o r-re l a te dco sts, schedulinglabor r equir ements,and deter -
m i n i n g p e rfo rma n cee va tu a ti o n sin which per iodic pr ogr essr epor ts ar e
c o m p a r e d w i th a cco mp l i sh me n tsexpectedunder the cur ve.
 ---
I

Chapter | 1

cl1-4
Shoitcomings:
(1) Actual payroll hours are not approved by production managernent.
(21 There is inadequate segregation of duties within the Payroll Department.
(31 Personnel Department should not have access to payroll checks.
(4) Departmen-tsupervisors should not distribute the payroll checks.
Suggested corrective action:
(f l All incoming time cards should be signed by both the ernployeeand
supervisor.
(2'l The payroll clerk preparing the input for data processing should not do
the reconciling, but rather a second clerk should reconcile the payroll
journal to the time cards.
(31 An employee of supervisory level should authorize voiding of computer,
g e n e ra te dch e cks a n d the subsequentpr epar ationof a manuat r epl ac e-
me n t ch e ck.
(4) R e p l a ce me n tch e cks should be pr ocessedfoltowing good inter na l c ontr ol
p ro ce d u re s.
(5) A l l p a yro l lch e cks, i n cludingunsignedr eplacem entchecks, shoul d then
be given to the Accounting Department rather than to the Personnel
Department for storage in a secure location until payday.No Accounting
Department employee with payrotl recordkeepin g responsibility should
have access to the undistributed checks.
(6) On payday,checks should be distributed, preferabty by a Treasurerrs
D e p a rtme n te mp l o ye eor by an Accounting Depaftm ent employeew ho
d o e s n o t h a ve re co rd - keepingr esponsibilities.

cl 1-5
fi fh e re q u i re me n td o e s not ask for a list of r esponsibilitiesOsbor n ehas
vi o l a te d ,b u t, me re l y,which of the fifteen r esponsibilitiesapply to
Osb o rn e ,ssi tu a ti o n .)
Ma n a g e me n ta ccountantshave a r esponsibilityto:
C o mo e te n ce : P repar ecom plete and ctear r epor ts and r ecomm en-
d a ti o n s a fte r a p p ro p riateanalysesof r elevant and r etiableinfor m ati on.
(Osborneknows that if he consents to Wallace's request, the resulting
ma i n te n a n cej o b co st r epor ts would be m ater iatlymisstated and w oul d
p re se n t fa l se a n d mi sleadinginfor mation.)
Integrity: Refrain from engaging in any activity that would prejudice
t h e i r a b i l i tyto ca rry o ut their Outils ettr ically.( osbor ne is being as k ed to
be a party to an activity that woutd erode hii abitity to carry out his
I
duties ethically.)
b C o mmu n i ca teu n favor abteas well as favor abteinfor m ation and pr o-
f e ssi o n a lj u d g me n ts o r opinions.( osbor ne is being asked
to thwart c om -
mu n i ca ti o no f u n fa vo r ableinfor m ation.)
 Chapter l1

Cl1-5 (Concluded)

Refrainfrom engagingin or supportingany activity that woutd dis-

credit the profession.(Preparingdeliberatelymisteadin! maintenancejob
cost reports clearlywould be a discredit to the profession.)
Obiectivity: Communicateinformationfairly and objectively.
(Osbornewould violatethis responsibilityif the maintenancejob cost
reports are,altered.)
Disclosefulty all relevantinformationthat could reasonablybe
expectedto influencean intendeduser'sunderstandingof the reports,
comments'and recommendations presented.(Theshifting of cost among
maintenanceiobs wouldviolatethis ethical responsibility.)
 I \

\
!

GH4pTgR 72
DISCUSSIONQUESTIONS
012-1. Supervircrs' salaries, hdirect labor, overlimo
prcrniurn, lupplier, indirrct nratorials, payroll
tarq tactory hlurancc, and deprrciatian.
Ql2-2. Thr nst inportant r.elon fa variatbn in fae-
lory ovrfiead b tho pnroncc of lired and rarF
ablo rrpenrer. Thordorc, ar prcduction vol-
urno changs frqn nrnth to rrcrth, tho coCc
will do likowicc. Howcvor, ovcrhead alco wifl
''
cltrtgo bccause of inrprovcd or dccrcssed cflF
ciencies and ctrangos in pricer paU for over-
head ilrns LEh s! rupplies ard repairs.
012.3. Predclerminod ralcs aro ured when it
beconres obvious that 8ny other melhod of
charghg overhead resullr in inequilabfccoct-
hg and delays tho reporthg ct firancisl results.
Charghg aclual overhead io ic6s and producir
can resufl h charging unreasonablearnounls
of owrhead to varbur perirdr and in dehyed
rcporling of corl data. Thc urr ol prcdclcr-
mined ralcs alao onhances control through
analyria ol over. or underappliedlaclory over-
head
012-4. Sir bases used for applying taciory overhead
aro unitr prodrced, direst rnateriatr cost, direci
labor cosl, direct labor houc, machhe hours,
and transaclions. lmportant consideratioogin
seleclhg a base are the relatbnship (conela-
tion) ol the base used and lhe use d ovefiead
items in manufacturingoperalbns, as woll as
the clerical prac-ticability ol using a particuhr
bge.
012-5. Predetermhedrde! are used to charge
over-
head and becornethe basis for determiningthe
012-8. The underappliedoverhead will be higher
cost cil a lcb or producl.Thereforo,the reason-
ablenessof such costs is to a hrge exlent
determhed by the reasonablenessol-the rat€.
Shce these cqsts are used for costing hvenlo
ries and play sn important ole h esiabtishing
sales prices, the selectbn ol proper predeter-
O12-9. (a) ldle capacity costs arisc from
mined rates can be appreciated.
Q12€. An objectivein seleciing the baso lor prede_
a employeer give rise lo colte auch ar
lermined factory ovefiead rale b lo engurelhe
application of factory overhead in reasonable
proporikmto a benefbial or causal relatbnship
lo jobr, producls, or work perlormed or lo
be
porformcd.i,c., for rrtimaling purpose!.
Ordiurily, the base selostodehojj be'closety
rolded to ttnctions represenledby the applioC
overhcad cost. lf tactory overheadcosls
are
predorninantlylabq oriente4 such as
supervi-
sirt and indirect hbor, the proper base would
probably be dirccl bbor hours. lf taclory
over-
head costs are predominantlyretated
to the
cosl incurredin the ownershipand operatbn
ol
thc madrinery, the proper base would probably
be machhe hours.
Anotrer otriectivo in selecthg the base b to
minimizo clericel st and dfort relativo to tho
bonrlitr ottaincd. When two or more ber.s
pro\rid. apprcximatcly thr rgrno applicrJ ovor_
hood cst to specilb unils 6t prodrrtbn, the
rirplcsl ba$ lhouH be usrd.
Q12-7. (a) Theqrfrcal capecity b actuslly tho nrari-
rnum produclion possible frorn e givon
pbnl wit|r no allo*arrr rnade for ccsla.
lion of operations for hotidays, wrok_
endr, malerials shorleges, or machino
bnakdorns.
(b) precticsl capacity ig theoretical capechy
lege an ellow.ancefor interruptimr euch
as brealdo*,na, delayr in recciving rup
plict, and worker abgencer. prjcticsl
capacily is usualty 75 to 85 pcrcent of
theorelical capacity.
(c) Erprctrd ectual caprcity ir prtctical
capacity adjusted lor tho lach of autfbiont
dcmrnd h a tinglo oporathg period and
may br usod h building oporating bu+
gelr tdrcn expected capacity ditfen gub.,
stantially lun norrnel capaciV.
(d) Normal.capacityis practical capacity
adjusted to give consideratbn to t o toci
of suflicient dernand over a pcrird bng
enough lo hclude cyclical and reassral
fluc.luatbns.This is usually the basis for
l o n g - r a n g ep l a n n i n g . s l a n d a r d a ,a n d
preferably for the determinalbn cJ owr-
head rates.
lf
marinum capacity is used and bwer if normal
is used. ll this cost is charged lo lhc currrnl
perird, then nraxirnumcapacity will prcducr
a
krwer, and normal capacrty a higher, operating
prcrtii.
idlc
employees and idte tacilitiec. ldle
base wages paid, employor,r sharc of
payroll laxes, and other lringo benefit
cosls. ldle facilities cause capacity 6te
due lo delerbratbn with time, appreh-
i n g o b a o l e o c o n c e c, o s t ! f o r u p k o r p ,
readiness,maintenance,repairs, lhelter,
a n d p r o l e c t i o no f v a l u a b l e er u c h a r
hsurance.
(b) When iile capacity b prescnl, an
dtenrpt
should be made to regregalr idlo
employees and idle lacilitier through
proper recbssiticatbn. Tho rcurnula$on
ol lhe cost attributabtelo theso Ulc work-
srs or facililiec in excess _cla reasonablc
budgnted arnounl migrht be in aorno ki,rd

271

\
t-
272
ol overhead account to be lreated sepa-
rately aa e'rnanagemenl by erceplion'
faclor. ldb capacily corlr should bt
accounlod lor soparalely lor lhoro rea-
!ons: (1) to Pttv.nl dittortkn end srlu-
rirr h thr rna[air of ptoduclin cctt;
(2) to bililetr ircqne dclominalixt; (3)
to csrtrol ogcraticts; 8nd (4) lo phn nrrt
year'r hdget edrquatdy.
(c) Exeorc crpe.*ty cod h8! bem iJentilhJ
with thoo capacity.cootr thol rcrull frqn
grealrr produclion capacily lhan lhc
cqnpsny couH rvcr lrqe lo usa, or frcrn
unbalancrd rquipmenl or machincry
withh dcparUnenls.In creatng lhc fote
casl budgrl, il ir irportanl lo bobto the
.xc.r capacily cosl ro lhal manago-
mcnl can bo made aware cil ilr responsi-
bility rcaardng the excess invesUnentin
labor and machhec.
Q12-10. (a) Anaty":r and identifythe ovefiead trans-
actisrs.
(b) Joumali:,cthc lransrlisrs.
(c) Enlcr transaclbnr in general and gub-
sktbry lodgen.
Ol2-1 1. Ovefiead applicd lo prcduclicn ir enlered as a
credil h |he lactory orerhead control accounL
Aclual ovrrhrad it debiled lo lhc same
Chapter l2
accounl Therefore, ovefiead has beon oer-
applied when lhc account lras a crcdil balanc..
Q12-1z- Ovcrhead cen br ovcrappliod beceuso (a)
actual oveficad waa bss than budg.l.d; (b)
capeity utli:.d war greetor |h8n that eslirnaF
od h cnpdhg ovofirad rale; (c) lho wcr-
hcad cdinatc war lo hiCh (a mirtate); (d) lhr
produclian ortimab wat l€ low (a mirtakc);
(r) corn|liulkns of thr abor.
Q12-13. Over. or undcrapplicd faclory ovcrhead may
be proralod arrrcng work h proc.ss, finished
goods, and cosl of goodr sold, or it may bc
lrcaled rntirrly ar a period cogl. The firsl
method would have a smsller effcl oo cct ct
goods soH and |hcrelqc qr lho net ircorne for
the pcriod.
012-14. Thr cxislcncc ol largc undcrabcorbed vari-
ancis doot nol necossarily mcan ihat unil
costs ar. incorrecl. An analysis of thc under-
absorbod figwer will irdlplc (a) whether actu-
al ororhead ir loo high or whcthcr oxponseg
havo been incorreclty estirnated; and (b) what
part of thc underabsorplion is caused by
unusod capacity. ll Eclual ovrhead is cmtiJ-
ered lo b. t@ high and thcro ic Ule capacity,
unil coctr ccnpulcd ate morc rearcnablo lhan
they would bc if overhead rale! wero cornput-
ed to absorb all of the aclual overhead.
 1
\- Chapter 12
; 2n

EXERCISES
I

E12-7
(l) $l'75oro0o fixed overheadand $72o variable overheadper ton, calculat-
ed as follows:

For both the ngrmal capacltyand expected actual capacity,the problem

states the total budgeted overheadcost and the number oi ton"
' ty. The high'low method of estimating cost behavlor of activi-
can be used to
determine the overhead budget, usin-gthose two points:

Budgeted
Activity Level Tons Overhead
Normal capacity 6,000 $6,O7O,OOO
Expected actual 5,000 5,35OrOOO
Difference I,O0O -s 720,Ooo
.
Variable 5720,00O .
overheadrate=ffi-=$72ovariab|eoverheadperton

Budgeted fixed overhead = $5rg5O,0OOtotat overhead

- ($ZeOx 5,000) variable overhead
= 55,350,000 - S3,OOO,O0O = g1,75O,OOO
or, budgeted
fixed overhead = $6,070,000 total overhead
- ($72Ox 6,000) variable overhead
= $ 6,070,O0O- $4,320,OOO = gt,TSO,OOO

lv

\
 274 Chapter12

E12-1(Concluded)
(2'l The predeterminedrate at practical capaclty would be $895 per ton.
Using the budget for fixed and variable overhead, a predetermined oyer-
head rate can be calculated at any level of acUvity withln the relevant
range.Assumingpractical capacity ls wlthln that range, Orecalculation
is:
Predetermined
overhead rate at = Budgeted total overhead at practlcal capaelty
practical capacity PracUcalcapaclty In tons
(8,0OOtons )
Budgetedfixed overhead
+ Budgetedvariable
= -
overheadat 1O,O0O tons _ $1,7S0,000 + ($ZZOx lOr0OO)
{O'0 OOto n s IO' OOOtons

_ 9 1 , 7 5 0 ,0 0 0 + $ 7 ,2 0 0 ,0 0 O) _ $8r 95Or OOO= $895 per ton

{OTOOO tons IO' OOOtons
o\ $72o variable overhead per ton + ($trT5orooo/lorooo tons)
= $72O per ton + $175 per ton = $895 per ton.

E12-2
Work in process balance, Septernb:r 3O........,....r........r...r.r.....,.........,.. $12,200
Lgss materials sti!l in procgss...,...,......,.,.....,..,.............................,,....r.
5,56O
Factory overhead and dirgct labor sUlf in pnocgss...,.,.......,.r.,...........,..$ 6,6co

Chargedto
V/ork In Process
Amount o/o

Factory overhead.......... 515,840 dlolot x $6,640 = $2' 921.60

Dire c t l a b o r , . . . ..........o .., 20,160 56 x 6,640 = 3t718.4O
s36,o0o 100% $6,g4O.Oo
's 15,8 4 0
* $36,o0o = 44oh
(or)

S15,840-(factoryoverhead) * S2O,16O(direct tabor) =.7gST

Let X = direct labor still in process
Then,X+.7857X = S6,640
1 . 7 9 5 7 X = 5 6 ,6 4 0
X = $3,218.429T direct labor still in process
.7857X = S2,g21.SZO2factory overhead stilt in process
s6,639.9999
 I

>

t_ ;
Chapter 12
I 275
l .
El2-3'
I
: (11 135 peopter 8 hrs. per day r 5 days per w6ek r 4g weeks =
259r2OOdirect labor hm.
I
- l2l {35 peopler lo hrs. per day r 4 days per week r 49 weeks =
259,2OOdirect fabor hrs.

! Et24

Factory overhead rates:

b
(11Units of production: $225,000+ 5y000 units = S45

(2f Materialscost * $SoO,oOO

$ZeS,OOo =,{5 = 45oh
(3| Direct labor hours: $225,OOO
+ 56,25ODLH = 34
(41Direct labor cost: $225,oo0 + (56,2s0 DLH r $81= .5o = soo/o
(5| Machine houns: + 75,OO0machine houns= i3
$225,OOO
El2-5
(fl Assumingnormal capaclty:
(al The factory overheadrate: (90OO,OOO + 5O,OOO| + $6.69 = $14.69
(bl The fired part of the factory overhead rate: $e6o,ooO+ 5o,ooo = 38

l2l Assuming erpected aetual capacitln

(al The factory overheadrate: 1$lOo,oOo+ 4oroo0!+ $6.89 = $i6;69
(bl The lixed parf of the factory overheadrata: $lbo,ooo + .to,Ooo=
$lo
El2€
b

Actual ovgrhgad r.......'.r...r.....r.....r,...r...,.............,..!......r..r,........

AppliedllAoty
factory overhead(S2rSoO
machinehours r
SZZgTOOO
\-- $5.iOrt..............r... 267.TSo
underapplied
r"se'sPP"tttl factory
l.lgtClry overneao
ovgrhgad tor period ......,..........r,......r............
a - for tne
thg pgrlod ......,..........r......,r......... $ 1j1r?54
t$255,o0o +
! 5oro0o budgeted machine hours = $s.1o

,:
 Chapter l2

El2 - 7
(1l Work in Process.'.'..............................o......o................1
,45OrOOO
Matef|a18..........r..r.........r.......o.....o....rrr.o.....o........ l r45OrOOO

Work in Procgs,.....,......o...o... 928,OOO

Pa1rc!|...... 928,OOO
Factory OverheadContrcl... ......i.... 563tOOO
Materials, Palnoll, Accruals, and Various Credlts 563,OOO
Work In Process 551,OOO
Applled Factory Ovgrhgad,..........,.........,.......,...r 551,OOO
Appfied Factory Overhgad .r.................'.,......'rj-,r.rorr S5lrOOO
Factory Ovgrhgad Contrcl...or......,..o.,rrr-ooooorrroiror 551,OOO

Estimated factoly overhead $57O,OOO

Overhead rato : $19 per dr ill
Estimatedproduction 30,OOO

l2l Underapplied factory overhead: $563,000 . $ 5 5 1 , 0 O O= $12' OOO

E12 - 8

Agtual factory ovgrh gad r.....t.......r......!.................t..... $ 9,5OO

Applied tactory oyerhead (4rlO0 units x $2.46)r..,....r. 10.086
Overappligd ovgrhead....?.......o......o..r,,.,..,.......r......,.... s (586)
*
va tiabl g facto ry ovgrh gad fiito .......,...........,r....,..r.o.... $2.10
Fired fastory overhead rate ($ir44O + 4'OOO units).... .36
Total fa ctory overhead rilto ......,.r,...........r......rr.....,..,. 92.46

E12-9
(f l Applied factory oyerhosds
sl6,92O
= $ .47 lired portion of rate
36,OOOmachinehours
2.7O variableportion of rate
_S2€I total rate
$2.57 x 2,7OAmachine hours = g6,939 apptied factory overhead

t2l Actual tactory overhead ........................,... 57,4OO

Applied factory overhead 6.939
U n d e r a p p l i e do ve rh e a d s 46,1
I

I
I*

L
Chagter12
277
L. Et2-10
I Agtual factory ovorhoSd ..D.....................r'................r..!....o..,...
Appliedfactoryovarhoad (2ro,ooomachinehoursr tt.:::::. $836rooo -iio.ooo
I o1rgrappliedfactory overhe8d............'.................,.................
s ta.ooot
I

E72-17
I
I

\- (11 Fixed portion of the factory overhead application rate:

I
st50,ooo = $1.50 per machinahour
tOOTOOOmachine hours

(21 variable portlon of the factory overheadapplication rate:

= $2.5O per machinehour
1OO,0OO
machinehours

(31 Actual factory overhead .........r...........$4i

Appliedfactoryoverhead (lOS,ooo -654{,OOO
x S4.oo1.....::::::::::
Overappliedfactory overhead... r.........r(9€oo)
E72-12

fctu--altactory overhgad .........'........r...........r.........................

Applied factory overhead (2Oo%of $gri lZ) .........,...,.,,...,.....$141334
16.234
overapplied ovgrhg?d.........,...,..........................,....r..,.ro.r......
E_f:.gggl
 :t

Chapter12
278

812-13

Regulrements(11& (21
Account Percentage Applled Percentage
Balance of Total Overhead of Total
$ 6,000 5 % $ 2,ooo 4%
Work in process ..'o""'r"t""' 32%
Finishgd $ood8..,.....t"""""" 38,00O 31 zgoh 16,000
76,OOO 631noh 32rOOO 64oh
Cost ol goods 8old.-.....,......
ch $50,ooo 1oo%.
Tota1...............r...................$12OtOO]9 t00

(11 work in Procesz l5o/oof $8r0oo),.......,......r.......'..'r....r 300

1,9OO
FinishgdGOOdS 131ZnohOf $8rOO0)............'......,...'o'..
3,8OO
cost of Goodssold 1631nohof $610001.....,................ o,ooo
FaCtOfy OVefhgad GOntfOl.,,.,..'...,..,....'....'..r'o.....
(21 FaCtOfy OVgfhgad Contt!|........,......'.............r..'....'.r"'
o,ooo
300
Work in Process (5% of $6t000|""""""""""'t"'t
l r9OO
Finishod Goods 131 znoh ol $6'0OO)""-""""'o""
3r80O
Gost of GoodsSotd (63 lnoh of $6tooo1"""""""
240
(31 WOfk in PfOCgSSl4o/oOf $6rOO0|.'...,...'..'r..............t.."
Finished Goods l32o/oof 361000)""""""""""""""""'
1,920
3r84O
Cost of Goods Sotd lA4% of $61000!"""""""""""""' 6,O0o
Factory Ovgrhgad Contt!1 """" """"""t"""t"""' ' v
L
I
L-
l
I-

Chaptu 12 279
I
I

lF
PROBLEMS
)
b
P72-7

I
(rl Agtual oVorhead lpcurred .........'...'....'...........r.r...r,.r..........r..... $3r3g5,OOO
I Applied ovorhoadt..........................r.....r.........t......,.o...............
- 3.325.000
Underapplied ovgrhgad r.......'.........'..............r..tr..D......r..........rs 60.000
I
I
i- 'acrr3!It41_t_
prodoterminsd rate based on expected astual capacity
= 9,5OOMH x ($3,500,000/lO,00O MH)
!
= 9,5OOMH x $35O per MH = $3,325,OOO
E

(21 The predetorminedrate at practicafcapacity would be $316.67 per

machino hour (MHl,calculatedas follonrs:

Flrsg find thc budgeted total lired oyorhoad and the budgeted variable
ovorheadrato par MH. The problem states both the total budgetedover-
head cost and thc number of MH of actlvity,at both the normil capacity
and orpected astual capacitylevels,so the high-low method of estimai-
ing cost behaviorcan bE used:

Machine Budgeted
Astivlty Level Hours Overhead
Erpected actual lo,ooo $3r5OO,OOO
Normal capacity I,OOO _ 3TOOOTOOO
Differsnce 2,OOO $ 5OO,OOO

V a ri a b l e $ 5 OO,OOO= a
or"rf,""J'i"t" = frffi $25Ovariableoverhead
perMH

Budgetedfixed overhead = S3,50O,O00total overhead

l- - ($2SOx 1O,OOO|varfableoverhead
= s?r500,ooo- $2r500,ooo= $l,ooo,ooo

b or, budgeted
a fired overhead = $3,ooo,oo0totat overhead
I - (S2SOr I,O00f variable ovorhead
= $3,0001000 - $2rooo,ooo= $l,ooo,ooo
Then,usingthe budgetfor fixed and variableoverhead,a predetermined
overheadrate can be calculatedat any level of activitywithin the rele-
vant range.Assumingpracticalcapacityis within that range,the calcula-
tion is:
7 --'1
\

2W Chapter 12

P12-1 (Goncluded|
Predetermined
overhead rate at = Budgetedtotal overheadat practical capacity
practical capacity Practlcal capacity in MH
(15,OOOMHI
Budgeted fired overhead
+ BUdgetedvariable
overheadat 15'OOOMH _ Sl,ooo,ooo+ ($25o x 15,OOO}
1 5 ,OOOMH 1 5 , O o OM H
$ 1 , 0 OO,0 0 O+ $ 3 ,7 5 O,OOO $4,750,oOO =
$316.67 per MH
1 5 , O O OM H $ 1 5 , O O OM H

ot'r $25o variableoverheadper MH + ($f TOOO,OOO+ 15,OOO

MHf
= $25Oper MH + $66.67 per MH = $.?16.67per MH.

(31 lt the actual overheadol $?,405,O0Oyyereunderappliedby $1O,OOO, then

Applied Overheadwould have a credlt balance of $3r4O5rOoO- Slor0o0,
or 33,395,000.The closing entries ane:
3r395rO0O
Applied Overhgad.....r.......,.,......................r...o......
Factory Ovgrhgad Control r...,,.........r.,.......... 3r395rOOO
Gost of Goods So|d....... ..,...........r........'.. 1or00o
Factory Overhead Control .r.............r........t... IOrOOO

(41 Account Percentags

Balance of Total
Work in process ............o...r.r.,r....... $ 2oo,ooo 2.5%
Finishgd goods..................or.,...,..... 4OO,OOO 5.O%
Cost of goods sold 7,4OOrOOO 92.50h
Total _s8,ooo,oo9 100.ooh

Work in Process (2.5 % of $lOr0Oo)...........r......r...r..... 250

Finished Goods,.,. 500
Gost of GoodsSold 9r25O
Factory OYgrhgad GonttD1..............r...'..........t..... 1O,OO O
 I
i L

I
I
-

: C@ter 12 281
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 Chwter t2

P12-3

(f l Total cost of Job 50:

Work In process, December I 3 54,OOO
December costs:
Matorlal8..... aaaaaaaaaraaataaaraaaaaaaatataaaraaaa 45,OOO
Direct labor ($lO2,OOO+ 8,5OO|r 3,5OO| 42|OOO
Factory overhead (34.50 r 3,5OO| 15,750
$156,750

(21 Factory overheadcosts applied to Job 52 during Decemben

$l.SOx2,O0O=$9,OOO
(3) Total factory overheadcosts applied during Decomben
$4.5Ox8r5OO=$.?8r25O
(4) Actual Decemberfactory overhsadincured:
Supplies a ataaaa aa aaaaaa aaaaaaaaa ataataa $ 3,soo
Indirect labor lygftos....,... 15,00o
Supervisory sa!ari|B3.........r....or..........oo......r......r......r.r.....rr...... 6rOOO
Building occupanqy costs..t.................'r,...'....r...............o......r 3r5OO
Factory equipment costs...o.....'...........o.............................r.o... 6,OOO
Othgr factory costs...r...........r....r..................r'r..........'.r...r...... 5rOOO
$3e,999
(s) An insignificant amount of ovep or undsrapplied factory overhead woutd
be treated as a period cost.
(61 Agtual ovgrhgad....r.....r...r...r......rr...r.r....r.rr.....r...r'.......r......tr.. $39,OOO
Applied overhead 38,25O
Underappliedoverhead $ 75o
I

Clnpts 12
283

P724,

(11 Actual factory overtread:

Indlrect materlalg and supp1ies....................................o.,...,.r..
$ 18,O0o
lndlrggt 1abor....t....r........r...............r..o......r.o.r........................r.
Employec benefits.....................r...............r,.............r.............. 5 3 , 0 O o
Depreciatroll tttt.t............r.....r....r............t........1.............r...r......
23,00O
Supgrvisioll "tttt...o.'..r.o.r......................1..rrrr.t1..r.......r.....o.r....... {2,OOO
20.o00
fl?s'qaa
l2l Ovep or undoriapplledfactory ov€rhead!
I
Totaf dlrect labor, 2o-
r.r.............r........'......r...........r.....rr......o
Factoryoyerheadrato per direct rabor dofraro......,,.....,......r.,. s 7o,0oo
1600h
Applied factory ovgrhgad .........o..........o..
Actua I factory oygrh ea d ..........o,.,.r,,.......
st 12,OO0
126.OOO
Underapptigd
factory overhe3d...........,.o,...........r.,........r.......,.
s 14.000

(31 Amount included in cost of goodssold for Job 1376:

Beginning ba1ance..r.....r......rr....................r..............r...r.......rr.
$ 72,5OO
Matgriafs and labor r 20- ..r.Drr.....r.....r......................r.......r....,.
8,OOO
Appf ied factory overhead, 2O-- (S7,OOOx l6O%) 11,2OO
9_91,?og
(41 Gost assigned to the work in process account at
the end of 2o-z
Beginning balance (Job i376)...,..,.,.....o.......,......r
$ 72,500
Cost charged to work in process, 2O-:
Materialg ..........rr...................r...................o..
$ 43,ooo
L€bor
7O,OOO
a..aaaaaar-.aaa..o.a.a.a.a.-aa.........aa...aa.aa.arra..a..a

Appfied'factoryovgfi ead .....r,...................... 1l2,ooo 225,OOO

Less cost of Job i376, wtrich was completed $297,5OO
and so|d.......r....r.....o-..-.r.o.....rrr..........r......r...
91,7O0
s205,8OO
 --
I

2U
Ctlpter 12

P12-5

(11 Predetermined factory overfisad rate based on nonnal capacitln

$29 t25o ' -r-r-r-
= S.65 variable --r!^-
portion of rate for erpected actual and
4sroooTF
normalcapaclty
$ 1 8 ,OOO
= fired portion ol rate based on norrnal capacity
6o,o00TH =.19
.-- $.95 total rate based on normal capaclty

(21 Predeterminad factory overhead rate based on expected actual capacitr

s29t25o
r - L r - portion
= $ .65 variabte -^r!-- -
4s,ooo MH of rate for erpected actuat and
normal capaclty
$18'OOO
A5^oooitH = .4o of ratebasedon expectedactual
H:,rffon
9!.Og totalratebasedon erpestedactualcapacity
(31 Amount of-factoryoverheadchargedto production if the company used
the normal capacity rate:

47,OOO
MH r $.9S = $44,650
(4) Amount of factory overheadchargedto production if the company used
the expeeted actual capacity ratel

47,OO0MH r $1.05 = $4g,3SO

(5) Actual factory ovgrhgad.........o..................,..r..r...o....r....,.........
Applied oyerhead(from (3) normal capacity ratel r......,........... $42,1oo
44.650
Underappligd overhgad '............'......................rr.o....roo...r....r...
$ 2.4so

(61 Actual factory ovgrhgad ....o..'..r........o.o..........D..r....r................,

Applied overhead(fmm (4f erpected actuat capacity;i;t..,.. $42,1 oo
4e.3so
Overappligd ovgrhgad ...'..............'...r.........,.i........r......o,.o..,...r
$(?€gA)
 I

Chapter12 285

Pl2-q
(11 Work in Process: Flnished Goods:
Dfrect materialg ....,.. $ g,ooo Dlreet materials r.....,... $ 1 O , O O O
Dlrect 1abor.............. 161000 Dltuct labor,........,....... 4O,OOO
b
Factory overhead Factory overhead
(2'OOO x $3.601..... 7r2OO (5r0OOr $3.601 r.....r. l8,0oo
Total .........,..r.... s32,2OO Total s68,OOO
\-
(21 s t7,5OO
29,050
Heat, light, and power 23,goo
Depreciatlon-fa ctonr bull dlngs zqpp
4,00o
sOoo
6,5.O0
8,250
Depreciation-factory eguipment... 7r5OO
Miscellaneousfastory overhead.. aaaaattaaaaaa aDaataaaaa 9,goo
Total actual factory ovgrhgad r.,............................r!.,r..,...
9r.z,oog
(3) Agtual ovgrhgad ........r.......................... $l l7,ooo
Applled ovgrhEad r...o.................r.o.....r...................,..............r.. 115,200
Underappliedoverhead
9_1999

i-
2ffi ChWter 12

P12-O(Concluded)
(41 COLUMBUSCOMPA}|Y
Cogt of GoodgSold Statsment
For January

Materialc:
Inventory January I $ 2l,ooo
Purchasar $1O8,OOO
Lggt tlturng to rupplleJ''t!,..........r........... 61050 lO2r95O
Matgrialsava11ab1c................................. $123r95O
lnventory Janualy 3l 9'OOO $114,950
Dlract labor 25O,OOO
Applied factory 115,2OO
January manufacturlng cost..,........,............r $488r15O s
Add work in procesr, Janualt 1................... 32r50O
$5l8,6lio
Lgss work in process, January 3l ,........,...,.. 32r20O -
Cost of goods manufactured 9080,450
Add finished goods, Januaql I l8,ooo
Gost of goods availablg for galc.......,.,......... $so4,lso
Less finishgd goodq January 3l ......,......!.... o8,ooo
Cost of goods sold gt normal ...r...r............... s436,45O ' -
Add underapplled factory overhead .......D..o.. lrSoo
Cost ol goods gold at 8ctua|........................r $438,25O
I

Cluptcr 12
287

CASES
cl2-1
(tl Dlres{ l.abor Factory
Hours OverheadGosts
High..aa.......r....................a.1...........r......a, 217601000 hours 334r5OO,OOO
!ow 2rl60'000 2grggo,000
Differsnce 600,000 hours $- 4,620,000
'
varlabfc rate = ${ro2orooo + 30oroo0hours = $7.7O per dlrect labor hour
High Low
Total OOSt ......r...r....rrr'xlr.aarar..lraal.r....lrr..............
$34r599r999 s29rgg0,0oo
Variablecost $!Z.ZOper dlrcct labor hourl......... 2lr252rOOO lor632,000
Firgd elem gnt ......1.....1.......r.r...r..-.....r...............r.
$l3,24g.ooo
- $13,249,0oo
. -
Estlmatedtotal fagtory oyerheadfor next yoan
Total yariable factory overhead(zr3o0;o00r $7.70).....,........
Total firgd fagtory ovgrhgad .........,.,.......r....o.r..,..D.......r..r......
SlT,zlorooo
l3,24g,ooo
Total factory oygrhead,................,...,..........
s3O,g5g,ooo
- -
(21 Utility ol cost behavior Informailon:
(al EYalustlonot product pricing decisions-Tha calculation
of the fac.
tory overheadrate requfredthe company to esUmatethe
variable
fagtory overhaadcost. tn short-term-priie-cutting srtuations,
price get should cover at least the varlable materials, the
labor, facto'/
ovarhead,and nonmanufacturingcost8. For the longer toil,
total cost asslgnedto the various products may pnovide tfr"
some basis
for price dlfferentials among the ltems.
(bl cost control eYaluation-Tho calculauon
of the factory overhead
rate rcqulrsd the companyto estimate tho fired t*b;y-;;rhead
cost and thc varlable lactory overhead eost per direct
labor hour.
The amounts arc esumatesbt what ttro cost shoufd or
witl be during
t" let! yoar. Thc amounts can be used aJtnr uasis roi prsparagon
of a budget alforvancelor actual activity to U" compared
cost incunrd. Any drftenancobetween ine ruoget amounts to actual
actral cogt woufd be I moasunoof the ereaivJness ano
head cost contlol. or ractory ovor-
(c) Developmentof budgets-The
estimates of fixad factory
cost and the.variablefactoryov_erhead"o"t p"l' direct overhead
usefur In budget deveropment.They p.rriith" tabor hour aro
"o,np"nito
late thc estlmated factory overheal iost roioirerent carbu_
that arc berngconsrderedas the budget tsteveroped.activity levels

CHAPTER13
DISCUSSIONQUESTIONS
01},1. Departmentalovefiead ralot aro prcfrrrrd to a
. sirgle talc becausc they irprovr tre cmlrcl of
orcfiead by deparlnenl headr rosponrbb for
csrtrollablr ovrrtrrad, and lhry incroar lhr
' accuracy ol product and job corting whcn
productr or iobt rovo througfi variql prduc-
h9 depsdmonb.
01$2. Deparlmrnlalizing faclory ovrrhrad ir an
exlension of mclhodt used in ralablishing a
single ralc becausr (a) an application baso
musl be selected and crtimaled; (b) ovefiead
estlnales musl bo rnadc; and (c) adual wer-
head musl be accwnubl.d sd cqnparod with
applied overhead.Thcsc rteps an reguiredfor
each producing deparimenl, whereas wilh a
single rale, mly tolal factory dale ere neccr-
sary.
Ot3-3. The surn cil departnatal over- or underapglied
ovefiead would be diflerent. Every direct labor
hour *ouH havc thc sarno arnount of applied
overhead whcn a planl-wiJr ovrfiead rato b
used, assuming lhal thr applicatbn base ir
direcl labor hours. However,tho usc crfdepart-
menlal ralec resulls in ditlcrcnt amounts ol
applied ovorhoad, depending on thr labor
houn in cach dcparlmcnl and tho indivirJual
departmenlal ovcrhead ratos. For cxarnple, a
firm wilh an ovorall ratc ol $2 would have
S20,0@ ol applierJovefiead la 10,000 hours;
the seme firm wilh departmcntal rates ol 9l
and $3 lor its twe produchg dopartnents could
have more or lcss applied orerheed, depcnd-
ing an the breakdown c, labor houn receivhg
lhe S't ard 33 overheadcharge.
Thc lotsl cet cf gmdr lold ard tdsl hvcnto-
ry rtould also be differerd, becausr departmen-
tal rate! could cauro diffrrcnt unil cogts.
Thereforc, invenlory and cost of gods sold
would be hfluenced by productss<ld q still qr
hard. This hpuH not be thc case il a blanket
ralc were uced.
Q13{. A prodrrcingdepartment b dhestly csrcomed
with manufrturhg prodrctr or dc*rg ucrk qr
various jobr. A service departmentrenden
servico to variour deparlmenls and ig not
directly asrociated with manufacturing opcra-
tbns" Tho naturc cl tho nprt dono by a Otp.rf-
ment dclcrmhca rrhrther I b a rcrvicr or ptr
ducing deprrlmont. Exemplcr ol producing
depa.,tm.nl! arr cuilhg, fhirhing, m*hining.
m i r i n g , a n d r c f i n i n g .E x a m p l e r o f s c r v i s c
dgpartmontr arc mainlenancc,medbal, power-
h o u s o , p u r c h a s i n g ,r e c c i v i n g ,a n d c o s t
accoonting
Q13-5. The kinds o{ deparlmentsertablishodto con-
trol snd chargo ets depend on (a) simibrity
288
e l
t
of a company'soperalions,processes,and
machinery;(b) locatbn of operatbns. process-
es, and machhery; (c) responsibilitieslor pro-
duclion and cosls; (d) rclalionshipol opcra.
lions lo llow of product; and (e) number ol
deparlments or work centers. Thc number of
d e p a r l m e n l s e s l a b l i s h e dd e p e n d s o n l h o
emphasis placed on cosl control and on the
develognenl of overhead rates.
Qt}€. Physbally different segrnentsof a department
or clst pools for ditferent kjrds ol costs wilhin
a deparlment rnay be driven by activity baser
that are guite dillerenl, lhur callhg for lhc usr
ol subdepartm€nF tor taclory overhead accu-
mulalion, application, and analysis for each
physicalsegmenl or cest pool.
Q1$7. No. A more correcl method is the use of thc
planl assel records lo c€mpute deparlmental
depreciation,property tax, and fire hsurancc
charges, provided the recordg arr sufficienlly
detailed lor this pufpos. and thc rvork hvolve'd
is nol too complex. Swh a rnethodwouH give
proper recognitionlo lhe various depreciation
rales used and fire insurancepremiumspaid
becauseol varying tlpea of equipmenl
0198. Factors involved in selectingthe mosl egui-
table rale lor applyhg factory overheadinclude
consideralionof the nature of a department's
operalions,the relationshipol overhead ele-
ments to operalians involved, and any clerical
difticuties arising through the use of a particu-
lar rate.
0 1 3 9 . T h e s e v e r a ls l e p s f o l l o w e di n e s l a b l i s h i n g
deparlmenlalfactory overheadrales ar6:
(a) Estimatingdirect overhoad ol producing
departmentsand lhe direcl costs of ser-
vice departments.
(b) Preparinga lactory surv€y for the pur-
pose of distributingindirectdepartmental
cosb and servics deparlmentcosts.
(c) Estirnatingand allocatingindirect deparl-
mentalcosls.
(d) Dislribulingservicedeparlmentcoste.
(e) Compulingdeparlmentalfactory over-
head rates.
Ol$10. The questlcnrlhgt musl be resolvedin allocal-
ing service deparlment cosl! to benefiting
' departmontsinclude:
(a) Determhingwhich departmentsare bon-
elited.
(b) Selectingan allocatiqrbase.
( c ) C h o o s i n gt h e a l l o c a t i o nm e t h o d ,i . e . ,
direcl,slep,or simultaneous.
Ql3-11. (a) Direct-No servicedepartmenl costsare
allocatedto otherservicedeparlments.
(b) Step-Service departmentcosts are allo-
 I
l
lr
1I
Chapter 13
I celcd in thr order of th. d.partmonlr
, !.rying tho grcatest number of depart-
mentr and rrcriving tcrvic. lrom tho
I arnallesl numbor, or in thc ordcr of thc
b brgesl rorvb. deportmont st allcatod
lo oth.r cervict dcparlmrnts. Onco a
r.rvicr dcpartmenlie cortr havr bcen
t
rllocalod, no cortr of othrr r.ivico
b dcpadmontr an a.lteatrd to it.
(c) Simullanoour-Tho full rcciprcal inter-
relalio'rshipe ol bcnolitr amo.tg servico
d.partrnontr an csrs idcrcd.
t: Tho rinultanoour method b thr mat accu
ralt lor prduci coclhg ard for iJerdifying tcfal
c6lt tor ogeraling particulnrgeryice depart-
mmtc. Howevcr, thir mrthod b atao thc nrod
b difficull to conrput..
01$12. Contrcl of crtrtrheadia achieved by oornparhg
aclual rcsulla with ptanned or estimatod
rreullr. To makr arrh cornpericcrr, both tlgor
of orrcrhead must br aocumubled and rcport-
od in lho sarn. rE.tnor. Sincr thc ernputdbn
c{ overhead rater with required ovcrhead osti-
rndcs procodeclho ircun.ncc and accumuh-
lbo of astual o\rcrhcad, th. cqnputatiort prc>
duro dolermho tho accounlinglq aslual wcr-
head.
01313. Oepartmentalover- or underappliedovefiead
it determhed by curqrsring astual and appliod
ovcrhced.
01$14. ll a cornpfer product lhe is produced in a nqr.
deparlrnentalizedfactory or in a single depart-
I
289
monl of r taelory, onc appnoach lo accuratt
producl cosling is to use muhiple overhead
cosl p@lr and mulliplo bases wilhin a sirgb
rospcrbility c.nlcr.
0 1 $ r 5 . Nqrmanufacturing businorses (lrch ar rrtail
ltdcr, fluncbl iuilildilu, irsuranc. cdnps-
niot, oducalionrl i,nttitutirnr, tnd horpitela)
rhouH b. divu.d into dopartrrrnb to brrdgrt
and control stl. For oranlpb, a rrtail rtoo
mighl br dcprrUn nlalhed as folkrp* a*ninir-
lralirr, occllplrlc)r, ralc prwnclin and advcr-
tirhg,, purc{rarhg, relfing, and dclivcry. Ar h
mmulrturhg butirosser, departmcntal cootf
afr proreled lo ?ov3nuc-producingralor
dopadrncntsby urhg a cfrargingor billi.rgratc.
Departnentalizatinn ir particub rty n""J""rry
lor hcpitab and cducatioral hstitutbnr, whbi
must budgel lheir costr on a deparlmenlal
berb fo ccrtrol costs and to chargc adcquatr
rut rccorcring feee,
or$16. Govomrnent agencies employ targc numbcn
of people, and as they spend brgei and targer
surnt ol lax money for varbus seruicer, lax-
payor! arr domending more otficient urr of
lhd nrmey. Thercfore,rervices CrouH bo ren-
dered al thc l*ost coct with thc
Arrdcst cffl.
cioncy. Govcmmcntal activilier stpuU b. hrd.
gnlod and lheir csts controlled on a reaponsi-
bility accounting baeis. The efficioncy of ter-
vicer ahouH bc mcasurcd by ushg stch unit3
of measurementas per capita, per milo, q por
loi1.
 \
i

290 Chagter 13

EXERCISES

Et3-1

Work In Proceer 33,31O

Applied F8story Qverhead--DepartmentA
(1TtOOO j..,...,(
r $89 J -.......................,... 151130
Applled Fac,toryOrerhead-Department
--f
B
(1 SIOOO I $l rOl ...............o..r...........rr.......r.r.r..... 18,19O
' $l7'8OO + 2O'OOO= ti89
*$2or2oo + 2o'ooo= $l.ol

El3-2
Dcprrtmcntal Ovcrh cad Column r Gencral trdgcr
Genenl
Factory
Mecfilnlng Pelntlng Arrccmbly Cogt Pool Crcdlt
(al Factory Oncrhcrd
Control ....,.,D...-.-F l'5OO.OOO 600.00 300.00 3,ooo.0o
Accumulltcd
DoprrSulldhg[ 3,OOO,OO
trl Frctory Ovrrtrod
Con trol ...,..--ro....- or00o.o0 aooo.oo 1,2oo.oo 4OO.O0 0,800.00
Accumuhtrd
Depr.-filechhrry I,O()0.00
(cl Fectory Ovcrhcrd
Control ......ro........- 550.00 20it.33 170.00 74.67 1,000.00
Accrucd Proprr$
Trr Pryrblo--.-
1,0oo.oo
{d) Fectory (hrrrhrld
Control -,....8h- 450,00 180.00 100.00 850.00
Accr. Wortorrr
CompmteUon...
850.00
(e) Factory Ovrrhod
Controt-... ooo,oo 60.00 90.00 750.oo
Accrucd Powor
Peyebb...,...*..
750.0O
tr) Frctory Ovrrhod
Control ..........,F...,. 900.00 360.00 360.00 18O.0O 1,800.00
Accountr peyebtr
1,8OO.OO
bl Ftctory Ovrrhred
Control 1,8OO.OO 2,3OO.OO 5OO.OO 4,60O.OO
Mstrrbb
4,6OO.OO
t_
1
E
291
I
Chapter13
b
I
Et3-3
P1 P2 sl s2
(1)
$346,O0O $368,OOO $IOO,OOO SSO,OOO
Budgeted factory ovorhoad ""'t""
I
Oepiltment Sl distribuUon 7O,OOO (lOO,OOO)
3O,OOO
S (go/3OO,2l o/3o01..-u..D-.....""""
bepartment 52 distrlbuUon - (5O,O0O)
(64/8Ot I 6180l """"""""o"t"""""r
40,0oo I O,OOO

Budgeted factory overhead "D"o"t' $416,O00 $aae,ooo

Machlne hoUrlB tt""""t"""o""""'ro' + 64.000
Prgdetgrmlned rstc ........'r""""o"' ---_$6.5q
- l0q0m
Diroct lsbor houfE'."""""'r"'o"""'
Prgdgtormlned rate ......ro,o"""""D' $4.48

Job,437 ovorheadcost:
DepartmentPl
(3 x $6.5O) ..........""""t""t""t' $19.50
DepartmentP2
(2 x $4.48)"""""""'t"""" """' 8.96
$?glg

(21 Plantwidepredeterminedfactory overheadrate:

, ,T1lo1o. ' . = $6.40PerDLH

i35,OOO DLH
Sl9'2O
J o b 4 3 7 o vg rh e a dco st (2 x $4.48)"""""""""""""""""""""
cGA.Ganada(adapted}'Heprintwithpermission.
 292 Chaptor t3
I

E134
$ 4 O , O O O+ $ 2 5 ' O O O + $ 3 6 1 ' 9 5 6 + $ 4 2 0 ' O O O $846,956
= s.83
(11 452rgOO + 567125O 1rO19,25O

(21 Building Factory

and Admin-
Total Machining Assembly Groundg istration
Budgeted factory
overhead r.........rr.,.. $846,956 5361,956 $42O,OOO S4O,OOO 325,OOO
Distributionof:
Buildingand
gnounds.........!.. 18,OOO 2O,OOO (4OrOOOl' 2,OOO
Factory
administration.. 1 3 ,2OO 13r 8OO l3z€gg)"
Total $846.956 $393.156 :s 4 5 3 , 8 0 0
Base:
Machine hours 1 9 5 ,60O
Direct labor
hou r s , . . . . . . . . . . ...., 567r25O
Rate................o.....,r $2.01 $,80
- gl2o,
t
1ol2o, ltZo to Machining, Assembly, and Factory Administration,
respectively.
n
44lgor 46190to Machining and Assembly,respectivety.
CGA-Canada (adaptedf. Reprint with permission.

E13-5

Main- Admin-
Total Gutting Assembly tonanco istration
ove rhea d b u d g e t . . S i ,2 9 o ,o o o S 5 2 O,OOO $42o,ooo S2OO,O0O Si5o,oo0
Distribution of:
Maintenance
12113O,9/g0l,.. 14O,OOO 60,000 (2oO,OOOl
Administration
llslzs, lolzsl. 9o,ooo 60,000 (15o,oool
:
overheadbudset.. gl,ZrrJAA :
S*g€gg fr_4JlQg
Machine hours...... 2STOOO 2O,OO0
overheadrate....... 3o,oo $27.oo

CGA-Canada(adapted).Reprint with permission.

 --1

dlaptcr 13 293

' E13-C'
Producing Service
Departments Departments
Product
Total Mixing Finishing Cafeteria Design
Budgetedfactory
overheadbefore
distributionof
sorvict depart-
mentr $364,000 $1O4,O0O $2OO,OOO slO,OOO S5O,OOO
DistribuUon of
'sorviee
department
costg:
Cafeteria ($1o,000
-r 2OOemployees
= $5O)....'.'......'.... 3,250 6,500 (1O,O0O) 25O
P;oduct Design
G!SO'250+ 3OO
product orderc
= $167.50|..,,.,..... 16,750 33,500 (50,250)
E . g364.000 S124.OOO S24O,OOO
Bases: machine hours 4O'OOO 6OTOOO
Rates r............,. $3.1O $4.OO
GGA-Ganada(adapted).Reprint with permission.

E13-7
(f ) Producing Service
Departnients Departments
Total Pi P2 Si 52
Budgetedoverhead... $5s2,75o $2o8,ooo $300,000 $1o,ooo S34r750
Distributionof:
DepartmentSl .... 4,500 5,250 ( lO,OOOr 250
DepartmentS2.... 20,000 15,000 (35,OOolfi
Total fastory overhead ,$EEZJSO $Z3Z€O_q S3?9€99
' t8O/4OO to Pi,27O|4OOto P2, 10/4OOto 52
i' {,OOO/7,OOOto Pl, 3,OOO
lT .OOOto P2

P l : $ 2 3 2 , 5 0 0 + 4 , O O Om a c h i n e h o u r s = $ 5 8 . { 2 5 r a t e p e r m a c h i n e h o u r

P2: 3320,250 + 10,000 direct labor hours = 532.025 rate per direct labor hour
 Chaptert3

Elg-l (Conctuded)

l2l plant-wlderate: $544r75Or- l5rOOOdirect labor hours = 336.317plant-

wide rato Por direct labor hour

(31 Individualfobs lnal rsquiro relauvelydifferent amounts of time in each

departmenl ll Pl is machine-intehsiveand P2 is labor-intensive,then
ssparate departmentalrates would providea-fairerallocation of costs to
iobs.
CGA-Canada(adapted).Reprint with permission.

El3-8

(1) Main-
Total tenance Personnel Machining Assembly
Budgeted factorY
overhead....,.......... $27O,OOO s3OrOOO sl5,OOO SI5O'OOO $75'OOO
Allocate Maintensnce
(S3O'OOO + 4OTOOO
sq. ft. = $75 Per
sq. ft.) r..!......o.. (30,0001 3,ooo 14,250 12,750
Allocate Personnel
(S18'OOO + 12O
e m p l o y e e s= $ 1 5 O
per employee|. ( l B,ooo) 6,000 12,OOO
$27O,OP s170,250 $99,750
Divided by machine
hours .............. , 22,700
Divided by direct labor
hourS...r.r...'.... 16,625
Factory overhead rate s7.50 s6.oo
(21 Job No, 37522

Machining Assembly Total

Materials s60 s 7 $oz
Direct labor 24 99 123
Factoryoverhead:
1o machinehours O $7.5o..................... 75
11 direct labor hours O 36.00 66 141
slse s172
:
$331
:

CGA-63nada (adapted).Reprint with permission.

lL
-
Chapter13 295

s
Er3-g'

(11 Equation1: E = $2O,0OO +.2OF

Equation2: F = $2O'OOO +.2OE
Equation3: G = $1O,OOO +.3OE+ .iOF
SubstituUngEquatlon 2|nto EquaUonl:
E = $2OrOOO +.2.O($2O,OOO+ .2OE)
E = $2orooo + $4,ooo + .o4E
.96E = $24rO0O
E = $25'00O
SubstituUngE = $25,OOO into Equation2:
F = $2OIOOO +.2O($25,OOOI
F = $25'0O0
SubstitutingE = $25,OOO and F = $25,OOOinto Equation3:
=
G $1O,0OO +.30($25,OOOI +.1o($25,o0o1
G = $2O,OOO
(21 ProduclnE
Dcptrtmcntt Mrrlcgng licrvlcc Dcpartrncntr
Dcprrt- Ocncnl
S T m c n t O f f l c o E F O T o t a l
Dcpartmcnt
_ oycr|teed
! bcforr db-
trlbuUon
of rcMcr
> dcpertmrntt iEoroOO igo,Ooo 320,000 t20,000 $1o,ooo 32oo,ooo
Dlrtrlbutbn
ol!
Dcprrt-
nrnt E..... 12,50O (25,O0O) 5,OOO 7,5OO
Dcprrt-
mlnt F-..., 7r5OO 1O,OOO 5,000 (25,oo0) 2,5oo
Dcprrt-
ment O..... g,o0o O,ooo i4,ooo iz,ooo {2O,OO0}
Total..... ST5,SOo 311g,5oo S4,ooo S2,ooo s2oo,ooo
 -
296 Chapter 13 :

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 Chapter13
297

Et3-12

Lot Sl = $2O,OOO +.2OS2

5 2 - 3 1 7 , 6 0 0+ . 1 O S l

SubsUtutlng: Sl = $2O'OOO + .2O ($iZ,600 + .1OSt)

Solving: Sl = $2O,OOO + $3,52O + .O2Sl
.9gSl = $23,520
Si = $24,OOO

SubsUtuting: 52 = $17,600 + .1O ($2C,OOO;

= $ 1 7 ,600 + $2,4OO
= $2o,ooo
Total Pl overhead = $94,OOO+.4O (Stl + .5O (S2l
= $94r00O+,40 ($Z0,OOO) +.5O (S2O,OOO}
= $94r0OO+ $9,6OO+ $1O,OOO
= $113,600
Ef3-13

(11 The dual predetermined overhead rates are:

S4OO,OOO
= $25 per direct labor hour
l O , O O Offi

and
$3OO,000
= S75 per m achine hour
4,OOOmachinehours

l2l Job f345

$1,OOO
300

1.500
s2.BOO
2ln Chagter t3

I
E13-t 4

(11 The dual predeterminedoverheadrates are:

$9OO,0OO = $250 per machine hour
3,600 machine hours

and
s6oo,0oo=
$ 2 '00Oper ton
30O tonr

(21 Job flo3

Parts and matsrials $22,OOO
Applied overhead:
7Or $250 = $17,5OO
4 x $2rOOO = 9r0OO ..r....................r.r....r... 25.500
TOtal ........r.......r.....r..aa..r...aaaaaa.ra...rr........r.r.........r. $47.500
b

iL Chapter t3

I
L
PROBLEMS
Pl3-l

(r) DigtrlbuUon of Sorulcc Department

Overhead
Using the Dirsst Method

Producing Sorvics
Departments
-_
f,lain- Gener
Total cringl1g s-ooutilg tenance Fector
Overhead before
distribution ot
sorvicrg depart-
mOntS ....r............r $68l,ooo $l7s,ooo $23o,ooo $76,000
DistrlbuUonof Szoo,o
Maintenanco..,...,.. f 2,667
GentlFactory..r..... 83,333 (76,000I'
133,333 06,667
Total factory ___ l3gg,o
OVefhgad.r.,........ s681,O0o
- s32t,ooo $soo,ooo
Machine houtg..,.., + 4'OOO
Direct labor hour:. -r 3OTOOO
Overhead ratos:
per machine hr..,
per direct $ 80.25
l a b o r h r...,..,....
-$ 7 2

i19:{t,98.otg Grind-ins,
eoo/l,o8oto smoothins
6/9 to Grinding,3/9 t; Smootiiing

b
 go Chaoter t3

P13-l (Continued)'

l2l First, the simultaneous equations ane solved:

Let M =$76,000+(l/lOlG
G = $2OO,OOO
+ l72Oll,8OO)M
Substituting; M = $76,00o +.1($Zoo,ooo +.4oM)
Solving: M =, $76,0OO+ $2O,OOO+ .04M
.96M = $96rO0O
M = $ 1 OO,O0 O
Substituting: G = $2OO,O0O +.4O ($1OO,OOO1
= $2OO,OOO + $4O,OOO= $24OIO0O

Distribution of Service Department Overhead

Using the Simultaneous Method

Producing Service
Departments Departments
Main- General
Total Grinding Smoothing tenance Factory
Overhead before
distribution of
service depart-
me n t s $ 6 8 1 ,0 0 0 S 1 7 5 ,OOO S230,OOOS 76,000 $200,0OO
Distribution of
Main t e n a n c e . . . . . . ... 1O,OOO 5O,OOO (1OO,OOO) 4O,OOO
:--
-
Gen'l Factory 144,000 72rOOO 24,OOO (24O,OOO)
Totalfactory
overhead S681,OOO$S29,OOOS352,OOO
Mac hin e h o u r s . . . . . , + 4,OOO
Direct labor hours + 3O,O0O
Overhead rates:
per machine hr... s 82.25
per direct
labor h r . . . . . . . . . .. s 11.73

180/1'8OOto Grinding, 9OO/1,8OO to Smoothing, and 72011,8OOto General

.* Factory
6/1 O t o G r i n d i n g ,3 /1 O to S mo o th i n g ,a nd 1/1Oto M aintenance
 Chagter 13
JOi

P l 3 -l (C o n cl u d e d )

(3) Distribution ot Service Department Overhead

Using the Step Method

Producing Service
Departments Departments
Main- General
Total qin!!ry Sr*!!gg tenance Factory
Overheadbefore
distributionof
service depart-
ments ..r.......,...r.,.$6911000 $175rooo $23orOOO 576,000 S2oorooo
Distribution of:
Maintenance....., 7,600 38,OOO (76,000) 3O,4OO'
Gen'l Factory..... 153,600 76,800 (23O,4OO)"
Total factory
overhead.,........,.
$691,ooo s336,2oo s344,gOO
Machinehours...... + 4r0OO
Direct labor hours + 3O,OOO
Overheadrates:
per machinehr.., s 84.05
per direct
laborhr.........,. s 11.49
' 18o17'8ooto Grinding,
9oo/1,Booto smoothing,and z2otl,Boo to Generat
Factory
'*6/9 to Grinding,3/9
to Smoothing
w2 Chaptor l3

P13-2

(1) Cutting Assembly Finishing

Department Department Department
Predeterminedlactory
OVgfhgad ft1t9...................""'. s 2.40lMH s s.oo/DLH $ 1.60/DL$
Actual activity base amount... x 10,800MH r 12,4OODLH ry
g!_os,60o
Appliedtactory overhead...,... s25,920 s92,oo9
(21
overhead for 1
/Actual overhead for f - /Proiected
Revisedfactory \ first six months / |. second sir months )
overheadrate /Actual activity base \ -. /Proiected activity base \
( for first sir months / \ for secondsix months /

CuttingDepartment(machinehours):
+ $-z?t'1oo
szSro-o-9 - - s2.3o permachinehour
1 O , 8 O O+ 9 , 2 O O
ry-
2O,OOO

AssemblyDepartment(directlabor hours):
$ 5 6 , 8 0 O+ S 5 7 , 5 O 0'_ $ l 1 4 , 3 C - -
s4'5o per direct laborhour
12,4oo + rg,ofo: ffi

FinishingDepaftment(directlabor dollars):
s98 '5oo + $96'5oo - $195 '0o0 -
sl.5o per directlabordollar
5 6 6 , 0 O O+ $ 6 4 , 0 0 0 S 1 3 O , O 0 O
Chapter 13

Pl3-2 (Concludedf

(3) The applied overheadaccountsshould be adjusted by the differsnce in

the factory overheadrates (revisedrate less original rate) ilmes the actu-
al activity for the first sir monthg.

GuttingDelartment (9?.3o-$2.4O) r tO,BOOl$ (i,O8Ol

Assembly_Department(f.!o - $s.oo)x t z,looi is,zooi
Finlshing
Department ($|.SO:-$1,60)r $gO,ooOi iO,oooi
'
Dgct8asein appliedfactory overhead..............,.........
gFa*t,

The applied overheadadiustmentis altocatedto the inventoryaccounts

and cost of goodssold on the basis of the unadjustedoverheadcompo-
nent in each accounL

Workln Procgss......'r...r..'........,.........,..o,...,........D...$ t2rOOO

50h
Finishgd Good8.......r'.r..............r.oo..'..r...........o.......ro 4BTOOO 20
Gost of Goods So1d........r............r..........,.......r...o...o.f BO;OOO
75
$24O,OOO looo/o

Debit Credit
Applied Factory ovgrhgad-cutting ..r......,........,..,.r
1,09o
fnntieO Factory OverheachAssembty...,,......,.......,. 6r2OO
Appfig9 Factory Overhead-Finishin g r..........,...,..,..
616OO
Work In Process Inventory (Sf grggO x.05).....,
694
Finished Goods ($l3rgg0 r .20|...............j.,.,,..
21776
Cost of Goods Sotd fiti3rggo r .ZS)........,......r.
l0,4lo
n4 Chaptert3

P13-3
Produclng Departmentr Sorvlcc Dcpertrncntr
Gcnarel
Frctory
Cort Pool
Dlrcct departrncntrl
overherd:
3u pc rvlr lotl'....-.....'.. 32or3OO 316rooo 31{,ooo 37r2OO :!8,000 324,000
tndlrcct bbor ** 5r.4OO G,0oo 8r0oo orlgl 7 j2OO 18,00o
Indlrcct ruppllrl.* 'lr85O 5,OOO 5/a3O rraoo 3r6tt1 I,O7O
Labor frlngc bcncfltr ap72 0,349 10,14!t 640 700 2,100
Equipmcnt
deprccleUon......-- !rooo 8,000 10,000 500 1r74O 11100
Property ter'
. deprecbtlon ol
bulldlngr, ctc..-....
Total ..........'.......6,..-..o
ProraUon of llght end
pOWCf ...-.......n.'-.--.
3{5,482 '47,271 35O,38lt 31O,212 32i2,467 367,200
Dlrtrlbutlon of rcMcr
departmenta:
General Factory Cort
Pool ..'........-......F.. 16B00 20,160 23,52O 2,688 167,2OOl'
Sto rcroo m ...,...ro-F.... 81894 51670 2,83!t
Repaln end Mebi-
tenancc... 11,2,O
Total--produclng
departmontr .............
Macilnc houn.....-.......
Ovcrhead ratc pcr
mech lnc hr.....,....,-.,,
'General Factory Gost Pool can be distributed either on the basis of S.8O per
squaro loot ($67p2OO+ 84'OOOsq, ftl or on the basis of the following pencent-
ages: 25ohr3goh,35oh, 4oh, and 6oh tor the first five departments. The per-
centages aro determined by dividing the squansfootage in each department
by the total sguano footage.
- Storeroom can be distributed either on the basis of $.07 per requisition
($18,900 + 2TO'OOO requisitions) or on the basis of the tollowing percent'
sgos: 4gohr30ohr TSo1r'and 9% for the three producing and one service
departments. The percontages aro determined by dividing the number of
requisitions in each department by the total rsquisitions.
* Re p a i r s a nd ma i n te n a n ce ca n b s distr ibuted either on tho basis of 31.88 pe r
m a i n t e n a nceh o u r (S 2 8 '2 OO+ l 5 ' OOOhour sl or on the basis of per centages:
32ohrZgoh,and 4Oohto the throe producing departments. The percentages
a r e d e t e r m i n e d b y d i vi d i n g th e maintenancehour s in each depar tment by th e
total maintenanco hours'
!

CluptxtS
fis

Pt3-4
I

(tt Departments
Repair Assembly Power Molding
Departmentcosts,..................... s48,OOO s25O,OOO s2o4,ooo s32o,o0o
Allocation ol service department
costr:
Repalrll 19,8191.......,....,,,,.. (48,000) 5,333 42,667
PowerF 18,7 l8l ......'.r.r.....r (25O,OOO) 218.750 3l r 25O
Total ovgrhgadGost....,,r.....,......
s42soa3 s3s3,e1Z
Dirsct labor hour: 4O,OOO
Overheadrate per direct labor l60,o0o
h O Ur.a...a.aa a a o r . . r . r a r l a a r r aa . a . o . . . . . .
$r o.70 s2.46
(21 Algebralccalcutations:
R = RepairDepartment
P = PowerDepartment
R = $48,O0O+.2OP
P = $ 2 5 0 1 0 0 0+ . 1 0 R
Substituting: R = $48,000+.2O ( SZ5O,OOO +.1OR)
Sofvlng: R = 948,000 + $5O,O00+ .O2R
.98R = $98rOO0
R = $IOO,OOO
SubsUtuUng:
| = $250,000+.iO ( S1OO,OOOI
P = $260,000
Departments
Heparr power Molding Assemblv
Department costs...............,......s ;a,"ro sffio
Allocationof seruice department $zo4poo s3zo^ooo
costs:
Repairllll0, it7O, g/lO1..... (1O0,ooo) 1 O , O O O l
O,OOO SOTOOO
Power l2y'lO,7 l7O,l/l 0i ..,,.
_92,ggg (26O,OO0l 182,OOO 28,OOO
Totaloverheadcbst,...,.......r......
$396.OOO $426,oo9
Dirgct labor hours .......,,.......r.,,.
4O,OOO 1O0,000
Overheadrate per direct tabor hour
s9.90 s2.68
(3) Altocating service department costs to producing
departments onty
ignoras any service rendered by one ""fuil" department
whlle the simultaneousmethod t""ogni."s to another,
service departments' support
to one another through the use of simultaneous
equations. The latter
method is more complete and shoutd lead to results
of greater use to
managemenL
ffi Chagter 13

Pl3-5

(rt Total Pl P2 Si 52
Before distributioJt........,.,...... $65,000 $25,ooo $23r8OO $ TrZOO S9TOOO
Distribution of Sl (4/9' 5/91.'.. 3r2OO 4,OOO ftr2ool
Distribution of 32lUAr 4l8l.... 3'OOO 6,000 (9,OOOl
Aftgr distributioJl-,.........o........$65.ooo 53i.20o $33r8OO

tzl Total Pt P2 Sl 32
Before diStributiott................. $65'000 $25'OOO $23r8OO $7r2OO $9rOOO
DistribuUon of 52 (21O, 4l70l
4/1 Ol ......r.....r........ro...r.....r.t l,8oo 3,ooo 3rooo (9,oool
Distribution of Sl (4/9, 5/91,... 4,8OO O,OOO(lO,8OOl
Afterdistributiolt.,.....,,..o.r...o.. S65.ooo $3{.6oo $tgr{OO

(31 Let
3l =33:333
l:133?
Substituting: Si = 37,200 +.40($9r0OO+,10Sll

Solving: .9651 = $iO,8OO

S l = $ 1 1 r2 5 O

Su b s t i t u t i n g : 5 2 = S 9 ,OOO +.1 0 ( S11,250)

52 = $ 1 0 ,1 2 5

Total Pl P2 Sl 52
BeforedistributioJt.................$65,000 $2s,ooo $231800 $7r2oo I 9rooo
DistribuUon of Sl (4/tO,illO
I /1 O1t..........r..................r..r. 4,500 5,625 (ll,25ol 11125
Distribution of 32 (U7Or 4l7O,
411ol 2p25 4,O5O : 4,O5O ( lO,t25 )
-
Afterdistributioll..........,r...,,.,.
$65.ooo :iCr.szs
: $33r{75
\

Chapter 13 g7

Pl3-O
(11 Let r= Powerhouse;y= Perconnel;z= General Factory
Equationl: r=$161000+.foy+.202
x - .f oy - .2o2 = $161000
Equation2: y = $29r5oo+.1or +.152
-.lor+y-.152=$29r5oo
Equation3: z = $42rOoO + .2ox + .OSy
-.2Ot -.Osy+z = 30aOOO
Muftiply Equation 2by 1O and add to EquaUon l:
r-.lO.y-.2O2=$16100O
-x + 1o.o0y - 1.502 = 295r0OO
9.9Oy-l.7Oz=S3tlrOOO
Multiply Equation 3 by 5 and add to EquaUon l:
r - .l$y - .2Oz = $ 16,000
-x -.25y + 5.Oot = 2lorooo
- .35y + 4.802 = S228'OOO
Then eliminate y between the resulting equations:
9.90y-1.702=$3ltrOOO
-.35y+4.8O2=$228'OOO
(.351(9.9Oy) (.35)(l.7oz) = (.35X$3tl,OOOl
(9.90X-,35y1 + (9,90)(4.802) = (9.90)GB226,Oo0l
3.465y- .5952 = $ 1O8,85O
-3.465y + 47.5202 = s2r237,40o
46.9252 = $2,346 1250
z = g 5O,OOO
From the last equation, z = $5O,oOo;putting z = $SOrooOin any one of the
eguations in which r has been eliminated enables one to find f
9,9Oy- 7 . 7 O 2= $ 3 l l , O 0 O
-
9.9Oy l.7O ($5O,OOO) = $31i,OOO
9-9OY = $398'OOO
y = $ 4O,OOO
Then putting y = $4O'0OOand z = $5O,OOOIn any one of the original egua-
tions enables one to find r
r-.loy -.2O2 =$1O,OOO
x - .iO($4O,OOO} - .2O($5O,OOO}= $16,000
x = $3O,OOO
Hence the solution is:
I = $SOIOOO
Y = $40'ooo
z = S5OTOOO
 w
Chagter t3
Pf3-6 (Concfuded)

(2t
Totel Mhtng Powrn Porrm- ocncnf
-_
Prlmaty @!t........ $g2,goo Rcftnlng Ftnlattng ilil:
^-:-
DbtrfbuUon:
Powcrhouro.....
irzcsrooo t 0o,ooo
trd"oooffi##
T'SOO
Pcltonncl ...._.
Ocncref Fectory lfrooo
Ttoo
t2rOOO '-i"-9;'dffi
!,ggo (3o,ooo, 3,OOO
12|SOO lO,OOO :':::
torooo '-'-vv
ro,ooo
r -vtvYv'
?'5oo
i:333
2rooo
z.t;,go
srs.,ooofr.gg
-3482^3OO - -
3*r"6
# tso@l
P73-7

(1) Annuaf normat cost

center overhead ratesl

Jolat Fixed Variabte

Departmont1O: Rato Rate Rate
Gost Centgr ...............o..,.......
cost center I!!-f
o-2 ;:;::::::::........ s2.40 I .go
Department2O: 3.OO
$f .50
f.f5 1.95
lost Centgr .....r................r...
Gost center ?9-!
2o-2::::::::::.::::::.:....... $l.f s s .32 $ .83
7.25 .30
(21 Factory overheadapplied .95
to:
Cost
Department1O:. enters Depts.
Gost Center
7,220 machinehours x
cost center l9_1,
to-2: tboo rnlinin" hours $e.eO = S2,928
Department20: x $l.oo = 6100O Sg,g2g
Cost Center2o-1:
cost Center 20_22?r??Olabor hoursr 31.15 = $2rsgz.so
t;6s; ffi; t'ours r S1.25
= 2,O62.5O
(3) $4,650
qe&lq
3-T:lfactory overhead........,..... Dept. 2O
r'actory ovgrh ga $9, 430. oo
d "fi ;;:;!!'!'t""'t""""'.r.... s4r005.oo
Underapplied
(overapptied) 4,65O.oo
...r..,._..,....:.:_:.; -
ffi -$ - (ocs.oor
. - - ,
 Chapter 13
&

Pt3-8
! i
1

(11 The dual prodeterminedoverheadratas art:

- $4oorooo _ $25
.ra! ___ r!-
lorooo ffi = Pardirect taborhour

= S3oPermachinehour
#
(21 Job 1564
Direct rnateriaf...... ....................... $2rOOO
--t;;;
liregtlabor(3or$101............r.................r,......,...
Applied overhead:
3Or$25 = $75O
1OX $3O = 3OO...........,.,......r............,.......
IIOSO
?alal
tl'Lt1 "r"""""'r".....t.ar......r...r....oa....r...r.................
$3r3so

(31 Job l6il2

:i::l fabor
Dirgct S2TOOO
:i:gTl.::::.:........r...,...............................
(3O x $i 01.......r,o.r..r.r..
Appfied overhead: 300
3OrS25 = $ ZSO
60 r $3o = lr8oo .....................r..r....
zrsso
Total .........,.r.......,;;.....,...............r.......
$4rg5o

(41 (a)A single predetermined overhead

rate based on direct tabor hours would
be:
S4OO,O00 + $600,00O
l6,000 OirCAlaOortrours = 362.50 per direct labor hour
310 Chapter 13

Pl3-8 (Conctudedf
(bl Job 1564
Dirsct materlal $2,OOO
Dirgct labor (3O r $1 O1................'.........."o.D...................t......... 300
Applied overhgad (3O r $62.501....j..................r...........oo.'........ 1,875
Total 9!'1?9
(cl Job f6il2
Direct materlal $2,OOO
Dirgct labor (3Or $l O1..............r......o.........................'....'........ 300
Applied ovgrhgad (3Or $82.501............'....................,...D.o......r 1,975
Total $4,175

(51 The competitive lmpllcatlons of a single overhead rate are that on jobs
requiringmuch labor and littfe machinetime (e,9.,Job l5gdl, Mn will
compute lts cosB at too high a level and will thsrefore quote too high a
price to the customer.These iobs will probably be lost to competitors
who know their costs betten on fobs requlring much machine time and
little labor (o.9,, Job 16321,MTI will calcufate its costs at too fow a level
and will, therafore, quote too low a price, These jobs will probably be
won by MTI becauseof the low price, but will generate less profit than
erpected, or perhaps eygn a loss.
 CItWter 13 311

CASES
c13-l
(1) EmpcoInc. is currentlyusing a plant-wideoverheadrate that is apptied
on ths basis of direst labor dollats. In general,a ptant-widemanufactur-
ing overheadrate is acceptableonly if a similar relationshipbetween
overheadand direct labor erists in all departments,or the company - man-
ufacturcs produc-tswhich receive proportional services from each
' department"
In most casesrdepartmentaloverheadrates are preferabteto ptant-
wide overheadrates becauseplant-wide overheadrates do not provide:
t a frameworkfor reviewingoverheadcosts on a departmentalbasis,
identifyingdepartmentalcost overruns,or taking corrective action
to improvedepartmentalcost control.
' sufficient informationabout product profitability,thus, increasing
the difficultiesassociatedwith managementdecision-making.
(21 BecauseEmpcouses a plant-wideoverheadrate applied on the basis of
direct labor dollars,the etiminationof direct tabor in the Driiling
Departmentthrough the introductionof robots may appear to reduce the
overheadcost ol the DrillingDepartmentto zeno.However,this change
will not reduce fired manufacturingexpensessuch as depreciation,p-lant
superuision,etc. In reality,the use of robots is likely to increasefired
expensesbecauseof increaseddepreciationexpense.Under Empco's
currcnt method of allocatingoverheadcosts, these costs wi1 merely be
absorbedby the remainingdepartments.
(31 (a) In order to improvethe allocationof overheadcosts in the Gutting
and GrindingDepartments,Empcoshould:
o establishseparateoverheadaccounts and rates for each of
these departments;
' selectan applicationbasisfor each of these departmentsthat
best reflects the relationshipof the departmentalactivity to
the overheadcostsincurred(e.g.,direct labor hours,machine
hours, etc.);
' identify,if possible,fixed and variable overheadcosts and
establishfired and variableoverheadrates.
(bl In orderto accommodatethe automationof the Dritting
Department
in its overheadaccountingsystem,Empcoshoutd:
o establishseparateoverheadaccounts and rates for the
Drilling Department;
' identify' if possible,fixed and variabteoverheadcosts and
establishfixed and variableoverheadrates;
' applyoverheadcoststo the DritlingDepartmenton the basis
of robot or machinehours.
 :*i

312 Chapter13

cl3-2
(11 The companyshould use departmentalovorheadratos since the two
departmentsanoproducingheterogeneousproducta.The added accura'
cy is requlredfor pricing decisionsand for better cost control informa-
tion.
(21 The fixed cost of both seruice departments should be allocated based on
long-rangefacitiUesutilization.Variablecost of purchasingwould be bet-
ter lllocated using a cost driver,such as purchaseorders, becausethere
is a stronger explainedrelaUonshipthan by use ol volume of materials
ordered.Allocationof variabtecleaningcost basod on square footage
soems reasonable;however,the variablecost of maintainingequipment
should be isolatedand chargedto departmentsbased on the cost of ser-
vices provided.
A futler considerationof the interactivebenefits of departments
woutd be achievedby use of thE step or simultaneousmethods' and
preferablythe simultaneousmethod.Such considerationis desirable
becausethe ssrvice departmentsprovideservicesto each other.

cl3-3

A letter to the president of Summerville InC:

(1) Dear Sin

From a study of the manufacturing operations of Summerville lnc.' it

is recommended that in distributing its factory overhead, the company
use predetermined overhead rates applied as percentages of the direct
labor cost. Tho company should use predetermined rates based on nor'
mal capacity rather than actual overhead rates because of the wide
cyclical flustuations in its business. Using actual rates would, due to
targe frxed overhead costs, make the per unit overhead cost high in the
low production periods and low in the high production periods. Using
predetermined rates, the per unit overhead cost would be level the year
round. For quoting prices and pricing inventories per unit, costs which
are neither Inflated nor deflated by the cost of factory facilities are best.
The company shoutd use departmental overhead rates because the
rateg obviously yary so markedly between departments. An overall rate
would not be correct for any department. Summerville lnc.ts overhead is
a large part ol factory cost, and any inaccuracy in the per unit cost
caused by the use of an overall rate would be material. lf all the products
made used all departments proportionately, an overall rate would result
in a substantially accurate total (but not departmental)unit overhead
cost. Howeve6 in Summerville lnc. the products do not use all the
departments proportionately.Furthermoneruse of de partmental rates
aids in pinpointing cost control responsibility'
 Chapter 13 3t

C1'3.3(Concludedl
(21 Wagerates are substantiallyuniform within the separate depart-
ments, and departmentallabor costs ara closely proportlonatato labor
time. Therefore,distributingthe factory overheadon the basis of direct
labor cost would in this caso effest about as accurate a distribution as
would the direct labor hours baso. The clerical erpense of the dirsct
labor cost base would be low becausethe method does not requiro accu
mulaUonof the number of direct labor.hours applicableto each job.
Applyingoverheadon the basis of prime cost is not recommended
becauseof the wide differencesin the costs of the materialsused to
make a given lamp or fixture. Factory overhead is the cost of factory
facilities.The factory facilities used to make a lamp of silver are not
morc'thanthose used to make the same lamp of copper.For this nsason
the use of prime cost (sinceit includes materialscost) would rasult in an
ercessivechargeto lamps using erpensive materials.
Sincerely,

cl3-4
(1) The ten cost items can be categorizedinto four basic gnoupsfor purpos-
es of discussion:

Allocation
Item Method Justification
l. All ltems in this
categoryshouldbe
distributed.
(a)Salariesand
benefits.....,.,,..,,., Direct The costs of these two items
(bl Supplies..,......,,.,.... Direct are directly incurred by the
activity centers and can be
controlled by the supervisor.
A part of the salariesand
benefits might be ercluded
from a variable cost charging
rate.
 Chapter'13
311

Cl3-4 (ConUnued|
Allocation
Item Method Justification
ll. All ltemr In thlr
category rhosld be
dlstributed becauge a
dlrast caussl baslr
erlstr, but theY
ghould be crcluded
from a variable cost
charging 18t8.
(cl EqulPment The costs of these items are
malntenallclg ....... Direct directlY Incurred bY the activitY
(dl lnsurance......-..... Direct conters but are controlled bY
corporate PollcY'TheYwould be
includedin a lull cost charging
rate and excludedfrom a
variablecost chargingrate'
(gl Equipmentand
furniture
dePreclatloll........ Direct The costs of these items are
(el Heat and alr diroctly incurred bYthe activitY
conditlonill! ..'..'. Direct centers. TheYare not
(onceenteronM controllabtebYthe centerc in
(hl Buildlng the usual sense.TheYwould be
lmprovements Direct inctudedin a lull cost rate and
depreciatig ll ........ (one center on$ excludedfrom a variablecost
chargingtate.

lll. This item should be

distributed because a
reasonablemeasure
for estlmatlng the
caugal relaUonshiP
eristg.
m ElgctricitY.........'.. Equipment A reasonable estimate can
and be made of the electrical
wattage charges that can be controlled
ratings by effieient use of equiPment.
The cost should be included
in a full cost and a variable
cost charging rate.
 Chapter t3
3t5

g
Ct3-4 (Conctuded)
Allocation
Itam Method Justification
fv. TlrcroJi6Gisftems
thould be dlstributed
lf r fufl cost charging
rato lg required.
m Buitdins
occupancyand
security............... Squaro There is no cost controt benefit
feet from allocation of these costs.
ol Gorporate The only reason to ailocate is
admlnlstrative for a futl cost charging rate.
chargesr.............. ilumbgrof
employees
or some
other generaf
basis
(21 Thc number of hours serectedfor.determining
upon the purpo:" the charging rate depends
9f estabfishingthe rati. ii tie ouiectiie is-to "i"rg"
utor departments for all the coslts-ofcomputer-operations,
hours that can ba identified wittr ur? the actual
In thc base hours.This amounG-to3r5oo $;e;p"ir"nt" wiil be incruded
hour:, determinedas fogows:
Actual User Time
Tesungand debuggingffi
Setupof jobs .......,.....,. 250
Procgssingjobs ...r......,................... 500
2,750
Total hout€.... ra a a a a a a a a a a r a a a . o . a t a a
a a a.r a r a a a a a aa a a a aa a a
3,5OO
To promotecost contror,the companymight
rate, wherebythe variabrecosts wouid consider a duar charging
(31600hoursl and fired costs over uJ crrirg"d or",. actuaruser time
avairabfetiml (cre42hours).

250
500
2,750
742
4,242
 Chapter 13
316
I

cl3-5
Actual factory overh gad """""""""t"""" $85,OOO
(rl 60,000 (15'O0Ohrs. x S4l
Applied factory overhgad .....""""""""""
Underapplied tactoly overhe3d""""""""
tactory
l2l (al The too overtime hours resulted in $4oo additional applied over-
overhead.The overtime premium increased ttre astual factory
The extent
head of the department3525 (StO.5O+ 2l r lOO hoursl'
to which these items ifect the underappliedfactoryoverhead used in
dependson whether or not they wenoincluded In esumates
compuUngthe $4 factory overhead-rato'
(bl Wagi l;cia""" to direJ laborers do not affect lactory overhead
numer-
directly,However,such incteaseswill cause an increaseintaxes'
ous lringe benefii costs such as FlcA tar, unemployment also
worter{ compensation,and pensions.lt the incttase wers
grantedto indirect worierc of all categories,the increase in factory
over-
overheadmight be substantiat,causinga largor underapplied
head amouni, or a smaller overappliedamount'
(cl The FabricatlngDepartmentbshare of the loss would be sll2'5O
overhead
and would be a tactoi in causinga targer,underaPPlied was
"roun{ * a smalter overapplieOamount' Slnce the distribution
be given in
mosi tlkely a managementdecision,the reason(slshould
relieved
an erplanatorynote in the cost reports and the superuisor
of the responsibility.
 Clppter 13 3t7

cl3-O
(tl Allocationbasis: October November
Hours % Hours %
f,lachinehours:
Fast lood f urniturg .....r........ 1r32O 6.67 21560 13.06
Gustomfurnitur9.......r...r..... 18r48O 93.33 17,O4O 86.94
19,8OO l_9o,oo _1_Uoo 100.oo
Direct labor hours:
Fast food furniturg.........o.... IO'OOO 25.OO 17r 5OO 40.0o
Gustomfu rniturg.,........,...... 30,OOO 75.OO 28)25O 60.oo
40,o99 100.oo 43r75O 100,oo

Cost reallocation: October November

Dollars % Dolfarc %
Machinehour base:
MaintonaDCg.................,.....
$ 5orooo $ 48,OOO
Depreciatioll ,..,......r.r..,....... 42tAgO 42,OOO
Property tgx .....,.......,....,r..., IrOOO IrOOO
All othgrr........,.....,............,. 32rOOO 24,5OO
Total to bg allocatgd .,,...,............@f99 _grzpeg
Fast lood furnitur9.,....,.......$ 8r8OO 6.67 $ 16,000 13.06
Custom furniture,,..r.......r..., 123r2OO 93,33 l06,500 86.94
s132,OOO 1oo.ooS!_egoo 1_gg.oo
October Novomber
Doflars % Dollars %
Labor hour base:
Supervisio|l.........,...r,..r,......
$ 13rO0O $ 13,0OO
Employee benefits...,.,........ gS,OOO 1O9,5O O
Totstto be attocated..................,5io6,
oE $122,5OO
Fagtrgog
rasf foodrurn1run9..............
furn|ture..............ffi
$ zTrogo 25.ooFffi
z5.oo $ 49IOOO 4O,OO
Gustom furniture..r..t,.....,.... 81'OOO 75.OO Z3'5OO 60.00
_$log,oggl_oo.oo_$123,s99 !-oo.o0
(21 Whon gross profit is recalculated, with the factory overhead reallocated
on the base necommended by the controller, as shown in the fotlowing
Schedulo, the figures tend to support the controllerb conclusion. Also,
the allocation bases suggested appear to have a neasonablerelationship
to the costs being allocated.
318 AEiler 13

Cl3-O (Concludedl
AOUAFURNISHINGS COMPANY
RevlsedStatement of Gross Prolit
(ln thousandsl

October November
Fast Food Custom Fast Food Custom
Furnituru Furniturc Fumituro Furniture
Grosssa1os...........,......r............. $400.0 $900.0 S8O0.0 $ 800.0
Dirgct matgriats.................r....... $rOO.o $225J $4OO"O $ ,OO.o
Direct labon
,FOrming...o.............,.......r..... 17.O 82.O 31.O 72.O
Finish|ng.............,............... 4O.O 142.0 7O,O 125.0
Assemb1y.....r....,...D...r.......... 33.O 8O,O 58.O 53.O
Factory ovsrhoad allocation:
Machinehour base...,........, 8.8 123.2 16.0 106.5
labOf hOUf bi!1O.................. 27.A 8l.O {9'0 73.5
Cost of goods gotd....,.........r....., $gzs.g $713.2 $624.0 $ 830.0
Gross profit s 74.2 s180.8 $176.0 s 170.0
Gross profit percentaffo............ 18.6oh 20.f|oh 22.Ooh 21.?lt1,:h
 CHAPTER '4
DlscusstoN ouEsTtoNs
Ql.t-1. C.;qnparedto tradticnal coeting,ABC b I rpro
lhorough applicalion of cost traceability.
Tnditioal corthg traccr crly dirccl matcrial
rrd dirrsl labor to odput; ABC ncogni:er that
rnany cther cosils aro traceabb, it'ncl to ouput,
Utenlooftercod obieEtrcalled activitiec.
Q1+2. The rcle ol aciiviilbs h assigrrhg cctr to prod,
uclr, uring ABC, ir to rcrvo ar thc link
b.lwcon products and cogls; activitiecarc
nquired to producr cr.rtput,and it b hc activi-
licr lhat consumo rcaourccg,thur causing
codr to be hcuned This dtten lrorn traditbn-
el cooting h whicfi output ir ossurnod !o cause
cod!.
Q14.3. Examples of rignificant, costly activities in
manufacluringefr rctting up, changing
dcrigns, recciving matorials, reguisitioning
malerials, moving materials and products,
oderhg lrorn yendo6, and inspecting.
014-4. Thc two circumgtancer that mugt be presenl
for a traditbna, cocthg ryrtcm to repod distort-
ed prodwt c€st! arc a oqnplax cosi strusture
and a diverss prodrrt line.
Q1+5. A conrplex€sl Elrustureis presenl if a signifi-
cant parl o{ overhead cocl b not relatedto the
volume ol ouput
Q146. A dversc prdwt lhe is me h sfibh diflerent
producls consumr different mixes s{ volume-
relcled and nonnolume-relaledccts.
Q1+7. Thr four leveb cil cqb and drivers in ABC are
tho tnit level, the batch level, the product level,
and the plant level.
O1+8. ll a productconrumer l0% of all unit.level
astivities and 3ogl of all batch.level activities,
lradilbnal costing will under-report its cost by
assigning10% of all overhead costs lo tho
product, including l096 of batch-level costs,
whon 3096 of batch-level costs should be
assigned to tho produc{.
Q14-9. When both bw-vdume and higft-rolume prod.
uctr arc produced h a cornpany using tradi-
li<mal cethg, lht lorutolume prodrrt is likely
to havr ils coet distorted by a hrger percont-
agr than lhe high-volumeproduct. The low-
319
volumr product'r cost b gencrally distortcd
downwad by tradilinal ctinq and thr high-
volurnc prcdrrfr cct b diCodod rpwerd
01+10. In assigning pbntdvol co€il! to prcclrtr, ABC
offen little or no advantagt ovor traditbnat
clh9.
01+11. Thr dillercncc bctwecn CM and ABC tr pri-
rnarily rrplahed by thc fact thd AgC b a bng
run decicion-makingtechnique, while CM ic
ahql-run analysis.
Ot+12. lf a procl.rctb dirqrthued, lhe cocir reported
lor that producl by ABC will rpt necessarily bo
rvoided, bocaucr ABC only measuns how
rasource3 arc cgrsumed by products, not how
spending will be affecled by discontinuinga
prdusl. AvoHhg a cosl requircs ttrat lesr br
spstl ql sorrp rosqtnoo(s),and ABC docc,pt
predbl changos h spending Cfhis it also lrur
of Iraditboal absorption costhg.)
01+13. The relstbnshipbetweenABCand ABM b hat
ABM uses inlormation obtainod fronr ABC to
rnake improvornentsh thc finrr
Q1+14. The area ol ABM that lollows directly from
ABC's revisbn of product ccts b the strategic
realigrnmentof thc tirm,r prbhg rtructuro and
product line, permitting thr firm to retain or
regnh high-volumebusiness h spitc of prbhg
pressur€, and pronrpling managomentlo reex-
amine lhe roles ol sorne lorv-volumeprcducts.
Q1+15. The high costs ol eqne activitiea,especially
non-value-addedactivities, can focus aientirr
m lhe need to reduce or elimirate them.
014-16. ABC can lead to improveddociriona h design-
ing a producl becauco ABC tella thr coot c{
each activity required h prcduchg thc product
This informationpermits designen lo makc
design decisionr more acsuralely, eo that the
npsl cosl-ettsctivedesign can bc selecled
Q1+17. The link between ABC and TeM is that ABG
reveals the cosls ol each activily, including
lhose that do not add value, and TeM aeeksto
reduce or elimhalo non-value-addedasliviliec.
Thus, ABC can focus attenticn h a TOM ollort
and can prbritize TOM's imprwernentl.
 329
Chapter 14

Pl4-4 (Continued)

l2l SHAUTONCOMPANY
Product Costs from ActiviW Eased Costing System
overheadrates:
tl3ttrooo aetup-relatedcosts dividedby 90 aetups= 81'5oo per setup
S24O,OOO design-relatedcosts dividedby 8,OOO designhourr = 33Oper designhour
S825,OOO ou:er overtreaddividedby 3O,OOO direct labor hours= 327.50per direct laborhour
Fancy Plain Total
Direct material .....,.....r......... S 60,000 $ 160'000 S 22O,OOO
Dirgct fabor......,..............'..'.............'.. 28r0OO 272rOOO 3OOTOOO
Overhead:
Slr5OOx45setups,....,.......'.'........... 67r5OO
$1 r5 OOx 4 5 se tu p s,.....,........r ........... 67,500 135,OOO
$3O x 3rOO0design hrs......'........,..... 9OTOOO
S3 O x S 'OOO d e si g n h rs............,........ 15O,OOO 24O,OOO
S 2 7 .5 Ox2 ,8 0 0 D L H ,...,..............,..' .,, 77' OOO
S27.50 x 27 r2OODLH ,.......,,........r.,... 748,OOO 825,000

(3) Because the existing system used direct labor hours as the only alloca-
tion base and Fancy consumed 2,8OO|3O'OOO = I rrcohof direct labor
hours, the existing system allocated 9 lrcoh of all overhead to Fancy. The
activity information indicates Fancy consumed 45/90 = SOohof setup-
related activity and 3,OOO/8,00O = 37.ioh of design'-related activity, so the
reconciliation is as follows:
per
Total Unit
Cost of Fancy from traditional system,
ca l cu l a te di n re quir em ent( 1).......... szoO,0OOsl,OOO.OO
Adjustments fon
Understatement of setup costs,
$ 1 3 5 , 0 0 0 x ( 5 O %- g t r c o h l $54,900
Understatement of design costs,
S240,OOO x (37.Soh- g t,coh|..,...,.. 67,600
Total adjustments......... 122,5OO 612.5O
Cost of Fancy from ABC system, as
ca l cu l a te di n re quir ement( 2).......... 993?,s99 q,6l3.59
Chagter 14 321

El4-5' The existing system allocated only 5O/5O,OOO = O.l oh of all overhead to
Product RK last yean but Product RK accounted for 120161000= 2oh ot
design change activity last year. Therefore, with respect to design
change costs only the existing system understated RKb cost last year by
a total of:

(2% - O.1%l r S2,ooO,0Oo= S38'0OOunderstatement

The existing system allocated $40'OOO/S2OO,OOa

E14-6 'to = 2Oohof all overhead
Product BB last yea6 but BB accounted for only 2I2OO= 17o of the
activity of maintaining supplies of purchased subassemblies last year.
Therefore, with respect to the cost of maintaining supplies of purchased
subassemblies only, the existing system overstated BBts cost last year by
a total of:

l2o% - 1%l x S5o,ooo = $9,5oo overstatement

El4-7

(11 $126 of overhead cost will be allocated to a unit of f456, calculated as

follours:
s l , 4 O OO
, Oo
x 9O m achine hour s = $12 , 600;
l O,OOOma ch i n ehour s

$ 12 , 6 0 0 = Sieo perunit
1OOunits of Product f 456

l2l 9554 of overhead cost will be allocated to a unit of #456, calculated as

follows:

x 6 setups= $15,boo of batch-levelcost;

##
$ 5 O0 ,0 0 0
x 2BOdesisnhours =
4 ,OOOd e si g n h o ur s ,r"ot"T:[t"t",olo",,
s5'4oo of unit-
x 90 machine
" ' r ' v hours
"v.'s =
-
lo,ooo machine hours and plant-level cost.

Therefore,the overhead allocated to a unit of Product #456 is:

(S15,OOO
+ $35,OOO+ $5,4O0)llOO units = S55,4OO/1OO
units = 5554 per
unit
 ChWter t4

El4'8 Because itt" toCiti:ltlsJstem uses machine hours as the onty alloca-
tion bas-e'Product f456 is allocated 9o/1o,Ooo = O.9079of all overhead.
The actlvlty data indlcate f456 shoutd be assigned 6112o= 5oh of batch-
level costs, 28ol4ro00 = 7Voof product-level costs, and o.g7o of all other
overhead. The reconciliation is:

Per
Total Unit
Cost of #456 from traditionalsystem,as
eafculatedin part (f l of El4-7,.........,..,. $12,600
Adiustments for: $teO
Understatementof bateh-tevel
costs,$3OO,OOO r (Soh- O.g%1............ $ 1 2 , 3 0 0
Understatementof product-level
costs,S5OO,OOO r (Zoh- O.9%).....,..,... 30.500
Total adjustments.......,............,rr..r...,.'. $4z,goo 428
Cost of f456 from ABC system, as
cafculated in part (21of E14-l,..,....t...... s55,4OO s554
E14-9

(1) 5140 of overheadcost witl be allocatedto a unit of #456,calculatedas

follows:
sl, 4OOO , OO
r 2 QO D L h o ur s = Sl4, OOO;
2 0 , O O OD L h o u rs

sl4, O00
= $140 per unit
1OO units of Product # 456

(21 S74o of overheadcost will be alfocatedto a unit of #456,catculatedas

follows:
$soo,ooo
5OO setup hours x 3O setup hours = $i B,OOO
of batch-tevel cost;

ssOO,OOO
- S5o'oooof product-tevet
4 O d e s i g n ch a n g e s x 4 designchanges cost;
S 2 O 0 , 0 O O + S 4 OO,0 OO 2OOdirect labor S6,000 of unit-
X . =
2O,OOO DL hours houni and plant-level cost.

Therefore, the overhead allocated to a unit of product #4s6 is:

(S 1 8 , O O +
O 3 5 O,OOO units = S74,OOO/1
+ 5 6 ,OOO)l l OO OOunits = SZCOper unit
 Chapter 14 323

E 1 4 - l O Because the traditional system uses direct labor hours as the only alto-
cation base, Product f456 is allocated 2ool2o,ooo = 1oh of all over-
head. The activity data indicats f456 should be assigned 3O/5OO= 6oh
of batch-level costs, 4l4o = looh of product-level costs, and 1 oh of all
other overhead. The reconciliation is:

per
Total Unit
Cost of #456 from traditionalslstem, as
calculatedin part (1)of El4-9...,,.... sl4,OOO 5140
Adjustmentsfon
Understatementof batch-level
costs, $SO0,OOO x (O%- 1oh1......... $ 1 5 , 0 0 0
Understatementof product-level
costs,Ssoo,ooox (1o%- 1oh1....... 45,OOO
Totaladjustments...,...,. s6O,OOO 6 0 0
Cost of #456 from ABC system,as
calculatedin part (21of El4-9 ...... s74,OOO s740

E14'11 Activitiasgr u, y, and dd are the only onesthat definitetyadd value.

Activity k is questionable,becausea single deburring aiter drilling
. would be sufficient to removeall burrs. The first deburring,k, is proba-
bly performedto make it easierand safer for workers to handlethe
productin the interim.lf the needfor so much handlingcan be elimi-
nated (perh-aps through automatedmaterial-handlingeguipment),k
could be eliminatedwith no tossof vatueto the custbmer
iand perhaps
at a net savingsto the company),so it is reallya non-value-added
activity.
 Chaoter 1n

PROBLEMS

P14-l

(f l The overhead rates in the eristing costing system are S20 per machine
hour, and 31 4 per direct labor hour, calculated as follows:
SSO,OOOof machine -related overhead =
S2O per m achine.hour

S28O,OOOof remaining overhead costs

= S14 per dir ect labor hour
2 O,OOOD L H

(21 Makingonly the changessuggestedby the study,the structureof the

ABC systemwould be:
Pool Driver
machineoperation...........r......,... machinehours
setup and materialhandling....... setups *
other materials-re|ated.,.,..,........ purchaseorders
all remainingoverhead.....,.. direct labor hours
. !

The study did not suggest any change for machine operation cost, nor
for the "other overheadtt category.
, _
(31 The ABC slEtem's overheadrates (driverrates)are S16.25per machine
hour,$45 per setup,$5o per purchaseorder,and $1o.ZSper direct labor
hour, calculatedas follorlrs: -

5 6 5 , O O Oo f ma ch i n e o p e ra ti o n over head
= S l o . 2 5 p e r m a c h i n eh o u r
4 ,OOOma ch i n e h o u rs

5 1 5 , O O Oo f m a c h i n e - s e t u p o v e r h e a dp l u s
S3O,OO0 of materials handling overhead
= $45 per setup
1 ,0 0 O se tu p s
SgS,ooo of other materials -related cost
= S5o per purchaseorder
7OO purchase orders
S 2 1 5 , 0 O O o f tro th e r o ve rh e a d tl
= SlO.75 Perdirectlaborhour
ZAffi
I
I

Chagter 14

P14'2
- ' per
11)
l r The three overhead rates in the edsting costing system are S17.5O
machine hour, S.8Oper direct material dollar, and $1 .25 per.direct labor

s dollar, calculated as follows:

$700,O0Oof machine-related overhead = $12.5o per machinehour

4O'O0Omachinehours
S8OO,OOOof materials -
refated overhead Sooh of direct material cost or
- I dollar
@ S.8o per direct material
material cost
$ 2 ,5 OO,OOOo f o th er
overhead cost 125% of direct labor cost or
=
m $1.25 per direct labor doltar
direct labor cost

l1l Making only the changes suggested by the study, the structure of the
ABG system would be:
Pool Driver
maChingOpgfatiOn.......r.....,...,..., maChing hOUfS
setup and material handlio$ ,...... setups
materials administration..........r.. purchase orders
ffeight-in r...r....r.......r.,r.r..........,... matgfial pOUndS
all remaining overh€ad.......,..."... direct labor cost
The study did not suggest any change lor machine operation cost, nor
for the "all remaining overhead" categoly.
(3) The ABG system's overhead rates are $12.5O per machine hour, 51'OOO
per setup, $35 per purchase order, $.75 per pound ol materials, and
b
$1.25 per direct labor dollar, calculated as follows:
$5OO,OOOof machine-
operationoverhead
= $12.50 per machinehour
40,OOOmachinehours
$2oo,ooo of machine-setupoverheadplus
$3OO,OOO of materialshandlingoverhead = $ 1 , O o op e r s e t u P
5OO setups
S35O,OOO of materials
administration overhead
= $95 per purchase order
IO'OOO p u rch a se o rder s
 326 Chaptar 14

P14-2 (Concluded)

$150,0OOof freight-in = $.75 per poundof materials

2OO,0O0poundsof materials
S2,5OOr00Oof other
overhead cost labor cost or
= 125oh ol direct
m $1.25 per direct tabordottar
direct labor cost

Pt4-3

tl) DRAPERCOMPANY
Product Costs from Eristing CostingSystem

Overheadrate: 94,5O0,0OO of overhead divided by $3,OOO,OOO

of direct labor cost = 150oh of direct labor cost
Standard Custom Total
Direct materia1..............,..........,......,.., $ 882rOOO S 1215OO $ 894r5OO
Dirgct l?bor'......'...r........................r.... 219t 0rO0O 9OrO0O 3rO0Or0OO
Overhead:
150ohr $2r910rOOO........,..r,r..,.....,....41365rO0O
1 SOoh x 59OrO0O......,................t.r...,.. 135,OOO 4,5OO,OOO
Total cost .......,.-.......,..r....,................. $8r157rOOO $23715OO gg,3eds09
Units produced.........,.....-......ri.......... + 731500 + 125
C o s t p e r u n i t . . . . . . . . . . . . . o , . r . . . , . . . . . . . r . . i . . . t . . .$ 1lO.rB S lrrOO

v
 Chapter 14
.v

P14-3(Continued)

l2'l DRAPERCOMPANY
ProductCosts from Activity Based Costing System
Overhead rates:
Si:IOOTOOO
aetup-relatedcosts divlded by 6Oretupr = $STOOO
per aetup
s9oo'o00 deslgn-relatedcostq divldedby 15rooodeolgnhourr = $oo per designhour
$il'300,000other overheaddivided 1'loo/o
of direct labor cost
@
Standard Custom Totat
Direct material s 882,OOO s 1 2 , 5 O O s 8r4FOO
Dirgct 1abor..........,..r.r.r...........r........... 2,g1Or 0Oo 9O,OOO 3,OOO,OOO
Overhead:
S5TOOO r 3O setups .....................r,.... 150,OOO
35r0oo x 3o setups .......................,... 15O,O0O 3OO,O0O
$60 x 12rO0Odesign hls.........,........, 720,OOO
$6O x 3,OOOdesign hrs,........,.,....r.... 180,OOO 9OO,OO0
I fioh x $2,91Or000.........r....,r........... 3 , 2 0 l , O O O
1 1O% x S90r00o.......,....,..r,..,.,.,.,...r..
3,3OO,OO0
Total cost .......o.................!.,.....r..r.......
s?effipoo ## s8,394,599
125
_L _1,252
(3) Becausethe eristing system used direct labor cost
as the onty allocation
base and custom consumed $9o,ooo/s3,ooo,ooo= JTo
of direct labor
cos.tr-theexisting system allocated 3oh of ail overhead
to custom. The
activity information indicates custom consumed 30/6o =
sooh of setup-
refatedactivity and 3,ooo/15,ooo = zooh of design-rerated
activity, so the
reconciliationis as follows:
Per
Total Unit
Cost of Custom trom traditional system,
as calculated in reguirement (1)..,..,..
Adjustments for:
$237,5OO s1,goo
Understatementof setup-related
. _costs,$3oo,ooox (So%- g%1........514 i ,ooo
Understatementof design-related
costs,$9oo,ooo
x (Zo%- g%1........ 1s3,ooo
Total adjustments.........
294,OOO 2r352
Cost of Gustom from ABC system, as
calculated in requirement (2) ............
s531,5OO s4E2
 \
* \

Chapter t4

P14-3(Concluded)

(41 The only costs handleddifferentlyby the two costing systemswere the
S3OO,OO0 of setup-relatedcosts and S9OO,0OO of design-relatedcosts,
for a total of $l,200r00O;this nepresentsonly 27% of the total overhead -
of $4'500'00O.
The changein the costing system causedthe reported cost of Customto
changefrom $237,500to 9531,50O,which is'an increaseof 124oh.

P74-4
(rl SHAUTON COMPAI{Y
Product Gosts from Eristing Costing System
Overheadrate: $l,2OO,OOO of overhead divided by $SO,OOO
direct labor hours = $4O per direct labor hour
Fancy Plain Total
Direct materia|.....................ro............. S 601000 $ 160,000 $ 22O',OOO
Dirgct fabor........,................r.,..........r.. 28'OOO 272.OOO 3OOTOOO
Overhead:
S4O x 2r8OO DLH ...............,.o.........-.r l lZ,OOO
S4O r 27r2OO DLH .........r.....,..........,.. lrOBSrOOO ir2OOrOOO
Totalcost...........................o..,.,.......,...
Srooilooo $1FzO^ooo $1r?ro^0oo
Units produced..........r......,................, + 2OO + l6'000
Cost per unit,.....,.....,.....r.................... S l^OOO S 95
 329
Chapter 14

Pl4-4 (Continued)

l2l SHAUTONCOMPANY
Product Costs from ActiviW Eased Costing System
overheadrates:
tl3ttrooo aetup-relatedcosts dividedby 90 aetups= 81'5oo per setup
S24O,OOO design-relatedcosts dividedby 8,OOO designhourr = 33Oper designhour
S825,OOO ou:er overtreaddividedby 3O,OOO direct labor hours= 327.50per direct laborhour
Fancy Plain Total
Direct material .....,.....r......... S 60,000 $ 160'000 S 22O,OOO
Dirgct fabor......,..............'..'.............'.. 28r0OO 272rOOO 3OOTOOO
Overhead:
Slr5OOx45setups,....,.......'.'........... 67r5OO
$1 r5 OOx 4 5 se tu p s,.....,........r ........... 67,500 135,OOO
$3O x 3rOO0design hrs......'........,..... 9OTOOO
S3 O x S 'OOO d e si g n h rs............,........ 15O,OOO 24O,OOO
S 2 7 .5 Ox2 ,8 0 0 D L H ,...,..............,..' .,, 77' OOO
S27.50 x 27 r2OODLH ,.......,,........r.,... 748,OOO 825,000

(3) Because the existing system used direct labor hours as the only alloca-
tion base and Fancy consumed 2,8OO|3O'OOO = I rrcohof direct labor
hours, the existing system allocated 9 lrcoh of all overhead to Fancy. The
activity information indicates Fancy consumed 45/90 = SOohof setup-
related activity and 3,OOO/8,00O = 37.ioh of design'-related activity, so the
reconciliation is as follows:
per
Total Unit
Cost of Fancy from traditional system,
ca l cu l a te di n re quir em ent( 1).......... szoO,0OOsl,OOO.OO
Adjustments fon
Understatement of setup costs,
$ 1 3 5 , 0 0 0 x ( 5 O %- g t r c o h l $54,900
Understatement of design costs,
S240,OOO x (37.Soh- g t,coh|..,...,.. 67,600
Total adjustments......... 122,5OO 612.5O
Cost of Fancy from ABC system, as
ca l cu l a te di n re quir ement( 2).......... 993?,s99 q,6l3.59
 t - \

330 Chapter tl

P14-4 (Concludedl

(4) The only costs handled differently by the two costing slrstems were the
$135'OOOof setup-related costs and S24O,OOO of design-related costs,
for a total ol $375,00O;this repnesentsonly 31.25ohoI the total overhead
of $1r20OrOOO. -
The changein the costing systemcausedthe reported cost of Fancyto
changefrom S20O,OOO to $322,500,which is an increaseof 6l .25oh.

P14-s
(11 TUNNry COMPANY
Product Costs from Etisting CostingSystem

Overheadrate: $1,OOO,O0O of overhead divided by 5O'OOO

direct
labor hours = $2o per direct labor hour

lrlormal Enhanced Super Total

Direct materia|...........o........... $ 6OTOOO S 2OTOOOS S'OOO S 85rOOO
Direct tabor,.......o.........r....,...o 30O,OO0 35'OOO 5rO0O 34O'0OO
Overhead:
S2O r 45rOOODLH................. 9OOTOOO
S2O r 4r5OODLH.....,...r,......D, 9O,OOO
S2O r 50O DLH...........,........'. 1O,0O0 1,0OO,OOO
Totalcost . . . . . . . . . . . . . . . . . . . . . . . , . . , . S l r 2 6 O r O O O $ 1 4 5 1 0 0 O S 2 O T O O O 91,425,oO9
Units produced..,.........,. + 30,OOO + I'OOO + 5O
Gost per unit .,...r......,.....,o...... $ CZ $ . t AS $ 409
 Chapter ll 331

P14-S (Concluded)

(21 TUNNEYCOMPANY
Product Costs from Activity Based Costing System'

Overheadrates:
3400,000batch-leveloverheaddhvldedby 500 rcgulslUona= 38oo pcr requlsltion
$800,000other overheaddividedby5O,0OO direct labor houn = 312 per direct labor hour

Normal Enhanced Super Total

s 60,000 $ zorooo
Directmateria1....,............... s 5,ooo s 85,ooo
Direct 1abor,......,...... 3OOTOOO 35,OOO 5'OOO 34O'OOO
Overhead:
$ 8 OOx 1 5 0 t'e e ..,.........,...., 120r 00O
$8OOx 2OO|1ee..............,.., 160,OOO
$8OOx 15O Fee..........,....... 12O,OOO 4OO,OOO
$1 2 x 4 5 r0 OOD L H ......,...,,.. 54O' OOO
$1 2 x 4 1 5 0 0D L H ............... 54,OOO
$1 2 x 5 o o D L H 6,000 600,000
T o ta |co st.......,,.r...r.,........!.. Slr o2or o0O S269' 000 $136r ooo s1,425,099
Units produced.....,...r........r. + 3OTOOO+ I'OOO + 50
C ost p e r u n i t,,....,.........,....,.S 34 S 269 $ 2r 72O

(31 Becausethe existingsystem used direct labor hours as the only alloca-
tion baseand Superconsumed5OO/5O,OOO = Ioh of direct labor hours,
the existingsystem allocated1o/oof all overheadto Super.The activity
informationindicatesSuperconsumed15O/5OO = 3O7oof batch-level
activity,so the reconciliationis as follows:
Per
Total Unit
Gost of Super from traditional system,
as calculated in requirement (1).....,......... $ 2O,OOO $ 4OO
Adiustment for understatement of batch-
fevel costs, S4O0,O0O x (3O%- 1%1..,,..., 116,000 2,32A
Cost of Super from ABC system,as
calculatedin requirement(21.......... S136,000 $2,720

(4) The only costs handled differently by the two costing systems were the
$4oO'oOOof batch-level costs, which represents onty 4}oh of the totat
o ve rh e a do f $ 1 ,OOO,OOO.

The change in the costing system caused the reported cost of Super to
ch a n g e fro m S 2 O,OOO
to $136,000,which is an incr ease of Sa }oh.
 3g2 Chapter tl

Pl4-6
(rl TEKSIZECOMPANY
Product Gostsfrom Eristing CostingSystem
Overheadrate: $1,500,00Oof overheaddividedby 5O,OOO direct
labor hours = $gOper direct labor hour
Regular Large Total
I 1o,ooo S 4o,ooo s 5O,OOO
120,OOO 48O,OOO 6OO,OOO

3OO,OOO
l r20OrOOO I,50O,OOO
$43O,00O 91,72O,OOO s2d90,999
+ |OTOOO + IO'OOO
4 3 $ 172

(21 TEKSIZEGOMPANY
Product Costs from Activity BasedCostingSystem

Overheadrates:
S515,OOOsetup-related costs divided by 1O3 setups = SS,OOO per setup
S985,OOOother overhead divided by 5O,OOO direct labor hours = 319.7O per DLH

Regular Large Total

I l O,OOO $ 4o,ooo s 5O,OOO
120,OOO 48O,OOO 6OO,OOO

255,000
26O,OOO 5l5,OOO
197,00O
788,OOO 985,OOO
$582,O0O $1,568,OOO 52,15O,OOO
+ lO,00O + 1O,00O
s 58.20 s 156.80
Chapler 14 33?

Pl 4 -g (C o n cl u d e d )

(31 Because the existing system used direct labor hours as the only alloca-
tion base and Regular consumed 1O,O0O/50,00O = 20oh of direct labor
hours, the existing system allocated zooh of all overhead to Regular. The
=
activity information indicates Regular consumed 51/103 49,51456ohot
setup-related activity' so the reconciliation is as follows:
Per
Total Unit
Gost of Regularfrom traditional
system,as calculatedin requirement(11......'.... S43o,0oo S43.oo
Adiustmentfor understatementof setup-
refatedcosts, $515,O0Or (49.51456%- 2oo/o1... 1 5 2 , 0 O 0 15.20
Cost of Regularfrom ABC system' as
calculated in requirement (2).".........,......'.,.'..... 9582'OOq 998.20

(4) Yes, Teksize Company does have a diverse product line in the sense in
which the term is used in ABG. The fact that the two products have the
same annual unit volumes does not matter, because the existing cost
system does not use units as the atlocation base. Regular represents
only 2Oohof direct labor hours but nearly SOohof setup-related costs,
while Large has a very different mix, so a diverse product line is present
in Teksize Company.
 334 Chaoter t4

CASES

c14-1
(1) DALI-AS DIVISION
Product Costs from Existing Costing System

Overhead rate: SSOO,OOO of overhead divided by 2OTOOO direct

labor hours = S{Qper direg! labor hour

1327 #333
s 6,000 S lso
3O,0OO 600

288,OOO
4,80O
s324,OOO s5,55O
+ 2r4OO + 6
s 13s s 92s

(21 DALI-ASDIVISION
Product Costs from Activity Based Costing System

Overhead rates:
S24O,OOO batch-level costs divided by 1,BOOeetupe = Si5O per setup
S2OO,OOO product-level costs divided by 2,OOOdesign hours = SlOO per design hour
s36o'ooo other overhead divided by 20,0oo direct labor hours = sig per DLH

#327 #333
$ 6,000 S 150
30,000 600

6,OOO
600
32,00O
2O,OOO
12g,600
2,160
$2O3,6OO s 23,510
+ 2r4OO + 6
s 84.83 gegeeg
Chaptor l1 3a5

C l 4 -1 (C o n ti n u e d )
#321 f333
(3) U su a l se l l i n g p ri ce.............o. sl so s1,50o
PfOdUCt COSt."..........,...'......r.'...'............r........o. 135 925
9_!s s 575
10% 3goh

#321 f333
(4) slso.oo
Usualsellingprice ...............,.'.,................'....... s 1,5OO.OO
Product cost.........r......"..r..r...'....r...........'r...r.... 84.83 3,918.33
Gross margin 0oss)......................r..........!.........s 6 s . 1 7 s(2,418.331
Pgrcent of salgs r.........rr'...r...,.'r......'.'....t.r"t..... 430h

(s) The ABC system shows that the relative prolitabilities of the two prod-
ucts are the reverse of what is shown by the edsting system: the existing
system shows a very modest gnossmargin of lOoh on f321r which is
probably not enough to cover its marketing and administrative costs,
while showing a respectable 38% gross margin on f333. ln contrast, the
ABC system shows a 43oh gross margin on #321 and a substantial loss
on f333. The low-volume product appeansto be the more profitable of
the two under the existing system, but appears to be a money loser
under ABC; the high-volumeproduct appears weak under the existing
system, but highly profitable under ABC.

(6) Based on the results of the ABG study, Dallas division management
sh o u l d co n si d e r meetingthe com petitor ' spr ices on fl321; this pr i c i ng
strategy can be profitable in the long run and should avoid loss of market
share. The strategy for f 333 is not as clear. Gustomers are not likely to
accept the 20O% price increase needed to make #333 reasonably prof-
itable, and Dallas could lose some customers who also buy large
amounts of #321, if management discontinues #333 or increases its
p ri ce to o mu ch . Managementshould consider sever al possib i l i ti esfor
low-volume products such as f333:
(a) Reduce batch- and product-level costs enough to become an effi-
cient producer of low-volume products. This may require creation of
a small job-shop environment in a portion of the plant (or in another
facility) where low-volume products could be made more efficiently.
The case indicates the existing plant was designed to produce long
runs efficiently,which may explain the high batch- and product-level
costs.
 Chaoter l4
336

C14-t (Concluded)

(b) Reducethe numberof productsby designlng" new one that can be

substitutedfor severallow-volume,unprofitableproductsthat can
then be discontinued;this essentiallyerchangesseverallow-vol-
ume productsfor one of much highervolume,with substantial
batch- and product-levelsavlngs'
(c) Convinceone of the current buyers of the low-volumeproducts to
becomea distributorof severalsuch products;buyingthem from
Dallasin largerquantities,maintainingsmall inventories,and selling
them to othJr customers.This can reduce Dallastbatch-levelcosts
and marketingcosts,but it risks the loss of customerswho like to
buy the full line from one supplier.
(d) naise pricesgradualtyuntil all productsaneneasonably priced.This
does not mean all productsmust show profits.(lt is acceptablefor a
good customerto occasionallybuy a money'losingproduct.)Rather'
it meansthat the companyshouldnot continuemakinga money-
tosingproductwithout a good reason.lt is not acceptableto havea
customerwho buys only the money-losingproducts,nor for the "good
companyto continuemakinga money-losingproductthat no
customersttare buying.
(e) In additionto the usualpenunit prices,chargea lump-sumamount
per orderfor any small order of a low-volumeproduct. This charge
. coutdbe set at a levelto coverestimatedbatch- and product-level
costs.

cl4-2
(1) WARRENTONDIVISION
Product Costs from OPICS
O v e r h e a dr a te : s 1 , 9 3 0 , 0 0 0of overhead divided by 25'ooO direct
laborhours= 577.2Oper DLH
fl33 #44
sl5,ooo s120,ooo
6,000 60,000

341740
463,20O
s55,74O s643,2OO
+ 1OO + 2'OOO

:
s5s7.40 s 321.60
 J)/
Chapter 14

Cl4-2 (Continued)

(21 WARRENTONDIVISION
Product Costs from TPTCS

Overheadrates:
$gCOTOOO machine-relatedcosts divided by 2O,OOO machinehours = S17 per MH
iigO,OOOmaterials-relatedgosts divided by $1'32O,OOOdirect material cost =
25% of direct material cost
S360,000 + $9OO,OOOof remaining costs dividedby 25'Ooodirect labor hours =
S5O.4Oper direct labor hour

#33 r44
DifgCt matgfia1 ..ir.r.r..........r..r....r,.r....r..........t.........tt..t.... s15,OO O s 1 2 O , O O O
DirgCt 1abOf...........r...........r.r.............r...r....r.r.r..........r.r... 6,0o0 60,000
Overhead:
$17 X 300 MH ..,.....o...........'r............,...............t............. 5,1O0
$17 f 3rOOO MH ........,.........................t........r.........'.......
51,OOO
25oh x $l5rOOO r........"r'............,.'....-.....-.-..r'..,'...r.....'... 3,750
2 5 o h x $ 1 2 O r O O O. . . . . . . . . . . . . , . . , . . . . ' . . . . ' 3O,OOO
55O.4O X 45O DLH.......,....'....o....r,...'......................'....... 2216fjo
S5O.4O X 6rOOO DLH............,.....r....,.........i.,.......r....o...... 302,4OO
TOtal COSI.,....,...............,.............,............r....,.....,............ s52,530 s563,4OO
Units produced...r........... ...............r...r'...'...,.r.-. + 1OO + 2,OOO
COSt pef Unit...............'r........,.r'......'....................r. s525.30 s 281.70
I

(3) TPICS is not an ABG system because all the allocation bases are at the
unit level. The changes management made do show many of the attribut-
es typicalty associated with a change to ABC: the increase in the number
of overhead cost pools, the attempt to create homogeneous cost pools'
and the use of three distinct allocation bases. These changes show an
attempt was made to capture differences among the demands placed on
resources by the different products. But because there are no batch- or
product-teveldrivers used, the system cannot capture the demands
placed on batch- and product-level activities, i.e., it is not an ABC sys-
tem.
 (

3g Chapter tl

Cl4-2 (Continued)
(41 WARRENTON DIVISION
Product Costs from ProposedNew GostingSystem
Overhead rates:
SI OO,OOOtroubleshooting costs + $140,000 machine setup costs divided by
3,OOOsetup hours = $8O per setup hour
S135,OoOmaterial handling costs divided by 15,000 loads = 39 per load
S195,Ooomateriali administration costs divided by IO'OOOvendor orders =
919.5O per vendor order
3260,000 engineering design costs divided by 4,000 design hours = $65 per
design hour
$2OO,OOO machine operation costs + S90O,O0O other overhead divided by
2O,OOO machine hours = $55 per machine hour
f33 #44.
s l 5 , O O O sl20,OOO
6,OOO 6O,OOO

24|OOO
32,0OO
180
540
1,755
2,925
18,2O0
19,5OO
16,5OO
165,OOO
s81,635 $399,965
+ I O O + 2'OOO
s816.35 S 199.98
(5) The proposed new costing system is an ABC system because it uses cost
drivers that include non-unit-level drivers. The unit-level driver is
machine hours, the batch-level drivers are setup hours and loads han-
dled' and the product-level driver is design hours. Vendor orders could
be either a batch- or product-level driver, depending on whether orders
are placed for each batch; the case does not tell whether this is so.
(6) For the low-volume product, #33, the proposed ABC system shows a sub-
stantially higher cost than did either of the other two systems. This is the
general result when ABC implemented and compared with traditional
systems. At the usual selling price of S8OO,the ABC system says this
product is a money loser. Equally,or perhaps more importantly,the pro-
p o s e d A B G syste m sh o w s th a t the high- volum epr oduct can be pr iced
very competitively.
 .t r:t
Chapter 11

C 1 4 -2 (C o n cl u d e d )

f/) Based on the results of the ABC study, Warrentonb management should
consider meeting the competitorb prices on #44; this pricing strategy
can be profitable in the tong run and should avoid loss of market shat€.
The strategy for #33 is not as ctear. Some customers may not accept the
price increase needed to make il33 reasonably profitable, and Warrenton
could lose some customers who also buy large amoqnts of #44 if
managementdiscontinues il33 or hikes its price too much. Management
should consider several possibilitiesfor low-volume products such as
f3 3 :

(a) Reduce batch- and product-level costs enough to become an effi-

cient producer of low-volume products. This may reguire creation of
a small job-shop environment in a portion of the plant {or in another
facility), where low-volume products could be made more efficiently.
(b) Reduce the number of products, by designing a new product that
can be substituted for several low-volume, unprofitable products
that can then be discontinued;this essentially exchanges several
low-volume products for one of much higher volume, with substan-
tial batch- and product'level savings.
(c) Convince one of the current buyers of the low-volume products to
become a distributor of several such products; buying them from
Warrenton in targer quantities, maintaining small inventories, and
selling them to other customers. This can reduce Warrenton's
batch-level and marketing costs, but it risks the loss of customers
who like to buy the full line from one supplier.
(d) Raise prices gradually until all products are neasonablypriced. This
does not mean all products must show profits. (lt is acceptable for a
good customer to occasionallybuy a money-losing product.) Rather'
it means that the company should not continue making a money-
losing product without a good reason, lt is not acceptable to have a
customer who buys only the money-losing products, nor for the
company to continue making a money-losing product that no 'igood
customers" are buying.
(e) ln addition to the usual sales price, charge a lump-sum amount per
order for any small order of a low-volume product. This charge
could be set at a level to cover estimated batch- and product-level
costs.

CHAPTER15
DlscusstoN
ouEsTtoNs
01$t. Profil plarning oncompasses(a) sales estirnat-
hg and sales plannhg prograrns;(b) budgeting
progra,nr lor contol cf all costs, both rnanufac-
turhg lnd nqrrnanufacturing;(c) planning and
programming addilions to or deletions lrom
working capilal an'dplant hveslmenl; and, (d) a
review of all laclors that have an impacl m
retum on inveslmcnt, both from a shorl.lerm
viewpoinl of one year and longer periods of
lime. Thr profil-planningfunction must not be
merely financial in scope. ll must disckrse the
melhodg and programs by which the financial
groalsare to be achieved.
O1$2. A budgel is the oxp€ctedtarg€t that manage-
mont strives lo achieve, whereas a lorecasl is
a level of revenue or cosl that an organizalion
predictswill occur.
Olt3. The three approaches lor setling profit objec.
lives are:
(a) A oriori. Managementspecifies a given
ratc of rolum to be achievedin the long
run ard then draws up plans lor achieving
that rale.
(b) A msteriori. lr/lanagemenldraws up plans
and.then sels lhe rate resultingfrorn the
plans.
(c) Praomalic.Managemenluses a target
p r o f i t s t a n d a r dt h a t h a s b e e n t e s t e d
empiricallyand sanctionedby experierrce.
Qt$4. Long-rangephnning deals wilh specilic areas
of the cornpany's plans, such as future sales,
long.lerm c-f ilal expenditures,research and
developmenlastivilies,financialrequiremenls,
and the protil goal. Short-rangebudgeting
plrces the plannhg and particulariycontrol into
perirds of three. 3ix, or tw€lvo mstths.
Ql$'5. A budget is a detailedfinancialstalementof
the organizalion'sstrategy. lt converts generEll
s t r a t e g y s t a l e m e n t si n t o s p e c i f i c p l a n s o l
action, measuredfinancially.lt is related to
control,becauseit is the fundamentalguideline
for whal the organizationshould do. Thus, it is
lhe benchmarkagainst which aclual perfor.
manco is cornpared.This processof ccnpari-
son is a vital gart ol the conirol function in lhe
organizaticr.
QlS. I n c a r r y i n go u t m a n a g o m e n t ' sl u n c t i o n so f
phnnhg, organizing,and controllor lhe deveF
opmenl ol a budgetary conlrol program, il is
neco3saryto:
(a) organizethe budgetcommiilee
(b) organizethe entirebudg€tarycontrolpro-
gra!71
(c) plan sales wilh the sales manager
(d) determine the linished.gods inventory
a0
d l
requirement in harmony with the sales
budget
(e) plan production with the production man-
ager based on the sales budget
(f) -meel with heads of all dopartments-toth
producing and service-relative to direct
rnalerials, direcl labor, and lactory over-
head coslr required for the production
budgeted
(S) establish materials purchase require-
menls based on production planning, a
doparlment's malerials raquiremenls, or
tho produclbn budgel
(h) eslablish €xpsnso budgels wilh market-
ing, administrative, and financial division
heads
(i) budget capilal expenditures and prepare
a researeh and development budg€t.
0) develop a cash budget
(k) coodinate and surnnrarize ccrnpany.wide
budgets into a masler budget..+umma-
rized in the budgeled incorne stalEmont
and balance sheel I
O1$7. Thc periodic budget ropresents a formal com-
t-
munication channel within a company for the
lollowing r€asons:
(a) The periodic budget involves a lormal
comrnitment on lhe parl of management
lo lake posilive actions to make actual
events conespond to the formal budgel.
(b) The periodic budget is usually raviewed
and approved by a higher authority and,
qrco approvod, is changed only in unusu-
a.lspecified circumslances.
(c) The periodic bucjget conlains explicit
slaiemonts of the imolementation of man-
agomenl objectives for a period ol time,
published to all parlies wilh conlrol
responsibility.
(d) Comparison ol actual results with the
periodic budgel forms lhe basis tor man-
agoment control, motivation, and pedor-
rrance evaluaticn.
Q15-8. Budgels are required for planning, moniloring,
and molivating, and because they include esli-
mat6s, they always involve uncertainty. The
procass ol budget preparation forces idenlifica-
lion ol variables and attsmpts at eslimation.
Reiteralion should improve the process, and
the process should cause a positive atlhude to
atlain goals. Of course, a poorly estimaled
budget can causs dysfunctionalbehavior.
I n t h i s s i t u a t i o n ,t h e b u d g s t s h o u l d p r o v i d e
incentive lor going after bids. The inclusion of
budgsted and actual conlribulion margin data [ ;
Chaptor l5
h periodic roporb c{fers an early hdkxtion c/
' bobtf, par ccrlributbn, or the pesible noed lo
reduce bid prices, or olher corroctive action
thst rnay be reguire'd.
CGA-Canada(adantcd).Beprinl with permis'
airr.
Q15-9. All omployeec (including txoculivr manago'
rncnt) must accoPt fir inportancr of budgeting
and bo willing to parlicipalr fully in budgol
prcparatbn and irnpbmentatirxr,or hc budgnt
. will nst rtork.
a1$10. (a) Etlective ur cl budgrthg rholH rocult in
botter perlorrrlinc. by the organizatbn
because ol betlcr pe rformance by the
rnanagonr.Tho behavirral bonefit lies h
the ability crfthr budget and he btdgeling
proqgss to rnolivalc tnatragtB to accorn'
plish thc orgranizatbnobjec'lives.This is
done by ushg the budget ss a vehble for
c o m m u n i c a t i n gc o m p a n y o b j e c t i v e s ,
etablishhg subobjectiveein accord with
rnanagerobjectives,and providinga thq-
qrghly undcrctood ccrrvno.r bssie for por-
fonnenco rrreuuilTlont ard fcedbck.
(b) The budgeting procoss has been sublect
to criticism by behavioralscienlislr and
clhers on sevcral counls:
(1) The mosl scrbus charge is that the
budgeling pr€oer faib to recognhc thal
individuals may not accopt company
objective as their own. The resull is hck
cl eflort to achievethese objectives.
(2) The level of objectivessel may be
eslablishedwithout regard lo how this will
m o t i v a l c l h c m a n a g e rl o a c h i c v e l h e
o b j e c t i v e s .T h o r e s u l l s m a y i n c l u d e
underachievcmentol polenlially obtein-
able levels ol performance and/or
dostruclbn of employeenrorale.
(3) The budgetie used as a pressure
device lo force conlormity lo and accop-
tance of lhe objectives eslablished in the
budgel. This often resuhs in employees
finding ways lo beat' the budget rather
than actuallyimpoving pedormancc.
(a) The budget b adrnhbtercd by hdivU-
uals noi direclly hvolved in the operaling
elivrty ol thc organizatbn and not partic-
ubrty skillful h dealing wiih people.
(c) Thc rnosl coriour problem lhat must be
overcome h qdor to rclve the problems
idenlifiedby tho crilicismsin (b) is the
u1
bck o{ understandingof the lorccs that
cause ma Bgcrs to 8cl as they do. ll musl
bc recognrizedthat the tradilbnal assumP
tims undedying thc budget and budgel
Proces! atc nol .ntir.ly valid.Such
agsurnPliatsincludo:
(l) Managcn tulqnaticslly acc.Pt cqn'
pany obiecfiveeas lhcir qwn.
(2) Tighl gtandardsate best bocaur they
ropr.rent hard-to-reach goals, which
rrwt pcople strivc lo achicvc.
(3) Uppor levolc of managcmentan bol
equFped lo ostablishoperathg subobirc-
tives.
ll is necesssry to rccognizethc bchav-
brsl influence (psychobgi=l and rcb
bgbal) 6r tho rrprk ol menagers.
The rnost corr[Tronspecific neoorrvrpn-
dali'on is thc use cd parlbipative budgel-
hg, sinco il prwide lor an opportuniiylo
identify objeclivos of thc managcr and
ccrrrpany,hcreaseg the ability of both to
develop opcralhg activitier to reach thr
objcclive, and onhancesiho likolihoodol
setting objectives at levels elfcctive in
molivaling managors loward company
goals.
01tl1. Conrnercbl €xponsosare grouped into lunc-
tions by their actions or operalhg units. Thesc
functisrs are boked upon ae departmenlsend
should br gel along organizalional lincg in
order to identify lhe expente with an autho'
rized and responsible individual. Grouphg by
prcducls and by lenitqies may be desirabL al
well.
015.12. The budgeled incornestalement summarizer
in one stalernent the result! of lhe complelo
plan of aclion. lt expressesin financiallerms
the erd resuhs of proposed plans. ll can also
be used lo lesl the adequrcy or inadeguacyof
those phns.
Q l F 1 3 . T h e b u d g e l e d b a l a n c es h e e t r e v e a l r l h c
expectedlinancial conditionai the end of I
particubr perird. One ol the measurecof tho
adequary ol propoeed operaling and linancbl
planr is the etfed ol the cxecution of thcro
pbns on the linancial condilbn of the buainesr.
lf the budgeied balance gheel shoflg a polen-
lial unsatisfactorycondilion, propooedplant
csn be reviewed end perhapo revised lo ptc.
ducs sallsfaclory resulls.
 Chapter 15
342

E)GRCISES

Ei5-1
BROWI.IBROTHERSi
Budget of Sales Revenue8nd Grcss Profit
For the Year 2OB
Averagc Cost of GrosE
Saler Goods Pttlit
Saler In Pricc per Sold per por Salec Grcgs
Produst Poundsr Poundr Poundffi Pound Revenue Profit
Rer-Z 2O,OOO $34.50 $25,00 s9.50 $ 690'000 sl90,OOO
Sip-X 12,000 24.15 18.00 6.15 304,29O 77r49O
Tok-Y 7r5OO 18.90 14.30 4.60 141,750 34,5OO
s1,r36,O4O $3O1,990
'Product l9A Sales lncrease 198 Sales
Rer-Z lO,OOO 20a.oooh 20,OOO
SiP-X 9,00o 140.OAoh l2,600
Tok-Y 7,50O 1OO.O07o 7,50O
"Product 198 Price
l9A Price lncrease
Rer-Z s30.00 115,00% s34.50
Sip-X 23.00 I O5.OO% 24.15
Tok-Y 1 8 .OO lO5.O07o 18.90
*'!'od*! 198 Cost
19A Price I9A GP 19A Cost lncrease
Rer-Z s30.oo $lo.oo $20.oo 125.OOoh s25,OO
Sip-X 23.OO 8,OO l5.oo 12A.OAoh 18.OO
Tok-Y 1 8 .OO 5.OO l3.oo t lO.OOTo 14.30

E15-2
FINEFLEXCORPORATION
ProductionBudget'
For the Second Quarter Ending June 30, 20-
Units ol Units of Units of
Flop Olap Ryke
Salgs forgcast..........,... ...,.........r, 21,O0O 37,50O 54,O0O
Add desired ending inventory (June 3O1,... 6,OOO I o,5oo 13.OOO
Quantity required for tho quarter............., 27,OOO 48,OOO 67,000
Le s s b e g i n n i n gi n v e n to ry (A p ri l 1 1 ...,......... (s,5oo) qf_,o99) (14,soo)
Requir e dp r o d u c ti o n fo r th e q u a rte r......... 21,5OO 9Z€99 l-z'seq
 Chagter l5 u3

E 1 5-? '
MAGICEHTERPRISES
ProductionBudget
For the Quarter Ending March 31r 20-
Moon Glow Enchanting Day Dream
Units requiredfor sa|9s..............o...,.. 25O,OOO 175rOOO 3OO,OOO
Add ending lnvontoryof finished
Unitg ..i............rr.....r..........rr......o.....t t5rooo I O,OOO 2O,OOO
Total units roguinad..o.,o,................ 265,OOO 185,OOO 32O,OO0
Less beginningInventoryof finished
UnitS raraaa....tor..r........r!r.r..a.aa.........rr.. 1O,OO0 12,OOO 25,00O
Units to be transfered to finished
gOOdso..........rr...a.....a..r.......oo...r....raa. 249,0OO 173,OOO 295,0OO
Add endlng work in process
inventOry ...r....ro........r..r..or..........r.... 4r2OO 2,OOO 6,OOO
253r2OO 175,OOO 301,OOO
Less beginningwork in process
inventOry...............r..........r....o......... 2rOOO 1,8OO 5.600
Equivafentunits to be ptlduced....... 251,2OO 173,2OO ?p5Jp9.
E15-4

(11
Low Mid
and an d
Low Mid High M id High Three
Band Band Band Band Ba nd Band
Units reguired to meet sales
budget .r.............o......,.........r.... 200 300 400 250 350 200
Add desiredendingInyentoty.... 4 0 30 50 50 50 30
Total units required during
period .,.........,.r..........r.... 240 330 450 300 400 230
Less beginning inventory .......... (sol (701 (3ol (201
(30) eal
Required production quantity.... 1 9 0 370 210
_999 _380 280
344 Chapter 15

El5-4 (Concludedl

(21 Materialgpurchases'requirements:
Pcr Unlt Matcrbb Rcqulrrmcntr Total Metcrlrlr Fcqulrcmcntr
Produc' Fccd' Fccd-
fbn llnr llnc
Requlri- Mrtrl Con' Mctrl lnduc- Con-
Modcl mcnt Tublng Inducton nccton Tublng tort ncctorr

Low band...... 190 1 O fe e t 1 I l r9OOleet 190 190

Mid band,...... 300 7 I I 2r1OO 300 300
High band...... 380 5 I I l,9oo 380 380
Low and
m id b a n d . . . . 280 17 4r780 560 280
Mid and
hig h b a n d . . . 12
37 O 2 1 4,44O 740 370
Three band.... 22
21O 3 I 41620 630 z'ro
Quantityrsquired to meet production budget.... 791720 2r8OO lr 73O
Add desired ending materials lnventory.....'....... 7,0oo 800 500
Total quantity of materials required for the
period 261720 3,6OO 2'23O
Deduct matorials on hand at the beginning of
the period .......................t.t.'...............t...t.....t... 6.OOO I,OOO 1.500
Matgrialspunchasesrgquirements .......'.......'.'...z,SJ20. -2'609 730

E15-5

(1) Salesbudgetfor fourth quarten

Unit Sales
Product QuanUty Price Revenue
x 4,5OO $12.OO $ 54,OOO
Y 2,OOO 25.OO 5O,OOO
z 3,0oo 20.o0 6O,000
Total budgeted sa1es...............,...t.... s184,OoO
_

(2) Production budget for fourth quarten

Product
x Y
Budg e t e ds a l e s in u n i ts.. 4,5OO 2,OOO 3,OOO
Desired ending inventory 900 400 500
Quantity required .............. 5,4OO 2AOO 3,5OO
Beginning inventory 600 500 400
Req u i red p ro d u cti ort..,.,..................lf99 1,900 3,100
Chapter15 345

E15-5 (Concluded|

(31 Materials usage budget for fourtfr quarten

Planned MaterialsRequiredPer Unit Total Materials Required

Pro-
Product dustion
-
A c A B c
x 4,8OO 3 I 2 l4r4OO 4r8OO 9,6OO
Y l,9oo 2 2 4 3r8OO 3,8OO Trgoo
z 3rl oo I 3 2 3,loo 9,3OO o,2oo
21,3OO 17,9O0 23,4OO

(41 Materials purchase budget for fourth guailen

Material
A B c Total
Productlon requiremgnt r.......,... 21,3OO 17,9OO 23t4O4
Desired ending inventory .....o.... 2,5OO 2rOOO 2,AOA
Quantity required ..................r... 23,8OO 19,9OO 25,4OO
Beginning inventof''lf.......,.......... 2,0oo {.000 2,5O0
Quantity to be purchased ..,..,.... 21,8OO 18,9OO 22,gOO
Unit COSI...r.'....r...,.rr.r....r.....r,.r,. s ,50 3 z.oo 3 1 . 5 o
Purchasg req uiremoot....,.......... slo,9oo 63z.goo $34,359 s 83,O5O

E1 5 - 6

(1)
Tribolita Polycal PowderX
Units requiredto meet sales budget 8O,OOO 4O,OOO lOO,OOO
Add onding inventory 6r0oo 2,OOO SrOOO
Total units 1equirad.......,............. 86,OOO 42,OOO lOSrOOO
Less beginninginventory..,,.............. 5,OOO 4rOOO I O,OOO
Plannedproduction............ 81,OOO 38,OOO 98,OOO
 Chapter t5
a6

Et5-6 (Concluded)

tzl Material B
MaterialA
81,00011=8lO00kg
TribOlitg r.........r........r. 8 i , O O O1 2 = 1 6 2 O O Ok g
12 = 76 ooo
Polycal.......................3 8 , O O O
g8rOOOrl = 98O;
PowderX ............,,.....
157 Ooo kg 260 00o kg

Add ending inventory 12 000 15 000

169 oOO kg 275 ooo kg
Less beginning
invgntorY...........'...... I 500 11 000
{59 5oo kg 2 6 4 O O Ok g
Unitsto be Purchased
x s.20 x $.10
Cost per kilogt'ar[......
Total cost ot
pU nCh aSgS ................ s3{ .900 $ZOrlaIl
(31
Tribolite Polycal PowerX Total
Materials:
A: g t ' O O Ox I x S .2 Or..........'. $16,2OO I 16,200
3 8 r O O Ox 2 xS .2 O ..'.......... s15'2OO l5,2OO
B: 81rOOO x2xS. 1O........,...' 16,20o 16,20O
98,OOO x I x S.1O,............ s 9,8OO 9,8OO
$32,4OO 915,2OO s 9,8OO s 57,4OO
Direct Labon
8t r 5O I 38 ......'!...'....t......... s32,4OO s 32,4OO
38 r 125 r $8 ...,...............r.... s38,OOO 38,OOO
9 8 x 1 2 . 5 x 5 8 ,...................... s 9,8OO 9,8OO
$32,40O s38,ooo s 9,800 s 80,2oo
Factory overhead-variable:
81 X 50 X 56.................r....r..r s24,3oO s 24,300
3 9 r 1 2 5 r 5 6 ..........,..,.......... s28,50O 28,50O
9 8 x 1 2 . 5 r S 6 .......... $ 7,350 7,35O
$24,3OO s28,5OO $ 7 , 3 5 0 s 6 0 , 1 5 0
Total variable manufacturing
cost........ S 8 9,1OO 99l,7oo S26,e59 s1e7'75O

F ix e d m a n u f a c t u ri n gco st (n o t a tto ca tedto pr oducts).......... 4O' OOO

T ot al m a n u f a c t u ri n gco s1 .......,..........,... ' g?%ttg
Chaptorl5 u7

El5-7
wt(z lNc.
Budgeted Gost of Goods Manulactured and Sold Statement
For the Year 20-
Materials:
Beginning inventory.... 5OO,OOO. $
PUrChaSgS..................r........o................i.........t.t.. 2.600.0oot
Matgriats avaitablgfor usb .........o..........r......r..... $3,1OO,OOO
Ending invgntory'...........'..'........o...o...-..............'.. 600.ooo
Cost of matgrials usgd....................................t't. s2,5OO,000
L3 bO1...............o....o..o......................o.o...r.r...........tt.. 4 ,34O,OOO
FactOry ovgrh gad .........r........r.........r.t.................... 1 '840'000e
TotalmanufacturingCoSt.,......................'.............. S8'68O'0000
Add beginningwork in processinventotlf........'..... 1O0,000
s8,780,OOO
Deductendingwork in processinventory.......,..,.. 3OO,OOO
Cost of goods manufactungd r...r,..........'.r...r.....'.... S8 r 48O,OOOz
Add beginningfinishedgoodsinventory.....'.."...... SOO,OOO
Cost of goodsavailablgfor sa|e.......,'...,.....r.'.r.'.... s9,280,00O
Deductendingfinishedgoodsinventory.,...,..,...,.r 1,000,000
GoSt Of gOOdS SOld .............'......o...o"...........o.....'.... s8,28O,000r

tEarnfngr lE h of S2O,OOO,00O = tlr200,OO0l looh ol sales

Marketing, administrative, and financial erpense3 21
31ah of sales
Cost of goods sold (Sa,280,00O)..,.. 69
lOOc/cof sales

zCost of goods Ending linishcd Beginningfinished Cost of goods

rold goods inventory goodsinventory = manufactured
s8,290,000 81,oO0,ooo s8oo,00o s8,48O,OoO

Total manulacturing cost

rCost of gooda Ending work In Beginningwork in (materials, labor' and
manufactured process inventory processinventory = lactory overhead)
88,480,000 q3o0,000 sl oo,ooo s8,680,OO0
.Total manufac-
Labor lSOc/ool Cost ol materialg
turlng cost manutacturing cost) used = Factory overhead
88,gg0,ooo 94,340,000 32,5oo,ooo s1,84O,000
o Cost ol Ending Beginning
materlals materials materials = Materials
used Inventory inventory purchases
s2,500,000 s600.ooo s500,ooo s2,6OO,OOO
-----7

348 ChaDter 15

E15-8
PATZCOMPANY
BudgetedIncomeStatement
Second Quarter, 20-
Sales(S500r000 first quartgrsalesr 2)'..'..,......r...'.."... slrooo,ooo
cost of goodssold ($1'ooo,ooo salesx (1o0%- 4o%ll 6O0,0oo
sal gs x 4Ao/o1,..............,......!o...
Gross profit (9t rOOOrO0O $ 4OO,OOO
Commercial erpenses:
Uncotlectible accounts ($l,o0o,ooo sales r2%1.'.'.. $ 2OrOo0
Depreciation (($8OO,OOO + 2O yearsl r 114year! ..-'... 1O'OOO
Marketing:
Vafiable ($l rOO0rO0OSaleSX lO%1,..,......r...D..,...... {OOr000
FiXed.r.........r..r.................r.rro.....tr...........t.......'.o... SOtOOO
Administration (all fixed).....or..,,... .............'. 3o.ooo 2{O.OOO
lnCOmgbgfOfg inCOmgtax ..,.....,..,.............'.,..,.............. 3 l90.ooo

(adapted).Reprintwith permission'
GGA-Canada

Els-9
ME)OACORPORATION
BudgetedIncomeStatement
For the Year Ending December 3'lr 2OB
Sales (S9,OOO,OOO in l9A x 1.O5 quantity increase x
1. 10 pri ce i n cre a se )...,............D' ....' .r ....,' ........... $1O,395,000
Less cost of goods sold
(56,000,0OOr 1.O5 quantity increase x
I .O6 cOStinCfeaSe!...,............,...,..'.,..'............... 6,578,OOO
GrOSS pfotit...r..r........r.........r........r..r....r..rr.......r...t..... s 3,717,000
Lesscommercialexpenses:
Marketingexpenses
(S78O,OOO+ S42O,OOOincreasein advertising).sl,20o,0oo
Administrativggxpensgs,......,...'...............r............
9OO,O0O 2,1OO ,OOO
Operatingincomebeforetaxes and interest.........-.... s 1,617,O0O
Less interestexpense
($14O,OOO + ($4OO,O0Oasset increase x 1oo/orate)) 180.OOO
ln com g bgforg income IEIX........,.....,.......,................'.. $1,437,00O
Less income tax expense ($l ,447 .OOOx .4O tax rate) 574.800
Net lncome..........., ..,........... ,..,,...... s a62.200
- 349
anpbr 15

PROBLEMS

Pt5-1
(11 Sales Budget
Unit Price Total
b OO'OOO S 70 34t2OOtOOO
Thingonc .....................!......oir..oo....oor.....r..............
Thingtwo...... .......r.......... 4Ot0OO l OO 4tOOO;OOO
PfOieCted 881OS.r..r........oo...o...........rr..r.............

l2'l Produstlon Budget

Oejired inventoriosr Decamber 3l' 2O8..

ffiffi
25'OOO I'OOO
85,OOO 49,OOO
Less elpected inventories, Januar! 1, 208...'..... 2O'OO! 8t0!9
99,ooo 41,OOO

(31 Raw Materials Purchases Budget

Raw Mrtcrlrlr
C Total
Thlngoor (O5'OO0unltr
prolcctcd to bc produccd) 260,OoO lbr 130'OoO lbr"
Thlngtwo (41,OOOunltr
prolectcd to bc producr'd) 2O5,OOO 123'OOO 41'000 unltr
Produc,t|on
rrqulnmrnt..........- 485rOOO br. 5it'Oog br. {1'OOO unltr
Add dcllnd lnvcntorlcr,
Dccrmbrr 31, lg8*...- 3E,ooO 32'OOO 7'OOo

Totel nqulrrmcntr..* 5OI,OOO br, 285'000 lbr. 48'OOO unltr

L.cr rrpcctcd brvcn-
- torlcr, Jrnuary 1, 198.--. 32,000 20'OOO 5.ooo
h,rrchar roqulrcmcntt....- 469'OOO lbr. 256'0OO lbr. 43'000
'sr unttl
Cort pcr pound or unlt.* $8 35
'g13gggg
Totel coct of purchaeGr...... 33,252,000 3i,2go,!o9 sl,rclpoo
 Chaoterl5
3fi
I

Pt5-l (Concluded)
(41 Dlrect Labor Budget
Prolected Hourr
Productlon Per Total
(Unltsl Unit Total Ratc
g5rooo 2 t3o,ooo $8 $l,o4orooo
.......o.otttt"r"t"t"tt'
Thingonc
4t,ooo 3 l23,OOO 9 IrloTrooo
Thi n gtwo ............r.ot"t"t"tttt'
s2,147'OOO

(sl FlnlghcdGoodsInventoryBudgc! Deccmber 3l' 2OB

Thingone:
Raw materials:
A-4 pOUndA O $8 ...r.....r....r...r..'.'.........'."""' $gz
b2 pOUndS O $5 ...............r..............r...r....... lo 9,42
Direct fabor-2 hourg O $8 o.r............r.......'..""" 16
Factory overhead-2 hours O $2 per direct labor
h o llla......ar...a..taa...a.. a...aa" ttr'! " ""t" t tt t"" tt"t 4
s62
:
$82 r 25tOOO unlts r...........o..'........"t"""tt"ot" $l,55O,OOO

Thingtwo:
Raw materials:
A-5 poundS O $8.......................r.'..r......r...... $co
B-3 pounds O $5 ..........o..o......o."""""""""" 15
C-l unit O $3 ...t..............t..tt'r"t'o'o""t"tt"ttt' 3 $ss
Dirgct laborq? hours O $9 r.....................'.."""" 27
Factoryoyorhoad-.? houra O 32 per direct labor
hour........tt......o...t1...t.......t..t.""t"t"t"t"t""
6
rlel
591 r IrOOO unit8.....'..'.........r............'..'.o..... 8l9,OOO
Budgetedfinished goods inventory,
December 31, 2OB I34w
Clwptor 15 35t

P15-2 ,

(11 ROLETTERCOMPAT.JY
Budget for Produetlonand Direct Labor
For the Quarter Ending March 31r 2OB
Month
January February March Quarter
Salgs (uhitsl .....................'............ IOTOOO l2rOOO I'OOO 3OTOOO
Add ending inventOt'.........,...,.... l6'000 12r5OO 13r5OO 13r5OO
TOtalUnltS feqUifed ....,,..o,....,..,.... 26'000 24r5OO 21r5OO 43r5OO
Less beginning Inventoryr...o......... lO'OOO.. l6'000 12r5OO 1or00o
Unlts to be producod.................... IO,OOO 8r5OO 9'OOO 27r5OO
Direct labor hours per unit.........'. r 2.O r 2,O r 1.5
Total hours of diract labor time
n ggd ed ........o...........r....... 20,0OO t7,ooo 13,5oo 5o,5oo
Direct labor costs:
Wages1$8.00per DLHI........r...$l oO,OOO $136'000 $1O8,OOO S4O4,OOO
Pension contrlbutlons
($.25 pef DL10...........r..r.,..... 5'OOO 4t25O 31375 121625
Workergtcomponsatlon
Insurance($.1Opsr DLH)..... 2'OOO 1r7OO 1r35O 5'O5O
Employeemedlcal Insurancc
(3.4Oper DLI[.'.......r............ S'OOO 61800 5r4OO 2O'2OO
Employerbsocial security and
unemploymenttares
(ss.oor.1o = g8o per DLH| 16,000 13,600 1O'8OO 4O'4OO
Total direct labor G(tst......... $191rooo $182,350 s128,925 s4 82,275
: : -

rlOOc6 of the first foltowing monthb sales plus 5O% of the second following
monthb sales.
---

Chagter l5

P75-2(Concludei!)

(2) (al Gomponentsof the perlodic budgot, other than thc producUonbudget
and the direct labor budget, that would algo use tte saler data include:
(1) the salegbudget
l2l the cost of goods manufastured and sold budget
igl the markating and administraiivcoxponsosbudget
(4) the budgeted Income statement
(b) Gomponentsof the periodic budget other than the production budget
and the direct labor budget, that would also use the production data
include:
(11 tho dlroct materiab budget
l2l tho tactory overhead budget
(3) the cost of goods manulacturedand sold budget
(cl Gomponentsof the periodic budget, other than the production budget
and the direct labor budget, that would also use ttro direct labor hour
data include:
(1) the tactory overheadbudget (for determiningthe overheadapplica-
tion rate il based on direct labor hours!
(d) Componentsof the periodic budget, othcr than thc production budget
and the direct labor budget, that would elso use the dirsct labor cost
data include:
(11 the lactory overheadbudget (for determiningthe overheadapplica-
tion rate il based on direct labor dollars and for dstermining the cost of
employeebenefits attributable to wages earned by direct labor)
t2) the cost of goods manufacturedand sold budget
(3) the cash budget
(4) the budgetedincomestatement
 Chagtor 15 313

P15-3 '
(1) EsUmated cales lor third guarter (July-Septemberf .........r.,..... 1 8 , O O O
Add ending Inventory p'OOOr 8O96)....,.r.o.....,..........o..o.,............
5,600
23,6OO
Lgss bgginning lnventoly ..................r....'..... 5.600
18.OOO

t2l Material
101 211 242

Unlts to bo producgd'.'.........r.o............... l 8 r O O O lSrooo 18,OOO

Matgrials I'irto ...,.......,...o,.,. I6 t 4 x2
Unltg of matgrials required ...,.......,...o..,.. lOS' OOO 72,OOO 36,OOO
Add ending Inventory:
5t60O I 6 ..............r............t................ 33,600
5t6OO I 4 ...............t.'rr...t................o.t. 22r4OO
5t0OO I 2 .........r............r..........r..i....... 1 1,2OO
141,600 94,400 47,2OO
Less beginninginventory.,.....,.,......,.r..o..35rOOO 3OTOOO 13.OOO
PUrChaSgS......r...........r............................ f OO"gOO 64,4O0 34r2OO
Cost per unit r s2.40 x $3.60 x$1.20
Total cost of purchasoS.............,............. 9255r84O $231,84O $4'to4Q

{31 Hours Total Total

por Total Labor Labor
Process Production Unit Hours Rate Gost
FOrming .o.........tr...rr... 18,OOO ,80 l4,4OO $8,OO $115,2OO
ASSemb ly ....r.............. 18,000 2.OO 36,000 5.5O 198,OOO
Finishing .o........,........, 18,O0O .25 4.500 6.00 27 |OOO
54,9OO 9940'299
(41 ErpectedannualproductioJl.............r........ 60,000 units
Astual producUonthrough June 30 27,OOO
: , Erpocted production during last six months of 20A...,.. 33pOO units
Variable factory oyerhead per unit ($i gZ,Ooo + 27,0ool x $6.00
Budgeted variable factory oyerhead...........,.r.,,..o....,.....
$lgBrOoo
Budgeted fired factory overhead 93,OOO
Total budgeted factory overhead
3gt Chagter 15

Pl5-4

(tl RevlsedSaleaBudget in Unlts Bagodon tho Inder

Terrltorles
6-Month
I .il lll Other Total
1-lb. pack3ff o......."' IrO00 t l3,5OO torSOO 551r7OO 585,OOO
2-lb. packago...o.---.- r
1 O,8 OO lo,2oo lo,8oo 704,7OO 7{2,5OO
Total ....'....'......... llf99 29'-7OO :-21,600 1,256,4OO tl327,5OO

t l O , O O Or . 9 = I ' O O O
212'OOO r.9 = lO'8OO

(21 Sales Budget in Dollars

Territories
6-Month
I ll lll Other Total
gPZS $2,7OO $137,925 $146,25 0
l -lb. pack?ffo.......... $2,ZSO' $
2'lb. package.......... 5,4OOr I,l OO 5,4OO 352,350 371,25O
Tota1................ E?rsso 9!Jr475 $8.roo s490,275 $glJ.soo
| 9,9oo revised estimate r i25 (per packago!= $2,25o
,1o;8oo revised estimate x $.5o (per package)= s5,4OO

(3) Materials Purchases

Grain R Grain S Total
Bu. @t Bu. Gost Bu. @t
January..o..r........... 5rOOO $ 6,5oo 7,OOO $ 8,9oo
2,OOO $ 2,4OO
February ........o..r... t,oro ''rjo I,0oo 1,2OO 3,0o0 4,OOO
Malth......o......'..'..r 3,OOO 3,750 3,00o 3,75O
April,...,................. I,OOO l2,ooo .,:o .,ojo 1 1 , O O O 15,OOO
May .....................o. 3,OOO 4,5OO 3,OOO 4r5OO
June,............,...,..,. 4,OOO 614OO 4,OOO 4,OOO 8,0oo 1 O,4OO
4,OOO. $32,200 :13.OOO
: sl4,350 35doo E4Or5s9
 aqE
Chapter t5

P l 5 -4 (C o n cl u d e d )
(4) Materials Requirements for Production

Production of 585rOOO1-lb. packages..'.....-..........................r..... 585,OOO lbs.

Production ol 7 4215OO 2'lb. packages...r....-............-...... 1,485,00O
Total materials requirements for six months ...............'...............2,O70,0OOlbs,

Three bushels of grain in the proportions of 2R:1S produce 198 lbs. of finished
producl R weighs 7O lbs. per bushel and S weighs 80 lbs. per bushel.
Weight per
Grain Bushels Bushel Lbs.
R 2 7O lbs. 14O
S 1 8O lbs. 80
220
1 O7 oloss 22
We i ght of finished Pr oduct..' 198

Since each 198 lbs. of product calls tor 22O lbs' of grain, the total weight of
lbs. is:
grain required tor 2.O7O,O0O
t#
attat

lbs., to be apportioned as follows:

r 2,070,O0O= 2,3OO,OOO
lYo

Gra i n R = 1 4 0 x 2 ,3 OO,OO0
= 1,463,636lbs. = 20' 909 bushels @ 70 l bs . eac h
220

GrainS = = 836,364 lbs. = 10,455 bushels @ 8o l bs . eac h

x 2 ,3 OO,Ooo
#
(5) Materials Account (Fifo Basis)

Grain R Grain S
Bu. Cost Bu, Cost
1 O , O O Os l 2 , O O O 3,0oo s 3,ooo
22,OOO 32,2O4 1 3 , 0 O O 1 4 , 3 5 0
3 2 , O O O s44,2OO 1 6 , O O Os l 7 , 3 5 0

1 O , O 0 O $12,ooo 3,OOO $ 3,000

5,OOO 6,5O0 2,OOO 2r4OO
2,OOO 2,8OO 1,OOO 1r2OO
3r OOO 3r750
3,909 5,864 11455 11455
2O,9Og s27,164 10,45 5 s l 1,8o5
11,O91 Sl 7,036 5 , 5 4 5 s 5,545
 , I

Chaotar 15
356

P15-5

(1) BudgetedIncomc Statoment

(Ooosomittadl
Quarter
ft$ Second Third Fourth Total
Sales:
CommglciSl .........."""""t" s250 3268 3275 $goo sl,o91
GovgrnmgJlt.'..........t""""" loo 120 lto 115 445
tota t .r....... t....... t t tto"tt" " 33sO s386 s38lt 9{1s s1,536
Cost of goods 8old ..".,....'..'... tot 178 177 l9l 707
Grosg profit .........r.....'.......".t. $18e $208 3208 $,224 $ ezg
Other op€rating arponses:
Advertising ..'.............-----.-- $ o $ 6 $ 6 9 o $ 2 4
b
Sglling ........r..............t"""' 35 39 39 42 155
Admi n istrativg ............'...r.. 32 35 35 38 140
Gengral ofticg ...........r.'....-. 23 25 25 27 100 - i

TOISl ...........r..........tr....t. $go $l05 $los $113 s 41e

lncome before income t?r..'... se3 Sl03 3103 $rrr s 410
Incomg t3I.....'.................""... 37 41 41 44 163
' $ 6 2 s62 $67 s 247_
Ngt incomo ............................. $ 5 6

j
I
-
Chapter 15 357

P15-6 (Goncluded)

(21 BudgetedIncomeStatement
with 5% Incrtaso In GommercialSales
(OOOs omitted)
Quarter
Fi$ Second Third Fourth Total
Sales:
Comm grci8l ................trt'ttr $zsg $27e $zss $31s s|,146
. GovgrnmOrlt...........t'.....'."' loo 120 llo 115 445
Total ....t..........o....."trt"t' $36s s390 $3e9 9f30 s1r591
Gogt of goods Eold ............-.... 1A7 184 184 198 733
Gross protit ............o......'...t...' $1e6 s2l5 $21 5 s232 s 858
Other operating expensos:
Advertising $ 8 $ 6 $ 6 $ 6 $ 2 4
Selling .............................t' 36 40 40 43 159
AdministraUvc................... 33 36 36 39 144
Ggneral oftico .........t....t.r... 24 2g 26 2a 1o'4
TOtSl ...t.......t..t....t.........' $eg $l 08 $108 s l 1 6 s 431
lncome befora income tir".... $e7 $1 07 sl 07 $ 1r s 9 427
lncOmg t3L.....r.....-................ 39 43 43 46 171
Ngt inCOm|Et t.....r...............tr..... 358 9_g! Sse s70 s 256
358 Chapter tS

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 Clapter 15 359

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 Chaptar15
w

P15-6 (Concluded)

(3) JOHNSON AI*IDSMITH, CERTIFIEDPUBLIC ACCOUNTANTS

Budgeted Income Statement
For Year Ending June 3Or zON

Revenuefrom chargoableUme:
Blllable siliing Gross
Emplovee Hourr Rate Fees
700 $90.oo $ gg,ooo
Johnson 70.oo 77,OOO
t.r..t'ttttttt'r'rtto"t""""tt"r""t"
l,loo
Smith
tttt ' l"tr" t""" "ttot " ttt"" "' 1,5OO 52.OO 78,O0O
Vi ckg r3.....
l,600 39.OO 02,4OO
Lowe -aa aa aa a aa aa aata a aar a"

32.OO 52rOOO
1re25
KennedY....""' aaat a aaaaaaa a a r rrr rooo ort rr rro

32.OO 52,OOO
11625
Quinn '... 17.50 8,75O
...ott.t"""t'ltt"ttttt"tt"""t'l"t'
500
GarCia
I,l oo l5.oo l61500
Hammond '. 15.OO 15.OOO s424,650
LyOnS .......ttoo"tt""t'tt"t"t"ttt"""""
1,0o0

Erpenses of Producingrevenue:
Salaries: stoo,ooo
Partner:8.... 97r76O
Profgssi onal staff ....,r.r."""' 39r520
Sgcrgta ri g3""""tt "r" "t "" " "
35,OOO
Frin ge bgn gfits""""""'o"""""' 0 2'37o 334,650
Other oporating erpenseg .o.."'

Gross prcfit.......o.."t'o"t"tt""tt"""'
s-lgpoo
 Chapter 15 36t

P 1 5 -7
l

Schedule1
SalocBudget
Areas
South Southwest Total
Model l5O
Units ...r..r.....t..ot. 3'OOO 4'OOO TrOOO
Unit prico 9__!-75 9_l_Zg 775
Total ..rr...............t.....o.t.tt.r.o..t. t__925€99 g_7ooeg g!,?ailoo
M o d e l l OO
Unitg 5rOOO 7,OOO l2rOOO
Unit price ..t.........r.......rr......r..r.r.. q__! 20
$ r zo $_139
TOtal ......r...........r.rr.....'.r...'.r... 9_eoop.99 E__glgpoo 91,41!.ooo
Model 50
Units .............. 7,OOO I,OOO 15,OOO
Unit price ............... t_eo s___99 s 90
TOtal r..'.....r.... 9-_e99€99 gl20{99 il-egpoo
TOtal a.aa.ar....rtr ra. r....r.. r . r . a . a a a a a aa aa . . o . r r t fllTsE.OOO $3fgg,ooo s{ptlpgg

Schedule 2
Production Budget

Model
t-s 1_99 99
Units required to meet sales budget (Schedule l) TrOOO 1 2 , O O O 1 5 , O O O
Add gnding invento}y.,..,..,........r..r.o.,r,r...............r.. 200 400 300
Total units requirad..............r..........................r,..... 7 r2OO 12,4OO 15,3OO
Lgss beginning inventory.,....,...,...o..,..............r....,. 200 300 400
Planned producUontor thc year........r...............-.. 7 , O O O 1 2 . 1 0 0 1 4 . g O O
 Chapter 15
fi2

P15-7 (Continued)
Schedule3
Direct MaterialsBudget in Units
Units Lumber Finish
tq Be ln Board ln
Manuiactured Feet 9Peakers Pints
Model 15O
Utits to be manufacturod
(schgdulg 2! ""t"""""""""" 7,O0o
12
Matgrials lSte """""t""""t"tt"
84.OOO 35.000 14.OOO
Units of materials rcquired """
ModelloO
-Units
to be manufactured
(schgdulg 2| """"""'t"""""' l2,l oo
I
Matgrials lSto "tttt"t"t""to""t"'
96,800 36.300 12,100
Units of materials requlred """
Model 5O
-Units
to be manufactured
(schedule 2) ......"""""""""' l4,9OO
Matgrials lSto ....."""-""""""' 14' 900
89.400 29,800
Units ol materials required...."
Total units of materials requirad "
270.200 lE-loo 91poo

Schedule 4
Purchases Budget

Materials -. - .
Finish Total
@
Units requiredfor Production
(Schedule 3)..............-....... 27O,2AO l ot,l oo 41,00O
8.OOO 2.OOO
Add gnding inventofl.........-.. 30,ooo
3OO,2OO 1O9r10O 43,OOO
40.ooo I O.OOO 1.500
LessbeginninginventolY...'..
.......... 26O,20O 99,1oo 41r 5OO
Unitsto be Punchasod
Estimatedunit cost .............. $ ,75 s r5.oo $ z.oo s1.764,650
$83.OOO
Total cost of purchaseS........ $_esJlg @
 Chaptor 15 3&3

P15-7 (Gontinuedf
Schedule 5
Cost of Materiala Reguired lor Production

Materials
Lumber Speakerg Finish Total
Model l5O
Unitr of materialr roquired
lor producUon
(schedule3|.........,......... g4rOOO 35'OOO i4rOOO
Unitcost..,..........,,.........r...
t__ .25 f_l!E.og $ 2.oo
Total....,....,....,................
t-lgrg0O U2SOgg $28.OOO$ 6i O'OOO
M o d e l 1 OO
Units of materials reguired
tor producUon
(Schedulc 3f .......,..r..r.,,.. 90r8OO 3gr3OO 12,1OO
Unit coSt......r..............r.i.... t_- .75 L-19:oo $ z.oo
Total L72€oo $__gg{,5OO $24,2OO 641,3OO
Model5O
Units of materials raquirod
for production
(Schedulc 3) ...........r..r.... 89,4OO 2grgoo l4,9OO
Unit COStr....r.....,...............o t---75
9__--1-g.og $ 2.OO
TOtal ...... r......r............r....
r_o7ggg
gg?.s5o
$lrJse $29,800 543.850
TOta1...........r.....r..r..r........r..
e!E! !,soo $82.OOO $ 1 . 8 0 1 . 1 5 0
 f

url Chapter l5

'
P15-7(Continued)
ScheduleO
Dirsct Labor Budget

Cuttfns Assombll$ Finishinq Total

Model l50
Hourg per unlt '.................. .375' 2.OOO .375
Unitg to be manulactured
(schedulg 2)..........o.....o.. 7.OO0 7.OOO 7.OOO
Hourg of labor l€quiJ€d..... 21625 l4rOOO 21625
Labor cost per holtt.'."..'... 3 6.00 3 5.oo $ 4.oo
Total labor CoEt..,..........., S15.750 i 7O.OOO $1O.5OO $ e6'25O
Model 1OO
Hciursper unit................... .375 l'5OO -25,O
Units to be manufactured
(s c h e d u l e2 ) ..,....... 1 2 .lOO l2.lOO 12.1OO
Hours of labor rcquircd..... 41537.5 18rl50 3'025
l-abor cost per ho1tt........... $ 0.oo 3 5.oo $ 4.oo
TOtallabOr COSI..........!.... 527,225 $ 9O.75O $12.lOO 13OrO75
Model5O
Hours per unit...'...r'.......... .375 l'5OO '25O
Units to be manufactured
(Schedule2) ................... .l4.900 14.900 l4.9OO
Hours of labor rlquired..... 51587.5 22.35A 3t725
L:bor cost per hour........,.. S 6.00 $ 5.oo $ O.oO
T o t a l l a b o r co st.............,. 3 3 3 ,525 Sl I 1.75O $14,9OO 160' 175
Total....... 376,500 $272.5OO $37,5OO 3386,500
----------T\

Chapter 15 365

P15-7 (Continuedf
Schedule 7
Factory Overhoad Budget
(Applied Overhead|

Cutting ASSqrnb[lg Finishins Total

Model 15O
Unlts to be manufactured"
(Schedule21..................r TrOOO TrOOO 7rO0O
Estlmated departmsnt
factory overhead.,,or......, $ {'OO $ Z.OO $ .ZS
Total cost..................,..... $ 7,OOO $l 4.oOO S 5.250 S 261250

Model tOO
Units to be manufactured
(Schedule 2f .....,,,.,......... 12r7OO 12r1OO 12r1OO
Estimated department
factory overhgad ..r......... $ 1.OO $ 1.5O $ .5o
Total cost........................ 912.1OO S18,150 $ 6,050 36,300

Model 5O
Units to be manufactured
(Schedule.2|................... 14r9OO 'l4r9OO 14r9OO
EsUmated department
factory overhead r........... $ Irog $ 1.51 $_'l!!
Totaf cost........................ $14.9OO S22.35O $ 7,450 44,7OO
Total factory overhead.......... $34,OOO S54,5OO Sl8,750 SlO7.25O
 \-
I
- \
\

366 Chapter 15

'
P15-7(Gontinued)
Schedule8
Beginningand Endinglnventories

BeqinningInvenlo_ry- Endinq lnventorv

Materials:
Units Cost
ry Units Gost Total

Lumbgr............. 4OrO0O 9 .75 $ 3O,OOO3 O T O O O

$ .75 $22,5OO
Speakers.......... l O,OOO 1 5 . O 0 150,000 8,OOO 15.OO l2O,OOO
Finish .r.....t....... 1 ,5 0 O 2.00 3,OOO 2,0oo 2.oo 4,0oo
Total s183.OOO $146.500

Work in process: None

Finished goods:
Model 150.......' 200 se8.oo s 1 9 , 6 0 0 200 slos.50 s 2 1 , 1 O O
Modgl l OO......'. 300 62.OO 18,600 400 66.75 2617OO
Modgl 50.......... 400 47.OO 18.800 300 50.25 15,O75
Total r........... s 57,OOO $ 62.875
Total s240,ooo s209.375

S ch e dule9
Budgeted Cost of Goods Manufactured and Sold Staternent

Materials:
Beginning inventory (Schedule 8)...............'......," $ 183,OOO
Add purchasgs (Schedule4!...........r............r.,...... 1 . 7 6 4 , 6 5 0
Total goods available for use............,r.......,..........$1,947,650
Less ending inventory (Schedule 8) .....'..'............ 146,500
Cost of materials used (Schedule 5l .............'...... $1,8O1,150
Direct labor (Schedule6) ....................t.....,.,.........,... 386,5OO
Factory overhead (Schedule 7)..............'......'.oo..'.,..'. 107,250
Total manufacturing cost .,....,....r..........r.......r........... $2,294,90O
Add beginning inventory of finished goods
(Schedule 8| ............,..r..........................'r....'.... 57.000
Gost of goods available for sale.. ....,.......,... s2,351,9OO
Less ending inventory of finished goods
(Sch e d u l e8 ) . .....................,.. 62,875
Cos t o f g o o d s s o l d . ......r..............,............ €3;!9,939
 %7
Chapter 15

P15-7 (Concluded)
Schedule 1 0
B udgeted lncom e Statement
Amount
Sales-all models(schedule1)....""""""""""""" s4,o15,ooo.oo
2,289,O25.OO
Cost of goods sold (Schgdulg 9) ,..'........""oro"""'t'
Grossprofit.......,......,.........,.,................,.... s1,725,975.OO
Markgiing'erpgnsS....--..'..............'.. $5o0rooo
Administiativeexpenses........r.o...r.. 3O0'OOo 800.ooo.oo
lnCOmg bgfOfg inCOme taX,.....,..r.......r............,...... s 925,975.OO
PfOViSiOn tOf inCOmg tax i.r......'..........r....o.'..o......... 462.987,50
Ngt inCOm€).......rr...,..o...........o.'...................o....,...rr 9192€gZ.so

P15-8

Schedule 1- Sales Budget

EconomvModel
-oqooo WesternUS EuroPe Asia Total
Units...,... 5O,OOO 75,000 25,0oo 210'000
Unit price S so S so A------5o $ so S so
s3sooJoo s2,soo.oooI 3,?lo,o0osl,25o.ooo9J9r999rOOO
Tota1...,....
S t a n d a rdMo d e l
U n i ts.,...., 4 OT OOO 45,OOO 6OTOOO 35r 0OO 18O'OOO
Unit price S 70 S 70 S---7o S zO S_-7o
Tota1........Si.AOO,OOO$3,15O,OOOSIT2OOP.OO S2.45O.oOOSl3f99pOO
D e l u xeMo d e l
u n i ts ....... 2 o ,o o o 25,oOO 35,OOO 3O,OOO I 10'OOO
Unit price S 90 S go S---9o $ 90 9---9o
Totat........ 51.8OO.OOo -S2.25o.OOo q--9rl-99roo0 S2.7oo.ooo S--$99o.ooo
S11rl0op99 €9499p99 q93-ro00p99
Total........,...57.600.000S7,9OO.OO0
368 Chapter t5

Pl5€ (Continued)
Schedule2-Produstion Budget

Economy Standard Delure

Model Model Model
Units required to meet salec budget
(from Schedule 1! ............o..o."' 2lorooo lSorooo l lorooo
lAi Ogslrod endlng Inventory.................o......... 20.OOO l5.OOO IO.OOO
Total units ruquircd lor Year zto,ooo 105rooo t 2o,ooo
Less beginning Inventory..........-. l5.ooo ls.o(xt l5.ooo
Productlon required for the year..........,....rorriror2f 5p99 !-8OPOO 1O5P99

Schedule3-Direct MaterialsBudgetin Units

Tranr Dlodc Wlrc

Economv Modcl Bor formcrr Rcstlflcrr Fltten Rcrleton 0n tcet!
Unltr to bc msrutrcUrcd
(Schcdufu 2)..*......,..*. 2151OOO215'OOO 215'O0O 2lSrOOO 215'OOO 215'OOO
Metcrlelrquen0Uporunlt 1 2 2 5 5
Total quanU$ o,f
mttcrleb pqulrcd..,..,.-. 215,OOO2I5,OOO 43O.O0O 43O.OOOi.O75.OOO1.075'OOO
Standard Model
Unltr to bc manufectrrcd
(schcdutc 2)...-.............. 18O,OOO18O,OOO 180'OOO 18O'OOO l8O'OO0 18O'OOO
MaterlalrqutndtYperunlt t 2 3 8 o
Totel quentlty of
metcrlabruqulrcd.......... ISO,OOO360.000 72O,OOO 54O,OOO1.44q.OOOl'08O.OOO
Dclurc Modcl
Unttr to bt manufecbrcd
(schcdufu 2],.-....-.-...... !O5,OOO lOtt,OOO 1O5,OOO 105'0OO 105'000 105'0OO
Matcrlstr quanflV pcr unlt .3 5 6 10 8
Totel quanU$ ot
mstorlrlr rrqulrod.......... 1O5,OOO3i5,OOO 525.OOO 630.000 LOSO'OOO 840'OOO
Total unltr of matorlalr
rcqulredforproductlon.. 89O.OOO1.675,000 1,OOO,0OO3.585!OOO?f9EOOO
SOO,OOO
 sti9
Chapter 15

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370 Chapter 15

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P15-8,(Continued)

Schedule S-Dlrect Labor Budget

Economy Standard Delure

AssemblvDepartment Model Model Model Total
Units to be produced
(schedule2|......,........' 215rOOO lSO'OOO lO5rOOO
Hou.rsreguired per unit.. '5O .75 l.OO
Hoursrequired...o...r....... 7O7'5OO 135rOOO lO5rOOO 347r5O0
Labor rate por ho1tr,.,..... t__ los t____l_o.oo $ lo.oo $ lo.oo
Total departmental labor
cost for pnoduct......... $!ro751Q99 t1€gg'1Q99 $!ro5o€oo 93.{75'1|oo
TestingDepartment
Units to be produced
(Schedule2!,.........,..., 215'OOO lSO'OOO lO5'OOO
Hoursrequired per unit.. ,O5 ,O5 .O5
Hoursrequired...D.....r..... 10r75O I'OOO 5r25O 25rOO0
Labor rate per hour...,.... A-___l3.oo E__13.o9 S__U.og S__!3,oo
Total departmentallabor
costfor pioduGt......,..
t-_Izsoo s-l-9999 t__qg.ooo so.ooo
Total labor cost for the
period.............or.r.....,.9!r?9!r00o $rlggfoo $!rl-!3rooo aJzjpgg

Schedule 7-Budgeted Machine Hourc in Testing Department

Economy Standard Deluxe

Model Model rotal
units to bo produced
(Schodule21.......... 215'OOO lSO'OOO lO5'OOO
b Hours ol machine Ume
required to test uflit....... .15 .25 .35

b Total machine hours

required................,.....r... g2r2so 45rooo 36rzso tl4rooo
 Chapter 15
372

Pl5-8 (Continuedl
Rates
schedule g-Budgeted Factoryoverhead and Departmental
Budgeted
Depart-
Variable Budgeted Variable mental
Fixed Coit Rate Hours Gost Overhead
AssemblvDePartment
lndirect materials and
suPPlieso..........."""' $158,O0O $r.so 347,5OO $521'25O $ 679,250
347r5OO 773r75O 5231750
lndirect labor.....-.'......r 35O'OOO .5O
.05 347,500 17,375 399,875
Payrollt?ros'........-...... 382;5OO
Employeefringe
347,5OO 347,5OO
bgngfi ts.........-..r.......
65,OOO
EquipmentdePreciation 65,000
Repairsand
.4O 347'5OO 139,OOO 164,000
maintgnar|c(t............ 25,OOO
l2,ooo 12,OO O
Allocated building cost
Allocated general
241,125
factorycosts............ 241t125
TOtal depaftmental bUdggtgd OVefhead..'...'.....o..,..........."""""o"' $2,432,5oo
baSe (direCtlabOr hOUrS),......"""" 347,500
BUdgeted OVerheadattOCatiOn
Predetermined departmental factory overhead lElt€ ............o...r.... $-_7.09
Testing Department
lndirect materials and
s u p p l i e s . . .................$ 1 5 7 ,OOO $ .gS 114,OOOS 39' 9OOS 196' 900
Indirect 1abor..............t 25O;OOO l.OO t l4'OOO 1 l4,OOO 3641000
Pa y r o l lt a x e s ................ 5 5 ,OOO .tO ll4,OOO l1r 4O0 66' 400
Employee fringe
b e n e f i t s . . . ...........r'....l l 4 rOOO Il4tOOO
Eq u i p m e n t d ep re ci a ti o n 2 1 5 'o o o 215' ooo
Repairs and
m a i n t e n a n co............ 3 5 ,OOO l.5o I l4,OOO l71r O0O 2061000
Allocated building cost I'OOO 9'OOO
Allocated general
tactory costsr.........., |ftzr7}O f32'70o
Totat departmentat budgeted overhead r.....'............'.....""""""'D"' 91t254tOoo
Budgeted overhead altocation base (machine hours) .........!.t......... 114.OOO
Predetermined departmental tactory overhead rate...'....

AssemblyDepartmentbudget factory
TestingDepartmentbudgetedfactory
Total budgeted factory overhead ..........j.... s3,9ggE99-
Chapter 15 s73

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 Chapter 15
371

Pl5€ (conclud?n"or,e
io--Beginningand EndingInventories
Beolnnlnglnvtntety Endlng Inventory
chranutvunlt cort Total cot Quanutv Unlt colt Tstalsost
Matarlrlr: 't
IO,OOO3 r.5O l5,ooo 5,ooo I t.5o t 7"5OO
Trrnrtorm crr ...--..-...--. l5,ooo 4.5o g7r3OO- IOTOOO aso alt,ooo
Dlodc rccttllen -..6-.... zt,ooo .70 l7'5OO 2!',OOO .7O 17"5OO
Fllten ........-.....-.H--.-x *t,ooo 1.75 €r75O 2O,OOO 1.75 3li,ooo
to,0o0 .2o 2,000 5OTOOO .2O IO,OOO
S/lra ........-r....D,.'............ 3OiOOO .5O 15'000 4O'OOO 50 20,ooo
Totel mated8lt.--*...- t loo.750 Ll3r0oo
Worlr ln Prpcccr: llonc
Finlghed Ooodr:
Economy Modcl 15,OOO ti2s.oo 3 375,000 2O,OO0 325.15 3 5O3,OOO
Standard Modcl x............ 15,OOO 38,50 7Tf FOO 15,000 30,25 588,750
Dglurc Model..-.............. 15,OOO 35.25 828'750 10,000 58,4!t 564,500
Total flnlrhcd goodr ....... tL78'!-e!!9 tL,050,25O
Total InvcntotY .....'.-. 91,942f0o $J9125o

Schedule 1l-Budgeted Gost of Goods Manufactungdand Sold

Materials:
$
Beginning inVentOfy(SChedUle10| ........................'or..............'. l60,750
Add pUfChaSgS (SChedUle 4)....'.'...........o..'......'..rr.........r.....r.... 1 0 , 912,250
Matgfials availablO fOf USe.'..r...'...r.'...r.r".'......'..r...'................. $11,073,O0O
Lgss ending inventOry (SChgdUle i0!........'..r.........r.....r.....'....r. 135,OOO
Cost of materialsused in production(Schedule5)'..'..........-.... $1O,938,OO O
DirgCt labOr (SChgdUle6|...........'...'................'...............,.........". 3,775rOOO
FaCtOry Overhead (SChgdUle 8)....'..'..'.....'r............r......'............... 3.686.500
COSI Of gOOdSmanUfaCtUf8d dUfing the pefiOd...........,.....,......... $18,399,5OO
Add finished goods beginninginv€ntory(schedule l0) ...'.-......-.. 1.781.250
GOstOf goOdSavailable fof 3a1e..........................'.r.'.............r.r.r.. $2O,18Or 75O
Less fi nished goods ending inventory (Schedule I Ol.--.'.--.---.-.-'.. 1.656.250
GOSI Of gOOdS SO1d....r.................r..o...............r........r......rrr.......r... s18.524,500

ScheduleI 2-Eudgeted IncomoStatemont

Sales (from Schgdule ll .,.......................,............... $33,OOO,OOO
Less cost of goods sold (Schedule 11!....,............o. 18.524,500
Gross plltit...............................r.r.o...rr..rr......r........ $14,475,5OO
Less commercialexpenses:
MarkeUn g exponsgs ........o....r.,........................r..s6,145,OOO
AdministraUve erponse3 .r............oor-.ri-r..r 2.330.500 8.475.500
lncomg bgforg taxgs ..'............o.....t...'.'.................. s 6,000,000
Less income tar (4O% tar rate). 2.400.ooo
Net incomo............ : 3.600.000
s -
 Clppler 15 375

Pl5-o '
(1) CL CORPORATION
ProspccUvoStstoment of Incomc and RetainedEarnings
For Year Ending December 31r 2OB
(OOosomitted!

Revonuc:
Salef aa.aa..r...a.a.a4.......r......t....t..r..o..a..r.......a S600,OOO
Oth gr' lncorllC ..r..........r.....r...r...r...............t I,OOO S609,OOO
Erpenrcr:
Cost of goodsmanutacturadand sold:
Materlglc $213,OOO
Dlrect labor 218,OOO
Variable fagtort ove rh ead ..'.......r........... 130,OOO
Firgd factory ovorh gad ......o....'-'........... 12,750
$573,75O
Boginning inventol]f ...'...............o..........o... 4g,ooo
$621,75O
_!l-t!J!o' s5O7,OOO
Ending lnventory r.r.r...i.......r..................'..'

MarkeUng:
Salari gr r.r..............r......r..,,.. $ to,ooo
Gommiss1on3............r.rt.......r't......r............ 2OrO0O
PromoUonand advgrtisln$........................ 45.O00 81,OOO

Generaland administration:
Salarl es ....o..'.r'...r............. $ lg,ooo
Thavel 2r5OO
Office cost3...... 9.000 27.500 015.500
Incomc flossl bglorc Incomo t8r......'..o..'....'. $ (6,500l
Incomc tar rgfund (4O%1............r,..............r. 2,60,0
llet InCOmO(IOSS|....r........................'.'......'.'. $ (3,e001
Beginning rctaingd earningS ..'.........r..rr..,.... 108.200
Subtotal $lo4,3oo
Less dividends . 5.OOO
Ending rgtaingd earnings ..,........r.......o.........

t tseginnlng
Invcntofl.....o...r...rr.......o..............r.r.............oo...ror... units
4O,0OO
Adding to Invgntory (45OrOO0 - 4OOrO0Olr.........r.,,.r.......r...o..,. 50.ooo
Ending Inventoly....r..oo......c'.'..o...o..r.o....ro.r'....r......'......'.rr....... units
9OTOOO
198 cost per unit ($573175O+ 45OrOOOl ...............,..,,..rr..,...,..x s1.275
Gost of ending lnventory .......i...... s 11 4 , 7 5 0
 Chaptar l5
376

P15-9 (Gontinuedl
CL CORPORATTO}I
BalanceSheet
Prospectiveas of December31' 20B
(0o0s omittedl

Assets
Current asseta:
GaSh r.............. aaoaataaaartaaaaaaaaaaaaaat"ttott"t" i l,2oo
Accounts receivable 80,OOO
lnVentOfy .........aa..a........r..a.....aarr...........rr....ar......t......-a 1l{,75O
lnCOmg taf fgCelvablA ...............'....o...........D...o...r.....o...
2.800 $198,550
Plant and eqUipm6llt-...........,............r.o......'............'.....t.. $l3o,ooo
LaSS ACCUmUlatgd depfgCiatlOn r.r.'.......'..........D..t..."'t'
4l.ooo 89.OOO
TOtal aSSets.....r......r.......1..r..........r..'...r'.r.....r..............t
s287.550

Llabilities and Shareholdsrs' Equity

Current liabilitieg:
Accountg pa1nb1e.......o...........o.....rr.....r................'....'.'945tOOO
.
lccruaO paya0tes..r.....................rr....'....o.........rt......... 23r2SO
Notgs pty"ble .,................!.o.............t......r.........t.......... 5O.OOO Sl l8t25O

Shareholderg' equltf
Common stOCk....o....o.........................................r......... $7Ot0OO
Rgtaingd €arnings ...........................r.........r.......r.....'..r.99t3OO 1O9t3OO
Total liabilities and shargholderst €QUit!......,.....r...r..... :9?!l?:55O

pooner than in
l2l (al The profit performanco lor 2OB is forecast to be much
2oA.-A loss after Income tar of 3.?.9 milllon ls prodicted, companod-to a
profit aftor Income tar of $12.6 mitlion. Tlre company erperienced the
loss despitc a ggoh Increase in unit sales Yolumo. The maior problem
sosmE t6 Ue in the inabitity to raisa prices and/or in cost contlol. Tho
costs noso In every anoa of activitp
(il Variable manufacturing costs per unit increased 7.loh (from $1.16 to
sl.2464.
(21 Fired manufacturingcosts increaseds750,000, or g.3oh.
(31 Marketing costs, erctuding commissions,increased316 million' or
36o/o.
(4) General and administrative costs increased $3.5 million' or 15oh.
Chapter15 3n

P15-9 (Goncludedf
(bl All srsas will require spectal cost analysis because the costs in all aneas
Increased,but apecialattenUonshould be paid to:
(ll Produstloncost Incroaseg,because although relaUvelysmall in pen
centage,the dollar amount ls high due to the volume of units.
l2l Selllng and promotlon coat Increases, becauae the rate of these
cost Inc;gaset was lraater tlran the rate of sales increase.
Tho saleo prlce wa8 not Increa3ed in spite of the increased cost. The
hlgh sale! volumo Inciaase may be the result of too low a price. Further
Investigatlon Into markbt prico and price-volums relationship is needed.

A review of tho balancc gheet Indicateg a material deterioration in the

companyb working capltal position. Inventory has more than doubled.
This increaso appears to have been financed by a significant incraase in
current llabilities (more than a three-fold Increase| and a material
decllne In cash. The need for so large an Increase In Inventory and the
effeet of dectlning profitability on tho cash and working capital position
need to ba thoroughly lnvestigated.

(cl The following lmprovementsshould be consideredby management:

(ft lmproved coordlnatlon between gales, Inventory contlol' and pro'
ductlon, an a no-€Yaluatlonof the product pricing policy'
l2l Developmentof a standard cost system to monitor product sosts.
(31 Developmentol a line of credit for short-term liquidity problems.
 Chapter l5

CASES

ct5-1

(ll Businesg plannlng and budgetlng acUviUeslor Maiton Company ane impon
tant because:
(al A long-run commitment of resoirrceg to specialized assets is about to
be mide.,A one-time decision for major erpansion that could involve a
large amount of financial resouncesovor a long period of time is about
to be undertaken. This Investment will be committed to specialized
assetg and can be rccovercd only from the production and sale of one
particular YalYe.
(bl Tfte daily operatlong of the company will becomo mono compler. Mai
has had no erperience wlth the day-to-day operaUong of a large busi-
ness. The business ptanningand budgeUngproceduraswill provide Mai
the opportunity to review the company performanco and will allow the
company to develop and evaluate atternative counsesof aetion to satisfy
corporate objectives.
(cl They will asslst in obtainlng capital from erternal souncss.An erpansion
pnogramol this magnitude, with a significant amount of initial funding'
will require the generationof additionalcapital either through borrowing
or issuing stock Obtaining nacoliliary funds can be enhancad bY and
may requlra an orderly presentation of, the business plan and budget
acUviUes.
(dl They will highlight potential problem situations. Disciplined business
planning and budgotary procedurescould emphasizea variety of prob'
lem situations that might be encounteredduring the period of the plan.
l2l Listed below are the major probtems that would most likely be disclosed
because Maiton Companyis about to erperienco a significant growth.
(a) The lack of adequate production facilities to manufacture the valve at
the quantities required. The company has served a small part of the
markeL The new segment is much larger,thus calling for more produc'
Uon facilities than previouslyneeded.
(bl The tack of adequate Internal capital gources to finance the asset
erpansion (both working capital and plant and equipment).The company
is smalt and probably generatesmodest amounts of capital. The amount
is not likety to be enough to meet the new requiremonts.Gonsequently'
the companywitl need to seek capital from the outside, and probably
has little erperience because it grew slowly and had no previous need
for outside capital.
(c) The lack of adequate managementnesources(people)to administer the
company as lt gFo\rs. The company ls small and, thus, probably solely
run by GeorgeMai. As lt grows, there will be the neod for more manage-
rial people.This need probablycannotbe met with current employees.
Chaptorl5 379

Cl5-1'(Concluded)
(d) Lack of planningand budgetskills. The companyprobablyhas had little
need for planning.Consequently,it may experience difticulty in organiz
ing for and developinga five-year plan. Specific problems could occur
with regard to forecasting,production,marketing, and cost of capital.

c15-2

(1) Factorc that Marval Products needs to consider in its periodic review ot
long-rangeplanningincludethe following:
(al The curent state of the economyand its expected future statusl
(bl The current and future availability of resources, such as personnel
plant and equipment,and capital;
(cl Consumer attitudes with regard to product appeal, changing travel
modes and patterns, and changinglife styles and affluence;
(d) The level of industry sales, Marval's current and projected market
share, and Marvalb degree of influence or dominancein the industry;
(el The product lines with respect to the naturs of the production pnocess
length of time the product has been established, and utilization of
nesourcesand plant capacity.
(21 Factors that Marval Products needs to consider when developingthe sales
componentof its annualbudgetincludethe following:
(al The pricing strategy;
(bl The size of Marval'smarket share and the relationshipto its competi-
tors;
(c) The sales mix of products so that contribution can be maximized;
(dl Availableproductioncapacity;
(el The effect of advertisingon sales volume;
(f} Nationaland internationaleconomicconditions.
g0 Chagter 15

cl5-3
submission
(r) Divisionand plant personnelbiasesthat may be inctudedin the
of budget estimates include the tollowing:
(al Budget sales estimates probabfVw9.9lO, tend to be lower than actually
and the cur-
expected because of ths high volatility in product demand
rentreward/penaltysystemformissingthebudget.
(bl Budget cost'estimates n itt u" higher [han actually expected in order to
protect the divisions against thJ effects of down'side risk of business
stumps and the possibility ol increasedhigher costs' The reward/penal-
ty system encouragesthis action.
(c) Plant and division managementcan incorporate slack and padding into
the budget without the litetitrooo that it will bE temoved, because c9r-
porate ieadquarters does not appear to get actively involved in the
actual budget PreParation.
use to monitor divi-
l2l Sources of information that corporate managementcan
sional and plant budget estimatesinclude:
(a) Regional and naiional leading economic indicators and trends in con-
sumer preferenceand demand;
(bl Industry and trade associationsales proiectionsand performance data;
finan-
i"i prior year performance by reporting units as measured by their
cial, production,and sales rePorts;
(d) Performanceof similar divisionsand plants'
(31 Services that could be offered by corporate managementin the develop'
ment of budget estimates are as follows:
(a) providirig economic forecasts with regard to expected inflationary
trends and overallbusinesscycles;
(b) providing national and regional industry sales forecasts for products as
developedby corporate rianagementor obtained by managementfrom
other sources;
(c) Sponsoringtraining pnogramsfor ptant and divisionalpersonnelon bud'
geting techniques;
(d) lnforming divisionsof overall corporategoals in terms of sales, market
share, and profit.
(4) Factorsthat corporatemanagementshouldconsiderin decidingwhether or
not it should becomemore involvedin the budget pnocessinclude consider'
ation of costs and benefits and the resultingbehavioraleffects.
(a) Coststo be evaluatedinclude:
(f ) tncreasedcosts at the corporate level, because monetime and per-
haps additionatstaff will be required.
(2) possibletower profits, due to an unfavorablechange in divisionand
plant managementattitudesand motivation'
 ffi1
Chaptsr15

Cl5-3 (poncluded)
(bl Benefitsto be consideredinctude possibteprofit improvementfrom:
(il More accurate budget estimatesthat might reduce lost sales and/or
reduce costs incurred;
realistic budgets;
l2l More effective managementbecause of more
budget pnocess'
igi lmproved coordinatlon and control ol the
(cl bin"rioral variablesto be consideredInclude:
(f l Effect on goal congruence;-
corporate manage-
izi Effect on lhe communicationchannels between
ment and divisionalmanagement;
(31 EfeJ of restricting authority over the budget process at the divi-
sional level;
(4) iossible negative effect on motivation and morale, due to loss of
authority and autonom$
(sl Effect oh pertormance due to a potential reduction or increase in
bonuses.
 Chapter 15

cl5-4
budgetary 3ystom'
Schaffer Company appears to havc a woll'doveloped production'
Budgetg for each of tlre important areas requiring attention'-€ales,
Included In thc
inventory levels, olpense", Jii capltal invesiments-are the constntction
pnocoss.Insufliclbnt detailg are frovided to properly evaluate
prcduction and Inven-
and uso ol the UuJg"t" lor ssleq capltal lnvegtmentr and the arponse side of
tory levels. Thug, t{re analyslr li this caso must focus on
the budgeting Pnoeac8. proca-
Although an elaborate budget pmcosr odsts' analysia-of the elponse
purpose3: Tho
dures raveals a number of gtroricJrJng" for ptanning and contrcl
months ot
basic Input to the oxpsnso nuOgoi fotift" comlng yoar i9 the first slr
rsflect
the current yearb actuat pedofrance' tfic oxponso budget (modified to The
porcontage'
unconttollable eventsl, and the corporato olponse rcduction com-
next erpanse budget ii basically tait yeart actual costs reducod by the
puted orpense percentage.
planning
This approach does not capture the full potential of the budget lor pri-
purpo"."l--niln shoutd Ue torward-looklng.Thc Schaffer budget ls based
marily on past r""rft" and doeg not tpcognizs any planned changes in operating
does not
activi$es, The acrcss-the-board corporata olponso reduction target
consider the diffenencssamong ptantg in opportunities for cost improvemonF'
t"V permit the lrstrong' managers to build
The review ol division r"n"g"iJni proposed
slack into the budget And tho lacts Ao not make ctear whether the lor
budget is based upon the currsnt yearb sales volume or ttre planned volume
in
the budget year. Witnout such an idiustment, an additional weakness exists
the procedurc. is
The process atso falls short for contrcl purpose":-Tl" maior shortcomingto
its failure to Incorporate changes in operations that occur subsequent with
August. Comparisons of perforriancos that inctude these late changes'inclu-
provide usEful information for control' The
- budgets that do not, will not would t-afo
sion of allocat"O "orporatton and division costs in plant budgets contain
they
the erpense budgets less ettecUre for control purposel-Pe9.ausa division
irrelevant data iJr ptant-level cost control' The possibility that some the
managensmay be iUte to Introduce slack into their budgets also reduces
effectivenessfor cost control. partici-
The budget process appeaF to omit the plant managels trom active
pation in budget preparation"nC revision.Their participationvould improve tho
cost control and'ptanning benefitg of the budget pnoce:s'--Theuse of acnoss-
the-boardoxpensccuts and Inclusion of allocatld costs in tho budgets u19d-f9r
performancomoasurpmentlr further avidence that tha connpanlfhas 'failed to
considerthe effect of lts system on managementemployees.
With its budgetary syst-em,the company tries to plan and control its opera-
tions. To this end, tne company ls be*er off for having developed its__tJt"r'
However,tuttft"r benefits coulibe gainedby eliminatingthe weaknessesin its
procedures.
 g3
Ct;gtpter15

c15-5
(rl Tho manstaeturing managert vievrg can bo ssparatod into two argu-
monts-thc ugc oi ttre Eamc lmprovement tsrgetr lor all plants snd
lnconsistent appltcation of target ravisions. In both casesr the manufac-
turlng managefe argumontg 8rc valid.
ihc manufaciuring manager claims that the use ol the aamo
lmprovement targets'tor att plants fails to racognize the different abllities
oi-pf"nt" to achiive targeta. His,criUcisrn ig valid because plants do have
ditierent opporhrnlues ior lmprcvemenl and thls should be recognized in
"gtaUtfnind mprovement tailetr. Wrilo hlr arguments- ma-ybe valid to
aupport trir vie* thet older plantr havo lesc opportunity for impmYement'
tn6re are Insufficlont dst8 presented to vorify his claim.
The manufaclgring maneger obiects to the nowor plants' obtaining
revised targets and th6n being able to perform better than the ruvised
targel ThJ modification of targets in light- of new information is an
apiropriate budgefrng technique. Newer plants may need such revisions
get parameters and
because their lnixpeience makes it morc difiicutt to
crercise contrpl. ilo*erer, the manufacturing managerb alSumant is
valld becauge adlustmentr iravc not been avallable to ell plants' and' tur-
thermorc, Ute "Oiu*rn"nts granted to new plants appear to make lt easi-
r lorthem to achleve target*
The rssultng treatmint in establishing end revising targets' when
coupled with e pertotmanco sppnrisal and rcrvard system' does sppear
to discriminate in fayor of the newsr plants. This would apparently lead
to lower bonuses, appraisats, and morale among management of the
older plants.
(21 Both old and new plants have the capability of concealing slack in their
budgets. The otderptants cannot introduce budgetary slack t*rrough their
cost estimates because their costs havo ostablishod a pattern over'the
yoars. HoweYer,the ptant managoment knows thoso aneasof operations
wtrere changer and'improvements can bs initiated. These operatlng
changesc8n be Initiated after tho budget io adopted'
The newer plants can incorporato budgetary slack in other ways'
Their coSt estimates ang mgno uncertain because the plants an6 newar'
The plant operafions havo not stabilized, so ptant management may be
able to intlate costg slightly above what can be realistically erpected of
thom. There may be more o-pportunitiesfor improved operations that may
not be recogniz6dat the ti;; the budget is adopted. In addition, there is
aomo lag ln lncorporating Into the budget the cost savings of tho
IncreaseJ erperience of tho workerg and the efficiency in functioning of
the equipmsnt and machinerF
g1 Chlptt 15

cl5-6
ln thc cas. err not llkely to prcduca eftec'
r-'l The budget practlcg? d?:c4bed
(f
can bc
tfuo budget?ontrol In thc long runr'bccsusc rcveral weaknesscr
ldentified:
(al There 8ppoars to be no partlclpaflon of plant poFonnol In thc budget
develoPment.
In lour yoarE' thc manags'
Ol Cii"n ttrit ttrere have been flvc manage6 budget lr rcalistic'
havo had nobpportunity to assess whether thc
(cl. lt app""rr ihst adlugtmentr to tho budget, oubsequent to ltr adoption'
are not permitted even In tho tlght of newlnformatlon.
(dl The budget la being uoed to pressuts Fc plant menegoa
(21 ile lmmedlite effect wltl Ue a tnrstrated manager, who wlll not meet thc
budget and who will bc reptaced a! 8 noaultof belng unwllllng to cacrilfcc
the luture for the present, or s frustratsd managorr who meets the budget
by making decisionsthat raerlflco thc futurc for thc preaent. ln elther
casor Drake Inc. ls unfavorably affected.
Ttre long-term eflect wllt be to rcducc thc management affectivenes! of
Drake Inc. imployeeg. The arbltrary method of budget developmelt' lack of
partlcipaUon, in,i ttrc usc ol the birdget as t pnossurc devlca wlll result In
loss of talenied managors,developmentof nonproduetlvemethods by man'
agors to nbeat' ttre Uudge! decisions taken to meet the budget but wttich
arc detrimental to the company in the long nrn, and low moralc and motiva-
tion.
ll the present methods of budget administratlon continue' Davld Green
may adopi nonptoductlve methods and becomo an Ineflectivo managsr.
However,it tre is talented and conUnuasto raise such lssues as the poor
condition of thc plant and hls short tenuto, lt lg likely ho will rssign or be
fired.
 CHAPTEB 16
DtscussloN QuEsTloNs
Ol&1. A capibl olgcndituro b an upcrditure hlrtd'
od to bcnelil futun pcrio6. ll ia nornally asro-
cblrd wilh thr acquiritbn or imprwemrnl of
plant asrcte. Thr rral dislinclist betweln a
copital and rcvenul cxpendilure is not lhe
immediato charging of the expendilurc to
ilcotnc, as gppood to ita gradual atrprtizatim,
but thr bngth cil limr required lor ils recovery
in castr. Bccovericr ol rvenur expenditurel,
rtrch ee product c6ll, aro expected to lako
placr in a matlor ol weeks or, at the mosl,
monthr. Thc tinancial rccovery of capital
e:gendilures b measured h lerms of years.
O1&2. Purpoces cil e reoearch and devebpmonl Pte
Itarn are:
(a) A planned gearch lor new knowlodgc
pertainingto the industry withoul reler'
ence lo a specific applicatict.
(b) Crealion of a new producl or improve'
ment of an exislhg ptoduct.
(c) lrwcnlkxr cf a new or impoved procost
or machhery lo mEke a fhishe'd produci
orgnponenl
Bcs,rsrg fc a research and devclopmont Pro-
grarn arg:
(a) To protcct thc cabc dolbr, that ic, to
meet csnpotitbn. lmproving lhe quality
of pedonnancr cl produds or achieving
cod savhgr in eilher openting or capilal
erpenditurer falb hlo this categpry.
(b) To do research to promole new saleg
dollars,eiiher by enterhg a new market
or by aignili:anlly expanding an existing
msrket.
(c) To invesligate problems with respecl lo
environmentalprotrtbn, saletv"-rvorking
cordilirns, elc.
Q1S3. Budgetary prccecbres for research and deveh
opment expendituro are designed to:
(a) lorce management to lhink aboul
phnncd elgendilures;
(b) coordinate rosearch and developmenl
plans with thr inmediste ard lang-range
pbns of the conpany
(c) lorcc lhs research and developmenl
stafl to considcr major nonlinancial
aspects cil lhc prograrn, such as person-
nel, equipmcnl. and facililies require-
rnenb.
Q1S4, A cash budgct involveo detailed estimates of
anticipaled cash rcceipls and dicbursemenlr
for a rpccified perird cil time. lt Lr designed to
assbl monagemenl h coordinaling cssh tlow
lrcrn operaticr3 an a basis lor financial plans
rt '- and conlrol. The cash budget provides a sys-
85
temalic approach lo lhe synchronization ol
caglr regorlrce3 with needs. n a$bt! mansge-
rnent h rnakhg hlelligenl dccbionc corccrning
capilal expcnditures, dividend polbies, hvegl-
ment3, and other financial matler3, and often
exerls a caulionary influencc on any ol lhe
abovc phns. Porirdic roporb wnparhg aciual
with planned receipls and disbursemenl! per-
mil effeciivc ard cqrtinuous csrtrol ol cash by
signalhg signili:ant deviations fronr the firan-
cial planr for |he perird.
O1S5. (a) Nqrmanulasluring busiresses musl plan
la the tulure jusl as carelully as rrralu-
faclurhg cqtcerns. Seasonal pattemr in
ngyonuqrand expenditur€smust be po-
vided for, and requircd rquipmcnt
replacementand expansionsmusl be
budgeled.
(b) Not-for-profitorganizationsgenerally
operale on relatively fired incomes lhal
are received at ono time. Such recoipl
patlernr aro common for organi:ations
that rely sr tax dollars lor support.These
funds must be allcaled throughoutthc
year in order to mainlain operalions.
Careful budgel plans are a necessity for
such albcalbns.
Q l S ' 6 . P P B S g t E n d sf o r P l a n n i n g , P r o g r a m m i n g ,
Eudgeting Syslem, and is an analytical lool
focueed on lhe outPul ot final results ralher
than input or inilial dolbrs expended.The oul'
put is directly relatablelo planned goals or
objectives.
O1&7. Zerobase budgeting[ZBB) is a planning and
budgeting lool using cost.benefil analysis of
projects snd functbng to imprwc an orgraniza'
lion's regoutce allocation. Budgel requecls
consist of declsbn packageslhal are analy:ed,
evalualed, and ranked in a priority order based
on cost-benelil analysis. lvlanagernenlcan then
evaluate pqssble astivitier for the corning peri'
od, selecting those that will best achieve orga'
nizalioal grels.
Traditional budgeling tends lo concontralo
on the differential change fmm the gdot yean,
assumhg hat existhg astivitiec arc essenlial,
must be cmtinued, are currently performed in
a et-officient and optimum tr16tr1er.and will
be cost-effectivo h the canhg yest Cost! arc
devebped monr on a line-ilem tather lhan atr
activity basis. ZBB orgranizerall budget cootr
h the lorm of activilies ancl/oroperaliau (deci''
sion packages) and evalualec tho effeclivc'
ness of each decision package as if it were a
new aclivity.
 Chaptdr t6
ffi

I
Th. .rtlbtl ap.cl.d linr L th. .arl'Ltt titn
cl16-8. (!) Zcro'btsc budgctingtcquirc! mlnlgcrg lhrl rn rctivity cln br orprclrd lo ttrrt.
tb justity thclr Lntirc budgat rcQuast' lt
-thc b.ctutt cl'ltn roldbnrhip to pondng rtivitior.
Plates burdan d Progl on thc Thr btort ellrrrrbb tino b tho blst llna thd
mantgcr lo i|J3tifywhy any.moncy tt tll 9rr ldh;ily mey brgin rtd nca doby catpblbn
chould bc budgctc'd' ll docs thb bY of tho Poioa. Sbck ir drlorminrbb onty in
sttrting wilh thc essumplion lhet zcro
will bc rpcnl on arch tctivity' to thc rrbtbn !o an ontirr path th ngh thr noilorlL
budgating plocctr bcainr with r brrc of Ol&12. PEBT/iort ir rmtly rtr .xl'nlion of PERT'
zafo. Wih linoqtins evailabb, il sootnt sdvttsbb
' Thc two kinds of tllcrnrlivca
(b) contidcrcd to .ltign cat to llnr end eclivilior, thoroby
for cach rcrNiry erc (1) diflcronl wrp oil proviling load fiu rcbl pbnnhg rd cc'rttol by
pcrforming thc ectivity end (2) diflcrcnt I rnctistsl rcPonribilitY.
lcvcls d cftort In pcrlcming thc lciivity. Ot&t3. CanrPulr lrpport olfon dbtirrl advanlagor lo
(c) A dccirion prckegc include en enrlyris PEFIT urn. PEF|T'tr e rnethrnltrtbalty'orionl'
d an sciivitYt cat rnd Purpotc, U.rlV ruilod to
ed itdrniqur rnd is thlr.ld.
sltcmativa courlcl of rclion' mcltura3
ol pcrlormencc d thc rctivitY' thr high'rpo.d t.tpont. of compulrn for
consaquoncct of not Pcrfaming Urc drriving lhr critical path' llack limrr, end
activity, and thc tctivity'3 bcncfitr. elr, elrd tor storhg erd rrporting tttultt !o
(d) A packegc idcntifico end dcscribsr onc tnanagom.nL Flovisbnr to all sch'dulo olo'
tctivity in ruffrcicnl dcteil eo thtt it crn mtnlt' whothor during thr initiel retirnaling
bc cvaluatcd rnd compercd with olhcr phar or durirg tho seiiv. Ptoiccl Phar' can
acllviticc. br updatod and thr rlvircd rcluhs PrqnPtly
(c) Succesr in thc imPlemcntation of zcro reporlrd.
basc budgctingrcquirer thc following:
Cornputrr'ruPPorf b hdpful in dosling with
1. Unkagc d :aro-balc budgcting
wilh short-.sndlong-rangcplanning largr, canplox nrtworkt cil intrrdepondencior
2- Susteincd 3upport end commitmcnl and whon proirct conlrol roguirol timrly
from axocutivc mlnlgomcnl progt.3r rrporting againrt th. uPdat.d Platl'
3. Innovelion bY mtnsgcn in Most program ptcktgrt oflrr e varirly of
dcvcloPing dccislon Prclcrgcl rrporling frelunl and tormrl!. including
4. Acccpttncc ol zcro'besa budgcting gtsphic notwork dirphy !t w.ll er prinlrd
by Pcnont who murt Pcrform thc r.Porlt el verioul summrty lovrlr. Curronl
budgcting work rrpodhg prwidrl inlonrulbn !o Ptoj.cl tnsn'
O1e9. Prorprtivr hformrtbn lhouH br prwitod h agon, rnabling qubk t.|ctigr to dovietiqts'
oxlornrl finencial ltrlom.nlr whrn il will
enham thr rli:rbility cil tho ucor'r pndi:ticnr.
016-10. PERT b prttbulatty rpProprhto u e rchlduF
hg and ccntotlhg trd'rniquo fot Ptoioctl sl'
rirling of e lergl numbor of trskr, roorr ol
whidt cannol bl strytrd unlil otrrn rt. corY}'
Plclr, and lsno of rttrbh can br undrriakon
cdrcurtontly.
Conceptually. lhr rllrrrncl ir to e nrtrrprl
of intordependcntectivities wtrijr. rr I group'
roquiro cocli.tabb tlm to ccrnpbto. Thrn b
usually subctsntbl srt.up linr (and cel) a$o-
ciated with enatyzing, defhhg, and onln8lhg
c6ch discrot. prcied sstivity; thur, lhl bonefii
is h proicctl rcquirhg a cstsUerablo sttpunl
ol limo and consbth! of r reblivcly ccnpler
netrrorlc
PEBT albw: thr ucrr to uPdal. erd rovisr
rchrdubd activilis rnd thoroby drtrmilr thr
rilrts ol changor st tho worall pojrct. lt b
Pattbubrty apprgrbte whon thl timing cl irdi'
vdual aciivitbr and thr Proi.ct cotplolict dale
arc criibal lo lr,rccatt.
016-11. Slack is c6npd.'d by rubtracting thr rarlicsl
oxpocled timo lrsn thc latctt allowablo limo.
 g7
Cl'ppter 16

Q1&14. Tho lrcditioal budget focurer on qrc rel cl

'aseunptirtr. Thc probabilbtic budgel povbes
for tvaluating rlvoral gets of acsumplions,
ircludhg the prcbability odeach and a ccrnPc'
ilc oxpectedvalue, range, ard standard devrs'
tiqr lor eaci budget elemenL
w Chagter 16

EXERCISES

E16-1
January @s March
Beginningcash balance $ o,ooo s2o,5OO 326,500
Budgetedcash recaipts:
Gollect accounts rtceivable:
Novembercradlt sales:
(S60TOOO
r 1 Oohl..o.'.....,.........'..t $ 6,000
Decembercredit sales:
r OO96)...
GiTO,OOO 42,OOO
x 1o%l
GlTO,ooo $ 7,ooo
January credlt sales:
r 25%l
GGGGtsO,ooo l2,5OO
Glso'ooor 6O%l 3OrOO0
(S5O,OOO
x lOTo| .... $ 5,000
Februarycreditsales:
(S6OtOO0r 25%l .........o.............. f 5,ooo
($60rOOO r gO%l .........D.'.r'..r..o... 36,OOO
March credlt sales:
(llTOrOOO r 25ohl .,..r......r.,...,..r... 17,50O
Total cash receipts....................r.t.r........ $6O,5oO $srilooo $sB"soo
Cash available during month..............,......... $86,5OO $72,5OO s85,OoO
Budgeted cash disbursements:
Pay accounts payable:
December purchases:
S!2OTOOO r S0ohl........................ $16,OOO
January purchases:
Stf 5'OOOt2Oc/o1.... 3rOOO
Gll5rOO0 r 8O%1,...........,.....,..... $l2,ooo
February purchases:
G$E2S,OOOr2Oohl ... 5,O0O
$2o,ooo
4,OOO
21,0OO 22,OOO 23,OOO
6,OOO TrOOO 6,OOO
26,OOO
$46,000 $4g,ooo s79,OO0
$2O,5OO $26,5OO $ 6,000
 ChaPler 16 g9

E16-2 Finlshed Goodg

April May June
UnitSreqUiradtO meet SaleSbUd9et..........-. I'OOO IOTOOO l2rOOO
-
Add desired ending inventory l2oohot
fotlowing monthb sales|.....o..r...o...o...... _4tOO€ 2r4OO 2r2OO
Total units required.....i,..r......r.............r... l lpOO I2AOO l{/rOO
-
Less estimated beginning Inventory
l2}oh Of CUrrent mOnthb 8a1e31............. 1r8O9 2rOOO 2r4OO
Planngd productlolt'........... 9,2OO lOr4OO l1,8OO

Materialg
Aprfl May June
Units reguired to meet planned pmduction
(planned productioll r 3|....-................. 27rgOO 31r2OO 35r4OO
u Add desired ending inventory pO% of follow-
ing month's production requirements) 12r48O 14'160
Total matgrials requ|red.....,......,......o..r.... 4O'O8O {51360
- Less estimated beginning Inventory (4oohot
current monthb requiremoJltsl..........-.. 11rO4O 12r48O
Planngd purchases...,........r,........o..... -2grO4A -92r88O
Gash disbursements during May for payment of accounts payable for material
purchases:

113 r 29,040 r $2O x.98 = $189'728

a3 r 32,880 r $2O x.98 = 4291632
$619,369
CGA-g3nada (adapted). Reprint with permission'
3 n l Chagter 16

Et6-3 Par produetionbudgets

June July
Unlts regulredto meet sales budget............o....... 5Or0OO 3OrO00
Add desired endlng inventot"lf......... 3'OOO 3,OOO
Total units req 53'OOO 33'OOO
Lass beglnnlngInventory S'OOO 3,OOO
Planngdprcductfoll ................'o.. 48,OOO 3O,OOO \
Tee purchasesbudgets
June JulL
Units requiredfor producUon:
48'OOOr 3 ......... 144,OOO
3O,OOO r 3 9OTOOO ,
Add dgsired endlng inventot! .....,..........,,..........r. l4'OOO I I,OOO
158^OOO f Ol "OOO
Lass beginning Invento1yo.................r......r..o.......r 2OTOOO t4'OOO ,
Unlts to bg punchasod..............................r...o......r 138rOOO 87,OOO

Cash disbursements In July for purchasss of Tee:

1 3 8 , O O Or $ 5 r 1 1 3 r . 9 8 = $ZZ5,4OO
87,0OO r 35 r 213 x .98= 284r2OO
$5O9,8OO

GGA-Canada(adapted!.Reprint with permission.

CMptcr16 39t

E16-4
(rl CROCKETTCOMPAT$Y
GashBudget
For July
Cash balance,July I s 5,OoO
Cash receipts:
June salgs Sl3OrO0O r 4S%1.....o...............o.r........-....... $14,4OO
July sales (S4otOoor 5O%1,o...r............o..r..........o......... 20,OOO 34,4OO
Cash aYailable r..r........................................r.r...r...'r......... $39,4OO
Cash dlsbursements:
Jung purchasas($r orooo I 75%1.......'..r...........'........, I 7,5OO
July purchasgs($l 5rooo r 25o/o1...,r,o.r.............-.......... 31750
Other marketingand administrativeexpeflsoS............ lO,OOO
Incomg t3Xt....r.................ro.....r................................o... 2rOOO*
Dividgnds......r.....r............o.....r...o..'........'...o.r.'..r.'.r....r
15.OOO 38.250
Gash balance, July 3t o..r..o........................o.........r.o...r...r. $ 1.150

tCalculation of June income tar:

Sal es......aa...a.a.a.t........r.a.......t.rtaar.r.....t.r....o. aa... ara..rr. arr.... $:o,ooo
Cost of goods so1d.........o...r.,.!.o..,.,.............,....r....r...r....r l2,ooo
Gross protit t.........rri.rr....'......o.r.......r....r.rr...r...........r......
$l8,ooo
Commercialerpenses:
DepreCiatiofl ....................r.............,.......... $4,OOO
Other marketlng and administrative......... 9.OOO 13.000
Taxablg income................r.........'.r'...r.r...........r....!,...r.....
sl,gag
Incomg tar ($4rggO r 4Oo/o1............................ $.2,99q
(21 Sincethe desired minimum cash batancels $5,OOo,arrangements should
be made to borrow $3,850 ($S,OOO- $i,1SO),

CGA-g3nada(adaptedl.Reprint with permission,

392 Chapter 16
I
E16-5
(f ) PERTnetutork:

l2l Alternate paths and times and the critical path and the erpected project
time:

1-2€-6-7 = 11 weekg r- critical path

l-2-3-5-8-7 = lO weeks
1-2€-4-5-8-7 = lOweeks
(3) The two activities In question ano3-4 and +5. lf these activities weno
eliminated,thelt would be no effect on the critical path or the expected
completiontime because3-4 and 4-5 are not on the critical path.
Clppter l8 393

E{ 6-6
(rl Astivlty (to + tm(41+
hl = Total -F t8
1-2 I 2(41 3 l2 6 2.OO
1-3 2 6(41 9 35 6 5.83
1-4 t 4(41 6 23 o 3.83
2-6 2 1r(41 t8 u 6 10.67
3-5 4 6(41 I 30 0 6.OO
4-5 3 4(41 5 24 o {.oo
5-O 4 5(41 6 30 6 5.OO

l2l Path _bl Total t,

1-2-6 2 + 1O.67 12.67
t-4-5-6 3.83+4+5 12.83
1€-5-6 5,83+6+5 16.83 + critical path

CGA-63nada(adapted|.Reprint with permission,

 Chwtert6

E16-7

tf) 6 + 11 + 5 + 4 + 3 =29
l . + 2 - - 5 - . O - r - f 7 - d 9
6 + r l + S + i + 2 = 2 5
I € 2 --{ 5 -r 0 I -r..9
6 + I + 9 + 4 + 3 =3Ocriticalpath
1 . . . . r 2 + 4 . - d O - - . 7 ' d g :
O + g + g + | + 2 =26
I ...+ 2.d 4 6 8..--. I
6 + g + 1 3 + 2 = 2 9
I -.+ 2 --.) 4 ..-.+ 8 g
6 + O + 3 + I + 4 + 3 =25
1 . + 2 - 3 . + 4 6 . - . + 7 - 4 9
I + O + 3 + I + I + 2 =21
I - 2 -€ 3 .r- 4 .r..4 0 --+ I ---| I
6 + O + 3 + i 3 + 2 = 2 4
l - + 2 - . + 3 - + 4 - { 8 9
i O + 3 + 9 + 4 + 3 = 2 9
' l - + 3 - - + 4 - . d 6 . . d 7 . + 9
iO + 3 + 9 + 1 + 2 =25
1 - + 3 - - r 4 O - - 8 - 9
i O + 3 + 1 3 + 2 = 2 9
1 - . 3 - . 4 - + 8 - - . . + 9
',21 Latest Allonrable Slack
Earliest Erpected
Event Time fime Time
1 0 o o
2 0 6 0
3 to tl 1
4 1 4 14 0
5 1 7 18 I
6 2 3 2 3 0
7 2 7 2 7 0
8 2 7 2 A 1
9 3 0 3 0 0

CGA-Ganada(adapted!.Reprint with permission.

Cluptcr 16 395

E16-8'

(11 to = $o + 4t,,, + ty' + 6 = (1 + (4 r 2l + 9l 'F 6'= 3days

(21

(31
Path Time Reguired
O - 1 - 2 - e - - T= 4 + 3 + 6 + 5 =lSdays
0-1€-4-6-7 = 4 +4 + 3 + 3 + 5 = 19 daYs
O-l-3-4-7 =4+4+3+O =lTdaYs
0-1€-5-7 =4+4+E+6 =2Odays

The critlcal path is O-1-3-5-7,because lt requires the greatest total time

(2Odays|.
(41 CflUCal pathtltl|O"............r'...................'.......r.r.....,.... 2O days
Less time rsquired after event 2:
Activlty 2.6 6 days
Agtivity tl-7 .............. . a a. aara a aa a t a aaaaalaa a t 5 days 1l dayrs
Marimum time lO gVent2 ......................"....'.............. 9 days
Estimatedtime to event 2:
AgtiVity O-l .t.tr...r.....r...D.............r.........................r.. 4 days
Astivity l-2 aoaaa a a aaaaa aaa aa aalaa aaaaal 3 days 7 daYs
Sfack timg at evsnt 2..,..o.........o..........r..r....r......'......... :::
2 daYs
 I

Chaptar 16
396

PROBLEMS

P16-l
(11 Budgetedcash disbursementsduring June:
Purchaseof materials:
May (1 1r25o1x$2o r 460/;1...,.'r...."""""" Slo3tsoo
Jung'(l irlgo' r $go r54%l r.........."""""' l3lt544 $235,O44
Marketing' general,and administrativeexpenses:
rufaytSSirSSOa xa6%1,.......t.o.r.......,.......... $23r713
June'($a6reOOl x 54%1.............................. 261622 5O,335
Waggs and salad€S ......."t"""""t'r"""t""""' 37r9OO5
Total .t..........'........!..r"""""""'t"o""'t"""t""'
$323,279

1 May 3l endinginventory(11,4O0x 130%)..,..... l4r82O units

Mai pfOdUCtiOn.r.....r.................r.r.......r......r...... I l t9OO
MatgfialSnggdgdinMay,.....ro.........,........r........ 16r??oUnitS
April 3O ending inventory ($309,4OO + $2O1...... l5'470
:!j!r25O UnitS
May pUrchaSgS ..r......r....r............t.........r..r.........
2June 3O ending inventory (12IOOOx 13O7o)......' 151600 units
JUng pfOdUCtiOft...................r..............r....o.....o.. I lr4OO
MatgrialsnggdedinJung....'............................. 2 7 ' O O Ou n i t s
May3l ending inventoryo.....................r..r......... 14r82O
June purchases.........,......,.......,.............-- !-2J!9 units
depreciation= Sst'55O
May sales x t5%) - S2,OOO
3 (S357,OOO
-
1 a-^ -^^
June sales x 15%l- $2,OOO
(S342'OOO depreciation= $49'3OO
5
Accrugd payroll on Jung 'l .,.......'... $ g,goo
Payrollearnedduring June.......r...r 38,000
$41,30O
Accruedpayrollon June 3O.........., 3,40O
Cash paid out for payro11................ 937,90O

(21 Budgeted cash collections during May:

March sales ($354,OOO x 9%).,t...,.............-,..-... $ 31,860
oh
Aprif sales ($gogrooo r 97 r 607o)......................-'........'.-. 211,266
April sales ($SoS,OoO| 25ohl .'-....-....-.--... 90,75O
Total 99s9dz9
 397
Clvpter 16

Pl6-1 (Concluded)

(3) Budgeted
- units ol inventoryto be purchtg-d during July
goohl"" 15'860 units
3ilv 3l ending inventory l12,2obx f
JUii' ptOOUCtiOn ..,..............r....'.............r....'... | 2tOOO
2?rS60UnitS
MatgfialSnggdgdinJUly...................o..t...'.o..
I 13O7o!"'
June 30 endinginventory(12'OOO l5'600
July purchases .......... 12e6O units

. t
 Chapter 16
398

P16-2 June
April May
Beglnnlng cash balancc t loo,ooo 3 loo,ooo3 lOO,OOO

Cash recclPtr durlng monthl

Cottecttonrof accounts recelvable:
Februarysales:
($2rOOOrOO O I 4O'/c1""""'o"""t""t"""""""' 3 SoO,OOO
March aaler:
(Sl 18OO'O0Or 60olo)..'.""""""""!"""""""" 1,080,OOO
t 72O,OOO
Glf rSOOrOOO I 4Oohl.-....................ro......""""'ts"'d
Aprll rales:
(S2,200,O00r E0%)..-'.'..-...-...r.. l132O,0OO
t 88O,O0O
tS212oo'ooo r 40%)-....,..o..-.o...--....-....................d
MaY sales:
(32,500,000 x E0%)................-.'- ......o.x. l,Soorooo
Total cash collecUons 3 1 , 8 8 O , O O O i32,o4O,OOO32,38O,OOO

Cash available tor use during s1,98O,OOO 32r14O,OoOs2,48O,OOO

Cash disbursements during month:
Accountc payable lor Purchascs:
FebruarY Purchasec:
(S2,OOOpOO February sales I SOohr 4O'/ot 20ohl 3 80,000
(S1,8OO'OO0 March sales r SOchr 600/o| 2Oo/ol...- 108,OOO
March purchases:
(S1'8OO'0OOMarch sale3 r SOt/t r 4Ot/oI 8Oo/.)...- 2g8,OOO
(S2,200,000 April sales r 30o/ot 60'/. t 8O%)......- 528,OOO
(St,8OO,OOO Mareh eales r SOoh r 4Oo/o | 2O'/cl ..... 3 72,oOO
(S2,200'OOOAprll sales r 50% x 600/o| 2Oo/o1........ 132,OOO
April purchases:
{32,2OO'OO0 Aprit sales I 5O'h t 4O1/or 8O%).....-' 352,OOO
(S2,5OO,OOO May eales r 5Oo/tt 8O'/ot 80%)......-. 6O0,OOO
(92'2OO,OOO Aprit galG3 r 5Oo/ct 4O'h z 2Ot/ol.*...- 3 88,OOO
(S2,5OO'OO0 May sales r 5O'h r 6o'h t 2O'/c1...-...,. 150,OOO
May purchages:
(S2,5OO,OO0 itliy salcg z SOthx 4O'h r 80t41......... 400,ooo
(S2'8OO'OOO Junc csler r SO'h r E0% x 8O%)"---. 672,OOO
Wages l2Oo/ool current sales):
April (92'ZOO'O00t 2Oo/o1...... -.-..-....o......... 44O,OOO
May (S2'5OO'000x2Oo/cl-*.. ...................,. 5OO,OOO
June (32'800'000t 20041.......... 50o,ooo
Generaland administrativeexpenses:
Safarles 11112 r 3480,000). 40,000 40,000 40,ooo
PromoUon 11112x SS60,000). 55,OOO 55,00o 55,O0O
Propertytar6 1114r S24o,000) o o 50,ooo
fn guranca 11I 12 t 936o,oO0) 3O,OOO 3O,OOO 30,o0o
UtiliUea (1I 12 z S30o,00O) 25,OOO 25,OOO 25,OOO
lncomc tarer (St,o2Orooo lncomc t 4ooh tar rate) .-..- 408,OOO o o
Total cash disbureements............ s2,Oo2,Ooo $1,806,OOO s2.07O.OOO
Cash balance beforc borrowing or lnvestment.-............... 3 (22,OO0) 3 334,OOO S 4'O,OOO
Cash to be borrowed (or invested)...-.-.-...- 122,OOO (234'0OO) tgro.oool
Ending cash balance'............ 3 l O O , O O O3 loo,ooo s__1!-qp_q_q
 Chaptor 16 399

P l 6 -3
E II/!A1gP'4"- BIHG COMPA}IY
TVIAY1I
Ca*r Budget
For thr Ycan Ending March 31

208 20c

Balancc of cash at beglnnln! ..........-.-...... s 75,OOO

Caeh generated from operatlons:
CollecUonc from curtomerg-
Schedule A....,.......... 3825,OoO $1,O65,0oo

Digburgcments:
Dlrect materla ls-Sch edulc B ...,.,...,....... 3220,000 3 245,ooo
Dlrect 1abor..........a.-6....F.... 300,000 360,00o
Varlablc overhead 100,ooo 120,O0O
l3o,00o
Total disburrementg 3750,00O 3 855,OOO

Excess of caeh collectlong over cash

disbursementsf rom operationg 3 75,Ooo 2l0,ooo
Carh avallable lrom opcraUonr t 75,000 s285,OOO
Cagh recelvcd from llquldaUon of erlsUng
aicountr rcceivablc end Inventorier -.-. eo,0oo
Total cash avallablc ....,...........,......,_.....r.... tl85,OOO s285,O00
Paymentsto generat credlton
fllguldatlonproceeds) 90,O00 270,OOO2
Balance ol cash at end $ 7S,OO91 t ts,ooo
i Thlg amount could
have bcen uaed to ply gcnoral credlton or cerried forward to thc begln.
nlng of the next-year.

2 6ooo,ooo r Eoo/c|-
sgo,ooo

. :
 Chapter16

Pl6-3 (Concluded)

ScheduleA--Collectionsfrom customets: 208 20c

sgOo,ooo sl,08o,ooo
SaloS tttttt"t't"tttt"t"tto"to"r"ot""t"tt"t""t"""""'
o 75,OOO
igginning accounts rgcgivablo """"""""""r"
$9OO,OOO $t,155r OOO
ttttttttto'itttttt"'ot"tott"tl"'orr"""tt"t'o""'ot"
TOt!l
75,0OO 9OTOOO
Less ending accounts rccgivabllB""""""""""
ColIections'romcustomen;........................|.'.
s829roo9 $o65poo

-
ScheduteB-Disbursements lor direct materials: 2oB 20c
s2oo,ooo s 24O,OOO
Direct materials requinedfor production """"' 4O,OOO3 '
5O,OOO
Requirgd ending inventory o""""""'ot"""""'t"
$240,OOO S 29o,ooo
Tot3l tttttt""""t""r"t"tt"""""""""""""ttt'lt"
o 4O,OOO
Lgss beginning inventory"'t'Do"""""'t"""""""
t"t"tt'o "t'r" "' $24O,OOO $ 25O,OOO
PU fC h a S93..r.....................r.t........o 2O,OOO
0
Beginningaccountspayab1e""""""""""""""
$24o,ooo $ eTo,ooo
TOtal...ttttt""""t"""""t""""""t"""t""t""ttt'
20,OOO 25,OOO
Less ending accountspayab|9......t.........1....,..
Disbursgmgntsfor diract materials""""""""'
s220.ooo s- 245.OOO
3 12,Ooounits | 2112= 2.AOO; 2'Ooox S2Op€r unit = $4O,OOO
2,5oo x S2o per unit = sso,ooo
. is,ooo units x 2112= 2-r5oo7

Pl6-4

ProductionBudget:
Requiredto meet sales fotecast 214OO
January($3601000 sales+ 915Oper unit}""""""""'
3,0oo
Feuruary(Sas6rooosales + S15oper unit)""t""""r' 3,2OO 8,600
March (54-gorooo sales + $150 per unit """o"""""'o'
Desiredfinished goods ending inventorlr: - 500
((S600,000A-prilsales * 5f So per r-rnit)a l0ohl'r 1o0)
9,100
Total quantity of product to prociuce""-"""""""""""""

Direct Materials Purchases Budget: s182,ooo

r S2o)..'..
Materials *quii"J ior proOuttion (9,1Oounits 2,OOO
Desired materials ending inventotY """""""'
first quarter """"""""" sl B4,OOO
Total di rect materiats purchases during
Clpptor 16 101

Pl O?4(Concluded)

Cash Budget for First Quarter Ending March 31, 2oA:

January l, cash balanco.............o..o.........r.'..o...r....
Cash receipts:
s o
InYestment by owner s 5OTOOO
Mortgagetaken out t5o,ooo
CoflecUons of sccounts receiyable:
January saleg:
(SS8O,OOO r 3Oohr Seohr 98%o1.o..,..,.. 941672
(s360rOOOI 3ooh x 2O%1..,...,.o,.......o... 21,6OO
(S360,O0 I 3 O7of......o....r,o.,..........r...,... 108ro0o
St36 O,O00 I 38 7o)...,..............oo....o.,..... t36rgoo
Februarysales:
Gt4sOrOOO x g$o/ol,,...,..,r 105r84O
x 3Oohx SOoh
G|45O'OOOx 3Oohr 20%1,.....r........,ts... 27',OAO
(S4SO,0 0o x 30 ch1...oo..........r....r.......r... 135,OOO
March sales:
G!48O,OOO x3Ooh xSooh f 98%1...'...... 1121896
(S480,OOO x3Ochx2O%l 28rgOO 96O,608
Total cash availabte for use during quarter,r.......D.
Cash disbursements: $ 960,608
Accounts payable a aa aa aat aaa a aaaaaa $184,OOO
Dlrect labor (grlOO r $3O)- $7r5OO1r.,............. 265,5OO
Varlablg oyerhgad (grlOOx $l5i .....-.........,....... 1361500
factory rent (910 r S'OOOcapacity x 3) .,......... t5orooo
Sales commlsslons (gr60Ounlts x-$g;...........,., 68,8OO
Office rgntals ($t ZrOOor 3! .,..,...........,.....,.,.,.r 36rOOO
fnterest payment ($iSOTOOO x 2oh r 3|.,....,,..... IrOOO
Payment of princlpal on long-term note.......... 3O,OOO
Equipment pu rchasos..........-. l50,ooo
March cash balance before currsnt financing,._...
Currgnt financing reguired ..,............r,r.................. $ (69,1821
8,4.16.2
Desired March 3i cash balance .................r....r.r..r
$ ts.ooo
 I
I
I

102 Chapter l6

Pt 6-5
('tl TRIPLE.FHEALTHCLUB
BudgetedStatementof Income(CashBasis)
For the Year Ending October 31r 2OC
(000s omitted)

Cash nevenue!
Annual membership fees' $gSS r 1.1 r l.O3 $,402.2
Lgsson and cfass fggs,- s$234
1 8 0 r $234 '......r............o..o.............'....... 304.2

Miscellaneous,92'0 I $2 a...a................a.aa.a..aaa.t..a.aaa..aa.a..aararato'r"' 2.7

;i"
TOtal CaSh fgVgnUe.......rr.............rr........rr..........r............o........... s709.1
Cash expenses:
Managefb Salafy and bgngfitSr$gg X 1.15..'.......................r...........s 4 1 . 4
RegUtafemployeestWagesand benefitS,S19Of 1.15'.'.'....'.......... 218.5
Lesson and class employee wages and benetitsr3195 x 1.3 x 1.15 291.5
TOWeISand SUppligS,$16 f 1.25 .......,.,......r...........r..... 20.o
Utititigs (heat and lightl , 522 X 1.25...................o.r......'r............i..,.. 27.5
Mortgagg intereSt, $gOO X .09....r...o.....,........'r........'r...............r...... 32.4
MiSCgllangOUS,$2 I, 1.25 ..................r...r....................r..............r..... 2.5
Total cash expgnsgs.....rr.................ar........r.........o...........t.....r..t.. 3633.8
Cash income......................r..'...r............r..........o............r.......r............... 3 ?53
Cashpayments:
Mortgage paymgnt ....o.......r.r....r...........r $ 30.0
AccountS payablg balanCg at 10131IB ....'......".".......o...............'.... 2.5
Accounts payable on equipment at l0l31lB.... 15.0
Planngd new gquipmgnt purchase.................r. 25.O
TOtal CaSh paymgnts..r................r.........................r...............t..to. s 72.s
Cash surp1us..............................o.....r.......r.........................r............r..o.. $ 2.8
Beginning CaSh ba1anC8...................r..........'..............r.....................'t... 8.3
Cash available for working capital and to acquire propetty.......o.......... LlQ-t

(21 Operating problems that Tripte-FHealth Club could experience in 2OG

inc l u d e :
(a) The lessons and ctasses contribution to cash will decrease because tho
projected wage increase for lesson and class employees is not made up
by the increased volume of lessons and classes,
(bl Operating expenses are increasing faster than nevenuesfrom member-
ship fees.
(c) Triple-F seems to have a cash management problem. Although there
appeani to be enough cash generated for the club to meet its obliga-
tions, past due amounts occur. Perhaps the cash balance may not be
large enough tor day-to'day operating purposes.
 Ctle,pta- 16

':'::'*fli^d*Tl#$,
pto-s (concrudedf tog
(31 Jane c
fn ttre c
annuafi
clubb rr
mentpun^has-e:6ffi ;iir"irH:rr:r,if
purchas
prope'ty, rri:fi}H"Tl"v."qui;_-
cantincll"-:9r"!"ins ln: !":F o"li.5" ,o
lil"-g;'i;"otr""Tlilt
sl,ipuonTil.l""nffi
":*i[**_.':l;;*"ff :"","j1*;i1fu:
P'O.E

(1) Schedufe
of b.gdgetedcash
- -r" '|neceipts by
(ooos omitted): month for the thtrd
guarter of zoA
Billings
Receipts
Actuat/
Itfonth Percentages
|ut"t"o
n'6;.-...... Timins August
Auou-sr.jip:
frli-::-...-#
.1.:::........... T;SSS-?:"
*
ffi slv
sffi L.d;'
SrOOd ;: 40 2oo
J,ne""'...'.1 srooo #
;9
s,ooo uo
{.::"....-;;;r;;; nl i9, "'333
rf1JDo...,.......

i'iii to;s ,o#

20
$;ss
i{g
u"ry..-...] :,::g
uurv..-....._ :':99 90
I,o
45
iJ # 2'o2s
.tuf!"....,...,.. :'::: ;3
{u1r.,..."'..... 20 t8o
iffi l3 $
&ff"; :,,1?: d; :3
'o eoo ffS
i,T$* :;fri
septembe, f;:::
J3
il
so
septembe, F,:9g ;3 2'2so
eo
."j:#idTfrilfrfu","'.:
23
;3s
rota, ;"J;,f::::::::::.--# *: >
";; S _C-- qF
....................91980
@ d
 Chaptar16
&1

Pt6-6 (Goncludedl
quarter ol
schedule of budgetedcash dlsbursementsby month for the third
l2l
2OA (OOOsomitted):
Disbursements
July August SePtember

Salarier
Variable:
$4,500 t 2Ooh 3 900
$l,ooo
$5,OOOt2Aoh $1,1oo
$5,5Oo x 20oh
$ 9OO Strooo $t,l oo
Total variabl g .o.'o""""""""" lr5OO
l,5oo lr5OO
Fired t a a aa aa at a aaaaa t t t tt
"
'

s2,4OO $2r5OO $z,6oo

Total salarigs """""""""t'trt lr Soo
':" ':"
Purchasgsof pr€viousmonth"""""""' 450
lntgltSt......t.""""""t""""t"""ttto"t""o'
Depreciation (not relevant! ""'o""""""'
$3,60O $3,750 s4,55O
Total cash disbursgm€llt3 """""""""" :: #

(31 (oooomitted| $ 300

Cash balance-.fuly 1, 20A...,.....
Cash receiPts in third quarten $4,580
t"""t"""'otttt'
J U l!tttt tt tt""tt'r""t"""t""tt'o"t"t
4r43O
August ttttt""ttt"t"""ttt't""""t"""tt"t""""rttt
4,660 13,67O
SeptembgFttt"tttttttrtt"t'tttr"t""t'r"""t"""""t'
$tg,g7o
Total cash availablg.r.................'.....................,.."
Cash disbursemcntsln third quarten
$3,8OO
JUlltttttttt"""""t"""'t"t""tt"""t""t"t""t"""'
3r75O
August aalaaaaaaaaaaaa""t"'Dt"

4,55O I l,9OO
Septembolttttttttttt""ttt"t""t"""t"tt"ot""""tt'
$ 2,O7O
Proiectedcalrhbatance-September30' 20A"""
Minimumend-of'monthc:rshbalancenoquirod 185
Gtt ;SSO r IOo/o) """""o"""o""""""'t""""""'
S 1,885
Cash available to acquire capital items """""""' (3.700)
Gapital erpenditures planned for October l' 20A
$J915)
Amount of borrowing necessary on October l' 2oA
 CnaprcrtA

Pr8-7, 46

(1' rt + 7 +
1 10 = 2 2 critical path
R
v + 1 0 + 7 -
7 5 =20
E
e + T + 7
I 5 = 1 7
- - r _ 4
rE + S + 7
7 to =20

(2'l
Et Activities
t +-i-- Cost
2 As f 800+ $ ,
3 A'B ::99. $ Boo =$t,6oo
I 4e ::::* s 8oo =$1,600
o A'B ::::* s 8oo =$f,6oo
$ 8oo =$l,600
I Ec,D,E :^:::*
: I'C,D,E

ffi*ff*
; 5 l ' o,
o ,t t
16 3,1'
::
ii i 3;3;i
F , C , D ,I
.t: H, c, I
:: H,c, l
.,: H, C, I
.,: H, G, I

==s;
:: H,G,I
J: H,G,I

2
J:
.:' :r
2
H,G,I
H,G,I
H
H
se,ood
-:,;;;
$,ffiill;;li --'-vv
;Si;lll
= $2rooo
GGA-Canada
(adapted).Reprint
with permission.
 Chapter 16
16

Pl6-8

(rl G
B o

Start
A
rl ,% &xx D E I
Finish
H

c
# F

(21 Path Time Required

A-B-E-G-H = 2+5+3+3 = 13 weeks
A-B-E-F-H = 2+5+4+3 = 14 weeks
A-B-D-E-G-H = 2+2+l+3+3= ll weeks
A-B-D-E-F-H = 2 + 2+ 1 + 4 + 3 = 12 weeks
A-C-D-E-G-H = l+4+l+3+3 = 12 weeks
A-C-D-E-F-H = 1 + 4 + 1 + 4 + 3= 13 weeks
path'
The critical path is A-B-E-F-H,becauseit is the longest

(31 The totat cost of the proiect as plannedis:

Activity Normal Cost

A-B ...................tt $ {,ooo
A-C......'............o. 800
B_D...4.......t...o...ta 1,50O
B-E ...............t..'.. 5,1OO
C-Dt.................... 2,5OO
D-E..................o.. 600
E-F ..................... 1 , 7 0 o
E-G..............r..r... lr2oo
F-H ..................... t,4oo
G-H..........r.......... 1 ,3 OO
Total normal cost stT,too
\
.\

Chapter 16 407

P16-8{Concluded}

(41 Since the critical path requires 14 weeks, at least 2 weeks must be cut
from the project in order to complete it in l2 weeks. As originally
planned (determinedfrom requirement(2)),the following three paths
require monethan 12 weeks:

Path Time Required

A-B-E-G-H = 2+5+3+3 = 13weeks
A-B-E-F-H = 2+5+4+3 = 14weeks
A - C - D - E - F - =H 1+4+1+4+3 = l3weeks

The first place to start reducing time is the critical path, A-B-E-F-H,
becausethe largest amount of time must be cut from this path. tn this
project' each activity on the critical path can be crashed, so the first
activity to crash should be the one that has the smallest crash cost per
week. By crashing activitr F-H, which costs S2r8oo, path A-B-E-F-His
shortened by one week to 13 weeks. ln addition, since activity F-H is on
path A-G-D-E-F-H,it is shortenedto the required 12 weeks. Now one
more week must be cut lrom activity A-B-E-F-Hand from activity A-B-E-
G-H to bring each path and the total project down to 12 weeks. The
activity that costs the least to crash and that is common to both paths is
activity B-E, which witl cost $5,2oo to crash one week. The only other
way to reduce both paths by one week would be to crash one activity on
each path (activity E-G for 9rl,6o0 or G-H for $2,300 on path A-B-E-G-H
and also activity E-F on path A-B-E-F-Hfor s3,zool, which will result in a
minimumadditionalcost of $6,000.Therefore,the minimum cost to
reduce the total proiect timo from 14 weeks to l2 weeks is $g,ooo,
resulting from reducingactivity B-E and F-H by one week each for costs
of $2'8oo and $5,2oo,respectively.Sincethe minimumadditionalcost of
9lqilg two days off of the total time reguired to complete the project is
$8rooo,the minimum total cost of compietingthe project in 1?weeks is
$25'lo0 ($12''loonormatcost from requirement(3) pius $8,o00 addition-
al cost).
 I
L

Chapter 16

Pl6-9
(ll The normal critlcal Path ls:
3 + S + I + I + I =ilweeks
A B E H - K L
The normal cost to be incurrad in openlng the stors is the sum of tho
norrnal cost of all l4 aetivities-$85'ooo.

(2t The minimum time in wlrich the store could be opened is I weeks at an
additionalcost of $l l,5OO,or a total cost ol $96,500 ($85,0OO+
$t I '5ool'
Potential
Alternative ErPected Time New
Paths Time Redugtion Time
A-B-E-H-K-L llweeks 4(A-B'B'El Tweeks
A-C-F-!-K-L 7 '"
A-C-F-.,-K-L 10 2 FJJ-n
A.D-G.J.K.L 7 2 (D-G,J-R 5

The new critical path becomes A-C'F-.r-K-L.

ReducedUme pnogramswould be initiated on the following activities:

Reduced Reduced
Activities Time Cost
A-B lweek $4,5OO
B-E 3 3,500
F-J 2 2,OOO
J-K I 1 ,5 0 0
sl l,5oo

The activity D-G reduction ls ercluded becauseit would not contribute to

reducingthe total proiect time.

(31 The store should be opened on the normal schedule becausethe cost
Fllr5OOl erceeds the benefit Gt6,OOo). The reduced pnogramwould save
3 weeks at a cost of $11r5OO,while the earlier opening can be expected
to yietd an operating income of S2,OOOper week' or a total of $6'O00.
I

1 Chapter 16 409
t-

l , CASES
\.
c16-1
I
I
b
(f ) Network snalysis torces the companyto plan ahead and developa
detailed plan for proiect completion,lt presents a visualizationof alf indi-
vidual tasks and their interrelationships. Network anallrsis proyides ;;;-
l "
b sgement with timely informationlor controlling schedules,shorrs the
effects on tho entira proiec! of changes mado lo individuai activiiies, ano
allows for the continual updating of project pnogFess.
l
!
DisadYantagesof netnrcrk analysis as e means of organizing and
coordinatingproiects include the use of probabilistic scheduleslh"t ."y
i
be highly subiective, a bias torvard overly optimistic time estimates often
b
based on managementerpectations,and the need for cooperation
smong a large number of units to estabtishconsistant priorities. A
proportionateamount of managementtime and effort may dis-
l be required
for planningfor the benefit reclived; there may be other alternatives
b
could be mors effective. that
(21 Norm Robertsonwould be concernedwith the defay in activity
A-D
-
because it would shift the critical path from sta*-B-c-F-l-.J-Finish.
NeilPsestimate of the time tor activity A-D (i o to r2 weeks) shiela
results in
start'A-D-G-J'Finishrequiring 23 to is weeks. Furthermore,
Neillb
ment that activity A'D cannot start until after activity-B-E means com-
I
I

becomespart of this new.criticat path, making ttre criucal path that B-E
\,

E-A-D-Gd-Finish with a time requirernent of Cg to 3o weeks. start-B-

change in the relationshipof ths activities woutd change Thus, the
b
oven mororso that the project will be completed I the critical path
the originafestimate. to io weeks later than
(3) Norm Robertsondevelopei tlre PERTdiagram for the
with inadequateinput. RobertsonstroutJiave consulted vector.12 project
ments involvedin the project to ensurethat the alt tho depart-
to complete the activities wora attainable.Because expected times required
sulted, the Ume reguirementfor activity.q-Dwas Neill was not con-
tionship between activitiesA-D and g-E was incorrect, and the rela-
(41 missing from tho network
The behavioralproblemsthat could arise within
quence of-the pranningof tho vector.l2 project caltron Inc. as a conse-
(al A lack of commitmentJo the proiec[on incrude:
the part of the department
direstors, particularly Neill, beciuse of their exctusion
planningprocess. from the
(bl conflict among the department
directors that could affect future
working relationships.
(c) A tack of goal congiuencoamong
tho departmentsinvolved.
 CHAPTER 17
DTSCUSSIONQUESTIONS
Respcrsbilirty accounting b a program encotn'
Ol7-1.
paming all operalhg managomcn! f.ot whiclt
ihr accountlrg, oill' or budget dMritrrr pro
vidr lcclrni:al aristanc. h thr form ol daily'
wcckly. or rurthly ontrol t'pottt' Th' obiec'
tivt of rerponrbility accounting ir to prcvilo
managcrnont with I weilul cod csrtrol Ool" To
bo clfrctivr u I control mochaniam, thr
rerpontibility accounting tyd.m rccordr and
reportr cootr ircurrod ar a neull of roch ecfivF
ty to the individual in thr company who ir
reoPonsbb lor cantrolling ho aclivity.
O17-2. Tho crnpharb of nrpcsbility reunting ia or
htemal coct csrtrol raher ttran on deierminhg
ptdtrt cod. Thb reguircr a rtritt h cnphasir
frqn delcrminhg tho cost of reoouncotused h
manulacluring e product to dctormining lho
amounl of control indivkjual managen hovc
ovor cost. Fblponribilily accounling deler-
minc thc cst ircuncd by an rlivity or group
ol aslivilier, rathcr than thc cost incurred lo
produce a Producil.
O17€. Cartrolbbb c6lt arr thool thal arc lrcunod
al thc rerult of. or lor thr bcnefil of' a businss
activity. Presumably, suclr a eocl will ircreaso
or decrease as a reaull ol lhe lovel of effriency
with which trc aclivity lhal genenles lhc cost
is conducted or managed. To bc ctfeclive,
reoponsbility reunlhg mud hold e managcr
responsble fa crly tlpse cods thal he or she
can conlrol.
Ol 7-4. Tho organization musl br arrangod so thsl
thcro aro m ovortapphg lher of mrpcnibility
(i.c., no morc than onr indivkJualrhouH be
rcponcbL tor.adt eslivity). In edditbn, caclt
hdivi48l h thr organizalirr murl havo a cbar
understandhg cl hir or hcr rcsponsbilities, and
musl havr rulficirnt aulhority lo lakc tho
actbnr necellary to meel ttroot respctsibili'
liec.
017-5. Thr cet of any oxpondilurc clarcifhalion ir
of t*p ebmenll: thr unit pricr and
thr quantity cl thr itenr ured. Ono irdivirJual
may havo cqrtrcl of pricr wtrile ano0ror hdivU-
ua! har control ol quantity. Evon in caror
whoro prico door nol changr, lhc quanlity
urcd mey nol bo fully cofrollabb by tho irdi-
vUual ufio o\^rrilr.r fho acfivity that srrurnec
tho ilrn. Thr qrality cl tho itsn nrsy dtrt th.
guantity urod and tho quality may br delcr-
mined by thr purcfrascr, or tho ctfbiency with
which tho item ia used may be affeclcd by
decbboa rnsd. at the executivo monagemrtt
levcl (e.g., porsannel ctranger and machhery
acguisitionr). Sincr lha accounlanl cannot
alwayr dclcrmino absoluto control, costs
110
should be assigned on lho basis of relalive
conlrol, and variancor should be viewed al
quedbnr rather than as atlewcn.
017€. Opinion ic dividcd on this subiecl. Somc
believe that for thc mel effeclive overhead
cqrlrol, &partrnont headr shouH bo chargpd
crly for ho.. codl thal they ircur. lf lhey arc
cfiargod wilh uncsttrollable costs, they could
spend rignili;ant atrpunt! ol limo lryhg !o cct'
tlol cosl that they havl no ability lo cqltrol, or
they may bccqn hultrated and givc tP tryhg
to csrbol 8ny stt. On the ofter lrand, ssne
believe that deparfnent headg should aPprocF
atc thc fact that many auxiliary costs musl bo
incurred to tuPPort their activiliel; thereforc,
they $ould bo charged with a fair share of
suclr cct+ clearly labeledas uncsrlpllable,
Ol7-7. Total costs c/ servica departmenl overhead aro
included in overhead rales h order lo charge
irbs and prod.rcts wilh all overhead hcurred h
their production. Aclual service deparlmenl
cetl et. cqrtolled il they are accumulated in
seryice departmenl accounts where they can
bc assigrredto setvico deperlmenl managen.
ll rervice dePatltnent ccls atc charyed direct'
ly to producing departmonte,3uch costg
becsne an indirect, noncontrolhble item of the
departmantbreceivhg lhe charges.
017€. Servicc department costs should be charged lo
user deparlments by predetermined billing
rales rather than by allocating aclual ccat al
lhr end of the period. The use of predeler'
mined rates maker il posrible lo determinc
sewicc departrnent gfticierEythrough lhe corn'
putalbn of spending and idle capacily yari-
. anooa. ln addilixr, uscr department elficiency
can bo evaluated nrore elfectively by eliminat'
ing noncaltrollable cosb frorn service depart'
menl charges. This is parlicularly imporlant
where user dePariment3 have some control
over lhe anrount of the services usod. In such
csses, usors thould be held accounlable for
their usc ol seruices,but the rales lor pricing
ttpoc eorvicegstrouH be known by the users in
aclvancc.
Ql7-9. (a) No. Thc ctrargc is an arbilrary allocalbn
ol cost. lt cannot bc influenceddirectly
by acticrs of ihe divisinn rnanagorneni.
(b) Yea and no. The amounl ol computer
seruicc used ir within the contol of the
divbbn managemenl However,lho c€t
pot unil of servicevarieg with the effi-
ciency of the computerfacilily and lhc
amounl of use by other divisions.
Consequently,the charge is cnly partly
controlbblo by divisicn rnarragemenl-
 I
1
Clnpter 17
!
(c) Yct. Thr chargr for goods purchaced
' tro.n anothor diviridt is conlrotlablo by
thc diVisbn managcment, provided that
thr quanlity of g@ds purchascd b car-
trollabL by tho divbbn managcrncnt and
lhat thr prb. it an rxtemally sCsblished
rnarkcl prict.
417-10.(e) Thr highor al.ctric pcrfler cob rnay be
thr resull of any ono or snbination of
b
thr folbring
(t) ircroaser h tir prbes paU tor tuel,
labor, rnsinlcnorco, rlc.,
(2) incflicicnt oporaling praclices or
b macfiho lailurcr withh thc porrer deport-
,nont,
(3) lhr acquirition ol erpensive new
i crFacity, ancl/or
(4) incrcarcd production of electricity
b providirg services. This rvoutd not mly
requircd to rroot uror demand.
(b) To lho oxtont thd any incffbiencies exist
h tho po'vor drpartmcnt tho cunent slb,
b calbn rctremr wilt pass them on to the
wcr dcparfncntr. Wlth the kind of alb,
catirn usod by Errmonr Cornpany, il is
I nol possiblo lo drlermine wtrat caused
tb lhc cost incroatr. A better syslem of
handhg lhis depsrtment'scosl wouH be
I to chargc user deparlments for acluat
I
uragrr on lho basir ol a predetermined
b variablc rdc, and lor available usage on
thr basb ol tho power doparlmont,s abili-
ty to provUo rowbo at maxinum capaci-
ty. Bndgetrd fixcd cogt rhould be allocat.
cd on lhc barir of ability to provide
oeryico, becausr the Electric power
Dopartnrentcanncl control aclual usage.
Thb apprc*h rucuH make it possible-to
! encos b€tween the prices and the quantitiesof
c o m p u l a s p r n d i n g v a r i a n c e sl o r t h e
Electric Powcr Dcpartment, which are
ureful in cvaluating lhe department,s
optraling effir:iercy.
Ot7-11. (a) Highcr total cort incurred
by the
Mahlonsrrcr Drpartrnent (i.o., hcreases
ir lht priceoandor quantiliesol the varF
our ilem! ol corl in the Maintenanco
Dcportrmrn), fowcr tolaf hours of mshte-
nancr rorvicr provided lo all ure r
6partn.nt! during the period, o, a com-
binatlxr of both could rcsull in a higher
aclual mainlonancc co3l pcr hour,
Q'l 7-14. To aiJ rnanagoment in evaluathg and cqrlrol-
Howcvor, rucfi incrcaser in cosfr should
remain in thc MaintonanceDepartment
artd nd be drargredlo the usorc.
(b) An improvcd mcthod
tor distributing
i/binlmancr Dtpartnent cost would bi
l lo rslablbh a prcdetermined rate lo be
chargod lor oach hour of maintenance
torvbo prwirJod to users. Thc ratc wor,rld
at7-15. An idlo capacity variance is
bo octablirh.d annually by dividing thc
oudgclcd hours of servico to bc por_
411
formed during the period into budgeted
Maintcnance Dopartment cost for thc
samo period. Using lhis predetermined
ralo, cach usor deparlmcnl's maintc-
nanor cost rouU deperd qr lhc nunber
of furrs of servbe il reeived. By using
thc predetermhed ralr, lho aciual cqt
could be compared with totel charges
madc to u3ere and thc dilfcrrrrcr decqrF
posed into spending and idb capacily
variances lor tho Mainlcnanco
Department. These variances arr useful
i n t v a l u a t i n g t h e e l t i c i en c y o l
liahtenanco Dopartrned scnivity.
A fudher refinement would be to
requirc ho lr,lahtenanco Dopartmcnt to
lubrnit estirnatescil cct lo users beforc
-
give the dopartment reccivhg the sorvbe
rqne idea of the cogt of tho work, bul
would afso restrain the Maintenance
Department from spending loo much
time on a icb.
Q17-12. The flexiblc budget (a) provides the monthly
budg€t allowance regardless ol the flucluating
nurlhly volume of produclitxr; (b) permits not
having to estimate the operating activity ol a
rnooh in advancc ol the period lor wtrich the
budgot is prepared; and (c) recognizeslhe
fixed and variable nature ol costs, wfrich leads
to easy adjustments when evaluating actual
perfornancc,
Q17-13. A spendhg variance is the dilferencebelween
actual cost and the budget albwance (i.e., the
budgeted anrowtl sdiusted lor the aclual level
of aciivity erperiencod). tt is caus€d by difter-
the variotrs ilemr ol cost budgotod and actualty
incurred.To the extent that a manager has
conlrol over eilher price or quanlity, or bolh,
the manager has control over the_amounl of
the spendingvariance.However,il the mrnagcr
doeg not have conlrol over both prices and
quanlities,lhe rnanagerhas mly lirnitedcsrtrol
over lhc amounl ol thc spending variancc.
N c v c r t h e l e s s ,s i n c e a m a n a g c i m a y h a v c
somr control over spending variances, they
arp us€d lo evaluale efficiency h responaibitity
reportirg.
ling cosl, a spending narbnco tor each ilem or
classilicationof cost should be reportedlo
responsible management each period.
Itemizcd varianccl tell responeiblc manago-
menl which ilem war inefficientlyured. Thic
detoilod hto.rnatbn phpohts wtreie thc roarsh
iJentily causos shoutd begin.
io
lhe amounl of
ovor- or underappliedbudgeted tired faclory
overhead. In responsibilityreporthg, it
b used

112
l
er a mcarut. of capacity utilizatkxl. To the
ortent thal rnanagement can cstlrol capacity
utilhatinn, thr kilo capacity variancr can bo
controlled. Howevlr, lho arnounl of capacity
utilhed ir cillrn a furction ct fotcs ot ttij' th'
cfittol d hdivHrrsl depadment suprrvboo'
Ql7-16. Thr two primary PutPolct of rrsponsibility
raPotlt tra:
(a) To nrolivato inclvi<Juralrb achiovo a high
levol of performancr by reporting etli'
cieircbr and helliciencier to rerPonsiblc
rninager! and thcir ruPerirrs.
(b) To providr inlormation that will helP
responcblc rnanagot'r3ldernity ineffbien'
ciet so that thcy can rnoro rflicirnlly
conlrcl code
Afl-fi. Dyslunclianal behavion that can result |tom
' the practice ol evaluating managerial perfor'
,nanc. rathr tlrsr cvaluathg aclivitier lcilow:
(a) Managera trnd lo lakr aslirmr lhal an
rell acrvirg rathrr than bcndicittl b |hr
cqrtPany ar a wfiob.
(b) Managcru coflcontral. or mceling lhe
budgBt rather than an obtahhg the beet
levcl of Prrformancc thal can be
achieved. Tht usr of budgelr lends lo
thwarl continuour imProvement.
(c) Since budgell are bared on current
opcraticrr, rnanagoF lend lo fcur lheir
altontivr qr short.run targels and ignore
the bng.lerm needg of hc business.
(d) Managen *tro arl unablo to subwrl the
lysl.m rutlicicntly to gcl acceptable
evalualbnr, bd who are othelise corrt'
petrni and rfficient bccqno fruslraled,
do ttot gct prornolcd, and olten bave the
cornpany.
Ol7-18. Responsbility accounthg and reporthg should
not be abandoned despile lhe lacl trat its use
in evaluating lhr perlormancc of rnanagort
resultr h dyslunctirnal behavior. To overcornc
he prcbbm ol dydurrlimal behavix, tcsPo.l'
sbillty reportr lhorrld br Lrsodb ovalulr lhl
perlornrancr ol burinccs eclivilirr, nol tnan-
agen. Maragon rhouH bo ovaluatod qr lhc
basis of multiple ac-tivitjescil whk*r ccl cstltol
is crty ane. lvlanagon shoub bo rncouraged
to expcrinent with now approachcr, lo irplwo
producl quality, lo onlist th. coop.ration of
thcir departmonl rc*on in irpoving output,
lo cooporalr with cthor departmontt, and lo
rcrk tor thr fmgttem succosr cil tht canpa-
ny. Using respansibilily reports ar an aid in
cvaludhg thr olficbncy of busho$ aclivities,
hslead ol managroo, takcr procsurc off man-
ageru to defend hoir acticos ar thoy reble lo
cod, and rnaker il po+rblo for hem to pursue
cficr desirablebushess activilioc.
Q17-19. Somo problemt that llmit thr usofulnesr ol
cootrol data repqld to rnsnagcr' in a rcspon'
sbility accornrhg and reporfhg qFtom 8t :
Chaptor t7
(a) Most rcsponsibility accounting and
repodhg rlalrns irnpmperly bese allour'
ablc budgrtl on volume'based mca'
ruret of astiv,ty thal havc litlle to do with
cosl incurrrncr (1.9., labor hourl,
rnacfihc houn, rtc.). lf nqlvolune rnca'
surcr (o.g., m*hinl rcluP!, relooling,
nrwhg or do.ing parlr or prodtrl' ctc.)
arr maior corl driveru, aclivity based
cethg should br uced as thc basis lor
budgcting end PrcParing variancr
reportr.
(b) Conhol daia ryailablc in a nsponsibility
reporting ryrlem are lo aggregated lo
bc ucaful. Thb ctilicicrn slems frotn an
anemPt lo ur rcspotsbility reporis tor
operating control. Even ilemized vari'
ancr reporlr may nol bc suflicient lo
rolvo thic problern
(c) Cqrtrol data availabl. lo rnanagen ar.
financbl and not oalily intcrpreled by
operating lcvol managers' I'ho are nol
trained in accounting and finance. The
accounting slatf chould provide assil'
tance, when practbal h trainhg operal'
ing pcrsonnel in lhe use ol tinanciEl
reporls. ln addition, nonlinancial mea'
surer that can bc easily understood by
operating managers shouH be reporled
along with lharcial data, when pnclical.
(d) Control data availablc lo tnanagore ate
not tlnefy onough to br weful. This critl'
cism cteint frqn an atlempl to use finan-
ciat based reponsibility roPorb for day'
today operathg controL Morc frequent
tePortingwill not likely solvc lhir prob'
lem, because il slill takeg dalts or weeks
to collect tho necegsary dala and pre'
pare financial reportr. A better solutitx is
to use statistical procesr conlrol and
other operatirg control syslems lor day-
today openthg csrtrol ard lo use peri-
odic financial rcporlr lo cvaluate thl
financial elfcclivenclc of lhe businesr
t)Etomt and thr Prees! cooltol syslemr
used h mcriloring activtty.
Ot7-20. Despile thc tact that nsrfinancbl measures of
oporating podormancr arc mot. easily hter'
preted and can br nradc avaihble qt a moro
timoly bacir than linencial data' financial
reports genrrated by a responsibility accounl'
hg syslem slill havr value bocau3e they Pto-
vUc hformation about tho impact ol bueiness
systemr sr incornr. To bc effective, manago'
ment musl nd d|ty bclievo lhal roducing invcn-
tory, spcilagc, c rework will inprovc proCilabilF
ty, but also it must rrpnitor thc lmpact that guch
cfforlr havc on incomo. Thc tio belwcen
clrogor h bushess s)lstems and the effect of
thoo change3 on it6ne Lr provided by lhan'
cial ropodr-
 \,

: Chwter tZ 413

RCISES
E17-1
(11 MaintenanceDepartmentcqst should be charged to all dopartments on
the basis ol a predeterminedcharging rate and could be computed as
follorvs:
Fixgd COSt...................r......................r.......r...........r........o $ z,5oo
Variablecost (15,00Or $8.5O| l27r5OO
Total MaintonanceDepartmentcost sl35,OOO

= $gPermaintenance
hour
ffi
The agtual MalntenancoOepartnrentcost for November,gl32rOOOwould
bo chargod dirscUy to that departmenl The $9 charging rate is used to
charge other departmentsfor MaintenanceDepartmentservice received.
The Novemberchargeswould be $1261000(l4,ooo actual maintenance
hours x $9 chargingrate|.
b
The same approach woutd be followed for Generat Factory cost, except
'I
that transfem and chargesfor such costs would be made to producing
deparunents only. The rate woufd be determined as foilorvs:
!
Fixed cost $3O,OOO
Variable cost (1rO0Or $201..r..r...,... 20,OOO
Total General Factory cost sso,OOO
$5O,OOO
= $50 per employee
b
I,OOOemployees
The actual cost chargodto tho GonoralFactoryIn Novemberwould be
$51r0o0,and GonoralFactorycost charged to producing departments
would be ${srooo (98o actual employeesx $50 charging rate}.

l
v
{'t1 Chaptert7
1

efl-1 (Concluded!

t2l f,lalntenance DepL General Factory

ACtUal COgt ........D......o...... $l 32rOOO $511500
Budget ellomnce:
Variable cost:
l4rooo hours I $85o..$119,OOO
98O employeesr $20 $19'600
Fired cost 7r5OO l20,5OO 3O,OOO 49,gOO
Spending varlancc..r........ S 5r5OOunlav. $ {.90o unfav.
Budget allowancc..,...,..,.. $128r5OO $491600
Cost charged oub
l{'OOO hourc r $9......... 126,OOO
990 employeesr $50.... 49,00o
ldle capacityvarialrcro...... $ 500 unfav. $ 0oOunfav.
Totalvar|ance............... 5-TF unfaY. $ 2.5oounfav.

El7-2

(11 Billinsrates: Carpenter

Shop: = $lo perhour
#ffi
Electrlctans: -qggjo-oo = Si 2 perhour
2,5OO hr s.
(2) Charged to producing departments:
Department
1 2 3 Total
CarpenterShop. .................o...,.. $ 4rooo $ Irooo $ 4r5oo $l61500
E|octriciansn...............r.............l2'OOO lO'2OO 61600 281800
Tota1......t..........r....,....rrD.......r.$l6rOOO $l8r20O $t I,too $45,300
r4oo r $io = 34,o0o;Boor $to = $8,000;45or $io = $4,5oo
- 1,ooor $12 - tll2,OO0;
85Or $12= $lo,2oo;55or $12 = $6,600.
I
I

It

I
i
! Chapter17 1r 5

E17-2 (Concludedl
(31 VariancesIn each service department:
Varlablc
Monthly Flrcd Cort FLcd Varlablc Rata
Budget Percentage Coet Gost Per Hour
GarpenterShop $2O,O0O 70% $l4,ooo $6,000 s3.OO
Electricians 3O,OOO 80 24LOOO 61000 2.4O
Carpenter Shop Electrlclana
Actual co!t-*-...... 31e,8OO Acbral corEt-** s27,7OO
Eudgct ellowanccl Budget allowancc:
Varlablccoct (1,050 Varlablc cost (21400
htt. r lXr,OOl.-, 3 41950 hn r 32,401 ..-. I 51780
Ftcd colt*.-* 14,000 18,050 FLod Go!t*...-- 24.OOO 2017go
Spcndlng Ytrlanc. - t 85O unfav. Spcndlng yarlancc - S (2.06O)fav.

Budgetrllowlncc.,. s18,95O Budget Ellow8ncc... t29,760

Cort chargcd to Coat chargcd to
produclngdepart- produclng depart-
mcntr {mq.2}..-,. 16,500 mentr (ttg.2)-.... 28,80O
ldlc capacltyvarlancc S 2,450 unlav. ldlc capaclty varlancc 3 96O untav.
I E17-3
b

(11 Billing rate for MaintenanceDepartment

Fired rate! $12r8OOtotal lired cost + 3,2OOnormal
maintgnanCO hOUf3.......r......,.........,....r $ 4,00 p er hour
Variable rate: Variable rate per maintenance hour
fo r l a bor ...... $8.70
Variablerate per maintenancehour
for other costs:
S up ervisio Jl ...,..,,..... $.so
Tools and supplies,. .75
Mlscellangous..r...r.. .o5 1.30 10,00
Totalaa..aataaaataaaa....r.........aaaaaaD.a.aoar.......r......rrr...r...........
$1{.99 per hour
Bllfing rate for PayrollDepartmenb
Fixed rate: $12'OOO budgetedfired cost + 1,290
aygr:lggnumbgrof employggS...........,. $lo per employee
Vari ab I g riNto.....,......r...,...,...,.,..r.,.r, 2
Tota1.....,.......ro..r..r,.,r,........ per employee
_q!_?
The billing rate for the Maintenance Department was based on the rurt-
ber ol maintenance hours worked, because it was the only variable given
on which a measure of operating results could be computed. For the
Payroll oepartment, the billing rate was based on the number of employ-
ees' because it was an adequate measure of operating results for that
department.
416 Chapler 17

E17-3(Concluded)

(21 MaintenanceDePartment g47,2OO

Actual CoSt..........."""
Budget allowance based on actual hours:
Variable cost (31355hours r $101..'..... 933,55O
12r8OO tf6r35o
Fired cost
Spendingvariance 9_99.9 unfaY.
Budget allonrance based on actual houls.'. s48,350
Cost charged out (31355hours r $14)....,,... 46,970
ldl g capacity variar|G19.............'................'.' $ (62o) lau

Payroll Department:
AgtUal 9OSt....'.....................'...."""""t"""t' s13,875
Budgetallowancebasedon actual number
ol employees:
Variablecost (l rl65 employeesr $21 $ 2,330
Fired cost l2,ooo l4r 33o
Spending variancg ............'.'.........t........'...' L:('t9!l tar.
Budget allowance based on actual number
of employees 3l{,33O
Cost chargedout fl'165 employeesr $121 l3198O
ldle capacityvarianco... 3 35O unfav.

E17-4

(11 Producing 3oruice

Departmentr Dcpartments Total
A B x
Firgd costt ...,.....r.... st,2oo $2,4oo $ 1 , 4 4 0 $960 $O,OOO
Variable cost (rate r hours)n........ l,600 2,600 1r4OO 1,20O 6,800
Total....... $2,840 $2,160 q!?f99
$2,800 89p99 $2,849
' Dept. Hourc % F i re d cost rA = I,OOO hls.
A l O,OOO 200h $l,zoo B = l3,ooo
B 2OTOOO 40 2r4OO X = TrOOO
x l2'OOO 24 1r44O Y = orooo
Y I,OOO 16 960 34,O99hrs.
5O,OOO lOOo/o s8,ooo $6,8oo = 3.20 variable rate
34, OOOhr s.
Cltwter 17 417

El74 (Goncluded)
(21 The two generalprinciplesfor the allocation of service departmentcosts
applicableunder tho circumstancesare (a) distribution on the basis of
servics or benefit receivedfor the variablecost; and (bl distribution on
the basis of readinessto serve or capacitythat must be maintainedfor
the fixed cosL
This solution distributesall variablecosts incurred. A predeter-
' mined variablecost rate should be calculated,so that the efficiency of
the power plant could be judged. The present $.ZOrate is based on the
actual monthly consumptionand cost.

E77-5
(11 Quarterly
Benefiting Standby oh of Fixed Cost
Department Gapacity Total Billing
Cutting,.......o...o.. 35'OOO 35oh S2,45O
Grindin9,........r........... 26'000 26 1,920
Polishing........,...........,..,.,...,..........
3OTOOO 30 Z,I OO
St0J€S.'...o.......o..'.....rr............'r....... I;OOO I 630
TOtaf r...................................'.r........ I OOTOOO lOOo/o s?,oo,9
Variablerate = VariabteCost* ,*""*O Onnr"ilp""i ry
= S30,OOO+ 30O,0OOKWH
= $,1o per KWH
 Chapter 17
118

El7-S (Concludedl
Benefiting Department
Grindlng Pollshing Stores Total
First Quarter Bllllng:
Variable lilto.."""""-"' $ .1o $ .10 S .1o $ . l o $ .1o
85,OOO
Agtual consumPtloo.... 29r5OO 20,0OO 2910OO 61500

VariablgGost............'.. $ 2,950 s 2rooo $ zrgoo $ 850 s 8,5OO

Firgd CoSt....."...""'o"" 2A50 1r82O 2rloo 630 TrOOO

Total . t..oo..t......."t"" t"" $ 5,400 $ 3,820 $ 5,OOO 3l,2gO S15,5Og

Second Quarter Billing:
Variable lllto.........-.'.t.. $ .lo $ .to $ ' . 1 0 $ .10 3 .10
Actual congumPtion .... 33,5OO 24r75O 23,5OO 8,250 9O,O0O
Variable cost ............... $ g,gso $ 2,475 $ 2,350 s 825 $ I,ooo
Fired GoSt............"""" 2r45O 1,820 2rlOO 630 7,OOO

Total ...........r........r""tt' $ 5,goo $ 4,295 s 4,450 $1,455 sl6,000

Third Quarter Billing:
Variablg itlto........'....... $ .lo $ .lo $ .10 $.10 $ .lo
Agtual consumption .... 32.-750 21,25O 25,5OO 6,500 86,000
Variable cost ...'........... $ 3,275 $ 2,125 $ 2,550 $ 650 $ 8,600
Fired GoSt.................... 2,45O 1r82O 2,10o 630 7,00o
$ 5,725 $ 3,945 $ 4,gso $1,280 $15,600
Total .....o.............'.......'
Fourth Quarter Billing:
Variable rato......,..,...... $ ,1o $ .1o $ .1o $ .10 $ .lo
Actual consumption .... 28,25O 23,OOO 27,75O 6,000 85,OOO
Variablg cost ............... $ 2,825 $ 2,3oo i 2,775 $ 600 $ 8,5OO
Fixgd CoSt'.........r......... 2r45O 7r82O 2 r l O O 630 7,OOO
Total '.'........... $ 5,275 $ 4,120 $ 4,875 $1,23O $15,500
$5,345 $62,60O

l2l First Second Third Fourth Annual

Quarter Quarter Quarter @ Total
Actual cost....... $ 1 5 ,450 $16,200 sl5,9OO s l 5 , 4 O O $ 62,950
Less budget allowance:
Variable rato .............. $ .to $ .lo $ .1o $ .1O $ .1O
Actual KWH provided 85,OOO 9O,OOO 86,000 85,OOO 346,000
Variable cost.............. $ 8,5OO s I,ooo $ 8,6O0 $ 8,5OO $ 34,600
Fired cost..,.... 7,OOO 7,OOO 7,OOO 7,OOO 28,OOO
Budget allowance...... $ 1 5 , 5 O O $ 1 6 , 0 0 0 $ 1 5 , 6 0 0 $15,5OO s 62,600
Spending variance ......,.,....... s (so)s 2oo s 3oo s (1oo)s
: - : : :
35o
lav. unfav. unfav. fav. unfav.
 Ctapter 17 4t9

E17-{' UNTYERSITY
MOTORPOOL
\-
BudgetReportfor March
Monthly March (Overf
Budget Actual Under
Gasoline $ 5,513 $ 5,323 $ tgo
Oll, mlnor repairc,parts, and supp||gs........,......r. 37t' 38o (21
Outside repairs 236 50 186
lnsurance 525 525
Salaries and benefits 2r5OO 2,5OO
Depreciation.......'.r............o..o..!r.rr.,,....r....o...r...... 2,31O 2,31O
Total $!1d93 9!rf99 9--32!
. 2 1 21
Total m11g3............................r..r.r.......rr................. 63,OOO 63,OOO
Gostper mile $ . 1 8 1 9 $ .1700 $,ooss
Supportingcalculationsfor monthlybudgetamounts:
Gasoline: 6(l,000 miles
x $1.4opergallon = $srslz.So
b 16 milesper gal.
Oil, minor repairs, parts,
and supplies: 63,000r $.000 per mile = $.328
Outside repairs: = $23o.25
Insurance: Annualcost for one auto: $0,O0O+ 20 autos = $3OO
Annualcost for 21 autos: 21 r $3OO= $61300
Monthlycost $g,3OO+ 12 = SSZS
Salaries and benefits: No change
$3O,OOOannual cost
= $2,5oo per month
12 months
Depreciation: Annualdepreciationper auto:
$26,400+ 2Oautos = $ir32o
Annualdepreciationfor 2i autos:
$lr32o per auto r 21 = $2T.T2O
Monthlydepreciation:$27l2O + 12 = $2r3lO
. :

b
120 Chapter 17

E77-7 CLAYTONCOMPAITY
Assembly DePartment
Flerible Budget-9Oc/olovel
Dirsct materials l9O%r $2O'0O01 $18,OOO
Dircct labor lg0% x $l 1'2501 1O1125
SUpefViSiOJt..............r......1................o.......................t......o...'.'."t'r"t"
"'t' 500
hdirect materiats ($zsO+ lgOohr ($l t75o $2sQlll"""""""'t""""""" - I,600
PfOpgfty t3I..r........................t............................t.t....t..o.t.t.""t"tt"ttt"tt'
300
Maintgnanco ($600 + (9O% -
r Gtlr600 $600111...'........r....o.................... 5O0
1r
Power Gt2oO + Paohr ($3OO- $200jll '......... 290
Insurancer....r.r......'........ aaaaaaaaaaaaaaoaaaaaaaaaaaaataaaaaaaaaaaaa 17s
Depreciatioll .................. l1600
Tota t......ro.,..D................r....r....r...............r......r.o......r....r..................t.r. S34 t 09O
:
 Chapter 17 421

E174 ONE MONTH FLEXIBLEBUDGET FOR FINISHINGDEPARTMENT

Ooeratinq level
Based on labor hours.....,.r.. 8OO 9OO I'OOO lrlOo
Percentage of cipScit!....... 80o/o g0oh l00oh l7Aoh

Variable cost:
Indirgct |abor.........o.........o.. s lr2oo,oo s 1r35o.oo $ lr5oo.oo $ 11650.00
Factory supplies....r.r......,.r.. 1r88O,O0 2rl15.OO 2'35O.OO 2r585.OO
Power.,...,......,..r..,............... 600.00 675.00 750.oo 825.OO
Rework operations.............. 4OO.OO 45O.0O 5OO.OO 55O.OO
Payrolltares....................... IrO40.OO 1r17O.OO lr3OO,OO 1'43O.OO
Repair and maintenanco..... 320.00- 360.00 4OO,OO 44O.OO
Generaffactory.......,........,.. 160.00 18O.OO 2OO.OO 22O.OO
Total variable cost........... $ 5,600.00 S 61300.00 $ TTOOO.OO$ 7'7OO.OO
Fixed Cost:
Indirect |abor................,...,.$ 4r000.oo S 4roo0.oo $ 41000.00 $ 4rooo.oo
Superuisior|......,.....r......,...., 2'5OO.OO 2,5OO,O0 2'5OO.0O 2'50O.OO
Factory supp1ies............o..,.. 9OO.O0 9OO.OO 9OO.OO 9OO.OO
Powgr'..........'....r..........r...... 5OO.OO 5OO.OO 5OO.OO 5OO.OO
Rework operations......,....... 2OO.OO 2OO,OO 2OO.OO 2OO.OO
Payroll tares.....,....,....,....... 8OO.OO 8OO.OO 8OO.OO BOO.OO
Repair and maintenance,.,.. 600.00 600.00 600.00 600.00
Property insuranca.........,.... 7OO.OO 7OO.OO 7OO.OO 7OO.OO
Property taxes..................... 3O0.OO 3OO.OO 3OO.OO 3OO.OO
Vacation p3!.....,......D..,...,.... 2r2AO.OO ZT2OO.OO 2,2OO.OO 2.2OO.OO
pensioncosts.,... l,2o0.oo 1,2oo.oo
Employee 1,2oo.oo i,2oo.oo
Employee
healthp1an...,...... 1,8oo.oo 1,8oo.oo irgoo.oo f ,goo.oo
Machinery
depreciation,..... Irooo.o0 l,ooo.oo 1,ooo.oo i,ooo.oo
Water and heat..........o......r.. 600.00 600.00 ooo.oo 600.00
Buildingoccupanc!......,...... Irooo.oo lrooo.oo Irooo.oo Irooo.oo
Generalfactory...................lr5oo.oo irsoo.oo irsoo.oo ir5oo.oo
Totalfired Gost................
$ir"goopo $1r"goo"oo$ir"BooJo $lr"Boooo
Totalco$..................r.........
$r5,4oo.oo$A6rtoo.oo $r6"900.00 $r?Foo^oo
 Chapter 17

El7-9
Spending
Original Budget Aetual Variance
Budget @ Cost Unfav. (FaY,l
Gapacityhours 8,0oo
Variablecosts:
Supplles $2,ooo $2,2oo $2,goo $loo
Repairc and maintenance ...... 8OO 88O 9OO 20
lndifeCt 1abof.......................... 4rO0O 4r4OO 4r3OO (f OOI
Powgr and !|ght.....r..............,. lr2OO 1t32O lr4OO 80
H63t................r........,...r.....'.r.. 40O 44O 5OO 60
$ Sroo
subtotal................,.......... $ ,"r4o $ ,roo
Fixedcosts:
Buifdingorpense.................... $ 8oo $ 8oo $ 84o 4o
Depreciation-machinely....... 2r4OO 2r4OO 2r4OO O
Propertytar and insumnco.... 4OO 4OO 42O 20
Subtotal $ 3,600 $ 3,600 $ 3,060
Total costs sr rpoo $l r^s4o $13,060 s 220
Appliedfactoryovgrhgad...o..,.......r.....,,.o..... 13r2OO unfav.
ldlecapacityvarlaDCo........r...............r.,.....o. $ (36Olfav,

Actual factory ovgrhgad........,..r...,..,..........o. $l3r060

Applied lactory overhead l3,2OO
Overapplied factory overhead 3 (r4ol

Spendingvariance S 22o untav.

ldle capacityrvariance (36O!fav.
Overappliedfactoryoverhead.r....................
$ (140)
 I
L

i
l-

L Clppter 17 .123

I
L Er7-Io
Spendi ng
Original Budget Aetual Variance
Budget Allonrance Cost Unfav. (Fav.)
Direct labor hout'r8.....'......'............ IOpOO ,"gOO ,1600
: = : : :
Variablecosts:
lndirgct 18bor......r........'r......... $ 7O,OOO$ gz,zoo$ 7o,ooo
!
32,8oo
I
Payroll t3xg3.............r......o.....r 6lr 5OO 59r04O 6O,OOO 960
I Factory suppli gs'..r................r 27rOOO 25r92O 28,OOO 2rO80
b
El gctric utility......-.!...r............ l2,ooo 1 1 , 5 2 O 't2,ooo 480
Gas utility...oo....o..-.o.....'.......or. 6,OOO 5,76O 6,1OO 340
Water Utility.......'...........,........ lr 5OO 1r44O l15OO 60
MachineryropairB.................. io,ooo 9,60O
' l0,ooo 400
Maintenatlco ...............r..r....'.. 2l,ooo 20,1OO 15,OOO (5,t 60l
Ovgrtimg pnomium ..,.r....r....... IrOOO 8,640 IrOOO 360
b
Subtotal ....o........r......r..".. $2l8,OOO $2O9,28O$2t t,600
Firgd costs: ............r..................r..
t Supgrvisiofl ...........r.....'........r. $ 4g,ooo$ 48,OOO 48,OOO O
Indirgct labor.......'........r......r'. 38,OOO 36rOOO 36'000 O
Vacationp?!.....................".... 4O,0OO 4O,OOO 4O,5OO 5O0
L Payrol I t8I33......r................'...
Employee insurancg...............
8,OOO
l2,ooo
8;OOO
12,OOO
I,OOO
72r25O
O
25O
Factory 3upp1i6s.......r.r.....'..r.' l9rooo 19,OOO 19,OO0 O
S Elgctri c uti1ity................r......., l5rooo 15,OOO l5,ooo o
Gas uti1ity,...t......r............r.r.... I,OOO I,OOO
I,OOO O
Watgr util ity.....'..!....ror...... r..... 5rOO0 5,OOO
5,OOO O
i- Maintgnance ............,........,..., 23,OOO 23,OOO
23,OOO O
Machinery depreciation .......,. 5O,OOO 5O,OOO
5O,OOO O
I
Building rlB!1t.........'.....'.r......... 15,OOO 15,OOO
15,OOO O
Propg rty targs ....,..........tr....... l2,ooo 12,OOO
13,OOO I,O O0
Property insura n c g..,.....,........ l5ro0o l5,ooo 15,250 25O
Subtotal ............o......r.,....,$307,OOO q3O7,OOO$3O9,OOO
Total costs .r.........D... 3525,OOO$51O,28O $52O,OOO 91'329
Appli ed factory overhoad ..........o........t...,..... 5O4,O0O untav.
ldle capacity variallco ..,...,..,..........r.o,..,.....r$ 12,280 unfa%

Agtual factory overhgad....r.r...........r............$Szorooo

Appliedfactoryoverhead.......,..................... 5O4rOOO
Underappliedfactoryoverhead.................... $ l61600

t_ Spendlng varianco S 4r32Ounfav.

ldle capacity variallcg ...................,.....r........ 12,280 unfav.
Underapplied f actory oveth ead ........,,.....,....
i-
il_6,6OO
424 Chapter 17

PROBLEMS
P77-7

(1 ) Factoryoverheadapplied for each prcducingdepartment:

Dept. A: 20r48Ohrs. x $4.2O = S881016
Dept, B: 291850hrs. x 3.10 = 921535
Dept. C: 2O,l0Ohrs. x 3.75 = 751375

(21 Oner.or underapplledfactory overheadfor each producingdepartment

Producing Departmants
Erpenses A c
Actual departmentfactory
ovgrhgad,.......r.r... $56,02O s52,85O $42,580
Prorationol seryice departments:
Utilities (on actual hrvh).......... 1 31755' 161170 12r 53O
Repairsand maintenance
(on actual dlhl .-....o...'...... 181432r' 26,865 18,O9O
Total actual department factory
overhead ..o.r......r.................rr. $88,207 s95,885 $73,2OO
Appliedlactory ovgrhgad........,..r. 8 6 , O 1 6 92,535 75,375
(Oven)or underappliedfactory
overhead $ 2,191 unfav. $ 3,95Ounfav. $ (2'1751fav.
r 39r3OOr $.35 =
s13r755
t'20,48Or$.9O= 18.1432

(31 Total variance for each geruice department:

Repairs and
Maintenance Utilities
Actual cost befors allocationof Utilities
Department COSt .............................r...r......rr $56,320 $5O,O4O
Utilities Department cost allocation
(1 8195O kwh x S.SS; ....r..,.....r..o.............,o...... 6,633
$oz,sss
Services allocated (sold)to other departments:
ffOt43Ohrs. x $.90;.............'........'.............'..63t387
(14orz5o krrh r gssl r...........,....................... 4gro88

$ (434! fav. $ 952 unfav.

L
t
L

I
L Cllo,pty 17 425

I
I P17-2

(f l Maintenancs Department

Total estimated cost _ s t o , S o o= 3 3 per maintenance hour

Total osUmatedmalntenancehours 3,5OO

UUlitles Department:

l
Total estimated cost - S8'40o - 9 . 1 2 p e r k w h
b Total esUmatedkwh 70'OOO

(21 Service
b

Otilities
b Variable overh ga d..........D.......Dr'. $l5rooo I I,OOO $ 4,5OO s3,6OO
Fired ovgrhead .....,...r....,..,,...r... l8r0oo l5,ooo 6rOOO 4,8OO
I Direct departmentalovefiead .. 333,oOO $24,oOO $f o,5oo s8,4OO
b
DistribuUon-eeruice d epts.:
Maintenance:
I
(2r5OO
x S3).,................,
L (1,OOOr 33)..............r.... 3rOO0 (1O,5OO)
Utilities:
(45rOOOr $.12|.,............ 5,4OO
(25'OOOr $.12).............. 3rOOO (8,4O0)
Total factory ovgrhead..,.,......r... _$15,eooigo,ooo
Dirgct labor hours .o..,................ 12,0O0 7,50O
Overhead rate per dlh ............... $3.825 $4
 Chapter 17
126
I

P17-2(Continued!
Planerg Radial Drills
(31
Spendingvariance:
Astual factorY overhead 93,l2o.oo s2,3OO
Add distribuUon-
garvice dePartmentsr l,44O.OO 480
Total departmental factorY
ovgrhgad ..........r..o.... s4,560,oO $2,780
Budget allowancebased
on actual hours:
Variable:n
Planera(1'O2Ox
$2.325;..........r.r.$21371.5O
Radial Drills
(680 x $2f .........' $1,ggo
Firgd.t........"...""t"" ltSOO'OO 3,871.5O 1r25O 2,61O
Spending Yarianc8.......... S 688.50 unfav. S 170 unfav.

rDistributionof service departmentcosts to producingdepartments:

Radial
Planers Drills
Maintenance:
S 960
Ptaners(32Ohrs. x $31r,.r..............'.........'...r....'.r..........
Radial Drills (8Ohrs. r $31.........'...'.....................""""' $ 24o
Utilities:
Planers (4,OOO hrs. x $,121 480
Radial Dritls (2,OOO hrs. r $12'..........-......... 240
s1,44O $ 480

"Variable ovorhead rate:

Planers: 33.825 - ($tS'OOO+ 12,OOO} = $2.325
Radial Drills: $4 - ($1510oO+ 7,5oo) = $2

Radial
ldle capacity variance: Planers Drills
Budget allowance basod on actual hourE...... $ 3 1 8 7 1 , 5 O $2,61o
Lass applied factory overhead:
Planers (1,O2Ohrls.r $S.aZq.. 3,9O1.5O
Radial Drills [680 hrs. r Sa].....'. 2r720
ldle capacity varianco........ s___19_9€9) fav. $ ( 11 0 ) fav.
 Chaptor 17 427

P17-,2(Continued)

(4) Maintenance Utilities

Actual sgrvicgdepartmentcost..............................,....$ t1170 $ 710
Distributedto producing departments:
Maintenance(4OOhrs.x$3|....,.................,..,........ lr2OO
720
s (3ol s (tol
Spending variance:
Actual service depart-
ment cost .............,. S1'17O.OO STi O.OO
Budget allowance
based on actual
hours:
Variab1e.,r........,......
$ S14.Z8l $Og.4O2
Fixed................,......
- 5OO.OO IrO74.28 4OO.OO 7OB.4O
spending variance..... $ iss.?z unfav. $ i^6o unfav.

ldle capacity variance:

Budget allowance based
on actual hou1s.....................r..$1roi4.2g $Zog.4o
Less applied overhead:
Maintenance (4OOhrs. r S31..., i,2OO.OO
utilities (6,000 kwh x $.121...... 72o.oo
f dfe capacity variance...,.....,....,.. g (i gS.72ltav.
Net variance........
9l1l:o9)rav'
$ (go.oo)t"*r. $ (lo.oolfav.
t Estimated variable expense
$4, SOO
gstimffi- ' Fr
3,soo
$ 1.2 8 5 7 r 4 0 O h o u rs = $5i4.28
2
Estimated variable expense $31600
- $.0514Perkwh
ffi- zo;ffi
. . $.0s14x 6,o0okws = $gog.qo
 Chapter 17

P17-2(Concluded)

(51 Reconcillatlon of total variances:

Agtua I ta gtory ovgrh gad ...........r........ $713OO.00

Lsss: Applledto work In Process-
Planers...........'..............""tt $3t9Ol'5O
Applied'to work in Procsss-
Radiat Dfit13,..........r......o...... 2'72O.OO 61621.50
Ngt total Yariance.......'r.r..............o...o $ 678,50 unfav.

Variances: Unfavorable Favorable

Spendingvariance-Pt3ll9!'t3....... $ 688.5O
Spendingvariance--RadialDrills 170.Oo
ld le capacityvariance-Plan 8t3.. $ 3O.0O
ldle capacltyvariance-
RadialDrills ."..........'............... 110.OO
SpendingvariancFllllaintenance 155-72
Spendingvariance-utilitios.'..... 1.60
ldle capacityvariance-
MaintgnaDCO..........'.......r.......'. 185.72
ldl e capacity variance-lJtilities.. l l.oo
s1,o15.82 S 337.32
Net total variance $ 678.50 unfav.
 Chapter 17 429

Pr7-q
(1) Budget allowance for each producing department in Januarp
(a) Basedon scheduledproductionhours:
Variablefactory overhead: Machining Assembly
(5,000units r S.45t per unit) or
(1r25Ohoursx S1,8Oper hour).r......r........ S2,25o
(5,OOO units r $.ggeper unit) or
(l rOoOhoursx S1.9Oper hour)..........,...... sl,90o.oo
Fixed factory overhead:
($17r52O + 12 months)............o,,.........r......... 1,460
($34r23O + 1 2 months).........'..............r.r......r 2,852.5O
Share of service department cost:
Maintenance (1r25Ohours r $.SOsper hour) '625
Maintenance (1,OOO hours r S.5Oper hour) . 500,oo
Janitorial (9lrggO + 12 months).....,...,.......... 165
Janitorial (S2r97O+ 12 months).................... 247.50
sdggg
Total budget allowanc€ ...."...,.......,..r.......,.........,.. s5,5OO.OO
r Machining:S2T'OOO + 6O,OO0 units = S.45per unit; S2Z,OOO
+ l5,OOOhours =
$ 1 . 8 0p e r h o u r
z Assemblr $22'800+ 6o,ooounits = S.gBper unit; $22,Boo+ l2,ooO hours=
$1.9Oper hour
3 Maintenance: $13,5OO + 27.OAOhours= $.5Oper direct taborhour
(b) Budget allowance based on actual production hours:
Variablefactory overhead: M achining Assembly
(1 ,3 4 Oh o u rs x $1.8Oper hour | ,......,............ $ 2 , 4 1 2
(1 ,0 3 0h o u rs x Sl.gO per hour )......,...,........., s t,957.0O
Fixed factory overhead:
Gl17r52O+ 12 months).,........,r.................r.... 1 , 4 6 0
($34r23O+ 12 months),............................,... 2r852.5O
Share of service department cost:
Maintenance (1,34Ohours x $.50 per hour) . 670
Maintenance (1,03Ohours r $.5O per hour) . 515.0O
Ja n i to ri a l(9 1 ,ggO+ 12 m onths) ........ 165
Ja n i to ri a l($ e rgZO+ 12 m onths) ............,.....,. 247.50
Total budget allowance s4,707 99,s?2.0o
 Chapter 17

P17-3(Continuedf
The budget atlowancescatculatedin (af and in (b) include the service
department shares by two different mothods: the share of the
MaintenanceDepartmentcost is basedon the charging rate of $.5Oand
the actual hours worked, which is in harmonywith the general procedurs
advocated.The share of the JanitorialDepartmentcost is based on 7112
of the apportionedcost. This approachls used becauseit is believedthat
ianitorial services have no relationshipto the number of hours worked In
the producUondepartments,In fact the lllustratlon could be made moFo
realistic by basingthe apportionmentof Janitorial Departmentcost on
the basis of the relative amount of floor space occupied by the producing
departments.As long as no changein the spaco has been reportedrthe
share would remain as establishedin the budget figures.
It should be noted further that the maintenancecost could be
chargedto the producingdepartmentson the basis of maintenanco
hours and not direct labor hours.An additionalrefinementwould appor-
tion fixed cost on the basis of a predeterminedmaintenanceschedule'
and the variablecost on the basis of maintenancehours actually used.
(21 Spendingand idle capacily variancesfor each producingdepartment'
based on astual produstionhours:
Machining Assembly
Aetual departmentalfactory
ovgrhgad ..............r....... s4,2OO S5,24O.OO
Add share of budgeted service
departrnent costs:
Maintenanco Department r.......... 670 s15;oo
Janitorial Department................. 165 247.50
Total actual factory overhead..........,, $51035 $6'002.50
Budgetallowancebasedon actual
productionhours.. 4r7O7 8,572.OO
Spending variance .,....r......r.......r...... S 328 unfav. S 43O.5Ounfav.
: :

Budgetallowancebasedon actual
productionhour:s,......,...........,....o
S4r707 S5r572.OO
Applied factory overhead:
(1'34Ohoursr $3.6Oper hour).... 41824
(1'O3Ohoursx 95.50 per hour).... 5,665.OO
ldle capacityvarianco...,.... 9_Ill f) ta* $ (93.oo)fav.
 Chagter 17 431

Pf 7-q (Concluded)
(3) Spendingvariancefor each servicedepartment:
Maintenance Janitorial
Actual cost (month ol January).,....,.. $lr3SO.Oo $iro4o
Budget a||owancgt..............r............. 1rl4Z.g3 g?s
Spending variance.,,..o................r......$ ,OrJ? unfav. S 215 unfav,
*Variable lactory overhead:
($S,t AO+ 27rO0Obudgeted hours
= $.189 per hour) l2r370 actual
hours x $.199 per hour) r......,.. $ 447.93
($ZTZOO + 12 months)..............h.. S zas
Fixed factory overhead:
(SA,COO + 12 months)........ 7OO.OO
(S7'2OO+ 12 months)..............t... 600
Budget a||owancg....,.,.....,..,.............. $1rl4Zr3 $ g25

P17-4
Capacit1r...t...,...r............................o....,........ g}oh gooh l OOoh
Dirgct labor hou!s.....................r...,........,,...4OroOO 4srooo sorooo
Variabfgcosts:..r........t....o......o.....o.............. $ 4rOOO $ OrSOO $ SrOOO
Indirgct |abor..................r....r................IBTOOO ZO'.2SO 22rSOo
Payrolftaxes and fringe benefits.......... slrz4o oc,ggs 71,5sol
P o w e r a n d |i g h t..,..,.....r .........,....r ........, 1r 2oo r igso 1r 5oo2
Inspectiott.........,........r.........,o,..............4rgOO SrAOO grOOOg
. Other sgmivariablgcosts....,.,.,.,,.......... 6'OOO O'ZSO 7r5OOa
Total variablg costs.r..r..o....r........,..r.r... g 91,24o $io2r64s $1 lqoso
Fixedcosts:
Depreciation..................,.................r..,.$grooo$grooo$gro
Insurance ..r...,......,.. 1r5OO t,soo l r5OO
Maintenancecost......,......,.......r....,..r.,.Z4rooo Z4'rooo 24rOoO
Propgrty tdr.,...........r....o.....,.........r...,... l r5OO f 'SOO l r5OO
Supervisorystaff '..,..'....o...r.....,.....t..o...gorooo gorooo 361000
Powgr and |ight.,....,..........r...,..,........... 2OO 2OO 2OO
Inspection......,.............r....r..............r.... 4r2oo 4r2OO 4r2OO
other semivariablecosts...................... i,4oo i;a;o 1,40o
Totalfixedcosts,..,....,..... ...... $ 77,goo $ ??"soo $ ??"goo
Totalfactoryoverhead...-.....,--... .. slqt,t* lirttras $t "t,t*
432 Chaoter l7

P17-4 (Concluded)
rPayroll taxes and fringe benefits:
Direc't labor cost = 50'OOOht€. x S7.50 s375,ooo
Indirect tabor cost = 5OTOOO hr:s. x $ .45 22,5OO
S397'5OO x . 1 8 = S 7 1 r 5 5 O
2Power and light:
Hours Cost
Lt:-t-
tllUaa aaaoaaaaaaa..aaaa.aaraaaaaaaataraoraa...r....t........aaaaaaaaaaaaaaaaa.....t.... 5OTOOO st,7oo
LOW..r.a.r..a.a a.a a..aa.....a aa aaa a..r.......... aa aa aat.at.. aaaaa.raaaaaa. aaaaa aao. a a 4O,OOO 1,4OO
10,0oo s 3oo
s300
$. 03 per directlaborhour
1 0 , O O Oh r s .
Total cost a a aa a r r ar a a a a a a a a a a. a aa t a a aa a a a ta aa a aa aa a aa a a a aa a a a aa a a a aa rl aar a a a s1,7OO
1,5OO
Fixgd cost........,....,,............,..,..!. ...........................r.....r.... S 2OO
:

clnspection:
Hours Cost
Llt-
I ll!ral
r.
a.a.......aaaaaaa.aaa.aa...raa.aaaaaa.aaaraaaro......aaa..a...aaaaa.taaata.aatala 5O,OOO s1o,2OO
Low..... a t a aaa a t aa a aa aa a a a aa ra a.. a a a aa ta ata at ata ao aaa a a a ta a a a 4O,OOO 9,OOO
Diffgrgn cg............. ..........r!....r.,...r...'.... 10499 $ 1 , 2 o o
s1,2OO - .
S' 12 Per direct labor hour
ie-dffi;
Total CoSt ....rr.r.....r..o...............r..r..............r.'...........r....................... Sl Ot20O
Variablo cost (5OrOOOhrs. x S.12)......r......r.'.'....................t......r'..... 6tOOO
Fixgd GoSt..........rrr..............r.......r....rr.......r.....1..........r............r..rt.... $ 4t2OO

lOther semivariable expenses:

Hours Gost
5O,O0O $8,90O
4O,0OO 7,44O
1O,0OO s1,5OO

s8,9OO
7,5OO
Fixed cost sl,4OO
t

Chapter 17

P77-5.

(1} ONE MONTH FLDOBLE BUDGETFOR FABRICATIONDEPARTMENT

Ooeratino level
Based on machine hours,,.. 1r 600 lrgoo 2,OOO 2,2OO
Percentage of capacity ....... gooh
-- _so% |_oo% 11o%
Variable costt
Indirect labor .....o.. $ gr44o.oo $ 3,87O.OO $ 4,3OO.OO $ 4,73O.OO
Factory supp1ies,,r....,...,...... t,2oo.0o 1'35O.OO lrsoo,oo l1650.00
POWgr.........r.rr.....'....r.....r....r go0.oo goo.oo ITOOO.OO l r l oo.oo
Rgwork operations.......,.,.... 490.00. 540.Oo 600.00 660.00
Payroll targs ..,.r......r.r......... 580.0O 630.00 700.oo 770.OO
Repair and maintenanco..... 400,00 450.oo 500.oo 550.OO
Ggngral factory ..,.............o.. 320.0O 360.00 400.oo 440.OO
Total variable cost........... s 7,2O0.0O$ 8,1OO.OO$ I,OOO.OO $ grgOO.OO
Fixed cost:
Indirect|abor....,..o.....,..r.r,..
s 2rooo.oo$ 2rooo.oo$ 2rooo.oo $ 2TOOO.O
Supervision..,......................
2rooo.oo 2rooo.oo zjooo.oo erooo.oo
Factorysupp1ies.,................ 600.00 600.00 600.00 OOO.OO
Power...,....,..,..............,t..,... 4SO.OO 4SO.OO 4SO.OO 45O.OO
Payrolltaxes""""""""""'.. lrooo.oo irooo.oo rrooo.oo
Repairandmaintenance,.... i,!oo.oo rrooo.oo
t jooo.oo lr4oo,oo 1r4oo.oo
l-p"tty insurance.....,........ z5o.oo 7so.oo z5o.oo 7so.oo
l-p"tty taxes............,...,.... 5oo.oo 5OO.OO 5OO.OO 5OO.OO
vacation pay......................., l'7OO.OO l,TOO,OO l'7OO.OO l'7OO.OO
Employee pensioncosts..... Irooo.oo trooo.oo Irooo.oo
Employee healthp1an.......,.. goo.oo Irooo.oo
goo.oo goo.oo goo.oo
Iltlachinery
depreciation...... 3,5oo.oo 3,soo.oo 3,soo.oo
Water and heat..o..............r.. 3r5oo.oo
4OO.OO 4OO.OO 4OO.OO 4OO.OO
Building occupancy............. 9oo.oo 9Oo.oO 9oO.Oo 9oO.oO
Generalfactory...,.........r..... lrog,g jg ITOOO,OO ITOOO.OO Irooo,oo
Totatfiredcost.........,,.....
!@f9 $lgpoooo !!t sr;ffi
Totalcost.....,.,..r..............o..
ffirr* $rrrrrr", *rr*gg ffi

s*'.
134 Chapter l7

P17-5(Goncludedl

t2l FABHCANONDEPARTMENT
VarianceReport
For the Month of Februaryr 2O-
Budget Budgct Spending
Allowancc Allowancc Variancc
Hormal Actual Actual unfav.
Capaclty CapaclV Coct (lav.)
Based on machlnc houn..o-...€ 1,800 1,88O
Parccntagc ol capacl$ o.........-.- 00% 93'/o

Varlabla cott:
Indlrcct labor I g,azo.oo 3 3,999.00 t 4,125,00 3l2E.OO
Factorysuppllct 1,35O.0O 1,395.0O 1r5:t4,00 150.OO
Power 000.00 930.0O e7050 40.50
Rework opo rat!ont........,..'.....'..... 540.O0 558.OO 11088,25 530.25
Payroll taret ..........x......,....o,....... so,oo 651.00 675.50 24.50
450.00 465.0O 125,75 (ql0.25)
Repalr and malntelEDCC......'.......
Gen era I lactory ..................o..o...... 360.O0 372.OO 3a5.OO 13.OO
Total varlable cost .'............xo 3 8,1oO.OO $ 8,370.00 3 8,924.99
Flxed cost
lndlrcct labor 3 2,ooo.oo 3 2,OoO.OO t 2,ooo.oo o.oo
Supcrvlglon 2,OOO.O0 2,OoO.OO 2,009.0O o.oo
Factory auppllel 000.00 600.00 o00.00 0.oo
Powcr &50.00 4no.00 4!to.oo o.oo
Payroll taxeg 1rooo.0o 1,ooo.0o IrOOO.OO o.oo
Repalr and malntenancc..........-- 1,40O.0O 1,40O.OO 1,4OC,OO o.oo
Proporty Insu rancc ...................... 750.OO 750,OO 785.OO 35.OO
Propgrty t8jf 8t......,.oo..............-... 500.0o 500.oo 490.00 (1O.OO)
VacaUon pay -.-..-. 1,70O.O0 l,7oo.oo 1,7Oo.OO o.oo
Employee penslon cocb 1,ooo.oo 1,O0O.OO .1,OOO.OO o.oo
Employec health plan ...-.-. 800.0o 800.0o 845.O0 +t.qo
MachInery d eprcclaUon ...,.....-..- 3,500.00 3,500.0o 3r500,OO 0.00
Water and hcat .............,.,. 400.00 400.0o 405.00 olt,o0
Eulldlng occu pancyoo................... 900.00 900.00 900.00 0.00
General factory 1r000,00 I,00o.oo I,O0O.OO o.oo
Total fired cost sl8,ooo.oo stS,ooo.oo $18,135.00
Total cost $2O,loo.og s26,370.00 9p'o5o.o9 3689.0O
Applled factory overhoad untav.
(S14.5Orate x 1,880 actual hours)...,-......,....... 28,g7O.OO
ldle capaclty varlancc
@f"".
Actual tactory overhead cost.......... s27,059,0O
Applied factory ovsrhead.. 2g,97O.OO
Underapplled factory overh ead 9__-_@
Spendlngvariance 3 689.00 unfav.
ldla capacity variancc (800.0o)fav.
Underappliedfactory ovefi ead 3 89.00
' l

Chaptar 17 435

'
P17-6

(T} ONE MONTH FLDOBLE BUDGET FOR ASSEMBLY DEPARTMENT

Ooeratinolevef
Basedon direst labor hours lr2OO lr 35O 1,5OO 1,650
Pelcentageof capacity....... _80% _90% Iga% yo%
Variable cost:
Indirect labor $ 2rzoo.oo$ 3r037.5O $ 3r375.OO $ 3,712,50
Fagtorysupp11es.................. 1,44O.0O ITO2O.OO l,goo.oo 1,ggo.0o
POWOi ............o.....rr...r.....r.r.r 420.0O 472.50 525.OO 577.50
Rgwork operations.............. goo.00 675.OO 750.00 825.00
Payoll targs ......................r 420,OO 472.50 525.OO 577,50
Repair and maintenance..... 180.OO 202.50 225.OO 247.5A
Ggngral factory r...........r...... 240.00 270.OO 300.oo 330.OO
_--
Total variabl g Gost........... $ 6,000.00 $ o,z5o.ooS 7,5oo.oo $ 8r25o.oo
Fixed cost:
Indirect labor ...................r.. s 2,500.00 $ 2,5OO.OOs 2,5OO.OO$ 2,5oo.oo
Supervisioll ............r............ 1,80O.0O lrSoo.oo 1,8OO.OO 1,8OO.OO
Factory guppll gs......D...or...... 500.00 500.oo 500.0o 500.o0
POWer.....r.......r.rr.r............... 150.00 150.OO 150.00 150.OO
Rgworkopgrations............,. 600.00 600.oo .600.oo 600.oo
PayrOll targs r..............r....... I,OOO.0O ITOOO.OO ITOOO.OO ITOOO.0O
Repairand maintenance..... 350.0O 350.OO 350.OO 350.OO
Propefi insurance.............. 150.00 150.OO 150.0O 150.OO
Propgrtytaxes.....,.....o......... 200.0o 200.oo 200.0o 200.00
Vacation p8|....................r... l'8OO.OO lr8OO,OO lr8OO.OO 1,goo.o0
Employeepensioncosts..... 11200,00 1'20O.OO l,2oo.oo 1r2OO.O0
Employeehealth p131t.......... 500,00 500.oo 500.oo 500.oo
Machinerydepreciation...... 450.00 450.0O 450,00 450.oo
Waterand h gat..............,..r.. 400.0o 400.oo 400.oo 400.oo
Buildingoccupancy....r........ 900.00 900.oo goo.oo goo.oo
Ggngral factory ........o.......... ITOOO.OO IrO00.oo
I,OOO.O0 lr0oo.oo
Totalfixgd cost.,......r.,.....sl3,5OO.OO$l3,5oO.OO$13r50O.0o $13,5O0.0o-
Total cost.......r............r....r..
slgr500.oo $eor2so.oo s2lrogo.oo $21'75O.OO
16 Chapter 17
I

P17-O(Concludedf
t2l ASSEMBLYDEPARTMENT
VarlanceRePort
For the Month Ending August 31r 20-
Budgct Budgot Spendlng
Allowancr Atlowencr Varirncr
Norrnel Actual Actuel unfev.
Capacltil CaPecltY Cod tfavJ
Bs$d on dlnct hborhourr * tFsO lr2,0
Prrccntagr of cePaclUF@n 90.t 80%

Verleblc cosi:
hdlrrct bbor 3 3,Oil75O t aoo2-5o 3 srso.oo 3a7.50
Fecloty stppllcl IrO2o,OO 1r5a&oo 1,6!t+OO 100.00
Powrr 172.5O 45150 405.OO 13.50
Rcwort opcraUonrffiForu 675.0O o45.OO 4€a,3rt (150.751
Plyroll tarcr ...-o.Hffi6...o.d 172,4O 41t1.50 alt150 o.oo
Repalr rnd nulnteflttlcl --*-- 202-50 103'50 1,173.75 982.25
Oencrel tactory ---...*.E.--.- tlo.oo 258.0O 3a5,OO 127.OO
Totel varlrblc @tt ..-.'...D...s t 0,750.00 3 6,450.00 3 7,800.50
Fhed coaE
lndlrcct t 2'5OO.OO t 2,5OO,OO 3 2,5OO.OO o.oo
lBo0,oo lpoo.oo I,aoo.o0 o.oo
Factoryruppllcr 500,oo 500,o0 500.o0 o,oo
Powcr l50,oo 150.00 130.00 o.oo
Reworl opcratlonr-offi-.-.ffi ooo.oo oo0.co ooo.oo 0,oo
Papoll terar I,OOO.OO I,OOo.oo 1,o0o.oo o.oo
Repalr end malntenlnc!...,......- 3rio,o0 3:io.00 3:to.oo 0.oo
Propcrty lnlurancc -tr*-ffi l50.oo 150.00 1s5.OO 15.00
Propcrty t-rcr,..-* 200.00 200.0o 21050 10.50
VacaUonpat l18OO.OO 1BOO.O0 2120O.OO 400,0o
Employcopcndon oortt -** 1300.00 1300.00 1300.00 0.00
Employcr hcrlth phn *.*.- 9o0.00 500.00 500.00 o.oo
Machlncry dcproclatlotr-o--* 450.00 450.00 4llo.00 0.oo
Watcrrnd hoet 400.00 400.00 a65.00 05.oo
Bulfdlngoccuprnqy 000.00 900.oo 000.00 o.oo
Oencrel factory t,ooo.oo I,OOO,0O I,OOO.0O 0.oo
Totel lhcd cod tl3,50o.oo Itt3,5OO.oo 313,090.50
Total cst, tt20,250.00 319,950.00 321,800.00 t1,010,09_
Appllcd factory ovcrhred unfav.
Fl5.00 retr r 1'290 rctuel houn),.-...,......,-... 19,3!10,00
ldlc capaclty varlrncr..- 3 OOO.0O unfav.
ActrtI tectory ovrrhud eort...-...., 321,89O,OO
Applled factory ovcrhcrd... 19,35O.0O
Undonppllcd fectory ovrrhced 3 2,510,00
SOondlngvarlanct 3 1,910'OOunfav.
ldlo capeclty verlancr OoO.O0unfav.
Undcrappllcd fectory ovc 3 2,51O.O0
 Chapter 17 43t7

' QASES
c17-1

(f l The factors that influencethe behavior of the production managers,

described in the case, conflict with the factors that motivate the mainte-
nance managens"The productionmanagenshave been given a monetary
incentiveto improvethe costs in their own departments.They require
the support of the other departments,(e.9.,Storrrcom and Maintenance|
to achievetheir objective;but the incentives (monetaryand otherwise)
have not changedin the other departments.
To lmprovetheir costs and earn the incentives,the pmduction man-
sgonr have postponedrepairs;demandedemergencyrepairs more fre-
quentlythan in the past demandedrepair work be done monequickly to
reduce downtime;demandedspecial treatment in some cases; pfaced
undue pressuneson maintenancemanageni;and complainedabout the
maintenancecharges.
The results of the demandsby the production managansconflict
with the following tactors, which appear to be important io the mainte-
nanca managensand reflect on their performance:good relations with
other managens;high quality repair work, inctuding making machinery
safe and maintainingits normal life; and orderly work schiduting.
(21 lf monetaryincentivesto the pmduction managensare to be continued,
complaintsand conflicts could be reduced by revisingthe chargingsys-
tem as follows: developpredeterminedhourly charging rates for each
skill levelwithin the MaintenanceDepartment;Oertloi predeterminedor
budgetedhours for routine or repetitive maintenancework; develop bud-
geted costs for parts and materials;use maintenancejob time
cards that
are initialed by productionmanagerswhen the job is done; and developa
penaltyrate to be chargedto those production man"g"o ;rho
need quicf
servicethat could havebeen avoidedby timely maint-enancsschedut'ing.
lncreasedproductivityand reduced conflicts between managens
probablycould be more effectivelyachieved by revising
the renrardand
evaluationstructure. Evaluationslnd rewards tor indiv'idualefforts
should be eliminated,and cooperationand continuous imfrovement
should be encouragedand tewarded.High rejection rates and internal
conflict suggestthat far moro is wrong wittr ttre current "yit"-
the chargingrates. than just
KB Chaptor l7

c17-2
(11 Variousalternative answerEmay bo consideredacceptable depending
upon the lustifications given and top managementbreacUonsto any
resutgng wriances. The main objective ig to ensure that the costs are
allocated to the aneasthat ara rasponsiblefor the incurrenco of the
costs.
(al $8,OOOcost of idle time in the AssemblyDepartment-This should
be chargedto the MachiningDepartmentbecauseit is a direct
result ol their decision to change productionschedules.By charging
Machiningwith this cost, they beeomeawanoof the overall effects
of schedutingchangesand the overaltcost to the companyof their
decision.SomejustificaUoncould be given to charging$3OOof this
to the PurchasingDepartmentbecauss.thatwould have been the
added cost to the companyif the schedulehad not been changed
and it is a direct result of the PurchasingDepaftmentb decisionto
go with a new supplier.
(bl $1,OOO savingsin costs due to layoffs in MachiningDepartment-
This should be credited to the MachiningDepartmentbecauseit is
a direct result of their decision to lay off machinists'
(c) S1,5OOcost of training in the MachiningDepartment-This should
be chargedto the MachiningDepartmentbecauseit is a direct
result of their decision to lay off machinistswho must be subse-
quently replaced,This would ensunothat they ane aware of the total
effegt of their decision on the overall companyinstead of iust their
own department.
(d) S2OTOOO lost profit on sales resulting from AssemblyDepaftment
downtime-This ls an opportunitycost that is not normallyrecog'
nized in the accounting records and, therefore,would not be
chargedto any departmenl In evaluatingthe AssemblyDepartment'
considerationshould be given to the shutdownthat occurred in the
MachiningDepartmentand its effects on the output of the Assembly
Department,
(21 Overall,the companyb present budget and leward (bonus)system would
appearto be causinga fack of goal congruence,poor communicationt
and an overatlemployeedissatisfactioncaused,in whole or in part' by
the following:
(a) The companydoes not appearto be followingthe basic conceptsof
responsibilityaccountlngand reporting(asevidencedin (1)).The
companyshould try to ensunethat the responsibilityfor a cost is
directly retatedto the authority to control the cost in order to estab-
lish a fair evaluationsystem.
(b) The companyappearsto havea "budget-constrained" style of eval-
uaUon,in that all managersseemto havetheir prime concern
focusedon meetingtheir budgetregardlessof tho overalleffect on
the company.A sprofit-conscious" style would be more appropriatot
Clppter 17
Ag

Cl7-2 (Concluded)

whery a -managerwould feel free to exceed his budget if it

would
benefit the overall company {without fear of aoreoJlv affecting
his/her evaluation).For example, Winston woutd have been prepared
to have the added cost of air freight charged to hirsoepartment,
resulting In a considerable cost savings to the overal company
(el The companyb present renrardsystem of giving
uonuses
managerb ability to meet budget tends to ptaci ioo mucrrbased on a
on the short-term, to the possibte detriment of thelong_term. emphasis
Managersare making decisionsto ensunotheir bonuses
maximizingthe overarfggrpany objective". An "-,,.,pr" instead of
of
might be the decision-ofValqueztolay off workers tJsave this
this period and, therefore, gat the bonus, evsn though $l,ooo in
reduced.This action wourd rssuft in adaed "o=t" ;ili,5oo output was
replace the workensin the next period. to
(dl Generaily,an ail or nothing bonus "y"i".
such as this poor
motivator,becausetoo much emphisis is pracedon is a
budget' This may lead to a lack oi goal congruence meeting the
this case-manipulation of the dati to meet the budget as evidenced in
ticular period and/or overatlemployee in one par-
' frustratio;;;;1, their inabit-
ity to meet unreatisticbudgets.
(el The companyb overalfattitude seems
to be that yariances
budget representpoor performanceby the ,"n"g"r;-This from
lead to serious motivationaland Inot"i" problems courd
Emphasisshould be ptacedon the raci tirat variances with the staff.
attention directors and indicate the need to invesiig"t;are only
were different frcm expected.The variances why things
may indicate that tho
originarbudget uraswrong and shourd
price of part # 88 would appearto be be up_dated(for exampre,the
unrealistic),that overalt com-
pany objectivesand/or proceduresneed
to be
things hava happenedthat are oifterent from ";;;;a or that
the control of anyonewithin tfr" org"iLtiorr. ext;;ilbut beyond
(0 The companywoutd appearto
be u-singa static budget for its evalu-
ations,as evidenc-edby the fact ttraivitquez
their bo-nusesfor being under ilteiioriginal and Diron received
period' ft is also evidencedby the budgeted costs for the
ractirrat Wnston had an annuat
rimit to the amount of air freiiht costsattoweo
ailowancebased on the totar purcrrases instead of an
Evaruationsshourdbe based.il ""ip"ri"on made in the period.
erpected p.sults using a fteribleruuog;t, of actuar resurtsand
based
activity achieved'Thi; is to isolat"-trtll"riances on actual levels of
cies/inefficienciesas op.posg{ ttrose caused by efficien-
to
ume of activity from that whict'"r"i caused by a change in vor_
o-riginariy;#;i";
 Chapter 17
440
I

c17-3

(11 (al Danielb perception of scott, the controlle4 is that she is:
(i) an accountant who knows and cares little about the production
aspects ol organization;
(21 unsympatheticand not helpful in providingsertices to the pro'
duction dePartments;
(3! an accountant who is unwilling to change or nequestexecutive
managementto make changesin reporting requirements.
(b) DaniePsperceptionof corporate headquartersis that it is:
(11 unfair beciuse they are using the cost report as the sole-iudge
of performance,thereby ignoring monErealistic cost comparisons'
product quality,employeepride, and motivation;
productionpeople;
iZ1 ins"niitiue io the needs and concernsof pnocess'
igi resistantto changein reportingpoliciesand budgetary
es,
(c) Daniel'sperception of the cost report is that it is:
(il a shortsightedreport overemphasizingcost minimizationas a
singfeobiectivei
(21lnflexible and not subject to the changingproductionlevelsand
operatingconditionsof a dynamicproductionprocess;
give
til a biaied repoft highlightingshortcomingsand failing to
pnoperrecogniiionto lmplovements in performanceor innovative
pnocesses.
(dl Daniel'sperceptionof himselfis that he is a:
(il qualiiiedproductionmanagerinterestedin a quality productat a
reasonableprice;
(2! frustrated managerunable to get satisfactorycooperationfrom
the AccountingDepartmentor executivemanagement;
(3) discour"gJd production managerrecognizingthat the current
reporting situation is nearly hopeless,and that others before him
have been equallYunsuccessful.
(21 Danieltsperceptionsadverselyaffect his behaviorand performanceas a
productionmanager.Operatingin a ttnowinttsituationin which he
believesperformanceneportsdo not fairly representhis accomplish-
ments, pius the inabilityto communicatehis desiresor needsto appro-
priate peoplein top management,can inhibit motivationaldesiresand
curtail incentive.
(3) Ghangesthat could be made in the cost reportsthat would make the
inlormationmonsmeaningfuland less threateningto the production
manageniare as follows:
(a) Includea monedetailedbreakdownof labor and overheadcosts.
(b) Use a budget allowancebasedon actualactivity rather than a static
masterbulget for measuringperformance'so that changedcondi-
tions, voluniechanges,and fixed versusvariablecosts are recog-
nized in the rePortingProcess'
-

ChWter 17
lUl

Cl7-3,(Concluded)

(cl Separatecontrollablecosts from noncontrollablecosts

and clearly
identify those erementsor the report for whicrr the production-man-
ager is diresily nesponsibte.Tlrese actions wiii p-ride a
mors
meaningfulanarysisor operationsand manago; wil kn;;Lsponsi_
bilities.
(d) A variance column that highlights both favorable and unfavorabre
circumstances would provide a less negauve report. significant
variancescould be hightightedto drawlftention to them.
cl7-4
(11 Functional_anddysfunctionalbehavioralnesponses:
(al Delayingaction on certain reports during pttioo"
of peak
could be dysfunstional. lf the reports contain information activity
immediateattention' any delay in action woulJ h;r; requiri-ng
tional. lf the reports continueio accumulatewith no tr be dysfunc-
place(i.e.,the departmentheads do not catch action taking
up during the tulls),
this definitely is dysfunctionatbehavior.
(bl Havingtoo many reports so that no action
or the wnongaction is
taken is a dysfunctionalnesponseand a gooo eia;;i"
tion o.verloqd.The departmentheads were unable to of informa-
supplied informationpnoperly,and therefore ttreyeiitrer assimilatethe
it, or used it incorecily. did not use
(c) Delayingaction untit remindedby someone
can be dysfunctionat.lf
9"!")rs continuafly take place "nJ re"ult in complicationsand/or
delaysin other departments,this tack of action is
(d) The departmentheads'actions""n dystunctional.
u" consideredboth functional
and dysfunctionat.The developmentof information
f;m alternative
aourrcssis dYsfunctionafto the firm becausethe
formal system is
not producingthe informationin a usableform
ano irtl process of
deveropinginformationfrom other "our"", probabry
However,the fact that the departmeni tr""o has a cost.
,r"" "dl" io generate
the needed informationfrom other "our"""
in
courdbe taken is a functionatnesponseto the order that action
probrem.

ra
 I

Chapter t7

C17-4(Goncluded)
was a
l1l The dysfunctlonal behavior that occurred In McCumber Company sys-
dlrect rcsult of management'slailure to recognize that inlormation
it
tems "r" Jyn"mic. Once a system is designed and lmplemented'
and incorporate any
should be iontinually rcviewed to acknowledge
changes.-A"y"i";situCy committeo' c-omposedof bolh systems staff
and to
and users, siiould Ue estatrtishedto reYiewthe present system
educate ui"rs as to Information needs and the uses of information.
During U," systems review, the committeeb attention should be directed
toward informagonneedei by department heads and the information's
form and timing. Unnecessaryreports ghould be eliminated, and individ-
ual reports sno-utObe rsdesigned-so tlrat only relevant information is
included. once the reporting system is rovised,the systgm should be
reviewed periodicallyto seJttrat it is functioning smoothly and to make
any necessarYcorections.
 CHAPTER18
DlscusstoilQUEST|ONS
Ol&1. Standardclr ar. thr predetermhed coet! of
rnelru{ac{uring prodrdr durhg a specifb pod-
od mdcr cunonl or anthipded opcrathg cr-
dtkrrr. Stsndardr airJ in phrning and wrtrol-
lirp opcntims.
Q1&2. A ftw uscr cil etgrdard catr are:
(r) oatablirhhgbrrdgntt
(b) conlrclling coetr by nrotivating .rnploy-
oot and rnrarurhg rtfpbncier
(c) rirplityhg coting preeduroo and epc.
diilhg cod roportr
(d) aaaigning cortr lo materials, work in
proc.sr, and finklhrd god inventqicr
(r) forming the barir lor ostablishing con-
lrecl bidr and for retthg saler prbes
Ot&3. To tol rabr pricct, exccutivesneed cogt hfor-
malion lumished by tho accounting depart-
rnont Sinct $ardard cod! repr$€nt the ost
that shorrld bc a&ained h a weil-nanaged plant
oporalrd al nollral capacity, thcy arr ideally
cuitrd lor fumishing hfonnati:n that will enablc
lhr aalor depaimont to prbc products.
Eudgetr are urcd for planning and coordi-
nalhg lulurc activitics and tor curlrolling cur-
rrnl rliviticr. ttlhcn budget figurec erc baged
qr rtendad c€lq the aocuracy
ol lho resulting
brrdgct i! strwrgly hfluenced by the retiability J
tho rtandard costc. With standards avaihLb,
prodtrction figurer can be translated into
the
manufacturhg costr"
Q18-4. Sbrdards are m htegral pE t of
irb order and
proce$ co3l accumulation, but do nol
com-
pdr a lydom that ouH b. utilized h licu
of
sro of lhc accumulaftxr rnothoclr. C,ets rnay
be r.cumuhtcd wilh or without thc use d stan-
ct rdr.
Q1&5. Critcria to bc used wtron rolecthg
thc opera-
lirnal activitiea lor which rtEndar& are lo
be
rrl includc thc fdbrrhg:
(e) Thr activity should be repetitive
in
nalur., with thr repetition occurring in
reldively short qrcles.
(b) The hpd-and output (product
or rervice)
of thc aclivily shoub be measurabteand
unilonn
(c) Tho obmonlt ol coal, ruch as
direcl
meltriab, d,act labor, snd facto.y orer-
hoa4 mud b. dsthed cfoarly at the unit
lovol of act vity.
Qt8-8. Norrtel or currntly attainablo
standards arc
proforablo to th.oretbal or Ueal siandafdr
for
(a) porformancc rvalualion and/or emptoyee
rnolivation, qn!, (b) budgeting and ptanning.
Thoorctirl or Ueal ctan&rds-are nol realisti-
cllly attainabtr. Ar a con3oquenc. of using
/t43
rucfr standards, employees rnay bocanr dir.
couragcd ralher lhan rrolivated, and budgetr
or pbns arr likely to be distodod end unroli-
abL,
Qt&7. Behavinral bsuer lhat need b br cqrsUend
wfien selec.ling tho level of portorrnsnc. to b.
ircorporated into ctandards inctudo tho fdl*,
hg:
(a) Thc standards musl bo fcgitimatc. Tho
atandads noed not rellect thr actual cogl
ol a ahgb ilem or o7clo. Fbrrew?, lhcy
iteally will repraent the coci bst thould
bo incuncd in the productbn of a giron
produgt or the perlorrrlance ol a jiven
operatian.
(b) The standardr musl be attainable. tt/trcn
the atandards arc set too high, thc
ropealod failure to chievc them wilt tond
lo reduca thc rrotivatbn lor attahment.
Thc cqrvenr b sbo trur. Standadr h8t
aro loo looro represonl an invitatiqr to
relar.
(c) The participant shoutd havc d voice or
influencr in the establirhment of rlan-
derda and reeulting pedormancr mea-
sures. Innolvement in the formutatbn ot
standards gives the participant a gmalor
sense ol understanding and commil-
ment.
Q18-8. (a) The role of the accounting department in
l h e e s t a b l i s h m e n to f s t a n d a r d s i a t o
determine their ability to be quantified
and lo provide dollar valuee for
ryecific
unil standards.
(b) In the establishment of ctandards. tht
lole of the depariment in wtrbh thc pcr-
formance is being mearured ir to prwido
hformatim lor realistic dandards, and to
albw tor subsequent perfonnance evalu-
atkrn lor the purposc of delecthg prob-
lems and irprwhg perfomance.
(c) The role ol the industrial engineering
. department h thc estsblishment of ctan-
darde b to provide reliable nreasurer c,
phyaical activitieg related lo thc rtan-
dardr ol performance, and lo vcrity tho
consirterry of the pertomancr botwcon
departrnents.
Q1&9. Thr factory overhead variablo etficiorrcy
varF
anco b ! ,nea3ur. of tho efficient or ineflbirnt
uac ol lhe tase. thet wac used in allocating
fectory overhead to production. To thc crnont
that the activity used as an allocatircnbaso
driver variable lactory overhead, lhc variablo
efliciency varisncc is a mearurc oil tho
cort

444
savings or cost ircJnence that is attributableto
tho etlicieot or hefficient uso cl lhal acfivity'
Thr factory overhead spending variance ir a
01&10.
mealurr cl the ctficient or inefficientuse of the
varbur itsns of tsctory ovefiead ll ir caused
by dilfcrmcea in thc prices paiJ lor thc itens cf
ovcrhcad actually used (i.c., lhr differences
between tho ac'tual quantity at thc aclual prbe
and the sctual quantity at the standard prico for
all ilomr ol lactory. overhead) and lhe ditf er'
encee h the quantities ol the varbus ilerru of
tactory ovefiead adually used (i.e.' the difler'
ences between the standard quantity allorved
for the actual level of the aclivity base at the
etandatd price and the actual quanlity used at
thr gtandard price lor all items ol lactory over'
head).
01&11. The factory overhead volumc variance is a
measute ol the under' or over'utilizalion of
pbnt failitier' lt it tho diflererre between the
total budgeted lixed factory overhead and the
amounl charged to (or chargeable to) aclual
production based on the standard quantily
allowed for thc activity base used lo allocate
overhead. Thc volume vatiance may oo
thought of as ttle emount cl under' or ov€raP'
plied budgetedfixed lactory overhead.
01&12. Atter variances have been dEtermined'rnar:'
agemenlshould:
(a) decide whether each variance ig suffi'
ciently signilicant to require invesligation
and explanaliro
(b) hvettigate and obtain, frorn the resPo.r-
sible department head, explanationsof
signilicantvariances
(c) take coneclive acticn and recognize and
reward desirable performance,whsro
sppropriale
(d) revise standardsif needed
018-13. (a) Featuresol lolerance limils include:
('l) A standard cost control syslem is
established,specilyingexPoctedperfor-
rnance levels.
(2) An hforrnation syslem is designed lo
highlightthe areas most in need ol hves'
tigntkrnand poesibleconeslivc action.
(3) Variancc rangos for areas and ilems
are compuled. Managemenl does not
spend tirne on parts of the operations
thal producr satislactory pcrlormance
leveb wilhh theso ranges.
(4) lvlanagemenl's Ettenlion and etlods
arr csrcentraled on signifi-nt variancec
frorn expccted resuhs. which sigoal the
prosonca of unplanned condilions need-
ing investigalion.
(b) Tolerance limils have potenlial benefits
because they may resuh in more eftec'
live use ol management time. Thc rnan'
Chapter l8
age/s tirne b not wetod on lho prcest
ol kJentilyingimportant problems or in
workhg m unirnPottant ones. Thc man'
ager should bo able lo concenlratb
etforls on inPottant problems' becausc
the teclnkPc highlightr lhern.
(c) lt may br difficult to determine which
variancor ere rigrrilicant. Also. by focus'
ing on varianceg abovc a cadain level,
other sscful hformatbn, suclr as trends'
rnay not be notbed at atl oatly stago.
ll thc evaluatbn lYltrn b h anY waY
dircctly tied to thc variances, subordi-
nals! ttlsy be ternpled lo cover up n€$a'
tive exceptbns or not tePort lhem al all.
Jn addilirn, subodinatea tnay not receivo
t e i n f o t c a m € n tf o r t h o r e d u c l i o n a n d
rnahtenance cf coat leveLg,but only rep'
rimands tor those itemc which exceed
the range. Subordinate morale rnay sut'
fer because of the lack ol Positive reh'
lorcemenl for work well done. Using toF
erance limits rnay also atfest supervisory
emgloyeer in an unsatislactory m'vlner'
Supervisorsmay feel that lhey ars nol
getthg a cornplete review of operalions
because they are always keying on prcb-
lems. ln addiliqt, superisors may think
that they are excessively critical of their
s u b o r d i n a l e s .A n e g a t i v e i m p a c t o n
supervisorYrnoralernaYresuh.
01&14. Overemphasison prico variancescan resull in
a large number of lorr cast vendors, high levels
of invenlory, and poor quality materials and
parts. Since lhe emphasig is on price rather
than quslity or reliability, purchasing will likely
have a large number ol bw cct vendors avaiF
. able, who can be played cre against the other
to got the lowest pqssible prices. ln addition'
purchasingwill likely purchase invenlory in
largo quantities to take advantage ol purchase
discounls and to redwe the need to place rush
orders that resull in premium prices. Inventory
tends to becorne unnecessarilylarge, resulting
in excessive€rryhg costs, and rnaterial qualF
ty tends to decline, resulting in poor producl
quality andor excessivespoitage,scrap, and
rework
Overemphasison efticiency variances can
reault in long production rung, largc work in
ptocoss inventories, and attemptr to control
quality through hspestbn alone. Long produc'
tion runr reguire lewer mschino set ups and
reduce tho amounl ol inelficiency resulting
frorn thc leaming tequired to changc produc'
tion lrorn one product to snother. Large work in
ptocoss inventorier resull frgn bng prodrrclion
runs, and large invenloriegare likely to be
viewed by departmentmanagors as buftero
Clppter 18
45

thet ern bo utod to rbrorb rnschino broak-

rdownr, rmployrt ebrrnlorism, end rlack
demand for thr product. Atthough carrying
hrge hvernori.. b €3ty, thr carryhg sn do
not affri thr offbienqy yariansf, whi*r in tum
oncourlgor d.plrtmantrl rnrnagrn to ovrr-
producr. Shco offlcioncy variencot meerur.
lho utr cJ inRlr h nhtixr to ouput volum,
rtto.tr b sttrol Crrsfrtyl.nd to bo orisrtd to
intprctbn elone. Stopping lho procorr lr
rrprrinrnl wlh allemdivc prodrrtbn nrethoc!.
lo pormanen0y conect a problem or improv,,
Cualty can rccult h an unlarorable labor rffi
cbncy v8rianc.. In cqrtrast, increasing tht vol.
umr of prodrstbn and rrrodrhg or di*arding
dotccb har e rnaller inpact sr rtrr cttbienci
varianca.
 Chapter18

pGBClsES

El8'l = Amount
QuantlW Unlt Cost
AetualmaterlalsPurchasod $60,345
{,5OO lbc; $13'4{ actual
at aCtual OOSI""""r""""'
Actual matarials Pur'chassd 13.5Ostandard 60,750
at standald cogt""""'o"" 4,5OO
MateriatgPunchascPricc :S
(4O5) fav.
Yariancc 4r5OO Ll.ogi
Quantltv Unlt Cost = Amount
Actual matariala used 8t 553,640
4'OOO lbg. $13.41 actual
actual cost
Astual materialg usod at 54.OOO
standard GoSt""""""""" 4rOOO 13.5Ostandard
Materials Prico usago S (36O) fav.
VafianCO ...."t"tttt"ot"tttt"' 4,OOO 9l.oe)
QuanUtv Unit Cost = Amount
Actual materiat3 usod 8t s54,OOO
standard |ElO8t..."""""""' i,o6o lbs. $13'50 standard
Standard quantltY allowed
13.5Ostandard 51,300
at standald cogt.'.....o""" 3.800
13.5Ostandard 3 2.7OO unfav.
Materials quanUtyvariancc -2AO. lbs'

El8-2 = Amount
Quantltv Unit Gost
Actuat materiab Purchasad
..'.....-.'.....'. 5,OOO 522.10 actual ${1o,5oo
at actual ClOSt
Actual materials Purchg$orl I12.500
at standald coSt......'t'....' 5,OOO 22.50 standard
MaterialspurchasoPrico (2.00O) fav.
5rOOO $__J.49) S
variance .r........r..r............

QugnUtY Unlt Cost = Amount

-
Actual nnaterlalspurchased a

at standardcost.,.,...or..-.6,000 $22.50 standard $112,5OO

Actual materialglssued at
standardcost..,,....,.o...r..,
4.4OO 22.50 standard 99.OOO
22.50 standard :B 13.5oo unfaY.
Materialsinventoryyariancc __q99
 Clppter 18
447

El8-2"(Conctudedl
Quantitv Unit Cost = Amount
Aetuaf materials issued at
standard CoSt.....,...r........ 4r4OO $22.50 standard
Standard quantity of $99,OOO
materlals at standard
GOSt aa...aa..........r..o............ 4.300 22,50 standard 96,750
Materials guanUtyvarlanoo _t_99 22.50 standard l-3e9 unfav.
Et8..?
(rt Quantitv Unit Cost
Astual materials purchased = Amount
at actual Cost..................6,OOO
Actuaf materialspurchased $4,2Oactuaf $25,2OO
at standald cost........r..... 6rOOO
4.OOstandard 24,OOO
Materials punchasoprice
YafianCO ..rr....r................. 6,OOO $ .2o _Lli2oo unfav.
Quantitv x Unit Cost = Amount
Astuaf materials used at
gtandard Gost ......r....ro.....
Trloo 94.OOstandard
Standardguantity allowed $28,4OO
at standatd cost...........r....6.9o0
Materials quantity variance 4.OOstandard 27.600
200 4,OOstandard g__e99 unfav.
(21
Quantitv x Unft Cost = Amount
Materialsbeginning
_ inventOt]f......................... 2rOOO $4.12 actual
Materials punchasodduring $ 8,240
If|O11th...................r..........
I,O00 4.2O actual
Materialsavallablefor use.. I,OOO 25.200
Materiafslssuedto 4.f B average s?3,44O
produCtiOr1.......................
7rf OO 4.18 avor:lgo
Materialsendinginventory Too 29.679
4.18 averago _$_9,762
Quantitv r Unit Gost = Amount
Aetual materiats used at
- actual averago cost........ 7rl OO $4.18 average
actual materials used at $29,678
stan dard GGISI................r. Trloo
Materialsprice usago 4.OOstandard 28..400
varlanca......o....... 7rl OO $ .18 -$_ff78 unfav.
 Chaptar 18

El8€ (Concludedl
Unit Cost = Amount
(31 QuantiW
Materialsbeginning 9.12 actual $ 8,240
inventory .t"t""t"'rtt"tttt"' 210oo
Materials Purchasedduring 25,260
6,000 4.20 actual
mOnth...ttttt"tt"t""t"ottttt"
$33,44O
Materialsavailabletor use" 8rO0o
Materials issued to 8r24O
pfOdUCUOfl."t"t"""""""" 2rOOO 4.12 oldest
5.100 4.29 nowost 21,420
Materialsending inventorY _900 4.2O newest
Quantitv Unit Gost = Amount
Actual materials used at $ 8,240
actUal GOSI """"""""t""' 2rO0O $4.12 oldest
5.1oo 4.2O newest 21.420
Trloo $29,66O
Astual materials ussd at 4,OOstandard 28.400
standard cost.........."'r"ot 7,10O
MaterialsPrico usago l-11260 unfa%
YafianCO .r..t""tt""'Dtttt"tt'

Quantitv Unit Cost = Amount

(41
Materialsbeginning $ 8,240
inventoql 2,0oo $4.12 actual
Materials Punchasedduring 4.2O actual 25.200
mOnth It.ooo
..t...."tttt"t"""o"tt"'
$33,44O
Materialsavailablelor uss.' 8r0oo
Materialsissued to 25r2OO
production 6t0oo 4.20 newgst
1.100 4.12 oldest 4.532
4,12 oldest S. 3,708
-
Materiatsending inventorY. _900
QuantiW Unit Cost = Amount
Actual materials used at
aCtUal COSI .........'.........'.r 6,000 $4.20 nswest $25,2O0 -
t l oo 4.12 oldest 4,532
Trl oo 329,732
Actual materials used at
standard GoSt.......r..........T r l o o 4.OOstandard 28'400
Materials price usago
3 1,332 unfav.
varianCg .....r....r...
r
 dlg.ptcr rs
119

Et8:{
Houn Rstc = Amount
Aetual tabor hours rvorkod.. 650 $ 9,8O 8ctu8l
Actuaf labor hours work6d,. 650 $51370
lO.OOstsndard 6.500
Labor rate varialtco............. 650 qj.2qt S (i3o) fav.
Hourr , Rate = Amount
Aetual labor hours workod.. 650 $t o.oo standard
Standald hours allowed $6,5oo
(lr2OOunlts r1l2 hour
1abOrf ...r....ror...............o.... 600 lO.O0 standard I,OOO
Labor efflclency varlancc..., 50 |O,OOgtendald $ 5OO unfav.
Et8-5
(11 Quantltv Unlt Cost = Amount
Actual materials purchased l,5oo
Actual materlals purchased lr5OO $3.8O actual s5,7OO
4.OOstandard o.ooo
Materlalspurchaseprtce
Vafia nCg .r........D............... 1,5OO $ (.2o1 l-(3OQl fav.
Quantity -Unlt Cost = Amount
Agtual materlalsused........r 1,35O
Actuat materlatsused,..r,.... '1,35O $3.8O actuat $5,130
4.OO-Etandard 5.400
Materfafs prica usage
VafianCO ...o....r.....r...........
1,350 $ r.201 $_EZO fau
Quantltv r Unlt Cost = Amount
Actual materialsused ......... 1,35O
Standard quanilty allowed .. I,O20 $4.Oo standard $5,4OO
4.OOstandard 4,Ogo
Materlafs guanUtyyariance
_930 1.OOstandard $!,329 unfav.
I2l Houns
-Tio- x Rate =
Astuallaborhoursworkod.. Amount
Actuallaborhourcworkod.. 3rO $12.20 actual $3,782
Laborrate variallcrg............. 3lO
1z.oo standard 3.720
$ .20 .unfav.
$_0?
Hours r Rate = Amount
l$uqt faborhoursworked.. 3 l o
Standardlaborhoure $12.0Ostandard q?,72O
allowed...r,.....
340 72.OO
standard
labor"rri;;;;#il::.: (301
4,OgO
72.OOstandard $ (geQ) tav.
 Chaptcr 18
150

E18-6
" " """' -'-':: " "" " " "' $166,000
Actu al la gto ry ove dl ea d "" ::;':'::: :: ^ -
eabIeto:"Y:1 tP1.::17 rate)..
ililari-o""?rt " " d.chare 137.500
; overhead
r 312.5o -
iil,ffir-"t-"i;;ffip ead varianco
."."d """ a S 28,5OO unfav.
o"Lraff factory ovefi
t a aoaaaaoaa

gad ..........t.......""""'o't"""""'!"""t"""' s166,OOO

ACtUal taCtOfy OVgfh
allowed:
--v;;;tleallowancJUasedon standardhours
Budget machine
overhead(11'ooostandard
hoursattowedi'sn.sovariableovefiead rate) s49'5OO
96'000 145.500
Fi;;;;;;rreal ruageted"""""""""""""""' S_ 2O.5OOunfav.
COntfOltablg VafianC1O...........................o.....o......""""""""""'
allowed
Budget atlowance based on standard hours s145,5OO
(ffOm abOVe).r....................o............""""""t""o""'o"t""to"'
Standard factow o"e rhead chargeabt^"!o g"duction rat6)'. 137.500
(t I rooo standard hours ailow;o r sl2.5O overhead 8.OOOunfav.
VafianCg rrorrorororLro....o...rot..."."t""""ot""""tt"tt""o"oo'
-t
VOlUmg
$20t5OO UnfaV'
COntfOllablgVafianC8.......................""""o
8.ooo unfav'
volumg yariance............................!o...'r.....
orrerall factoly ovefiead variance """"o"r 128'5oo unfav'

Et 8 - 7
" " " """o""""""""r" $13O,OOO
ACIUal f aCtOfy O.Vefhgad o....................."
CianOarO
- overheadchargeabteto actual producUon 125.400
overheadrate)""""'
iS,ZOOstandardhours allowed x822 S 4.600 unfav'
Overatt.f actory overhead variance""""' ""'t""""""'
r

"""""""o""""""' $13O,OOO
Agtual factory overhgad"""""""
Budget allowancebased on standard hours:
variableo""ttt"iJis,zoo standardhoursr 36) 33!'?99
90t0OO 130.200
Fixgd ovgrhgad """""""""""o""""""""""""
GOntfOllable VafianC18......................"""""""""'

Budgetallowancebased on standardhours s130,20o

(ffOm abOVe)...r......i..........................'.r.........or..........""""" v

Standardtactory overneaOchargeableto production t 25.400

(lfOm abOVe).................o.................................""t""t"t"'oot'
3_ 4.8OO unfav.
Volumevariance aoaaaaaraaa.aa
"t"""o"t""'

""""""'r"""o'o (2oo| fau

$
controllablg varianc9...."""""""""" 4.8OOunfav.
volumg variance ......""""""""""o' ""'r""""""""""
Overatlfactory ovefiead variance -$-:!J99 unfav'
 Ctnpter 18 t*51

Elg-g ,

Agtual factory ovgrhgad ...-...........-...rD.....................--...........sl2l,OOO

standard overhead chargeabreto actual producuon
(4r2OOgtandard hours aflowed r $2{,gb overhead rate}....
l04.l go
Overaflfactory ovorhsad variance
_L!grq40 unfav.
Actual factory ovgrhgad ..'.........o..........t.o............,....o..o.........
Budgat allowancebased on actual machine hours: $12f,ooo
Variable overhead (41600actual machine
hours r $5.8Ovariable overhead ratef .....,.. $26,gBo
Firgd ovgrhead budgeted ..,..o...Dr.........r.......... 95,500 I l2,1go
Spending variancg ...........,..oerorr--r'orr j$__e,820 unfau
Budget allourancebased on actual machine hours.......D......,
Budget allowancebased on standard hours attowed: $112,180
variable overhead l4r2oo standard machine hours
allowed r $S.8Ovariableoverheadrate)..... g ZCTSOO
Firgd ovgrhgadbudgetedr'........r.......i............ g5.5oo
109.960
variabla efficiency variance....r.o.......'.r.......o.,.............,r..r......
_S 2.320 unfav.
Budget allowance based on standard hours allowed.,..........
Standard overhead chargeabrE to actuar production $f 09,860
(4,2oostandardhoursailowedr $24.gb;verrreaa
rate)..., f 04,t 60
volume variancg t'o...........r......r.............o..r..r.......rr.o.........r.....
E_5'7O9 unfav.
spending variance "...............'........o.....r....r......................o....
variabfg efficiency variancg......r....................r.............r......... $ 8,820 unfav.
volumg variancg "'....r........r.'.........i.......r...............,......rr...r... 2r32O unfav.
overall factory ovgrhgad variancg.,r....r.r.,...r....r..,.....,r..........
5.7OO unfav.
_$_16.840 unfav.

r t \
 \
.\

Chpler 18

El8 -9
AgtUal ladtOfy OVgfigad ...............................o......tt"""""""t' 3 1O,5OO
--(''OSO oyerhsad chargeable to actual prcductlon
sundard I 0.250
Standard hOUrSatlOWedf $5 OVerheadrate1...........
_$ 25o unfav.
Q1fgfall faCtOfy OVgfhgad VaflanCe ............o....'....""""""'o""'

Astual lastorY overhead 3 1O,5OO

Budget atlowancebased on actual hourc:
VJriaUleoverhead(l,9OOactuat hourg r Sl.5Ol S 2'850
FiXgd OVefhgad ............................................... 7.OOO 9,850
:3
65O unfav.
Spending variance
Budget aftowancebased on actual hours ffrom above)""""' t 9,850
Budget atlowancebased on standard hours:
Variableoverhead(2'O5Ogtandardhours r
s1.5Ol rr.r,.o.....o.......,.................................i. s 3to75
Fired overhead 7.OOO I0.o75
Vafiablg effiCignCy VafianCO........r...o...!..'...r.......r.......t....."t"'

Budget allowancebased on standard hours (from gbovol.... 3 1O,O75

Standardfactory overheadchargeableto productlon
(from above)..,.. aaaaaaaaaaaaaaa
10,250
Volume varianCg .....r.....o"'.o.'t....'....."t""' s (17s1
fav,

Spending VafianCg...............o...o..........,............................o.r... 3 65o unlav.

Variable effiCignCy VafianCO..................r.'............'o...o.......o."'
(2251lav.
Volume Yariance... aa rt oa a ara aaaoa aaaaaaaoaa" " t ttto"""
(1751tav.
Ovgrall faCtOfy Ovgfhgad VafianCe r..o.........r..'...................."" 3 25O unfav.

El8-10
ACtUal faCtOfy OVgfhgad r.....r.r............,......r...r.......r.o.....r.r.t..r sToo,ooo
Standardoverheadchargeabteto actual produc$on(38'OO0
units r 2 standard hours por unit r $9 ovefiead rate|"""' 684.OOO
Ovgrall faCtOry OVgfhgad VafianC9...........,,...............r............ S 16,000 unfav .
 Chapterta
453

E18-1O,(Concluded)

(1) Tlro-variancemethod:
Actual factory ovgrhgad ...........rrr.r...r...........r.r.......r.........r.r..
Budget allowance based on standard hours ailowed: s7OO,0oo
Variable oyerhead (ggrOOO units r 2 standard
hours per unit x $6 variable rate) .....r......... $456'000
Fixed.overhead(SO'OOO budgeted hourc
X $3 fiXed riate)..................................,......r..
24O.OOO 6g6.ooo
controllablg rrarianc€.-...........r...'.........r........................rr......r
_L {.OOO unfuv.
Budget allowance based on standard hours ailowed
(from above)ttttt"t"4.t....t...r...............o...h.r...........rrr..r..rrD....
-
standard overheadchargeabreto actuarproducffon (sa,ooo $696,OOO
units x 2 standard hours per unit x $9 overhead rate).......
vofumg
694.ooo
variancg "tt1..r....rr...r...........r.D...r.rr......................r......
S_j!-&ggq unfav.
controllablg varianc8....r...r............t.....D..r...........,r.....,......or...
4'OOOunfav.
volumg variancg t".r.....r.....-.r.....r........rr....r.........r...r.!r...r...r... $
ovgrafl factory overhgadvar|ancg.......,...................r.r...D....,,. 12.OOOunfav.
_$ 16,]0o9 unfav.
(21 Three-varlance.method:
Actual factory ovgrhgad r.....r........ro.r.r..........r....r..........r..t.....
Budget allowance based on actual hours $7OO,OOO
worked:
Variable overhead (TTTSOO actuaf hours
x$6 variabfe rate)........,..,......,.....r...o........,.
Fixed overhead (gOrOOO $465rOOO
budgeted hourc
x93fixgdrate).,..,............1..........,..r............
Spgnding
24o,ooo 705,OOO
variancg..........t.r.....r..rr.........rr......r....r...r.,.....

Budgetallowancebased on actuat
hours worked
tlry
- 1!ove)ttt.tr..r.....................r....r.......!...tr....r................r $7O5,OOO
Budget ailowance based on stanoard hours ailowed
(from above)ttt.......r..........r..r...r...........r.......r..D....r.........r....
.-
variablg efficiency variancg...r...D......r.......r....r.................r..... 696,000
Budget allowance based on ]L__grgqA unfav.
standard hours atowed
(from above)...............r...,.......
^-
standard overiread crrargeabil i;'#;; $696,00o
units x 2 standard hoJrs per unit ilil;;;;'&ft;
volumg
x $g overtreJd otry....... 684.000
variancg r""'r'r"r...r.......r.........r.r,................r..trr.......r.
]EIS.OOO unfav.
.Spendingvariance .............,........ " " " "' t " " " " " " " " " " " " " r" " "
b le effi Cien Cy Vafia n Cg.....,..'
_YbflA $ (5,ooo) fav,
volumg variance.:..--_-___-__r.,..,....r......r..r.......o.r.r...or...o......... 9r0OO unfav.
overari
r*iil;;;;';;;.:::.:.::...::::::..::.:................. 12.0OOunfav.
1 { \
ra a aaa a aa a a a a.
aa a
_L _10pgq unfav.
 Chapter 18

El&11

Materials Price variance:

Actual Standard
QuantitY Cost Standard Actual Materlals
{LFs'}, - Per Lb' Gost . Cost Prlce Varlance
Ingredients
$ 6,500 unfav.
Cocoa nedtls'..... 325rOO0 $eO $ 195,0q, $2Ol,5oO (28,500) fav.
Mi|k...........t........ 1t425IOOO '5O 712,5OO 684,0(X'
'4O 100.0q) 97.500 (2,5OOlfav.
Sugar..r.'..........,! 25O'OOO
31.OO7,500
- - :198{l,ooo
:: -:$(24,500)
fav.

Materlals mix varlance:

Standard
Forrnula
Actual for Actual Standard
QuantitY QuantitY Difference Cost Materlals
(Lbs.l (Lbs.)'- in Lbs. per Lb. Mix Variance
Ingredients -
Cocoa Ue?DS...'.. 3251000 32OrOOO 5,000 9.60 $ 3'0OOunfav.
1r425rOOO 1r480r000 (s5,0001 .50 (27,500)fav.
Mi1k....................
200.000 50,000 .40 20.000 unfav.
Sugar.t.r,....,....... 250.000
2.OOO.OOO 2,0oo,0oo 0 fav.
-

'cocoa beans = (8oo+ 5,000) x 2'0o0'ooo

Milk = (3,7OO'+5,OO0)x 2'OOOTOOO
Sugar = (5OO+5,OO0) x 2'OOO'OOO

Materialsyield variance:

lbs. input + 51000lbs' ="""'t"o""

Expectedyield: 2'OOO'OO0 400
ACtUal yield in Ong-tOn batCh€S....,........,...'..'.............'..r.t.'." 387
UnfaVOfablg yigld in batChgs ...............'...'.r.'.'....'..r.r......."r"'
13
Standafd COSIpef One-tOn batCh...........'...............r'..rr....r.."' s 2,530
Matgrials yigld VafianC9...,........,......,..r.o'.........r...'.......'.....t"r932,890 unfav.
 Chapter18 455

ela42

(1) Materials purchase price variance:

Actual Standard
Quantlty Gost Materials
Purchased por Standard Actual Purchases
lnErcdients in Llters Llter $]_ Cost Price Variance
Echot:..;.........,..... 2s ooo $-zoo f srooo $ sr36s $365 unfav.
Plotgx.....t..r....r.r!.... i3 0OO .425 S'S2S 6'1240 715 unfav.
89n2.......'...............
40 ooo .iso orooo srgao (160)fav.
CT-40"'...r...r...,.,..... 7 5OO .3OO 2.ZSO 2'.iO (3O)fav.
$18,775 $'l9.665 $99O unfau

(2) Materials mix variance:

Standard
Actual Formula
Quantlty for Actual Dlffen Standard
Used ln Quantlty ence Gost per Materials
lnqredients Lttens in Litersa j4 Liters Lfter Mlx Variance
Echo| .....,....1...,...,... 26 SOO 2g OOO (1 2001 $.20o 9(24O.0O)fav.
Ptot9r............,........ i2 660 i4 OOO (1 340) .425 (569,50) fav.
Bgnz ...,r.........,.r...,.. 3Z 4OO 95 OO0 2 400 .150 360.00 unfav.
C T - 4 O..,..............,....T l 4O TOOO 140 ,300 42.OOunfav,
g1-org 84 ooo o @s)
fav,
'Echol = (2OO+
600) x g4 O0Ollters
Protex = (1OOr. 6O0) x 94 000 llters
lenz = (25O+ 600) x 84 O0Otiters
CT-4O = (5O+ 6O0i x 84 0OOtiters

Materialsyield variance:
Erpected yiefd: 84 OOOllters input + 6O0 liters E''..--.-'r,
Agtual yield in 50o-lltgr batchgi.........,..r..r.......D.....r.r............ 740
136
I:frYoTbte yield in batchgs ............r..r.....r.........rr..,.,...r..r.,.. 4
-o-"-noltdcost per SOo-lltgr batch .........r,.............................. $13s
f,'latgriafsyigld variancg..r............,.........r....r...r.....r........r.......
$SCOunfuv.
 Chagtar18
1fi

El8 -1 3
BENJAITIIHPRODUCTSCOMPAHY
DePartment2
FaEtoly €)vertreadVarlanco Report
FoiMonth Ending June 3O

l2l (rl (3) (4)

Budget Budget Controllable
Allowable Allowance Varianco
Normal Standard Actual UnfaY.(Fav.l
GapaclW Houru Cost (31- (21
Dlrgct labor hourg ................'. 6000 Sloo
CapaClU t...o........t....."ttt"ttt"t' loo% -Eolo

VariablefactorY overhoad:
lndirgct 18bo1.........r..'t't"t"' $ 2,4OO $ 2,o4o $ 2,1OO $60
ManufagturingSuPPli€3...... 2 , 1 O O 1,785 1,8O5 20
t....t..........tt!"ttt"t'o" 800 680 850 (301
Repairs
poworr and llght...-.... 100 85 l05 2A
Heat
TotalYarlablgcost .......... $ , , 5 . 4 o o 3 {.59O $ 4.660

Fired taetory oYefisads

Supervision $ o,ooo $ o,ooo $ 61200 200
lndirect labor 514OO 5,4O0 5,40O o
Manufagturing 8upp|183...... lr02o 7,O2O I,O20 o
MaintgnallCo .'...r................ 960 960 960 o
Heat, powor, and light r.....r. 120 120 720 o
Machinely depreciaUotl ..... 540 540 540 o
360 360 372 12
lnsurance and targs ".'r.r.r..
Total firgd co8t..'............ $14.4oo $14.400 $14.612
Totatfactoryoverhead...........J!-g€Oo $18,990 s19,272 w
unta%
Standardfactory overhead chargeable to
work In process (5'tOOstandard houra
r $3.3Oratel _l 0.830
Volumg Y4riancg.r.o..rr.........D............r...... s 2 , 1 8 0unfav.
Reconciliation of variances:
Actual tactory ovgrhead .-.ri.....!.......'. 319r272
Standard factory overhead chargeable
to work In procesS ........'.....""""'o' 16.830
Glerall factory overhead v8rlsnce ..... 3 2.442 unfav.
Controllable nrlanCo .."""""""""""' s 282 unfav.
VoIu m g Yariance.'.""'o"""""""o""""' 2.1g 0 unlav.
Overalt factory overhead varlSnco ""' 3 2,442 unfav.
< \

Clnpter t8
457

E18.I4 APPENDD(
$15,OOO budgeted overhead
2,5OO budgetedm-chino houF = $8 overhead tato

SSTOOOvariable overhead
2r5OO budgeted machine hours = $2 variable rate

Agtuaf factory overhgad.'........................r.....rr........o.....r..r.....

standard overhead chargeabfeto astuar producuon $f 6,500
(2r4oostandard hours attowedr $o ovirtrJal ratel..-..or...
ovgrall factory ovgrh gad variance .............r.r t4.400
lliloo unfav.
Agtual factory ovgrhgad...........'......D...................,...........Dr.....
Budget allowancebased on actual hours: $f 6,500
Variable overhead l2rTOO
actual hours r $2|...
FiXgd OVgrhgad.........................r..r.............r....
$ 5r4OO
1O.OOO
spending variancg.........r.r..r...r.......r..........t..D....r.r,................
15.400
_S_l,.:!gqunfav.
Budget allonrancebased on actuat hours (from abovef
.........
2'7oo actuaf hol,' r $o factory overheadratg...,.,................ $t5,4oo
ldfg capacity
16 .200
variallco..r..........-r..r..r..rrro.rr.rrrr.r...o..r............rr...
fav.
2r7oaastualhoTs r $6 factoryoverhaadrate (from
standardfactoryoverheadchirgeabreto pruductionabove|
(from
$to,zoo
abovef tt"""t"""t'....a.D...a.a...aa.r....a............r..........o..r...........
Efficigncy varianco .......'....r..........r................oi.....r.r.t..o......... 14,400
_$_l.8OO unfav.
spendingYariance.........-......r.....r..............r......r....................
ganacftyvarialtcG) $ 1,1OOunfav.
l-d.l-e .........."::::'..,................r....r..,......r........ (8O0| fav.
Efficiency Yariancg .............r......r....................r............ro.......r
Overaflfactory overhgad variance........... 1.8OOunfav.
-jFl.lOO unfav.
 \

Chapter18
48

E18.t5 APPENDX
$t6'8oO budg"t"d o""th""g = $14 overheadrate
iFoTuageted laborhours
$4,8oO variable overhead = $4 variable rato
iFo-oE-dg eted labor hours
$15,8OO
-Ct"nJ"tU
ACtUal taCtOfy OVefhgad......................""tt"""tt"tt""t""""""
- ovirhead chargeableto actu8l producUon 16.380
overhead rsto)""""'
d;to standard hours allowod I $14 3' (58o1fav.
orreratlfactola overhoadvariance I ta a a aaaa a -a 4"""

$15,8OO
Agtual lactory ovgrh9ad..r......."""""""'
Budget allowancebased on actual hours:
Variabteoverhead(7r12oactual hours x 94|"' $ 4t48O
I2tOOO 16,480
Firgdovgrhgad"""t""""""""""'o't"""""'t""
Spending VafianCe ............r......r.r.........t.r.t.......tttt"""ot"t"t"t'

Budget allowancs based on actual hours (from above)""""' $16,480

15.680
1.J2Oactual hours r $14 lactory ovgrhgad 13t8""""""""""
S 8oo unfav.
ldle capacitY variance aaaaaaaatatataaaaa"attttt"' #

$ 4,480
1r12Oastual hourg r $4 Variablefactory overhead rate .t...... 4.680
tittO standard hours x $4 variable factory overheadr8t6...'
Vafiablg gffiCignCy VafianCg ........................t......r't"""""t""r' - S (2OOlfav'

1r12Oactuat hourSr $1o fiXedfactory overheadF3to........... $1t,2OO

11.700
f rtZO standard hOursx $10 fixed factOryOverheadFiito"""'
FiXgd gffiCignCy YafianC18 .................r..r....r....ttr..t.."""t""""r'
S (5oolfav.
:-E:

VafianCe......r.......r...........r.o.r.......oo....r...r...........ttt" $ (6801lav.
Spgnding
ldlg CapaCity Vafia11CO..............rr.........'...................o........""ti
800 untav.
Variablg effiCienCy VafianCg,................'....'............."........""'
(2oolfav.
(5001lav,
Fifgd gffiCignCy VafianCO,.....,..,.,.......r............".........'....o..."'
Ovgrall faCtOry OVerhead YarianCO ...............rrr....r..............'." $ (5801fav.
'----

ClpOlcr 18
451

PROBLEMS
P t8 -l
(f l Factory overhead per unit:
Variabl e ($3o r 2l gl ..'.........,..................o.............
Firgd ($go r 1/31..............................................r..
s20
to
$go
Variable tactory oyerhoad por unit
Dlrcct tabor hours per unit = $?O _ $5 variabfe overhead rate
4 per direct labor hour
l'lormalcapacitydircct labor hours(2r4oolr Fired tactory overhead
per direct labor hour Gtto * 4l = 2r4oor $zso = rate
$6,000nr"Ji"Jory
overheadbasedon norrnafmonthfycapacitp
(21 Yards r Unit Gost = Amount
Agtuaf quantity purchased..... ls,ooo $rssaffit
Agtual quantl$ punchased..... St4tiiii;
l8rOOO 1.3S standard 24-.gOO
Materlals punchasoprlce
VAfianCO ....-.r.....r................ t8,ooo $ .o3 $ 54o unfav.
Yards r Unit Cost = Amount
Actual quantity usgd ...........r.. 9,5OO $1.35 standard
Standard quantity allowed .,... $f 2,825
10.000 1.35 standard 13.500
Materials quantity varianco.... 1.35 standard s l67slfav.
Hours x Rate = Amount
Actual hours worked ......,,....r. 2 , 1 o o $9.15 actual
Ac-tualhours workgd .............. $19,215
2rlOO 9.OOstandard 19.900
Labor ratg variaJlGo ........r..t.o,, 2r7OO s .15 $ 315 unfav.
Hours x Rate = Amount
Actual hours worked .......r..,... 2,100 $9.O0stanCarC $t8,9OO
Standard hours allowed ......... 2,000 9.OOstandard 1 9,000
Labor efficiency vgt'ianco....... too 9,OOstandard 909 unfav.
$
lctual factory ovgrhgad....r................r........................,....,.....,., $16,650
Budget allowance based on standard hourc aflowed:
Variable overhead (2'OOOstandard hours attowed
r $5 variable ovgrhgad riltg|.......r...................... $lOrOOO
Fired overhead budgeted.o..........,....................o.... O.OOO
f 6.ooo
controllablg varianco........'..................r....................................
$ 650 unfav.
Budget allourance based on standard hourg allowed ...............
$1 6,OOO
Orerhead charged to production (2rOoOr $2.5o!.......,..........,.r.
15.000
Volumg variance ..,........... ......................,
$ 1,000 unfav.
 \

1@ Chwter 18

P18-2

(1) Materials Direst Factory

A B Labor Overhead
Units completed and transferred out this
period 4,600 41600 41600 4,600
Lessall units In beginningInventofl.....'....,... 500 500 500 500
Equivalentunits started and completedthis
pefiOd 4r lOO 4r 1OO 4 r l O O
.......a..........o.r.......a..............t.....D....... 4,10O
Add equivalentunits in spoiled units.............. 200 0 t40 200
Add equivalentunits requiredto complete
beginningInventorythis period................., 0 500 150 250
Add equivalentunits in ending Inventory....... 600 ooo 540 600
Equivalentunits of productionthis period...... 4,9OO 5,2OO 4,930 5,150
Standard quantity allowed per unit of
pfOdUCt ....r.......r.........r 3 units 2 units 112hn t hr.
Standardquantity allowedfor current
productiol| ......,,,...r...........r...r.....r...,....,......
14.700 lO,40O 2,465 5.15O

(21 Quantitv x Unit Gost Amount

ActualmaterialA purchasedat
aCtUal COSI ........r......o.......r. 16,000 $4.60 actual $73,600
Actual materialA.purchasedat
standardGost.....,,.............. 1 6 ,OOO 4.50 standard 72,OAO
MaterialA purchaseprice
variancg...........,..,............,.l 6 , o o o $ .to 9_11609 unfav.

Quantitv Unit Cost Amount

Actual material A used at
standardcost ..................... 1 4 ,8 0 0 S4.50standard $66,600
Standardquantity of material
A allowed at standardcost 14,700 4.5Ostandard 66.150
MaterialA quantityvariancs.. ___t_99 4.50 standard 9__450 unfav.

Quantitv Unit Cost Amount

Actual material B purchased
at actual cost..................r.r 1 2 ,0 0 o S1.95 actual s23,4OO
Actual material B purchased
at standard cost ................. 12,OOO 2.OOstandard 24.OOO
Material B purchase price
variance .r........................... 1 2 ,OOO $ (.os1 $ (oool fav.
 Clppter 18
461

P18-2 (Continued)
Quantitv r Unit Cost Amount
Actual material B used at
standard COSI..................... l lrooo S2.oOstandard $22,ooo
Standard guantity of material
B allowed at standard cost 10.400 2.OOstandard 20.goo
Materlaf B quanUtyvariance.. _6OO 2.OOstandard $ l,2OO unfav,

Hours r Rate Amount

Actual labor hours worked at
actuaf labor riatg................. 2,550 $lo.2O actual
Astual labor hour: workod at $zo,oto
standard labor it1to.....,....... 2,550. lO.OOstandard 25.500
Labor ratg variartco............,... 2,550 $ .2o 5tO unfav.
$

Hours x Rate Amount

Actual labor houru worked at
standard labor lilt€..,.......... 2,550 $lO.OOstandard $25,50o
Standardlabor hours allowed
at standard labor JZlto........ 2.465 IO.OOstandard 24.650
Labor efficiency vSrlilncg....... 85 lO.OOstandard 85O unfav.
S

fctuql factory ovgrhgad................r........................o................r..

s75,0oo
standard overheadchargeableto actual production
(5rl50 standard hounsallowedr $lS overheadrate) ...,.....r...
77.250
Overallfactory overheadvariance................ ................ .il3€99 fav.
Actual factory ovgrhgad.....'...............................,........,....,.........
Budget allorrancebased on standardhours: $75,OOO
Variableoverhead(5rl50 standardhours x $5!......
$2S'7SO
Fixgd ovgrhgad'......o............r.............!..r..r..r.r.....ro..
SOTOOO 75,750
Controllablg variancl9....'....................r..................,.......r............
_$ _l7so) fav.
Budget allormnce based on standardhours (from ilbov€f........,.
Standardfactory overheadchargeableto production $75,75O
above)tttt...................r.......r...........r....ro...r.......r..r.r..r....r.
- - tfrom 77,250
Volume varianca .r......r..!............
l.ll_,€gg) fau
Gontrollablg varianGo...........o.r....................r.....,..,r......,.............
Volume variance...r..............r......................r..r.................o....r.....$ rtsol fav.
( 1.5001fav.
ovgrall factory ovgrhgad variance.o.....r.............r............,...........
$ (2,2501fav.
62 Chapter 18

P18-2(Concludedl
(31

Standard cost ol units transferred to finished goods:

(41600units r $37.50 Standard cost per unit of product!,............ sl72,500

Standard cost of apoiled units charged to factory overhoad:

Materlal A (2OOunits of product r l0ooh complete r 3 units each
f 94a5O) aa.....aa.a.aa.a.aaaaa..aaa.....a....r...a.....aaa......r..D.-.aaa.a.aaaa....aatattt'
$ 2,7OO
Material g (ZOOunits of product rOoh complete r 2 unitg each I
S2aOOl aa.a...aaaat.aaaaaa.a.aaaaa.a.aa..oa...... a.aa...aa..ara..oa.aaat...aaa.aaaa""t"tttt'
o
Direct labor (20Ounits tTOoh completa t1l2 hn each r $lO.OOI 700
, Fastoryoverhead(20o unlts r l0o% completax I hr. oach
x S15.OO| 3,OOO
TOtal COSI Of SpOilgd UOitS,.........rt.....r.o,.........r........ s 6,400

Work in processrending inventorP

Material A ((iOOunits of product t lAooh complste r 3 units oach
f 34.5O) a.a.aao.a...aa..aaa...oaaa...aa........aaaaa.l........ra..t.aa...aaa.o.a..aa'attt"t'
$ I,loo
Material A IOOOunits of product r loOohcomplete x 2 units each
f S2aOOl taa.rr..aaaa.....a....aaa.aara.r..........aa....rr.......l.....a.....atr"ttto"ttt"
2,4OO
Direct tabor (6OOunits r 9O% completo r1l2 hr. each x $1O.OOI 2r7OO
Factoryoverhead(6O0unlts r IOO%complets r I hr. oach x
$l 5 aO01 ...ao. aa..a a..o ar..r.ao....a......a... r.r.....o...........ta...taa..4.4aa..... a'4"t" 9.OOO
g 22.200
TOtalStandard Cost Of work in process, ending inventory......r....

Pl8-3

(11 Januaryequivalentproduction:
Material Material Conversion
A B Costs
TFansferredout 8,00o 8,OOO 8,OOO
LessbeginningInventory(all unitsl.... 3.000 !t.o0o 3.O00
Startedand finished this period,.,....., 5,O0O 5,OOO 5,OOO
Add beginninginvontory(work this
period) o 3,OOO 2rOOO
Add ending inventory (work this periodl 5rOOO o 2rOOO
Add abnormal gpoilage .............,.....,... 1.OOO l.OOO 1.OOO
llpoo units 9.OOOunits I O,9OOunits
L-
I

ClpOter 18
,tA

Pf 8-3 (Continuedf

(21 Gallons x Unlt Gost

Actual guantity of Material A Amount
USed r...r..... 5O,OOO $t.0o actual
Aetual quantity of Material A $ so,ooo
Uged
50,0OO
.............r.....1a.1....a....r.a
l.2O standard 60.000
Material A price uliago varianee 50,0oo $ (,201 fav.
_$(!-e'.!999)
Galfons x Unit Cost Amount
Astual guanfity of Material A
USOd ............... 5OrO0O $1.2Ostandard s6O,OOO
Standard quantity of Material
A a11OWgd.....or..................... 44.OOO 1.2Ostandard 52.goo
Material A quantity varianco.. 6,O00 l.2O standard _Lzi2og unfav,
Squarc
- Feet x Unit Cost = Amount
Actual quanUtyof Material B
, USOd ......j.............r.........o.... l8ro0o
Actual quanfity of Material B $.75 actuaf $13,soo
s
USed ...........a.a......a...._......... l8,OOO .7Ostandard 12.600
Materlal B price ulritgo
- VafianCe....r...........rr.........,.
l8r0oo $,05 S gOOunfav.

Square
Feet r Unit Cost = Amount
Actual quantity of Material B
USed .............................. 1g,o0o
Standardquantity of Material $.7Ostandard $12,600
B allowgd ....r..r.................D. l8,0oo ,7Ostandard 12.600
Material B guantity yarianco..
__q .7Ostandard __!
Hours r Rate = Amount
Agtual hours workgd ............r. 7Or2OO $12.oOactuaf
Actual hours workgd .r,.....,..... $722,4OO
10,200 tl.5O standard t 17,300
Labor ratg variaJtco................
7Or2OO .50 S_5OO unfav.
Hours x Rate = Amount
Actual hours workgd ............r.
lor2oo $11.5Ostandard $l t 7,soo
Standard hours alfowed ......::: I o.o00 11.5Ostandard I t5.ooo
Labor effi ciency ydriancg .......
_ 200 1f .5Ostandard ]9_ 3i99g unfav.
 Chaptor 18
&l

Pl8€ (Concludedl

tactory ovgrlrgad ..D."""""""""' $ 60,100

-euJget
Actual
altormncebasedon standardhoursallowed:
--Viri"Ole
--i overhead(lOrOoOequivalentunits r
*anOardhour per unit r $l'8o Yariableratel $t8,ooo
Fired overhsadbudgeted(7'8OOlabor houra 57,OOO
at normatcapacityr $5 fixgd l?ltof....,.....'.......'. 39.OOO
VaflanCO,................r.r......t.tot..."t""""""tt"tt"'tt"t"
3 3.loo unfa%
#
COntfOllablg

Budget allowance based on standard

hOUfg allOWgd (abOVe1r...r....r......r.............rt.t.....t...tt'o"tt"ttt"tr $ 57,oOO
Standard overhead chargeable to actusl producUon
(lO'OOO gtandardhOUrSallowed r $6.80 oyerheadrate) ...'."' 68.OOO
VOlUme YafianC4......r............o....r.......r......or........r.r.........."ttttt"t'
$(11,oOOlfav.

CGA-Ganada(adapted).Reprint with permission'

Pl8-4
(11 Conversion
Materials Costs
UnitS COmpleted and tfanSf gffg d OUt'....................... l7' OOO lTrooo
LoSSbgginning lnVentOfy(all UnitS)..........'....r....r..... 4.OOO 4.000
Units started and complgted this period .....'."""""' 13,OOO 13,000
Add beginning Inventoly (work this period) ........""" o 3,20O
Add ending inventory (work this period)........""r""" 2,150 860
Add abnormal spoilage (work this periodf ...........""" 850 850
Equivalent units of production this period..........r""' 16.OOO 17.910

(21 Quantitv r Unit Gost = Amount

Actual materials purchasod at
actuat CoSt.........................6O OOOkg $3.95 actual $237rOOO
Actual materiafgpurchased at
standard GoSt..'..................60 OOO 4,OOstandard 240.OOO
Materialspunchaseprice
6OO0O
variancg............r................ $Js) $ (3.0001fav.

QuantiW Unit Cost Amount

Actual materials used at
standardclost..................... 50 OOOkg $4.OOstandard S2OO'0OOunfav.
Standard quantlty allowed at
standard cost (l6,000 r 3 kgl 48 000 4.OOstandard 192.OOO
Materialsquantity varianco.... 2 OOOkg 4.OOstandard S 8,ooo unfav.
\

Chaptar 18

Pt8-4 (Goncludedl
, H o u r s x R a t e = A m o u n t
'
Actual labor hours at actual
' lZltG!.................'..'................ 9rO0O $1 2.OO actual SI OS;OOO
. Actual labor hours at standard
l?1to........o.o......r................... 9r0OO I l.OO standard 99.OOO
Labor rate varia11cg................ 9r0o0 $ 1.oo $ 9.ooo unfa%

H o u r s r R a t e , = A m o u n t
Astual labor hours at standard
rirto.....................................IrOoO $t t.OOstandard S99r00O
Standardlabor hounsallowed
at standardrate (l7r9lO
equivalentunits r 1/,2hour
per uni 8.955 11.OOstandard 98.505
Labor efficiency variance....... 45 1 l.OO standard S 495 unfav.

Actual factory overhead.... $134,9OO

Budget allowancebased on actual hours:
Variableoverhead($6 rate r grOOOactual hours) S54,OOo
s Budgetedf|Igd factory ov9rhead.......r........r...... 8O.O0O i34.OOO
Factoryovgrheadspendingvarianc9.r........................r........r....
:S 90Ounfav.

. Budget allowance based on actual hours

(compUtedabOve)....r'.....,.....................................................
S134tOOO
Budget allowance based on standard hours:
Variable overhead ($6 rate r 17,91o equivalent
units x 112standardhour per unit).,...........,.. $53r73O
Budgetedfixed factory overhead...........,... 8O.OOO 133,7 30
Factoryoverheadvariableefficiencyvariance.........................s 270unfav.

Budgetallowancebasedon standardhours(computedabove| S133r73O

Factoryoverheadchargeableto productionat standard
. ' ($14rate x 17191O
equivalentunits x 112standardhour)...- 125,370
Factory ovgrhgad volumg variancg.......r,...................r.............. $ 8r360 unfav.

(adapted).Reprintwith permission.
GGA-Ganada
 Chaptar18
ffi

Pl8-5
Gonversion
(rl Materiall Gosts
32rOOO 32rOOO
Units completed and translerrsd out this period""" 5.000 5.OOO
LgSgall UnitSln bgginning InVento;1f...................""' 27 rOOA
Equivalent units started and completed this period 27,OOO
ld6 equiyatentuni6 nequinedto complete beginning
inVentOfy this pgfiOd ......................r.......'.......r......
o 3rOOO
2.000 1.600
Add equivalontunits in ending lnventory""""""r""'
29,0oo 3l,600
Equivalentunitg of producUonthis period""'r"""o'r' 1 1 4h n
Standard quantlty atlowed per unlt of product """"' - 3 unltr
87,OOO 7.900 hrc'
Standard quantlty allowed for current produetlotl""

(21 QuantiW x Unit Cost = Amount

Actual materials Purchased
at actual GoEt ......-r-..........r. I OO'OOO 36.54 actual $654,OOO
Actual materials Pur,chased
atstandard cost........'-..r.... lOO'0OO 6.00 standard 600.ooo
Materialspunchaseprice
variance 1OO,0OO s ,54 $: 54,ooounlav.

Quantitv Unit Cost = Amount

Actual materials Purchasedat
standard G(l8t ..................'.... loo,ooo $o.OOstandard $600'000
Actual materials issued at
standardcost ...'.............'..... 92.OOO 6.0Ostandard 552.OOO
Materialsinventoryvarianco.. I,OOO 6.0Ostandard unfav.
3 48.OOO

QuantiW Unit Gost = Amount

Actual materials issued at
standard cost 92,OOO $6.00 standard $552,OOO
Standard quantlty ol materials
at standald CO8t.....r...!..r'..... 87,OOO 6.O0standard 522,OOO
MaterialsquanUtyYarianco.... 5.000 6.00 standard : 3 3o,o00
unfav.

Hours Rate = Amount

Astual labor hours worked at
agtuallabor riato........,,......... I,OOO $l 0.60 astual $84,8OO
Actual labor hours worked at
standardlabor riatc........o...... g,ooo l O.OOstandard 80.ooo
Labor rate varianco........'....... I,OOO s .60 3 4,8OOunfav.
\

Chapts 18 167

Pl8-5 (Concluded)

Hours x Rate = Amount

Actual labor hours worked at
standard labor t'gto............. 8rO0O $lO.0O standard $8O,OOO
Standard labor houru allowed
st gtandard labor tilto ........ 7,9OO lO.0Ostandard 7g.ooo
Labor efficlency yarianco....... ____!_gg IO.OOstandard ll.OOO unfav.

Agtual factory overhead..r..............'......................'...................

975,OOO
Standard overhead chargeable to actual prcductlon
(7r9OO standard hourg allowedx $1OoverheadriStrB),...,.,....... 79.OOO
Overall factory overhgad variance.,...r...........r.........................._s_rcpgg, fav.
Astua| fagtory overhead $75,ooo
Budget allorrance based on astual houra:
Variableovefiead (81000actual hounsx $21..r...,.. s16,000
Fired overhead(8r5OObudgetedhourc x $81,....... 68,OOO 84,OOO
Spendingvariance 3p.ooo) fav.
Budget allourancebased on actual hours (from above!,,....,.,... $g4,ooo
Budget allonrancebased on standardhours:
Variableovefiead (7r90Ostandardhours x $21..... $l5r80O
Fixad ovgrhgad............. ., 68.000 83.gOO
Variablggfficigncy varianclg......................................,........r.....,
l__ 2oo unfav.
Budgetallonrancebased on standardhourg (from above)i....... $83,8OO
Standardfactory overhead chargeableto pruduction
(from abovef.o....r........................r.....................................r.... 79.OOO
Volumevariance $ 4.8oo unfav.
Spending wriance..........r..................r.rt..r.r...........r.r..o........r.... $ (e,o00lfav.
Variablg efficiency variance.......r.,.......................r.,....o............. 200 unfav.
Vofumg variancg................r...............r....r.....r........r.rrr.....r........ {.800 unfav.
Ovgrall factory ovgrhead varianca ..........,..........,.....r.......o,......._$_(!poo)
fav.
 a
--

Chapter18
4@

Pl8-6
(1) Standard cost of Production: Total
QuantitY Sbndard Gost
(dozensl per dozen Standard Gost
Lot
22 l,ooo $53.10 i s3'too
53.10 gor27O
23 1,700 31,680
i 1,2ao (direct materials) 26.&
26.70 25.632
980 (direct labor and
factory overhead) -s200,682

Yards x Unlt Gost = Amount

-
(2)
Actual guantitY Purchased..... 95'OOO $1.12 actual $t06,100
95'OOO 1.1Ostandard 104.500
Actual quantitY Purchased.',..
Materlals purchase Price 1,9O0unfav.
variancg ...r.......'.............."'
g5,oo0 _$ .o2 3 .

(3) (al Lol 22 Lot 23 Lot 24

Achral quantity used ......... 24r1OO 40t4d,O 28,825
Standard quantlU allowed:
'l r 24 Yatds........... 24,OOO
rOOO
1r70Ox 24 Yards'....'..... 40,800
1r20Ox 24 Yards.'.....'.'. 28.800
100 (360) 25
Standardcost per yard..'... x $1.1O x $1.1o xl-L!-g.
- $(3961fav. _$27.50
unfav.
Materials quantity variance -$ l f O unfav'

(b) Lot22 Lot 23 Lot 24

Actual hours worked r.......' 2r98O 5,130 2,890
Standard hours allowed:
11000x 3 hours...."..r.... 3,000
1170Ox 3 hourcr.'..,....... 5,100
960 x 3 hours'..r......... 2.880
(2-o) 30 10
Standard cost per hour..'.'. x $4,90 x S4.9O x $4,90
Labor efficiency variance .. -tjgg) fav. 3 147 unfav. $ 49 unfav.

(c) Lot 22 Lot 23 Lot 24

Actual labor rate.........,...... $5.OO $5.oo s5,oo
Standard labor rate ........... 4,90 4.90 4.90
$ .ro $ ,1o $ .10
Actual hours worked .......', x 2,980 x 5,13O x 2,89O
Labor rate variallco '.....'-... 3 298 unfav. $ Srg unfav. 3 289 unfav.
 - \

lm Chapter18

Pt8-7
CI-AFFYMAilUFACTURINGCOMPA}TY
Department 2
Factory ChlerheadVarlance RePort
For Month

(r) (21 t3l (.1 trl {o}

VrrlrHo
Et|lctongt Spcndlng
Btrdgd Budgd Brdgtrt Yertrnoe Vtrlencc
Allomlrr Allowrncr Allowrncr lJnilv. Unfrv.
lforrill Strtrdrrd A.td Acfirrl (Frv.l (FrvJ
9:negry ]bun Houn Coet Fl-fiD f.l - {31
Proccrelng Umc
In houn....,...'.. O'OOO 5r7OO 6r84O
Ccprclty,......F.- IOO% 95% 97.33%

Varlgblc factory ovcriud:

lndlrcct labor... 3 2'OOO t lr9OO I 1,047 t tr92o 317 q27l
Manufacturlng
ruppllcr....-.,. 2r4AO 428{) 2,gto 2$125 50 (r1)
Repr|rl..,......... I'OOO opo 073 I'OSO 23 77
Hcet, powcrr tnd
llght......--.-. 3OO 246 a2 szlt 7 3.t
Totalvarhblc
cort........-. li 6.700 E 6,415 t 6Ji48 3 6.620
'Fhcd
factory ovcrhcrd
Supcrvirlon -... g ar(XX) t a,o@ 3 +Ooo 3 +OOO o o
lndlroct lrbor... 6'200 63OO 63OO 63OO o o
Menufecturlng
rupplloc......... IOOO aooo aooo IOOO 0 o
ilalntcnanco..,. trl o o lrlOO 1110O I'OSO o (201
Heet powcr,
end llglht..,..... 1/0OO 1r4OO ir4oo lr4oo o o
Mechlncry
deprcclaUon.. ar5oo 416oo a'5oo 4r!OO o o
Inrurencc tnd
lrtc!.......,...-. 9q) 900 900 070 o 70
Totel lhcd
cort........... 32O,1OO t2O.t0O s20.loo 3a0,160
Totrl frctory
ovcrhcrd 32!t,8OO $21t,"5f5 s25.O48 !326,770 31gr tl2t2
Strndrrd fostory ovtrhoed unfrv, unfiv.
chargceblc to wort In
procrsr (5r7OOrtandrrd
houn r 3l3O rrtcf .r.-.-... 2a.6lO
Volumc verienca... E 1.oo5 unfev.

I
l'--

I
I
t-

l
I
L '
Clapter 18
I 171
L

L ef*ifl s F s e s8,"sFp,
F!t
' Y
lgllg
t_ oiflg l F a a o o F o o o slog l l g
t E fig s $ a e g g F " g g SHili
'
? ?

L- rtY
D

!
I

2
sf$!fl oooooooo
6
F
5
.6a6
o F l ) 6 - Y F

lgli Y

t- 3 ,E,s lJl
t- s=iF i$uqfl ;s33i3-Hdl
P5 s ; =!tiigl
I
5
95r,S
$F € E i*uilg
ii$sss,iflg1
I
E " I Easilsl3-ll
E

$$'31fl
ii3333'ff1flI
:
f $F, stii;le*il
i3uqgils$33"1g$
fl1
o l

egilfl3Fll 'n
i$s:lfl
iisi*ru1$g1_
'i 'ii iiji
iiis,;i
:
il
isii
i
igii i,s
iigi ii;ii;rsFi; f:S;
tiig;ifi
o

i;ff3jF;frii
I
o
F
G
 l

Chapter 18

Pt8-8 (Concludedl

Reconciltatlonof variances: $3O,OOO

ACtUal faCtOfy Oygfhgad ..................."'t""""""""""""tt""t"' 28.800
process""""""""
Standardoyorheadchargeableto work in l.2oo unfaY.
gad Yaf ianC9.."""""""""""""""""""" -S
OVgfalt faCtOfy OVgfh

Spending variance:
Spending quantity variancg """o"""""""""" $ogo unfa%
150 untav. $ 84o unfav.
Spgnding price Yarlance""""o"""""o"""""" (36O)fav.
variablg efficigncy YarianctB.,............,......'....'....... 72Ounfav.
VOlUme VafianCe ....r....r.r..r.r.............r.......tr...t"rt't"""ttttt"tt""""
$ 1,2oounfav.
OVgfall faCtOfT OVOfhgad VafianC9.........""""""o""'r"""""""""

P18.9APPENDIX

Equivalentproductionfor Septemben gonversion

Materials
" t' t " " t' t t t " " " t t t "' 42,00o 42r0oo
Than sf g rrg d o lrt.... t. t " " "t " tt""
1O,O0O lo,ooo
Less beginninginventory""""""""""""t""""
32,OOO 32rOOO
Startgd and finishgd this period'""r""rt"i"""t'
Add beginningInventory(work this periodf""'
o 510oo
5,OOO 4,50O
Add ending inventory(workthis period!"""""
37.OOO 41.500
Equivalentunits of product ....""""t"t""i"""" :z:

Pieces x Unit Gost Amount

Actual quantity used.,..,......... Zopoo $'5o aetual $38,ooo
36.480
Actual quantityused.............. ZOTOoO ,'48 standard $ 1.520 unfa%
Materialsprice us:lgovariance 76'000 S'02 r

Pieces x Unit Gos! = Amount

.49 standard 936'48o
Actual quanUtyused ..........r... 76,00o
Standard quantitY allowed 35.520
(37rOOOI 2! ..................'.."' ZI'OOO .4g standard
.48 standard S 960 unfav.
MateriatsquanUtyvariance.... -3p99
Hours x Rate = Amount
Actuaf hours workgd.............. lzrsoo $8.0o actual $18O,ooo
7'60 standard 17l.OOO
Actual hours worked....r......... 22'tsao
S- 9.OOOunfav.
Labor ratg varia11co................ 22r5g0 -$-'4O
Hours x Rate = Amount
Actual hours worked .......-....-. Tz,soo $7.9ostandard $171'ooo
Standard hours allowed 157.700
(4t r5OOI 1 121."""""""""" 2O.75O 7.6O standard
1,75O 7.6Ostandard S 13.3OOunfav'
Labor efficiency variance ...""
 Chapter 18
173

Pt &e APPENDTX
(Conctudedf

Actual fastory overhead .................... $42rOOO

Budget allorrancebased on astuaf hours worksd:
Varlable cost (22r5OOastual hours r
$1.4O variable overhgad ratef r..........r............ g3l,5oo
Fired cost budgeted g,ooo 39,500
Spending rrariancg......r.................................r..or....D.r.r......r.......
,......,....... _L3rsOOaunfav.
'll|e spendingvariancoIncludesthe
differencebetween actual and budgeted
fired cost, $zoo ($8'200 - $8,oool. Thil portion coufd ue separately
labefed as
a fired spendingvariancc,leavinga batanceof S2,3ooss the varia-ble
varianco. "p"roiig
Budgetallovyancebased on agtual hours worked..r...r,,..........r g39,5OO
Actual hours l2Z,SOOl
r standard overheadrate (Si.BOi:.::::::::: 40.500
ldle capacity variaJlco '..........'........".....r..............r.,rr.......o......o.
$ (1.OOOI
fav.
Actuaf h9gr" l22rSOOlr standard overheadrate ($l.gO).,.....,... $4O,5OO
Sl9f! hours (4t,5OOr1t2lr standardoverheadrate
Gtl tB 0l tttt"t"t" ttt'o...t....a.......t....r......................o..r...r......r.......
37,350
Eflicigncy varianco .........-....r......o...........,.............................r...
l__9'!5g unfav.
CGA-Canada(adaptedl.Reprint with permission.
Pl8.1O APPENDIX
Raw material:
Gallons x Unit Cost = Amount
Actual quantity purchased..,., 6OO,OOO $t.ef 7 actual $ 1 , i 5 o , o o o
Actual guantity purchased ...,. 6OO,O0O . 2.OOO standard 1.200.o0o
Materials purchase price
Yariancg .........,.....o..........r.. 600,o00
Drums:
Drums r Unit Cost Amount
Actual quantity purchased,.... 85,000
Actual quantity purchased..... $1 actual $ 8s,ooo
g5,0oo I standard g5,ooo
Materials purchase price
variance ............................, g5,oo0
o
Raw material:
Gallons Unit Gost = Amount
Actual quanUty used
TOO,OOO $2 standard $1,4OO,O OO
Standard quantity altowed ..... 600.ooo 2
Materials quantity variance.... standard 1.200.000
too,ooo 2 standard $ 2OO,OOO unfav.
171 Chapter18

Pl 8-l O APPENDIX(Continued|

Drums:
Drums Rate = Amount
Actual quanUty used ....r......... 6O,OOO $l gtandard $8O,OOO
Standard quantltY allowod .-... 60.ooo I standard 60.ooo
Materials quantltY varianco.... _____9 I standard _9
Dirsct labon
Hours r Rate = Amount
Actual hours workgd .......'...... 65,00O 37.231 actual s47O,OoO
Actual hourg workgd .............. 65,OOO 7.OOO standard 455.OOO
Labor rate var|atlGo................ 65,OOO g_.231 S l5,OoOunfav.

Hours x Rate = Amount

Actual hours workgd'......r...'.. 65,0OO 37 standard s455,OOO
Standardhours allowed '...or... 60,000 7 standard 420,OOO
L-aborefficiency varianco......' 5,O00 7 standard _S 35-OOOunfav-

Factoryoverhead:
ACIUal faCtOfy OVgfhead....................,....................'.................. $666,5OO
Budget altoumnce based on actual hours worked:
Variable overhead (65,000 actual hours r
36 variable overhead ratel.r.o,..'...r..,............r.S39OroOO
Firgd ovorhgad budget...................................... 275.OOO 665.OOO
Spending variance r......i............'.........r.......r..........'.r................ $ 1,5OOunfav.

Budgetatlowancebased on actual hours worked (see above) $665,OOO

Actual hourg (ssrOoolr standard overheadrate (S10).............. 650.OOO
$ 15.OOOunfav.
ldle CapaCity variaJ|C8.......r...,.............o.,........'.r.........'............'.
 Crlaptr 18 175

Pi &1 q APPENDIX(Concludedl

hr,
O8r75Onormal capaclty hours r 94 fixed overhead titto........... $275,OOO
651000actual hours worked r $4 ffxed overhead ri8tg,,.......,.... 260.Ooo
ldle capacity variancc (3175ohours r $rll .......................o......... S l5,OOOunfav.

Budget allowancc bassd on actual hours worked (see above) $665,ooo

Budget allourancebased on standard hours allowed:
Varlable overhead (60,000 standard hours
allowedr 6 mriable overheadrate).o.......,...,. s?6O,OOO
Fired ovgrlrgad budgeted r.....r..rr.r.'.....r............ 275.OOO 6:15,OOO
Vari abl g cffi ci e ncy varia nce .ro............,..,. ... S 3O,OOOunfav.

hd
65;O00actuafhoursr $Ovariableoverheadrate $39O,OOO
601000 standard hourg allowed r $o variabre overhead rate.... 360,Ooo
Variable efficiency variance (5rOOO
hours r $61 ,......,..r.........o.. $ 3o.ooounfav.

651000 actual hours r 34 firgd ovgrhgad rirtrg.......................... $zoo,ooo

60,000 standard hours allowed r 30 fired overhead J?to.....,... 240,000
Firgd cffi ciency variance (STOOO
hours x $4)............................. $ 2O,OOOunfav.
 Chapter 18

CASES

cl8-1

(il Fl The use ol participgtive cost gtandards to motivate plant managorg

and department heads has several benefits. These benefits rcsult
from contact with erecutive managomentthrough the interchange
of ldeab, negotiation betweenthe partles, and a final compromisein
establishing the standard. This allorvs the plant managers and
department heads to personallyidenUfywith these standards'
which wilt increasetheir desire to achieve a goal they have accept-
od.
In this caso, howeve6 the standard-setUngpnocessdoes not
sppoar to be partlcipative.Erecutive managementappearsto follow
through with the interchangeof ideas, but the negotiationand final
compnomiseare missing. Executivemanagementmerely reviews
necomm€ndationsbefore setting the standards,without discussing
the standardsfurther with plant managemenLAs a consequence'
plant managonsmay become frustrated with the standard-setting
system and a negativeirnpact upon motivation could result.
(bl The use of tight, but attainable,standardscan have a positive moti-
vation effect on departmentheads and plant managers.Ttris is par-
ticularly true if they participatedIn setting the standards and are
confident that good performancewitl be recognizedand rewarded'
However,if the standardsaro perceivedas being unattainable'then
the motivation'will probablybe negaUvebecausethey leel there is
no uso in trying lor an unreachablegoal, The unfavorablevariances
being the norm seems to imply that the standardsaro too tight' and
this coutd be part of the causo for the low motivation among first-
line supervisors.
(21 Under the present system, there is no motivation for department heads
to control overheadcosts becauseall overheadcosts are allocated on
the basis of actuatunits produced,and the actual productionoutput in
other departmentscan have a significantimpact on the overheadcost
chargedto each department.
The use of standard, pradetermineddepartment factory overhead
rates, apptied on the basis of standard activity allowed for actual produc'
Uon,should provideuseful cost control informationand enhancecost
control on.,thepart of department heads.
 Chapter ta 477

c18-2,
(r) (a) The characteristics that should be present in a standard cost sys-
tem to encoufiage positive employee motivation include:
(f) partlcipation in settlng standards from all levels of the organiza-
tlon including purchasing, engineering, manufacturing, and
accounting;
(21 the integration of olganizatlonal communication by translating
the organizational goals and objectives into monetary terms for the
employees;
(3) support of the standard cost system by executive management;
(4) standards that ane perceived as achievable and accurate and
apply to contlollable costs.
(b) A standard cost system should be implemented to motivate
employ-
ees positively by:
(1) communicating the corporate objectives of a standard cost
sys-
tem;
l2l solicitlng imprcvement in standards fipm employees;
(3) using a standard cost system to prcvide a guide-to action,
not a
straight lacket. (Although signlficant variances should be expiained,
employees should not feel that the standard ls a mandate.
Gontinuous imprcvement shoufd be the goal.);
(4) not overemphasizing variances, although standard cost
vari-
ances often are used for individual perfotrnance review and reward,
(Employees should be encouraged to take actions that
will benefit
the company as a whole rather than simply to meet standard.)
(21 (a) Management by ercepilon focuses management's
attention only on
those ltems that deviate significanily frc; the standanl, The
assumption is that by foregoing a thorough, detalfed analysis
of all
Items, the manager has morretime to concentrate on other
manage_
rial activities.
(b) The behaviorar rmplications of management
by exception Incrude
both positive and negative implications. on thl positive
side, this
technlque increases management efficiency by concentrating
only
on slgnificant variances, ailowing time for the h"n.gg
to concen-
trate on other activities. on the negative side, managens
tend only
to focus on the negative variances rather than the positive
ones,
limitlng their employee interactions to negative reinforcement
punishment. This technique may not indicate or
detrimentar trends at
an early stage, and fragmentation of efforts can
occur fipm deallng
only with the specrfic probrems rather than gtobar
issues.
 Chapter 18

ClA-2 (Concluded|

(31 Employee behaylor could be affected advercely when standard cost vari'
snces aro the sole basis for performance evaluaUon.Employeesmay
gubyeft the system and attempt to build slack into the standard so that
they can meet or exceedthe standard.There can be a mlnimal level.of
motivation sinco erceptional performanco is not rewarded' Employees
may tend to engage In acdvlUesthat atp not In tlre best overall Interest
of the companffust to mest standard. Oveltmphasis on price variances
can rtsutt in a large number of low cost vendorsrhlgh levels of Inventoryt
and poor quality materials and parts. Oyet€mphasis on efficiency vari'
ancas can ltsult in long production run3, large work ln process invento-
ries, and attempts to control quality through inspection alone.

cl8-3

(1) Had Stevensnot confined his initiat remarks to telling the employeesthat
producgon standards were too tow, but rather erplained whyr the results
of the confsrence would certainly have been monoeffective.
Furthermore,he should have lemained with the grouP and ioined the dis-
cussion. He lailed to establishtwo-way cotnmunication'to exchange
ideas,to air differencesof opinion,and to provide neasonswhy certain
practices could or could not be followed. Had he remainedwith the
groupr Stevenscoutd have stated that he had been thinking about the
problem of production standardsand, In his opinion, such and such
should be done. Then he could have asked the group what lt thought
about fottowingthe ouUlnedapproach.The ensuingdiscussionshould
shape a suggestedcourse of action nopresentingtho groupb opinions as
well as those of Stevens.
lt is poor pracUcefor a managerto abdicate,as Stevensdid in this
incidenl An important part of a managerbiob is to provide effective
leadership,to show tha way by offering a plan, by giving neasons'and by
taking into account suggestionsoffered by the members affected by tho
plan. Usingthis approa-ch,the managerlsideas, the groupb wishes, and
the needs of the enterprisa can be blended into an effective program.
h might be that the employeeswenecorrect, that standardsshould be
reduced.For example,errors In calcutatingthe standardsano possible.
The employeesmust be given the opportunityto present reasons for
their nocommendations.
Both facts and experienceare important in determiningthe level of
productionstandardsadopted. Stevensshould abstain from forcing any
decision.lt may tako severalweeks or months for events to demonstrate
what standardsshoutdbe established,for they will bo influenced,among
other things, by the verificationof the employees'major beliefs,the cor'
rectness of Stevens'statements,the extent of modificationsrequiredt
and the fult comprehensionof the situationby tho employoes.
Chapter 18
179

Ct8-3 (Concludedl

The subject of raising productionstandards,in itself, is

not a popular
-
ono among e-mployees. Ons must be quite naive to betievethat an
employeewill_acceptan increasein production standards without some
explanation of the reason it is requested or required. The issue in this
Incident could be better identified as sHow can the enterprise survive?'
or sHow to Increaso our production outputDor .rHowto regain " st-ng
competitiveposition for our company.t
one might also raise the question of whether Stevenswas adequately
in touch with the attitudes and beliefs of the Department B employ"u" '
torrard their worknespeciallyprcduction standards,He does not
appear
to be. Better communication,improvedsupervision,and effective
leader-
ship apparenily are in order.
(21 Stevensshould calt another meeting with the production employees
Departmelt-B' indicatingthat he wishes to off-erto the group additional of
pertinentinformationonproductionstandards.Next,tre1trouloget
together all data dealing with the companyb produciion it"ndards
and
fair profits on the ownerb investment,the continuity of the enterprise,
and other significant and applicabledlta. Preferabli it " "aoitional
shoufd be in a visual form to increasetheir effectivdness.Also, data
advisablefor Stevensto talk informallywith leaders oi o"p"rtment it is
empfoyeest-o discoverwhy-thegroup recommendedtower production B
standards.He can use this informationto shape friJpiesentation
forthcomingmeeting, at the
The best approachfor Stevensto foltow at the meeting is to:
(al thank each memberfor his or her interest and past participation,
(bl advisethat additionalinformation,vitat to the
modification pre-
sent productionstandards,will be presented,foltowedUV of
a g.oup
discussion,
(c) present the adrJitionalinformation in a forthright
(dl remain with the group and join in the discussion manner,
from which the
decisionon productionstandardswifl evorve.

CGA-Ganada(adaptedf. Reprint with permission.

 Chapter 18

)18-4

:il Standard direet cost of I ton-gallon batch of raspberry sherbert follows:

Direct material:
Raspberrles (25 qtst r $gO per qt.l ..............'. S8.oo
Other lngredienb (1Ogal. I $45 per gat.!........ 4.5O S1O.5o
Direct labon
Sorting (((3min. r 6 qts. raspborries)+ 6O min.)
r$gperht-|......................rr.......o...rr............. $2.70
Blendlng(ll2 min. + 6O min.)r $9 per hB)........ 1'8o 4.5o
Packaglng (4Oqts.- r $.38 per qt.l 15,20
Total dirsct standard cost per ten-gatlon batch of sherbert ... 99o.2o
'6 qts x (5 qts. + 4 gts.! = 7.5 qts. reguired to obtain 6 acceptable qts.
"4 qts. per gal. r 1Ogal. = 40 gts.

l2l (al For the most Fartrthe purchasingmanageris responsiblefor unfa-

vorable materials price variances.Gausesof unfavorablematerials
price variancesat GoldKingare likely to includo one or moneof the
following:
(11 failure to correctly forecast price incraases
l2l purchasingnonstandardor uneconomicallot sizes
(31 purchasingfrom suppliers other than those offering the most
tavorableprices
(b) The productionmanageror foreman is usually held responsiblefor
unfavorablelabor efficiencyvariances.Causesof unfavorablelabor
efficiencyvariancescould include one or mora of the tollowing:
(ll poorly trained emplolrees
(21 substandardor inefticient equipment or machinery
(31 inadequatesupervision
(41 poor quality of materials (in particular,the raspberriesthat must
be sorted by handl
Clppter 18 181

cl8-5,

(11 Standardunlt cost per cutting board

Diract material:
Lumber (1.25 board feet r (F + f) + 5| r $3 per board foot).. $4 .5o
Footpads (4 pads r $.O5 per padl .20
Total direct materials 9l.zo
Direct labon
Prcparc and cut 112+ 6O hour per board r ((5 + 1! + 5 x $80 si.92
Assemble/finish(15 + 6O hour r $8;,.... aaaatataaaa 2.00
Total dirsct labor $3.e2
Total standard unit cost......r.......r..........r................,..........r.ro. s8.93
(21 The advantagesof implementinga standard cost system include the lof-
lowing:
(al Standardcosts are incorporatedinto the accountingsystem, making
record keeping easier and facilitating cost anallsis.
(bl standard costs providethe basis for building a company budgeL
(c) standard costs ssrvo as goals; they encourage cooparation and
coordinationamong all elementsof the corporation.The variance
analysis associated with standard costs provides a feedback slrstem
to those responsiblefor controllingcosts.
(31 (a) The role of purchasingmanagerin the developmentof standards
includesestablishingthe standardcost lor material required by the
bill of materials,determiningif the companyshoutd take advantage
of price raductionsavailablethrough economic order quantity,and
obtainingdata regardingthe availabilityof materiats.
(b) The role of industrial engineerin the developmentof standards
includes preparingthe bill of materiatsthat specifies the tlpes and
quantities of material required;establishing,in conjunction with the
manufacturingsupervisor,any allowancesfor scrap, shrinkage,and
waste; and participatingin time studies and test runs to facilitate
the establishmentof time standards.
(cl The role of cost accountantin the developmentof standards
includes reviewingall informationregarding material and labor stan-
dards received from other departments,establishingthe labor rate
gtandardsbased on the type of labor required, deteimining
apptica-
tion rates for indirect costs such as material handling and factory
overhead,and convertingphysicalstandards such aJ hours and
quantitiesto monetaryequivalents.
/t82 Chapter 18

cl8-6

(rl
Actual Standard Unit Gost Price
Material Quantitv Cost . Cost \/afiancg Variance
Maran................ 8r48o $2'05 $2.oo So5 $ 424 unlav.
SatOI.................. 25r2OO .7O .75 (.051 (11260llaV.
cra|yn..o.....r....... l8r54o .9O 1.OO (.tol (1.8541faV.
Ngt matgrials purchaseprice varianco..........r.........'...r.....o...'-$(3€9Olfav.

Actual quantifies at individualstandard materials costs:

Maxilo...,.... 8r48OgallonsO $2.0O......-.r.. S161960
Safer......... 25r2OO o .7 5 .........,. 18r 9OO
Cralyn....,... 18.54O o 1.0o.......,... 18.540 s54r4OO.OO
92220-gallons

Standard (expectedl output from actual input (52,22Ox

.8O= 4lJTAI multlplled by $1.3Owolghted averageot
standard materials COSIOutpftt ...,..'...................r........o..... 54.308.80
Matgrials mir Varial|CO......r................'r.................'......o...'..... t_9!.2O unfa%

Standard(expectedloutput from actual input at weighted

averagO Of etandafd matefials COSIOUtpUt.,.....,..,............. S541308.8O
Actual output quantity at weighted averiageof standard
materialscost (4OrOOO r $1.3O!...,................,...,................52.OOO.OO
Materials yield varianc $1i998.8o unfav'
a ar ar aa a aaaa a at aaala aaaaaata.aa araaaaa

An analysis of the portion ol the mix varianco attributable to each material

follorvs:

,La.trl
OulndV
Totrl Urlnc at nd.td [lrtrrirb
. Actu.l ttrrd..d Acfirl ltryrdrrd Qurntity lJnlt }Ir
Qr,rrnttt Forrnslr r gg3ggl r Fonnrdr Yrrirdon r- Co.t I Vrr!gg911

Ma:en.... 8,48osab. 52,220gay 8,355salr 1% gab. 32.00 S25o.oounfav.

:H

Selcr.....253OO 300
62,220 25,060 .75 lOO.5Ounfiv.
o25

Crayln... 18,540 2t23 (259.oo) fav.

32"220 18,799 l%0, 1.OO
625
34-9c"r. Wgar". J
Roundlngdlflerencc. (.30)
f_9!39 unfav.
 Clppter 18
4&t

Cl8-6 {Concluded}
(21 Belore LAB ChemicalCompanymanagementcan controt costs, they
need to know which costs ara out of line, within whosa area of-responsi-
bility has the cost variancoappeared,what is the ggtuseof the cosi vari-
snce' and who has the responsibilityto correct the cause of the vari-
gnce.
Standardcosts and the variancesfrom them help managementto
begin to answer thess issues.Specifically,the variances indicate where
managementshould begin its invesfigation:
(al Price variations-the informationto identity the causes of the price
variancesusuallycan be obtainedin the PurchasingDepart-unt. A
review of purchasingproceduresand rccords woutd disclose
whether the varianceswenacaused by permanent changesin
prices,poor purchasingpractices,or poor productionsJheduling
requiring incurence of extra costs to expedite shipments.The
informationobtainedwifl identity the department responsiblefor
the extra cost and provide clues to improvethe control.
(bl Mix and yield variances-the informationto identity the
cause of
thesa variancesusuallycan be obtained in the proiuction depart-
ments. A review of materialsrecords and handling procedurcs
would disclose whether the mix variance was caused by the use
of
wrrongproportions,entering excess materials into the process
becauseof carelessness,or adjustmentof the mix to accommodate
off-standardmaterialsquality caused by the same factorr. Thus, the
yield variancewould often be explainedby the same information.
Nonstandardproportionswould often result in nonstandardyields
and excessmaterialsinputs.Tho informationobtainedwould
identifythe departmentresponsibleand provideclues to hetp
improve
the control,

c18-7

(1) (al Materials-quantity purchased..............,.........,.....,..

5,2OOlbs.
Unfavorable unit cost ($2.iO - 32) ........,...........t....... x $.lO
Materials purchase price variance.......,...............,,...
$ S2O unfav.
(b) Materials-quantity used.o.....,......
5,30O tbs.
Materials-qu a ntity req uire d at sta ndard (5,OOO
units produced x 1 lb. per unit).............'..:.............
S.OOO
Unfavorable quantity.................o............,......r...........
3oo lbs,
ItanOlrOcost per lb. ........................ r $2
Materiatsquantityvariance . $ ffi unfav.
......,.....:.::::::::::
(c) Directlabor used
Unfavorable 8,20O hrs.
unit hourlyrate ($4.1O_ S4)..................
Direct labor rate variance x $.1O
S 82O unfav.
 r

481 Chapter l8

C18-7(Continued|
(dl Direct labor used 8r2OOhrc.
Direct labor required at standardfor 5'000 units
pfOd UC gd .r..............i..r.............ooo...r.................t.r... 8. OOO

Unfavorabtg dirgCt labor llS€...................................'. 2OOhrs.

Standard wagg rate per direct labor houl...-'...r........ x $4
DirgCt labOf gffiCignCyVarianC8.............,....rt..........., -9999 unfaU
(el Analysis by expenses of the factory overhead controllable variance
for 5rOoOunits of production:

J:*"9.
'Ji:-''l:'"f;'
or":*'ilo
"ilH:l'.:.
J,:";'9,
Chargcd
!:Jll1il,i
Output Ovcr (Undcrl
Variable factory overhead:
$ gr84O
tndirgct 1abor.......o......r.....r.....r......r...,. $lOrOOO s (16Ol
SU pplieS.-Oil ............r.......o.....r,......,o.... 3r3 0O 2t5OO 8OO
Allocated variable seryice department
COSI...................r....r.r.,...'................. 3.2OO 2.5OO 7OO
TotalvariablefactOryoverhead....o....r.
$16,340 315.OOO 31.34O
Fixed factory overheadz
Superuisioll.......... 92,475 $2,250 S 225
D e p r e c i a ti o n..............,.......r .,.o.....,.....r3r. 75O 3r 750 O
Other fixed costs ..,........... ,.... 1,250 1,250 O
Totat fixed factory overhead .. $ 7,475 $ 7'250 $ ZZS
523.gl 5
Totaf ........ro....,......................................... 522,25O Sl ,5.99

(21 Clearlyindicatingwhere the responsibilitiesfor price and quantityvari-

ances tie and chargingthe variancesto the departmentswith initial
responsibilityreducesthe conflict but does not eliminateit.
The specific cause(slof the varianceneedsto be determinedbefore
there can be certaintythat the proper departmentis charged.For exam-
ple' if materialswere purchasedat higherthan standardprices because
the ManufacturingDepartmentrequireda rush order,then the price vari-
ance is the responsibilityof the ManufacturingDepartment.ll the materi- :
als providedby the PurchasingDepartmentwere of slighUylower quality
than specificationsrequired,due to carelesspurchasing,the excess
quantityused by Manufacturingis the PurchasingDepartment'srespon-
sibitity.
Clppter tg
.rEs

Cl8-? [ConUnued]

Even if the variances anBpnopedycharged

can be argued that the purcjrasing b"p"rtrentbto the two departments, it
by the orc€sr_quantity requirod bi M;;-"cturing. varianli is influenced
-oepartrienit
fi this case, the extra
3oo pounds will increase.itr.e. g
mulated over_severalperiodslryrd_rrasin G ri"n"e (accu-
by $SOt36Olbs. I $,iO;. The S3Ois the
foint responsibility of the two dipartments.
(31 Generally,the ManufacturingDepartment
price of the overhead items' T?r"'r-rore, manager cannot controf the
$te prices srrouiJ not inffuence
the data in the departmentalrepo*. r,irn"r,
gervicedepartment costs is the allocation method for
not "umci"nliv erptained ioletermine
part (if any) of this variation can be identirilo what
fixed overheaditems listed in this case iirmattv iliut il; ;-";"rtment. The
ment managerb control. Suppliesand indirect "r. ort"ioe a depart-
control can be erercised-it ne o"p"*r"ntal labor remain.
items used' Therefore,emphasissrroirci level over the amount of
be placed on the quantities
within the variances'wittr iittte ;r;;;ii""i"
major use of the doliar valueswoutd be on dolar vatues.The
eachvariancethat would be economicatly io estabfish the guantity level of
tion. worth managementb atten-
 I
I
I

Chapter18

Cl8-7 (Concludedl
TO: Departmont Managen-Manufacturing
FROM: Performance AnalYsis
RE: GontrollabIe Factory Orerhead Performance-N ovember
Percent
Gompared
Quantitv to standard
rndirect tabon
Favorableindirect labor use
(doltar value-94O01 1OOhrs. 4oh
Supplies-olt:
Unfayorableoil use (dollarvalue-SSOOl I'O0Ogals. 2ooh
Commentarv:
The dollar value of the oil variation and its large percentagerequire iden-
tifying the cause and applying control procedures.
The indirsct labor variation, althoughfavorable,should be investigatedto
be sura that it does not represent unaccomplishedactiviUesaffecting
other aspects of the operatlons.
Gomoutations:
lndirect labor:
Hours usgd...r.......'..,...r...'r'.....o.....'.o..........'........... 214OO hrs'
units of output
Standardhours for 5,OOO
(5rOOO r .5 hrs.)...............,o...,....r....'................'.., 2.500
'
Favorable indirect 1aborvariation...,....................... __199hrs.
Dollar value at standard wage rates.........,.......'. 1199
Supplies--oil:
6rOOOgals.
Oil consumed....,..............r................,.......r....'.....'.'
Standard quantity for 5,OOOunits of output.......'... 5.OOO
Unfavorablg oil consumption........o.........,...............lrO0O gals.
Doltar value at standard oil prices,..................r'.....lSOt
(4) The immediate reaction might be to dismiss the department managen
However, careful thought would require analysis of the situation to deten
mine (al if, on an overall basis, the department is being operated eco-
nomically (if so, then dismissal may be undesirable|; and (b| if the cause
of such behavior is due to management reaction to unfavorable vari-
ances without regard to size, or to undue emphasis by managsment on
individual variances to the erclusion of measurement of overall perfor-
mance.
lf it is assumed that the manager is porforming satisfactorily on an
overall basis and should not be dismissed, then two possible solutions
can be considered:
(al Revise reporting methods to emphasize overall performanco.
(b) Revise reporting on labor to combine direct and indirect labor into
one item for performance evaluation-
I

Chaptor l8
487

cl8-8
(1) (a) Revisingthe standardsimmediatelywould facltitate their
use in a
master budget. Use of revisedstandards would minimize production
coordinationprobfemsand facilitate cash planning. Revisld stan-
dards would facilitate monEmeaningful cost-volurie-progi anafysis
and result in simpter,monomeaningfufvariance analysis.Standards
are.oftenused in decisionanalysissuch as make-o".-lrv,p-ar"t
pricing, or product discontinuance.The use of obsolete
standards
would impair the analysis.
(b) Standardcosts are carried through the accounting
system in a stan-
dard cost system. Retainingthe current standaroianJ eifanoing
the analysisof varianceswould eliminatethe need to make
in the accountingsystem. changes
Changingstandardscould have an adversepsychologicalimpact
on the persons using them. Retainingthe current standards
preservethe well-knownbenchmarksand aftow for would
conJi"tln"y in,
reportingvariancesthroughoutthe year.
Variancesa-reoften computed and ignorcd. Retainingthe
standardsa1d expandingthe anallrsisof varianceswou-tJ-io.r" current
diagnosisof the costs and woutd increasethe lirerirroooltrit "
cant varianceswould be investigated. signifi-

(21 (a) changesin prime costs per unit due to the

use of new direct
material.
Changesdue to direct materialprice:
((newmaterialprice - old materialprice)x new
materialquantity = ($T.Zt- $Z,OO) x t pound)., $ .77 unfav.
Changesdue to the effect of direct material
quantityon direct materialusage:
((oldmaterial quantity- new miterial quantity)
x
ofd materiarprice = (1.25- 1.ool r iz.ooi.:.:..... (r.75)fav.
Ghangesdue to the effect of direct material
quantityon direct labor usage:
((ofdlabortime - new rabortime) x otd rabor
rate =
((24+ 60) - (22 + 60))r $i2.6oj............:.:...........
(.42ltav.
Totalchangesin prime costs per unit due to
the
use of new direct materia|............,.....,..............
$(i.4Olfav.
(b) changesin prime costs per unit
due to the new
labor contract
((newraborrate - ord taborrate)x new
rabortime
= (S14.4o- Si2.60l rl22 * 6d))............:.:.:.........
.66 unfav.
Reductionof prime costs per unit ($1S.OS _ $13.79) $ (.7alfav.
 , r
- \

CHAPTER19
DtscussroNQuEsTloNS

O1$'1. Whm rtandetd cotr an nof ircorponlc4 hry cycb llwtuatbnr. and brcaur prrkdic
rnayb. ucedfotth. Putpocs cl prichg' budgrel' reporlhg requirementr rcault in arbilrary
hg, and canlrolling6t bd if |hcy an not uscd cutcill daleq varianc. smt balarcer d
tor twrntory cocthg, tho advaniagerlrqn lho a parlicuhr culrff dalc ar nd astignabb
Bving cl clodcal dlorl in accounthgcannol bc to oprrating r!!ull! of lhr prriod lhrn
oblahed ond€d They will carrcel oul ortr lino and
O1$'2. With actual cost methodq it ir tirsl noceesaty lo herefore shorrH br carriod b |hc balarrco
rolect a coat flow melhodJifo, fifo, averago, rheeL
'l (b) Varbrccq appesrhg ar clrarger or credilr
ob. lt lhen ncccsgary to keep detsiled rccordr
ol quarililicr and prbo atd b mrko laidy cun' qr |frr ircqnr rtdemrnl an rognrdrd ar
phx calcubticrs cl invontory cods. Wilh a statl' approprbr ctrarges or crcdils in thr pcrF
dard cocting syclm, crly quantitieg, nol prirxs, od in whk*r they arise. Thcy an conski
murl br taken into accounl' facililaling both rrcd tho resuh €t larrorable or nfavorsblo
ncod keephg and cabubtbnr. Stan&rd codl dcpadurcs frqn nonnd (ttatdatd) condi'
abo prwiJr el stllol tione and aro disckcscd rcparalely frorn
Ol 9'3. Tho nurnber of variance occountg is delermhed cot of goodr soH at stendatd" Thb pro'
by (a) the nunrber ard typc cil variancec lhat are vUer rnanagemerdwih mobscured hlo.'
to lppeat in ttatomont! for managemont u!c, mElbn for inmedialc correclivc aclkxt
and (b) lho need for casy dbp€al of variarcer lnventory etl and cod cil goods sold
at thr ond O ,6" ;ircal prrird, particularly whon shouH not b. digtortod by variancer that
thr variancec are not trested uniformly h finan' represenl abnormal etficienciet or ineffi'
cial Catementg and for analyrcs. cionci.t. Thc slandard cocl roprorenlr
Ol$.t. (a) The standad coct ol prcduc-trcsnpleted thal Irnount which is rearcnably fieces'
and productc sold can be detormined sary to produce finishcd products and
inmedbtely withord wailing lor lhe aslud should lherelon be considored the bcct
c€l to be cabuloted. With stsndsrd costr, measure of the scst of goods mgnufac'
rnmhly stalomontr can be prepared nrorc tured and inventory cool, as bng ar the
qubkty. underlying operating conditionr remain
(b) A firm producing a greal many dillerent undranged.
products finds it praclically impossible to (c) The argumenl for allocating variancea
delermine the actual cost of each product belrvo€ninvenlories and cost of goods
The use ol standard costs will facilitate the sold is that standard cogts are a uselul tol
preparaticn of hcorne statementsby prod- for purposes ol managerial control, bul
ucl lines. shqrld not bc substitutesfor actual hictorF
(c) Keeping linished goodr stek recor& in cal cetr h the financial slatemenla Only
quantiiier mly will result h derical savhg, aciual historical costs shouH be used for
s i n c e l h i s e l i m i n a l e sl h e n e c e s s i l y f o r tinancbl reporlhg, even though lhey arc
recording lho aclual unil cost of each greater or leas than stEndatd cootl, and
nceipl and i*ruc or strbmml. wilhgut regard to lho reasqlr for their dif-
0195. Thr standard cethg ol invcntorics depends cr fersnceg lrom stan&rd costt. Standard
(a) lhe types of standardr cmployed, (b) the cod varianco3 are no{ gahs or loeses but
degree of guccesg that the company haa in costs (or reductions therein) ol goodl
kceping overall sstual cost! h lhe with standard manufacturedand should be allocaled
cod!, std (c) the ccrrcepthcld with regard io the between invenloriegand cosl ol goodr
nsl suilablc khd of cost. rcld. To treat |hem ar gahs or lcser h
at$€. (a) Defenal of variancor is supported qr the the period h which they arise disfofi both
grounds that. il th. rtandardg in usc arc tho inventoryand gres profit figurea. Thir
basod qr nqmal prbr, efficienqy,and orn- distortbn will bo cven gtealer if tho clatl'
pul levels, posilive and negstivc varionces dardr are Lackhg in rccuracy or rcliability.
can be expoctod to offget src anothcr h Further, lo tubsliluto standard coslt lor
thc long run. Becaule varisncc account actual historicajcost8 h thc lirancbl atal*.
belances al any givon point in limo aro rnrnb rgptslontr an unwarranledcacrilicr
duc to recurringrcasonol and businesr ol objeclrvity.

488
 Clupter t9
189

E)GRCTSES
Er9-1
Price Yarlancerocorded at the time materials are received
and pfacad in the
storcltom:
ilaterials (2oroo0 r $.421..r.o.r..........o..........D..........,....
Materials Purchase prico Varlance (2O,O0Or $.O3)....
8,400
600
Accounts Payable,(2o,OOo x $.45)..,..,,.r.,............... 9,OOO
Work In Procass (8r2oo r 2 r ilZl r...............,..........o. 6rggg
MaterfatdeuanutyVarlance(t oo i $.42;...,..:::.::::,,.,..
Matgrlalg (l 0r5Oor $'lzl .................,.................o... 42
6,930
Materialsrscorded at astuaf cost when-reccived,and price
at the time materialsars lssued to production: variance determined

M a t e r i a l s ( 2 O , O 0 Ox $ . 4 5 ) . . . .
9,OO O
Accounts Payabte .'.......'.....,..r.r.r......r.....o..-....r...r..
9,0o0
work in Proggss (8r2oo x 2 rg42l..,..,..........,.o,....D....
MaterialsPrica UsqgeVariancalio,soo , S.0g1......... 6,ggg
495
MaterialseuanUtyVariance(t oo , i.ce;...J..:...::::,.....
Materials (16,500 x $.as). 42
7 1425
Prica variancedeterminedwhen the
productlon until the materiarsare materialsara-received,but not chargedto
actuartypracedIn process:
Matgrials(2oro-oo r grfoo
Materiatspurchase$a2)....,........................,............,.
prici variance,iid,doo x
Accountspayable (2o,oo0, S.asi..... $.o3).;. 600
9,ooo
Work In Prccgss (gr2o0x 2 r-$.42)..,,......,...........o..r...
Materials 6rggg
luqntitrVariance (ioo;C.4t::.,.,...,,n..,....
Materials(i 6rsoor $,42).-................,:::........,.......,. 42
6,930
Materials Usage Variance (16,500x $.o3)
|rigpurchaseprice
Materiars 4ss
varianie.,1..,.,................. 495
E19-2

(1) Materials(l2'O.OO
Ae purchasedr $S Sp) ..........or..,.o.961000
Materialspurchasepiice Vari"n""..,...,:.:.:....,............
Accountspayable g60
96,9g0
Work in process(12,BOO Se r Sg Sp)
Materiatseuantity Variance.........::.:.::.:::::...... lOZ,qOO
Materiats(r3,oooAe issuedr 38 apt::::.........:.::::: 1,600
1o4,ooo
#n Chaptor t9
1

E19-2 (Concluded)

l2l Unit
Averaqecosting Total Cost Quantitv Cost
Beginninginventof!..,.............. $ 15r88O 2,OOO s7,94
PUrChaSgg.........".rr.................. 96.900 12.OOO g.og
Availablefor use. 14.OOO 8.OOaverago
Materials... 96rg60
Accounts Payable ...r..........o....r..r...'................r.r.... 96,96O
Work ln Process (12r8oo SQ r $S Sn,............o......t...! lO2rdoo
Materials Quantlty Vadance (i3,OOO - l2rBOO)r $S Sn i,600
Materials Price Usage Variance (t3'OOOAe r
(s8.o6AP - $8 SP)) 780
Materials(13rOOO
AQ r $8.O9AP}.,..,..,..,,..........,... I 04,78O
(3) Fifo inventorv
Work in Process(sameas abovg|...............,.............r.
102,4OO
Materials QuantityVariance(sameas above|.,........i.. 1 , 6 0 0
Materials Price UsageVariance 760
Materials (($Z.ge r 2'OOOunits) +
(S8'o8 r I l rooo units)) ..........o......o...............,..r.,. 1O4,760
(4) Lifo inventorv
work in Procgss (same as above) ...........................o...102,4OO
Materials QuanUty Variance (sarne as above}..........,.. 1,600
Materials price Usage Variance.....,.......r...,..,.......r.,... 900
Materiats ((SB.OAr 12,OOOunits) +
(S7.94r l r0oo units))............,...........o..........,...... 104,90O
E19-3
Payroll'... ............t,..,r.....o.r..,.........,.,,r..,......... 18,048
Accru gd Pa1rrclt....'.,.......,r...,......................,..r.,..r,.. 18,048
Work in Process (2rdOOx 314 r Sg.5O).r........r......r..r,r. 1 7 , 1 O 0
LaborEfficiencyVariance(1Zox Sg.io) 1,14O
Labor Rate Variance (1,g2O x S.1O)............
192
Payrolt (1,92O x $9.4O) 18,O48
 Ctlr,Ots t0 191

Elg-4'
Work in Prpcess
(lO'OO0unltg r 2 SQ per unlt r $2 Spl'....,..r.,.... 40rooo
Materials Prlce Varlancc
(($e.tOAP - $Z S4 r 2lrO0OAQI.....................,.. 2,too
Materialg QuanUtyVarlancc
($2 SP x (2O'OOO SQ - 2l'OOOAQ)).........r...,.....,.. 2,OOO
Materlals (21,OOOAQ r S2.1OAPI 44,l Oo
Work in Procass
(lo,oo0 unlts r 114SH per unlt r $i2 SR) 3OTOOO
Labor Rate Variance
( ( $ 1 Z . Z OA R . $ 1 2 S R ) x 2 , 4 O OA H ) . . . . . . . . . 480
l-abor Efficiency Variance
[$12 SR r (2,40OAH - 2,500 SHD 1,2O0
Payroll (2,4OOAH x SIZ.ZO AR) ........
29,2go
Er9-5
(f) Work in ProcessGt7FO rate r l2rO0OSH).................. 84rOOO
Applied FactoryOvefi ead ..,...,,,,...................,....... 84,0OO
l2't AppliedFactoryOverhgad....r.........r........,..................
84,OO0
Fagtory Ovgrhoad Contro1...r.,..,...r.........-,..roo. 84,00O
(31 Volume Variance
(S4.5Ofix. rate r (l5'OOOBH - l2'OOO SH)f ........, l3,5OO
Controllablg Varianc6.....................r......,.......,........ 6,5OO
Factory Overhead Control
(S 9 1 ,0 0 Oa ctu al - S84,O0O
apptied) .. 7,00o
E 1 9 -6

(1) Factory ovgrh gad Contro1....................r................,..... 56,OOO

various crgdits r-...,..r........r.......,............................ 56,0OO
(21 Work in Process (i l'OOOSH r $5 FO rate)..,........,...... 55,OOO
Applied Factory Ovorhead .o....,........ 55rO0O
f3) Applied Factory Overhead............r.,....,..........,.......,...55,OOO
Factory Overhead Controt.. ..,,.....,.... 55,O00
(4) Controllablg Variance....,........r.......'...............r....,.,... 4,00o
Volume Variance
(S2 fir. rate r (1O,OOO BH - 1i,OOOSH))
_ 2rOOO
Factory Overhead Control
( S 5 7 , O O Oa c t u a l - $ 5 5 , O O O a p p l i e d ) . .
2,OOO
 r - l
- \

KP Chagtor 19

=79-7
llt Work In Process (4rgOOSH x $10 FO tiato),.,............... 7618OO
Applled Factory Overhead 76,8OO

i2l Applied Factory Overhead 76,8OO

Factory OverheadGontrol 76,8OO

B} Variable Efficlency Variance

($4 var. rate x (5r2OOAH - 4r8OOSH)l ............,.,.r I'OOO
VolumeVarlance
($12 llr rate r (5;OOOBH - 4800 SHll .......,,r....... 214OO
SpendlngVarlance 2,6OO
Factory OverheadContml
($78,200actual . $7618OO
applied)..r,..,.,.,...,...,...r. 1r4OO

:19-8

fl Work in Process (Z'0OOSH r $11 FO ritof ,..........r,..... 77,OOO

Applied Factory Ovgrhgad r...........o........r.........o..... 77 |OOO
2l Applied Factory Overhead 77,OOO
Factory OverheadControl 77 |OOO
3) VariableEfficiencyVariance
(98 var. rato i (Z1600AH - Zroog SHlt ..........,....,. 4,8OO
Volume Variance
Gt3 fix. rate x (BTOOO BH - T'OOOSH}!...........o...... 3,OOO
Spending Variancg'.........r.r...............r..r..r.........r.....,r.. 1,7OO
Factory Overhead Control
( $ 8 6 , 5 0 0a ctu a l - $ Z Z ,OOOa p p l i ed) ..........,..r ,..,...... 9,50O
 Clppterrg

l-
Ei9-9 .
Percentage of curnent-year labor cost element
In finished goods and cost of
goods sold:
oh
Flnishadgoods,lgrooo units x $,01abor..,...............D..
Gostof goodssold (ftom cumontproduction), ##:; 20
(91ro0ounib - lSroOOunitsix Sl faiot ............._g94.ooo
80
sgsq@9 too
b Allocation of cumant-yeartabor variances:
Finishedgoods (*?f0_9o_l 2o%o1,.............r...r..............
Sior4oo
cost of soods sotd (g52,ooor tioy"1...............:::::.......
4t.600
lga€99
End-of-yearbatances:
Finished Gost of .
Balance Goods Goods Sotd
at standald...'.........r......o........r...r...o...............
Jaborvariances $tTirooo $819,OOO
P:f:ll:arb aiiocation...................,.
lO'4OO
Last yearb variances, alt appllcableto "o"i-oi-;;il; 41,600
I sofdon a fifo ftow assumrition .r......................-__-_--
!t 5,goo
-s866.400
E 1 9 - to
Percentageof units in inventories
and cost of goods sotd:
Direct Labor and
Materials Factorv Overhead
Units o/o Units %
1' 500 2soh 5OO lOVo
l r2OO 21oh 7 r2OO 24oh
3,300 55oh 3.300 660h
I

b
_q@@@@@@@@@@@@@@@@g
7_oo% 5.OOO 10c.o.h
Allocation of variances:
I
I
> Gost of
Total Work in Finished Goods
Amount Process Goods
I Sofd
: $ (150.001 $ (37.501 $ (3o.ool $ (82.so)
500.oo 125.OO 100.oo
600.0o 275.OO
I 60.oo t44.OO 396.OO
l12OO.OO 120.oo 288.OO 7g2.oo
1,5OO.OO 150.oo
(1,800.00t
360.oo 990.oo
(180.oo1 (432.OO1 ( 1 , 1 8 8 . O O )
$r,sso.gg s43o.og $:,i-g3.sg
 -\

$1 ChWtor 19

E19.I I APPENDD(
Work In Procest ($4 FO rate r 3'{5O unltr I 1.5 SH per unltl 2Or7OO
Applled FaCtOfy OVgfhgad.............................'..............F...
20r7OO

Appllgd FaCtOfy OVeffiead .r........o............x'or8r.o.,............-.o. 2Or7OO

Lifci"n"y Varlinco St4Fo rate r (5'320All -5'175 SHll""" 680
ldle Gapiclty Varlanco(33 llr rats r (8,000BH- 5'320Al0! 4040
1r97O
SpendlngVarlancc
Fagtory Overhead contJol ..-. 21r35O

EI9-i2 APPENDX
Work In Process ($2o FO ratc r 9'4OOSHI 188,OOO
App ll g d Factory Overh ea d .......r....rr..... t88,OOO

Apptled FaCtOry OVefhgad....o...........'....o..o....'.....o.'........D..188,OOO

Varfable Efticlenqy Varianco
Gt4.5OYaf.I (f 0'600 All - 914OO SH))..'......'.'........... 614OO
Flxed Efflclency Varlanco
GNl5.5O fh. r (10'600 Alf - 9r4OOSHll ..'.""r"""'o"" 18,600
7,2OO
Spending Variance ...o.o....
ldle Capacity Variancc
Glt5.5O fir. r (lO'OOOBH - lOr6OOAl'l)1.............'.o... 9r3OO
Factory OverheadControl aaaatat aaaaaa 195,5OO
t
\,

t I

l
\-
Clpptcr19 1lE
I

L
PROBLEMS
I

\,
I
Pt0-l

I
Materlats(33rOOOAQ purchasedx 32 SPI ..'........r................t 66rOOO
Materials Purchasg Pricg VariancO..............,............o'.... 1r32O
t'
Accounts Payable(33,OOO AQ purchasedx ${.96 AP) ..,. 64,68O
I Work In Prcces8 (OroOO oqulyalent unlta r 6 SQ r $2 SPf '.'... 72rOOO
L
Materials Quantlty Variancc SrOOO
I
Materlals(4O,OOO AQ lssued r 52 SP) 80,OOO
!
Work In Prtcess (5r8OOequivalentunlts r7l4 SH r $8 SRl.,. l 1 , 6 0 0
I
Labor Rate variance ($g.zo AR - $s snl r 1r5o0AH)......,..... 300
L
labor EfficlencyVariance($8 SR r (1,5ooA]l - 1,45OSR]l.... 400
PayrollGb8.2OAR r l 'SOOAH|.....,.......,....o...........,........... 12,3OO

Factory Ovgrhgad Contrc|..,...r..... 65rOOO

b
VariousCrtdits... 65rOOO

Work in Process
tt
(5,5OOequivalentunits r 314SH r Sl0 FO rate1........ 66rOOO
Applied FaCtory Ovgrhgad '.D......'.......'......o.................t...r g6,ooo
tr
Appli gd Factory Overhgad .'...'.'............o...r...........r................66,OOO
Controtlablg Varianco ......,.,..r..........r..........r.r....r........r.,..,..... 500
Volume Variance ($12 fired rate r (4,OOOBH - {,125 SH}} 1,5OO
iD
Factory Overhead Control ....,r...............,.................,....... 5,OOO

Finished Goods (5r2OOunits r $26 standard cost),......r....o.... 135,2OO

!
Work ln Procgsg ..........,,.......,.,,.., ..r,.,.r....r, 135,2O0
I Accounts Receivable (5r50Ounits r 940 sales pricel ..,..,...... 22O|OOO
>
Sa1es...........'.r..r................. .,....,.,,........ 22O,OOO

I Cost of GoodsSold (5r5O0units r 326 standardcost).,......... f 43,OOO

!
Finlshgd Goods...,...r...........,..................t.......r........,....r... 143r OOO

'''
I
 1# Chapter 19

P19-2
Materials Labor Overhead
Units completed gnd transferred out this period 2r4OO 2r4OO 2r4OO
Less all unltg In bgglnningInventofi,...............,r 300 300 300
Equlvatentunlta gtsrted and completed thla
period 2r1OO 2rloo 2,1oo
Add equiyalent unlts requlred to completc
beginnlngInventory o too 150
Add eguivalent unlts In endlng lnventory r......-.. 2ao 100 50
Equivalentunitg ol producUonthis period......... 213OO 2r3OO 2r3OO
Multlply by standard guanUtyof lnput per unit
of product 5 unlts 3/4 DLH 2MH
Standard quantity of Input allowed for work
producedduring the period l_l.5oo 1_J25 !.600

Materials(l1,0OOAQ purchasedr $0 SPI 66rOOO

Materials Purchase Price Vari 1,OOO
Accounts Payab1e.........r...r............rr...........r..r.....r........... 67,OOO

Work in Process ($OSP x 11r5OOSQ allow€d).....,.,,......,....... 69rOOO

Matgrials QuanUty Variancc r...........o................o.................... 3rOOO
Matgrials ($6 SP r 12roO0AQ lssugd|............o.....,,........r 72,OOO

Work In Procesg ($i2 SR r lrT25 SH aflowodf .............,...o..... 20t7OO

l-abor Rate varlance ($12.10 AR - $rz snl r l,7oo AH!........ 170
Labor Efficiency Variancc
($12 SR r (1,7OOAll - 11725SH)l ...,...ri..........,,.......r. 300
Payroll a a aaaaaaaataa aaa aa aa a a t att aa 20r57O

Factory ovgrhgad Controt..............................o.....,.................

69,OOO
Various Grgdits..........ro,...........r..,... ......,.r..,.....r, 09,ooo
Work in Process (Sf 4 FO rate r 41600 SH a!!owod|...........,.... 64,4OO
Applied Factory ovgrhgad........,..-.r.r.,r.......,..r..........,,.... 64,4OO
Applied Factory overhgad ......o.,........,r............r..o.r....,..r........
64,4OO
Variable Eflici ency Variance
(S2.80yar. rate'r (4,9OOAH - d,6OOSlIl) ................. 840
Volume Variance (St t.Zo fix raten x (5,oOOBH - 4,600 SHI) 4r48O
Spending Variancg.t,........,,.. ...........r,. 720
Factory Overhead Control ,..........,..................... 69,OOO
'S1 4 FO
r a t e x 2 O o hva ri a b l o= S 2 .g Ova riabter ate
" 314 FO
rato - S2.8Ovariabte rate = 311.2O fired rate
 I

I
\-
Ctaplstg
I 197
L Plg€'
I
Conversion
- Materials -Efoo
Cost
-Unltsggmqfot-odand transfermd out this period ....... 5,ooo
L'8gsall unfts In beglnnlng lnventoty........:......:.:.,......
I 3,OOO 3.OOO
b
Equlualentunlts startod and compteteOthis perlod...
Add equlvalent u-nftsrcqutred to complete 2,OOO 2'OOO
beginnlng lnvantofl ...r.......D...t...................
I Add egulvalent unlts ln ending Inventory....D...o....r...., o 2rOOO
b
Equlualent unlts of producUon Urtg penoA 2,OOO 1.500
Multlpfyby ---'
....,........,... 4,O0o 5,5OO
standardquaniltyof lnput p"i uiii
Of prOdUCt................Dor..ea11..11....1..i.......!.....
_
Standardquanilty of fnput altowed for work 6 unlts 1t2 hour
produceddurlng thc perfod,............o.,........
24.OOO Z,ISO
Materlals($'5qsP r goroooAe purchasedt
.,,.........,..o..........
Matgrials Purchase Price variancg.........ror.....................,o..r.,lsrooo
Accounts Payab|ett"rr.........r.........r.....'...........r...r.r.......... lrooo
16rooo
work fn PrccesL.F:?o , 24roooSe altowed),..................,
_sp
MaterlalseuantityVariance izrooo
..... 2so
Materiars
($.sb
sp;-;d#iliiffiil':::::.::.::::.::.::::.::::
72,zso
Work In prccess6f 9-9! , 2r7SOSH
LaborRatevarianco .............,....o..o. 2TTSOO
-a-fl91ved|
((sro:t6AR- sro $ii;'iiiiooAH usedt r,eso
Labor Efficiency Variance
Glfo sR r (2r8ooAH - 2r7s_?sl0).....,..............ro,..........
PayronGto.zs AR r 2,600 ax useii:::::::::::.:...............::: 1r5oo
27,e5o
Work In Process($12 FO rate r 2rlSASH
allowrod),...............33rooo
AppligdFactoryovgrhgad.'.......................,....t,...............
33rooo
FactoryOverheadContro|.....,.....
various credits......:.::::::::::::::.::::::..::::.:.::::.:.:..:.,::::::..::.::3 i ,ooo
sr,ooo
Applied FactoryOverhead....,..,..
""""""""""'..r....'...........,.
controltablevarian"" .....,....:::::::, 33rooo
vofume varfance
Fe nred;;;i{iilH;ffi;1iil. 2so
t
Factory overheadcontrot.-.::............,r............,...,......o.... 2,2so
\ 3i rooo
 r
I

Chapter19

P19-3 (Concludedf

Finished Goods Inventory (5,OOO

unlts x $14 standard costr) 7O,OOO
WOfk in PfOCeSS ..r.........o...r.r...........o.........r..................... 70tO0O

'Materials
(6 unlts O $'50 eachl'.'... $ 3.oo
Labor lll2hovr O $1O per hour) 5.(X'
Overhead:Varlable lll2hour e 33 por hourl...... 1'50
Fixed (1/2 hour O $9 per hour).......,.. 4.5O
Total standard cost per unlt of product.............. 9!4.00

Cost of Goods Sold (5r1OOunits x $14 standardcost).,......... 71r4OO

Finishgd Goods lnventory...................'.'...o...........'.......... 71t4OO

Accounts Receivable(5r1OOunits x922 sales prlce|....,....... 712eOO

1"l2r2OO
GGA-Canada(adaptedl.Reprlnt wlth permlsslon.

P19-4
ENSLry CORPORANON
Income Statement
For Year Ended December 31. 2OA
Sales((2O'0OO unlts + 1101000unlts - 12r0O0unltsl r $251.....r......$2,950,000
Cost of goods sold at standard (118,0OOunlts x $17.60) .. 2.076.800
Gross profit at standard ....,...,.......r....r.,..o.,,.......,,......,......,..........,..
$ 87312OO
Add ngt manufacfuring variancg....r.....,...r....o.,....,............,............. 9O1
Grossprofiq adjusted to actua1...,..... $ 873,290
Lgss markgting and administrative expe[s€s,...,..............r,...t........ 68O.5oO
Opefating InCOme..................'t.'.'.....o...r.....r....r...'...........'..'.".t.r.'r.. $ 192.79O

I Manufacturing variances: Unfavorable Favorable

$ 3,750

44,OOO

1, 1 0 0
s48.760 s48,85O
48,780
Net favorabte vartanco ........
!:-s fa*
I

I
v
Clnpter 19
199
I
L Pl9-4 (Gontinuedf

Materials:
I
Agtual quantity r average cost
l-
[25OtoOO fbs. r 1.485 per lb.]..........,...,.........rr.r....,.........
s37tr25O
Astual quantity r standard cost
I (250,OOO lbs. t $i.5O per lb.f 375.OOO
:
Matgrials purchase price variance.........,..........,..............r.
E_e,7soffav.
!
Thansferredinto production(24O'O0O lbs. x $1,So1...ri....... $360,OO0
standard quantity for l is,ooor eguivafentproduction
ynits (23O'OOO lbs. r $1.5o per lb., or liS'OOOunits r
$3 pgr unitl.t...............r..................o...r..............r........o.... 345.OOO
Matgrials quantity variance...........,.,.........
-L _!5l0o9unfav.

Pound Unit
Basis Basis
Thansfgrrgdout of work in process..,...r.............,.,.r.. 22OLOOO
Beginnlng inventory (all completed|..........................
110,O0o
20.ooo lo.ooo
Startgd and compfgtgd this period .............,.r........... 2OO,OOO
Add gnding inventoly....,.......................o.........r...,.....30.ooo
I O0,oo0
15.OOO
Total 'Dr"tt....t....ot...r.........rr.....r.r....................r.....rr
?39e9 115,OOO

Labon
Ac'tuallabor cost.......D......"..'...r............r.,......r....o.........,.
Actualhoursr standardraborrate(16r,ooohoursr $81 -iiiea,ooo
$l,3l3rzGo
l-aborratg variallco,'.'."........'.'......r...,..,....r,,.,........,.,.,.i.
E-zsrzeo
-
unfav.
v
Actual hours x standard labor r?ttG)....,................,........,...
$1,288,OOO
Standardhourc r standard labor rate (l661500hrs.il I
per hour,or ll irooO units * r $i 2 per uniU..........
. $8 1.332.00 0
LaborefficiencyYariance..,..,.,........................r......,.,......
fav. S__(4!.,OOO}

I
 I

Chapter 19
ffi
I

P19-4 (Concluded)
r* Computatlon ol equivatent pmductlon for labor and tactory overtread:
Hour Unit
Basis Basis
Thansferredout of work In Process 165,000 11O,OOO
Beglnning InVentOltsflOfk In pfOCeSS.'.................... 15.OOO IO,OOO
Staftgd and COmplgted this pefiOd .,...........o............. l5OrOOO lOO,OOO
Add 3/5 tO COmplete beginning inYefltgtJ..........r...... I,OOO 6,OOO
Add I /3 Ol endlng inVentOfy.r..t..........'............o...r..... 7.500 5.OOO
TOtal .aaaa..ra...r.r...a.o..o.....aaaa.aaa.....r...a.aoa..rar..aaar.aar.aa
166.500 I I l,OOO

Factory overhead (two-variance rnethod):

ACtUal fagtOfy OVgfh gad ....o....,.r.'...r..........r'..........'.....'..o.'. $295,5OO

Budgetallowance:
Variableoverhead(1I t 'OOOunits r $1.5O|... $169'500
Fifgd OVgfhg4d........,...r..,.....,...,...........r....... -!3L@ 287.500
COntrOltablg VafianC8.................i...'.'.....'........'.'..........t..... $ 8.OOOunfau

BUdget $287,5OO
a11OmnCO...............o.rr..r........r.o....................t....o....
Applied lactory ovorhead(t I l r0OOunits r $2.601.............. 288,600
VOlUmg varianCg..................................o......o.......tt............o. :S
(l,1ool fav.

P19-5 KALMAN COMPANY

lnterim Income Statement
For the Second Quarter, 2O-

SalgS (SOOTOOO f $3Ol ....r....o.....o..................r....................'............ $18,o0o,ooo

COSI Of gOOdS SOld at Standard (600'000 f Sl 81......'..'...t.o'.......o... 10.800.ooc
GrosS prOfit at Standald ....................r....r...............'.......ot.............$ 7,2oo,ooo
Adjustmentsfor standard cost variances:
Matgrials price variance1..........'...'...o................. $ 237,800
Labor efficien cy Yarianco2......'........................... 38,OOO
Overheadspendingyariancos.... t35,OOO
Variable oyorhoad eflicie ncy yarianco4 .............. 8,00o
Ovgrh gad Yolumg yariance5.....................o.....'...' ---j 416.600
Adjusted gnoss profit o...,........, ......,....... ............. $ 6,783,400
Less commercial erpenses:
MarkeUng orpensos ($t8,OOO,OOO r 1Oo6)..'.......$1'8OO'OOO
Administrative oxpensos (SOTOOO,OOO r 25oh)'.... 1'5OO.OOO 3.300,ooo
lncome b e f o r e I n c o me ta x......... S 3,483,4oo
Loss income tar erponse (S3,483,4OOr
'1,741.700
( s 3 , 7 5 O , O 0/ 05 7 , 5 O O , O O O ) ) . . , .
Ngt incom€ .,.......o....,..r............r............o.............'.'r......'.'.....'.""" sJJ4E-9e
t
t

L
I
l>
Chapter 19
501
I
I Pl9-5,(Continued)
rrhe materialsprice varianceshould prorated
be between work in process,fin-
= ished goods,and cost of goodssold as ioltows:

I Endingbalanceof $72,OOO
- - 4'OOOunits
! work in process $18 per unit
i Endingbalanceof $goo,ooo
I
E finished goods 5O,OOO
units
$18 per unit

l Totalunits in endinginvgntori€s...,........................
b
5!_,ooounits
Jo!"! units produced during second quarter..........
Totalunits in endinginventori€s.....,....,.........,....... 45O,OOO
54.ooo
Units producedand sold duringsecondquarter..,
- 3g6.ooo
Materialsprice variancecharged
I
b to cost of goods sold - 396,OOOx 27O,OOO = 5237'600
T56:FOO
zsince the tabor efficiencyvariance
is not regardedas significant, all of it is
\, chargedagainstsecondquarterincome.
oA portion of thE overhead
spendingvarianceis attributable to the overtime pre-
lL mium paid. since the overtiire-premiumwas incurred
forecastsfor the entire year' the portion of the in order to meet sales
from the overtimepremium spending variance resutting
I isg.ob raborp",' unii at regurar rate x Sooh=
S4'50/unit)shouldbe proratedover the entire y""r. proportion
each quarteras follows: in to the sales of
Productionin excess of capacity (euarters 1
and 2 onry):
Quarter1 = 465,000_ 43OrOOb = 35,0OOunits
Quarter2 = 4SOTOOO - 43O,OOO = 2O,OOO units
I
overtime premium resurtingfrom ercess production:
QuarterI = 35,OOO unit! x $4.SO/unit=
Quarter2= 2OTOOO $f SZ,SOO
units x$4.5o/unit = 9O.OOO
> Totalovertime premium for first six months
_S24Z,SOO
Prorationof overtimepremiumportion
-
of spendingvariancebased on sales:

Quarter2 = -s600'ooo x s247'5oo

A' Et.-^r^^-.
total overtimepremium= $99rooo
$l FoAooo
 Chapter 19

Pl9-5 (Goncludedl

The overhosdspondlngvarlanco chargedagainstsecond quarter income is

calculated aa follorvs:

Total overheadspendingvariancefor second quarter.-............... 91261000

AmOuntresulting frOmSeCOnd qUartefOVertimepremiUm......,... 9O'OOO
$ 36tOOO
Amount rgtatgdio unexpgctgdIngff|cignc|93.................r............
Amount ol overttme premium chargeable to second quarter on
the basts of salgs attocatlondgtgrmingdabovg.................... 99.OOO
Total spendingvariance chargedagainst second quarter income SI-95'O0O

aSincetactory overheadis chargedto productionon the basis of direct labor

hours,an unfavorablevariabteoverheadefficiencyvariance occurs because of
the inefficient use of direct tabor.The amount of the unfavorableoverhead
variableefficiencyvariance is determinedas follorvs:
labor eff lclency varlancc r 32 = $g,ooo
r varlablcovsrheadper unlt = #
l-abor coot per unR

5Thecompany pollcy is to report a volume variancoon Interim statements only

il actual producgon Oittersirom the ptannedproductionschedule. Sincs actual
productionis equal to budgeted producUonthrough the end of the second
quarter,there is no volume yarianceto be chargedagainst second quarter
income.

P19-6
(1) Material Material FactorY
A B Labor Overhead
.|
Units completed and transferred out...... 15r0OO 15rOOO 5,0oo 15,OO0
Less beginning Inventory (att unitsl.......'. 6.000 6.000 6.000 6,000
Started and compteted this period.....'.... 9rOO0 IrOOO 9,000 I,ooo
Add work this period in inventories:
Beginning inventorlf ..........,.r.'....r...... o 2,OOO 3,OOO 2rOOO
Ending inventory .............r................. 5,OOO 2.500 1,250 2.500
Equivalent units of Wgstco.....,..,......,...... 14,0OO 13r 5OO 13,250 13,5OO
Standard quantity per unit of Westco...... x i x o x 11l2 x 113
Standard quantity alIowgd.................,..... :14.OOO
: 81,OOO 6,625 --l!I!ioo

Materials ((15,OOO
r 314) + (BO,OOo x $21). ,. 3TO'OOO
Materials Purchase Price Variance,..............,.r......'........ 65rOOO
Accounts Payable (15,OOOr $13) + (8O,OOO x S3l).... 435,OOO
Work in Process ((14,OOO r $f e} + (81,OOO x $2)1...........,. 3 5 8 , O O O
Materials Quantity Variance ........r.......'r............ 5,4OO
Materials ((14,2oOr $14) + (82,3oOr $2ll 363,4OO
t

I
C@ter 19
503
t I

Pl9-6 [Goncluded]
I

- Work In Plocgss (0t825 r $r o) ........................,...r.........r.. o6,25O

labor Rate Varlanco (61500r GltO - $l l)l ror,,,......,.,.....,.. 6,5OO
I labor Efficienciltariance ((6,025 _ tirsoo, r $lO) .....
\- Payroll (8t5oo r $l ll ..o...o........'..rts...,...........,........o.-. 7r25O
71,50O
Work In Procggr (4r5OOI $24.............................r.........., 1 2 l , 5 o o
I Applled Factory Overhead.....
\t aaaaaa.aaaa
121,500
Applied Factory Ovorfi o8d ....... t2t,5oo
VolumeVariance((5,OOO
- {,5001r $241 ........,..............oD. l2,OO0
! Spending Variance ..............o.......-.........o...o...ro.....oo..
VariableEfticiency Variance([4'SOO 11,2OO
- dr4oOlx $3]..::
Fagtory Ovgrheadcontrol ....r..........................,......... 300
: 722,OOO
(21
Labor-Efficiency Varianc4.................o..............................
b 1,25O
Spending Variance.D............r...............................r..,........r
11r2OO
Variablg Efficigncy Vartanco...........,................................
Income^ Summary.......!...r...........r....o...................r...r........
300
Materialspurchase price Variance.......,......:::.......... 7 6 , 1 5 0
MaterialsQuanUtyVariance,..........o....r.,......r..,..,...... 65rOOO
Labor Rate Variancg............o.....o..........r.o.................. 5,4O0
Volumg Variance....r.r.......r.......r...o.....................r...... 61500
1 2,OOO
I (3) PACIFIC MANUFACTURINGCOMPAilY
b
Incomo Statement

S
lales ((4r0oo+ l5rooo - 3rooolr $601......t,...........r...r..... s924,OOO
Cost ol goodssold (f 5r4oo x Slol r............o........,o........o..
9-* profh at standald ..............D................................... . 6t 9.000
Adjustments for standard cosi variancos: s3O8,OOO
Matgrlalspurchaseprice variancg....,.........,.............
Matgrialsquantityvariancg..............................,r...,.. s65,ooo
b 5,4OO
Labor rate varianto..........i........!..............o..r.........r...
Labor effic i ency varian ce ........,......,..r....... 6,5OO
t....,........., ( 1,2501
.spending variancg............'r..........r....t.......rD..,....r.....
\ Variab Ie e ffi ci e n cy vari an ce :..........,.......r.,....,.t......... ( 1 t , 2 o o l
Volume yarianco..........r.............................rr. (3oo)
I Adjustedgross profit..... l2.ooo 76,150
v Lesscommenciirexpen";; ::::::::""""""""""""""""""' $231,850
120.OOO
::.::::.:::::::::.::. ::.::::::::.::::
l n c o m e t a x e x p e n s e ( 3 O 7 ox $1 I 1,85O
S111,gSO).....
N e t i n c o m e ,....... 33.555
s_7q.?95
 I
,
I

w Chapter 19

?79-7

ill Materialg (4OOOollterr AQ purchas€d r 94 Sn.r............ IOOrOOO

Materiale Purchase Prico Varlancc.. 800
ACCOUntg Payable ....'...r.......................................ro.. 159,2OO

Work In Process flO'OOOunits r 3 liters SQ Per unit r

$4 SPI t2o,ooo
Matgrials QUanUty VarianCe ...,......r.'r.............o.r.....'o...... 4,OOO
Materials (31 ooo llters AQ issued r $tl SP|...........". 124rAOO

Work In Procegs(lOrOOO unlts r 112SH r $Z Sn1.'-'...---t 35rOOO

Labor Rate Variancs ($7.42 AR - $7 SRI r {1800 AH).-.... 2,O16
L^aborEfflclency Varlanco Sl7 SR r (4'8oo All -
StOOO SH)|....................r......r...'......r.o...i...............t. I,4OO
PayfOll Gt7142AR f 4180O AH) .......,......r.o....r.r........... 351016

Work in Process(iO'OOOunits ,,112 SH r $15 FO ratel... 75,0OO

Applie d FaCtOfy Ovgrh gad.......o..,,....'.r.....'................ 75rOOO

FaCtOry Ovgrhgad COntrOl .o.r.............o...'...................t..... 8lr 5OO

VariouS Grcd1t3....r...o.r.........r......................t.............. 81,5OO

units r $23 standard costl ........ 230,OOO

FinishedGoodr (l O'OOO
Work In ProcgS8.........................,o........r.........'....r..... 23O,OOO

Cost of GoodsSold (8,00Ounits x $23 standard cost) .'.- 184,OOO

Finishgd GOOdS........r'...r....r...o.........o.................r..t.'. 184,OOO

Accounts Receiyable(81000units x 340 sales ptieo)"".. 32OlOOO

Sa1gS....r.....r... r.rr.rrr..r........r...r.....r..........t.t.. 320,OOO

Markgting and Administrative Expenses......'...D..'........... 5O,oOo

VariouS Ct€dits..........................................r.r...tt.t...... 5O,OOO
 Chapter19 505

P1s-7iContinueCl

121Aetual factory overhead. s81,5OO

Budget aflowancebased on ir8OOsctuaf hours:
Variable overhead ($8 variable r:ater
4rgooAl{ ....... ...........4..... S28r8OO
Firgd ovgrhgad.............r...r....................r.,...r 4g;5oo 78,3OO
Spending variance......r.......'.......r.o.......rr.r.......rr...r........rr..r $ 3,2OO unfav.

Budget allorlrrance
based on 4r8OOactual hours
(from above).........'D.....r..r..rr....t....r.......'.................
s78,30o
Budget allourancebased on B'OOO standard hours:
Varlable overhead ($6 varlabfe rate r
5rO0OSH) ...........,.........,......,.r..........r.....33OTOOO
Firgd ovgrhgad.'.o...-....r'.-....r.o...r.'.D.............. lgrsoo
Variable efficlency Yariance....'.........o...........r.,..........,....or..

Budgetallonrancebasod on S'OOO
standard
hours (from above)........o..'......r..r...............,...r.....,r s79,5OO
Applied factory overhead (Sf S FO rate r 5,OOOSH)............ 75,OOO
Volume variancg..'......'.......r......r......o......rr.,...o.....,....,...,..r.
$ 4,5OO unfav.

(3) GRINDLECORPORATION
Income Statement
For November
Sa I esttt ttt"" """tt o" " '. o....t...........r r...........r.
Less cost of goodssotd:
r.... r.....r.r..r.....r..................r
$320,OOO
Standard cttSt............i............o..,r................ri.
$l g4rOOO
Netunfavorabtevariances(Schedule
i1.......,.....,...... 1O.316
profit
194,316
Gross tt"""to"......rr...ro...........r.........r........r.r.r...r....r......,..rD....r..,
MarkeUng and administrative orpenses.............. s 125,684
...,r............ 50.o00
Income bgforg tar95.......r.......'.........................r...........r.........r..rr.......
$ 75.684
 i l
I

ffi Chaptar 19

P19-7(Goncluded|
Schedule1
GRINDLECORPORATIOII
Schedule of Variances
For November
Materials purchase price variance taaa aaatata S 8oo
Materiala quantlty variance ........... $ 4,OOO
Labor rate variallco .................'..... 2rO16
Labor efficiency variance 1r4OO
Factoly Overhgad epending YarianC9..................................r.. 3r2OO
Factory ovg rh gad va ri a bl g eftl ci gncy vari anc8 ...............r...'.. 1r2OA
Factoryovgrhgadvolumg variancg..'..........r.....r'.........'......... 4r5OO
$13,716 $3,4OO
(3.4001
SlOt316
Ngt unfavorablg YarianCg......r.....r......r.r..........'.'....r..r.'..........

CGA-Canada(adaptedf.RePrint with pennission.

P19-8
(1) Allocatad to Coct
Allocated of Goods Manufachrred
to Coat ot
Wor|r In Flnlghed Goodl
Total Procaar Total Gooda Sold
Materials price usage variance......r.. sl,5oO ssoo sl,ooo $gzs s625
Materials quantity variance.......,....... 660 220 440 165 275
Direct labor rate variaflco .......,......... 250 50 2AO 75 125
Factory overhead spending variance (30o) (60l 4 l24ol _(99J (1501
Total variances ..r..r.,.................,......., $z,t1o $7ro $1,4OO $SZS 9875
Discounts lost on purchases............, 120 40 80 30 50
Tota1..................................,.....,,....
: $2,23o
: : : : $75Q Si,48o 35€5- S925

FactorY
Materials Direct Labor Overhead
Pro- Pro- Pro-
duction duction duction
Units % Units % Units %
Work in Procesg:
Materials (t r2OOunits r I O006).....,..,...l r2OO 33 lrs
Direct labor (1r2OOunits t 5O06).......,. 600 20
Factory overhead (l,2OO units x 5O%) 600 20
Fi n is hodg o o d s ( 9 OOu n i ts x l OO%)..,..." 9OO 25 900 30 900 30
G o s t o f g o o d s s o l d (1 ,5 o Ou n i ts r 1 OO%l 1.5Oo 41 2B 1 , 5 0 0 50 1 , 5 0 0 5 0
Total .........'..............o..........'t..."""""' 3teOO 1_99_ _gpoo 1 0 0 :3 -. O O O t o o
 Chapter 19
fi7

Pl9-8 (Conctuded)
(21 Fastory
Direct Oven
Materiafs Labor head Total
Work in process at standard cost
lOOVol... s 8,4OO
Direst labor 17r2AO
units r $g r SOo/o1.. $ 4,8oo
Factoryoverhead(ir2OOunits r
$2 r SOTol ......r...r.o...r.r...r....r.r......r
sl,2OO $t4,4OO
Finishedgoodsat standard cost:
tttai"@.....,r,....... 6,3OO
Dituct labor (9OOunits x $g) .....D......r.. 7r2OO
Factoryoverhedd(9OOunits x $2)....,..
l,goo 15,3OO
Cost of goodssold at standardcost:
tvtatg ......... 1 O , 5 O O
Direct labor (i'SOOunits r Sgl ............ 12,O0o
Factoryoverhead(lr5OOunits x S21..,.
3.OOO 25,500
Total mfg. cost at standatd cost... s25,2OO s24,OOO
Less work in process,Dec.gi, t9_... s6,OOO $55,2OO
9.400 4,800 1,200 f 4.400
Gost of goodsmanufacturedat
Standard COSI....................r....,...r.$16,800
Add: Variancga11ocation.................,.r 1r44O $1g,2oo $4,8oo s4O,80O
Allocation of discounts lost on
200 (24o1 1 , 4 O O
purchases...............,........r...... 80
Cost of goods manufactured at actual 80
cost...,.......r...............r.....,.,...........
[q€20 $lgrgoo $4€so s4e/80
(3)
Work in Finished
Process Goods Total
Materials at standard cost ...........,
Materials-price variance ailocation........'.. S 8,4oo $ 6,300 $14,7OO
-quantity variance allocation 500 375 875
....... 220 165 385
-allocation of discounts
lost on
purchase3............,............r....
40 30 70
Total matgriats.,........,...
,........r $ 9 . 1 6 0 $ 6,870 $18.030
Direct labor at standard cost
.....,.........,.,..... $ 4,8OO $ 7,2oo
Direct labor-rate va riance allocation
..........
$tz,ooo
Total direct |abor.................................... 50 75 725
$ 4.950 $ 7.275 $12,t25
!a ctorV overhead at sta n dard cost...D..r........ $ 1,2OO $ i,Boo
Factory overh ead--op.n ain g
r"ii"n "" $ e,ooo
allOCation.........,.....................r.....r...
(601 (e0l (150)
_loull
. Igt"l factory overhead ....,.,....,
inventories at actuat cost... $ 1.140 $ 1.710 $ 2.850
$15.150 $15.955 $gl .oo5
 *t

Chapter 19

PI9.9 APPENDIX
Convcr-
Cotton alon
Cloth Dver Cost
Units comploted and transferred out this period....,. 3'OOO 3rOOO 3rOOO
Lgss all units In beginning Inventol'1f
........................1,00O LOOO I,OOO
Equivalent units started and completed this period 2,OOO 2rOOO 2rOOO
Add equiyalent unitg required to complete
bgginning InvgntOfl .t................'..........r.............. O o 750
Add equivalent units in ending inventory.............r..., 75O 750 250
Equivalent units ol producUon this period.........,o...., 2r75a 2r750 3,OOO
Multiply by standard quanUty of Input per unit
Ol p rodu Ct ........................o...........r.o.i..........r.......3-@.g. I pint tt2hour
Stardard quantlty of input allowed for work
producedduringthe period......,..,............,.........
Eg99 2J50 1.500

Materials-Cotton Cloth (5,OoOyards AQ purchasedr $f SPI 5rO0O

MaterialsPurchasePrice Variance--CottonGloth ................ 500
Accounts Payable(5r0OO yards AQ purchasedx $1,1OAP) 5,5OO
Materiats=Dyes[2r5OOpints AQ purchasedx $,50 SP]......,.. 1r25O
Matgrials PurchasgPricg Variancg-f,l1/€s........r...,......... 25
Accounts Payable(2,5OOpints AQ purchasedx $.49 API 7 1225

Work in Process(5r5OOyards Se allowed r $l Sp) ..,.,..,..,.... 5,500

MaterialsQuantityVariance-Cotton Ctoth....................,..,.., 100
Materials--CottonCtoth (5,OOO yards Ae issuedr $1 Spl 5,goo
Work in Process(2r75Opints Se atlowedx $.5o Sp)........,.... 1 , 3 7 5
Matgri aIs Quantity Varianc e-Dy€s ......,..........,,...,........,. 25
Material-Dyes (2r7O0pints AQ issued x S,50 SP|.....,.... 1,35O

Payroll(1,55o All r $5.9o AR|................................................

9,145
Accrued Papoll (and employeewithholding accounts),.. 9,145

!'l/orkin Process(lr5OOSH attowedr $6 SR)............,..........t. 9,00o

LaborEfficiencyVariance($e SR r (1r5SO AH - I,SOOSR)}..,. 300
Labor Rate Variance((gs.goAR - $6 sRl r i,550 AHi ..... 155
Payroll "'...................r..r.......r..'..r.r r.................... 91145
Factory Overhead Contro1....,......r..,, ..rr..... l6rl OO
Various Credits.......,....................... 16,1OO

Work in Process (1r5OOSH altowed r $1O FO rate)....,.. 15,OOO

Applied Factory Overhead..........,... ......o....r....... 15,OOO
I

C,lWter 19
509
I
lr
Pt 9-9 )APPEHDIX
(Conctr.rdedl
I

> Applled Factory ovgrhead ......r...........r....,.............r...............

15,OOO
Chlerhead Spending Variancg...o........r...r..............or................
OverheadEffielency VariancegllO rate r 650
llt55o fH - lt5oO Slfl) .............r.....................r.r........ 500
Overheadfdle Capactty VariancoGt7flxed rata r
(t t600 BH - 1t55O AH)l ....:...'...............r,o......o............
Factory overhgad Cohtroi.......r...........,..................,.-,...r. 350
16,5OO
Finished Goods (3'OOOunits r $i O.5Ostandard c(lst!.....,,.....
31,5OO
Work In Process......o.............o..........r...r...r..rrrr......D.........
3l,5oo
AccountsReceivabre (3rroounitssotdx $rc salesprice)...,. {3,4OO
Sa1gs tttr""ttt""tt.......r.r.o.r.rr....D..r....................a..a.....r.r....o
43r4OO
Cost of GoodsSold (3rlOOunlts r $lO.SOstandard costl...,..
Finishgd
32r55O
Goods '....r........o.tr.................o......r.rt..o............r,
32,55O
Cost of Goods So|d tt...........o.......r.r.o.......................r..............
Matgriafs Purchase price variance-DyiErg..,.,......,....or....o...... 2r195
Matgrials Quantity varf ancg-.Dygs.............r,........!.........,,...t. 25
Labor Rate Variance............rr.....t..............o........o..........r....... 25
Materiafs Purchase price Variance_Cotton t55
G|oth.......... 500
Materlals Quantity varianc+--cotton croth.,....D......r..,....
Labor Efficiency variancg ......r.......,............,......,.......,.... 100
Overhead Sp_en d ing Variance,....,..,................................. 300
Overhead Efficien cy Varian ca ..r.....................,,............... 650
overhea d I dle Capiclty Varian cr) .,..,...::.::::::...,............... 500
350
Pl9.IO APPENDIX

Materiafs(1o ooo kg Ae purchasedr

$z sp).........,...............2O,OOO
MaterialsPurchasePricg variancg,..,...,.,........r..............
Accountspayabte(tO OOOkg Ae purctraieJ 500
r $i.9S Apl 1 g,5OO
Work in Process(90Ounits r 9 kg Se per
unit x $2 Sp1......;.. 1 6 1 2 O O
MatgrlalsQuantityvariancg'.:..............................,.........,......
Materiats(B 600 kg Ae issueor $z spt.:::::::.................. 1 , 0 o 0
17r2OO
Work in Process(9OOunits r 2 SH per
LaborRateVariance((Slr.55 An-_-S_to.sounit r $1O.5OSR)...... 1 8 , g o o
sR) r 1,74oAH)... 11927
l-aborEfficlencyVariance(SlO.5OSR r
(71740A|l _ 1,goosH))...,....r..........,..
PayrollfSt r.ss AR r i,7do AH)........::::::::::::::::::::.::.:..:::: 630
20,Og7
 tI

5to Chagtor 19

Pl g-l o APPEIIDX (Concludedf

Factory Ovgrhead Conttpl.....-...........'............................'...... 24rOOO

VarlOur Crgd1t4...r....................................r.....o................t 2d,ooo
Work In Procegg(9OOunlts r 2 SH r $13 FO rgtel .............ror. 23r4OO
Applled Factory Oryerhead 23,4OO

Applled Factory Overhead 23r4OO

ldle Gapaclty Varlano SilO fhed rate r
[2,OOOBH - I,74O At0' 2rOOO
SpendlngVarlancc... 520
Varlable Eftlclency Varlancc Str?var: rstc r
ll,74o Alf - 1,8OOSHll 180
Fixed Efticloncy Variance ($f O fir. ratc r
11,740 All - 1,800 SHll 000
Factory Overhead Gontrol 24,7OO

FinishedGoods (9OOunits r $65 gtandardcostt..........o......... 58r5OO

Work In Procgss r..'...........................r..rr.......................... 58t5OO

CGA-Canada(adapted|.Reprint with permiesion.

 -T
L I
I

I
\-

i
I
f-
Chaptcr tg
5tl

L l
CASES

L cl9-t

(1) The guotation implies that sactuaf'manufacturing costs form

t
I able basis for inventory costing becausethey we; incurred tha prefer-
b the inventory, in producing
The notion that actuaf costs are the only acceptable
! tory purposeshas been ctrallengedby advotates costs for inven-
I
t: of
Accountants who advocate usinl stanoaru "o=tr-1orstanoard costs.
believe that standard costs ate iore nepnesentativerepo*ing purposes
the product than actuat costs. Ttr"v r"intain of the true cost of
that r"t"n"us ars mea-
sunesof abnormalinefficienciesoiabnormal
ances cannot be inventoriedand should efficien"i""; therefore, vari-
bs immeJiai"iv t""ognized in
determiningnet income of the period-rather
and cost of goods sold. Thus, tire costs attached than p--#"o to inventories
costs that shoufd have b?:n in"uo"J, not t'o irre-product aru the
the
Many accountantsbelievethat u"ri"n""" costs itr"t rrur" incurrpd.
ried as long as standards ale currentty do not have to be invento-
attainable. gut it standalds
not up to date, or if they reflect ttreoriticat ano
f ormance under t""=onib ty efficieni pe*orm-ancerather than per-
variancesshould be split uet1vg.en,rr" "onoition", irr"i, l-on""ptualty, th e
from attainabrestandirds and til;;i;n o"r,ion tirai;it}" departures
Most accountantsagree that unfavorabfe that does not.
the differencebetween standarus r"ri"ni"lresutting from
those based-onnormat p-erforman* uaseJ on theoleticai parformanca and
and pr''oratedto inventoiiu" "nJ-il"t "r,ourJ i" ti"ffi'i" product costs
ment relating to variances.resulting iiiooo= sotd. n ; is ress agres-
performance and standards fror; the diffeilr""'i"t,reen actuat
based;; ;;;,nd (attainabrelperforrnance.
standard cost advocatesbefieveirr"lii-"=e
expensedbecause they nepresent variances should be
accountantsbelieve that tirese t"ri*t""abnormal conditioi"-.'t,,"ny other
cost of producingthe goodsand, nepnesent part of the actuat
costs and proratedto inventories theref;, shourd u":irr"t"d as product
(21 and "o"t or goodssord.
The three
To"t-appropriateatternativeme$rodsof variancedisposition
woufd require the ioltowingentries:
{a} Cost of GoodsSolJ..
Finished cooJ"rn;;;i;:::::::::::::.::::.:::::::::.:::.::
I
V a ri a n ce ............... r,l3l
fb) C o s t o f Go o d s S o td ......--- - ------ """""""""""o""' ltso0
variance........:.::.:::""""".. l,soo
(c) Finish.ed
Goodsrnr"ntorr::::::::::::::::::::::::::::::_::: t,soo
variance............... ,
1,soo
.............:.:..:::::..::::
1,soo
 r ' lI

Chaptor 19
5t2

Ct9-l (Concludedl
(3) The first journal entry is in accordancewith the discussion in part (ll as.
the most appropriatEmethod of handlingvariances.Cost of Goods Sold
is charged-withthe excess cost above what it should have taken to com-
plete the proiect, based on a nonnal (attainable)standard. Tho costs
stan-
ivariancei| resuttingfrom the differencs between the theoretical
goods
dard the normal standard should be proratedto cost of sold and
inventories,based on the relative proportion of the associated cost con-
tained in each. ln the situation presented,the entire $l'OOOis charged to
FinishedGoodstnventoryinstead of being prorated to inventories and
cost and goodssold becausethe productionis includedsolely in finished
goods inventorY.
The second;ournalentry can be justified as an appropriatemethod
for dispositionof the variance primarily on practical considerationsbut
has litge theoreticaljustification. The practice of charging all variances
to Cost of GoodsSold (or against current revenue!often has been justi-
fied on the grounds of simplicity,convenience,and immateriality.
The last entry woufd be appropriatewhere it is desired to adiust the
standard cost inventoryto actual costs. Many accountants would advo-
cate this entry in the circumstancespresentedbecausethe inventory
would then bi stated at actual costs of production.However,when this
method of variance dispositionis foltowed,the asset inventory will be
carried on the financial statements at an amount that exceeds the cost
that should havebeen incurred.Thus, inefficienciesin operationsane
being capitalizedas assets in the financiatstatementswhen this method
is applied.
 CHAPTER 20
ouEsTloHs
DrscussloN
O2Gl. Diracl cosls arc dirccl tnaletials, dirccl labor.
and clhcr cost3 ditccuy assignrabb to e product
ir r procrduro by which only
Aj1qgl-Cailigg
prirn costt plur variabb faclory ovrrhoad aro
rttigrt d !o ! Ptoducl or irvrntory; ell firrd cods
porbd cstc.
aro srrUorcd
O*Z Ptoduc{ €ir rt esrcietd wilh thc mrnulac'
turo of e product end ircludo di?cct mat.tieb'
dirrl labor, and lactory orcrhead. Thcs. catr
arc chstgod againsl rcvcnuc Es s€sl of goods
rold. or shovn on thr bahnco sheel as invenle
rier of work in ptocett and finished gooda'
P.riod costs are asseiatcd with thc passage cil
timc and sre included as cxponggs in lhe in'
cdrrc stalemerd. Under dircct esting, lired frc'
tory overhead is trealed as a pcriod coet nther
than !s a produc'l cosl.
O2O3. Under direct costing, only Ystiabl. manulac'
turing 6ts are ircludcd in invcntory. Undcr ab'
rcptioo costing (thr cunrnt. gcncrally acccpled
method of cor'ling invtnlory for extemal rcporl'
hg), all nranufeeturing coets, bolh variablt and
tixed, are included h invontory.
O2G4. lt iB argued that lired manulacturing cosls 8te
thc exp€nses of mahtahing productive capacfy.
Such expenses ara mo.c closoly associatod with
thc passage ol time than with produciict activity
and rhould, thereforc, bc chargcd lo Period
erp.nre ralher than to tho product.
O2$5. The direcl costing method ir useful lor hlemal
roporting because il locuses attention on lho
fixed-variable cosl relalbnshp and the contribu-
lion margin concept. lt facililates managerial
decisioo making, product pricing, and cosl con-
Irol. lt allows corlain calculalidrs lo bo readily
rnade, guch as break-even pohts-and contribu-
tian mirgins of products, cales lerrilorios, oper-
alrng divisions, otc. Tho leus on the contribution
margrn (salos revonue less variabie costs) en-
ables managemont lo cmphasizo prolitabilily in
mshing shorl-run busincss decisions. Fixed
cosls aro ncl oasiv cstlrollable in the short run
and hence may not bo parlicuhdy relevanl for
rho.l.run bushess decisistr.
O2O€. Argumenls lor thc urr c{ direcl cosling hclude
tho lollrwing:
(a) For profit-planning end decition.making
purpo3es, mlnlgem.nl requir6r cosl-
volumo-profil rolelionship data that 6r.
moro rradily eveilabb from direcl cort
ltal.mcntr than from ab3orption cort
rtalements.
(b) Sincc lixcd laclory overhead is abrcrbed
as a perird cogt, fluctuatbns in production
and diffcrcncrr briwcen thr numbcr ol
unils produccd ahd tho numbcr rold do
513
nd aflect the per unil Ptodttt cosl.
(c) Dirrct costing toports Ete mote oasily
undcctood by managemcnl becausc lhc
Etal.mmi! f ollo* mrna genronl's doctsbn'
rnsking Ptoc.r33s morc closely than do
a\rorption 6l gal.ments.
(d) Rrpodhg thc tctal fixed ccl lor thc perird
in tho incorrrr rlatcrnent dirccts manag.-
rncnfs dlentian lo the relatirnship of such
6l to Prolils.
(o) Thr dirninatbn ol allocated jcint fixed cet
prrmitr a mot. objeclive appraisal ol
incornr conlributions according to prod-
ucls. tafes areas, kinds of cuslorners, elc.
Cot-nclurnr rclaticnships are highli ghled.
(f) Thr rinilarity ol lho undertying concepts ol
diroc'l cosling and flexible budgels facili-
tatca th. adopibn and use of theso meth-
ods for reporting and cost conlrol.
(S) Dircct coeling provides a means ol cGting
invrnloqy lhat ir similar to managemenl's
cqrcopl of invenlory cosl as lhe currenl
oul-of-pockel erpenditurei necessary lo
produco or replace the hvenlory.
(h) Cle&al costs ate lower under direcl cosl-
ing because the m€lhod is simpler and
dosr nol require involved allocalions ol
fired cosis o special analyses of absorp-
tion data.
(i) The cornputation ot product cosls is sim-
pler and rnore reliablo under direct ccling
because a basis lor allocatinglhe fixed
costs, which involves eslimales and per-
aonal ludgment, is sliminatod.
0,20-7. Argumenls 8gainsl lhe use of direcl cosling
include the follaring:
(a) Separalian of costs inlo fixed and variable
might be difficult, especially when such
cosls aro semivariable in nalure. More-
over, all coslsincluding fixed c6ts{tc
variable at sorne level ol produclion and in
the bng run.
(b) Long-range pricing ol products and olh€r
long-range policy decisions require a
knowledge ol complele manufacturing
cost, wtrich would reguire addilirnal sepa-
rsto computalions to allocale lixed over-
head.
(c) Thc pricing of invenloricr by tho direct
cotling method i3 not accoptable lor in-
co.r|c lax cornpulation purpo!os.
(d) Direcl costing has not been recognized as
conlorming with generally acccpled ac-
cotnling principles applied h lhc prepara'
tbn of financial statomonls for rtockholcl-
orr and lho gencral public.
 511
(r) Prbfitr dotorminod by dirrct cothg en
not'trua rnd prcpor, b*llr cl lhr uclu-
rixr cl fnrd prcductixt qtr thrt rn prn
of tolel prcductbn corl. .nd invontory.
Pradwtion rculd nd br porbb wilhort
plrnl frilitiel, rquipmonl, olc. To dirrr
g.rd lh€. fu.d str violdeo tho grrnl
pdrrcipb cl mrbhhg co.t, with rov'rrnu..
(f) Tho olnirdim ol tir.d str lrqn hvrn.
tory r.rultr ir r lowor figuro end @rut
qurot red|rticn G||rrpodod *odrhg crpfd
fq firerrciel rnrr),!b purpor.
A2O€. Assrrnhg thrt h. qurntity cf rndhg invmtory b
larger than thr qurntity ol btginning invrntory
and lhr lilo mothod b urod, op.nling incqnr
urhg dirrt strrp rpuld br rrnallor tun oprr-
ating irrornr urhg abtorptbn corting. Diroct
corling oxcludor firod lrctory ovrrhord fronr
invonlorio boceul ruclr cotr rro conridrrcd
to bo porbd cortr which rf. axponrod whon
incunod. In cqrlrerl, ebrcrptin sthg ircludot
tirrd frtory ovtrhred in invrntorio bocruro
sirch cotr en suidond to br product ots,
whbh aru rxprcrod crly whon thr prcdLnt arc
sold. Whrn tho guentity of invrntory irrcrotrl
during a poriod, dr.st c6ti1g producco a brrer
dolbr ircroaro in hvrntory than obcorptbn ccot-
ing, bocaurt firtd cortr aro oxp.nsod rathrr
lhan cherg.d lo invrntory. Sincr e rmelbr
anpunt of cuntrl prird sl ir chargnd epirut
incornr undrr tht lbrorptioo corting mrthod
whrn invonlorior incrour, ebrorptioo cating
Incom. would br lergor thcn dirrct cotting
ncgTl..
Q2G9. Thr brrah-ovm pcirl b the Xint et rtrbh costr
and r.vcnua irrc h eguilbrium, rlowing noither
pofil nor lora lor thr busirrsr.
O2Gl0. Thc ccntrbutixr rnargh it lhr nsutt ol rrrbtract.
n9 variablo cql lrcrr tho ralcs figun. Tho con-
. tributiqr margh indicatcr lhr arrpunt rvailablo
fq th. r.@.ry of tirrd co.t arrd lot proltl.
o 2 G t1 . ,
(a) R(BE) = - F
t-v
or (ir *ordr):
Brv$uo rt
tho Totst tir.d c6t
brrakrvrnpc*rt= EJ,ilf,Gffilr
por dollar cl ralos
(b) O(BE) =;L
P_C
or (h rords)
Unilt of ubr at Total tix.d coot
= (a) Whon morc thst ane product ir producrd,
broehrvrn pc*rt Cartribulbn rrrargin
product
o2or2. (r) Dolr' of 'vonw #;1of
(21 Volurrr oaorrtp{rt,rxprrsed h unrb, ptr-
cant of capacity, lelol, or lom. othil
rnaatun|.
Clnpter fr
(3) Totrl cat lin .
(4) Verieblo cod rna.
(t Firrd coet rrrr,r
(0) &rl-rvon pcirl
m Lorenr-
(8) Pnlil enr
(9) Sd..litr.
@o13. An rdpb of tho rrpra.d bohrvbr cl a firm.t
frporrr.f end rtvrnur lor thr purp€o of csr-
dructhg r bn hvm ch.rf b uruetly nrtrictod
lo tho qrtpr, lovrlr rt whi*t Uro firm i likrly to
oponh. Artumplbor rbout thr lovrl of firod
god, tro nlo of verirbb st, and salcs prbos
rn buod qr tho oprnting srditisrr ard msn.
rgrriel policior thtt will bo in olfrct ovor tho
reoclrd ostpul bvob. Thesc oxp.cled output
lovrlr roprcsrnt thr firm,r rrltvanl rangc, and
thr sl-vplumr-prc{it rrbtlxrr}ripr r}ronn in e
brodr.evtn ctrerl err applkrblo mly to output
ltvob within thir rango. Tht bohavior of fixcd
cod. variablo cod, md ralot prbco at tcvob ol
orjtpul bobw or oboyr thr rebvenl rangc er.
lik ty lo ruuft in an ontiroly dilforrnt rt of cool-
yoluntr-prc{il nlaticxrshiu bccauro of cfungrd
op.trling csrdtbnr c nranagrrbl polbio. Tho
trl Srat hr cct and nvtnuo lirer qr e breal.
rvon cherl arc typically txtrndcd past thc uppor
and lowcr lirnitt of thr rcbvant rango thouH no!
thordoro, bo intrrprotod to mean that thcy aro
vrJU for lhrao bvob of ouqpd.
A bnakrvon chart rtr*ing cot-volumoprof.
it relalicnrhigr for rll bvdr ol ovtput could bt
drvolopod. Tho rhrpor of hr cod and rovonuo
linrr in euch r chart could not, howcvor, bo
trpoclod lo approrimatr rtraight-linr (linmr)
p.ncrnt. By rcstrictingthc undorlyingccl.and
. rov.nua bchavior aslumptionr in broak-ovon
Inalys.s to a relativelynarrow output range (tho
rang. orcr whi:h thr firm b likcly to opcrate), it
ir urually poesiblolo rlsumo linear bchavior
paltornr wilhoul any rignificant dietortbnr in
sl-volurno-prc{il rc latianrhpr, thereby airnplify-
ng the analyris.
tf tho rangr wer wtrich o firm ir likely to opor.
a|l ir guitr widr, curvilinearfunclionr may bo
ompbyrd; or it may bo dcsirsblo lo dcvclop e
numblr of brcak.ovrn charlr, oach hlving ilr
own rllovanl rang., for which thr undrrlying
cort and rcvcnua bohavior arrumplionr erc
valiJ.
O2G14.Woaknesseshherenl h thc preparatbnand usc
of brcak.cven analpis arc:
lhr cqrtribulicr margin of ooch producl
will probably diflor. Accordhgly, a broak.
ovon analyrb for tho urholooprratbn wiil
not hdbat. tho csttribtuirn of rach pred-
uci to firod co.t and thc volunr rcquirod
lor oach product
 Ctugtcrfr
, (b) Somo'costr en elrnosl impouible to
dalsify ccrduJvcly ar bchg ri{rer fired
avarbbh
(c) Grnrnl rcqronic conditioor and othrr
rrtrmal hcton rmy rflect ho dete urod
h th. rrtsl)ttb.
(d) In thr final enalyrb, fird coct b nlatod
!o productir:n end ralor rn4 thrrofon,
may drcnrtr romrwhat dur to
docreard production and ralcr-cnd
vbr vonr.
(r) Ouilr oftcn cstr hcrcare tharpt el crr-
. tah pcirn! in prcdraion and raler lcvett
and lhen levol or,lt until a ccrtain gmster
rlagr of production andlor rahs ir
rcedrcd, el wtrbh tino hc phrnanoncr
ir rcpealcd ar production and/or talrr
are agair ircreased.
(0 Pedormancr murl bo conrlanlly com-
parod to thr bnal-ovcn analyab h older
to determhr whrihcr thr csrdilirrrr that
rxirlrd at tho timr of thr colculatlons
havc heH lruc, and whether any changes
have been cqrsUered.
42S15. (a) With cales pricr prr unit and totat fired
cogl rcmaining cqrrtant, thr brcak.evcn
poinl movcr up rapidly ar unil variabb
- cool ir increased; at thc samc timc. the
brcak-ovon poinl moves down as unil
variablc cost ir decreased
(b) A decrease h fired cst krwerc the break-
. Q20-2l.Elevating a conrtraint maanr improving tha
even poinl. An increase in fired cost
npver the break-cvenpoht higher.
Q2S16.The mangh ol salefy b a seleetedLbs fgure
less break-evensales. The rnargh cl satety is a
cushion agninst sales decreases.The greater
the margin,lhe groatefthe cushbn againstsuf-
feringa bsc.
Q2Gl7. Cct-ye1g6r-profil relationshipi: lhe
retatron-
ship of pofil to sales volurne. Thb relaticrship
is importsnt lo,rnnagement because ,rEvrago-
ment lries el all timos to keep volume, cost,
prrce, and product mix in a ralio that
will
achievc a desirod level ol profit.
5t5
O20-'t8.Thc.Tf,"9ty of Conrtreints lr r spccializad
ycnion d dirud corUng for urc in ghorl-run
optlmizaton dccirionr. A dittincUon batwecn
TOC and dircct costing ir thgt TOC focuscc on
only thc purely verieblc coltr rnd doa not
consider dlrcci labor to bc puroly verieblc.
Q20-19.Mosl cornpenict thrt deesify 6nt tnto ftxeO
and variablc c8tcgoric! bcst dircst lebor ar
verlablc, co In dirrl cottinE, dircct lebor i,
arigncd to productr ar e wrleblc
- or
incramantsl cort-of producilon. tn thc Thcory
of Conrtreintr, dlrcct labor lr sdpuletcd to ba
not purcly vsriablc rnd lhcrclorc is not traltcd
ar an incramcntsl cost of output.
Thc diffcrcncc betwccn thc contribution
margln rnraruru ln dlrcct coillng snd thc
lhroughput mcalurc in TOC lr that ilroct lebor
lr onc of thc cost! daduclcd from sslcr to
celculsle conlrlbutjon mergin, but dircct hbor
is not r coEt to bc drductcd hom relcr in
calculetin0 throughput
Thcrc arc mrny dtflcrencs in Grnphesir
bctwecn dlrcct corting and tha thc6ry ol
conrtraints. For aremplc, whllc dlrect coitlng
ir widaty ug6d er sn eccounling epproach foi
i:t!"ln"t reporting of incomc and pioduci cort.
TOC dcalr hcavily wlth thc improyorncnl ot
conslreinl! or botilaneckr In . producllon
syslcm.
Q2o-20.Throughput ir tho rata at which a rystem
gangratas moncy through s8ler. lt i3
cslculsted ar srlcr minur thc purrty varisbte
coslq and ottrn th. only purcty varieblc cost ig
lhc cost of materials.
conslrairtimproving thc condltions at a
bonlenecl In the lystsm. tts slgnificanca is
grcatrst lf the constraint ls thc fightast one in
'
lhc aystom: thcre, any improvcmcnt wilf
increaaa lho totsl throughput of lhe entire
3yElem.
An improvomentin product guallty can hetp
elavalr a constraint bccausc lt can iaducc the
workload on r bottlcnecl resourca. For
oxemplo, ramoving - dctecilva unilt _bafora
ralhor lhan eftor thsy roach thc bottteoeck
meens therc wlll bo fewer units passing
through lhe botilanock. Thig har approrimatetf
thc samo cffect on thc bottteneck ai
increesingita capacity.
 \
\

516 Chapter2O

E)(EBCISES
E20-l
Operating income tor 2OA using direct costing:
Salgs (9Or0oor $1 21.............r.r slrOSO,OOO
Variablecost'of goods sold (gOrOOO r
Gross contribution margin aaaaaaaaaaaaa aaa ta ao aaa $ 72O,OOO
Variable marketing and administrative expenses
(9o,00or $2ol 18,OOO
Contribution marglJl ........'.........o...r.......r.r.r...r...o....r............r, s 702,O0O
Less fixed expensess
FaCtory Overhgad .'..'................................o.. $2OOTOOO
Marketingandadministrativeexpenses..... 14o.ooo 340.OOO
Operating incomg.............r.......r..r.,.....r.r..r.....,.rr................rr $ 362.OOO

E20-2
(1) Variablecost per unit:
. ST,OOOTOOO total variable cost
eO% manufacturingcost portion
ql2oo'999- total variablemanufacturingcost
S4,2OO,OOO
total variable manufacturing cost
1n S3O per unit
Fixedcost per unit:
S11,2OO,00O total fixed cost
59o/omanufacturingcost portion
q_5,6oo,00ototal fixed factory overhead
55,600,00Ototal fixed factory overhead
35 per unit
160,000units normatproductionvotume
Full cost per unit at standald ..........................
Numberol units sold duringthe year.........,....
s65
x lOO,OOO
Cost of goodssold at standardunder
absorption costing ..,,.r....,..r.,..,,......,,.....,...r.
s6fggooo
(21
9 n i t " a c t u a l t yp ro d u ce d d u ri n g th e year ..,...,........ 14O,OOO
Uni t s s o l d d u r i n g th e ye a r..,........... l OO,OOO
Unit increase in inventory 4O,OOO
St a n d a r dv a r i a b l e ma n u fa ctu ri n gcost per unit........ s30
Ending inventoty at standard direct cost ..............r.........t.. sl,20O,OOO
 Chagterfr
5t7

E9,O-z(Concluded)
(31 NormalproducUonvolume lgo,ooo
Unlts actually produced during thg ygar,..o..........,r..........o. l40,ooo
Ercgss of budget over actual productiort .............r............. 20,ooo
Fixed fagtory overhgad per unll...,....D..........o...o..............r.. $ss
Factory ovgrh gad volume variancg...,..-..,..............,,......o,...$ Too,ooo
-
(4) Sales(tOO,0OO
unlts r $f AOl $ tg,ooo,ooo
Standard varlable cost of goods sold (iOOTOOO units x $?O
unlt variable cost!.........r............r.......r...r......r.....r..r........ 3,OOO,OOO
Gtoss contributionmargin...D....,........ $ 15,OOO,OOO
variabfesellingerpense(sz,oooroOo
variabfecost r 4avol. 2,9o0,000
Contribution margill ........,.'...............D.'...o...........o...r..........$ l2,2OO'OOO
Less fired costs. ll'2OO'OOO
aaaaaaaaaaaaaaaaaaaaaaaaaaaa

operating income undgr dirgct costing.......,,........,.,.....r....

$ I,OOO,OOO
E20-3
(11 Incomestatement using absorptioncosting:
Salgs(9'OOO r $SO1.....,.'...........,......."...,....,...,.......,.......,...
$ 27O,OOO
Cost of goodssold (9r00Or ($lO + $S)l.....r,..........r.,...r...... 135,OOO
Gross pfofit.......r................r...r........r..ro.r.rr...r..o.......rrr..r......
Less commercial expenSBS............'or......o...............r..........
$ i3s,ooo
50.ooo
Operating Incomg..o............r"....o...rr.........o..,............,,........ 85.OOO
-$
(21 Incomestatement using direct costing:
9ales (g,OOOr $30)..........,.... ....r,............,..r.........
$ zzo,ooo
Variablecost of goodssold (9r000r $1o)................D....,..o.. go,ooo
Contribution marg ilt ...................or..,,,.........
Less fired erpenses:
$ iBo,ooo
Factory ovgrhgad.,..or...ro.......................r,
$COTOOO
Commgrcial erpens€S...,...,..................,..
so.ooo go.ooo
Operating incomg '....................,...,.........r,..,.r....,..........,.*
ll_goJqg
(3t computations explainingthe difference in operating income:
Absorption costing operating income..,.....o,.,.....,...o,.o..r..... g5rooo
Dirgct costing operating incomg.,,.........,...,.,..................... $
go.ooo
Diffgrgnc8""..................r.....,o...................r.......................,.
l_.(5,oogl
Unlts produced during the period.....................,........,.,..r... grOOO
Units sold during the period................,............ grOOO
Unit decrease in finished goods inventory ...,...,....o.
Fired factory overhead charged to each unit of product f f "OOOI
under absorption costing .......................,........r 35
Differenco............ ....,.,...,.......r.......r.....,
g_ (SrOOO}
.=
 I

518 Chagterfr

E20-4
$6ro00 = $e'ooo - $g,ooo = $iorooo break-eyenpoint in dollars
tE- i-.eo -60
s2.OO
$lO'OOO+ $2 = 5rOoObreak-evenpointin units
(orl
$8'ooo - $,6'ooo - srooobreak-evenpoint in units
Stroffi-o m-
units r $2 = $lO'OOObreak-evenpoint in dollars
5,OOO

E20-5
$ 1.oo
Dirgct 18bor.......... 1.20
Variablelactory oYefiead aa ,50
Variable marketing gxpsnsG)...'.....'................o!......'.......r.r...r........'....r.. .30
Totafvariable cost per unit s__g,og
SalgS price per Unit.'.........'....o'...r..'............r.. $ 5.OO
Variablg cost pgr U11it..r.............r....r.r..r.........r........".r..r....r.................. 3,OO
Contribution margin per urtit.......o.......'..r.r................'..........o.....rr....'..S 2.oo
Fixgd factory ovgrfrgad.........'.r.......r.......t....'......r......rr.r.....r.......rr.......$15,OOO
Firgd markgting erpensrg .......................... ..,r,....r..................r 5,OOO
Firgd administrative expeflSg.......'.'..........,.'.....r.'..........,...rr..r.r........r. 6,OOO
Total fixgd grpgnse,....r.....,..........,.....o...,....,.... r...........r. s26,OOO

(1) 326,000 total fixed cost

= 13,000 units of salesto break even
$2 contribution margin
(21 13,OOO
units r $5 per unit = S65'000salesto breakeven
(3) $26,00Olixed g.ost.+$1O,09Oprofit
= i8,000 units
$2 contribution margin
(41 18,OoOunits r 35 per urit = $9O,OOO
sales

E20-6
Plannod salgs r.........o................o............,. ......,..r,......o...... $2,OOO,OOO
Break-even sal es .....r........ l r5OO,OOO
Margin of safety s 5oo,ooo

-oo'90=ollryin of,stP = zs'h Marginof safetyratio

52,OOO,OOO Planned saleJ
L
L
L
Clpptarn 5r9
L E,.o-7'
L r{r
l - ,
$9r3OO
.42
break-evensalos
$l 5,OOO

L t2l S'o99= $16'ooo = g2o,oooagtualsaleo

1 - .25 .76
L (31 PR = C/M r M/S; PR = .62 t .25 =.155
32O,OOO r .155 = $3rlO0 profit for the month
L
E20-8

L (r) $3o'ooo = $so,ooobrsak-evonsaleg

.oo
L (21 T0'oo:o = $59'9oo = $o2,5oosalesfor the year
1 -.20 .80
L P R = C /M x M/S ; P R = .2 Ot.6O = .12
$92,500t .12 = S7,5OOprofit for the year

L (3) Sal gs
aa..raaaa...aaa...a.aaaraa.ra..r.aaaaa..r..r.o......

variablecost stg2rsoor (l -.60)).......

$82,5OO
25,OO0
contrfbution margin (38215oor .8o)..,..r...,........,....,.,..............$37,5OO
L
E20-9
!

Chip A Chip B Total

Sales:
L (1 OOTOOO
r $S! ..o.......r......r........,... $8OO,OOO
(2OOTOOOr $61 .,,...o.............r......... $l,2oo,ooo $2,OOO,OOO
Variable cost:
L GIaOOTOOO r 30g6)............r.... 24O,OOO
GfrDl,2OO,O OOr "5oA1....,............,.... 3OO,OOO 540,OO0
I Contri b uti on ma rg i n...r...o.,......r........ $560,000
lb $ 9OO,OOO $1,460 r O00
Planned operating prcfit.........r.o......
270.OOO
I Firgd cost .r..............,.........,.
i- $1.190.O00
 5m Chaptor2O

E20-10
Tbbles Chairs
Sales price per unit. $110 $gs
Variablecost per un|t,.......r......... 50 20
Gontributionmargln per ultit ...... s60 _81_€
fixed cost
$72O,OOO $l'5OO,OOOsales
1 - ((Sso+ (4 x $zop * (9t 1o + (4 x $3s))l to break even

or alternativelp

$72O,0OO flxed cost $1,50O,OOO sales

($60 + (4 r $15)l * (911o + (4 r S35)l to break even
$lr5OO,OOO
sales
= 6,0o0hypotheticalpackages
rc
or alternatively;

S72O,OOO
fixed cost
= 61000 hyryothetical packages
360 + (a r Sis| CM
61000packages r I table per package = 6,000 tables to break eyen
61000packages x 4 chairs per package = 24'OOO chairs to break €ven
6,000tabfesr31iOpertable = $ 660,000
24,oOOchairs x $ 35 per chair = B4O;OOO
Total salgs to brgak evgn.....,...o....,. $l r5oorooo

E20-11
Produst L Product M
Salgs price per unit ................-...r... $20 sls
Variablg cost per unit,..........r.....r,r.. 12 10
Unit contribution margin..................
Expected sales mix,........,r,..........r...
s 8 s s
x 2 x 3
Contribution margin per
hypothetical pickigo ..................
s16 + s15 = $st
 Ctpptcrfr 521

eo-1i (Concluded)

(11 S372'OOO fired cost = l2rOOOpackagesto brsak ovon

$31 contribuUon margin
l2'OOOpackagee r 2 unlts of L = 24rO0Ounits of L
l2'OOOpackager r 3 unlts of M = 38,OOO units of M
24rO0Ounits of L r S2O = $ 48o,ooosales of L
36,000 units of M x $ f 5 = 54O,OOO sales of M
Bfgak-gVgn Sa1gS.t......r..................r. 9l,o2o,oo9

l2l $372,OOOfired cost + $93,OOOprofit - l5rO0Opackagesto achieveprofit

$31 contribution margin
l5'OOOpackages x 2 unlts ol L = 3OTOOOunits of L
15,OOOpackages r 3 units of M = 45,OOO units of M
3O,O00units of L x $zo = $ 600,000 sales of L
45,O0Ounits of M x $ 1 5 = 675,000 sales of M
Sales to achieve profit....D......,...r.....
$1 1275,OOO

E20-12
(il Variablg manufacturing CoSt........r......'.........r.........r.,......... $2to,ooo
Firgd manufacturing Gost.,....,.,.........r...r..,..............,........., 8O,OOO
Variable marketing expenso ..........,..r..,.........r...o..D....r. 105,OOO
Fired marketing and administrative axpenses .r.,,,............. 6O,OOO
Total costs to produce and sell 70,0OOunits...oo............,..., _$4s9,oo9

S455,OOO
total cost
= S6,50sales price per unit to break even
70,OOOunits

(21 ($80r9OO.+
360,0O0)
fired cost = Si,g52
units
38-$4.5o-(ro%r$B)
(3) ($ 1 2 4 ,o o o+ $ 5 o ,o o o)fixed cost
= 8o,ooo units
38 - $4.5o - (r 5% r S8l

CGA-Canada(adapted).Reprint with permission.

 P AnW20

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L I 173

L. E2&|4
I

L (i) throughpuUunit =sales-materiats cost= $45-($fC+ ${) = $i:}0

, (2) Maximum thmughput per mon0r is ${44000. Total thmughput tur a period is tre
L g3o/unit (hom rcquircmed f) multiplied by the number of units shipped; units are
limited by ttre loyrestcapacdy operation, which ls Surface Prep's 4800 units per
i month: d800 units/monfi x $3olunit = ${44y000lmonth.
I
(3) Surface Prep is the tightest constraint with a dS0Gunit capacity.

r- E2o|5
(f ) No, Oreyshould not acquire tre equipment Gloss Coat ls nst the tightest
! constraint so increasing its capacity will not help.
(2') Tgto,llaximum monfily tlrroughput will not increase'
!
(3) Yes, an addifonal Surface Prcp (SP)crew should be hired. The increase in overall
thmughput rnore thaniustilles ffre cost
!
. (4) Maximum ttrrcughput witl increase by about ${5'000 per montfi (500 unitsfnronth
x $3o/unit).SP is the tiglrH constrain! so increasing its capacity will incrcase
: $roughput of the entire system until SFs improvement causes anofrer
conslraint to become tfre tightest Glcs Goat, tre secon&tightest constraint
presentfy has capacity 500 units higherifian SFs.
!
E2G'6
s (1) Yes, an inspection should be created just prior to Surface Prep (SP).For each
1,000 shipped, 50 defectirrcs enter SP-26, 1d and 10 arising in tlre tfree
preceding operationq rcspectivcly. SP trstlre tightest constraintr so removing
s
de{ectives priorto SP will increase total system tfrroughput At S30 throughput
, p€runi! the 50 added units (perthousandshipped)doiustify the added
\' inspection.
', (2) Removingall defuctives just prlorto SP will increase tfie number of good units
! entering SP by 5U1r000or atrout 5"/o.Vyilfi SP presenffy handling 4800 units per
rnonffr,a 5o/oinclease in units shlpped lE .05 x d80O = ?4r0.Additional thtoughput
\. will be 240 unitstnontr x $30funit = f/r200 per mon0r. BGGau$eltre inspection
will cost $1,800 per montlr, tre monfirly adrantage of the added inspection
' operationwill be Ft,200 minus $11800,or $5'4O0per nrcnffr.
 I

521 ChwterZ0

PROBLEMS

P20-1
IIIASTERPIECE TOOLCORPORATI ON
Product-LlnelncomoStatement
(ContribuUonMargin Approachl
Ecctronlc PncumaUc Hand
Total Tooh Tooh lpolr
Sslct.-,-....-.....o*...s--...roo.ru- StrOOOrOOO 31 '5OOIOOO tir00O'OOO 35OO'OOO
Locr varlrbb co.t of goodr told-..*. lrOOr00O 7O0r000 5OO'O0O 2OO'OOq
Orocr.contrlbuUon mlrgh.....o-o.F. llr6O0rOOO t 800'0OO 3 SOOTOOO 33O0'OOO
l-acr wrlcbb markcUng crpcnrc!
(packlng rnd drlppln!).....-..-...-.-.. 25O,OOO 1OO,99q IOO'OOO 5OTOOO
Contrlbutlonnargln sl,3:to,ooo t 700,000 3 aoo,ooo 3250,000
Leu tracceblc thcd opanlc*
Manufacturlng t 25O,OOOt loo,ooo 3 loorooo 3 5o,ooo
MarkcUng (advertblng)..,.............-.. 450'O0O 200'O0O 2OO'0OO s0r0q!-
Totel tnccrble lked arpcntc...-. ! 7OO'OO0 t 3OO,OOO 3 3OO'OOO 31OO'OOO
ProductcontrlbuUon-.*..-.-H-- t E|IO,OOOf aoo,099- U9'009. l1!0'@_
Leo common lkcd arpontrt:
Manufuctrrlngl. 3 3r0,ooo
MarkeUn92 IOOrOOO
AdmlnlgtraUon ...--. 150.O00
Totel common thed crpcnrc3 --. S 550.000
OporaUngIncomc $ IOO.OOO

r $1,950,000 abaorpUon coat of gmdr rold - $tTAOO,OOO vnrlablc costr - $250'000 traceablc
fhed coct
2 Ssoo,ooo total marlcettng cottr -
i2sgrooo yarlabto openao - 3+5o,ooo advertlalng expenaa
Ctpptcrfr 525

P2A-2'
(rl ROBERTSCORPORATION
Income Statement
For Year Ended 2O-
Sales (52,OOO r $251 $1,3OO,OOO
Cost ol goods gold:
Standardfull cost (52rOoOr $f 5! ...'...'..... $78O,OOO
Net unfavorablovariable cost variancos '. 2,OOO
Untavorablo volumg varlancer.'.'.......r...... SrOOO 787,OOO
Grcsr prlflt. c 513'OOO
Less commenclalerpenseo:
Variableorponses (52'OOO r $11.,......o...... $ 52,OOO
Fired orpsnses t80.ooo 232.OOO
Operating fncome under absorption costing s 281.O00
rUnlts budgeted for production during ttte year.........r......, 5O,OOO
Unlts actually produced during the year ....o..................... 49,O0O
I'OOO
Fired factory overhead chargedto gach unit.......,..,...,.... $s
Unfavorablevolume variance $ 5,000
l2l ROBERTSCORPORATION
lncome Statement
For Year Ended 20-
Sales (52,OOOr $251 $1,3OO,00O
Cost of goods aofd:
Standard variable cost (52r00Or $lO)...... $52O,OOO
Net unfavorabla variable cost variances.. 2,OOO 522,OOO
Gross contrlbution margin......D.....'...'...........................o.....$ 778,ooo
Variable commencial expensgs (52rO0Ox $11 .....,,....,..,...,.. 52,00o
Contribution margill ...........,.,r.........Dor.......... $ T26,000
Less firsd costs:
Factory sverhead
(5O,OOO units budgetedr $51 $25O,OOO
Commgrclal expensBs.........,o...,,...r...,...... 1 8 0 . O O O 430.OOO
Operating Incomg undgr dirgct costing..,.............,Do....o....r. $_?egJgq
(31 Operating income under absorption costing.......,..,.....,..... $ 2 8 1 , 0 0 0
Operating Income undgr dirgct costing...,o..o..i.........r....,.... 296.O00
D1ffgrgnco......t...............................................'.r'..'.......r..r..r
l__0_9'o991
Unlts produced during the year............o.o...,......i.........r...r.. 49,OOO
Units sold during the year ......r.....,............o,......r...............r 52,OOO
Unit decrease in finished goods inventory. (3,OOO)
Fired factory overhead charged to each unit under
35
$ (15,OOO)
 rI
I
g l

526 Chapter20

720-3
(1) PLITCIDCORFORATIOH
Income Statement
For Year Ended 20-
Sales (48,000x $161 $768,0OO
Cost of goods sold:
Standard full cost (481000r $9)............... 9{32'OOO
Net unfavorable yariable cost yarlancos,, lr0OO
Favorable volume variance' (3,OOO} €o,ooo
Gross proflt $338,OOO
Less commenclalerpenses:
Varlableerpenses (48'OOO r $l)............... $48rOoO
Fixgd oxpenses......o..........t......r..........r..... 99.O00 147.AOO
OperatingIncome undgr absorptloncosdng ...,o...........r.,... $_1e,Lqoo
tUnlts budgetedfor productlon durlng the yoar................. 50,OOO
Units actuallyproducedduring the yoar...,r.....,..r.......,.,... 51,000
(r,o0o)
Fixed factory overhead charged to each unit x 3 3
s (3.OOO)
tzl PLACIDCORPORATION
lncome Statement
ded 2(F
Sales (48t000 x $f 0) ......r'.....................'..............,......o.r.r...$768,0OO
Cost of goods sold:
Standard variable cost (481000x $61......., $2g8r0OO
Net unfavorable variable cost yariances.. 1,OOO 289,OOO
Grosscontributionmargin.......................o.............,, $czg,ooo
Variablecommercial expenses(48,000x $11 48,OOO
Contribution margiJ| ..........r.....r..r....r.r...t.....r...r.r.r.r............ $431,0O0
Less fixed costs:
Factory overhead
_ (50'000 units budgeted r $3)...-........,.. $15o,o0o
Commerclal expenses.................,..,...r..... gg.0oo 249,OOO
Operating income undgr dlrgct costng.,.......,..................., $1_g2J9g
(3) Operating income under absorption costtng,..,,.......o.,r..,... $19{,OOO
uperating income undgr dirgct costing........................o..... t82.OO0
D iffg rg n c,e .........'....r....r...............
$__9,OOO
oo . . . . ' . . r . . r . r . . . . . . . r . . . . . . . . . . . . . . . . .

Units produced during the year.......r.........,...,..r,................ 51,OOO

U n i t s s o l d d u ri n g th e ye a r.:..,......... 48,OOO
Unit increase in finished goods inventory 3,0oo
Fixed factory overhead charged to each unit under
absorption costing s3
Difference............ $ I,ooo
 Qppterfr 527

P204
I

Quarter
(rl Absorption costing; First Second
Sa1 gS r..a............r.......r.r..r...r...r..........t.......... $2OO,OOO s26O,OoO
Dirgct matgrlals......,..............,...... 3 3O,OOO s 2O,OOO
Dirgct 1abor..........'..,r.r....'..'...'......r.......rr..r. 6O,OOO 4O,OoO
Variablg factory overhead..,...........,......r..... 45,0OO SOTOOO
Fixgdfagtory overhoad......'.................'..o.r. g2,4OO 62,40O
Cost of goods manufagtured....r,......,......... $197,4OO s 152,4OO
Beginninginventory 65rgOO
Cost of goods available for 8a19..r............,.. sl97,4OO s2l8,2oO
Ending inventoryor..'..........'................'..r.'... 65,800 t 3o,480 2
Gost of goods so1d......................,...r........o.. s 1 3 1 , 6 0 0 s187,720
GrOSS pnOfit..............'...........r....rrt..............t $ 68,400 3 72,zao
Marketing and administrative oxpenses,.... 25,OOO 28,OOO
Operating incOme ....'................r.......r......... $ o3.4oo s_9.289
| $1 + $2 + $1.5o + ($62,coo + 30,0001= $6.s8
$6.58 x IO,OOOunits = $65,9OO
2 $1 + $2 + $1.5O + ($6Z,COO+ 2O,OOO) = $7.O2
$7.62x 4,ooounits= S3o,4Bo
(21 Directcosting: Quarter
First Second
Salgs ....ir.o.......'.rr..........r..r...r......r...rr.....r.... s2oo,ooo $260,ooo
Dirgct matgrials .......,..r....r..r..............r...,.... $ 3O,OOO $ 2O,OOO
Dirgct 1abor...........................r.....,.....,,........ 6O,OOO 4O,OO0
Variable factory overhead........r.................. 45,OOO 3O,OOO
Variable cost of goods manufactured......,.. $135,OOO $ 9o,ooo
Beginning inventory......o...,.....r.....,r............ 45,00o
Variabtecost of goods availabfefor safe.... $l35,OOO $135,0O0
Ending inventory........,.....,.,................,.....,. 45,OOO 18,OOO
Variable cost of goods so1d,..,....,................ $ go,ooo $1 17,OOO
Gross contributi o n margin,...........,...,......... $l l o,ooo $143,O00
Variable markeUng and administrative
exp9ns9s.............. 1O,O0O 13,O00

-- Gontribution margin...............................r.... $ 1 o o , o o o
t-Hfi".iffffffi:............. $13o,ooo

Marketing and administrative

.......$ gz,4oo $ 82,400
15,OOO 15,OOO
Total fired expenso ..r.................,,. $ 7z,4oo $ 77,4oo
Op e ra ti n gi n co me ....r .......r .........,..
J
E 22,609 s 52.600
'528
Chapter20

P2O-4(Concluded|'
(31 Quarter
First Second
OperaUngIncome under absorptioncosting $4g,4oo $ e4rzgo
Operatinglncome under direct costing...... 22,AOO 52,600
DiffefgnC g ............!..........r.r............i...r.......t $2O,8OO glg'3291
ChangeIn inventoly under absorptioncosting:
Ending inventory,.....r....r..............r.......,.. $65,8OO s 3O,48O
Beginning inventofl ...........r.r............r..r.. o 65,80O
lncreasg(decrease|in invento[.....,....... $os,goo s(3s,320)
Ghangein Inventoryunder direct costing:
Ending inventory......,i,....,...,...D........o...... $4s,ooo S 18,ooo
Beginning inventorlf................o.,,.....r...... o 45,OOO
In crease (decrease) in inventor]......,...... Qrri nnn
wvtvvv s(27,O001
Differencs between absorption and
dirgCt COSting.......o.....rrr....,.........r.....r.r...
_$2o,8og s (8,320)

P20-5
(11 Capital Labor
Intensive Intensive
Salesprice ....,........, $30.oo s30.00
Variablecosts:
Matgrials............,...........,... ss.oo $5.6o
Direct labor ....,....,.,.. 6.OO 7.20
Variablefactory overhead.,..........,........3.00 4.80
Variablemarketingexpens€s............... 2.OO _l_6.0.9 2.oo 1 9 . 6 0
Gontributionmarginper uflit......,..........,.r sl o.40 sg
(al Gapital-intensive
manufacturingmethod:
Fixed factory ovgrhgad..........r.'....'..............r.rr.'...r..r...r
$2,44O,000
Fixgd markgting grpenses....,.................r.....,..........,.... 5OO,OOO
Total fixgd cost...................., ...........r..r......t... _S2,94o,oog
S2,940,OOO
fixed cost
= 21O,00O
units of sales to break even
s l 4 contributionmargin per unit
(b)

s1,32O,oOO
5OO,OOO
_S1,829,ogq
S 1 , 82 0 ,OOO
fi re d co st
= 1 7 5 , O O Ou n i t s o f s a f e s to break even
SlO.4Ocontribution margin per unit
-\

Clppter fr

P2O-5,(Concludsdl
(21 Klmbrgll Companywould be indifferent betweon tho two alternaUveman-
ufacturing methods at the volume of sales for which total cost was egual
under both alternatives.Let O equal the quantity of units of product man-
ufactured and sold.

6lo r al + $2,94o,oo0= l$ig.oor el + $f ,B2o,ooo

- $1,82O,OOO
$2'94O'OOO = (Stg.eOx Ql - ($fS r O1
$ i ' 1 2 O ' O O O= $ 3 . 6 O r Q
311'lll = O

Total cost will be the same for both manufacturing methods at 311,l i l
units of sales.

P20-6

(11 The number of units to break oven at a per unit sates price of $38.5o:
Variable costs:
$ 60,000
Dirgct 1abor.......,...r...r,...r.... 4O,OOO
Variablg factory ovgrhgad,.r.............. 2O,O0O
Variablemarketingand admlnistrative erpensgsr,.......o...... 1O,O00
$13O,0OO
s?o'ooo+ $15ro99
= Y,ulo=o,o
= 3,60obreak-evenunits
s38.50- $26.00' 512.50
'S13O,OOO
-r 5,OOO
units = $26 variablecost per unit
(21 units that must be sold to produce an $1g,ooo profit, at a g4o per unit
sales price:
$45'990+ $18,ooo= su?'99o = l,soo units
90o- $zs S14
(3) The price castleton must chargeat a SrOOo-unit
sales level, in order to
producea profit equalto 2Oohof sales:
Let r = sales price per unit
S,OOOx= 5,000(926)+ S45,OOO (.2x1
+ 5,OOO
4,OOOx= $175,OO0
r = $Cg.ZSsalesprice per unit

CGA-Canada(adapted).Reprint with permission.

g
 T 't

5g ChWter fr

I
P2A-7
92 E4
Salegprlce Per unit $180.OO s176.00.
Less:
Variablemanufacturingcost per un|t......,..,.... $121.oo $ 96.00
Variablegelllng erpenso per unit
15ohof sales pricel 9.OO 8.8O !
Total varlablg cost per unit...........,....i............. $1 3O,oO $1 04.8o
ContrlbuUonmargin per unit 3 50.oo $ 71.20

*S160sales price per unit In 19A + (9f 00 r 107cincrease in 19Bl

Total fixed factory overhead

((2O'O0O B2b + 4Or00OB4ts)r S25 per uni$,....,.....,,...... Slr50OrOOO
Totaffixed selling and administrativaorpenseS............r..r, 2O7r33O v
$1,7o7,33O

S1,7O7,33Ofired cost + (S135,OoOprotit + (1 - .4!f

l2B2\ x $5O GM eachl + (3 B4b r $71.20 CM eachf
pretar profit
$1,7O7,33Ofixed cost + $225,OOO
=
$313.60CM per package

$1,932,390 = 6,i62 packages

si!13.60
6,162 packagesr 2 units of 82 = 121324units of 92
9,162 packagesx 3 units of 84 = 18,486units of 84
 Clpptcr fr 53'

-
, P2Gg

- (l) The 2OAsales mir in units is l:2 (7O,OOO tape recorders; 14O,OOO
elec-
tronic calculators).
Lat r = Number of tape recorders to break oven
2t = Number ol elastronlc calculators to break even
At break ovon:
Salec = Variable cost + Frred cost
$tsx + 2 gt22.5or) = $8r + 2 gi9.5o$ + $l,32o,ooor
$15r + $,45x = $8r + $l9r + $1,32O,0O0
$8Or = $27r+$1'32O'OOO
$33r = $1,32O,OOO
r = 40,OOOtape-recorders
2r = SOTOOO electronic calculators
r Fired costs;
Factoryovgrhgad.o.,...,..r.............r I 2gOrOOO
MarkeUngandadminlstrailvo...... ITO4OTOOO
Tota1...........,.....................,......,
gl!92o,ggg

:
,Q Chaptorfr

t2o€ (Contlnuedl

2l The followtng lormula can bc used to calculatc the galcs dollars required
to carn an aftertar proflt ol 9oh on ralec, using 2OBestimates:
s = vc(sl+FC+
#]}
Where: S = NecessarYsales dottars
VC = Variable cost stated :ur a pencentageof sales dollars (Sl
FC = Fixed costr
p = Desired profit stated as a pencentageof sales dollars (S)
T = Income tar rato
. s =
.4esr+$1r3??rqoo2*-'O9(Sl-
' (1 -.551
s = .465 + $1r377rOOO+ .2S
.34S = Sl'377'OOO
S = S4'O5O'OOO
'lVariablecost rate for tape recordels and electronic calculators:
Tape Electronic
Recorders Calculators
Per Per
U n i l % U n i t % _
Satesprice...,.......... .,.........'......91!.OOl00oh$?g{q lOO.O%
Variabfecosts:
Matgrials ..........rr,..r....,!..............'..r...'. $ 3.60 $ 3.60
Direct labor 2.2O 3.3O
Factory overhead............,. 2.OO 2-OO
TOtalvafiable COSI...............,.,......... $ 7.8O 52c/o $ 8,9O 44.5oh
Contributlonmargi11............r.......t...........
$f-.n & qU.lo W
Composito variable cost rate per dollar of sales: s
(.2O r Tapo recorder variabte cost rate| + (.80 x Calculator variable cost
rate| = .2O(.52) + .8O (.445) = .l04 + .356 = .46

zFired costs:
$ 2SOrOOO
Fagtory ovgrhgad.............,.,...............,..,...r....,,.'..'.......,'.

ooi:u,:::.:::::::.].].::..:::.::::::::::::::
MarkeUng and administrative I 'O4O'OOO
 Chagter2O
533

P?IO-A.(Goncluded)

(31 Let x = Number of tape recorders to break even

3r = Number of electronic calculators to break even
At break even:
Sales = Variablecost + Fixed cost
$lSr + 3($20xl = $7.80x + 3(g8.9oxl+ $t,37Z,OoO
9l5x + $6Or = 7.gox+ $26.ZOx+ $trgZT,OOO
$75x = $34.5Or+ $1,377,OOA
$4o.sor = $1r3z7rooo
r = 34,OO0tape recorders
3x = 102,O0Oelectronic calculators

P2A-9
(11 (al In order to break even' Almo must sell 5oo units determinedas fol-
lows:
E $100,000
O(BE} = = 5OOunlts
P-C 3400_s200
where F = fixed cost, p = safes price per unit, and c = variable cost
per unit.

(bl To achievean afteptax profit of $24o,ooo,Almo

must sell 2,5oo
units determinedas foltows:
F*" _ $ 1 O O , O O 0 + ( S 2 4 O , o O o + ( l -_. e$oi )O) o , o o o + $ 4 o o , o o o S 5 o o , o o o
a = p-c =F=-66_-
$4oo_s2oo
= 2,500units
wfierER F, and c are definedthe same as in (lxa), and n
is the
after-tar profit objective.
534 Chapter20

P2O-g(Conctuded|

l2l Almo Gompanyshould choose alternaUve (a! because it will result in the
largest aftertar Profit.

Attematlvc (al:
* \
Revenuc = G34OO unlt ralct prlcr x 350 unltrl + ((3{OO- 3lO prlcc rcductlon} r 2,7oOunlta}
= !14O'OOO + $972'000
= tlrllaOOO v \
VarfablcCoct = 32OOpor unlt x (350 unltr rold + 2r7OOunltr to bc roldl
= i810,000
Atter-tar Prcflt= (Rcvcnuo- Varlablo C5gt - Fhod CorQ r (l - Tar Batel -
= Gtl,l12,ooo - 3o1o'o00- 31OO'Ooo)r (l - "t)
= 3{O2,OOO r.6
= t241,2OO -

Alternattvc (bl:
Revenuc = Gi4OOunlt asler prlcr r 350 unlts) + ((9400- 3SOprlce reductlon)r 2,2OOunitg)
= 3140rOoo+ $814'Ooo
= 3954rOOO
VarlirblcCoct = {320Oper unlt r 35O unttr} + ($2OO- t25 coat reducUon)r 2,2OOunits)
= 37O,OOO+ 3385,0OO
= $4.f5,OOO
Atter-tar Proflt= (Revenuc - Varlable Coct - Fked CosQ r (1 - Tar Rate)
= S1954,000- $455,000 - 3100'oo0) r (1 -.4)
= 3 3 9 9 , 0 0 0r . 6
= $230,400

Alternattvc (c):
Rwenuc = CI4OOunlt rabt prlco r 350 unltrl + $4O0 r 11- 5% prbo reductim) r ?rOOOunits)
= 314O'O0O+ 370OI0OO
= 39O0,00O
vartablo Cost = izoo per unlt r {35o unltr aold + 2,ooo unltr to bs aold}
= 9470,00O
After-tax Prollt= (Revonuc - Vartablo Coct - Fhed Coge r (l - Tax Rate)
= ($9oo,ooo- S47o,ooo- Gll0o,ooo - 31o,00o cost reducUon))x (1 -.4)
= S34OTOOO r.O
= $2O4,00O
 Clppter fr

P20-70
(1) Egtimated brpak-even point based on pro forma incomc statement

3819t ttttt"""............tr.........................r................................
$l orooorooO
Varlablc costs:
costof goods80ld...-....r-...........t.'....,..... $6rooorooo
Commlssionspaid to agents................... ZTOOOTOOO8TOOOTOO
Contribution margill.....'.............r....................o.o.....r......,....
$ ar"ttrt*

Gontributionmarginratio - $. ?'oo0'ooo = 2oo/o

CIM
$t0r0oo,0oo
'
$loorooofired cost ,
= $5o0,o0obreak-evenpoint
zortffi
(21 Estimatedbreak-evenpointwith the companyemployingits own
pen;ons: safes-

Variable cost railos:

gost ol goodssold to sales (g6rOOOrOOO
+ gIO,OOOTOOO)........ 600h
Commissions on salgs.......r.-......r......r.........r............D...........r..
5%
Totaf variablg cost ratio...r...'..r....,..r..or...r...,................r..,...
65%
contribution margin ratio = 1 - 6sohvariable cost
ratio = 3soh
Fired costs:
Administrative"..'.o...r..........'..'...r............r......r...!r.....r.r..I
es manager "t.........r...r..........r........r....o.r.....,....o.,.,.ro..
$1OO,0OO
!af 160,000
Salariesof satespersons(3 x $30,ooo)....::::::::.....,......... go,ooo
Total fixgd costs.'..................'.........,...,..r...r.,..r..,.,r.....
_$3sg,oog
S35O,OOOfixed cost
gsoh CIM = SI,OOO,OOO
break-even point
536 Chapter2O

P2O-10(Concluded|

(31 Estimated sales volume to yield net Income proiected In pro forma
lncome statement with Independentsales agents receiving 25ohcommis-
sion:

Total Income bgforg Income t3I ..........'r..r..!r.....'.........r.....r.t Sl T9OOTOOO

Fired cogt lOO,OOO
Total lixed cost and pJEfit...,............................. _Eooo,ooo _
Variable cost ratios:
Cost of goods sold to sa1gs.................o....,....,.. 600/o *
Gommissions on salgs .......'...,..............r..... 250h
Total variablg cost ratio .,..,r,....o..r..,.,.,.... g50h
w

Gontribution margin ratio = 1 - 85% variable cost raUo = 15oh

fixed cost and profit

S2,OOO,0OO = S13,333,333safes
15% CtM
(41 Estimated sales volume to yield an identical income regardlessof
whether the company employs its own salespenionsor continues with
independentsales agentsand paysthem a 25ohcommission: . v

Total cost with agonts = Totalcost with companyb

receiving25ohcommission own sales force -
(85% variablo cost r sales| = (95%variable cost x salesl
+ $100,00Ofired cost + $350,0O0fired cost -

29ohxsales = s250,000

sales = $1,25o,Ooo
Chapterfr
537

CASES
c20-l'

(ll Becausa star Gompanyuseg absorption costing, Income from

la Influcnced by both sales v_otumeand productfl; volume. opera$ons
sales volume
wag Incrcased In the tlovember 3o forecast, and at standard gross
profit
ratag this would incroasc Income-from operafion" lv
SSri-oo.
during this same period, production volume uras belo* it XorrLJ"i---
forecast causrngan unprannadvotumeva;anc; ;i $;ffi. e January I
variance and the increasedmarketingerpenses (due to Tho vorume
Increasein sales) overshadowedttre aoaid pronL trom the lo%
""1"", as folours:
InCrgaSgd 881O8...............r...............r.......r...
Increasedcost of goods cold at 8tandard... s26,800
27',2OO
Increasedgross profit at standa1d.,............
Less: $ 5,goo
Volumg variancg ...rr....o..........r.........r......
$6,OOO
lncrgasgdmarketing erpenso.,.....,........, 1r34O 7.340
Decreasein income from operations,.,....,..
-$
(1,7401
 t

5g Chapter20

C2A-1(Goncluded!

l2l Star Company coutd adopt dlrect costing. Under direst cosUng, fixed
manufastirrin-gcosts would be treated as period costs and woul.dnot be
asJigneOto pfoductlon, Gonsequently,earningswould not be affected by
proA-ucUon votums, but only by sales Yolume.Statements prepared on a
direct-costlng basis ars as follows:

STARCOMPAMT
Forecasts of Operatinq Results for 20-
Foracasts as ot
JanuarvI November3O
Sal e3........o..... .,....,......,... $268'000 $294r8OO
Variablecosts:
Manufacturing .t.....t....t..t...to"to""""o'ot"r"tt' $182,OOO $2OO,2OO'
Markgtin$ .....t........r.tt......t......."""o"tt"ttttttt l3,4OO 14r 74O
Total variabl g CoSt .........tt.'.'."""""""'r"' sl95,400 s214,940
COntfibUtiOn mafgift,.............r,.............".'o...'.. S 72,600 I 79,860

Fired costss
Manufacturin g .......t............o.ir.o.....""tttrt"r" $ 3O,OOb $ 3O,OOO
Administrativg o....t........................""'r"t""" 28,80O 26,80O
Total fi xed cost'....'........r......r.....-........-..' $ 56,800 I 56,800
$ 15r8OO 9-23'960-
Incomefrom operations'......".......r.....r...r..,.....
'S182,000x l looh = S200'20O
Reconciliationof differencesin incoms from operations:
Januaryl: No differenceIn absorptionvs. direct costing because
$3O,OOO fixed factory overheadwas expensedin both cases.
November 30: lncome from
Ooerations
DifeCt COSting.r..........r..r....................,............................r $23,o60
AbSOfptiOn COSting .,....,,...... ...............'......'......' 14,060
Diff g rg n cg................r.......r....... r.....r..'......t "r " t"" ttt ttt "tt" ' s 9,ooo
Fixed factory overhead included in cost of goods sold at standard:
November 3O lorecast (S3O,0OO in January 1 forecast
+ l Qo h sa te s vo l u me i n crease) ....:- ........ s33,OOO
J a n u a ry 1 fo re ca st...........' ...,.' ,...- .... 3O,OOO
s 3,ooo
Underapplied fixed factory overhead 6,OOO
Diff grgncg..................1'................'...........r...............r..t.'.. S gtOOO
Clppter fr
539

c20-2
(rl In absorpuon costiDgrBtscurently omployed by RGB Corporation,
factory overheadis considereda product cost rather than a periodfired
Firad tadory overheadis appfied to production based on a normal cost.
capacityof I'ooo,ooo units. Thu3,the fixed factory overheadis
applied
to products in the samo manneras variable costs, even though
not vary with production.In addition, lf production ano sai.s it does
are
equal duringthe year,fired factory oveihead is deferred as part not
tory costs-(whenproductionerceeds sales)or releas"o ,pon of inven-
Inventory(whensales erceed producUon)- sales of the
During2oA, productionexceededsales, rcsulting in a portion
fired factory overheadbeing Inventoriedin finisheigooo-s-ratherof the
being
than
expensed in 2oA. This resulted in 2oA operatin! income
ger than lt woufd have been ll all fired being tar-
factory overhead had been
charged against 20A sales revenue. Then in
2oB, sales exceeded produc-
tlon, resultingIn morefired factoryoverheadbeingctrargeo
against
salesnevenuo than was incurredii 2oB.First,RniJtreogioos were 2oB
out of inventorywhich meant sotd
lhaf th9 part of fired factiry overtreadthat
was incurred in 2oA and inventoried in 2oA was charged against
sales revenue.Second,fired factory overhead,^r"" 2oB
uid"raiptied in 2oB
becauseonly 85o,ooo units
lvere produced (isorooo units less than nor-
mal capacity used in determining itre tactory overhead
cd In an unfavorablevotumevariancethat was chargediaie). This result-
goodssold in 2oB. Both of these occurences to the cost of
goods sold and resulted in a reduction gnoss increased the cost of
of profit and operating
income in 2OB.
 5

ffi Chapterfr

C2O-2(ConUnuedf

l2l (rt ROBCORPORATIOII

OpcnUng lncomo 9tatamcnt
For the YearsEndedNovember30,20A and 20B
(h thourend$
20A, ?OB
30,ooo 311,2OO
Vrrlrbb cst of goodr rold:
g0OrOOO unltr et 35,00--- .3r500
IOOTOOO unltr rt 35.OO-*- tr'5oo
TOOTOOO unltr et 3550**- 3p5O 5,350
@ntrlbuUon nrrgln *...*,.-s-. t4,5OO t 5,850
Fh.d.pcntc$
Fllcd frctory ovcrlrced D...s.'. 33'000 33'3oo
8cllhg rnd rdmlnlttntlv. -.* 1.500 .f'5OO f "5OO 4"800
OpcnUng Incomr ....'.-......o'o...ts 0 3 lro5o

tr) RccmclllaUon:
204 208
OpcnUng lncomc-
rbrorpUon corUn g .,.-.....--.{ 3 900 3 o4lt .u
OperaUng Incomo-
d lrcct coaUn9,...........-.,.......,. o 1,050
Dlfferrncr 3 9oo r ro*r
Dtffsroncr eccounted for rr
followr:
hvcntory changr undcr
rbrorpUon cocUng:
Endlng Invcntory:
30O,0OO unltr rt 38,00..., tZragg
150,000unltr rt 38'80,... 31,320
BcAlnnlngInvcntory:..-....... 0 32r4oO
SOO,0O0unltr rt 38.00.... 2,1OO 3 (1,080)
hvrntory changr under dlrcct
coaUng:
Endlng lnvcntory:
3OO,OO0unltr at $S.0O.... t1"500
150,ooo unltr at 35.50.... $ 825
Baglnnlng Inventorp O 1,5OO
3OO,O0O
unltr at 35.OO.... 1,5OO (s75)

Dlflcroncr t eoo 3 {4o5)

 Clpptrfr 541

Cz.G.?(Goncluded)
(3) The advantagesof direct costing for internal reporting include the follow-
lng:
(al Direct costing aids In lorccasting and in erraluaungreported income
for internal managementdecision-makingpurposes,becausefixed
costs alt not arbitrarily allocated between accounting periods (or
among different products, eafes territories, operating dlvisions,
etc.!.
(bl Fired costs ars raported at Incurred vatueg (and not absorbed val-
ues|' Increasingopportunityfor monoeffective controt of these
costs.
(cl Profits vary directly with sales volume and are unaffected by
changesin inventorylevefs.
(dl Analysis of the cost-volume-profit ralaUonshipis facilitated, and
management is able to determine the brsak-oven point and total :
profit for a given volume of prcduction and sales.
The dlsadvantagesof direct costing for Internal reporting inctudethe fol-
lowing:
(al Managementmay fail to consider properly the fired cost element in
long-rangepricing decisions.
(bl Direct costing lacks acceptabitity for external financial raporting or
as a basis for computingtarable income. As a consequonce,addi-
tional record-keepingcosts must be incured to use direct costing.
(c) The separationof costs into fixed and variable elements is a
costi-y
pnocess.In addition,the distinction between fixed and variabtecoit
is not precise and not reliabteat alt lEvelsof activity.

c20€

(11 Daly would determinethe numberof units of Producty that it would

have to sell to attain a 2oo/oprofit on sales, by dividing total fixed costs
plus desiredprofit (t.e.r2oohof sales price-perunlt multiplied
by the
unfts to attain a profit) by unit contribution margin {i.o., sales price
!o%
per unit less variablecost per unit).
(21 lf variablecost per unit increasesas a pencentageof the sales price,
Daly would have to sell moneunits of Product Y io break even.
Because
the unit contribution margin 0.o.,sales price per unit less
per unit) would be lower,Daly woutdhave to variable cost
selt mora units to coverthe
fired cost in order to brreakeuen.
 i
t
-r

t12 Chapterfr

C2O-3(Goncludedl

(31 The llmitatlons of brpak-eyen and coat-volume-profit analysis ln manage-

rlal declslon maklng follow:
(al The snalyslg lg fundamentalfy a gtaUc enalysis' and, In most casor'
changeo can be determlned only by recomputlng ltsults. lf a break-
oyen chart la used, changes can be shown only by drawing a n€Yv
chart or geries of charts.
(bl The amount of fired and yariable cost as well as the slope of tho
eales llns, ls meanlngful ln a defined riangeof acUvity and must be
redefined for actlvity outside the relevant range.
(cl The analysisls hlghly dependent upon a meaningfulgeparationof
llred and varlable costs, whlch may be dlfficult to obtain In actual
pracUco.
(dl The analyslais based on a slngle mir of producta. lf the mlx ls
erpected to change,the rpsults must be rpcomputed.
(el The analyslsassumesthat productiontechnology (i,e., labor produc-
Uvity, level of automation, and product specificaUons| will be
unchanged.ll changes In productiontechnology are erpectpd to
occur, the analyst must consider tho expected effects on costs.
(0 The analysisassumesthat selling prices, input prices' and other
market conditions will not change.Erpected changes must be
IncorporatedInto the analysis.lf a rango of possfble changes can
occur, e different rasult must be determinedfor each possible corl-
binaUon.
 CHAPTEN27
DISCUSSIONQUESTIONS
@1-1. Dillcrential6t b thr ditference h the cct of
allrrnative choicoc. Thc cconqrrist calb ruch
cdb marginal, and the engineer calls them
ircnrncntal.
A21-Z Marginal cosl (or ditlerential cost) is the cost
ircunod by increasingthc present outptrt The
coeil,lhenfore, would nol have been hcuned il
-additional
lhr u n i t r h a d n o t b e e n m a d e.
Marginal cosling (or diract costing), on the
o,trer hand, is a cclhg approach h wtridr crly
' variablc rnanulacluring cost! are charged to
prcducls, and thur to invenlory, while fixed
manufacluring coelt ar. lreated ar period
coslr and are charged olf withourtbecoming
psrl of hventory cools.
@1€. Incremcntal coslr are important in decision
rnakhg, bccausc the least cosily or most prof-
. itablo allemative cannol be determined unless
incremental costs are known. lncremenlal
coslr are lhe costs that musl be incurred in
order to cornpletesn €ctivity that is being con-
riicred. These co3tt must bc known h oder
lo onrpare each arrailableEliernative.
O21-{. Differentialcets do nol clrrespond to any pe.
eibb accounting calegory, because they are
oriented loward the future rather than the past
and lhey treat producl costs on a differential
rather than a total cost basis. Furlhernroro,cor.
tain costs relevant for ditferentialcost analysis
(o.9., opporlunitycost and imputed cost) are
nol recordod h lhe accounls. Conversely,cer-
tain costs recorded h the rccounts (e.g., fixed
cosls thal will remain urchanged) are inelevanl
for dilferential cost analysis. The diflerential
cod corrceptis a corcept for cosl analysis and
nol cosl accumulatbn purposes.
O2t-5. The flexiblebudget b uselul h differenlialcet
Q21-12. AppendixThe unit costs usod in linear pro_
analyses,because lhe incrementgbelween
each ditferenttevel ol ouiput representtho ccl
thal must be incurred il additisral business is
undertaken.As bog ar lired costs rernah con_
rtant under all rates o{ oulpul, variablecosts
are alwala the ditferontial costs. lf fixed costg
change in the flexiblebudget,differentialcosts
will includethe incremenlalelementof fixed
cogl rellectedin the llexible budgel
O21-13. Appendix(a)Thearea bounded by the tinee
O21€. Historical costs are usually irrelevant because
they have been created by a past decisbn lhat
cannot bc changed by a luture decision.
Historical costr obtained frorn accounling rec.
ords oflen include arbitrarilyallocatedfixed
cosl thal rnay not be relevantto dilferentialcoet
analysis.
g3
@,1-7. Variablc corl ir important bccauso it can
always be idantified as a differential cost.
However, dillerentbl ccls msy also includr
addltiqtal fixed cctr.
O21€. Sunh coeilsare incccrerable ccts that ar not
relevanl b futuro decisisrs.
O2t-9. A fixed corl would bc relevant in deciding
bctwecn altcmstiver il the lhed erpenditun ir
an oul-of-pockot cost required in ordor to
undertake an allemative (e.g., the cet d rcnt-
ing eguipment needed lo provido sulficienl
capacity in deciding whelher or not to accepl
an offer); or if a fired erponcfture can bt avcii
ed by undertakhg an altemalive (e.g., supervi.
eory ralaries that will be discontinued in the
evenl of a plant cbeing).
Q21-10. Oppoatnrty coctr are the measurablovalue ol
an opporlunity blgassed by rejecling an alter-
nalive use ol resources.
021-1 1. Appendir Lhear prograrnming b a rnathemati-
cal lechnique decigned lo argial
decision makers in detcrmining thc
allocalbn of resources that would be
reguired to mEximizeor mhimize the
objeclive lunctim; i.e., it b a tool that
can be used by business ,nenagerll
lo determinethe mix of inpuishecer-
sary lo maxirnize contributbn rnargin
or minimize cost. Linear program-
ming is an algorithm that maximizes
or minimizes a function ol several
variables subject lo one or,Tpre con.
slraints.The functionbeing opti-
mized and the conslraintl sro
agsumed to be linear wilh respect to
produclion activity.
gramming problems are the lracc-
able variable costs. Costs murl be
traceable lo the prcduct and variablc
with respect to prcducticr quantily in
order to affect changes in total po-
. duclion
cost and total contribution
margin when changes in productbn
quantity and mix occur.
AB, BC, CD, and DA b calfedthr
sohrlbn space because il repre-
senls thooe quantilies and cqnbi.
nalions ol standard and doluro
models lhal can be produccd,
given the availablecaprity o{ thc
grinding and polishingmrhiner.

544
(b)TrlangleBCF represenlslhose
comblnations of slandardand
dolura modelsthat could bc PtD
duced by thc poltshingmaclrlnes
hJt mt by the gdndingrnaciinee.
TrlanglcCDE reposonte$c lovol
ol productlonthat tho gtindlng
nracfrhcscouldatlain,bul nol th.
poliahfngmacfilnor.
(c)Polnt C denolesthc oPtimum
solutbn bocauseanYolher level
of snalnablcprodwtbn will result
ln a srnallertotal contdbulionmar-
gin. ll can bc identiliedbY com'
putlng lhe lolal conttibulionmar-
gin availablelrom thc productbn
and sale of thc combinatlonof
standErdand delure models-
dcnotcdby cach corncr point-
and chooslngthc cornorpoinl
wilh thc largosltotal conltibution
margin.Altematively,a seriesol
CM lines can bc construclod,
which havc a slopc cgual lo -l
multipliadby lhc unit conlribution
marginavailablelrom lha produd
!
I
Ct@ter 2t
identifiedby thc horizontaleris,
dividedby thc unit contribulion
marginavailablotrorn Utc prodrcl
idontifiedby tn verticsl 8xb. Thc
ptofit lino farthestfrorn lhc ori$n.
poinl A, rcPtts.nb lht gtcalosl
totel contrlbullonmargin. and In
thb casc, il Passasthtottgh Poinl
c.
021.14. AppendixThcsimplexmsthodi3 an ilsrativc
ptoaas tul finds lhc oPtimumso|tr
tion to a llnoarpmgrammingProts
lem. Thc simplexmethod,which is
based on malril algobta, is a sys-
lematic way ol cvaluatingsacfi cor-
- nor point in the teasibloaraa. Tha
prooassbeginsat thc zero level of
prodrclionand systematicallyrnoves
lrornonc comctpoht to anothcruntil
tho optimalsoluuonis found. Each
movc provitJeslhc lsrgosl por unll
improvement in the objeclivofunc'
tion.Th€ ptocesscontinussuntil lhe
objsdivc fundion can no longer be
improvod.
 Clnpter 2l
545

E)GRCISES

F27-7

Saleg ($1.90 r 5 0OO kg).............r....,...........r........

$9,ooo
Gost to manufactut€:
Dlrcct materlalr ($.eO + $.0i| r 5 OOokg).._... s3,O50
Dircct labor (3,50r 5 O0Okg)..,.. 2,5OO
Factoryoverhead:
Indirect labor ($.2Or 5 000 kg) ...........,....... I,OO0
Power ($0OO+ 3O'OO0) x 5 0OOkg).,.r......... 100
SuppliesS1.02x 5 OOOkff)...............r........... 'too
Maintanance and repair ($.027r 5 000 kg) 135
Deprcciation (i3r00o + 24 months),..........-j.. 725
lnsurancg($,OOZ r 5 oOOkg)......,.....,......,,.r 35
Payroll targ!.......oo.......r......r........rrr....o.....o..r
160
Gost of goods producedand so|d,......,.................
.7.205
Gross profit contributiGtll ..,............rD....................r
s1,795
Administrativg gxpenso......D....ro...,.................,.....
150
Profit contribution from accepting new business
s1.64s
E21-2
(1) Estimatedcost of the additional loo,ooo units:
Ma te ri a ts(($ 1 5 0 ,OOO /1SO,OO0 units) x iOO' 0OO
units)
D i re ct l a b o r (($ {f z,5oo / 15o,oo0units) x loo,ooo units) slOO,OO0
.... 75,OOO
Variable factory overhead
( ( $ 7 5 , 0 O O/ 1 5 O , O O , u n i t s x) 1 0 O , 0 O Ou n i t s ) o r
($125,o0oat loo% capicity - bzs,ooo:Jt dol%capacity)
5O,OOO
Fixed factory overhead
(9125'o0oat 1ooo/ocapacity- $f oo,oo0at 6o% capacity)
25,OOO
Total differential cost of manufacturingthe additional
10o,o0o units '.........o.......'...............,......o...,.rr.....r............r
$25O,OO0

{2} Total cost of producing 250,O00 units in

Janua4n

Budgct for Diffcrcntial Cost Total Cort for

15O^0OOUnitr for lOO.OOO Unitg 25O.O0OUnltg
Materials .........D, $150,OOO
Direct |abor....,.....r..........
$too,ooo s25O,OOO
112,500 75,OOO 187,50O
Factory overhead:
Variabfe. ....,... 75,000 5O,OOO 125, o00
Fixed 10o,ooo 25,OOO t25,OOO
Total cost $437,5OO $2gg,ooo J68Z@
 l
r\

546 Chagter2l

E21-2 (Concluded)
(31 Saler price rcguirsd to achieve a 2Oohmark up on production cost:

Production cogt per unlt ($6871500+ 25O'O0Ounits)..,....r...........r $2.75

Plus 2Oo/cmark up on cogt ($2.75 r 2O%l .55
Safer price reguired to achfeve 2Oohmark up on cost............o..... $3,3O

E21-3

Revenuefrom ttre rpecial cale (15,0OOunits x $12,5Oeach).. $1BZ,5OO

Lesr differontial costs:
Direct materialr ($2O,OOO + lO'O0Ounits) x
15,000 unftsl $3o,ooo
Direct labor (($3S,OOO+ 1Or00Ounits) x
l5rOOOunits|....... 52r5OO
Additional overtime premium on apecial order l0r0OO
Variablefactory overhead(($1Or00O + 1O'0OO
units) x 15rO0Ounits).......................,,.ro. 15,000
Additional fired overhead from equipment
t€nta1...... 7,OOO
Variable marketing oxpen3es (($201000+
t 0 r O0 0 u n i ts)xl 5 1 0 0 0 u n i ts) ........o..r .......^..., 3OTOOO i44.5oo
Additlon to annual company profit resulting from
special 3a1e...........,.....,.......

q
 Chapbr2l
547
:
! l

F214

|- No, Hunungrtonshould not accept Lufkinb offer because it would be

$5'OOOcheaper to make the part.

Gost lf purchased from Lufkin (1O,OOO

r ttf S) s180,O00
Cost lf manufactured by HunUngrton:
Direct materiab... s2O,OO0
! Direct labor....,o.r 55,OOO
variable factory overhgad ............-.o.......,......r.. 45,000
Rent from thlrd party forgone lf part
manufactllF9d........r...........r..t......r...ro...r.r..... 15rOOO
Additional fired factory overhead eliminated lf
part purchasedfrom Lufkin (1O,OOO x $3)..,. 3O.OOO 165.000
Savings lf part manufactured by Huntin!fto11...,.... $ ,|5.ooo

This solution assumesthat a monoprofitable use of the fucilities

does
not exist than that derived frcm the saving of $is,ooo. oth;;;, ir woufd
be preferable to buy Part M-l from Lufkiriand'use Huntington's
I facilities
for the monoprofitable activity.
S

e3-5
The company ehculd purchase the pistons from the
outside supplier
because lt woufd cost $6,oo0 less than manufacturing them
\- at the
Tlcson plant.

The differential cost of manufacturing pistons at the

Ttrcson prant:
Dircct matgria|s.r.....r...........r........,......t..r...r.....
$i 6OrOOO'
Dirgct |abor.........r....r........oo.........r...r.......r.,.....
SOTOOO
Variablefactoly overhead(2Oo/c r S24O,OOOi.... 48,OOO
Incrpmsntarfixed cost for machineryr6ttri.... gorooo
lncrementalfired cost for additionai
supervisol ..........,..r.o................
4O,OOO
Total differential cost to manufacturr
80ro00 pistons..........o..r...r.r....,.,.......,.......
Gost to purchase g0,OOOpistons lrom Wichita $3SgrOoo
Machine Works (ge.COper piston x SO,OOO
pistons)...r..,......,.,,..,............r...........
352rooo
Cost savings available from purchasing
the
pistons from the wchita Machine w-orks
rather
than manufacturing them at the TUcsonplant.
$ 6,O0O
 I

548 Chapter 2l

E21-6

(ll Yes,the sales managert pnoposalto drop Tift from the product line and
increasethe produetlonof Mift should be accepted because it will
Increasethe companyb income by $4,OOO, determined as follows:

Contribution margin from sale of Tift:

Revenuefrom sale of Tift (Sor T,OOO units)...,. $czrooo
Less variable cost of manufacturingTifts
Materials($Z x T'OOO units|....... $14'OOO
Labor stl x 7r0OOunits)............. 7r0OO
Variable factory overhead
($f x T'OOOunits!.......o.....,.... T'OOO 28'OOO
Gross contribution margin from sale of Tift ..,.. S14,OOO
Less variable markeUngerpense from sale of
Tift ($1 r 7rO0Ounits|..................r..........,...,.. 7ro0o $ 7ro0o

Contribution margin from sale ol4,0OOadditional units of Mift:

Revenuefrom.saleof additional Mift
{$lOr4rOOO units}.......,..r.....r....,..,......,........9{OTOOO
Less variable cost of manufacturing additional Mift:
Materials ($2 x 4r00Ounits)......, S 8r0O0
Labor ($2 x 41000units|..,.......... 8r0OO
Variable factory overhead
($1 r 4'OOOunits1o.................r 4'OOO 2OTOOO
Gross contribution margin frpm
salo of additional Mift..................r..........., 92or00O
Less yariable marketing oxpense from sale of -
addiUonal Mift ($f r 4,OoO'units|.....,....,r....o. 4'OOO 16,000
Additional contribuUon margin from converting capacity to
to production of 4'OOOadditional units of Mift...,......,......... $ I'OOO
Additional advertising expense required to sell 4,000
additional units of Mift ..r............................,.......r..........,..... 5r0OO
Additional income from dropping Tift from product line and
converting capacity to production of 4,000 additional units
of Mift...............r....'.'..r.........o..'....'. r.........'...r........ $ 4,ooo
\

Clppter2l

E2l-e (Goncluded)

(21 Montrealshould considerwhether dropping Tift from the product line will
result in decrcassd sales of Mift and Lift in the long run. For erampte, if
the three products ara complementary,customers may prefer to maintain
only those Eouncs3of supply from which the full product line is available.
The present ability to sell moro Mift by dropping Tift may be a short-run
condition.lf this is a concern,the cost of resuming Tift production at a
later date should also be considerad.
CGA-Canada(adapted). Reprint with permission.
E21-7
Silver Polish
per Jar
Sales price..,... ,.r,,............,............. $a.oo
$ .4o
2.50
.30
s3.20
Contribution margin .......r...r......r.......r. $ .80
Opportunity cost from further processing rather than
r ($2.0O- Sl.60)).r,....,.......,...,........
sefling Grit 332 (7/D4 .lo
Ngt contribution margin per unitr.................................,,....
!_ ,tg
$5,600 avoidable fixed cost + $.7O = 8,OOO,the minimum number of jars
of silver polish that must be sold to justify further processing of Grit g37.

E2 1 - 8

(1) Direct tabor hours (DLH)

= 1,000,000doses to be packaged
required for the job I,OOOdoses per DLH

= 1,000 DLH

Direct labor ($S x I 'OOOhours) ......,..,,,........r. s5,OOO

Variable factory overhead ($2 x l,OOODLH)....,..
2,OO0
Administrative expense 1,OO0
Total traceabl e out-of-poc ket costs.............
_gg,ogg
Minimum price per dose = Total traceable out-of-pocket costs
1,

= .sPlo9?= = $.ooe
l rOwr.rrvuu
 1 - -

; \

sfl Chwter2l

E21-e(Concluded)

l2l Marimum allowable = Marimum rsturn after tares

return belore tarog (l - TaxRatel
'Og 'O9
= !! = r r o iorr 15o/o
-t5
FZoi= so_=

Total traceable out-of-pocket costs (from requirement(1ll--r-.... $ g,ooo

FiXgd laCtOry OVgrhgad ($5 f I rOOODLFI r.........o.r.....'..'..r........... 5rOOO
TOtal lUll COStrr....................o.............r...........t..............t....r....t.... $13,O0O
MaffmUm allOWable f6tgfn 115% f $1 3rOO0),...,........r.............o'.. 1,95O
TOtal bid priCe...............r................r......r.......r.r..o..........t.........t... :S14t95O

Bid price per doso = Total bid price

doses
ITO0O,OOO

sl4.950 = s.o1495
= iFociFoo

(3) The factors that Hall Companyshould consider before deciding whether
or not to submit a bid at the maximumallowableprice include whether
Hall has orcass capacity,whether there aro availableiobs on which oarrl-
ings might be greater,whether the marimum bid of $.O15contributes
toward coveringthe frxed costs, and whether this iob could lead to moFo
profitable businesswith Wyant in the future.
(4) The competitiveenvironmentof the industry should have been consid'
ered by Wyant Memorial Hospitalto determinewhether or not a lower
price could be obtainedthrough competitivebidding.The hospitalshould
also have consideredthat cost-plus pricing is not usually viewed uni'
formly by prospestivebidders, is difficult to compute lor products pro-
duced in smass' quantity,and is better suited lor products that are
uniqueand high priced.
 Chapter2l 55',t

v3-0

Franchlsefee collections per day

Averagegllss rovenuagper tnanchiseper dEl|............,.......... $ soo
Numbgr of franchiSOS............'..................o........o...o..r.............. r 42O
Total gnoss rBvenu8.......r.....o......'..............r'............orr.......r.r... s2lO,OOO
Franchisg fgo ............. x .25
Avgraggdaify franchisetge collgctiofls..........,.,o.......,..r......... 52r5qg
_$
First proposal(i.o.,use local messongerservice to collest and mait checks
only):
Averagedaily franchisefge coflegtions,.....,..........,...............o
s 52,500
Days savgd.,...r,.. x2
Total float saved.,,,,. s l 05,OOO
Beforg-tar opportunity cost.'..o...."..........,r.......ot.r..........r..,..r. x 15%
Avgragg annual savings.....'.r..o.r...................,..............,.r.t,...r.. 1 5 , 7 5 0
s
Lgss cost of mgssenger sg|'icg............r...o.......r...,.r.r,....,...r... 2O,OOO
Annualreductionin incomeif pmposalimplemented.............
_s (4,2sO)
Second proposal(i.o.,use local massonger.servicewith a lock-box arrange-
ment):
Average daily franchise fee colteetions ....,....,r...........,.,.......D.
s 52,5OO
Days saved.............r........................r..r.r.....r.r..........i..r..........r,
x5
Total float savgd r....'.......................'.......r...........,......
$262,5O0
Before-tar opportunity cost ..!,,......... x 15o/o
Average annual savings.....r..........r.........r,,,.,r..........-...............
Less costs:
$ ss,375
Messengerservice aa a a a aa a. ra aa a a a $2o,ooo
Gompensatingbalance ($iS,OOOr i5yo)...,......
2,25O 22,25O
Annualincreasein incomeif proposalimplemented....,,.,...... l?Jr5
$
 I

' H

552 Chagter2l

Ezl-10

Silk-gcreen method:
circuit
Prepare tcraon 17 1/2 hours r 2O'OOO
bOafdA f $6.5O).........r.................................r...r. $l95,OOO
Scrsen patterns (1/3 hour r 2O'OOO
circuit
bOafdC I $0.501......r.........................r................ #t,333
TOtal cO8t.................rr......... $238,333
AZ-17 pnocess:
Labor (1t2hour x 2O'OOO circuit boardsx $6.50) $ 65,000
Monthly cost for materials and equipment
rental gnd operation ($41000r 12|.............--.... 48,OOO
TOtal GC)3t..........'..r......r.r...r..............o..................t. 113,OOO

Annual savings from changing from silk-screen method

tO thO ngW AZ-l 7 prOCes3..........'....r.........r.r.....t.. $125,333
Chapter2l
553

E27-11 APPENDIX

Let Mr = marking board as.semblodin automated assemblydepartment

Ml = marking board assembledin labor assembty depirtment
Te = tack board assembledin automated assem6ly department
Tr. = tack board assembledin labor assembly oepirtmlnt

Me Mr- Tr Tr.
Salgs price per unit........o..................$60.OO $60.00 S4s.oo
$4s.oo
Less yariable costs:
Direct materials:
BaSg ...........r..... $ o.oo s 6,00 6.00 S 6.00
Covering 14.50 14.50 7.75 7.7s
Frame .r.................r.................... 8.25 8.25 4.25 a.25
Direct labon
Cutting Departmeftt.....,...........,. 2.OO 2.OO 2.OO 2.OO
Assembly Departmellt ............... .60 3.OO .60 3.OO
Variabla factory overhead:
Gutting DepartmeDt.....,.......,.r.,. 2.45 2.45 2.45 2.45
Assembly Departmellt ...........,... 3.30 2.25 3.30 2.25
Variable marketing expens€s ......,. 3.OO 3.OO 3.OO 3.OO
Total variable costs per unit....r.,... $ 4 0 , 1 o s 4 1 . 4 5
s33.35 @
Contribution margin per 1111it............. $19.90 $18.55 $11.65 $10.30

Objective function:

Maximize CM = $f g.gO Ml + $i8.55 Mr- + $t t.OS Te

+ $iO.3O Tr-
Subject to:
.2O M^ +20 Ml + .2O Tr + .2O Tr. < 3O,OOODLH In Cutting
.05 M^ + .25 Ml + .05 Tr + 35 TL S 4O,OOODLH In Aesembly
.15 M^ + .15 Ml + .15 Te + .i5 TL s 25,OOOMH In Cutting
OM^ + .O2 M!+ O Te + .02 Tr s 1,5OO MH In LaborAssembly
.O5 M^ +O Ml + .05 Tr + O Tr. S 5,OOOMH In Automated Assembly
1M^ +1 Ml + O Tr + O 7r, ) 3O,OOOunlts eales contract
0M^ +0 Mt+ 1 Tr + 1 Tr- > 3O,OOOuntts salee contract
. 5r1 Chaptorzt

E21.12 APPENDX'

Let L = the number of legal pads

R = the number of rcgular pads
Objectivefunction:
MaximizeCM = $f 8L + $12R
Subject to:
2OL+lORs9OO minuteslabor
(2 peoplex 7.5 hour r 60 minutesl
L+ Rs 6 0 boxes daily marimum demand
(3O0boxes per week + 5 work daysl

OU

L + R ( 60 boxesdaily'demand
50
4E

40

30

20 10Rs 900minutesol labcr

10

'r0
0 20 30 40 50 60 70 80 90R
A = (L=0, R=O) = (S18Xo) + (312X0) = SOCM
B = (L=411, R=0) = (318x4tt) + (312X0) = $a1o CM
c =(L=30,R=3Ol= (318X3o1 + (812X3o) = S9OO CM <- Maxlmum CM
D =(L=O,R=60)= (S18Xo) + (sl2xso)= S72O CM

CGA-Canada(adapted).Reprint with permission.

 Qppter 2l
555

E21-13APPENDIX

Graphicmethod:
Objective functlon: Marimize CM = 4 a + 3 b
Constraints: Za + b I 'OOO Time
a+b 8OO Leather
a s 4OO Buckles
When: a = O When: b = O:
b = 11000 Time a=5OO
b = gOO Leather e=gOO
No b Buckles a=4O0
't200
1't50
11 0 0
1050
1000
950 TimeConstraint
900
850
800
750 Constraint
700-
,Bocxle
650
500
550
500
450-
400
'l(n

300- Leather Constraint

250
200
150
100
4n

A-ll
s 0 I 1ls_01lz s o ls s o la s o ls s o lo s o iz s o ia s o lg s o l r o s o l l l s o r l 2"5 o r
1 0 0 2 0 0 3 0 0 4 o o 5 o o 6 0 0 7 o o B o o 9 0 0 1 o 0 o . 1 1 0 01 2 0 0
1so0

Tlying values at each of the corner points,

A=(a=o , b=o); 4(o) + 3(61 =g OCM
B = (a= o--, b= Boo);aioi + giabot= $2,aoo cM
c = (a = 299, p = 600);cizbol+ sioooi= Sz,ooocM
D = (a= 499, = <_
p 2oo);cicooi+ sieooi
-' = Szizoocii
E = (a- 4o0,b = o); nicooi
+ 3iot = Sr,ooocii
Optimum combination woutd be 2OO a
and 600 b
2OO (4) + Goo (3) = $2,6OOCM
 :

sffi Chapter21

E21-14APPENDX

Graphicmethod:
cost function is: Minimize C = $3x + $4y
Subiect to constraints: 4r + 8Y
7r+2y
1.51 + 5Y

3.5 ( 1 , 3 .s )
,,',K%w
Product a Constraint

r.5*
I

Possiblesolutions:

Points x v 3x 4y 3r + 4y
A o 7 o 2A $28
B 1 3.5 3 14 t7 -+ OpUmumgolutlon: Uge 1 ton of x
and 3.5 tonr of Y tor
c 5 1.5 15 6 21
a mlnimum total
D 10 o 30 o 30 cost of 317
Chapter2l 557

E21.15 APPENDIX

Let x = poundsof hardwoodper batch Subject to: x + y

y = pounds of softwood per batch ,gr + .5y
.2x + .5y
Minimize:C =.sOX +,4OY
30.000

FEASIELE
AREA

.2r . .5y>6.000

5.000
x. Pounds Ot Hardwood Der BalCh

Gorner point B values: Cor ner point C values:

, 2x + .5 y= 6 '0 0 0 .2x +.5y = 6,000
. 9r + .5 y= 1 2 ,OOO x + y=24,OOO
. ox = 6 ,0 0 0
x = lo,ooo Multiplyby 2z,4x+ y = l2,ooo
Substltute: -r+ v=?9.99o
.2(lo;oobJ+
.sy= 6,ooo '6r
,5y = 4,ooo
= ff33
Substitute:
y = 8,O0O + .5y = g,OO0
.2 (2O,OO0)
.5y = 2,OOO
Tryrngvatuesat each of the corner points: y = 4'ooo
A = (r = -ol+
o. v = 24,ooo!;
$.19! s.4o(z4,ooo)=$g,sooc
B = {x=1o,ooo, y= sioooiii.:qiro,oooi*i.oo(
c = (r =2o,ooo,y = e,oooii$.soizo,oooi. s,ooo}=$
8,200c+
i.co ( 4,ooo)=$1i,600c
optimalsolution:1o'ooopoundsof hardwood
per batch groo0
poundsof softwoodper batch resurts and
tho Sg,2oostandard-perbatch in a cost equarto
5g Chagtar2l

PROBLEMS

P21-1

(il The dlfferenUalcost analyslsfor the GlasgowIndustries' order for

I 20,O0Ovalves lollows:
tncrementalrevenue($18 per unit x 120'000units) $2'160'000
lncrementalcosts:
Variablecosts:
Dlrect materials ($5 per unlt r 120'0OO
unitsl $ 8OO,OO0
Direct labor (96 Per unit r 120'000 '
U nltSl .....o............o... t..t..........tt......t..... 72O,OOO
Variableoverhead(36 x 1/2 hour per
unlt r l2OrOOOunlts).....r..".D......i..oo... 36O,OOO
Shippingexpense($1 per unit r
I 2OtO00unitS)..o...........................t..... 120,OOO
Total variablg costs .....r.............r.'......$1,8OO,OOO
Fixed costs:
Supervisory and clerical costs
(12O,O0O + 3O'OO0per month x
$1 2r000 pgr month|...............r............ 48,000 1,848,O0O
Incrsment to pretax profit as a result of
aCCeptlng thg Offgr..........r............r..'.'.....r............r.'.....r'.. $--XZ'99O

tzl The mlnimumunit sales price that Sommerscould accept without reduc'
ing net income must cover all differentialcosts (i.e,,tho variable costs
plus the out-of-pocketfixed costs).Therefore,the minimumsales price
per unit would be:
Variablecost per unit:
$ 5.oo
Dirgctmatgria|s.............,....r.........................
Direct labor ..,....r.....i..,.,..r, O.OO
Variableoverhead($6 per hour r 112
hour per unit)........r................................... 3.OO
Shipping grpgnse....o............o..........,....r......., 1.O0
Additionalfixed cost per unit:
Supervisoryand clerical costs (S12,000
total cost + 3OTOOO units!.,........................ .40
M i n i m u m u n i tsa l e s p ri ce ...................,..r ........r ..$15.40

L
 Clnpls2l 559

P27-7,(Concluded)
(31 SommersCompanymanagamentshould conslder the following factors
before accepting the Glasgow Industries orden
8' The effect of the apeclal order on Sommers'aales to other cus-
tomers at tfie rcgular sales price.
b. The possibillty of establishing contactg in the internaUonal market-
place as a nesultof the sales to GlasgowIndustries,which could
lead to market erpanslon.
c. The wear and tear on machinerythat might increase maintenanco
and rcpairs and result in a prematurereplacementof the machinery.
d. Possible retaliation by competitors who may learn of Sommens'
deep price-cutting actlon, including risk of a price war that would
disrupt rcgular selling prices;

P21-2
(tl lmpact on net income if APAaccepts bid:
Submittgd bid..........rr.............................r.o..,.,.....r $t65,000
Lgss salgs commissiofl ......,...,...............,...,rr.....r. | 6,5OO
Ngt sa1gs.....................o.........................trr.rr......... s 148,50O
Variablecosts:
Dirgctmatgria|s......r.,,................r...........,.........
32gr2OO
Dirgct 1abor...r.t....................r.r.o...D..r.....r...o.....r 56rOOO
Variablefactory overhead(3O%of
dirgct labor)* .'..r......'..........,..................o...... l618OO l02,ooo
$ 46,500
18,600

"J:*J";Tl',f,*::::::::::::::::::::::
'The lactory overheadrate is Soohof direct
labor dollars. Based on the
$ 27,9OO

erperiencefor the fiscal year snded September-3o, the rate due to the.
variablefactory overheadcost is gO%($2,ZSO+ $7,5O0).
(21 Framarwould realize a positive contribution margin of $1z,goo before
incometax, increasingnet incomeby $7,380,if the $l 27rooocounter-
offer is accepted:
$ 127,OOO
12,7OO
sl l4,3oo
102,OOO
$ 12,3OO
4rg20
g__L389
ffi Chapter2l

Pzl-2 (Concludedl

(31 The lowest price that Framar could quote on this machinery without
reducing lts net lncome ls $1131333($IOZ'OOO + ,9f. This bid woufd cover
exactly the sum of the variable manufacturing costs ($I OZ'OOO| and the
l0oh sales commission,thereby resulting in no increase in contribution
margin and no income tax.
(41 lf Framar Inc. accepted all of its work at prices similar to the $127,OOo
counteroffer, a loss situation could result. The analyses for requirements
(11,(2),and (3f vveroshort-nrn decisionsIn situations In which Framar
had ercess capacity. Consequently,the analyses concentrated or cover-
ing only tha differential variable cost. However,wfien all orders ane con-
sidered, Framar must cover both its variableand its fixed costs. A bid for
all work similar to the one for $127r0OOwould not cover Framarb
fixed cost.
Galcufationsrestating the most recent entire fiscal year on the $127,000
price/variablecost relationshiparo as follows (00Osomitted!:
Salgs ($l StZSO x 1.2451'...r............or.......r......r.........r'....o.....'r... $1 91609
Lgss COmmiSSlOll .....r.............rr.....r..........o...r............................ 1r961
$17,648
Expenses (per income statement for year ended 9/3O|:
Variablecost....... $15,750

$15,75O

Markup on variablecosts = 9127'OOO- 7.245

s102,OOO
Clppter2l 56't

P27-3

(1t An analysiscomparingcosts of each alternative:

(al Sehedule overtime hours:
otrertimeHourc
Reouircd
May I'OOO
June 2rOOO
July 2,OOO
AUgUSt .r.............o...'.'.... 215OO
Septemb91.,.................. 2r50O
Octobgr ............r...r....,., 2,OO0
l2,ooo
In efficien q (5oh1....-..... 600
Total overtime houns..... _13€oo
Additionaflabor costs (72r8oor $6 r f .5)...........,..r........r$t 13,400
Rglatedfringe bgnelits ($l tgrcoo r .10f.........,.o.......,.r.... 1 1 , 3 4 O
Differentialcost if overtimeis scheduled...D....,,.....,........$124,74O
(b) Hire temporary workers:
Ertra hours ttquiled .... 12,OOO
fn efficien cy fa ctor (25%r....r...,t.., 3r00o
a a a aa a a a aa a a a aa,

Total hourc tequi1ed...,.....r..... aaa aat 15,000

a t aa a l ataaaaaat

Hourlyrate for temporary workgrc.....r....,.....t.....D.........D..

xSo
Differentialcost if temporaryworkerc hired.......,............ s 9O,OOO
There anono fringe benefit costs with temporary worker€.
 Y

,g

w Clppter2l

721-3 (Continued)
(c) Erpand labor foree and rchedufe level productlon of IO,OOOunits
per monthl lf the labor force le expanded co that level production
can be gcheduledrValbec will produce lOrO0Odolt house unitr per
month, requiring 5'ooo dlroct labor houn. This meanr that 12,ooo
additlonal regular dlreet labor houra will be roquired during zoa
with no ccheduled overtime or need for temporary wortens, ar
chown below:
Requlrements
Montfr Annual
Forgcast production In units.o....o................ _Iggoo l_?g,ooo
Diroct labor hours required 5,OOO 6O,OOO
Former direct labor constraint in hour!...... 4rOOO 48,OOO
Addltlonalregularhours In zOa ..,..............._l'ooo 12,O0O
Direct labor costs:
Regulartime (12,O0Ox $Ol $72,0OO
Relatedfringe benefits ($72,OOO
x .2O|... 14,4OO $86,4OO

AddiUonalinventory carrying costs (refer

to the achedule of lnventory levelr below):
Average monthly inventory with
overtimg or temporary wortol'tl .......... 13,846
Average monthly inventory with level
productiort .,r,................ 16,231
Diflerence 2,38,5
EsUmatedannual cost of carrying
Inventoryper unit ....r.............r...,........ r 3 1 21385
Differential costs if level production is
USgd i...a...a...a.....raaaa.r......r.....rr.r...............
sqgn85
 drapter 2l 5A?

P21-3 (Concludod)

Schedule of Inventory Lsvels

Urc Ovcrtimc Lcvcl Produetion
Lsrt Day or Tcmporery
of Month Workerr' Bcolnnlnar Prcductlon Salcr Endino'
Docrmbcr. I,OOO 8,OOO
Jenurry 8............. I,O0O qooo to,ooo IrOOO lo,ooo
Fcbnrery I,OOO t0,ooo lo,ooo I,OOO t2,ooo
8,OOO ra(X)o torooo I,OOO l4rooo
Aprll'..-........................... IrOOO l4'OOO to,ooo IrOOO 16,OOO
May.........-rt..o...............!r 1O,O0O l6,0oo lo,ooo 8,000 18,OO0
12,OOO l8,ooo torooo IO'OOO lg,ooo
JUlf ....r....-r......r........r...rr 12,000 t8,000 l0r0o0 12,000 16,000
13,00o f 8r0o0 lO,OOO 12,OOO t4,oo0
Scptcmbcr.........r.....,...... 13rOO0 t4,ooo to,o0o l3,ooo t I ro0o
Octobcr ....,............ t2,ooo l l,ooo 1O,OOO t3,ooo IrOOO
Novtmbcr....................... I,O0O 8,OOO IO,OOO 12,OOO o,ooo
Dcccmbcr. I,OOO 6,OOO lO,OOO 8,OOO I,OOO
128,099 159,000
Avcngr pcr montfi
crcludlng Etoty
rtock (divldo by t3)...... 9,849 12,231
Salaty rtock ............,....,. 4,O00 4,O00
Avcragc monthly
invantory 13,848 unitr 16,231 unltr
'Ercludcr ralcty
rtock of 4,OOOdoil hougc unltr.

Alternative (c) affords the lowest estimated differential cost.

(2', There aneseveral noncost factors, or factors that are difficult to cost,
that Valbecshould consider in conjunctiorwith the cost analysisof tire
three alternativecourses of action. Relevantfactors include:
(al Considerthe degree to which Vatbec'snegulartabor force is wilting
to work overtime.
(b) The tabor force may plan on ovsrtime pay as part of their
normal
work situation. lf wages should be reduced because overtime is not
scheduled,due to the use of temporary worke6 or an expanded
labor folee, then the morale of the tabor force coutd deteriorate,
laborersmight seek wo$ elsewhere,laborers might seek base pay
inc*ases, or the tabor force might decr€ase its efficiency.
(c) Overtime does provide a certain degree of flexibility,
should sales
volume and patterns not occur according to the fo#casted plan.
(d) lf the labor force is to be expanded,Valbec
must be sure there is an
adequatesupplyof skilledworkers.
 I
ai
I
l

i-l
I
I

Chaptor 2t

P274
GroupI productioncosts: "
Matgrials ($9.27 + 251 .....................i......"......t....o....o........... .131
Labor (S19.48t2.51 + 251........ ,948
Variablefactoly overhead($eee x 150 1.422
Total variable unit cost......o.....o.....r.,..o,.r $ 2.501
Total variable cost (S2.5Olx (3 + 2l r 2'OOO1..........t.............
$25,01O
Additional fixed factory overhead....... ..........r.. 7 rO4O
s 32,O5O
Gmup ll productlon costs:
Materlals (93.9O+ 20) $ ,180
LabOr (($tZ.l6 X 2) + 2O!....r.r.....'.....r...r..........r..................... 1.219
Variabfgfactory ovgrhead($t.ztO r 150%1................-.,...... 1,824
9__3.22O
Totafvariablecost (t03.22O
x (2 + 2 + 4l x 2r0OO1..r.....,....,....
951,52O
Additional fixgd factory ovgrhgad ,.r..,..,r....,...r..........ro......... IrOOO
s57,520
Sales ($54 x 2,000) $116.O00
Group I costs:
Outside suppliers:
Dissection knives ($.f,ZOr 3 r 2,OOO)...,......,. $ 1 9 , 2 o o
Scalpels ($3.SOr 2 x2rOOOloo,..........,.,.,.......r 13,2OO
q?2,40O
Group I production costs (computed aboye|..,.. s32,05O i$ 32,05O

Group ll cosG:
Outside suppliers:
Scissors($g.OOr 2 r2,0O0l sl2,ooo
TWegzgrs($2.97| 2 x 2rOOO)..........r.............. 1 1 , 8 8 0
Clamps(Sg.zar 4 r 2ro0o1........i.........,...o.....26'24o
s5O,120 \
Groupll productioncosts (computedabove|.... 957,520 t '
l so.tzo
/
6rOOO
I,OOO
12,OOO
6,OOO
sl14,170
s 1.830
Clppter2l

P214 (Goncluded)

Production of Group I compononts l_esscostly than purchasing

fc fiom outsides.
and purchaslng G-,u-p lt componenta lrom outsiders ls fess
fng them. However,tho estimated operating profit contribution i[;;;;;:'
"o"tiv
ls only marginaf-
ly posluve ($1'830 or 1.60/oof the eifimated iares fi-gure)anJ"nv
addiUonalmarketing cost ralated to the dlssection Instrument sets oecossary
tlrer reduce the erpected protit contrlbuUon. would fun-
Present annual fired factoly overhoad ls ercluded from the differential
cost analYSls'becausethese costs wllf be Incurrad whether
alt marketed. oinot the sets
Basedon the information assombredby the study team, the proposar
little merll has
 I
I

ffi Chaptor2l

P21-5

lll The lowest prlce Chemco should bld for a one-Umespeclal order of
2STOOO pou;& (25 totsl would be $?4r75O,whlch is equal to the variable
costs ol the order, determined as follows:
Diroct materlals:
on a one-tlme-only speclal order, chemlcals used In manu-
facturing the firmb main product have a relevant cost ol
their expected future cost, repnesentedby ttre current
market price per pound. chemicals not used In current
production have a relevant cost of their value to the firm.
CW-3 (4OOpounds per lot r 25 lotsf = 1O'0OO pounds'
substitute cN-S on a one-foFonebasis to its total of
5,5OOpounds.The relevant cost iS the salvagevaluo.. s 500
The remaining4'5OOpounds would be CW-3 at the
relevant cost of $.gOper poundrits expected future
COst aaararaaaraaaaaaaaa.aaaa.rarr.raaa.aaao.aaaaaaaaatoa.aaaaaaaaa..aaaaatt.aaaaa"
4r05O
JX-6 (3OOpounds per lot x 25 lots r $6O per pound)"""""' 4,5OO
MZ-g (2OOpounds per lot x 25 lots x $1.60 per pound)..""" IrOOO
BE-7 (1OOpoundsper lot r 25 lots r ($.eScost per
pOUnd - $.lO handling pgf pOUnd|)...........'.r...,...'..,..'..r'.... 1,375
TOtal d ifgCt matgfials COSI'....."........!.................t..............." sl8,425

Direct labon
(60 DLH per lot r 25 lots) = l,5OODLH
Becauseonly 8OODLH can be scheduledduring regular
time this month, overtime would have to be used for the
remaining7OOhours; therefore, overtime is a relevant
cost for this order.
l r5OODLH x S7.0Oper DLH at regulartime lilte."'..'...""'r"' s1o,5oo
7oo DLH r $?.50 overtimepremiumper DLH..""""""""." 2,450
TOtal difgCt labOf COSt,......r...'......r.......r..'............r...'..r....t...r $12,950
Factory overhead:
This special order will not increase fired factory overhead
cost, and it is not an order for a continuing proiect that
shoutd contribute to the Fecoveryol fired factory overhoad.
Thereforo,the fixed factory overheadis not relevant,and
the retevantfactory overheadcharge is the variable factory
overhead rate.
1,5OODLH x $2.25 variable factory overheadrate $ 3,375
Total differential cost ol manufacturing this special order and
the minimum bid price for the order....- g1/99
Cluptx2l
fi7

P2t €'(Concludod)

l2l Calculation of the price for rccurring orders of 25,OOOpounds (25 lots)
follours:
Dirsct materials:
Because of the posslbillty of ftrtura orders, all raw materials
must ba charged et thelr erpected future cost, reprasented
by the currrnt market price per pound.
CW-3(4OOpounds per lot r 25 lots r $.gOpar pound|..,......, $ I,O0o
!t6 (3OOpounds per tot r 25 lots r $6O pgr pound|.,......... 4r500
MZ-9.(2O0pounds par lot r 25 lots r $l,gO por pound)........ g,oo0
BE-7 (l OOpounds per lot r 25 lots r $,65 per pound).:......... IrE25
Total dirggt matgrials cost .........-...........t......o........r..........D...,
s23,125
Direct fabon
$oo/col the production of a batch (goo DLt{) can be done on
regularume; the remaining600 DtJl direcuy ciauseoveF
time to be Incured and aru, thus, a retevani cost of this
new prcducl
1r50oDLH r $7.0o regularrate per DLH..........,.r,................. $lo,5oo
600 DLH r $3.5Oovertimgpremiumper DLH....D................ 2rlOO
Total direct labor cost $t2,6OO
Factory overhead:
All new prcducts should contribute to the racovery of fired
factory overhead as wert as cover ail variable costs. There-
fore, the overheadcharge woutd be thE full overheadrate.
lt50o DLH r $8.0o per DLH..r.....'.r.....................r..,..r,..,.r...r..
$ I,O0O
Full manufacturing cost..'......'...r..!....r....r.....r...........r.....r.......r.
Markup ol 4O"/oon cost ($44rZ2S x .4O)
$c4,7ZS
17.ggo
Fufl manufacturing cost plus 4oo/orf.arkup........,...!....r,.,........,...
$62.6{s
 I

5ffi Chapterzl

P27-6
Present Additional
Caoacity Capacity Total
Sales:
r $10
5O,O0O $5oor0oo
x $lO
25,OOO $25O,OOO $75O,OOO

Variableerpenses:
Direct materials:
5Ot0OO I $2..........r......rt.....'...... $loo,ooo
25,OOO r ($2 x.94) $ 47,OOO
5O,OOO x ($Zx.O6) (6,0ool $ l 4 t , o o o
Direct labor (94 x'1.O51......$4.2o
Factoryoverhgad...r.....,...r. L30

s* 275,OOA

:.::.:::.
JifJ"s,:ffi
Total variablg gxpense,......o,o....
12,00o
137,5OO
6,00o
$184,5OO
412,5OO

Contrib ution margifI.,........,.............o........ $ 1 1 3 , O 0 O

Fired expenses:
Fact o ry overh gad'........r.......r.......
t I 72,5OO $ 1 5 , o O O $ 87,5OO
Markgtfn g erp gnsg ................r.r.... 11 , 0 0 0
Increaso in advertising
(511,O0Ox.1Ox.251 275 11,275
Additional plant depreciation:
3260,000 + 25 yrs. = $1O,40O
S 84,OOO+ 20 yrs. = 4r2OO
$ 1 4 ,6 0 0
S 1 4 , 6 0 0r . 9 5 r = 13,870 13,870
Total fixed expense $ 83.500 S 29.145 s112.64s
O pera t i n gi n c o mg ...............,..,..,..............$_298O_q S 36.355 $__85,955
'57o allocated
to inventories.

The expected operating income from additional capacity ($36,355) should be

evaluated as to whether or not it is a satisfactory return on the additional capi-
tal investment of S344,OOO ($2OO,OOO + $84,OOO) (See Chapters 23 and 241.
Chapter21 569

P 2 1 -7
(1) MAru( CORPORANON
Boston Plant
Gomputation of Number of unlts of Xoff Requlred ro Gover
Fixed Factory orerhead and Frxed Regional promoilona! costs
Total fOOOsomitted) per Unlt
Sa|9s....,..r....,...1 a aa aaat ataaat a a at aaaaa a a taa a s2,200 s2o
Variablefactory costs:
Difgct matgrials ..ro..,r.....r.r........r.r........o.. $ sso $s
DirgCt labOr'................r.........r.r..r...Dt.....r. 660 g
Variablefactory overhead.......r............... 440
Total variablg cost ..............r......ts....t....o, sl,g5o sls
Contribution margi11,..................rr..r..r....,.... S sso ss
Units required to cover fixed factory overhead and fixed regular promo-
tional cosls:

(21 MARX CORPORATION

schedule of Budgetedcontribution Margin and operating Income
lf Boston OperationsAre Expanded Under plan A
(OOOs omlttedl
Total Boston Ghlcaqo
$7,400 s3,4OO g4,OOO

s 1 , 8 5 0 s 85O $t,000
2rO2O 1,O2O tr,000
1,390 680 700
s5,250 s2,55O s2,700
s 2 , 1 5 0 S Bso $1,300

s 1 , 6 0 0 S 7oo $ 9oo
320 220 100
$t,920 s s20 $t,ooo
$ z3o $ (70) s 300
310 142. 168-
l.
s (8o) s(2121 $ 132
S3,4OOBoston sates
$31O Home office cost = $tAZ
ffix
tt-
54,000 Chicago sales
x $3f O Home office cost = $f Og
ffi
 rl
'l
-l

Chapter 2l
570

P21-7(Continuedl
MAR)( COBPORANON
Schedule of Budgeted Contribstlon Margin and Operatlng Income
lf Boston Plant [s Closed and Ghlcago Operations Are Expanded
Under Plan B
Chicago Operations
(ooos omittall
S3l OEa...aaaaaaaaaaaaa....aa.raa...a......rr...ro..a..aaa..a.a.aara....
$8,2OO
Variable factory costs:
Diroct matgria|S........i...r..r.......'r....r..r.'...r.r Sl t55O
DirgCt labOr ..r...........o..r............................. 1t55O
Variablg factory ovgrh gad............""""""" I,O85
Total variable factoly GoSt'."........."""""" $4,185
GOntfibUtiOn mafgill ..........,.,.......r..r...r..............
Fixed cosB:
Fixgd factory overhgador......--.....'.....-..o.-... $ 95O
RegionalpromoUonalcost............,...r.r...... 200
Total fixgd CoSt...............'.......................... Si t 150
Plant Opgfattng InCOmg....r,........r........,....,.r...... $ 865
Allocatgd homg office cost........r....................... 3lO
operating income...,.........r.".o............r.............- $ 555
Chapter2l
57'

P21-7(Concludedf

schedure
B"dsm"??ff ?iH:lI oo"ratins Income
"r rs ctosed_andRoyartyAgre",n;;t rs contracted
lf BostonPlant
UnderPlan G
. . (o0osomittedl
Total Boston Chiceoo
Revenues;
Sal eS ..... .r.. !......rr...r.....
ROyaltieS...........r..........r.........,......r.........
$4,ooo $4,O0o
275 $27s
Total rgvgnu gs .................r........t..r......r...
$4,275 $27s $4,ooo
Variablefactory costs:
DirgCt matgrials r................,..rr......r......,..
DirgCt lab or,....,.....r,..........o.......r.t,,r...o,...
$l,ooo $t,ooo
Ir OOO ITOOO.
Variablg factory ovgrhead.....r..D............r.
700 700
Total variable factory cost ...........,..o..,....
$2,7OO $z,zoo
Contribution margirt...........................,.......r
Fixed costs:
$1,575 $27s $1,30o
fixe-d fa ctory ovgrhgad ..........,.......r..o..... eso $so
Regional promotionat cost,....,.......,........ $ $ eoo
200 100 r06
Total firgd cost .,.,......r..r...,....r.........o.r....
sl,t50 $rso $t,ooo
?llnt operatingincomeandroyafties.........$ 42s
Allocated $12s $ 3oo
home office cost..,..]...........,.....,.
310 310
Operating income (toss)..........,....
$ lts $12s $ flot
 I
i

Chaptorzt
5n

P21-8
Source:lrhnagoment Aa unting@npus Rofr,tt(lttonNale, N.J.:lnstihrteof ManagemonlAccountants(br'
19f3fl'WInslihtloof
,rrrV N"ri*al-Associsttn olAccoontants),Spring,1987),pp.4-5.Gopyd0htSpring,
Accountants(tcrmerlyNatirnalAssociatbnof Accountants).All rightsreserved.Beprintedby
Management
permisskrn.
punchasesilica in
Ler GtassGompanyshould imptementthe pnoposodplan to plan
the dlscount quantitr rne annuat savingsfrom implementauonof the
would be 9{8rl5O, determined as follouts:
Annual cost with quantity discount plan:
Interest orpense to flnance carrying Inventorp-
Average level of InventorYIn tons:
Ler Glassb roquirements.........' I OIOOO
Requirements ol other manufactuners
(3OOTOOO+ 12 months + 2| average +
(3O0'OOO+ 12 months * 2)
minimUm).'........."tt"""o""'t"' 25tOOO 35,OOO
PfiCe pgf tgn With d|SCOUBt.......o..'.................o. r $1.80
TOtal ayefage COSI Of inVentOfy.....'.'.....'..r....... $g3,ooo
Ratg of intgrgst to carry inventory..............,.... x 5% $ 3,150

Gost of purchasingInventory(42ofoootons x $1'801.....""'o"' 756tooo

Additional costs to carry additionalinventorp
[-abor..............................r.........,................o'..... $ZOTOOO
Administrativeexpenses.................................'I OrOOO
Lost revenuefrom rental of warehouse
requiredto store additionalinventory..,...."' 1O,OOO 4O'OOO
$799'150
Lessnovonuofrom the sale of silicato other
manUfaCtUfgfs (3OOTOOO tOnS X $2 pef tOn|.........'.r............. 6OO,OOO
AlnUal COSIOf qUantity diSCOUntp13fl.'......r..'...................'..... $ 1 9 9 , 1 5 0

Annual cost without quantity discount plan:

Interest expenseto finance inventory':
Averagelevel of inventoryin tons.........'.........r 1 O , O O O
. x $2.OO
Prico per ton without discount"......................'
Totalavgragecost of inventoryr.......,.....r.........$ 2o,ooo
Rate of Intgrgst to carry inventory'.....-............ rSoh
Interestoxpense .............. $ l,OOO

Cost of purchasingsilica (12O,OOO tons r 32) .'.". 2 4 O , O O O 241,OOO

Annuat cost savings available by implementing quantity discount

p|an....... ............................ s (41,85O)
Chagter2l
573

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 I

-\

Chapter2l

P21-g(Concluded)

l2l Net revenue Potential:

The cofored paper brochurg prcvidesthe most net revenue if it can be
mailed at bulk mail rates; however,there is a risk of earning only the
third best revenus if it must be mailed first class. The glossy paper' if
It can be mailed on time, producestAe second largest amount of net
ngvsnue;however,the ranking slips to the fourth best net revenue if it
is mailed late. The plain paper bulk mail brochure has a substantially
lower net levenue than any of the other alternatives'

lmage as a well-run organization:

The image would be based upon comparisonof two things related to
. the mail campaign-the quatity of the brochure (appearance|and the
arrival of the brochure immediatetyfollowing the radio and television
coverage.The glossy brochure,if it arrives on time, would probably
conveythe best image;however,there is some risk that it would not
arrive on a timely basis.The colored paper brochurewould be the next
best in terms of guality,but the bulk mail alternativeraises some risk
of a timety receipt of the brochuresby the potential donors. The plain
paper brochure would be ths poorest quality,and because it is to be
sent bulk mail, it runs the additionalrisk of not being delivered on a
timely basis.

lmageas a fiscallyresponsibleorganization:
The imageof fiscal responsibilitywill be basedon a comparisonof
potentialdonorstperceptionsregardingthe cost of the brochureand
cost of the mailing.The glossybrochuremailedfirst class may be per-
ceived as an extravaganceby the potential donors.At the other
extreme,the potentialdonorcmay concludethat the plain paper bulk
mail alternativeis an indicationthat the organizationis unwillingto
devoteadequatefinancialnesourcesto the fund-raisingefforts.

The foundationstaff must weigh the consequencesof each of the alter-

nativesand the risks associatedwith them on the three criteria to select
a specilic alternative.The staff has good informationon net revenue
potential,but needsto obtain informationon the effects of the quality of
the brochure,the timelinessof the mailing,and the type of mailingon
potentialdonorstopinionsas to what is a well-run and fiscally responsi-
ble organization.
 Chapter21
575

P2t-t o
(rl JUSTA CORPORATION
Quarterly Income Statement
Total Local
Reqional
SalgS ........r..........r..r.....r.............. sl,3oo,ooo $I 'OOO,OOO
S3OO,OOO
Variable expenses;
Manufacturing (Schedule A1.... $ 82O,OOO $ 63O,OOO s l 9O,OOO
Marketing (Schedule B).....,..... 3l,ooo 24rOOO 7,OOO
Total variable expensg .....r.. $ 851,OOO $ 654,000
s 197,OOO
Contribution ma1gi11,....,..........r... I 449,O0O I 346,000 s l 03,OOO
Separable fixed marketing
expense 74,OOO
aaaaaaaaaaaaa
36'000 38,OOO
N e tma rke tco n tri b ution.,.....r ..,... $ 3TSr OOO $ glo,ooo
s 65,000
Gommonfixed expenses:
Manufacturing($l,OfO,OOO -
sg2orooo).............o.........,....
$ 19O,OOO
Admin istrative........,.r..r..,......., 52,OOO
Total common fixed expense $ 242,ooo
Operating incomg r..r..................r
l_lg3,ooo

(r) el (3) l4t (sl (6)

Local variabre Regionar Regionarvariabre
m
Product Totar varrabre
% Local Sales Exoenses f2l x f3l s-ales Exoenses l2l r (5) Exoenses l4l + {gl
A 60 $4oo'ooo $24o,OOO $100,o0o s 60,000 s3oo,ooo
B 70 3OO,OOO 210;OOO IOO,OOO 7O,OOO 28O,OOO
c 80 3OO,OOO 180;OOO roo,ooo BO,OOO 24O,OOO
Tota1.........
9630,009 $ro,ooo S82o,ooo

(1) (21 (3) (4) (s) (6)

Local Variable Regional Regional Variable m
Product Total Variable
% Local Sales Exoenses(21x f3l Sales
Exoenses f2l r f5l Exoenses f4l + l8l
A 3 s4OO,O0O s12,000 $100,000 s3,ooo
B 2 300,000 $15,000
6,000 100,000 2,000
c 2 300,00o 6,000 1OO,0oo
9,000
2,O0o 9,00o
824,0O0 37,ooo a31,OOO
Separable fired marketing erpense computation:
Local R eoi onal
Total marketing expense.............r..,..t.............,
Less variable (schedule B),.....................i........ s6O,OOO s45,O0o
24,OOO 7,O00
Fixed marketing expenss...,........
_$36,oog S3B,ooo
 I

Chapter21
576

P21-10(Goncluded)
l2l No. Ttre regionalmarket should not be dropped.The regional market
sates are adequateto cover variable expenseand separablefixed
erpenso of the regional market and contribute $65,000 toward the recov-
ety of the $242'OOOcommon fixed expenseand operating income.
lf the regionalmarket is dropped,the local market contribution margin
must absorb its own separablefixed marketing expenseplus all common
fixed expenseas shown below:
' S 346,000
Contribution margin o.....r....r.r......""""'r
Separablefixed marketingexpense""" 36'000
NgtmarkgtcontributioJl........................$ 31Or00O
Total common tixgd expgnsg.....o........." 242r0oo
Operatingincomg.....,.'.....t........r..."" 9-994OO
Thus the corporationoperatingincomedeclinesfrom $133'OOO to
56g,OOO. This $65,0O0reduction is the amountof the contributionloss
from the regionalmarket.

(31 JUSTA CORPORATION

QuarterlyIncome StalE!!en.!
Product Product Product
Total A B c
$1,30O,ooO sso0,ooo s4OO,oOO s4oo,ooo
Variable expense:
Manufacturing
(Schedule A)'.................. $ 820, ooo $3oo,ooo s28O,OOo s24o,ooo
Marketing
(Schedule Bl'.--.....1.-.... 31,00o 15,000 8,0oo 8,00o
Total varlable expense ... 3 851,000 i?15,ooo s288,ooo S248,OOO
Gontributlon margin 3 449,000 3185,O0O s112,oOO s152,oOO

Fixed erpen3es!
Manufacturlng .......-, s loo,ooo
MarkeUng 74,000
Administrative .......... 52,000
Total fhed expense ...... 3 3 1 O , o o O
Operatlng Income..... _!._19t,009
iSchedules A & B are in tlre requirement (tl solution.

(4) When the new product reptaces Product G, the minimum contribution
margin per guarter must be at least S162,000 (the present contribution
margin of Product C + SI O,OOO of new fixed expense) in order for Justa
Corforation to be no worse off financially than it is currently. This contri-
b u t i o n m a rg i n w i l l sti l l p ro vi d e oper ating incom e of 3133' OOO.
Chapter 2l 577

, cAsEs
c27-1
(f ) $21 per unit, a total of 9210,000for 10,000units, is the lorpestprice
companycould acceptwithout reducingbudgetedincome the
of tne coming
quarter'At any lower price,the speciatorder woutd
add monoto costs than it
adds to rcvenues,rcducingthe comingquarte/s budgeted
openatingincome.
The price is calc-ulatodto equatttre retevint costs of filling
the special order.
First' calcufatethe following per-unitvariabfecosts of
$ubrunits:
Budgetedmanufacturingcosts for the quarter..
-i,zoo,ooo
$5,400,000
Less: Budgetedfixed co_st(3 mo. x $i,ioo,ooo;
Budgetedvariabfemanufacturingcosts .. $i,200,000
B u d g e t evdo l u m eo f r e g u l a r b u s i n e s s . . . . . . . . . + 1 0 0 , 0 0u0n i t s
Budgetedvariabtemanuf.cost per regurarunit
ffi
Budgetedselling & admin.costs for the quarter
Less: Budgetedfixed cost (3 mo. x $900,000) $3,200,000
2.700.000
BudgetedvariableS & A gosts for the quarter
B u d g e t evdo l u m eo f r e g u l a r b u s i n e s s . . , . . . . . . $ S0O,0OO
+ 1 0 0 . 0 0u0n i t s
BudgetedvariabteS & A cost per regulatrunit
Regufarsales commission(S/oof $9i pricel.. . $ S.0O
. i.SO
Budgeteds & A cost per unit,exct.commigsion
i-,jEA
The casestateshow much to add to the regular
directlaborcost rwo otheradjustments direct materiatand
must be calculated:(1) The saw is
neededfor onfy two months,At a rentalof
$S,S00per month,its cost totafs
$11'000for the speciarorder,or $1.i0 p"r *ir
specialunit is triptethat of a regutarunit, 1zy'v"ri"ot"oerrr"ad per
and the casestatesthat this applies
to total variabreoverheadand to the variabfe
operation.The totatvariabteoverhead overheadof the cut_off
cost of a regurarunit is 92.50,and
variableoverhead-ofthe regularcut-off
operationis a part of that total, so the
entircs2'50is.tripledfor th6 spec-iat
oruert.nJ no separateadjustmentie
neededspecificallyfor the cut-off
operation).il" sz.boig inctuoedalreadyin
the budgetedcosts of regufarrllF,
so the adjusbnentneededto cost the
speciatorderis an addttina,
$s.00p", ,nitJ6lSr.ro) _$z.so1,or a total
adjustmentof $50,000for the special
order.
sufficientcapacitymust be availabte
accepungit wourdrequirecancering for the specialorder.(othenrise,
opportunitycost aqualto the tost "oru ,"gulr oroe4s),and an
contribuuoi marginon cancetfedorders
would be a rplevantcost of the special
limitedto 60,000 ord"r.i Crinoing-rn""tin" ie
units per monilr, ""p""ity
ih" quarterrscapacity
regutarunits,andS.OuLar
the budgetedy9rlt" "o is 1g0,000
availablocapacityequivatentto 80,000 roo,Jobregurarunits reaves
"r
reguilunit". Eachspecial-order
usestriple the grindingtime of a regul"t unit
,init, special units require
the equivarentof 30,00breguraruni6' gri"Jiig"o-io,ooo
regularunitsof avaifablecipacity. time,we[ within the 80,000
 t'
,l
-l
I

578 Cttptor2l

eI-1 (Concluded|
SpecialOrder
RelevantGogtAnalvsig
Total oer unit
Units .... . _IO.0AA
Relevantcosts of special order:
Regularmanufacturingcosts. . . , $120,000 $12.00
Regularselling& administrative
', costs,excluding
commission.. S,0OO .50
Additionalcosts of specialorden
Directmaterial. 20,000 2.OO
Directlabor
Variableoverhead.,...... 50,000 S.00
Saw rental(2 mo. x SS,S00) 11,000 1.10
Metallurgisfsfee 4,000 .40
Relevantcosts of special order. . SA0-A09 $Zl,qA
The relevantcost of $21 per specialunit,althoughconsiderablyhigher
than that of a regularunit, is far belowthe regularseltingprice of $g0.This ia
becaugethe company'scosts are predominatelyfixed costs, plrsumably due
to high levelsof automation.The companywill try to negotiateas high a-price
as possible,but the $21 figureshould be regardedas an absoluteminimum.
(21 Nonquantitative factorsto considerincludethe foltowing:
(a) Effectson regularsales
ls the customerwho placedthe specialordera now customer?lf so, will
they becomea regularcustomerprovidedthe specialorder is successful?
will that customeralwaysdemandlargeprice discounts?
Will (or does)the customeruse a targequantityof the regularproduct
and
pay the full regular price lor it?
Will regularcustomer-s leam of the speciat,low price?lf so, will they
demandrargeprice discountson their futureorders?
Will this special,low price start a price war that can erpde regularprices?
(b)Effectson empfoyeosand community
Will the specialmateriafsand equipmentaffectlevelgof safety,
environmentar poilution,and noise in the company,aprant?
will emptoyees and managersgainvaluablenewikills and knowledgeby
producingthe specialorder?(ihe case
statesthat this ig the company,s
first opportunityto produ-ceand gell thia particutar
type of producl)
Will the specialorderrsaffect on totat production
volumeenablethe
companyto avoid layingoff valuedemployeeein the
(c) Strategiceffects coming quarter?
lmJrtet share, grou/thlinnovation,etc.)
Doesthe speciaforder productrapresonta new or fastgrowing
Are thereleaming-curveeffectsoi other advantag""t" 6r g"in"amarket?
addingthe new type of productsoonerratherttrairtatere from
Are prices and profit marg.ins on thig type of product expected
or is it a matureproductlikely to declinegoon? to improve,
 Chapler2l
579

czl-2

flt continuing to obtain coverg from lts own Denver

cover plant woufd aflow
Blg-Auto to mafntain rtg cunpnt feverof coniroior",
coverEand the timing of therr delive-p,--Keep-i-ng the quarity of the
the Denver coyer ptant
opon atso alfour Brg-Automon. nexiuitityif,"n-pu*hasing
lrom outslde suppli-r* BIg:Auto coutd niore e"llty tie ttve.ing
deslgn and changethe quinuues pro.duc"+ alteit"ne'l-oJ"ring",
tracts are raqulred with outsidesuppliers.lilg-f,*r if rong-termcon_
""p""iaily
should also consider
the economiclmpact that closing denver coier
nlty and how this might affest ail-autot otrr"i will have on the Gomfnu-
In addiuonr nolationgwith the woikforce at op"rauons in the region.
;th"; plants could be affected
by nenvsof a ctoslng and layoffs at Denver C;;;;.
(21 (al The fofrorvingrecurrini annuar
buogeteJto"t" can be avoidedby
closing the Denver Goverplant
Matgria 1s.a.o.r........r.............-..r....................o.o......r
Dirgct tabor.r......r...r.........o.r.......r
r....,.
,-..,..r.r...................'..o....D....
sl2,ooo,ooo
Indlrgct costs: 13,O0O,00o
supgrvisfot ....'...-...r......or....r......or.....r gSrooorooo
IndirAct labor ...r...,.............................
4TOOOTOOO
Differentiafpension erpense
(S4'00orooo-$3r0o6rooo;.............
lrooorooo grooorooo

(b}Thefol|owingn9cut7ingannua|budgetedcosts",'no.#
the decision to close the DenverCover ptant:
Depreciation--+quipment...
.............. $ S,ooorooo
Depreciation-building.........r................,............,,......
Continuingpensionerpenses 3,ooorooo
Plantmanagerand staff ...... 3,OOO,OOO
corporate
a-rocation...*.....::::::::::::::.:::::_.._.::::.::::::
3:333i3S
s*,r*pgq
The depreciationamountsare not retevant
they representportions of sunk costs to the decisionbecause
tnat are
ing 2oA. Three-fourthsof the annuarpension being written off dur-
is not relevantbecauseit wourd e)(pensa($3,ooorooo,
closed'The arnountfor ptantmanager wiettrer or not the ptantis
"ontinr"
and staff
becausevositoand his it"n rrorrd is not relevant
continue
administerthe three remainingptants, with Big-Autoand
not relevantbecausethis represents ir,":"orporate arocation is
non-avoidabre
outsideDenvercover, that a?eassigned costs, incurred
to the prant.
 I
I

-i
I

- I

Chapter2l
fio

C21-2 (Concludedl

(cl The following nonrecurringcosts would arise due to the closing of

the DenverGoverPlant:
Terminationcharges on canceltedmaterial orders
($IZTOOOrOOO i157ofr..........,....,....r........................$lrSOOtOOO
gnipfoymgnt assistSl|C€..............'..o....'.r.................... 1 tOOOtOOO
$t'tt"Pgg
These two costs are relevant to the decision because they are
incurred only if the Denvercover Ptant is closed. Gonsequently'
they can be avoidedif the plant is not closed'

(d) ltems not specifically mentionedin the case that should be consid-
ered by Big-Auto before making a decision inc|ude:
(i) The disposalvatue or alternate uses of the plant
r ' ' Any income tax implications;includingthe
(iii income tax rates
appticaUleto gain or toss on the salesof plant and machinery'
cost of losing-depreciationtax shields, any depreciationand
investmenttax credit recapture,etc'
(iiil Outsidesupplierb prices in future years'
in
fiui Gost to manufacturecoveringsat the DenverCover Plant
future years.
 Chapter2l
58t

c21-3 I

(1) FactorsCalcoshoutdconsider,beforeenteringthe consumerproducts

market, follow:
(al the productb contributionmargin and break-evenpoint
(bl consumerdemandfor the proOua in the short nrn and long
run
(c) the companybability to producethe quantity needed in the
short
and long run
(dl the companyblack of erperiencein the consumermarket
and the
need for differentmarketingtechniquesfor productssold in the
consumermarkets
(e) qualityof the competition
(n the impact of the decisionon employees,and the
effect of the
diversionof calco managementeffo-rton total business
(21 Alterationol linanciaf forecastsfor use in deciding uetnreln
tives: the atterna-
Galcors
|ncomebeforeincometaI.................t.....W,ffioo
Add fired manutacturingcost:
lOOrOOGunit lgvgl .,.......................,..... TSOTOOO
-'- - -
l2Oroo0-unit lgvgt ...,,..............,.o.........
9OOTOOO
Add shareof current MarketingDepart_
ment,smanagementcosts.........,r....... i OOTOOO
operatingmarginr................,...,..,....,.....r
$1p?5poo $l prorooo
Insteadof a difference of $35,000in391ne
Galco,the new catcurationshowsa $ts,ood Fffit
(S-1'O75,O0O operatingmargin
- $f 'o9o,Ooo)favoringJasco.Ths
financial difference is
slight' addingsignificanceto the reliabilityof the
well as to the rerevanceof nonquantitative financialestimatesas
(3) factors,
9ng :rl only speculate about tire reliabitityoi ttre two proposars.
fact that Jascohas experiencein the conslmer The
predictingsuccessor fairureof the proje"i;b; market is significantin
estimatesfor the expectedbenefits of itre i""ii"ting not necessariry for the
associatedcosts.lt shoutdbe remembered program or the
ly lost their jobs and pa.v be twing that the Jasco people recent-
especiailyhard to rook good.
similarly,GatcobMarfeting'Department
matesin an effort to avoideti-mination may be biasedin its esti-
of existingemproyeepositions.
--L"nytTturing costs are the same becausecitco will manufacture
product' The saresprice the
differs an_dan of the s% ($5 per
$t oo of safes) differencl il il Jates "ipr"n"i[n
calcob inclusionof assignedMarketing ,ate is not given.
"orili"Joi
oepartm"nt managementcosts
is perhapsan attemptto hedge
its estimates.
 I

Chapter 2l

C21-g(Concluded)

(41 Significant nonguantitative factorg that Calco's management should GOrl-

sider inctude:
(al impact of the decision of Galcorspresent work force; 1.o.,moralo
tosg of lamaining employees if layoffs happen versus the ability of
retained employees to work effectively in the new market'
(b) abiliUec and expectations of employees from Jasco, if Jasco is
selected,
(c) the possible diversion of Calco top management effort from its reg'
ular tine of business,if it does not hire experiencedtalent.

No single item may in itself be important enough to warrant selection

of one atternativeovsr anothea The information presented in the caso is.
limited and does not give an indicationthat any one nonguantitativefac'
tor is moro important than any other. However,any one of the factorc
could be sufficiently significanl For instance,the impact of eliminating
CalcotsMarketing Departmentpositions,if Jasco is acquiredrls perhaps
the biggest single nonquantitative tactor for consideratlon. Since ttrese
new omployeesdisplace existing Calco.employeesr the management
pnocesscoutd be hamperedby serious human relations problems.

c21-4
(1) (a) The product-line income statement for PrecisionGauge Corporation
is presentedon a full costing basis and, consequently,is not suit-
abtefor analysisand decision making.The fact that tho statement
does not distinguish between variableand fixed costs hinders any
analysisof the impact of volume changes on profits. ln addition' the
statement does not distinguish between costs that are directly
related (traceablel to a product line from those that are shared
among all products.
(b) An atternativeincome statement format that would be monesuitable
for analysisand decision making would incorporate the contribution
approach to costing, Expenseswoutd be classified in terms of vari-
ability and controllabitity;such as, variable manufacturing,variable
seltingand administrative,direct fixed controllable by segment (dis-
cretionaryl,direct fixed controllableby otherc (committed)rand
commonfixed. The common fixed costs would not be assignedto
the product lines bscause such an allocationwould be arbitrary.The
contribution approachis monosuitable for analysisand decision
making becausethere is a meaningfulsegregationol costs.
Chapter2l
5&3

C27-4.lGonUnuedf
(21 (al The suggesteddiscontinuanceof the T-gaugeswould be cost effec-
tive, but the suggestio;rsretating to Dgiuges and p-gauges would
not be cost effectivo. These conclusions ano based on ttre foilowing
quarterly differential cost anallsis.
D-gauge P-gause @
Unit salg8 prico......r...t.....,....D.r..,... seo $2oo -$18o
Unit varlable costs:
Dirgct materialsr.............,..o....... $f Z S gl S 50
Dirgct 1abor..................r......r...... 20 40 60
Variable factory overhead.....,..., gO 45 60
Selling expenses.......r................ 4 .;O 10
Total variable costs.................r.. $7f qF Slgo
Unit contribution matgin........,...,.,. $f g $ ?4 $ o
lncrcase (decrease| in units
suggested:
D-gauge ($SOOTOOO sales +
price|
_ $gO 1.5O....o..,.........,....x (5rOOOI
P-gauge ($l,600,00O sales _r
$2O0 price) I .15......,............. x lr2OO
T-gauge($soo,ooosates* $tgo
'l
pfiCef I .O,,......r..,.....r.o......... X (5rOOOl
tncrease(decrease|in total
contribution margin................... $ (95roool $ ggrgoO o
Decrease(incrcase)in fired costs: $
D-gauge,$10o,oOO - $2O,00O.... Bo,oOo
P-9auge.......,....r.....,...,......,........ (1OOTOOOI
T-gaUge ....................,,........,...r..,
4OTOOO
lncrease(decrease)in segment
contributioD..........o.,........,.........
$ (ls,oool $ll1,2ogl _S4o,oog
(b) Yes.The presidentwas correct in
etiminating the T-gauges.The T-
g?.ug€sales price coverc only lts variabte cost and doeCnot con-
tribute anythingto the .ecoviry of fired tactory overhead p-ro-
tion costs. Thus, the T-gaugetris a zenocontribution o,'
margin.
 I

- rrt

Chapter2l

C21-4(Concludedf -

(cl Yes. The president was corect in promoting the P-gauge line rather ' E
than the D-gaugeline becausethe unit contribution margin and
contribution margin per labor dollar is greater for the P-gaugeline
than the D-gaugeline, determinedas follorlrs:
D-qauqe P-qauge b
Unitcontributionmargin(see(a)1......r............. $19,OO $74.OO
Contribution margin per labor dollan
$19 contribution margin * $2o labor..o..o.... .95 v
974 contribution margin + $4o labor r.......o. 1.85
However,the presidentb decisionsregardingpromotion expensedo
not seem well conceived.The decreasedpromotion on the l)-gauge
' line and the increasedpromotionon the P-gaugeline do not pro-
duce sufficient contribution marginto offset the promotion costs.
(dl No. The proposedcounseof action does not make effective use of
Precision'scapacity.The 15% increasein production volume on the
P-gaugeline will not require all of thE capacity that has been u
releasedby discontinuingthe T-gaugeline and reducingthe
D-gaugeline by S0oh.

(31 Yes.The non-quantitativefactors that Precisionshould consider before it ' -

decideswhetherto drop the T-gaugeline include:
(a) Customerrelations-the sale of D-gaugesand P-gaugesmay be
relatedto the sale of T-gauges(i.e.,Precisionmay neLd a complete ' -
line of gaugesdesiredby many customersin order to maintainsales
demandfor D-gaugesand P-gauges).
(bl Labor relations-reducingemploymentmay create labor (personnel)
problems.

nt
ClWter2l 585

C21-5APPENDIX

(11 Let r = rolls of commarcialcarpet

V = rolls ol resldential carpet
Heavyduty fiber constraint 80r + 40y = 42,OOOlbs.
Regularfiber constraint: 2Ar + 4Ay = 24,OOOlbs.
Solvingby slmultaneousequations:
80r+ 4Oy = 42,000
2Ox+ 4oy = 24,OOO
60r = 18,OOO
r = 3OOrolls of commercialcarpet
80 (300) + 4gy = 42,OOO
24,OOO + 4ty = 42,OO0
4Oy = t I'O0O
y = 45O rolls of residential carpet
t2l Leastancannotmanufacturethese quantitiesof commerciatand residen-
tial carpeting,becausethe direet labor constraintwill be erceeded:
Laborconstraint 15r + 15y = lO,5O0
Usingthe requircment(lf solution:
r5(3001+ 15(450)= 17r25o,whlch exceedsthe direct tabor hour
constraintof 1O,5OO by 75Ohours.
(3) Linear pnogrammingis a mathematicalmodel for solving two or mone
unknownsin two or more equations.Linear pnogrammingis used to
determinea mir of productsthat will marimize the contribution margin
or minimizecosts by identifyingthe inputs, outputs, and their related
assumptionsand limitations(constraints)and combiningthem in the
model.Linearprogrammingcan be used to alfocatelimited facilitiesand
resourcesamongtheir manyalternativeuses in such a way that optimum
benefitis derivedfrom their utitization.
 I
II

-
ffi Chagter2l

C21-5 APPENDIX(Goncludedl

(41 Commerclal Residential

$lrOOO
Salgsprlce per unit..........'.,.o............r.............r.r $8Og '| +
Less variable cost Per unit:
$ 24O
Hearryduty fibgr........................o.r.,...............r $120
RegUtarfib€1..'.........r'......'............................. 40 80
DirgCt labor......'..........o.........o........................ 1 50 I 50
Vafiablg faCtOfy Ovefhgad.......,r...,...........'..... 90 90
1.r.........o....r................rr.....rr.r...................... $ Stro S44O

Contributionmarginper unit................'....o....... 9-199 -3360

Let x = rolls of commercialcarpet

y = rolls of residentialcarPet
c = pounds of scrap of heanyduty fiber
d = poundsof scrap of regularfiber

Objectivefunction:
MaximizeCM = 480x + 36Oy+ .25c + .25d

Constraints:
8Or + 4Oy + c = 42r00Opounds of hearryduty fiber
2Ox + 4Oy + d = 24rOOOpounds of regular fiber
15x + 15y s 1O,5OOdirect laborhours
 Chapter 2l fi7

C27.8 APPENDIX

(11 The linear programmingmodol starts with an objecuve or goal to be

achieved aubject to a set of limiting factors, calted constraints. The lin-
oar pnogrammingmodel alloursthe usor to optimize (marimize or mini-
mlze| the objecUvefunction subject to tha constrainG. The cantral
assumptionln all linear pnogrammingmodels In linearity.The linearity
assumptionmeans that the objectivefunction and the Constraintsin lhe
model can be expressedin the form of linear equations.The constraints
can be in tha form of strict sgualities, upper bounds (less than or equal
to constraints)rand lower bounds (greatertAan or equal to constraints|.
l2'l Linearpnogrammingmethodsare appliedmaintyto allocationproblems,
1.o.,allocatingscancenesourcosamong atternativousas accordingto
aome objective. The scarco rosourcasfor a businessfirm may include
personnel,material, equipment,or capitat.The objective fun&ion may
take the form of profit marimizationor soma other measunoof desired
benefiL In this particular cass, linear pnogrammingis appropriate
becausethe firm of Miller, Lombardi,and york hasan o-uieciivein the
form of profit maximizationsubject to restricted r.sou.cis, i.e., staff
availablein the short run is restricted in each area.
(31 The followingdata woutd be neededto developthe tinear programming
modelfor Miller,Lombardi,and york
(a! Total managementhours availabtein each category of service pro-
vided.
(bl Totalhours avaitablefor each category of service provided
by each
type of staff person, i.e., erperienced and without experience.
(cl Numberof microcomputersand hours avaitabte
(dl Billingrates for managementand staff.
(4) R. Olivashould considerthe foltowingalternativeobjectivesbefore mak-
ing the staff allocations:
(a) Maximizethe computerhours available
(b) Minimizetotal variablocosts consistentwith maintaining
a high
level of professionalservice.
(c) NonquanUtativeobjectivessuch as the preferencesof individuals
in
managementto be in specificareasof service.
 CHAPTER22
DISGUSSIONAUESTIONS
o2)-1. Effective phnnhg and control ol capital exP€n' A22-5. Gash oulflows lhat might be expecled for a
dilureg are impodant because: capilal oxpondilureincludo:
(a) financbl risk is increased by long'lerm (a) purchasc prbe of one or rnore assets (or
conmiUnentr; a down paymont il prcpe@ b purdrased
(b) lhe magniludc of capilal expendilures is m irslalknont);
aubstantial and the.penaltier for unwir (b) conslruclbn pericd inlerest and taxes il
decbbnr arc us0ally severo; the prcperty b behg concructcd;
(c) deciebnr mEde in this area provide the (c) machinery and equipmenl letup cost,
supporting slruclure for operalhg activF padiculady if mehhery behg evaluated
lies of he firm. utilizeg a more advanced lechnology
)22-2. Exampler ol opportunitiesard templations lor tfran that currently h use;
unethbal behavbr in the caPilal budgeting area (d) cornPutersoftware development cost if a
include: cornpulgt aided design, cvnpuler aued
(a) prossuro applied to the cosUmanagerial nranufacturing.or tully cornPutet integrat'
accountanl by superiors or associates to ed manulacluringsystem is being pur-
circurnvent the capilal expenditure chased;
approval process, in order lo gel a pel (e) increased annual maintenance and/or
projocl approved power costs resulting frorn more canplF
(b) pressure to wrile olf or dovalue assels c a t e d o r t e c h n o l o g i c a l l ya d v a n c e d
below their lrue valur in order lo jusiily rnachhery or equiprnent
replocemenl; (0 lease paymenls, if some or all of the
(c) exaggerating the expecled economic assets being acquired h the project are
b e n e l i t so f a p e t p r o j e c ti n o r d e r l o leased:
i n c r e a s e t h e l i k e l i h o o do f g e t t i n g i t (g) increasedworkingcapital reguirements
approved. (inventory,cash on hand, receivables,
1))-3. The ccUnranagerigl accountanthas an obliga- payables,etc.) may hcrease as a resull
lion to the company to make sure thal the corn- of increasedbusiness generatedby the
pan/a legilimalepolbies and proceduresar€ capital projecL
not circumventedand lo make sure that the Q22-6. Cash inflows that might be expected fronr e
data used in the evaluationof capilal expendi- capilalexpenditureinclude:
lure proposalsare as reliableand realisticas (a) rov€nu€slrorn additional business gen'
p o s s i b l e .l l a n e l h i c a lv i o l a t i o no c c u r s , t h e erated by the project;
cosVmanagerial accountantshouldf irst discuss (b) cost savingscrealed by the capilal
the perceivedproblernwith his or her immedi- expendilurethat resull in a reduclionof
ate supervisor(in order to clarify the signilF cash outllows (8.9., maintenancosav'
c a n c e o f t h e p r o b l e ma n d i d e n l i f yp o s s i b l e ings, labor savings, reduced inventory
counres of aclbn) and lhen with the individual r e q u i r e m e n t sr e s u l l i n g t r o m r e d u c e d
or individualshvotued.lf lhe individualinvolved setuplimes,etc.);
is the accounlanl's irnmedialesupervisor,lhe. (c) retentionof market share that mighl have
cosVmanagerial accountanlshould consull the been losl il the capilal expendilurewere
next higher levelof management.ll the prob. n o l m a d e ( p a r t i c u l a r l yi n t h e c a s e o f
lem cannotbe resolvedthroughdiscussicn,the a d v a n c e dt e c h n o l o g i e st h a t i m p r o v e
cosvmanageria!accountantis obligatedto prq. p r o d u c lq u a l i t y ,r e d u c e c o s t s , p r o v i d e
vide a full disclosureol all the details to the m a n u f a c t u r i n gl l e x i b i l i t y ,€ t c . t h a t c a n
o x o c u l i v o sr e s p o n s i b l el o r e v a l u a t i n ga n d providea competitiveadvantagelo lho
approvhg capilal expenditures. firm wilh the techrology);
)224. The econorniclile of a project ir the perird dur- (d) salvage frorn the sale of the property at
rngtvhbh il produceseamings.lt need not, and the end of the economiclile c/ the capital
probablywill nct, be equal to the physical lile c/ Prolect.
the relatedasset(s).lts lengthdependsprimari- A?2-7. Sornenonquantiliable benefils lrom investing
l y u p o n l h e o b s o l e s c e n c eo f t h e p r o d u c to r in advancedmanulacturingtechnobgies, such
manufaciuringprocossinvolvedor the nature as ClM, FMS,and robotics,include:
ol the productitsell. Managersusuallyfind it (a) improvedproducl qualily (abilily to meet
qutle diflicullto estirnateeconorniclife because closer productionlolerancesand at tho
il depends upon future evontsov€r which they same time reducelhe variabilityin pro-
may have littleor no control. ducticnoutput);

588
 fuptsP
(b) docmrod nrrchhr trtup and rhorlor
, nrmufaclurhg aTcb tirnra (wt bh prot ido
lho company with tho ability to adjust
outpul quanlity end veririy guickly to
mo.l rapidly changing curlomcr
dornane).
A2,4. Tar &procbtion ie guito likoly to diffcr fronr
boofc dcprcciatbn boceurc thc cool r.covery
podcrd ueod fc tex purpooor ir. uaually rhorfci
than tho oconornic lilr ol tho'assrt uted for
finarcial @unting purp6er. Abo, an ecccl.
onled melhod of depnciation is tlpbaly used
for tex purpo..r, whrrosr tfre iiraigirt-tinr
molhod ir npn c{trn trcod for bok purpoer.
Q2-5. Book dopreciatbn lhorrH not be cqrsiJored in
ulindhg tho friun c8!h tbr, lrrn a projoct
belurr bok deprcciatinn har no elbcl qr
lho rnornt or linhg of cash tbm.
^)2-1O.
Tax deprccidbn stould bo conrbered in ostF
maling lho luturc cach llowr frorn a proioct
bocaurc lax deprccialion reduces tarsblo
ircqno and, thereforo, tax liability. Tax depro-
ciation rccult! h a tar ravhgs, i.j., a reduction
oatar liabilitythat is a caqh outtbw. The timing
of cssh flnn's lr affoctod by the tar d€p.scratbo
rnothod and thc recovory period used-
@2-11. Fiunciel accotrnthg dora sro nol mtirely ruit.
ablt for ucc h evaluathg capital expendilure
propocsb becauss:
(a) Finenciel accounling uter lhc accrual
buir. Capilal oxponcftun docioicrr
9en-
rrally rety on eslimales of cash flows,
r a l h e r l h a n r l v c n u e s a n d e x p e n l r es
delerminedsr the rccrual basis.
589
(b) Firancial accounting ir desiTrcd b rner-
ruro prricdb oamings. Capilal rrpondi-
turc eva.luatbn is cqrcomed with tho lile
of a given prc,iecl, rrhiclr reldorn corro-
rpqrds to urual accorrrting p.rkdr.
(c) Financial tccounling mcalunr tho
rccultr of oporati<xrr ol a ccrrpany or a
aegmenl of a company. Although thir
ontity romelimrr corrorpondr with r
capital cxpenditun prciect, il b urualty
composed of rnany interminglod capilat
erpenditure prciedt.
(d) Fiuncial accorrrthg capitalizer .p.ndi-
lurcr if lhr cxpenditure ir dermed to
havs a futuro rraluoor benefit to the csrr
pany. Capitalization ir an attcmpt
to
malch expendilurer with revcnue! g.n.
traled by thoao rrprndiluroc. Whtn
lulun nalue or boncfit cannd bo roliably
rneasured,financial accornthg treats thc
expendituro ar a porlad axpcnla rath.r
than ar an ascel acquisilbn.
o)2-12. Benefitr of folblving up prciect
regulls irctude:
(a) comparis.on ol actual with projected
resulls to hsure lhat a project b meethg
expecled performance, or taking cofiec.
tive astbn or lermhathg a projecl that b
nol achievhg expectedpedormancc;
(b) evaluation of accuracy ol projcctionr
trorn different depsrtrnerrtr;
(c) improvemcnt of futuro capital projcct
eslimdes;
( d ) m o t i v a l i o n o f p e r a o n n e ta r i r i n g l r o m
knowledge that lolbw.up will occur.
59 ChapterZ

E)GRCISES

E2t2-1
Estimated Unit Unit Unit Net Pretax
Demand Salec Variable Contribution Gash Inflowa
Year ln Unitr Price Cost Margin @Salgg
I t2,ooo $25 $15 $ro $l2o,ooo
2 12,OOO 25 15 to 12o,0oo
3 12,OOO 25 15 10 12O,OOO
4 12,OOO 25 15 10 12O,OOO
. 5 12,OOO 25 15 10 120,000
Total net pretar cash lnflowr from 36OO,OOO
Inltfal cash outflow (cost of asset}r....r........ $55or0oo
Lesr pretax estimated salvagey?hro.......... (i2s.ooo) 42s.ooo
Excegs of net pretax cash inflows over cost................. fl.75J9o

v2-2
Estimated Unit Unit Unit Net Pretax
Demand Sales Variable Contribution Cash lnflows
Year In Units Price Cost Margin f:g- S"l*
1 o,ooo $12 $g $3 $ 18,OOO
2 8,0OO 12 I 3 24,OOO
3 IO,OOO 12 I 3 3O,OOO
4 1O,0O0 12 I 3 3O,OOO
5 10,0oo 12 I 3 30,000
6 1O,OOO 12 9 3 30,000
7 1O,0O0 12 I 3 3o,0oo
8 8,000 12 I 3 24,OOO
I 0,000 12 I 3 18,OO0
10 4,0oo 12 I 3 12,000
Total net pretax cash inflows from sa|es.,....r........r...,.r $r46pOO
Initial cash outtlow (cost of machine).....,...$15O,0OO
Less pretar estimatedsalvageva1ue.,........ (15,000) 135'OOO
E:<cessof net pretax cash inflows over cost.......,.....,.o. $1 I I rOO0
 dtWtsz 59t

Estimated 8% Annual Price-level

Net Pretar Price-level Adiustod Net
Year Gash Inflowr loiu"t-g!t cast Elgf
I $f 5,oo0 ( l +.06) l = 1.060 s 15,900
2 20,OO0 (l+.06)z=1.124 22,490
3 2O,OO0 (l+.06)r=l.lgi 23,920
4 20,OO0 (1 +.O6)r=1.282 25,2&
5 l5,ooo (1 +.O6)c=1338 20,070
6 l O,OOO (1 +.06)c=1.419 14.190
Total price-level adjusted net pretax cash
Inflows from operaUons . $121,700
Plug cash inflow from salvage $5,ooo
Price-leveladjustlng!|t............. 1.419 7.095
Total price-level adjusted
net pretax cash inflowa $128,795
Larr Initial cash oufftow...,........r... 75.000
Ercess of net pretax cash inflowr over
Initiat cash outflow,..,........,....r........o...
Li3J95

E224
Estimated 9% Annual Price-level
Net Pretar Price-level Adjusted Net
Year C"sn t"now" Adjustment C""tr lnno*s
I $2o,ooo ( 1 + . O 9 ) t = 1 . 0 9 0 $ zr,8oo
2 3O,OOO ( 1 + . O 9 ) z= 1 . 1 8 8 35,640
3 4O,00o ( 1 + . 0 9 ) a= 1 . 2 9 5 51,goo
4 80,o0o (1 +.09)a=1,412 g41720
5 60,o0o (1 +.Ogls=1.539 921340
6 6O,O0O (1 +.0910=1.677 too,82o
7 gor00o (1 +.O9)z=1.828 109,680
I 6O,O0o (1 +.09)a=1.993 | 19,580
I 4O,OOO (1 +.09;e=2.172 80,98o
10 2O,O00 (1 +.oo)to=2.367 47r34O
Total price-levet adjusted net pretax cash
Inflows from operations...............r....o..$750,4o0
Plus cash inflow from salvage. $iO,OOO
Price-level adjustment............. 2.316l 23,670
Total price-tevel adjusted
^ not pretax cash inflows ........ $774,O7O
Lesr Initial cash oufi|ow.....t......r.... 25O,OOO
Ercess of net pretar cash inflows over
Initial cash outflow $524,O7O
592 Chagter22

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ClvpterZ
59?

E22-8

(1) (21 (3) (4',1 (5)

Estimated Tarable Tar Uability Net
lnflation- Tar Income With 4OVo After.tax
Adjusted Net Deprc-. (Loss) Tar Rate Cash Inflows
Year Cash Inflowa ciation' (tl - (2) a0% x (3)
I $3O,O0O $40,00o qlo,ooo) $ (4,OOO) $ 34,OOO
2 40,000 64,0Oo (24,OO0) (9,6O01 49'600
3 5O,OOO 38,4OO t 1,600 4,64O 4{i,360
4 6O,OOO 23,0OO 37,OOO l4,goo 45,2OO
5 7O,000 23,00o 47,OOO 18,8OO
go,0oo 51,2OO
6 11,600 6g,40O 27,38,O 52'040
7 60,000 o 6O,OOO 24,OOO 36,OOO
Total net after'tar ca$h inflows.,,....t..................,........,.
Lesr initiat cash outflow to purchase system,_.ro.,.t...... $.?14rOOO
2OOTOOO
Excess of net after-tax cash inflows over initial cash
outflow .......r..r..................i
q!_u,o0o
MA6pg S-year Depreciable Tar
rear Recovoty Rate Basis Depreciation
t .200 $2OO,O00 $ 4O,0o0
2 ,320 2OO,OO0 64,00o
3 .192 2OO,O0o 39,40o
4 .115 2OOrOO0 23,OOO
5 . 11 5 2O0,0oo 23,O0O
I .058 200,O00 11 , 6 0 0
1.000 gegg,ogg
w Chapter2

vJ2-7
(11 l2l (3) (4) (51
Estlmated Taxable Tax Uability Net
Periodic Tar lncome wirh 40% Afteptax
Net Cash Depre- (Loss) Tax Rate Cash lnflows
Year lnflows ciaiion' (1)- (2) (1) - (41
1 $1O,OoO $14,3OO $ (4,3ool q1,72ol $ 11r72O
2 15,00o 24,50O (9,5ool (3,800) 18,800
3 20,OOO 1 7 ,5 OO 2,5OO IrOOO 19,OOO
4 25,OOO 12,500 12,50O SrOOO 20,OOO
5 25,O0O 8,90O 16,1OO . 6,440 18,56O
I 25,0OO 8,9OO 16,10o g,UO 18,560
7 25,OOO 8r9OO 16,1OO gr44O 18,560
8 20,OOO 4,5OO 15,5OO 6r20O 13,80O
I l5,0oo o l5,ooo 6,OOO I,O0O
10 l O,OOO o 10,000 4,O0O 6rOOO
Total ngt aftErt-taxcash inflows r........................,.........r..... 9154,OOO
Aftentar cash Inflow from salvage at end ol economic life:
Pretaxcash inflowfrom sa|vage........r......... $1Or0O0
Lesr tax payable on sale at 49% tat rate.... 4,OOO 6,OOO
Total net aften tax cash inflows $160,000
Lesr iniUal cash outflow to purchasg systemo...r..o........o... l0o,0oo
Erces8 of net after..tax cash inflowg oyer initial cash outflow $ oo,ooo
'
MACRS 7-year Depreciable Tax
Year Recovery Rate Basis Depreciation
I .143 $ l Oo ,OOO $ 14,300
2 .245 l OO,OOO 24$OO
3 .175 1 O0 ,OOO 17,5OO
4 .725 1 O0 ,O0O 12,5O0
5 .089 1 O0 ,00o 8,90O
6 .089 l OO,OOO 8,90O
7 .089 1 O0 ,00o 8,90O
8 .045 1 O0 ,OOO 4,50O
1.000 sl oo,ooo
Chapter22
595

PROBLEMS
P22-1
(1) (21 (3t
Inlladop
Adf usted
Estlmated
Periodic
Gash
Cash lnflours
Year Inflows I "r6Jrlce-LoveI AdJustment (1)x (21
I $ 20,000 (1+.08) 1.O90
2 ?2,OOO $ 21,600
(1+,0$)z 1.169 25,652
3 24,OOO (l+.08)g 7.260
4 30,240
19,000 (l+.08). 1.360
5 24,48,a
15,OOO (1+.O8)r 1.499 22,O35
6 1O,0OO (1+.0$)c 1.597 15,970
9lgg,ogg s139,877
(1 ) (21 (3)
Depre- S-Year Tax
ciable Property Depre-
Basis of Recovery clatlon
Year Property Perrentage (1) r (2)
I $60,ooo .200 $12,Ooo
2 60,000 .320 19,200
3 60,0Oo .792 11,520
4 6O,O0o .115 6,900
5 60,OO0 .115 6,900
6 60,000 .058 3,490
$8O,OOO
-
596 ChagterZ

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 ChapterZ
597

P22-2,

cost of now mach|nettt.................r..r....r........rr...........o...r.......o,.........r...

Thade-ln allouranco tor old machillo ..........Do........,...........o....r,....,.r........
$t8,ooo
grooo
llet cash outtlow at beginnlngof proiegt.......,.....r.D....o.........................
S o,ooo
Tar basis of otd maching tradgd |J|...................o....ro.........r..D..r...,or...r...r
gro0o
Tax basis of new machine ..........r.........t.........
araaaaataaaa
slT,OOO

Annual cost of oporaung old machino..............,....o.......,..,r,.,................

Annual cost of operating ngw machino......,......r., S2o,ooo
1g,0oo
Annual cost savingswith new machino............
$ 4,ooo
(11 (21 (31
Tar
Original Depre-
Tar S-Year ciation Note that year 1 is
Basis Property on Old actually the second
of Old Recovery Machine y6ar the old property is
Year Machine Rate (1) x (21 depreciated.Therefore,
-
1 $lo,ooo .320 s3,2OO the recovery rate for
2 10,000 .192 1rg2o the second year ls used
3 to,0oo .115 1 r 1 5 0 to compute the amount
4 t 0,000 .l l5 of depreciation on the
I,l50
5 l O,OOO .058 old property in the first
580
q9'ooo year of the capltal
erpenditure proposal.
(r) (21 (3)
Tax
Originat Depre-
Tar 5-Year ciation
Basis Property on New
of New Recovery M achine
Year Machine Rate (11x (21
1 $17,ooo .200
2
$ s,4oo
17,OOO .320 5,44O
3 l7rooo .192 31264
4 1 7 'OOO .t t5 1r955
5 1 7 ,OOO .115 1,955
6 1 7 ,OOO .o58 986
$17,ooo
5!n Chapter22

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ClppterZ
599

P22-3,

(tl cost to purchage yar,vegtem from outside supprior

($2Oper unlt r gOr0OO unitg per yearf.......:.....,.., $l1600,000
Incremental cost ol manufacturlng yalve stem:
Dirgct materialg (1i4.5o x Sorooou nits) ...........,........,o..........
$ 360,000
Direct labor ($f.ZO - $Ao1 per unit r gorooo units)...,.......r.
232,OOO
Variablefactory overhead(($l.ZO- $aO) per unit r
80to0o units}
"""t""".........'.........r..'......r...o.r.....t....o.r...... 72|OOO
Total incrgmgntal costs......r.'........r......r...D........r.....
$ 664,000
Totalannuafcosts savingsto make rather than blr1l................
-$ 936.000

(1 ) l2l (31
Tax
Tar 3-Year Depreciation
Basis Property on New
of New Recovery Tools
Year Tools Rate (1) x (21
-
1 $2,5OO,OOO .333 $ 8g2,5oo
2 2,5OOrOOO ,444 1 , 11 0 , 0 0 0
3 215O0roo0 .149 370,OOO
4 2,5OO,OOO .o75 187,50O
-$2,5OO,OOO
ffi Chapter2

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P252-6(ConUnuedf

(t) (21 (31

Adjusted
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Net Cash Price-Level lnflows
Year Inflorvs Adf ustment
1 $ 7,5OO (1+.101 = Ll oo $ 8,25o
2 7r2OO (1+.1Olz= 1.270 8.r712
3 6,9OO (1+.1Ols= 1.331 91184
4 6,6OO (l+.10p = 7.484 9,662
5 6,3OO (1+.10;r = 1 . 0 1I 1O,149
6 6,OOO (1+.1O10 = 7.772 10,832
7 6,OOO (1+.lO)z= 1,949 11,694
$46,90O $68,399
(t) (21 (31
Depre- 5-Year Tax
ciable Property Depre-
Recovery Basis of Recovery ciation
Year Machine (11x (21
@l@
1 $4o,ooo .204 $ 8,0oo
2 40,0oo .320 12,80O
3 4O,OOO .192 7,68O
4 40,ooo .115 4r600
5 4O,OOO .115 4,6OO
6 4O,OOO .o58 2r32O
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P22-6
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Inflation-
Adjusted
Unadfusted Annual 10% Cash
Cash Price-Level Inflows
Year lnflows Adiustment (1) r (21
I $15,ooo (l +.1o) = 1.1oo Stg,soo
2 2O,OOO (1 +.1O)2 = 1.210 24,2OO
3 25rO00 (1 +.10)o = 1.331 331275
4 25rOO0 (1 +.1O)r = 1.464 36,600
5 25,OOO (1 +.1Oll = 1.611 4Or275
6 25'OOO (l +.1Olo = 1.772 44'300
7 25'OOO (1 +.1olz = 1.949 4B'725
8 2O'O0O (1 +.1O)8 = 2.744 42,880
I 15'OOO (1 +.lole = 2.358 35'370
10 1O,O0O (1 + .l Olto = 2.594 25'940

(1) l2l (3)

Tax 7-Year Tax
Basis of Property Depreciation
Depreciable Recovery Available
Year Property Rate (1) x (21
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2 1OO,000 .245 24,5OO
3 I OO,0OO .175 17,500
4 l OO,OOO .1 2 5 12,5OO
5 1 OO,OO0 .0 8 9 8,900
6 l OOr0 OO .0 8 9 8,9OO
7 1 OO,O0 O .0 8 9 8,900
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P22-7(Conctudedt
,}r (lt l2l (31
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3 2OO,O0O (1 +.O8)s = l,lgf 238r2OO
4 2OO'OOO (1 +.06){ ; 1.292 252r4OO
5 2OOTOOO (1 +.06)5 = 1.338 2671600
6 2 OO,OOO (1 +.0 6 )o = 1.419 283' 8OO
 Chwter2 611

. GASES

c22-1

Some of the factors that affest the decisionof whether or not to delay the
investmentin new cleaning equipmentare given below. Each factor can have
two sides (1.e.,delay versus no delay)dependingupon the circumstances
involved.
(al' "" "oT;:
" onsinsenerar'
oiu
r3l,?Hhiil:1i"J#l:fi:Hl
Business deteriorating-delay.
outlook
All of these factors affect the climate for business and should be consid-
orgd.
(b) Difficulty associatedwith acquisitionand installation of equipment and
training of operators.
I otdera,'
$f'?'J"#it',H;,
The greaterthe lead time involved,the soonerthe equipmentshould be
acquiredso that it is readywhen needed.
(c) Extent of operating efficiencyimprovements.
Great-do not delay.
Little-delay.
The greater the efficiency,the less it should be delayed because costs
notincrease'
(d) il[ffH:,T:3"T;i3l"H1;T'i:"""
Cost of equipment not expectedto increase drastically-delay.
Cost ol equipment erpected to inclease drasticalty-do not delay.
Companywants to minimize its initial cost outlay.
(e) Dependabitityof presentequipmentand likelihoodof breakdowns.
Dependabilityis good-delay.
Dependabilityis not good-do not delay.
Companycould defer,or havetogo aheadwith investmentdue to conCi-
tion of present equipmenl
(0 Chancefor technologicaladvancesin equipment.
Good-delay.
No chance-do not delay.
lf there is a chancethat technotogicaladvanceswill developin the design
of the equipment,the companymight want to take advantageof the new
, design.
(gl Ability to obtain market advantageby providing better quatity service at
- Eameor lower price.
Good-do not defay.
Poor/neutraf-delay.
Better service means more customersor justifies higher rates.
 I

612 Chaptor22

C22-1(Conctuded)

(h) Gompetitors'plans for obtainingsimilar equipmentand achieving market

advantage.
High probabili$--do not delay.
Low probability-delay.
Companywants to maintain competitiveadvantageor meet competition.
(il Ability to predict timing and increasedvolume of demandfmm new or
edsting customens.
Good-better quality of decision;could defer switch longer.
Low,-less reliable criteria for dscision.
The better a companyis able to predict new business,the more certain il
can be of its decisionand, possibly,the longerit can wait to make a
change,

c22-2

Knightis probablycorect in her assessmentthat the proposedcapital invest-

ment framework grants too much freedom to the divisions.Neoglobeb long-run
performancedependson its capitalinvestments.Whiledivisionsmust have
some responsibilityfor capital investmentsfor the proposedorganizationstnrc-
ture to be effective, corporate managementmust maintainadequate control to
direct the future courss of the firm. Underthe proposedframeworlg division
managementcontrolsa substantialportion of the capitalbudget,and in some
year:i' few funds would be availablefor investmentby corporate management.
The presentproposalwould reducecorporatemanagementbability to diminish
a productline, and it also would impair managementbabilityto have adeguate
funds availablefor investmentin new businesses.
Capitalinvestmentproceduresshould involveboth divisionand corporate
managementsin such a way that divisionmanagementstilt should be able to
influencethe future directionof the firm. Such proceduresmight include classi-
ficationof capital projectsinto groups,some of which could be approvedby
divisionmanagementwithout corporatemanagementstudy,
An alternativeto the Neoglobecapitatinvestmentprogrammight have the fol-
lowingfeatures:
(a) All proposedinvestmentproiectswould be classifiedaccordingto their
natunHeplacemen! cost savings,erpansion.
(b) Replacementand cost savingsproiectscould be adoptedby divisionman-
agementalone,without approvalof corporatemanagement,providedan
individualproject did not exceeda specifieddoltartimit and the totat of
such projectsdid not exceedanotherspecifieddollar timiL The doltar lim-
its would reflect the nature and size of each divisionboperations.
(c) All oxpansionprojects,or other projectsthat exceedthe doltar limit,
would be submittedto corporatemanagement for evaluationand
approval.
 ClppterZ 613

c22-3

The process of planning for and ovaluatinglong-terrn commltments of resources

is normally relerred to as capital erpenditure planning, evaluating, and controt,
or capital budgeting,The capital budget is distinct in that it focuses on the
long-term effect of lesources committed. lts primary objectives arc to provide
managementwith (ll a formal process to chart its futura coutlsef (21a means of
ranking and selecUngamong altornativenesouncecommitments to maximize
rcturn on investment and (3) I pnogr:lmfor ongoing evaluation of extant
nesourcocommitmsnts.
Any significant resource commitmentis viewed as a projecl Hence, the capi-
tal budget is composedof projects,some of which are in pnocessand some oi
which are pr,oposed.Each project affocts significant periods of time in the
ongoinglife of a company.A project often involvesthe evaluation of atternatives
and the purchaseof such assets as property,plant, and equipment. lt should
also consider,howevor,any proposalor pnogriamthat reguires a signifieant
resouncocommitmentover an extendedperiod, such as the development of new
products' openingnow markets, and the design and development of major com-
puter pnograms.
Onca nesourceshave been committedto a particular project, the project
reguires ongoingevaluation;i,e., are the projectb objeciives being meti lf not,
it needs to be evaluatedin terms of wtretherthe project should UJ iutained as
is, modifiedif possible,or abandoned.
McAnguscan make significant use of capital expenditure planning, evaluat-
ing, and control. At the division level, projects will need to be defined in terms
of those elementsof the plant, or operationof the division,over wtrich the man-
ager has control.On the basisof the facts given,the divisionmanagerhas
authorityto operatehis or her plant essentialtyas if it were an independent
company.Hence,anythingaffectingoperations,which has required
or wilt
requiresignificantresourcecommitmentover i significantperiod
of time,
shouldform an integralpart of that divisionbcapital budgel At the
top manage-
ment level,the presidentmay view each divisionas a project, particutarly
evaluationpurposes.The other describedactivitiesof top management(investi- for
gating and evaluating_such things as new markets, etc.) are projects in the capi-
tal budgetingsense.Theseand othel new proposatsmay
be defined,anafyzed,
and evaluatedusing a varietyof avairabretectrnigues.

c22-4

(1) Ametfs revision of the first proposal described in the case can certainty
be considered a viotation of the Sfandards of Ethical Conducl Arnett
carded the reasonable proiections and estimates dis-
after being questioned
and pressured by Earlg, and used figures ttrai
frave only a remote chance
of occurring. By doing this, Amett viotated tha
(which requires that the management standard of objectivity
accountant communicate informa-
tion fairfy and obiectivety and disctose fullyi"iur"nt
information that
 611 Chaoter 22

C22-4(Concluded)

could noasonablybe expscted to influenco an intended ussrb under-

standing of the report pnesent€dl.By altering the analysis,Arnett also
violated the standard of integrity (which requires that the management
accountant (fl refrain from engaging in an activity ttat would prciudice
hig or her ability to carry out the rcquired duties ethically, and (2) com-
municate unfavotableas well as favorableinformation, profes.sionaliudg-
ments, and opinions|.Arnett also violated the standard of competence
(which reguires that the managementaccountant pnepanocomplete and
clear ruports snd rccommendatlongefter appropriateanalysis of relevant
and reliable lnformation).
l2l Basedon the facts in the case,Earlewas certainlyin violation of the
Standafdsof EthicalConductas a resultof pressuringa subordinateto pre-
paro a proposalwith data that wenofalse and misleading.Earle has vio-
latad the standardsof competence(failedto perform professionalduties
in accordancowith ,.. technical standards;and failed to prepare com-
plete and clear reports and reliable information!,integrity (engagedin an
activity that would prejudice his or her ability to carry out required duties
ethically,actively or passivelysubverted the attainment of tho organiza-
tionb legitimate and ethical objectives,failed to communicate unfavor-
able as well as favorableinformation and professionaljudgments or opin-
ions, and supported activity that would discredit the profession),and
objectivity (failedto communicateinformation fairly and objectively and
did not disclosefully all relevantinformationthat could reasonablybe
erpected to influencaan intendeduserb understandingof the report
presented),
(3) The elements of the proiestion and estimation process that are compno-
mised becauseof a predetermined,misleadingoutcome include:
(al the quality of the base data,
(b) the quality of the assumptionsused,
(cl the probabilityof the projection occurring, and
(d) the credibility of the people submitting the projection.
{4} The internal controlsFore Corporationcould implementto prevent
unethicalbehaviorinclude:
(a) approvalof all formal capital expenditureproposalsby the controtter
and./orthe board of directors,
tb) designatingI non-accounUng/financo managerto coordinatecapital
erpenditunenoguestsand./orsogrogatingduties during tho prepara-
tion and approvalof capital expenditurerequests,
(c) requiring all capital orpenditurs prsposals bs roviowed by senior
operatingmanagemen!which inctudesthe controtler,belorc the
proposalsare submittedfor approval,and
(d) requiringthe internalaudit staff to reviowall capital erpendituro
proposalsor contractingwith externalauditorsto review the pro-
posal if the corporationdoes not havesufficient personnel.
QydsZ 6t5

c122-6
'
(11 Referringto the specific standards in the IMA's Standards of Ethicat Conduct
for Pnctitionerc of ManagementAccounting and Financialllanagement, the
conduct of H. Dodge and G. Watson is unethical as discussed below:
(al H. Dodge! first rcvlsion of tlrc proposal for the warrhousc coDyor-
eion was unethical becausoDodgeb actiong violate the following
standards:
Gomoetence.Although thc sstimates used in the analysis are based
on managementbjudgment, Dodgeb action in changing reasonabfe
estimateato ramote assumptionsls unethlcal. Management accoun-
tants havo the responslbilityto propare complete and clear reports
and rucommandationsafter appropriate analyses of relevant and
reliableinformation.
Inteoritv.Dodge has the rtsponslbili$ to avoid conflicts of interost,
refrain from subvertingthe attainment of the organizationb legiti-
mate and ethical objectives(profitability),and refrain from engaging
in or supporting any activity that woutd discredit the profession.
Obiectivitv.Dodge has the rcsponsibilityto communicate informa-
Uon fairly and objectivelyand to disclose fully all relevant informa-
uon that can influenco an intended userb underistanding.
(b) G. Watsonb conduet in giving H. Dodge specific instructions on
preparingthe second revisionof the proposal is unethical because
Watsonbconduct violatesthe lotlowing specific standards:
Gomoetenee.Watsonhas the responsibilityto perform his profes-
sional duties in accordancowith relevant technical standards, such
as using conservatismand realistic estimates in the net present
value analysis.Managementaccountants should prepanocomptete
and clear rspons and recommendationsafter appropriate anaiyses
of relevant and reliable information.
confidentialitv' Watsonshould refrain from using or appearing to
use confidential information acquired ln the courso of his work tor
unethicaladvantagefor personalgain (savingon commutingtime
and costs).
Intearitv.Watson has the responsibilityto advise all partios of any
potenUalconflict of interesl Watson shoutd refuse any favor (tho
warshousercducing his commuting time| that woutd appear to influ-
cnco his actions. Watsonshould communicate unfavorable as weil
as favorable lnformation and professional
Judgmentsand opinions.
obiectivitv.Watsonhas the responsibilityto disclosefuly alt
rolo-
vant informationthat can influencean intended userb understand-
ing of the analysis.
 I

6rO 22
ChaPtor

C22-S(Concluded)
l2l Steps recommendedby the Sfaadardsof Ethical Conduct for Pnctitioners of
*lanagement Accounting and Financial *lanagement that H. Dodge should
follow in attemptingto resolvethis situation are as follows:
(al Dodgeshould first investigataand see if Evans Companyhas an
estabflshedpollcy for resolving confllct, and lf such a polict erists'
Dodgeshould lollow lL
(bl Since it sppears tAat G. \f,/atson,Dodgeb superior, is involved, there
is no need to confront Watson or discuss this lssue with Watson any
further. Dodge should present the sltuaUonto the nert higher level,
the vice president of finance, tor rpsolution.
(c) lf Dodgedoes not receivoany saUsfacUon,Dodgeshould continue
to successivelyhigherlevels,includingthe audit committee and the
board of directors, if nscessary.
(d) Dodgeshould clarify the concepts of the issus at hand in a confi-
denUaldiscussionwith an obiective advisor,i,o., a peor.
(el lf the situation is still unlesolved after erlrausting all levels of inter-
nal revieq Dodge will have no nocoursebut to resign and submit an
informativomemorandumto an appropriate representativeof the
organization.
(0 Unlesslegallybound (whichdoes not appearto be the case in this
situation),it is inappropriateto communicatethis situation to
authorities or individualsoutside the organization,
(g) Dodgemay consult with personal legal counsel.
c22-6

(1) By referringto the IMA'sSfandardsof EthicatConductand taking into

considerationthe specific standardsof competence,corfidentiality,
integrity,and objectivity,L. Forrestshould evaluateB, Rolland'sdirectives
as follows:
Comoetence.Forresthas a responsibitityto presentcomplete and clear
reports and recommendationsafter appropriateanalysis of relevant and
reliableinformation.Rollanddoes not wish the report to bs comptete or
clear,and has providedsome informationthat is not totatly reliabte.
confidentiatitv.Forrsst should not disctoseconfidentiatinformation out-
side of the organization;but it also appearsthat Rollandwants to refrain
from disctosinginformation to the board of directors that it should know
abouL
Inteqritv.Roltandis engagingin acUviUesthat could prejudicehim from
carrying out his duties ethicatty.In evaluatingRoltanOt Airective as it
affects Forres! Forrest has an obligationto communicateunlavorabloas
well as favorableinformationand professionaljudgments or opinions.
ChapterZ 617

C22-8,(Concluded)

Obiectiviw.Tho responsibilityto communicate information fairly and

objectivety,as welt as to disclosa fully all relevant informaUonthat could
rrasonably be erpected to influsnco reports and rtcommendations pre-
sented, is being hampered.The board of directors will not have the full
scope of informationthey should have when they ars pnesentedwith the
anallsis.
l2l By refening to the Slandardsof EthicalConduct, L Forrestshould take
the following steps to resolvethis sifuation:
(a) Forrestshould first investigateand see if lDl has an established pol-
icy for resolutionof ethical conflicts and, if so, follow those
procedures.
(bl lf this policy does not resolvethe ethical conflict, the next step
would be for Forrestto discuss the situation with his supervisor,
Rolland,and see if he can obtain resolution. Ons possible solution
may be to present a "base casst' and sensitivity analysis of the
investmenLForrestshould make it clear to Rolland that he has a
problemand is seekingguidance.
(c) lf Forrest cannot obtain a satisfactory resolution with Rolland,
Forrestcould take the situation up to the next layer of management,
and inform Rollandthat is being done. lf this is not satisfactory
Forrestshould pnogressto the next level, and eventually to all high-
er levels of managementuntil the issue is resolved (i.e., the presi-
dent, audit committee, or board of directors).
(dl SinceRollandhas instructedhim not to discussthe situation with
anyonoelse at lDl, Forest may want to have a confidentialdiscus-
sion with an objectiveadvisorto clarify relevant concepts and
obtainan understandingof possiblecourses of action. Forrestmay
want to talk to a close professionalfriend or the IMA "Ethics
Hotline"lor this purpose.
(e) lf Forrest cannot satisfactorityresolve the situation within the orga-
nization,he may resignfrom the companyand submit an informa-
tive memoto an appropriateperson in lDl (i.e.,the president,audit
committee, or board of directors).
(f) Forrestmay consultwith personallegalcounset.
 CHAPTER23
DtscusstoN
ouEsnoNs
O2&1. The weighted average cost of caphal is com-
putd by lhe lolbwing steps:
(a) Calcrlale ech componenl of caFital as a
p€rconlage of total capital.
(b) Calctlale the after-tax cost of each indi-
vidual capital componenl
(c) For each capilal componont. multiply (a)
by (b) and sum lhe resulls.
Q23-Z Using the cosl of a specific source of funds
may lead to laully decisions. For example,
when debl is used, low.return projects would
be acceptable while better investments nrruld
have to be ruled out in a following period, when
@mmon stock shares are soH lo obtain tunrjs.
023-3. There are two problem areas associated with
eslimatingthe firm's weiThtedav€ragecost ol
capital-the proportions of each source ol
funds and lhe cost ol each souroe of funds.
The proportionsthat are expected over the
i n v e s t m e n th o r i z o n s h o u l d b e u s e d . S i n c e
these amounls are typicallyunknown,the pro-
portionsdesired by managementin the long
run aro usually used. With fesp€ct lo costs, the
market prices of each source of lunds should
be used. Since the market price varies over
lime as creditor and investor expectations
change, curr€nl market prices adjusted for
changes expectedby managem€ntar€ Com-
monlyused.
CGA-Canada(adapted).Reprint with permis-
sion.
Q23-4. The payback (or payout) period method mea-
suresthe lengthof time requiredby a projectlo
recoVerthe inilialinvestmentoutlay.
023-5. In computingthe accountingrale ol relum on
o r i g i n a l i n v e s l m o n l ,t h e d e n o m i n a t o ri s t h e
orrgina.linvestmenl,whereas in computingthe
accounlingrale of relurn on avaraoe invesl-
monl, lho denominaloris the averageinvest-
menl-
023-6. The presenl vatus concepl states that a dollar
recetvedtoday is worth more than a dollar to
bs receivsd al a fulure date because of the
earningsthe 1oday.dollarcan generatein the
i n t e r i m .l t i s i m p o r t a n ri n c a p i r a l b u d g e r i n g
becauseol the relativeVlong perircdsbelween
lhe investmentof tunds and ihe returnol those
funds as eamings (i.e..dollars ,eturnoda long
Itme in the tuturearo wlrth considerablylesi
than lhoso investedtoday).
Q23-7. T h e b a s i c d i f l e r e n c eb e t w e e n t h e p a y b a c k
methodand the nel presontvaluemethodcon.
c a r n s l h s r e c o g n i t i o no f t h e t i m e v a l u e o l
monoy. The payback method, which ignores
lhe time value ol moneyand all cash llows
beyond the payback pericd for the project, is
618
the measure od the time it will take lo recover
the inilial cadtal inveslmenl in nct cash infbws.
The net present value method does consiier
lhe lime value d mon€y. This method involves
comparing the present velue d all future cash
inflols and outflows of a given project, using
some minimum desired rate ol return A posi-
live resuh implies that the project,s rale of
relurn erceeds lhis minimum ralg, whereas a
negative resull indicales that the projed,s rate
ol retum is less than thb minimurn rate.
O23€. ln the net present value method, the discount
rate is known; whereas, in the intemal rate ol
relurn melhod, the discount rate is not known.
ln the internal rate of return melhod, the dis-
counl rate is the one that will resuh in a net
prgsenl value ol zero.
023-9. The net pr€sent value method assumes that
earnings are reinvesled at a rale of relurn
equal lo the tirm's cost of capitat,whereas the
intsrnal rate of return method assumes lhal
earnings are reinvesled at the rate o'f relum of
the parlicularproject being considered.The
firm's cost of capilal rate is more realistic.ll an
i n v e s t m e n tp r o p o s a l i s p r e d i c t e d t o b e
erlremely profitable (e.9., having an internal
rale ol returnof 50%), it is unlikelythat similar
proposalsare available. Holvever, a firm
s h o u l d o r d i n a r i l yh a v e s e v e r a l i n v e s t m e n l
opportuniliesal or near the ralo of its cost ol
capilal.
CGA-Canada(adapted).Reprinrwilh permis-
sion.
0 2 3 - 1 0 . S s t l i n g t h e d i s c o u n tr a t e a t s o m e t h i n gi n
excoss of the cost of capital in order lo com.
pensate for risk and uncerlaintyassocialed
*;16 3 r.qpilalexpenditureproposal is concep
l u a l l y u n s o u n d ,b e c a u s e t h e r e i n v e s t m o n t
polenlial of cash llows is overstated. Cash
receivedin early periods has more value than
cash received in later periods, because only
the cash receivedin the early periods can be
reinveslsd.As a consequence,the use of a
rat€ in ercoss ol the reinvestmentrate in the
nol presonlvaluemethodwill resultin an over-
statementof the value of cash recsivedeartyin
the life of the capital erpendilure project. A bet-
ler approacfiwould be to clmpute lhe terminal
value of the cash lbws using lho reinvestment
rate (i.e.,computethe value of all cash flows at
the end ol the lile of the projecl),and then dis.
counl tho total to pres€nlvalue at a risk-ad,iust-
ed discountrate.An even benerapproachis to
explicillyconsiderunc€rtaintyby using proba-
bilityanalysis,as discussedin Chapter24.
 QrWtsA 6r9

gERCtSES

E23-1
Proportion Afteptar Weighted
Funds-Sounce of Funds Gost Cost
Bondg ll0% r (l - 45o/otar rate)) .,....,.... 390h 5.5oh 1.65o/o
Prcferrtd gtOCk......................r.r.'....!...... 20o/o l2.5%o ' 2.500h
Common stock and retained earnings... 5,00h 15.O7o *f 7.50oh
1000h 11.0,50h
'
l12o/or $l OOpar value for prafered stockl * $96 market value
* ($TS,OOO + 5O,O0Oshares of common stock) .F$f O markst price per
gharo

E23-2
Weighted averago cost of capital before bond retirement and sale-leaseback
transaction:
(r) et (31 (41 (s)
Weighted
Percent Pretax After.tar Gost
CapitalComponent Amount of Totaf Cost Cost (21r (a)
8ond3.......o.......r....r....... $ 5,ooo,ooo 50% 8.Oo/o 4.8o/o 2.40h
Prgferrgd gtock....,..,....r 1,000,0o0 10% 9.Oo/o 9.O% .s%
Common gtock and
rstained earnings... 4,0oo,ooo400h 72.50h 12.5Vo 5.Ooh
_91_qogo,ogg
1000h 9.30h
Weighted avarage cost of capitat after bond retirement and sale-leaseback
transaction:

(r) (21 (31 (4t (sl

Weighted
Percent Pretar Afteptax Cost
Capital Component Amount of TotalGost Gost (21r (al
Lease.r.........,.. $ 1 , o 0 0 , o o o 100h 10.ooh 6.Aoh .600h
Bonds..................r......... 4 , O 0 O , O O O 400h g.ooh 4.goh 1.920h
Preferred stock............. 1,00o,ooo l o o h g.ooh g.ooh .gooh
Common stock and
retained oarnings... 4,O0OrOOO 400h 12.50h 12.5o/o 5.OOo/o
s!g,ogg,oog 1000h
_8.42%
 "-\

w Chapter23

F,.3-3

tl) Annual cash inflow before fncomet3r.....,..,....,....r,....$15,OOO sl5,ooo

Less depreciation(the samo for financial accounUng
and Incometar purposes(94O,OOO cost +
8 years)f.,......o... SrOOO
Annual tarable income ......,....o..... slo,ooo
Annuaf Incomet* ($f or0oOtaxable income r AOohl.. 4,OOO 4,OOO
Annual income after tares $ 6,000
Annual aftgrttax cash inflow.,.....,...,.........o.,r,.....r,.,..r. $l1,ooo
$4O,O0OInitial cash outflow
= 3.636 yearsto payback
$ 1 1 , O O Oa n n u a l ca sh i n fl o w

S6,0OO averago annual Incomo _ .15 or 15oh rate of return

tzl
$40, OoOoriginalinvestment on originalinvestment

E23-4
$34,OOOinitial cash outflow
t1l = 3.4 years to payback
SlO, OOOannuafcash inflow

tzl Present value of annual cash inftows for six years

($1O,OOO annual cash inflow r 3.284).,...o......., $37,84O
Less initial cash outftow to acquire investmsnt.,....... 34.000
Net present value of investment,.......r..........r..
___3'940

t3) cash dgsirgd at gnd of six yeani .....D.....,.....r...r,.,..or........r...r...

534,O00
Present value of $i co-pounded annually at lioh,................ x .432
lnvgstmgnt required ....,................,.,,........,....r.
fl_4$sq

E23-5
tl) Presentvalue of annuarcash inftowsfor io years
(S20rooO annualcash inflow r 5.2i6).....,...,...............,.,..
s 104,320
Presentvalue of satvagovalue at end of i o-year life
(Sl O,ooOcash inftow from salvager .2701.............. 2.700
Presentvalueof alt cash inf|ows.....r..r....,.r.......,.....,.
$107,O2O
Less initial cash outflowto purchasepness (1OO.5OO)
Ne t p r e s e n t va l u e o f i n ve stme n t
L__ j.52q

tzl Present = $6,520 net present value

= .O65 or 6.5"h
value inder $ 1 O O , 5 O Oi n i t i a l i n v e s t m e n t
 ClapbrA el

E23-8

tr) t2l f3l r) (5) {01 c4 t8)

Prurnt
Co.l Stnlght- lncomr Vrfri ol
MACRS Stnlghl- Rocovrry Ulrr Dlffon Ter Prreont Trr
FrcoYory Uno Undr DrPr- onc4l Srvingr Valrr of Srvingn
Brio Rrtr Mlg35 chUon t3l - l.) (!l x.o% tt 0 ta% (olrf7l
1 0.200 o.too s 2o,ooo I lo,ooo slo,ooo 9fr0oo o.477 t3,508
2 o.320 o300 32,OOO 2OrO00 12,OOO 4l8OO o.7E0 3,691
3 0.192 0300 19"200 2O,000 (8o0) (320) o.675 (2r0)
a o.115 o^200 11"500 20,ooo (8,5OOl [3/4OOl 0,592 (2,O13)
5 o.tt5 o-200 t I r5oo 201000 (8,500) (3/4oO) o.519 (1,785)
c o.o58 o.to0 5r800 10,000 (4,200) (1,6801 o.456 cr88)
_$!oo,goo 3100,000 o ______9 _93'499

E23-7

(11 Inflation-
UnadiustedEstimate Inflation Adjusted Estimate
Year of CashInflows Adiustment of Cash Inflows
1 s2O,OOO 1.1oooor $22,OOO.OO
2 1 8 ,O00 l.2looo 2l,78O.0O
3 1 6 ,O00 1.33iOO 21,29 6.00
4 l O,OOO 1.46410 14,641,OO
5 t o,ooo 1.61051 16 , 1 O 5 . 1 O
$74,ooo s95,822.1O
t(l +.1 O)nw h e re n = num ber of per iods

(21 PV of PV of
Unadjusted Adjusted PV of $1 Unadjusted Adjusted
Year GashFlours Cash Flows Q 15o/o Cash Flows Gash Flows
o $(s8,ooo) s(s8,ooo) l.OOO s(s8,oo0) s(58,OOO)
I 2O,OOO 22,OOO .970 17,4OO 19r140
2 18,0OO 21,78O .756 l3,6Og 16,466
3 16,000 211296 .658 1O,528 14,013
4 I O,OOO 14,641 .572 5,720 81375
5 l O,OOO 16,105 .497 4r97O 8,004
Net present value of investment......... $ (s.7741 $_z9eg
 I

*\

e^ Chapter23

E23-8

(tl l2l (31

Tax
Tar 7-Year Depreciation
Basis Property on New
Of New Recovery Airplane
Year Alrplane Rate (11r (21
I $5OO,OOO o.143 $ 71,5OO
2 5OO,OOO o.245 122r5OO
3 50o,ooo o.175 87,50O
4 500,ooo 0.125 62,5OO
5 SOO,OOO o.089 44,5OO
6 5OO,OOO o.o89 44,5OO
7 5OO,OOO o.o89 44,5OO
8 5OO,OOO o.045 22,5OO
$goo,ogg
(11 (4 (31 (4t Ft {ot m (8t
lncnar lnclrrr Prrrnt
(DocnerI {Oocrosrl Vrltr of
Annrrrl Trr In In Aftenter Pnronl Aft*ter
Pr.trr Drpn- Tereblo lrcorrrr Incorrrr c.dr vrluo cuh
c..h clrtlon tncomo Ter Ter Inflowr of $1 lnflowr
Yrar lnflowr Dodugtlon (tl - (4 Rrtr (3) r {r} (t} - {51 e 7gy. (ol r ftl
1 313o'ooo t 7r"50o t 58,500 |;o'h 923'4oo $1oo,ooo o.87o t 92,742
2 13o'ooo 12!2'5go 7r5oo 4o'h 3,ooo 127'ooo 0.756 96,012
3 l3OrOOO g7.5OO 12,50,0 lO'h 17,OOO llSrOOO 0.658 74,39
{ 13o'o0o 02'500 67'500 4och 27 'goo 1o3,ooo 0.572 58'916
5 130'000 4ar500 8tt"5oo looA {}2oo 95'8oo 0.497 47'013
6 130'000 a4r500 8!t'5oo 4o',A u,2oo 95'8oo o.{t2 41,386
7 13o'o0o 44'500 8tt'5oo 1o'h 34'2oo 95'8oo o.37o 36,021
8 13o,ooo 2!2,5oo 1o7r5oo 4oV. #l'ooo 87'ooo 0.327 28,'#}e
9 130'000 o 130'ooo 40% 32,ooo 78'ooo o.2g 22,152
10 130,0OO 0 13O,OOO 40ch 52,OOO 78,OOO 0.247 1g,2$o
Prercnt valuc of pcrfodlc after-tar caah Inflows 35'l O,911
Plur prercnt valuc of cftar-lax ralvagc Gtloo,ooo r 11- 4o%l | .24n...... "14,8i20
Prcrcnt valuc of carh lntlorvr ovcr urcful ttfc of new a1rp1rnc............... 3s31r73i
toq Inlttalcaehouulow (costof new arrprane),.. 5oo,ooo
Net prcrent valucof Invettment-.----.-
t 31,?31
CtppterTS 6?3

F23-0
$38,0O0
GOSIOf neW maChine....,..'..r.........'..............'.....r.'.........'.............,'....'..'
Tt'adg-inallOWanCefOf Old maChlJtO ............'......'.................'................ l8,o0o
Net cash outllow at beginningof proiect s2O,OOO
Tar basis of old machino traded in 16,000
Tal! baSiS Ot nOW maChine .'.....r..r.....'...rr.r..rt...'........r........ _999'oo9
AnnualCOSI Ot Opefating Old maChit1O...........o.."........................or.'....... 90o,ooo
AnnualCOSI Ot Opgfating neW maChiltt8 r...............r.....'........................'r 34,OOO
Annual cost savings with ngw machine........'........."r'......'...'.'r'.'r.r.'..... -$ 6rOOO
(1) (21 (31
_ Tar
Original
Tar 5-Year Depreciation
Basis Property on Old
ot old Recovery Machino
Year Machine Rate (r) x (21
1 $20,OOO 0,320' $ 6,400
2 2O,OOO 0.192 3,840
3 2O,OOO o.115 2r3OO
4 2OTOOO 0 . 11 5 2r3OO
5 2O,O0O 0.058 I,i 60
sl6,ooo
'Note
that year I is actually the second year the old property is depreciated.
Therefore, the necoveryrate for the second year is used to compute the
amount of depreciation on the old property in the first year of the capital
erpenditure proposal.
(1) l2l (3)
Ori ginal Tax
Tar S-Year Depreciation
Basis Property on New
Of New Recovery Machine
Year Ma chine Rate (11x (2)
1 s36,OOO 0.200 $ 7,2oo
2 36,OOO 0.320 1l,52O
3 36,OOO 0.192 6r912
4 36,OOO 0.115 4r140
5 36,OOO o . 11 5 4J40
6 36,OOO o,058 2,OBf,
$36,OOO
 't

e1 Chapter 23

E23-9(Concluded)
(tf t4 t3l (41
AddiUonel
FI (0, m (E
Tar Annual Incrrar Inctrrlo
EbPn- Cort (Docnarcf (Dccruarc)
Savingr ln ln Hct
AllowabloTar Doproclauon*tfitfl wth TrHbb Incomo Incomr Carh
How Old Machlnr Hcw Incomo Tax Tar Inflow
Machlnr Machlno (11- (21 Machlno (4) - (31 Rrto (4)-m
(51r (ol
1 s 7,2OO 36,400 3 8OO so,0o0 S 5,200 400h S2,o80 s 3,920
2 11,52O 3p4O 7,880 0,00o (1,E8ol 400h 6,672
1fJ721
3 6,012 2,300 +A12 6,000 1,399 400h 555 5,44!i
1 1,140 2,300 1,940 6r000 4rlE0 400h 1,8O4 4,3i10
5 4r14O lrl8o 2rggo 0,000 3,020 400h 'l,208 4,792
o 2,089 o 2,Ogg 0,ooo 3,912 400h 1,565 4,435
Total Increagc In periodlc cash inftow
s29,6oO
Lesg InlUal cash ouUay for new machine,.. 20,o0o
lncrease In cash lntloursover Initial cash ouuay for new machine..,. l_g'809_
(11 (21 (3) (4) (5)
Present Present
Net Value Value
Afteptax Present of Cash Present of Cash
Cash Value Flows Value Flows
Inflow of sl @ 12% of sl @ 14%
Year (Outflowl @ 120h ( 1)r ( 21 @ 14o/o (11x(al
o $(2O,0O0) 1.OOO $(2O,OOO) l.OOO s(2o,oool
I 3rg2O o .8 9 3 3,5O1 o.877 3,438
2 91672 4.797 5,319 o.769 5 , 13 1
3 5,445 o.712 3,877 o.675 3,675
4 4,336 o .6 3 6 2,758 0.592 2r567
5 41792 0.567 2,717 0.519 2$87
6 4,435 o.507 2,249 0.456 2,O22
!_139 s (680)

Internal rate of return - lzoh . (z"n ,( s420 t z.76oh

S42O + $680 ) ) =
Rec omm e n d a t i o nT: h e i n ve stme n tma y be acceptable
becausethe inter nal r ate
of return exceeds the companyrscost of capitat; howeyer,
the internal rate of
return on.this project shouid bt compared
with the internal rate of return for
other proiects to determine if this is the best use
of avaitablefunds.
 Chaptor23 e5

E23-10
(rl ProiectA
Cash Inflow PV of $1 PV of
Year (Outflow) @ 75o/o Cash Flow
o $(ts,oool l.ooo 9(t5,OOOI
l-5 5,000 3.352 16,760
Ngt presgnt va|u9..,..............r..,.........r.... _g_l-i60
Pmiect B
GashInflow PV of $1 PV of
Year (Outflowl o 150h Gash Flow
o ql5,0001 1.OO0 9(1s,000)
5 35r0OO .497 17r395
Net present va|ug........................'.........! $ 2,395
(21 Proiect A
PV of
Cash Inflow PV of $1 PV of PV of 31 Gash
Year (Outflow) @ 18% cgghllgw @ 200h Flow
o $(15,OOO) 1.000 $(1s,ooo) l.OOO ql5,oOOl
1-5 5,OOO 3.127 15,635 2.991 14,955
s 63s g__l4s)
-
l n t e rn a fra te / /
oir"trrn
.
- 18oh
+ t(ffi* S635 \\ - .,r9oh+ (zw r.s34) - 19.g70h
lzv" ))
Project B
PV of
Cash lnflow PV ol $1 PV of PV of $1 Cash
Year (Outflowl @ 18% cegb_Eow @ 20o/o Flow
o $tls,ooo) 1.OOO $(15,OOO) 1,OOO s(t5,ooo)
5 3 5 ,OOO .437 15,295 .402 14,070
s 2es $__19991
lnte-rnafrate D
- |fioh * (Z"n ,( s295 \\
- 18.48%
ofreturn \ \ S295 + S93O Il-laoh+(2"t"x.241)
(3) Using the internal rate of return method, Project A is superior to Project
B. Using the net present value method, Project B is more attractive than
A. The decision hinges on assumptions made about reinvestment of'cash
inflow. Theory suggests resorting to the net present vatue method
because the cost of capital reinvestmentassumption implicit in this
method is considered more realistic than the internal rate of return
method, where a reinvestmentat the project's internal rate is assumed.
 !

e6 Chagter 23

PBOBLEMS

P23-1

(rl Weighted
Alternative Source of Portion ol Average
Plan Financing Aftertax Cost Total Required Cost
(al Debt 12oh r (1 - 40% tax rate) $lo,ooo,ooo 7.200h
$l0,ooo,oo0
(b) Debt 12"@tel $ 5,ooo,ooo 3.60%
$lOrO0O,OOO
Prefered goh $ 5.OOO,OOO 4.6goh
stock (1 - 4% issue cost) $IOrOOO,OOO
_9.2e%
(c) Common S2.1Oearnings per share $lo,ooo,ooo 11.o9%
stock ($2Ox (1 - S% issue cost)l $'lo,ooo,ooo
(21 Weighted
Source of Portion of Average
Financing After.tax Cost Curent Total Gost
Debt lOoh r (1 - 40% tar rate) szo,ooo,ooo 1.330h
s9O,OOO,0OO
Preferred stock goh slo,ooo,ooo l.OOoh
sgo,ooo,ooo
Common stock 560,000,OOo*
.$2,10 earnings per share 7.OOo/o
$2o market price per share Sgo,o0o,ooo
9.330h
3,ooo,ooosharesoutstandingx s2o marketprice per share
Chapter?3 &7

P23-1 (Concluded)

(3) Weighted
AlternaUve Source of Portion of Average
Plan Financing After.tar Cost Total Reguired Gost
(al Marginal cost 7.200h .720h
(from part (1)).......o.... $loo,ooo,ooo
Current cost 9.33o/o $ 9O,OOO,OOO 9.400h
(from part (2))......r....t sloo,ooo,ooo
Total cost .........,.....r,.r. _sJ2%.

(b) Marginal cost 8.29o/o $ lo,ooo,ooo .83%

(from part {1)}.,.......... sloo,ooo,ooo
Current cost 9.33o/o $ 9O,OOO,OOO 8.4oo/o
(from part (2)l .,...,....., $lOO,OOO,OOO
Total cost ............,.o...,, 9.23o/o

(c) Marginal cost 11.O5oh $ IO,OOO,0OO 1.11oh

(from part (1)1....,....... $IOO,OOO,OOO
Current cost 9.3370 $ 9O,O0OTOOO 8.4O%
(from part (2))..,.....,... $1OO^OOO^OOO
Total cost,......r-'rirororr _g€l_%
 \
I

ts-t I
i

r-l

e8
Chapter23

P23-2

Appraisedvalue of the pnopertyrexcludingstorage tank

and
watgr lY€llttttttt""""""'aa.a....r.o....aa..a....ar......ar...o...........a....r.a.......oo.
$19O,OOO
Replacementcost of storage tank .....,.,,..r......::::.................r.......r.....
250.ooo
$44q.ooo
Differentialcost of water resulting from ross of wefr:
Water from Glty
of Grant Welf
WaterfromCityre
of Darnett At g% tenance present
at 8o/oAnnuaf Annuaf and present
Year Increts-e- ValuEof
-!"".eas" Repair Difference Sili r o"z, value
2oA $ zz,7zo $ 35,2oo s gzreo .9p-
208 79,539 3g1016
ttffid
zoc g4,g?! 40-,522 ,g26 ggr477
4r',os7 49,264 .Tsl sz,s6.
zoD 91,999 qqisaz
zOE 4z',264 .683 s2,2s1
98,?1? ez,aag $zo,ooo 31,046 .627
zoF 106'850 s1'r72o
1g,28O
zoc zo,ooo 35,r 30 .564 r 9,8r 3
1is,398 ssieig zoiooo 39,540 .5i3
zoH tro,g-?Z 2o,2s4
- 60;322ggry 44',so2 .aoz 2o,6ge
Szzgllgz s324,4o9 Jqqpoo Eqlr,oru- s212,7s1
ertir"t"a-1"ffir"..ffi....-..:
s€EZJel
The city of Grant must also consider
the offsetting increase in property and
safestares arisingfrom the onioing
economit heatthof this part of the totat
businessactivity that occuo t^ritrrin-the
city, nri" may cause the
negotiatedland price to be reduced. "onrideration
of course,-$r, irncertaintyof the various
estimatesmust be recognized.

P23-3

(1)
Projoct 1 PV ol Project 2
PV of Sl PV of
Aftertax Project 1 Aftertax
Year @12% Project 2
CashFfows Cash Flows CashFlows Cash Ffows
o 1.OOO $(120,OOo) $ (1 2O,OOOl s{12O,OOO}
I .893 s(l2O,OOO)
l O,OOO B,g3o 5O,OOO
2 .797 44,650
2O,OOO 15,94O 45,OOO
3 .712 35,965
3O,OOO 21,360 35,OOO
4 .636 24,920
6O,OOO 39,160 25,OOO
5 .s67 go,ooo 15,9OO
51,O3O 2O,OOO 11,34O
Net p re s e n t v a l u e
-s 15,420
l__u,szg
 Q9
Chaptor?3

P23-3,(Continued)

l2l Project 1
Afteptax PV of 91 PV ol PV ol $1 PV of
Year CasnFlows @ 140h Cash Flows o 160h Gash Flows
q12O,OO0I 1.000 ql2O,OOO} l.OOO ql2O,OOO}
o
1 1O,O0O .tt77 8177O ,862 81620
2 2O,OOO .769 15,380 .743 14,860
3 3O,OOO .675 20r25O ,641 19,230
4 60,000 .592 35r52O ,552 33rl20
5 9 0 ,0 o o .519 46t71O .476 42,840
Net preSent va|u9.........r........t."' -9--9193o
Project I internal - 14oh. $6,630 - r s,,,zoh
(r* ,
rate of return ( $ 0 ,o s o + $ t , 3 3 o ) )
Proiect 2
After-tax PV ot $1 PV of PV of $1 PV of
Year Casn flows o 160h Cash Flows @ 18oh Cash Flows
o $(120,0001 1.000 9(12O,ooo) l.ooo $(l20,ooo)
1 50,OOO .f362 43,100 .B,47 42,350
2 45,000 .743 33,435 .718 32,31O
3 35,O0O .641 22,435 .609 21,315
4 25,OOO .552 13,800 .516 12,90O
5 20,OOO .476 9,520 .437 9,740
$ 2,290 $ (2,385)

Proiect 2 internal _ .,6oh $2,29O - t 6.s'oh

+("o/o,
rate of return l. ( $ 2 ,z s o + s 2 , 3 B s) )
 ChapterZg

P2g-g(Concludedt
(31 The net present value of Project I ls greater than the net present vatue
of Project 2 ($15r42o compared to $12,6751;however, the internal rate of
rsturn lor Proiect t ls less than the fnternal rate ol return for proiect 2
ll5.A7%ocomparod to I e.9B%ol. As a tosult, lt ls not altogether clear
which profect ls the moro profitabte. The difference In rankings occur:;
because of the dlffersnce In the pattern of cash flows; 1.e.,the cash
Inflor,Ysfor ProJect1 are smaller ln early yearc and targer in later years
than those of Profect 2. The Internal rate of return for Proiect 2 ii sub-
stanUallylarger than the companyrsweighted averago cost of capital. lt
may not be possible for the cash floursroceivedin early yea6 to be rein-
vested at a rate of return equal to the internal rate of return of project 2;
consequently' cash florrvsrcceived from Project 2 may not be as vaiuable
to the firm as indicated by tha internat rate of return. On the other hand,
the weighted avoragocost of capital is a realistic earnings rate erpected
by the company ovor the Investmenthorizon.Assumingthat there is no
difference ln the riskiness of the expected cash flor,nsior the two pro-
jects' lt may be safer to raly on the net present value ranking than the
intemal rate of return. This woutd mean that Project I shoutOUe setect-
ed.

P23-4
(1) Recoveryof
fnitial Outlay
After..tar Payback Years
Year Cash lnflow Needed Balance Required
1 $3OO,OOO $2,2OO,OOO $1,9oO,OOO 1.OO
2 35O,0oo 1,g0o,ooo 1,550,0O0 1.00
3 4OO,O0O 1,550,00o lrt5o,0oo 1.00
4 45O,OOO 1,150,o0o 70o,oo0 1.00
5 SOO,OOO 700,o00 200,00o 1.OO
6 55O,OOO 20o,ooo o .36
Total payback in years......,,..,....r.....,........,.....,..,...r,...
_9.39
(21
s5,25O,OOO
2r2OO|OOO
Net income over economic life of asset...,......
$3,05O,OOO
AccounUng rate of roturn ( Net income
= * Original investment
on originat investment t E conom ic life i

=( s3, O5O,OOO
* $2 ,2oo, ooo = 13,9oh
10 years
 Chapter?3 63t

P234 {Goncluded}

Accounting rato of return

{3} = ( Net income *,ar"oge investment
on averiageInvestment \ Economiclife )

=(/33, o5o,ooo.)* f 32,2oo,ooo)= 2T.toh

ro-l-t 2 )
(41 Cash
lnflow PV of $1 PV of
Year (Outflowl o 140h Cash Flow
o $(2,200,0001 - 1.000 $(2,2OO,OO0)
I 30O,OO0 .877 263,10O
2 35O,OOO .769 269r l5O
3 4OO,O0O .675 27O,OO0
4 45O,OOO .592 266,4OO
5 50O,0OO .519 259,5OO
6 55O,OOO .456 25O,80O
7 600,000 .400 24O,OOO
I 650,000 ,351 2281150
I TOO,OOO ,308 215,60O
10 7 5 O,OOO .270 2A2,5,OO
Net present valug ...........o.........r..,r,..............rr..... $ zos,zoo

(51 Cash
Inflow PV of $1 PV of PV of $1 PV of
Year (Outflow) Q 160h Cash Flow o lgoh Cash Flow
o q2,2oO,OOO} 1.OO0 $(2,2OO,OOO) 1.OOO $(2,2OO,OOOl
1 3O0,OOO .862 259,600 .947 25417OO
2 35O,OOO .743 260,050 .718 25 1,300
3 4OO,OOO .641 256,400 .609 243,60O
4 450,OOO .552 248r4OO .516 232r2OO
5 5OO,OOO .476 239,000 .437 21 8,500
6 55O,OOO .47O 225,5OO .370 203,5OO
7 6OO,OOO .354 212,4OO .314 18 8,40O
I o50,ooo .3O5 1gBr 25O .296 172,gOO
I TOO,OOO .263 184,100 .225 15 7,50O
10 75O,OOO ,227 17O,25O .191 143,250
E-- jlr999 g_(134lggl
lnternal
rate of = 1 6 o h . ( " * ,
sst,95O ) =160h + (2'h x .278 )=16,6%
return ($sl,95o + $ 1 3 4 , 7 5 O, )
 I

\-i
I

6p Chaptcr 23
l

P23-6

(1 ) Machlnc I
Totalpayback InlUaloutlay s500,0oo-
In years Unltonn cash lnftows 4 years
3125,0OO

M a c h i n e2
Recovery of
lnltlaf OuUay
Aftentar PaybackYoars
Year Cash Inflow Needad Balenee Rcquired
1 $ 60,000 S6OO,OOO 355O,OOO 1.OO
2 75,OOO 65O,OOO 475rOOO 1.OO
3 1OO,0OO 475,0OO 376,OOO 1.00
4 i25,OOO 375,OOO 25O,OOO 1.OO
5 1 5 O,0 OO 25O,0OO lOO,OOO 1.00
I 2OO,OOO 1O0,OOO o .50
Total payback In years 5.50
(21 Machlnc I
Netafter*tarcashInllows ........................,......,..
Sl,ooo,ooo
Lessdepreclailolt
........ soo;ooo
N e t I n co mo o vo r e co n o ml c ilfe of M achins 1............ Fsoo,ooo

A c c o un ti n g ra tc o f ro tu rn
- i Net income \ or _
ioinal investm ent
o n o ri g i n a l In ve g tm.i t r ir "
lE"onor ni" J+

- l/-Ssoo
poo \t + S. S O O p O O- 1 2 . 5 %
--
\ 8 years )

M a c h i n e2
Net aftentar cash lnflows
L e s s d e p re cl a tl o n...............,........
s'l,4oo,0oo
SOO,OOO
N e t I n co me o vsr e co n o ml c life of Machlne 2
s SOO,OOO
Accoun'ng ratc of return poo
- r $goo . seoo 'Foo - 1s.7.h
on originalInvestmont l.T yoan, ))
 Clnpter I 633

P23-6 (Continued)
(31 MachineI
Accounting rate of return - ( Net income * ar"r"ge investment
_
on averageinvestment \ Economiclife )

=[ffiJ-[.:f)="u*
t'gsoo'ooo
) /Ssoo,ooo
)

Machine2
Accounting rate of roturn [$soo,ooo)
on averageinvestment I I y"""s J
(4t Machine{
Cash lnflow PV of $1 PV of
Year (Outflowl a 150h Cash Flows
o $(5OO,0Ool l.ooo ${50o,oool
1-8 125,OOO 4.4g7' 56O,875
Net present value of Machino 1 __9_99,87s
rPresent value of $.| receivedannuallyfor 8 yearc from Table 23-2 of the
text.

Machine2

Cash lnflow PV of $1 PV of
(Outflow) o 150h Cash Flows
o $(600,000) 1.OOO $t6oo,ooo)
1 5O,OOO .fJ70 43r5OO
2 75,00O ,756 56r7OO
3 10oro00 .658 65r8OO,
4 125,OOO ,572 71r5OO
5 1 5 O,O00 .497 74r55O
6 20orooo .432 86,40O
7 30O,OOO .376 112,8OO
I 4OO,OOO .327 130,80O
Net present value of Machine 2,,.........,..r.,......r.].
E_lefso
Net present value index for Machine 1 Net presont value
@
$oorBzs =
- ."1 2 2
$soo,ooo
Net present yalue index for Machine 2 $42, O5O
. : - r - =
. o70
$600, OOO
 I

Chapter 23

P23-S(Concludedl

(51 tt4aqlilel
PV of
Cash Inflow PV of $l PV of PV of $1 Cash
Year (Outflowl Cl 18o/o GashFlows O 20o/o Flonrs
o $(5OO,OOO} LOOO $(5OO,OOO) l.ooo $(soo,oool
1-8 l25,OOO 4.O79 5Og,75O 3.837 479,625
srtlg _9_eo'gzgl
fnternalrate - $9,75O
l1oh + ("n ,(
ofreturn \ \ $9,75O + $2O,375 ) )
- 1 8 o h+ ( z W x . 3 2 4 ) - 1 8 , 6 7 o

Machine 2
PV of
Cash Inflow PV of Sl PV of PV of $1 Cash
Year (Outflowl @ 160h GashFlows @ 78o/o Flows
o $(6OO,OOOl l .OOO $(600,O001 l.OOO $(6OO,OOOl
1 5O,OOO .862 43,10O .847 42135O
2 75,0O0 .743 55,725 .7lfj 53,850
3 100,o0o .841 64,lOO .609 6O,9OO
4 1 2 5 , OOO .552 69,OOO .516 64,5OO
5 1 5 0 , OOO .4 7 6 71,40O .437 65,55O
6 20O,0OO .410 82,OOO .370 7 4,OOO
7 3OO,OOO .354 1O6,2OO .314 94,2OO
8 400,00o .305 122,OOO .266 106,4OO
$ 131525 s (38,2501

Internal rate -16oh,.(r* /

Yl:rr
s13525 \\
of return \ $l 3,s2s + S38pso //
-16oh +12% x . 2 6 1 ) - t o . S Z o
ChapterB 635

P23-6
(1) {2) (3} (4) (5) (s) (71 f8)
Gash
Savinga Cash Flow Total Taxablc Attcr-tax
lrom trom Caah Tar lncomo Ctsfl
Reduced lncreascd Flow Eleprc-. (Loas) Tarcr Flow
Malntenancc Capaclty (21+ (3) claUon- K)- (5) (61r 40% (4) - {'t}
1 $1,500 I O,3OO t TBoo StoBoo t (3,OOO)3(1'200) 3 g,ooo
2 1,2OO 7,,80 81480 17r28,O (8,8O0) (3,52O1 l2,oo0
3 000 17,188 18rO88 1Or3O8 7r72O 3,O88 15rOOO
1 oo0 25,2AO u'Sao 8}21O 19rO5O 7r80O l8'OOO
5 3Oo 25,560 25,880 4,21O 19,850 7,890 l8,o0o
o o 221912 22re12 3r132 191780 71912 15rOOO
7 0 22,5OO 22,3OO o 22,5OO 0,000 13,500
sloo,5oo
Caah Inflow trom aalvagc at snd of economlc lifc' net of tar
Gt6'000 aalYagex (1 -.,fO tax rate)). 3,OOO
Total after-tax caeh lnflowr 3104,1O0
rThc tax depreciaUon lr determlned by mulUplylng the depreclable basla of 354,O0O 0.e., tho
cash purchaeo prlcc plur the tar baclc of zero) by the MACRS percentagea provlded In Exhlblt
224 of thc text for the five-year property class.

(1) Recoveryof
Initial Outlay
After.tax PaybackYears
Year Cash lnflow Needed Balance Reguired
1 $ 9,ooo s54,OOO $45,OOO I
2 12,OOO 45,OOO 33,OOO 1
3 15,OOO 33,OOO l B,OOO 1
4 l g,ooo 1B,OOO o I
Total payback in years.r.....,.,.... .,.,......,,....,.r. _t
(21 Netafter-taxcash inflows (excludingsalvage),...,............. $1OO,5oo
Less financialaccountingdepreciation
(:ts4,ooocash + g4,0oo book value- 56,000 salvage).. 52,OOO
$ 48,5OO
Less tax on salvage ($6,000salvagex .4Otax rate) 2r4OO
Net incomeover the life of the property. $ 46,1OO
 !
'-ltt
I

Chapter2S

P2g-6(Concluded)
Accounting rate of return Net income \ + Original investment
I/\ -:;F 1
on original investment ECOnOmTC ilre /

- f g-) * ssa,ooo
- ir. ssoh
\ 7 years /
Accounting rate of return - / Net income- * aretage investment
on averagelnvestment \ Economiclifr )

- l ?/ y$lo,1oo
e*s/*|. \ | 958,ooo+ $6,O00\ 20.580h
2 )'
(3) Cash lnflow PV of $l PV of
Year (Outflow) @ 120h Cash Flows
o ${54,OO01 l.OOO $(54,OOO)
1 9r0oo .893 9,037
2 l 2 'OOO .797 9,564
3 15,00o .712 10,68O
4 18,00o .636 '111448
5 18,OOO .567 10,206
6 15,00o .507 7,605
7 17,1OO ' .452 7 1729
Net present valug .............,...r.....,..,............,........ ___9_!!399
*$13,500 cash inflow in year 7 plus $3,6O0 aftentar salvage.

N e t p r e s e n t va l u e i n d e r - s l
l,269 -.2O9
s54,OOO

(4) Cash
lnflow PV of $1 PV of PV of $1 PV of
Year (Outflowl @ 16% CashFlows @ 18% Cash Flows
o s(54,OOOl l .OOO s(54,OOOl l.OOO $(s4,oool
1 9,000 .862 7 1758 .847 71623
2 12,00O .7 4 3 8,916 .718 8,616
3 15,00O .641 9,615 .609 I,135
4 1g,ooo .5s2 9,936 .516 gr28g
5 l8,ooo .4 7 6 8,568 .437 7,866
6 15,OOO .410 6,150 .370 5,55O
7
*
17,10O .3 5 4 6,053 .314 5,369
gl€99 $ (s531
t S 1 3 , 5 O oc ash inflow in year 7 plus 53,600 aftentax salvage.

$2,996
fnternaf rato of return - 16oh +
lZ"t" r ($z,sso + $s53 - t z.oaao/o
))
ChapterB 87

P23-7
(1) (2',1 (3)
Adjusted
EsUmateof
Periodic Annual7oh Net Cash
Net Cash Price-Level lnflorus
Year lnflows Adiustment (r) x (21
I $ 2o,ooo (l +.Oil = l.O7O $ 21,4OO
2 25rOOO (l +.ofl2 = l'145 28.1625
3 . 3O,OOO (1 +.Oflo = 7.225 36,75O
4 30,o0o (1+.Ofa = 1.311 39,330
5 30,ooo (l +.Ofls = 1.403 42,OgO
6 3OrO0O (1 +.04o = 1.501 45,03O
7 2510OO (1 +.07}2 = 1.606 4Or150
8 2O,OOO (l +.Oflo = 1.718 341360
I l 5 'OOO (1 +.O7)e = 1.838 2Tr5TO
10 l O,OOO ( 1 + . o 7 1 t o= 1.967 191 670
_$239,ooq $334,975

(11 (21 t3l

7-Year
Depreciable Property T:ax
Recovery Basisof Recovery Depraciation
Year Machine @!ege ( 1 1 x( 2 )
I $ 1 OO,OOO o.143 $ 14,3OO
2 1 OO,O0O o.245 24,5OO
3 l OO,OOO o.175 17r 5OO
4 l OO,OOO o.125 12r5OA
5 l OO,OOO o.o89 8,9OO
6 lOO,OOO o.ogg 8,9OO
7 1 OO,O0O o.o89 8,9OO
I 1 OO,O0O o,o45 4,5OO
_9!_oo,ogg
 ,-'l

6g ChWter23

P23-7 (Continuedf
(11 @ (31 (41 (51 (61
Federal tncome Net
Adjusted Taxable and Tax Afteptar
Estimate of Tar lncome State Payment Gash
Net Cash Deptu- (Lossl Income (Reductionl Inflows
Year lnflours clatlon (11- (21 Tar Rate (31r (4) (11- (5)
1 $21,4OO $ l 4 ,3 OO $ Z ,iOO 40% I2,840 $ 18,560
2 281625 24,500 41125 40% 1,650 26,975
3 361750 17r5OO 19r25O 4goh 7r7OO 29,O5O
4 39'330 12'500 26'830 4oo/o 7Or732 28'598
5 42rO9O 8r9OO 33rl9o 4ooh 731276 28.,814
6 45,O3O 8,900 36,130 4goh 141452 30,578
7 4Or15O 8r9OO 31,250 4ooh 12,5OO 27rg5o
8 34,360 4,500 29,860 4A% 11,944 221416
9 27,570 0 27,570 40% 11rO28 16,542
10 19,870 o 19,670 40% 7,868 11,802
Total inflation-adiusted aften tar cash inf!ows....r................,.............:S24Or985
(f ) Paybackperiod:
Recoveryof
Initial Cash $!!ey_
Net Aftentax YearsRequired
Year Cash lnflow Needed Balance Until Payback
1 $ 1 8 ,5 6 0 $ 1 0 0 ,OO0 $81,440 l.O
2 2 6 ,9 7 5 8 1 ,4 40 54,465 1.O
3 29,O5O 54,465 25A15 . 1.O
4 28,598 251415 o o.9
Totafpaybackperiod in yeats.,..,.........,,,........,......,.... 3.9
(21 Accounting rate of return on original investment:
Total inflation-adjusted afteptax cash inf|ow.................,, $24o,985
Less financial accounting depreciation ..................!......... 1OO'OOo
Net income over economic life of project..,..........,.....,..... l1.!g999

Average
- -Nellqqgrng- - S14o'985 - sr4.oes
- - -'-
"r,n.rJl
return Economic life 1O years

Accounting rate of
re t urn o n o r i g i n a l A ve ra g e a n n u a l retur n
- - $14,099 -_r r ' 1410 or 14 .looh
investment originat'rn"estme"t Sloo"ooo
-t-

Chapter 23 639

P23-T (Continued)
(3) Accounting rate of return on average investment:
Accountingrate
of return Averageannualreturn $14 ,O99
.2820 or 2A.200h
on average Original investment + 2 $5O,OOO
investment

(41 Net presentvalue and net presentvalue index:

(1) (21 (3)
Net Present
After-tax Present Valueof
Gash Value Net Cash
(Outflow) of $1 Flow
Year Inflow @ 150h ( 1 1 x( 2 1
o $ (1 OO,OOO) 1.OOO $ (1OO,OOOI
1 18,560 o.870 161147
2 261975 o.756 2O,393
3 2 9 ,0 50 0.658 1 9 , 11 5
4 2 8 ,5 98 o.572 16,358
5 28,814 o.497 14,321
6 3 O,578 o.432 13,21O
7 2 7 ,6 50 0.376 1O,396
I 22,416 o.327 7,33O
I 16,542 o.284 4,698
10 1 1 ,8 O2 o.247 2,915
N e t p re se n t va l u e e__31€99
N e t p re se n t N e t pr esent value $24,883 -
.249
va l u e i n d e x R e q u ir ed investment Sl OO,OOO
(s) P re se n t va l u e p a yb a ck in year s:
Present Years
Valueof Recoveryof Required
After-tax InitialCashOutlay for Present
Year Cash Inflow Needed Balance Value Payback
1 $16,147 $l oo,ooo $83,853 1.OO
2 2 O,3 9 3 83,853 63,460 1.OO
3 19,115 63,46O 441345 1.OO
4 16,359 44,345 27 1987 1.OO
5 14,321 27,987 13,666 1,OO
6 1 3 ,2 1 O 13,666 456 1.OO
7 t o,396 456 o o.0 4
Total p a yb a ck p e ri o d in year s 6.04
 ll
t-

640 Chapter 23

P23-7(Concludedl

(61 lnternal rate of return:

(t) (21 (31 (41 (51
Present Present
Net Valueof Valua of
Aftertar Present Gash Flow Present Gash Flow
Cash Value Discounted Value Discounted
(Outflowl of $l o 200h of $l o 220h
Year lnflow €r 20% (rl r {2} Gl 22o/o (r) r (4)
o s(roo,oool l.OOO s(1oo,oool LOOO s( 1OO,OOOl
1 18,560 o.833 15,460 o.820 15,219
2 26r976 o.694 18!721 4.672 18r127
3 29,05O o.579 16,820 o.551 16,OO7
4 28r598 o.482 13r784 o.451 12,898
5 281814 o.402 11 , 5 8 3 o.370 1O,661
6 3O,578 o.335 1O,244 0,303 9,265
7 27 1650 o.279 7,714 a.249 6,885
8 22,418 o.233 5,223 o.204 4r573
I 161542 o.194 3,2O9 o.167 2,763
10 1l,8O2 o.162 1,912 o.137 1,617
-I--!'670 $ ( 1,98s)

I n t e rn a l S 4 ,6 7 0
rate of = Zooh. ( S4,670 + $1,985 .2140 or 21.40h
return [t* " ))=

P23-8

(1)
(t) ' (41 (51 (ol c4
l2l t3)
Total Nct Pcriodic
Boducod Lort Poriodlc Additlonal Savingr
Roduco'd Roducrd InvrntorT Contributlon Srvlngt from Malntonanco with CIM
Lrbor Machlno Carrylng Mrrgln CIM Syrtcm Cort wlth Syrtom
Ycar Cort Sotup Tlmo Cort Avoldcd ('l)+{2}+{3)+(ll CIM SFtom (5) - (6)
'3280,00O
1 315,O0O 34O,0oO 325,000 320O,0O0 325,ooo 3255,000
2 25rOO0 50TOOO 3:t,ooo 3{)o,ooo 4lo,o0o 25,O0O 385,0OO
3 30,0OO oor0oo 40,0OO 40O,OOO a3o,o0o 25,OAO 5O5,00o
4 30,O0o 60,OOO 40,OOO 50O,OOO Gto,ooo z'rO0O 605,OOO
5 30,O00 oo,ooo 40,0OO ooo,ooo 73O,OOO 25,OOO 7O5,00o
6 3O,0oo oo,0oo 40,0oo TOO,OOO Silo,ooo 25,OOO BO5,0OO
 Chaptor2S al

P23-f3,(Continued)
rr) {81 (0) (1ol (r 1) 112l (t3l lr4)
lnflatlon-
Tar Prriodic lndcx for Adjurtrd
Dcprc- Net Antlcl- Prriodis
N.t clatlon Tarablo Trr Altontrr prtrd Nrt Aftor-
Porlodlc rnd lncomo Effcetlvo Uablllty Carh 8% Ratr tlr C.fh
&vlngr Amorll- [.ou) Trr (Botundl lnflowr ol lnllorr
Ycar wlth CIM ratlon'. fD - (81 Bato (e)r (1ol ft)-(1rl Inllation (121r l13l
1 3255,000 344O,OOO $(185,000) lOcA 3 rt4,Ooo) 3329,000 1.080 3 3ri5,32o
2 38ti,O0O 88O,OOO (295,OO0) 40% (118,000) 503,0.00 1.160 580,498
3 5051000 424|OOO gl,OOO lgoh 32,400 472,OOO 1.260 595,470
4 605,000 2TOrOOO 335,OOO 4Oo/. 134,OOO 471,OOO 1.360 640,560
5 7O5,0OO 2TOrOOO 43{irOOO 4Ach 174,000 531,000 1.489 780,039
o 805,000 110,000 889,000 40% 275,gOO 52g,4OO 1.587 840,'158
Total annual InflaUon-adJusted sfter-tar saulngc lrom Investment In CIM system s3,798,051
Cagh Inflow from salvageof egulpmentand machinery
(S1OO,O0O salvagex 1.587 adJ.x 11- 40% tax rate)) 95,22O
Total Inflation adJusted atter-tar cash lnflowl trom Investrnent In CtM system.... 93,893,271
Less lnlual Investment (S2,ooo,ooo In equipment ptus S2oo,ooo In software)...... 2,2OOrOOO
Ercegs of cost of clM system over inflation-adjusted after-tax eavings s1,093,271

t
(1t l2l (3) (4) (5) (ol c4
Total Tar
Bato for Tar 5_ycar Tax Amortl-
Roeovcry MACRS Dcprc- Stralght-llno AmoRl- :atlon and
Proporty 3-ycar claUon Softwaro AmortiraUon :ation Elcprcciatlon
Y="r_ Tar Earlr _&gFrty (1) r (2) Tar Barlr Fatc (al x (3) ( 3 1 +( 0 )
1 82,000,000o.20o $ 400,000 s2OO,ooO 0.200 $ 4O,OOO $ 440,ooo
2 21000,0000.320 640,000 200,o00 0.200 4O,0OO 880,000
3 2,000,000 0.192 384,000 200,00o 0.200 4O,00o 424,0OO
4 2r0oo,000 0.115 230,000 200,000 0.200 4O,0OO 2TO|OOO
5 2,000,000 0.115 230,000 200,000 0.200 4O,0OO 27O,OOO
o 2,00o,00o 0 . 0 5 8 116,000 200,0oo 0.000 o 118,000
$2,OOO,OO0 s20o,ooo $2,20o,o0o
 I

Chapter23

P2g-8 (Concluded|

l2l Inflatlon-
Adlusted
Periodic Net PaYback
After.tar Years
Year @[!1.1[gl Needed Balance Required
r $55,320 $2,200,O0O $l,844,O8O 1.OO
2 5861498 1,844,680 112581182 1.OO
3 595,476 1,258.J82 862,700 1.OO
4 640,560 662,706 221746 1.OO
5 78O,O39 221146 O O.O3
Total paybaCk in yearS.......r..r..........r...'..r.............o...rr 4.o3

(31 lnflation-
Adiusted Present Present
Periodic Net Value Value
Afteptar of $1 of Gash
Year Cash lnflorrs @ 14% Inflows
o s(2,2oo,oool 1.OO0 S(2,2OO,OOO)
1 355,32O o.877 311,616
2 588,498 o.769 45t,O17
3 5 9 5 ,4 7 6 0.675 401,946
4 64O,580 o.592 379,212
5 78O,O39. 0.519 4O4r84O
6 935,378' 0.456 4261532 _
Net present value of investment.............r.......r.... 9--IZgrI-qg
-S84Orl58
t-
L
aftentax cash inflow for year 6 plus $95,220after-tar salvagevalue at
the end of year 6.
 Chaptor23 &B

P23-9,

Purchase alternative:

{1) (4 (3) (41 {q l0) m

X.l
mACAt lrrconre lncngr Incnoo Altrntex
D.prool. Ter ln Tenblo lncomr ln Incomo C.dl
C..h rlon Drprocl- lncomr Trr Tar Inflowr
Yoar lnllon Hatr aUon' 11)- f3l Frto lal r (51 (tl - (ol
1 SAOO'0Oo .1*l $286,000 $314,000 40 tl25,OOO $ 471r4OO
2 600,000 2# 490,000 1 1 O , O O O AO 44,OOO 556,OOO
3 6001000 .175 350,000 25OrOOO AO lOO,OOO 5OO,0O0
1 O0Or00o .1Ai 250,000 3ti0,0o0 AO 14Or0OO 4EO,O00
5 g0o,o0o .080 178,000 aa2,ooo AO 1O8,8OO 431}200
0 0oo,00o .089 178,000 422rOOO .40 1e8,800 4il1,2OO
7 600,000 .080 178,000 122,OOO AO 16a,8OO 431,2O0
I 600,000 .o4{t 90,000 510,OOO AO 2O4,OOO 396,0O0
I 800,000 .000 0 000r000 ,40 24O,OOO 36OrO0O
10 800,ooo .ooo o 800,0o0 AO 24O,O0O 360,OOO
11 600,000 .o00 0 000r0oo .40 24O,OOO 360,000
12 600,000 .000 0 600,000 AO 24O,OOO 36O,OOO
13 600,000 .ooo o g00ro0o AO 24O,OOO 360,OOO
14 600,000 .ooo o 600r0oo .40 24O,OOO 360,OOO
15 O0o,o00 .000 0 o00,000 AO 24O,OOO 360,OOO
EE,2OO,OOO
Aftsr-l-r cagh lnftow from ratvago at ond of cconomlc |ife........
l2O'OOO"
Total after-ter cagh hflbw frorn the purchacc attarnaUvs
s6,32OrOOO
l-eca ln1g"1cagh ouUtow -........,...
2,OOO,OOO
Total after-tar cash Inflow over aconomic tifc of project
90,32O,0OO
'Tho
deprectatlon b determlned by muttlptylng the depreclabte basle of g2,ooorooo
by tho
rilAcRg cost recovery percantageg provldod ln E$lbit 212.4of the
text for aeven-yosr proporty.
-P"
ealvage rscslvod at tho end of tho economlc llfe ol the asset would bo fuily
tarablo
because the tar baslr of tho property would be zero. The aftor-trr
cash Inflow would bo
3120'000, l-e., (s2oorooo rorvago vuiuo r (1 - .,{o tar rate)).
 644 Chapter23

P23-9(Concluded)
Net
Aftertax PV of $1 PV of
Gash Flow @ 14% GashFlow
o $(2,OOO,OOO) l.OOO s(2,O0O,OOOl
I 474,4OO .f377 416,049
2 556,OOO .769 427 )564
3 5OO,OOO .675 337r5OO
4 4 6 O,0 0 0 .592 272,320
5 431,200 .519 2231793
6 431,20O .456 196,627
7 431,2OO .400 772,48O
I 3 9 6 ,OOO .351 138,996
I 3 6 O,OOO .309 11 O , 8 8 O
10 3 6 O,OOO .270 97,2OO
11 3 6 O,OOO .237 95,32O
12 3 6 O,O0 O .208 74,98O
13 3 6 O,O0 O .182 65,52O
14 3 6 O,OOO .160 57,60O
15 3 6 O,OOO .140 5O,4OO
Net present valug ...r.......................r........r....'....... $ 727,129
Lease alternative:
Annual cash inflow before lease payment. $OOO,O0O
Annual lease payment ....,.....,... . 32O,OOO
Annual pretar cash inflow and increase in tarable income $28O,OOO
Annual increase in income tax expense ($2BO,O00 r 4o%l i 12,OoO
An n u a l a f t e n t a r c a sh i n fl o w fro m l e a se a|ter nativo.,............,..,..,...,..
S168,O0O

PV of PV of
Cash Annuity Cash
Year lnflow s l @1 4 % Flows
1-15 $168,OOO 6.142 s 1 , 0 3 1, 8 5 6
The lease a l t e r n a t ivea p p e a r to b e p re fer able becausethe net pr esent value of
the estimated aftentax cash flows is greater than for the purchase alternative
( s1 , 031 , 8 5 6v e r s u s $ 7 2 7 ,12 9 ).
ChaplerA ils

P23-1o
I

(1) Gencral-Rrrpoac Selt-

Equlpment Constructod
Leasc Purchasc Equlpment
Recurring cash flows from operiations:
Estimatedsales volume in units.,.... 4O,0OO 4OTOOO 4O,OOO
Unit contribution maryin..................$ l.ss s 1.55 $ 1.90
Estimatedtotal contribution margin $62,000 S62,000 $76,000
Less fixed costs:
SupervisioJl ........................'..o..r......r $16,O0O $16,000
$17,OOO
Propefi tares and insuranco....,,.,., o
3,O0O 5,O0O
MaintenaflCO .......................rrr.........r o
3,OOO 2'OOO
Total fixgd COSt .r'................r.r......."' $1o,ooo s22,OOO $24,OOO
Annual cash inflovrrsbefore tax...,.,,...,.,.. 946'O0O $4O'OOO $S2'OO0
Lease equipment altemative;
Annual gash inflow bgforg tax.,..,.........o......,..r..,..r..,.....r..o...,r..r.
$46,OoO
Annual lgasg paymgnt..........o....r...............r...o.....r.r......r.r.ir........ 40rooo
Annual incrgasg in taxablg income... ..,..o.........,,......-.r.s 6,000
Annual increasg in incomg tar ($6rOOO x 4Oo/o1.,..,e.......r..........,..2r4OO
Annual aftgrtax cash inf!ow....,.r...........o....r.,..........r.........,r.....,.r
$ 3,600
PV of $1 rgcgived annually for G years O 14oh.........o........,.......,x 3.889
Net present yalue of lease altemative.................,........ sl4,ooo
646 ChWtor23

P23-1O(Continuedl

Purchaseequlpment alternative:
lll (4 l3l ({)
lncomr
(5t t0l m
Nrt Pll of Net
lncomr Trr Allrr-t'r Aftrntrr
Protlr Trr TaHblo at lO% C.rh C.eh
C.rh Dcprrcl- lnconrr Tar Fato lnflowr P{l of il lnflowr
Yrar Inflowr rllon' (rl - (2t l3l r 40%tlt - Ft o 71% l3l x (01
1 $lo,ooo $25,OoO $15,OoO 3 E,ooo $3l,ooo .aT7 $ 29,818
2 4O,OOO 40,000 o o 40,000 .780 30,780
3 40,000 24,000 10,000 8,400 33,800 .975 22,f,8O
4 4O,O0O 141375 25,0.25 10,250 291730 .592 17,fJ12
5 4O,OOO 141375 25)825 10,250 29,750 ,519 15,44O
6 gorooo r' 7r25O 72,750 29,100 5O,9OO .456 23,21O
Preaant valuc of net cagh lntlow! s139,520 "
L"ecrInlUal caeh outflow 125,00O
Net preaent value of purchase alternaUve s 14,520
'Tar
depreclaUonle determlnedby multiptyingthe depreclablebasir of the equipmentunder
the purchaaealternattuo(Si2s,oo0) by tho tylACBSdepreclaUonnlter provlded ln Exhibit 22-4
of the terL
-tncludea
aalvagcvatueof S4OrOoo, all ol whlch woutd be tarablerBlncethe equlpmentwould
be tully depreclatad for Incomo rtr purpo3esat thc end of the ahth year. Thc total after-tar
cagh flow from opcratlonr of S5OrgOO chown tn column (5) b compoaedof after-tax cash
Inllow trom operaUonsof S20,goo(9co,ooo- ((S4o,ooo- Sz,2so)r ,40 tax rate)) and the after-
ta: cash flow from aalvagcof $24,0oo (S4o,Ooor (l - .40 tar rate)).
Chagter 23 647

P23-1O (Gontinued)

Self-constructed eguipment alternative:

(t) H (31 t4) (51 {0) m
lncomr N.t FV ol ifot
lncomr Trr Allor-trr Aftor-trr
Protlr Ter TrnHo d 40% C..h C..fl
Crdl Doprocl- lnconrr Trr Betr lnflowr Ptl of tl lnflowr
lnflowr rtlon' Ir) - (21 Fl r ao% (rl-t l o 1a.h {5}r lol
1 352,0oO $3O,OOO 31g,ooo 3 o,4oo 3o5,ooo ,a77 3 3e,991
2 52rOOO 5716OO (5,800) l2,240l 54.'2.4O .769 411711
3 5210oo 341560 17r/UO 6197A 4!iro24 .875 30r391
1 52,000 20r7OO 31,300 121520 3er48O .592 231372
5 52,00o 2017OO 31,300 72,320 39/{80 510 20,49O
6 g2rooo " 10r44O 71,580 281624 st,37E ,4.58 24,3:t9
,
Prccent valuc of net ca3h lntlow! s180,294
Lclr Inltlal crsh outtlow lE5'OOO'-
Net preaent valuc of purchagcalternativc 3 15,294
'Tar
depreciation b determined by muttlplying the depreciabte basls of the equipment
undsr tho self-construction alternaUve ($180,000, whlch ls the full construction cost
Including allocated fired cost) by the IJIACRSdepreciaUon rates provided In Erhibit 224 ol
thc text.

" tncludes aalvage valuo of 530,000, all of whlch woutd be tarable, lince the equipment
would be fully depreclated for Incomc rrr purpogeo at the end of tha rlxth year. Thc total
attor-tar cash flow from operaUons of 353,376 ahown ln column (51b composed of aftcr-
tar cash Inflow from operatlons ot 335,376 (352,000 - (|3SZ,OOO - 31O,44O)x ,4O tar rate))
and thc after-tar cash flow from talvagc ol 318,000 (S30r00Ox (1 - .4O tar ratel).
-'
Because Egelston Corporation ls operaUng at normal capaclty and the construcUon of the
new equipment will not Interfere with regular acUviUes,the company ahould not incur any
addlUonal flxed tactory overhead. Therctore, the 815,OOOof fixed factory overhead ls not
Included In the differential cost of the sett-constnrcted asseL The initial caeh outlay woutd
bo $180'000 tutl cost less $15,00Oof altocatedfired factory overhead, or 31O5,OOO.
 Chapter2S

P2g-1O(Concludedl

(21 EgelstonGorporationshould consider sny proposalthat is erpected to

have an.earningsrate In ercess ol the firmrs cost of capital. lf a proposal
has a positive net present value,that proposalb erpected earnings will
yield a rate of return that erceeds the firmb cost of capital. In this caso,
the purchaseof general-purposeequlpment,the constnrctlon of special-
purpose equipment,and the lEaseol general-purposaequipment are all
acceptableto EgelstonCorporaUon,becausethe net present value of all
three proposalsis positive,
EgelstonCorporationshould attempt to marimize the earningsthat
can be obtalnedfrom the funds availablefor capital Investments.When
comparinga set ol mutually erclusive alternatives,the atternativewith
the largest net presentvalue will result in a marimization of stockholder
wealth. Accordingly, constnrction of special-purpose equipment app ears
to be the most attrastive alternative.Howeve4the net present value
should be relatedto any requiredinvestmentby calculatinga net present
value index as follours:
Constructionof special-purposeequipmenb
Net presentvalue Sl5,294 = .4927
Requiredinvestment $165 ,OOO
Purchaseof special-purposeequipment:
Net presentvalue Sl4,52O =
.1162
Requiredinvestment $125,O0O
Purchase of general-purpose equipment promises a larger net present
value indsr and would be preferable, provided that the investment differ-
enco of $4O,00O($t65,000 - S125,OOO| can be used to earn a net present
value greater -
than S774 ($1S,eg4 $14,5201.

\
Chapter?3 &9

CASES

c23-1
(11 (al The payback method measuresthe number of years required for the
aftertax cash inflows to fully nocoverthe initial cash investment in a
project. The paybackmethod emphasizesan organizationb financial
liquidity and the riskinessof the capital project in terms of invest-
ment recovery.Since long-termforecasts contain moneuncertainty
than short-term forecasts(i.e.,it is easier to predict what will hap-
pen next year than what will happen lO years from now), the least
risky projects will have the shortest payback period.
(bl The net present value method recognizesthe time value of money
by discountingthe after-taxcash flows for a proiect over its life to
time zero using the firmb weighted averagecost of capital. The net
presentvalue is the differencebetween the present value of the ,
after*taxcash inflows, measuredover the life of the capital project,
and the cash outflow requiredto undertakethe capital project.
Projectsthat have a positivenet present value are acceptable,while
those that havea negativenet presentvalue are unacceptable.
(c) The internal rate of return method (also called the discounted cash
flow rate of return method)incorporatesthe time value of money by
determiningthe compoundinterest rate for a capital project that
would result in a net presentvalue of zero. A proposal would be
acceptableif the internal rate of return erceeds the weighted aver-
age cost of capital,and unacceptableif it is less.
(21 ln orderto maximizethe value of the company,CaledoniaDivisionshoutd
use the net presentvalue methodor the internal rate of return methodto
decidewhich capital projectsshouldbe inctudedin the capital budget
submittedto QuibleIndustries.Both of these methodswould identify
ProiectsA, B, D, E, and F as acceptable(each has a positive net present
value and an internalrate of return in excessof the companyb hurdle
rate)rand Project C as unacceptable(the net present value is negative
and the internal rate of return is less than the company'shurdte rate).
However,ProiectsA and D are mutually exctusive(meaningthat ultimate-
ly only one of the two can be pursued).The selection betweenthe two
dependsupon the criteria usedto rank the proiecB, i.e., the capital"
expenditureevaluationmethodemployedin the selection process.tf the
net presentvalue methodis used,Galedoniawould select Proiect D
becauseit has a higher net presentvaluethan project A (s24,g74for D
comparedto 3691683for A!. On the other hand,if the internal rate of
return methodis used,Caledoniawould select ProjectA becauseit has a
higherinternalrate of return than ProjectD (gsohfor A compared to 22oh
lor D).
6fl Chapter23

C2g-l (Concluded|
(31 In order to maximizethe value of the companyin this capital rationing
gituation' the net present value should be used to select the projects to
be included In the capital budget becausethe cash inflows aro assumed
to be ruinvested at the hurdle rate (the company has a demonstrated
earning rate equal to lts weighted averiagocost of capita!|,The intirnal
rate of return should not be used, because it violates the rsinvestment
rate assumpUonand may be unrellableas a basis for maxlmizingthe
value of the companyin a capital rationing situation. Using the net pre-
sent value method, the most profitable combinationol proiests within
the $45O'00Obudget constraint would be to include Projects & B, and F
becausethis combinatlonyields the greatest total net present value (net
prssent vafue of $l621929 for an initial investmentof $4sorooo).(Note
that the combinationof & D, and F is not possible becauseA and D are
mutually exclusiveproiects, and that the combinationof B, D, and F is
not possiblebecauseit would require a combinedinvestmentin ercess
of $45O,OOO.|

c23-2
(1) The 18.2o/orate of return on the investment differs from tha 24ohinternal
rate of return becausethe methods used to measurethe returns are dif-
ferent
Tha return on investment (18.2Vo1calculation is based on accrual
accountingconcepts.lf the reducedoperatingexpenses-legs deprecia-
tion-remain constantas planned,the numeratorin the ROIfraction will
not changeover the life of the investmenLThe denominatorin the frac-
tion, the investmentbase,decreaseseach year by the amount of the
annualdepreciation.Gonsequently, the rate of return calcutatedwill
increase each year oyer the life of the investmenl
The internal rate of return calculation PA%l is based on discounted
cash flow concepts. The cash flows erpected to be received over the life
of the investment discountedto the acquisition date aL 24Vo,eractty
equaledthe initial cost of the machine. This measunsof return on invest-
ment providesa percentagethat is constant for each year of lifE of the
investmenl This rate can be computed for each yearb actual operating
results if the annualsavingsin operatingerpensesaneconstant and the
new equipmentis depreciatedusing the effectiveinterest method based
on an interest rato of 24o/o.The method would be essentiallythe same as
that emptoyedin amortizing leaseholdsand bonds. Tho depreciation
chargeeach year would haveto be such that the numeratorand the
denominatorof the ROtcomputationwould changeat the same rate in
order to keep the annualreturn on investmentratio constant.
Cllagter23 65t

C23-2,(Concludedf

l2l Recap Corporation can restructure the data from the cash flow analysis
to make lt consistent with ths accounUngreports (which contain
straight-line depreciationfreceivedby the department manager.Once
the investment ls accepted on the basis of its internal rate of return, the
data can be converted into the lormat consistent with the accounUng
basis used for reporting. Annual contribution from the new investment
would be calculated by subtracting the straight-line depreciation from
the net cash operatingsavings.The accounfing book value for each of
the years of the investmentlifo would also be calculated. The annual
contribution would be divided by the investment base (book value| for
each year to obtain the rates of return. This would then present the man-
sger with the different rates of return for each of the yeansof the invest-
mentb life. Thus, the rates would be more comparablewith the actual
return on investmentrates experiencedeach year.
Alternatively,rather than computing an annual rate of return, it may
be more expedientto comparo actual net cash operating savings each
year with those forecast in the capital expenditureanalysis,lf actual
periodic savingsequal those forecast,tho internal rate of return woutd
be equalto the 24% budgeted.
I
!
S
CHAPTER 4
QUESTIONS
DISCUSSION
O4-1. The five Partsarc:
(a) Direct nraterblg reqtbn
(b) Direct lsbor ceclbn
(c) Frlory ovefiead
(O Work h Pr@oer hventories
I 3tatcmentsb morc rignilinnt in iudghg eaming
(c) Fhbhed grood hvmtorbr
iho bahnc" rhoet ir t 3tal.ment ct finsncbl
*2.
pcrttbt; the hcqrr ctBternont b a dalement of
sttYity. The incqne lbtement is ccnplementary
to thc babnce sheet, munthg in padicubr for
tho ctrange in hr prcprietary equrty Bs a resull
of operatims during the year. In |hat respecl' the
incornc atatemenl ir eeaentiallynothing more
than a major rection of the retained eamings
accounl. Thereforc, tht rsvenue and expense
accounls in the income 3talemont have been
lcrmed'cxplanatoqf ac@unl3, explainingthe
cbb and lkrw of r.YcnueE and cxpensee lhat
bod to thc new hcqno (or bce) and to the new
rrtahed camhgs balancc h the balance sheet.
O4-3. Thr ordinary babncr rhecl and incqne slate-
menl aro htended to ptwkJe hlormalist as lo
financial peilion and resulb of operation of a
burinesl, in sctordancc wilh several assump'
liqs that arc made h preparhg |he stalements.
Frqn the standpoinl cil the criticisms rnade, the
most important cil these assumptions are lhal
cocl lost appropdale arnortization of cost mea'
rurca unelgired cct, and that a business mey
bo a$umod lo bc gohg to conlinue operatbns
indclinilely into lhe future. Accountingstate-
mcntg sre usually prepared on lhe heory lhal a
cale or gome other definite event is essenlial
bcfore revenur is recognized.Basically,the
aseot sUe of a balancc aheet coctaha a preson-
tstbn o{ the anrounts cl cost incurred, which can
b c p r e s u m e d l o b e n c fi t f u t u r e p e r i o d s . ' A n
incornc slalement presents the srnounl of rov-
cnue recognizedas having been realized during
thc period, less the podioo cl all cosls incuned
thsl doe3 not appear to be lairly delerrablelo
'I ftnurc perinds.
Thc ircome staternonl is prirrnrity a m€asure
cd what lres been camcd, and not a measure of
'camhg power.'
For plant assots, the balance
rheot b pdnarily a rnasure cl accountabilityfor
cxp.nditureE,rhowing acguisitioncosls lees
codr sllocalod to past operatbns. This rneasure
of accounlability may br quile diflerent from
1rur velue.'
To hcreese ilg usefuhess as one elemerd in
judChC eaming porver, the ircsne stalement is
picparcd with a dietinclion between operating
and nonoperaling items. For the samo roason,
c.rtain iterns may be climinoled frorn the incorne
slstomenl and shown in the statemont ol
nrtained eemings. However, the effec-tof nmre'
curring and nonoperaling transaclions is not
entirelYeliminated.
lnfonnalion revoaled by a serios of income
power than informatbn revcaled by ane hcqnc
statcmstl. The incqne of a bushess rnay folbw
or .Yen exaggetat€ the ups and downs ol the
bueinesgcyclo and, therefore, lhe inccne of any
crc year will ncl representeaming powor.
Changes in law or local zoning ordinances
may result in a marked change in lhe eaming
powerol a bushess. Ukewise,changesin public
taste, devebpment of new prodtrts' apPgarance
ol new conrpetilion, acquisition ol subsiJiaries'
changes in management and lhe like, all may
change earning power and yet not be clearly
rellecled, il reflected at all, ir one incorne stale'
menl.
The accounting use of historical. rather lhan
curront, dollars in measuring depreciation and
cost of goods sold may resull in distoding any
view of earning power obtained frorn a single
incorne statemenl.
ln regnrd to plant ass€ls, il can be said lhat
their value to a going concetn is usually depen'
dent uPon the eaming power of the business.
Such s value is not necessarilythe same as lQ'
uidation value, cost, cost legs amortization.
repbcement value, or any other kind of value'
The phrase.true value'has no definileconnota'
tion.
O4-4. Actusldescribes the way cosls are measured.
i.e., at actual historical arnounts; /ull absaption
describos which elemenis of cost are allocaled
to hvenlory accounls, i,e., all elements of rnanu-
lacluring cost are fully allocated to hventories;
p/ootss describes how cqsl infonnation is accu'
mubted, i.e., costs are accumulatedfor each
procossor deparlment in the laclory.
O4-5. Prime costing systems albcate only lhe prime
costs, direct material and direcl bbor, lo hvento-
ry accounts. Direct costing syst€ms, abo called
variable costing syslems, albcale the variable
manulacluringccts, direcl materbl, direci labor,
and variable factory overhead lo lhe inventory
accounts.Absorpticn costing systems albcate lo
Ilvenlories parl or all of tixed frtory overhead,
in addiliooto all varlrble manufacluringcosts.
04€. Actual costing m€asuros product costs at actual
hislorical arnounts, while standard ceting mea-
sures product costs by ueing predetermined
arnountsol resourceg to be coosurrnedand pre-
determinedpriceso{ those resources.

62
Q,4-7. Preess costing aicumulates costs fot oach
pt@olts or department in the ladory end rnah'
tains detailcd recordr and calculationr of the
cotl of *ork h preest. Job order cting accu-
mulales cotr lor oach irb, lc', balcfi' or contrasl
and mEhtains detBilsd records and calculalbng
od tho cost! of tork in prceas. BacHlush €st'
ing accumulal.r coltr by working backwards
through ihc availablc inlormatiqr afler produc-
ticn is cornpleted (i.e., at the end of the accounl'
hg pori<rd)and rnahtahr no detailed records ol
lhe costs cl ttPrk ir Prcesr.
O.4€. Actual cosihg il more cornmon lhan standard
coothg in defense'rebted industries,while stan'
dard cosiing ic adnewhat more cornmon else'
where.
O4-9. Super'full absorpfbn or suPer absorption refers
to tho income lax requiremenl thal some pur'
chasing and storage costs be allocatedto inven'
tory ac@unts.
O4-lO. Job order costing would be colrlmon in repair
shops. buiHhg cotslructicr, and prhting; and in
servicc bushesse€ guclr as medical, legal' archi-
leclurat, corutrucliqr engineering,accounling'
and consulling lirms, as mentioned in the lexl'
Other examples include shipbuilding.bridge
building, tool and die manufacturing,arl and
antique resloratirn, and contracl rossarch'
o4-1 1. As mentixred h tho text, Pr66!ts costingwould
be common in thc milling, brewing,chemical'
and textile industries;in sirnpleassemblyoP€ra-
tions: and in seryice businessegserving large
numbers o( cuglorners simultanrcusly, ruch as
airlhes. Other erampleg includepetroleumrefin-
ing, basic food preessing, and manufacture of
ChaPter 4
low*ost @nsumor products such as toys, dis'
posable Pens,na:ronr'and lighters.
04-12. Aspecls cqrtrnon lo icb order and prccess cost-
ing are:
(a) They can be used by rervice organiza'
tbns.
(b) They requin cqrsiderablo detail to calcu'
late tho cost ol *ork h Procells.
(c) The wprk h process accotnl in the gener'
al lcdgcr ir lupported by subsidiary
t€cordg.
O4-13. A blended cthg method uee irb order ccting
lo accumulate soflrc clement(s) ol cost and
prcces3 ccthg to accumulaleofien-
O4-14. Flcxible manufacluring 3yslems consisl of an
integrated collection ol automated production
pnocesges,autornatedrnaterialsrpvemonl, and
cornputerizedsystetn csttrob lo utilize facilities
ln etticientlyrnanulacturinga highly flerible vari-
ety cl Products.
Q4-15. The adnantagesof a llexble nranufacturingsys'
le.n over the cther systems include shorl (near-
zero) setuPlimes, lhe absence of a learning
curve, lflet lead times to chipmont' lower diresl
labor cost per unil, lower direct labor cost in
total, and bwer work in prccess invenlories.
O4-16. Thc hilial cost of creathg a flerible rnanufactur'
ing system is much higher than lhat of olher
rngnufasturingsystoms.
O4-17. l,lanufacturingsetthg suiied for bacHlush cosl'
ing are distinguishedby very fasl processing
speeds, which rernovesboth the incentiveand
the opportunilyto track the detailed costs of
work in Pr@ess'
l-

I
t

L Chaptor I 63

I EXERCISES
\- .
E4-1 Calculation of cost of goods sold (in thousands):
I
b
TOtal manUfaCtUfingCOSt...........'................r.r.....t sl 10
Add work in process inventory beginning """"" 80
I $1eo
b
Less work in process inventory ending.r..........". 90

I Cost of goods manufacturgdr.......o.r.-........'....r..'., $t oo

S Add finished goods inventory beginning ........!.... 150
GOSI Of gOOdS ayaitablg fOf Sa|g...........o......oo....... $250
Less finished goods inventory, ending ...o......'...... 60
I
b
Cost of goods sotd .....'. .-,....................'.. $.11D
I
S
E4-2 Calculation of cost of goods sold (in thousands):
I
b DirgCt matgrials used.....................r...,...r,...'........ $so
DifgCt 1abOf .......................'.r....................r........... 60
FaCtOfy Ovgfh gad .o...'..r..........r............................. 80
Total manufaCtUring COSt ........r..............o............. $230
Add work in process inventory beginning ........'.. 250
I $480
b
Less work in process inventory,ending 210
G o st o f g o o d s ma n u fa c tur ed....... $27o'
A d d fi n i sh e d g o o d s i n ventor y beginning........' .... 340
Gostofgoodsavai|abteforsa|e.............. $610
Less finished goods inventory ending..............,.. 27fJ
Gost of goods sold .......o............. ..t......'.. s340

I
Clpptcrl 65

E44 (Goncluded)
(21 Gost of goods manufactured:
Stores,April 30.......'.'........r.,.. .....--..----. s 1O,25O
PUfChaSgS.................rr.............rr.......................................r..... 105,OOO
sl15,250
LoSS: StOrtSt May 3t ro....rr...........r.................r....o......r..o....or.... 12r7AO
Dirgct matgrials sl 02,550
COnSUmgd '......"............rr........t..r....o...........r.
Dirgct tabor used (4r25O x5221..r,.....,.........o.,............r.,...o...... 93,500
FaCtOfy OYefhead .......r.....r...........o..........r...........'.....r.......'..... 77.390
Total manufacturingcost 5273r4/,O
Add work in process, beginning inventory 61.420
s334,86O
Loss wgrk in process,endinginventory................r.....,...........52,80O
COSIOf gOOdS manUfaCtUngd....'.....'.........r......................'.......
s282,O60

(31 Endingbalanceof finishedgoods:

Finished Cost of Finished Cost of
goods, + goods goods, = goods
April 30 manufactured May 31 s ol d
S 4 5 , 6 0 2 + $ 2 8 2 r O g O X = s28O,OOO
X = $ 47,662
Therefore,the finished goods ending balancesis $47,662.
E4€ (al *",i135";;;;;il..:::.::::::.::::::::::::::-::::::
35,ooo
35,OOO
(b) Work in Process............ t...........r.... 33'OOO
Factory olrgrhead Gontro| ..o............r...,........ 21000
Matgrials .or..r.....'r.r......................r.r......o. 35,OOO
(c) Payroll 4O,OOO
Accrugd Payro11.....,....,.r,.r..,.....r....,...r..., 4O,OOO
(d, Accrugd Payroll .r................,......,...,.............. 4OTOOO
CaSh....rr........r........o.r...r.........r.........or.... 4O,OOO
(el Work in Procgss .................r....o,...,.,..r.......... g2rOOO
Factory Overhead control,.. S'OOO
Payroll .......... 4O,OOO
(0 Factory gverhead Control 4,OOO
C a sh 4,OOO
 Chapter4
ffi

E4-S(Concluded)
(g) FactoryOverheadControl.."""'r""""""""" l8,ooo _
AccountsPayable...........,.............."""" 18,OOO

(hl FactoryOverheadGontrol.....-.................'."' 4,130

AccumulatedDepreciation...................'. 2,1OO
PrepaidExpenses....r,....,-...........-.......... 780
AccruedPropertyTaxes.,..,........r........"' 11254

(il WOfk in PfOCeSS ........................r.................. 36,130

Factory Overhead Control 36,130

o 92,OOO
F i n i s h g d GOOd S ........,......,..........................,..
92,OOO
W o rk i n P ro ce ss..........................
(k) A c c o un ts R g ce i va b l €..............,..................." 8 O , O O O
Sa l e s .............. 8O,O0O

G a s h...........r................ 4O,OOO
Acco u n ts R e cg i va b l € ............................" 4O,OoO
:
C o s t of Go o d s S o 1 d ........................!........""" 60,000
Fi n i sh e dGo o d s ..r................' ...,...,.,"""" 6Ot000

E4-6 (al 13,50O

Acco u n ts P a ya b l e 13' 5oo

(bl 17,5OO
' 17,5OO

(c) 1,800
1,800

(d) 27,OOO
Accrued Payroll.....,.'...... 27 |OOO

Work in Procgss ......................'...............,..,. 1 7 , 0 O O

Factory Ovgrhead Control .r....r..,r.'.............,. 2,000
Marketing Expenses Control ........-............... 5,000
Administrative Expenses Control 3,000
Pa yro l l ...........,.. 27,OOO

(e) Factory Overhead Control 2r5OB :

C a sh .............. 2,5O8

(0 Factory Overhead Control 8,5OO

Accounts PaYable B,5OO

(gl W o r k i n P ro ce ss .....-.-..-. 14,8O8

14,BOB
Factory Overhead Gontrol
60,1OO
(h) F i n i s h e d Go o d s..'.
60,1OO
Wo rk i n P ro ce ss" " " " " "
Chaptor I 67

E4-O(poncluded)
O Accounts R9cgivab18.............o...............oo'.... 8O,OOO
Sa 8O,OOO
Cost of GoodsSold' 6O,OOO
FinishedGoods
'sl5,ooo 60,o00
-$1s,roo= $8o,ooo
+ $oo,roo

E4-7 WALLACE INDUSTRIES

Cost of Goods Manufactured Statement
For M ay
( in thousands of dollar s)
Direct materials:
Direct materials, April 30, 20A.........o $ zs,
Purchases......,...,. s5f o
Freight ill ...........r............r.....r....r.r...t.. t5 525
Direct materials availablefor use.....t. sss3
Less direct materials,May.31r 2OA... 23
Dirgct materials consumed.......... s s30
DirgCt tabOr.........roo........i..r.......o., 260
Factory overhead:
Indirect factory labor ..............,...r....... $eo
Utilities ($f gs r go o/o).............,..,...o..r.. 108
Propefi t?,if,..........r.....,.............r......... 60
lnsuranco ($2Ox gO%1..r...,...............r. 12
Depreciation Sl2O + $3O)..... 50
Total factory ovgrhgad,r...r..r.r....... 320
Total manufacturing coSt..........o....r............ $t,t1o
Add work in process, April 30, 2OA,... 150
$1,28O
Less work in process, May 31, 20A.,. 210
Cost of goods manufactured $ { . 0 50
:
 ChaptorI
ffi

E+8 cll{l{ABAR 69ffiplMf

Statement of Cost of GoodsSold
For Year Ended December 31
Raw materials:
Purchase3 .........'." $40o,ooo
Less dlgcounts on raw
materials Punchagod ."" 4,2OO $ggs,goo
Lesg raw materials on handt
Dgcgmbgr 3{ e 2OA.........""t 24,0O0
Cost of raw materials consumod s371'8OO
Dirgct labor ...........o."""""""""""r'
lEo,ooo
Factory overheads
Factory maintena!1co"............... s?8,4OO
Factory suppllgs used ....""'t""' 22t4AO
Powgr and hgat-factofl ......'...' 19,400
lnsuranco erpense-factorY
buildingand equiPrllollt...." 4,8OO
Depreciation-factory bullding
and eqUipmgnt..""""""""" l7,5OO
Factory superintendence.......... 1O0,000
tndirgct factory |abor.........."""' 20,OO0
Total factory overhead........ 222,5AO
Total manufacturingcosts-,....--.....-.-. $774,3OO
. 84,OOO
Add work in Process,January 1r 2OA
$858,30O
Less work in Process,December31t
3O,OOO
204
Cost of goods manufacturgd....-........ $828,3OO
37,5OO
Add finishedgoods,Jbnuary1r2OA.
Cost of goods availablefor sale o....-.. s865,80o
Less finished goodsrDecember3l'
2OA'.....................o.....t......"t""" . 7O.OQ0
Cost of goods sold ....................o....... szggJsq
CGA-Canada(adaptedl.Reprintwith permission'
ChaptorI 69

PROBLEMS

P4-1

(rl BRTDGEWELL COMPANY

Gost of Goods Sold Statement
For Month Ended July 31
(in thousands)

Direct materials consumed,...,....... .....r......r...,. s16

DirgCt 24
1abOf........r.r.r.................r..........r...................r..rr.r.o....'r..r..r
FactOryovgrhgad ................'.....................................'.....r............
20
Total manufacturing cost (a)...............................rr..,....,............ s60
Add work in process inventory July 1.......,......,.....,............,........ 1 5
s7s
Lgss work in processinventory,July 3'l ..........,.......................,...25
Cost of goods manufacturgdr.....,........r..,r....r...,........o..........,....... 55O
Add finished goods invgntory, July I (b) .............r....................... 20
Cost of goods availablg for salg r........r............,.,..........,.....o......... S?O
Lgss finishgd goods inventory, July 31(G) ................_.-.-.u.r.......... 15
Cost of goods sotd ........,.........'......r.r....................,..,.....,...r......,..
G
Calculations:
(a) Costofgoodsmanufactured.......,.............,..
$50
Add work in process,ending 25
s75
L e ss w o rk i n pr ocess, beginning.....,.......- .,... l 5
E q u a l sto ta l m anufactur ingcost.................. _999

(b) Cost of goods available for sa|e.,.,......,..r...o. $ZO

L e ss co st o f goods m anufactur ed...,.,......,... 50
E q u a l s fi n i shed goods, beginning......,....,,,.. 14

(c) Go st o f g o o ds availablefor safe................... $ZO

L e ss co st o f goods so|d........ 55
Equals finished goods, ending gg
'70 Chapter4

P4-1(Concluded)
(al Matefia1S.o..r..........................o..........o...........
25,OOO
l2l 25,OOO
AccountsPayable.....................t.|..........
(b) Work In Process a aa aa aa a aaaa a aa a aa aaal a 16,OOO
2,OOO
FactoryOvgrhgadGontrol....."""""""""""' 18,OOO
Matgrials...............r'........"""""""""""'
+$5'OOO)"""""""""""t""' 29,OOO
(cl Payrolt ($ZCrOoO
gd """"""""tr"""""D"""'r' 29,OOO
Accru Payro11
(dl work in Procgss ..............r....r.....................'. 24rOOO
Factory Ovgrhgad Gontrol r""""""""""t"o" 5,O00
PayrOll t......."t"""""""t"t""rt"""""""t"
29'0oo
5O,OOO
(e) Finished Goods aaaaaaataaaaaaaaaaaaaa'

5O,OOO
Work in ProcesS"""t"""""""""""""""
(0 AccountsRgceivabte"""""""""""""""""" 105,O00
"""' 105,0OO
Sales ($60'000 + (75o/oof $6O10O0))
55,OOO
cost of Goodsso1d............................,..o.......
FinishgdGoods"""""""""""""'r""""" 55r O0o
 Chapten4

P4-2
(11 SCOTTSBURGCOMPANY
Cost of Goods Sold Statement
For Month Ended June 3O
( in thousands)
Direct materials:
Materialsinventory June 1 ........................ sls
Purchases........................., .......... 33
Materialsavailablefor use... ........ s48
Less: Indirectmaterialsused.................... S 1
MaterialsinventoryJune 30........... 19 ZO
s,
t,

$ 1
7
17
2
13 4
Totalmanufacturingcost (b)........ sl1
Add work in processinventoryJune 1.................. 4
s1
Lesswork in processinventoryJune 30............... 3
Cost of goodsmanufactured...... sl2
Add finishedgoodsinventoryJune 1 (c)............,. 7
Cost of goods available for sale., sl9
Less finished goods inventory,June 30 (d)..........:. 3
C o st o f g o o d s so |d ....... sls
Galculations:
(a) indirect labor + direct labor = $4g
indirect labor + (indirect labor x 6) = $49
indirectlaborxT=949
indirect labor = 37
directlabor=6x$7=942
(b) C o s t o f g o o d s m a n u f a c t u r e d . . , . . . . . . . . . . . . . . . , . . .$. .1 2 0
Add work in process, ending gO
sl 50
L e ss w o rk in pr ocess, beginning......... 40
E q u a l sto tal m anufactur ingcost. Sl iO
(c) C o s t o f g o o d s a v a i l a b l ef o r s a l e S19O
L e ss co st of goods manufactur ed....... 12O
E q u a l sf i n i s h e dg o o d s ,b e g i n n i n g S ?O
72 Chapter4

P4-2 (Concluded)
(d) Cost of goodsavailablefor saler......'..""""' $ 1 9 0
Lgss cost of goodsso1d......................,......,..{ 5 5
Equalsfinishedgoods,ending...............""" s 3 5

(al Matgfials ..............r........r...........r...,.........,.... 33,O0O

l2l 33,OOO
Accounts Payable ...,......r.....,.........o..,....
(b) Work in Procgss .........tr....tt'otr""""""""t'r"' 28,OOO
Factory Ovgrhgad Gontrol ............................ I,OOO
Matgrials ........t........'t"""""""""t""t""' 29,0OO

(c) Payroll ....o................""""tttt"t"t""tt"""""t" 49,OOO

Accru gd Payro11...t..r..""""""""""""""' 49,OOO

(d) WOfk in PfOCgSS ...,..............r.....'.....r.,o..r...... 42rOOO

Factory Ovgrhgad Control ....t..r......""""""" 7,OOO
Payroll...............""""""""""""""""""' 49,OOO

(e) Finishgd GOOdS....,rr,.......r....,...,.......o..r......... 12O,OOO

Work in ProcgsS......'.....""r"""o""""""' 120,OOO

n Accounts Rgcgivabl€........"........"""""tt"""
+ (50%ot $14o'o00))...
21O,O0O
210,OOO
Sales($14o,ooo
{55,OOO
Cost of Goods So1d...................,....,..ro..........
Fi n i sh g d Go o d s ...'.........."""""""""""' 155,OOO
 73
- ChaPtarI

P4-3 ,

(11 MADEIRACOMPANY
Scheduleof Cost of GoodsManufactured
For Month Ended March 31
work in process,March I .............r.......r,....... s 4o,o0o
Productioncosts:
$lo4rooo tr
Dirgctmatgriats.....................................
"""""""" ttt
l6otooo
r Direct labor....r.-....."
Factory overhead ..............,......""""""" 8or999 *tt -344t009
s384,000
Lgss work in procgss,March31 ............."""' 36,000
Cost of goodsmanufacturgd..-.'....,...............' $a8,@'

+ endingfinished goods inventory

r Cost of goods sold ($345,O0O)
($tos,ooo)- beginningfinishedgoodsinventory(slo2,ooo)= s348r000.
'rpurchases of materialsduringMarch ($l tO,OOO)
+ beginningmaterials
inventory(S2O,OOO)- endingmaterialsinventory($26'000)= SlO4'OOO.
r.' production costs for March ($gCC,OOO) =
- direct materials ($t Oe'OOO1
direct labor and factory overhead($24O'0Oo).

Letx = directlabor
1.5r = S24O,OOO
x = $l60'000 direct labor
.5x = $8O,OOO factory overhead

(21 Prime cost:

Direct materials(requirement(1)).........,..r.o........,SlO4r0gO
l6OIOOO
(1))....:....,.....................
Dirgct labor (requiremgnt
_9261poo
(31 Conversioncost:
(1))'......r.....,.................
Directtabor(requirement $160rO0O
Factoryoverhead(requirement(1)1.............,.....,.. 80'0OO
_9240,999
 Chaptor 4

P4-4

CompanYA: s4,oo0,ooo
Salgs """"t"""""t"tt""ttt"tt""t"""ttt"""""t"

Cost ol goods sold:

Finishedgoods inventory Janualy i """ S 600,000
Gost of goods manutactlli9d""""""""" 3,80O,OOO
Gostof goodsavailablolor sa|e""""""' $4,4oO,ooo
Finishedgoods Inventory December3l lr2OO'OOO
3,20O,OOO
. Cost of goods Sold tt""t'o""t""""t"""t"'
Gross profit l2oo/oOf Sales).o......'..............r.....
s Soo,ooo

GompanY
' B:
ctst of goods availablgtor 3a1o.,..r.........,......5 1 , 5 {o.ooo
O,OOO
Less finished goods ending inventory"""""" _ 2'l
COSI Of gOods Sold "tt""t""""""""""r"""""' slJggJoo

CompanYC: S 429,ooo
Sal eS ..."""t"'rt"t"'ot""t"""""""o"t1""""""t"

Cost of goods sold:

Cost ol goods manufacttlrl9d""""""""" $ 34O,OOO
Add bsginning finished goods inventory 45,OOO
Cost of goods availablolor 8a1e""""""' $ 385,OOO
Less ending finished goods inventory"" 52,OOO
333,OOO
Cost of goods Sold """"'o"""""""""""'
$ 96,000
Gross profit """"t""""'r""""""""""""""""'

P4-5
FinishedGoods Work in Process
35O,OO0 Beg. 7,0oo 346,OOO
Beg. 34,0OO
(41 348r00O M 5O,OOO
38Ct,o(to L(2) 20O,OOO
End.3O,W FOH loo,0oo
357,W
End.17,@

Materialsand Supplies Accnred PaYroll

2O,OOO (8) 259,OOO Beg. 13,OOO
2O,OOO
65,OOO (11 5O,OOO 55,OOO
85,O@ 70,O@ 2OO,OOO
268,N
End.7S,OOQ
End.9,Ooo
Chapter 4 75

P4-5 (Concluded)

Accounts Receivable Accounts Payable

5 4 ,0 0 0 (7) 532,OOO (6) 77,OOO Beg. 18,OOO
5OO,OOO 65,OOO
554,OOO 83,OOO
End.22,OOO End.6,00O

,Factory Overhead Gontrol Sales

2 O,0 0 0 (3) lOO,OOO
5 5 ,0 0 0
10,00o
2 ,OOO
13,OOO
lOO,AOO

Payroll Cost of Goods Sold

5 5 ,0 0 O 55,000 (5) 350,OOO
2 0 O,OOO 2OO,OOO
255,OOO 255,OAO

(11 Materials issued to production' 55O'OOO

l2l Direct labor, $2OO,000
(3) Total factory overhead' $1OO'0OO
(41 Gost of goods manufactured, $346'OOO
(51 Cost of goods sold, S35O,OOO
(61 Payment of accounts payable' 577'0OO
rtl C o l l e cti o n o f a cco u nts r eceivable,5532,OOO
(81 Payment of Payroll' S259'0OO

GGA-Ganada(adapted).Reprint with Permission.

 t

1
,<

Chapter 4
76

P4-6
84,OOO
Work in Process laaaata

Material8... 84,OOO

Cost ol gOodg SOld ttt"tt""t"""""t""tt"" $14o,ooo

Add finished goods inventoq/ incl€ase" l7,ooo
Cost of goods manufactllhod..'...'...r..""' s157,OOO
Add work in process inventory increase 2,OOO
Total manufagturing cost -....--.-...........o" s159,OOO
Less : Factory overhead.t..... $35'OOO
Dirgct t:lbor.......,....o... 4OTOOO 75rOOO
Materials used in manufacturing .,.r,...... l_84,OOO
..........t.....t...t"""t"""ttttt"t"tt"tttt"
91,OOO
Materials
Accounts Payablg.....'..""""""""""""" 9l,ooo
Materials ussd in manufacturing
(from above| .........o...."r""""""'rt"""' $ 84,OOO
Add materials inventoryincrease....'..... 7,OOO
Matgrialspunchasgd".........""""'r""""' $ er,ooo
Payroll .....'.'....... a ata-aaaa aaa 40,ooo
Accnrgd Paytoll.......'.........""""""""to"'
4O,OOO

Work in ProcgsS ........................tt""t"""tttrt'

4O,OOO
Payroll .........r..........""t""t"""""""""t'
4O,OOO

Factory Overhgad Gontrcl ......r'.r.t,,.....""""' 35,OOO

Vari o u s C rgd its.'........"' t " " "" " " "r'r t " " "' 35,OOO

Work in Procgs3 ..............'.t""t'o"t"t"ttt"r"'tr

35,0OO
35,OOO
Factory Ovgrhgad Control o..r........ro""""
Finished Goods (12'OOO+ 84'OOO+ 4O'OOO+
35tOOO- 1 4tOOO)............."""""""""t t57,0oo
Work in ProcgsS .............'...r"""""r""""
t57,OOO

Cost of GoodsSold (28'000+ 157'O0O-

45tOOOl .........................'.."t""t"t""t"' l40,ooo
Finished Goods .............. l4o,ooo

GGA-Canada (adapted). Reprint with permission'

 n

92,OOO

26,530
(c) Payroll... 86,000
''
Accrued Payroll .............. 86,000
Work in Process....................r.............................6Or5OO
Factory Overhgad Contro|..........,.,....,...........,..... 1215OO
Marketing Expenses Control ,..............t............., IrOOO
Administrative Expenses Gontrol 5,OOO
86,OOO

47,33O

188,OOO

241,150

185,5OO
(hl Cash !........,r.........,......,.. ZOSrGO2
Sales Discounts,........... ...,...... 4r2ig
Accounts Receivable........... 212rg2}
(i) Marketing ExpensesControl ...,............ 18,ooo
Administrative F.xpensesControl 12,OOO
Accounts Payable 3O,OOO
0 A cco u n ts P a ya b l e 1O4,OOO
Cash 1O4,OOO

rt
78 Chapter 4

P4-7 (Gontinued)
Cash Materials
l/l Bal' 20,O0O (c) 88,25O 111Bal. 1o'oooI (d) 9O,8OO
(hl 2O8,662 0l l04,o0o (a) 92,OOO
't92,250 102,OOO
2i28,662
36,412 t7,2OO

Accounts Receivable Machinery

l/ 1 B a l ' 25,O0O (hl 212,924 1/1 Bal. 4O' OOO
(gl 241,15O
26art50
53J,3O

Finished Goods Accumulated DePreciation

1 t 7 Bal. 9r5OO (g) 1B5,5oO 111 Bal. 1O,OOO
(0 l 8 8 , OOO
,97,5OO

Work in Process AccountsPayable

t/l Bal. 4,50O 1 8 8 ,O0 O 104,OOO 1/l Bal. 15,5OO
(c) 6O,5OO (a) 92,OOO
(dt 82,50O (b) 26,53O
(e) 47,330 (i) 3O,OOO
(q4,>e3<t ,64\030

Accrued Payroll RetainedEarnings

88,25O 111 Bal. 2,25O 111 Bal. 21,25O
(c) 8 6 ,OOO

Sales Cost of GoodsSold

241,15O (g) 1 8 5 , 5 OIO
Sales Discounts Payroll
I
(c) 86,0O0 | (c) 86,OOO
LL
L
I\ Clppterl 79

P4-7 (Concluded)
t_ CommonStock Factory Overhead Control
I (b)
(cl
26,53O (e) 47,330
! l2r 5OO
(d) 8r3OO
I 47,33tO
!

Administrative ExpensesGontrol Marketing ExpensesControf

I
I (cl 5,O0O (cl 810oo
!
(il 1 2 ,OOO (i) 'l8,0oo
17,AOO 2l,ooct
b

(31 HOPKINS& WHITECOMPANY

ThialBalance
January 31

CSSh '........ $ 36,412

AcCOuntS RgCgivabl€...tr..............r............................r...... 53,23O
Finished GOOdS......r...........r.o....'..r..r......r...r'..........r......r. 12,OOO
WOrk ln PrOCgSS.........'.o,.r.,.....,..r'.......r.'....'.rr.'.....r........t 6,830
Materfals aaa aaa aroaaa aaaaaaattaaaa 11r2OO
aa aaaa a a

Machine 4O,OOO
Accounts Papble a aaaa aaa a aa aoaaaaaa aa taaaaaatta aal aa s 60,030
Accumulatgd Depreciation....,...,......,,.,.....,....,................ l O,OOO
Common Stock..,. at 6O,0OO
Retained Earnin a araotaaaaaaaaa aataaa a 21r25O
Sales 241,15O
Salgs Discounts,...,.. 4,258
185,5OO
26,OOO
l7' OOO
1993,430 _$3e2,499

l
 Ghapter 25
DfscusstoNQuEsTtoHs
ezs-1, Porcontago d gral'tl lo ralo b a nrasuro of
cun.nl operating activilirs. Fevenuo produc-
liwr, coal incurrcnco, Ind corl control arl
rnbodied in lhir ratio. Thr capitatrmployd
lumovrr ratr ir ! moa3uro of lhc anrount of
agsol investment rehtivr to tho activhy lcvel cl
th. cornpany. This rato highlights the succcgs
o{ adrievirg ealeg vc{urnr with mirimum acsot
' hvcaUnont ard measurcr
lhc salesaeneraliqr
activity and overafl anscl menagemont.
e2s-2. Capitsl omployedcqrsbtr ol nqrcurrent a$ets
(invrstmentr in buildingr, machinrry, and
oquipmrnt) ar wrll !r currrnl asrctr. Somt
finnr do ttcrtur. cuncnt aerr1tsbut p6fer rork-
ing c-Fital; lhat is, lho nol balsnce of curnnt
egrtt ard currcnl linbililicr.
Q25-3. Tr+o major objectivet that managemonl may
havc in mind when setting up a system for
m e a t u r i n g l h e r c t u r n o n d i v i a i o n a lc a p i t a l
crngbyed an:
(a) lo lecuro a summary msasurc of lho
profilability of operations, products, and
lacililies connecled with each divbirn;
O) to obtain hforrnation as to the success ol
division manag.rr in conducting thcir
. portirrr of thc canrpant'c rtivilies.
Q25-4. Dpfuncibnal astbnr that managemenl could
lak. lo irnprovc rhorl-term relum on caoital
ornpbyed at the expsrse ol bng-run prolitabili-
ty hclude:
(a) Defer or reduce preventivemainlenarrce,
which reducel currenl cxpenaebul
t h o r l e n r l h c l i l o o f a r ee l s , t h e r e b y
ircreaa irg I r.rturr cosi.
(b) Rcducr cxponditurr on research snd
drvclopmcnt, which reduces curronl
expcnr. bul makor thr cornpany less
canpelilivt h tho luturc.
(c) Rcduco or arrc*J rrnpbycr trainhg and
d c v e l o p m e n t ,w h i c h r e d u c e s c u r r e n t
cxp.nlro bul makcc lhe company less
cqryctiiivo h thr future.
(d) Sell ard then nnt nreded assets,
I,ltich
9e!s lhcm ofl thc balancc sheet but may
cosl the cornpsny rnorc h the bng run.
(o) Deler, reduce, or arcid nrodemizaticn
of
facilities,rspocially rubstantial inyost-
rncnb h eutornaled manulacluring frili-
lior, wtrich kecpr asrol cosl on thr bal_
anca sheot lotr bU rnalcs thc corngany
lcss carpetitivo h tht futurc.
425-5. Uac od lhc rato-o{-rolum-ori-cspilal.emptoyoc,
hag the folbwing livr claimod achranlaoes:
(a) ll focuses menagemont'satte-nlion
on
oaming thc bcst pro{it possibleon the
capital (tolal assets) avaihblo.
688
(b) lt lies lognther the rnany phasos ot fiAan.\-
cial phnning. sales cbjrlives, c6l st-
trol, and the prolit gnal.
(c) ll aids in detecting the strengthl end.
weaknesses wilh respect to lho usr or
nonuse of hdivijual assob.
(O h serves as a yardstbk h measurirg por-,
fonnance and proviCesa basis lor evalu-
a
ating inprovem€nl ovo, time ard arrstg
divbi:ns.
{o) }t devebps a keener eenge of resoqtsi_
. bility and leam eflort in divbisrol ,nan- -
agcrr by enablirg thcm to measurc and
tvaluale their orvn astivilies in he light c/
.
lhe brdget and with ,Dspeclto thr resuttr
achieved by other divisisrsl rnanagors. r'
025-6. The five lrequently encountered limitatbos of
using the rate-of.retum_on-capilal-employed
follow:
(a) lt may not be reasonable to expcct thr v
aame rolum on capital employed lrom
each division if the divisions selt thcir
respective products in rne*ets that difler
_
widely with respect to product develop-
menl, compelilion, and conrumo
drmand Lack ol egreernont on thr gti-
mum rale ol rclurn might discourlg. \r
rnarugen who believe lhe rate is ret at
an unlair level.
(b) Valuatiqrs of assets cil differentvintager
in ditferentdivisions might givo rito to *
comparison difficuttieg and misundcr-
atandings.
(c) Proper albcation ol conrrnon c€lc and
assots requirea dstailed information F
aboul tho budgeted and actual uro of
cofilmon lacilities. Thc cost of kecping
track ol guch detaila rnay be higrh.
(d) For the sake of making itrr curiont pcri:a -
rale of relum on capitaf empbycd -loot
good,'managers may be influenced to
mEke decisions that are not h thr best _
bngl,run hlerests of the firm. Thir prob-
l e m i s e s p e c i a l l yl i k e l y i l m a n a g c r t -
expecl lo be in pcitbns for mly a rhorl
time belore behg reassignod,thur, por- rv
sonally avoiding rcsponaibilityfor ,
lmg-run corsequoncet.
(e) A single moasure of performanco,ruch
l-
as rotum on capilal employed, rnay nrult
in a fixation on improving thc compo.
ncnts of the one moasurc to thc neglect
o f n e e d e d a t t e n l i o nl o o t h o r d c a i r a b b
activilies. product research and dovclop- \t
rnent, managerial devebpmonl, progror-
. sivc personnel polbict, groodonployoe

Chapter25
l1
moralo, and good custqncr and public
relolbnr arc juol ar irnportanl in oaming
a grealcr prc/it and assprhg csltinuour
growllt
Q25-7. Multiplc pcrformanco moaauro3 aro usod lo
oycrcorno tho limitetkrnl cl r rhgh financial
rnasur.. Multpll prrlorrnam tnealut$ PttF
vidc central rnanagerncnl with a nprc cornpt"'
hensive pictutr ol divisimal prdormancr by
considering a widcr rangr of managomenl
respansbililie3, nsllinamial activilies ar well
as fiuncbl performancl. Muhipleperfonnancr
mcalurcr cen bo derigncd to provido an
incenlivo to divisimal tnanagon to cnlngo h
activitieo that havo long'lerm bcnlfil lo lhr
company but which may havo r nlgalivr
impact on rhort-run protit. Ersmpler includr
baric roaearch, now producl drvrlopmrnl,
guality improvcmrnt, produclion innovalion,
e m p l o y e e d e v r l o p m e n l , . a n dn e w m a r k e l
dovelopmcnl. ln additiqr, mulliple moasutcs
miligalr tho problem cil trying to evalualc divF
sional performincc on the bagis ol a single
profil measuro that may be cornputedon diller'
enl bsser in each divisicn.
Q25-8. Cornrnanforml of managsmenl incentive csn'
pensatbn phnr irclude:
, (a) Co^rh bonuror, whbh erl urually paiJ in
a lurrp rum rl thc ond of lhr pcrird and
an basod qt a cornbirgtion of ccrporde
porlormancr, individual porformancr,
and thr managernenllevol.
(b) Stock bcnusea, wtrbh arc delermined in
essentiallylho same way a! cash bqtus-
ca.
(c) Delrrod canpmsalion, ufibh ir paid in
cash andor dock ttst do€s ncl vest urdil
a future perird. In tryno c8ses, tht rnan-
agcr io rcguircd lo invrsl annually and
thc oqrany rnatchcr lhc stlrbuli<n.
(d) Steh qlinr, whi*t givo thr tnatragor a
right lo purcharr rtock al a rrt price
wilhin r rct pcrird Tho hccnlivo b to
hclp thr cornpany insrcalr tho market
pricc ol itr clock s! much ar possible
withh thr oplbo porird
(e) Stek appreciot'ur rigrts, wtri*r art sini-
br lo ttck optbru crcopt that thc nran-
agcr is not roquired to purchasc rtock,
bul ircloed rccoiver an anpunt equal to
ils apprcciati:n at lho cnd ol a rel perF
od.
(t) Prrlormencr rharer. which arc rtock
awardl paid to lho rnsnagcr only aller
rorrr long*un groalhar boen schioved.
Cash and stock borru.r.t ara barrd on one
prri'cd rosultr ard thoroforo provi<Jea rhorl-
tcrm irccntivr, ln csdrast,.ctek cptbn!. stock
689
appreciation righls, and pcrlormancc sharlg
sro valuabb only if thc cqnpany imprwee h
tho bng+rn. Since adbns thal resull h shorl-
tcrm ?nprovements catl have a negativc lmgr
term irrpact hng-lerm incentiver probabty arc
nPrc oltrlivr.
Q2s9. Ttrc basb methods used h pticing irlrcqrpa'
nY Itansil96 ar.:
(a) trander prbhC basod cr ccl
(b) rnatkel-bas€dtranslorPricing
(c) cosiflus transfer Ptiing
(d) negrctiatedkansler pticing
(e) arbilrarYtransfer Prbhg
425-1o. A markot-baced lranster prico provides an
incentive for divisional managemenl lo mini'
mize cosir h qder to rnaximize dMsimal prof'
ilr. In csrtrast, e ccl?luc transler pricc pro-
vkJcs no incontive tor divisioosl managcmonl
to bo coot etlbiont. ln last il lhe ptdit rnartup
ir a percentagoof cosl, there is gubslanlial
incentive to bc inelficienl h order to increase
total divisicnd PrclfiL
a2s-1 1. (a) Negol'aledlransfer pticing:
('t) Advanlage: The profit'center man'
agots haYe conlrol over lho lransler
prices and can be held responsible lor
heir resuftingirnpact on profils.
(2) Disadvantage: lndividual manageru,
in heir endeavor to msximize profits cil
their om divbbns, may rnekc decisiru
delrimental lo thc overall prolil of the
lirm.
(b) ArbitrarYlransfer Pricing:
(l) Acfvantage:ll'rs Po.ssiblefor execu'
tivo management to eet transfer pricea
thot will guide profilcenler managors lo
make decisisrs that will maximiza total
firm Profits.
(2) Dioadvanlage:The profit'center
manager! do not havc aulhorily in an
aree aflecting the prcfil pedonnancr lor
which they will be evalualed.
CGA-Canada(adapled). Fteprintwilh permis-
rbn.
Q25-12. Under the dual lransfer pricing approach' lhe
produchg (selllng)division hcludes a profit h
carputhg itl revenue f rorn irdracornpanycales
while the consuming (buying) divigionir
assigned only variablo costs of lhe produchg
division, plus an equitablo porlion ol fixed
costs. Thc producing division lhu+ uses-g
t r E n g l e rp r i c e t h a l b e l t e t m e a s u r e s p r r f o r '
rnanc., whitc tho ccnsuming divisbn has avaiF
ablc a price more uselul for decisbn'making
purposos. The producing divisbn's prolil wor.lld
b r o l i m i n a t e di n p r e p a r i n g c o m p a n y ' w i d e
tinsrcbl stalemont3.
690 Chapter25

EXERCISES

E25-l

Sales
(11 Capital-emPloYed
${,6OO,OOO
=.8
turnover rato Gapitalemployed s2,ooo,ooo

,^r Percentage of Profit s200,000 =

tzt = .125
profit to sales Sales $1,600,000

Rate ol return on Capital-employed Percentageof

t3l E x = .8 x .125 = .1O
capftal empfoyed turnover rate profit to sales

E25-2
(1) Total corporate assets a t b e g inning of the year ....o.....,.,., $ 6S' 000' 000
Total corporate assets at the end of the year,..o..,..........o. TOTOOO,O0O
$136,OO0,O00
-r- 2
Averagetotal eorporate assets employed during the year $ gg,ooo,ooo
Assets used by corporate headquarters8nd not
allocatgdto operatingdivisions..........r..........o......,... oooo00
Averageassetsused by operatingdivisionsduring
the year..o......r.....r.....'...'.rr.............r........r...'..'.....o....
E_99p9s999
(11 (21 i3)
Total Average Percentage Gapital
Assets Used By Used By Employed
Division All Divisions Division (r) r (21
RecreationalProducts.... 563,000,000 25eh $15,75O,OOO
HouseholdProducts..,,,.. 63,000,000 40 25,2OO,OOO
Commgrcial Too1s.,....,,.,. 63,000,000 35 22r05O,O0O
TOtal rr.....o....or,...tr... j_oo%- _$63fOOr0OO
(1) tzl (31
Gapital-Employed
Gapital Turnover Rate
Division Sales Employed (l) +-(21
RecreationalProducts.... s1 5 ,75O,OOO sl5,75O,OOO l.OOO
HouseholdProducts ...,.. 2 0 , 1 6 O , O O O 25r 2OO,OOO .800
GommercialToo1s...,..,..,.1 5 ,435,OOO 22,05O,OOO .700
Overall Corporation.,...... 5 1 r345,OOO 6g,ooo,ooo .755
 69i
pter 25

E25-2 (Concluded)

(11 (21 (3)

l2l Percentago ot
Pmflt to Sales
Dlvlslon Proflf Salcs (11*(2)
ffiUonal Prodrrct8.,., s4,725,000 315,75O,0OO .300
Household Produetr ....... 4,032,OO0 20, t 60,000 -200
Commgrg!rl Tools........'.. 3,8581750 15,4iNi,OO0 250
OveralI Corporadroll........ 9,86O,0OO 51r34lt,OOO ,192

(31 (11 tr) (31

Capltal-Employ.d Percontago Rsto of Rehrrn on
Tlrmovcr of Profit Capltaf Empfoyed
Dlvlelon Rsta to Salor (1) r (2)
RecreaUonSl Prodtrctl.-. 1.OOO ,300 ,300
Ho usohold Produetr o...-. ,800 .200 .180
Commerclal Toob ..oo...-. .700 2W .175
Overall Co rporatlon .,...-. .755 .192 .1+5
or altomaUvoty (1) (21 (3)
Bato of Return on
Capltal Capltal Employed
Dlvislon Pro,fft Employcd (rl + P)
Flecroadona I P ro.ductr-, 9f,725,OOO sl5,75O,(XX) ,300
H o usohold P roductr Do..6r 4,032,0O0 25,2OO,OOO .160
Commorclal Tools..,-...-. 3,858,76O 22,O5O,OO0 .175
Ovc rall Corporatlon ..,,..., 9,860,O0O 68,OOO,OOO .145
 -l

692 Chapter25

825-3

(1) The company must seek to mlnlmlze total @st Since there Is no other
market for the 64,000 lons, and since the variabfe cost of S4.5Oper ton
ls less than the outside price of $5, the coke-producing profit centerrs
supply should be used at least In the short run. In the long run, the S4.SO
varlable cost may change, and the flred cost must be covered whlfe real-
lzlng a reasonableroturn on capltal employed. However, the 35 outslde
price may also change when the contract ls ronegotiated. In determinlng
the transfer prlce for profit-center proflt computatlons, the blast furnace
marulger has a sound basis lor a renegotfationof the transfer price so
that lt ls competitive wlth the $5 external price that ls available.

(21 Present Revenue Costs

Sales (16,000tons
l2O%x 8O,OOO tons) x $9.) $ 96,000
Variablecost
(8OrO00tons r $4.5O).......,.. $360,OOO
Fixgd cost.....,......,.r,,.,tD..,,...,.r 40,OO0
Total .,,...,......,r. r,...,...,......... $ 96,000 s4OO,00O= 5(304,009)
rSales price - marketing costs

Proposed:
Sales (8O,OOOtons x $6) 9480,000
Variablecosts:
Production... 53.00
Marketing.,.. .50
$3,50 x 80,000 tons $28O,OOo
Fixed costs:
Present.,.,..r.,.......S4Or0O0
Proposed......,....,. 60,OOO 1OO,O00
Purchase of coke for blast
fumace (641000tons x S5).. 32O,O00
Tota| .............r .......r s19999 - $7OO'O00= S(220'0OO)

By making the additional investment, the company woutd be better off by

S84'o0o (S304,ooo- $22o,ooo),The cost of capital committed to this
investmentshould be consideredby managementin making a declsion
on this proposal. (SeeChapter 23.)
 693
Ghapter25

Ez'5'4

(1) Ace Divisionshould take on the new customer becauseits gross protit
would be increased by $6001000.Aceb cost to manufacture would be the
same por unit and in total whether they ars sold to Duece Division or to
ttro outside customer (since the quantity is the same)' Thereforer 3rY
increaseIn sates nevonuewould immodiatelybe translated into
increasedprotit for Aco Division-
Sales novenugfrom nsw customer ($75 r 20,OOO UIlitS!...... $l '$OOIOOO
SatgS noygnuO from DugCg Dlvision D'..r..'....'..........t...........'. 9OOIOOO
InCreaSe In feVenUe and inCOme ffOm OUtSide S319S........'... -$ 6OOtOOO

l2l Initiat amount from new negotiated transfer price

Gl75 X 2OrO00 UnitSl...'.......oo.'o..."o...'..."r....'o....".t.....'..
$1,5 OO,OOO
Less manufacturing costs: Variabte cost...... 99OOTOOO
Fixed cost '...'..... 3OO'OOO 200.ooo
GroSS prgtit from tranSfer.............,.....'..'..'.'...r.o.'..,.o'.....'...r S 30OtOOO
LOSSaVOidgd On Ofiginal tfanSfef pfiCO...'..'.o.'.....'....,..'....t.. (3OOtOO0l
Additionatgross profit from proposedtransfer prico........'.. l-qOO'Ogg
S75
Initial UnittfanSfef priCe.r..............,..'.....'.......'...'...'......o...r.
Less 112ot average addlUonalgross protit
l5
1112r (600T000 + 2OTOOO
units)),.........t...'r...r.r"""""""
Actual transfer price after sptittingthe additionalgross
profit,.r........... .....',.'..r.. '...'....'........" -S69

E25-5

No, becausomakingbladeswould savo Dana Gompany$2,5OO,determined as

follorvs:

Outsidg supplier CoSt(S1.25 x 1Or00Ounits)....',,.'.....'...o...............r.'. sl2,5oo

Variable cost to manufacture by Blade Division.......'.'...'...'..r..........'. 1O,0OO
Savings to Dana if the Lawn Products Division punchasesfrom the
Blade Division.......r.....r.......r...r............'......."...r.r....'...D.....t......t.r S 2,500
694 Chapter25

PROBLEMS
P25-1

(rl Springy Leapy Total

Sales s42O,OOO S292,5OO 37t2,5OO
Variablecost 2gOrOOO units x $,9O., $252,O0O
l5O,OOO units r $1.35 s202,5OO 3454,5O0
Fixgd cost....., 13O,OOO 45,OOO 175,OOO
TOtal COSI...'."r.'.'..............o.....r'r..o $382,OOO s247,5OO 3629,5O0
lncome bgforg Incomg t3r..........,.r,.r, s_38,o09
_L l!,opg s 8g,o0g
Capftal omployod: Variable .o..t.....r.... $ 4z,ooo $ 58,5OO $.too,5oo
Fixgd ............r.,'.r.. 148,OOO 91,5OO 239,5OO
Total capital employgdro,.,........,,..r _$leg,oog st5o,ooo s34O,OOO

$ gg,ooo s 45,OOOS gg,ooo

$19O,OOO $150,0oo s34O,0oo
Rgturn on capltal emp|oyed.....,........ ZOoh 300h 24.40h
(21 (al lncreasespringy producuonand increase Leapy price by $.r5 per
unit:
Springy Leapy Total
Sal € S....r..... r r.....r.,......r... t.rrr.r...r. $487,5OO $ZtO,OOO $697,50O
Variablecost3
325,OOO units x S.90.........o...s292,50O
lOO'O0O unlts r $i.95........... $ 1 3 5 , O O O s427,5OO
Firgd cost...........,,r...............,o... t44,5OO
4O,OOO 18 4,5OO
TOtaI COSt.......... r.t.D.........,..o..
$437,ooo $175,OOO $612,O0O
Incomg bgfore incomg tar......... E50€gg s 35,OOO $ 85,5OO
Gapitalemployed:Variable....... $ 48,750 s 42,OOO $ 9O,75O
Firg d.........o.. 158,OOO 81,5OO 239,5OO
Total capital emptoyed.,....o... _S2o6,?so
sr2g,sog _$33q2sg
$ 5O,5OO $ 35,OOO $ 85,5OO
$2O6,75O $123,5OO $33O,25O
Return on capital employed,..... 24.40h 29.30h 25.9Vo
 695
25
Ch-apter

, -5-1(Goncluded)

(bl IncreaseSpringy production and continue present Leapy price:

Springy Leapy Total
Sale $487,5OO sl95,0oo s682,5OO
Variablecost:
325rO0O units x 3'9O."--.',..... s292,5OO
IOO'OOO units x 91.35...'....,r. $135,OOO s427,5OO
Fixgd COSt.........o...'..""t"t'o"o""' _ 144,5OO 3 1 , O O O 175,5OO
Total COSI.............ot...."."""" $437,O0O $166,000 $603,OOO
lncome before incomg tax....'.... g2ep99 $ 79,5oo
Gapital employed: Variabls o...... $ 48,750 $ 39,0OO $ 87,750
Fixgd.."..'..... 158,OOO 8 l , 5 O O 239,5OO
Totat capital employed....'..,'. -s206,750 _999€0o $n,25o
$ 5O,5OO $ eg,ooo $ 79,5OO
s2o6,750 $12O,5OO s327,25O
Return on.capital employed '.."' 24.40h 24.10h 24.30h

(cl IncreaseSpringy producuon and increaseLeapy price by 3.o5 per

unit:
Springy Leapy Total
Sa I gS..... t..... '........ r..'..... '.. 'r " " t t " s487,5O0 s2oo,oooSoaz,soq
Variable cost:
325rOOOunits x S.90..'....,.'.,. $292,50O
l O0 'OOOu n i ts x $1' 35.,......' r . $135,000 s427,50O
Fixed cost....... 144Jtoo 32,5OO 1 7 7 , O O O
Total s437,OOO $167,500- s6o4,5OO
CoSt'.....t...t....o....r..t"otot
tncorne before income tar.'...'..- s 5o.5oo s 32,5OO $ 83,OOO
Capitat employed: Variable $ 48,750 s 4O,OOO s 88'750
FiXed'.....'.'..' 158,OOO 81,5OO 239'5OO
Total capital employed....'..... -s2o6,75o
-- s121,5OO 9328'250

$ 5O,5OO s 32,5OO $ 83,ooo

s2O6,75O 9121,5OO 9sza,z:so
Return on capital employed'..... 24.4oh 26.7oh 25.30h

Note: Ercluding nonatlocable data understates costs and capital employed, As

an alternate solution, the nonallocablo fixed cost (S28'OOO) and capital
might bo
e mp to ye d(S 2 5 ,OOO) included in the total figur es, thus hi ghl i ght-
ing the nonadditive difficulty that can arise when full allocation is not
made to segments.
 -r
\

696 Ghapter25

P25-2
(1) Contributionmargin of sales increase
(2,4oor (3380- $7o - S37 - S3o - S4s - $rB)1........,..........s432,OOO
Loss in contributionmarginon originalvolume, arising from
decreasein sales price (15'OOO x S2O).o.......r..,. 3OO,OOO
Estimatedincreasein contributionmargin and in income
before incomotar if sales price is reduced 5% sl32,oog
(21 Contribution margin frorn sales to WindAir
(77r4OOx ($SO- 9l O.5O- $g - $t O11 .,........,.....,....r,.......,....
s374,1OO
Loss in contribution margin from loss of sales to outsiders:
Total unit capaci 75,00o
Sa19stoVtlindAir.....................,..........D,.......-... iZr4OO
Balance....,. 57,600
a a a a ta aa att aa atao aataa aa

Projectedsalesto outsiders...,.,. 64,OOO

_9,499
(6,400x ($f OO- $12 - $8 - $tO - $6)).,....,.,............,.......4 O 9 , 6 O O
Estimated decreasein compressor Division contribution
margin and in income before income tax if windAirb needs
arg Supplied....rt'.....t..r..r..r'..............o.r...r....o...'.r.r....r...r...... s 35,500
The GompressorDivision would find it desirable, from its own viewpoint,
to accept orders from WindAirabovethe 64rOoO-unit outside customer
demand level, up to its 7s,ooo-unitcapacity,becausethere would be a
positivecontributionmarginof $Zf .SOper unit.

(3) Gost savingsby using units from CompressorDivision;

Outsidepurchasepricer..............................r..,.,...., S zo.oo
GompressorDivisionbvariablecost to produce
Gl1o.5o+ $B + $10).....r.o... .rrrraraaata 28.50
Savings per unit...............r'..o.r...r.....'.',....r...r....r......,.r........r... s 41,50
Numbgr of compressor:i.........r,......,....r....,.........,....r...,,,.....,r.. r 17,4OO
Total cost saviD$s'....,..r......,rr!..,D............,...,.......r.. $722,1O O
Less CompressorDivisionb lost sales to outsiders
{614OOx $64 (see requirement2})}.....,,.......,,,,.....,,......t......
4O9,60O
Increasein income before income tax for Nationattndustries
_$312,5O0
The decision shoutd be based on what is best for the total firm. lt would
be in the best interests of National Industries for the Gompnessor
Division to sell the units to the WindAir Division. The net advantage to
National Industries is $312,5oo, as shown in the above cafcutations.
Since each division is evaluated based on its profits and return on divi-
s i o n i n v e stme n t, th e e xp e ctationsfor the two divisions shoutd be adjus t-
e d b e c au se o f th o e ffe ct o f this decision on individual divisionat per fbr -
mance.
 699
Cr.qpter25

>-5-4

(1) Basedon variablemanufacturingcost to producethe cushionedseat and

the Offics Division'sopportunity cost, tho transler price is 911869for a
1OO-unitlot or $18.69 per seat, computedas follorvs:
Slr329
VafiabteCOSt,....,.o....'....'....................'
Opportunitycost"'or""""""o"""""""' 54O
Thansfgrprice........"""'o"""""'o""'o"' 91t899'
This transfer price was derived as follows:
VariableGost:
' GushionedMaterial:
Padding.....r.............,......".-'-.-..D.r.'r 32.40
Vinyl 't......o.......r."'.""""'o"""""""' 4'0O
Totalcushionmaterial.....---r....,.'.'.. S6.40
Costincreass llO%r..-.-...r.-..'.,"..... xl'1O
I 7.04
Cost of cushiongdseat.,.................,.......,.'....'.'..
Cushionfabricationlabor cost
[$7.5O r .5 DLH]..,.......r.r.,r.,..,.......,.....,,.,......,. 3.75
Variablefactory overhead'
($5.0Oper DLHx .5 DLH)............'..........""""' 2.50
Totalvariablecost per cushionedseat....'..-r...-.. 913.2e
Totalvariablecost per 1O0-unitlot.... sl,329
'Variable overhead for 3O0,OOO
hours:
SU p pli eS .,................... '.r'.rD ...'....r'..r...,.o......r.. 42O,OOO
lndirgCt labOr ....r..'...'..r..'.ro......'..'.'...'.r........'.........o.'.. 375,OOO
. POWef aaraaaa.raaaai.aaaa..roa.arra.raroar..ra..ra....a..tttl..tt...t...ttt.tt.
18 O,OOO
Employeobenefits:
2Aohof direct labor and indirect labor (excluding
zoohof supemisors'salarywhich is a fixed cost)
(S575rO0O - (2O%r $25Or000)) ........'....'......'.'r....... 52 5,OOO
Totalvariableoverheadat 3OO'OO0 direct labor hours slEoo,ooo
Variableovertteadper DLH
35.oo per DLH
($l15ooroo0+ 3o0roooDLF4...,,...o.,.o,...,.'....'..r...'.
 \
1

700 Chapter25

P25-4 (Goncluded)
Opportunlty cost
Labor hour constraint
Labor hours to make a 10O.unitlot of defuxe office
stools (1.5oDLH r 1(x) unlts).....'.'..,........r..,.,.. 1so hours
Less labor hours to make a loo-unlt ]ot of
cushionedseats (,5 DLH x 100 unlts)......,.,,...., SO hours
Labor hours avallablefor economy office stoor ,,, J66 ho,ro
Labor hours required to make one economy
officg stool ..r.r...r..r...r..............r'.r..........r......r... .8 hour
Use of extra labor devoted to economy office stool
production(100 hours + ,8 hour)....,.D...o.r.,.,,..o. 125 stools

Deluxe Economy
Office Office
Stool Stool
Selling price per unit......,......., ,...,.,....,... ss8.50 s41.60
Less manufacturing costs:
M a tg ri a l s '...r...." '....'....r tr .........' o...........,..,.o..,..
$14.s5 S15.76
L a b o n (S 7 .5 0 x 1 '5 D L H) ,.' .....o...............,,...... 11.2s
($z.sox .8 DLH) .....,.,..o...,..,,. 6.oe
Variablefactory overhead:
7.50
4.00
s33.30 $25.76
s2s.20 s15.84
x1OO x 125
$2,520 -Sl,ggo
Opportunlty cost of shifting production to the
economyoffice stool ($Z,S2O- $t,gg0),...,...... t g4O
(21 variable manufacturing cost plus opportunity cost woutd be the best
transfer price system to use because lt woufd allow the supptying divi-
sion to be indifferent between selling the product internatlyio another
division or selting the product in thelxternal market This transfer price
method assures-thatthe supplying division's contribution to profit woutd
be the same under either alternative. The sum of fhe variable manufac-
turing cost and the opportunlty cost repnesentsthe effort put forth
by
supplying division to the overalt weil-being of the company.
appropriate transfer price must attempt to futfitf the company
objectivesof autonomy,Incentive,and goal congruence.while no one
transfer price can necessaritysatisfy each of these objectivesfully in atl
situations,the variable manufacturingcost ptus opportunitycost transfer
price should be the most appropriate method for meeting these obfec-
tives in most situations,
 701
ChaPter25

j-5

the cole Division

(rl ln orderto marimizdshod-runcontributionmargin' conclusionis sup'
silourosccoptthe contractfrom warescompany.This
portedby the followingcalculations:
Colo Divisiontransferto DiamondDivision
$4'5OO,OOO
ffi'ooounitsr$1,5oooach}..'.'....'...'........
Variablecost:
-fgrooo from BaYrside
-Purchaso Division
x
units $iloO oach)......"""""' $l t8ootOoo
processingcost In Cole
--(Crooo'unlts
Variabte Division
x$sbo each)....."""""" l'5o0'oo9 3,3OOr0OO
Gontribution margifl .'............... sl,20o,ooo

Gole Divisionsalesto Wales9ompany

each)o...............'.....-..t$4'375'ooo
Variablecost:
Purchasefrom BaYsideDivision
(3,5OOunits x $5OOeach)..,..,...."""' sl,75O,OOO
Variabteprocessingcost in Gole Division
" (3r5oOunits r $400 gachl ...."""""" l,4oo,o0o 3r15O'OOO
Contribution margiJl .."""""'o""""""""r $1,225,ooo

Conclusion:
contribution margin from transfer to DiamondDivision $1,20o,ooo
Contributionmarginfrom sales to WalesCompany"""" 1.225,OOO
$ 25,OOO
Differencein favor of WalesCompanycontract"""""""
 *{
-\
t!
i

702 Chapter25

P25-S (Goncluded)

l2l Cole Divisionb decision to accopt the contract from Wales Company is in
the best Interest of Robert Products Inc. because the decision increases
the overall corporationb contribution margin. This conclusion is support-
od by the following cafculations:
RevenuEsand cost savingsto Robert Products Inc.:
Sales by Cole Divisionto Wales Gompany
(3r50Ounlts r $1r25O9ach1................o.34r375rOOO
Sales by Bayslde Divisionto london
Company(3r0OO units r $COOoach)..... t',2oO,OoO
Cost savings (variablecosts avoided by not
accepting the Diamond Division order):
BaysideDivision'ssavings
(3r00Ounits r $30Oeach).D.,..,.r... 9OOTOOO
Cole Divisionbsavings
(3rO0Ounits r $50O each) ...ro.,..o,. i TSOO,OOO $7rg75,OOO
Erpenditures incurred by Roberts products Inc.:
Variablecost incured for the Wafes
Companyorden
Cola Divislon(3r5OO units r $400 each) $i,4oo,oo0
BaysideDivision (3,500 units r $25O
OaCh)...t....rr.or......r........o.r......r...D.....; 875rOOO
Variablecost incurred for Diamond Division
purchase from London Company
(3,OOO units r $ir5OOeach).....,.,.....,.... 4,SOO,OOO
Variablecost incurred for LondonCompany
order from the BaysideDivision
(3'OOOunits x $ZOO each).......o....o.'rjooo 600,000 7,375 ooo
PosiUveoverall contribution margin for Robert
Produgts 111G.........'....r.....'...r....r.rr,......r.,..rrr..,....r............ 6oOrOOO
$
. ChaPter25
703

CASES

c25,-1
tho
(rl The return on capital employedhas definite limitations for evaluating
performanco ol ths Dexter PlanL Too many fastors used to compute the
pon
return are not within the control of plant managemenl A significant
Uon of the "return''gide of the measunols determined by the action of
higher tevel managament-+ales and allocated costs. The plant manage-
ment appsars to have effestive control ovor only a part of the costs
incurred at the ptant levet, and the same Is true for tho asset baso.
Corporateand dirislon assets are altocatedto tho plant' In additionr it
qven though
appearsthat specific assets rnay be charged to the ptant
tho decisionwas made at a higher level'
l2l The case states that recommendationslor promotions and salary
increasesfor plant manageniare influencedby the cornparisonof the
budgeted return on capital emptoyedto tho actuai return. lt appears that
this ptant manager is reacting in direct response to this measunement
syrstem.T\ro evJnts have occurred outside his control (the sales decline
and extra tand charges|,which will reduce his return on capital employed
measure.He has respondedby influencingthose componentsof the
measurethat he controts and that will improve this measure.The
reduced costs-traini ng, maintenance,nepair, and certain labsr-wo uld
not affect sales volume in the short run. lt is also likely that reduction of
inventorytevetswill not inftuencethe sales in the short run. Through
these actions hs has improvedhis return for 2oA, but it may well be at
the erpense of 2oB, or later Yea|:i.

c25-2

(11 Tho shortcomings,or possibleinconsistencies,of using rate of return on

capital employedas the sole criterion to evatuatedivisionalmanagement
performanceinclude the following:
i") Rateof return on capitatemployedtends to emphasizeshort-run
performanceat the expenseof long-run profitability.In order to
improveshort-run profits, managersmay make decisions that are
not in the best interest of tho companyover the long run.
(bl Rate of return on capital emptoyedis not consistent with cash llow
modelsused lor capital oxpenditureanalysisand, therefore,ffiaY
not be comparabtofor divisionsthat uso different accountingmeth-
ods or that havo assetspurchasedin different periods.
(c) Rato of return on capital employedmay not be controllableto ths
same ertent by all divisionmanagers,i,e.,the divisionsmay sell in
differentmarketswith different degreesol product development'
compeUtion, and consumerdemand.
 t\
:V
*-\
a
:

704 Chapter25

C25-2 (Concluded)

(d) The use of a single measuroof performance,such as rate of return

on capital employed,may result in a firation on improvingthe com-
ponentsof the ono measureto the neglect of needed attention to
other desirable acUviUes-research and development, employee
development,and improvementol market position.
l2l The advantagesof using mulUplemeasuresii evaluatingdivisionalman-
sgement performanceincludethe following:
(al Multiple performancomeasunesprovidea monecomprehensivepic-
ture of performanceby consideringa wider range of management
responsibilities.
(b) Multiple performancemoasunesemphasizenonquantitativeas well
as quantitativeaspects of performance,thereby providingan incen-
tive for divisionalmanagersto engagein desirableactivities,such
as, researchand development,employeedevelopment,and
improvementof market position,as well as to seek profitability.
(c) Multiple performance measuneswill mitigate the problem of trying
to compare divisionalperforrnancewith a single measunethat may
be computedon different basesin each division.
(d) Multipleperformancsmeasunesinclude long-term as welt as short-
term incentives,thereby emphasizingtotal performancerather than
just short-term profit maximization,
(3) The problems or disadvantagesof impfementing a system of multiple
performancemeasuresincludethe following:
(al The measurementcriteria are not all equally quantifiableand, there-
fore, it may be difficult to comparethe overaltperformanceof one
division with another.
(b) Centralmanagernentmay have difficuttyapplyingthe criteria on a
consistentbasis.Some criteria may be subjectivelymore heavily
weightedthan other criteria at different points in time, and some
criteria may be in conflict with other criteria.
[c] A multiple performancemeasurementsystem may be confusingto
divisionmanagen;,thereby resultingin diffusion of effort and insta-
bility in performance.
 705
i cnapterzs

,3

(r) (al Avorage oporating assets omploved:

Batance at 12131120F"""" """r" $12,goo,ooo
/ 1'05)" I2TOOO'OOO
Balance' at 12131l2OE (512'600'000 " """'r
BeginningPlus ending balances $24r600,OOO
Average batanco ($24'600'000 * 2l' $t 2,3OO,OOO

Rate ol return on Ineometrom operationsbeforetaxes

capital emPloYed @issetsemPloYed
$2,460,0OO
$lZrgOo,ooo
= 2ooh

(bl Income from operations bgfore taxgs o,..il.'D.."'r.rt'..'. s 2,460,000

Minimum return:
Average operating assets employod $12,30O,ooo
Ghargefor invested capital '..--...'...'.. x 15oh 1r845,OOO
ReSidUal inCOme...rrr..or...rr....rr..o..........r.o........'.r.'..... $
#=:
615,ooo

Yes. Presserb managementprobably wOuld have accepted the invest'

ment lf residual income wenBused. The investment opportunity would
have lowered presser's 2OFrate of return on capital employed because
the expected return (16%) was lower than the divisionls_ historical returns
(f 9.3% to 22.1o/")as well as its actual2OF rale (2Ooh).
Management
reiected the investment because bonuses ane based in part on the rate
of return performanso measure. lf residual incomo weno used as a per-
formance measuno(and as a basis for bonusesl' managemont would
accept any and all investments that wsuld incroase rssidual income (i.e.'
a doliar amount rather than a pencentagel,including the investment
opportunity it had in 2OF'
(31 presser must controt atl ltems related to protit (revenuesand expenses)
and investment if it is to be evatuatedfairty as an investment center by
either the rate of return on capitat employedor the residual income per'
formanco measunes.Presser must controt all elements of the business
except the cost of invested capital, which is controlled by Lavvton
Industries.
 :-\
;f

706 Chapter25 i

c25-4.

(r) ($oOoomitted)
Marine Airline Plastics
Divisional plofit......-...r.............orr.....o.......... $ 5 , 1 O O S 1 , O 5 O$ 9 , 3 6 0
Add corporate headquarters allocatiolt ...... 3,4sO lfsq s70
Adiusted divisional profit j_gg gr,r* $ r,ro
Divisionalcapltal employed. s2O,4OO s5,0OO S36,OOO
Deduct corporate headquarteni allocaUon 970 252 941
Adjusteddivisionalcapltalemployed.......,. _9!9,430 g!,?49 J35,999
Adiusteddlvlslonalrate of return on capltal
employed _!:q"n_ _ 47% ____Ze%
Adjusted divisionalpro _$
8,550 $2,235 S 9 ,930
Less 20oh of adiusted divisional capital
employed(minimumlevel of income).. 3,886 950 7,O12
R e s i d u a l i n co mo -gl'664 sl,285 S 2,918

t2l All three divisions have a reported rate of return on capital emptoyed in
oxcess of the 2Oo/o target rate. However,Marine Division management
apparently turned down its Investment opportunity because tho invest-
ment had a lower rate of return than the division (24ohfor the investment
yersus 25ohfor t:lls division|, which if accepted would havE lowered the
divisionb rate lor the year, thereby lowering the annual bonus. Similarly,
Airline Division management appears to have avoided fleet replacement
tor the samo neason(i.e.,fleet replacementrEturn is 16% versus 21ohlor
the divisionfor the year).Plastic Divisionb managementhas achieved
the marimum bonus allowableunder the current bonus system and
therefore had no incentive to increase profit (which may have been
viewed as something that could simply increase next yearb budget). The
levised liguras indicate that all three divisions are performlng welt; how-
ever' Marine Division's residual income is greater than the other two divi-
sions combined.
(31 Airline Divisionls making an adjusted profit of $2,235,OOO and residual
income ol $1'285'OOO. The adjusted rate of return on capital employed is
47oh,which suggeststhat the target rate should be rovised in order to
properly evaluate it. Nevertheless,since the division is achieving mono
than double the present target rate of 2Oohand more than either of the
other two divisions, it appears to be a very good investment. Howover,
fleet replacementshould be examinedalong with the computation ol a
new adjusted rate of return on capital employedand residual incomg,
Assumingthat the $25,OOO,OOO capitat investment does not inctude any
corporate headquartersallocationand that the otd fixed assets have a
book value equal to market value,tho recomputationfollows:

n*^
 707
Chapter25

-4 (Concluded)

lnCfgm gntal diViSiOn pf0fit o........'........r......r..'...r'...."o""' $ 4,ooo,ooo

135,OOO
Add COfPOfato he adqUafte fS all OCaUOJl'....',"""""""oo""
AdiU5tgd InCfgmental diViSiOn pnOfit r.'...r..............'......." $ 4r135,ooo
Ad-dadiustod divislonal profit without fleet replacemsnt 2,235|OOO
Adjusted divisional profit with fleet replacefllsllt'..i.....'.. $ 6,370,000
DiViSiOn CUfnont aSSOt3...r'..-o.....r.'..t............t...t.......tttt"t
$ 2r748,ooo
DiViSiOnllXed aSSOtS (tleet feplagemgnt COSI}""""""""' 25,OOO,OOO
Adtusted divislonal capital employed with fleet
nOplaCOm€J1t..r......-........D.....r.ro.oo..r.............tt........t..... E?ulgfoo
Adiusted rato of noturn on capital employ€d"""""""'ro" 230h
AdjUSted diVisiOnal pfOtit'.......r"..r.o'.....'.,'.ro....D.'..........dt$ 6,370,000
Less zlohof incrgmgntalcapital gmploygd'.'................. 5r549,600
AdiUStgd InCfgmgntal fgsidUal inCOme..'..'......'.......r.o..o..s__82o49

Even when adjusted, the rate of return on capital omployed is above

the corporatetarget level and the incrementalresidual income is posi-
tive. Furthermore,assuming that profits do not fall in the future' the
roturn on assots employed should rise in the future because the amount
of assets employed witi Oeclinodue to depreciaUon.As a result' it
appoansthat from a quantitative perspective tho airline should not be
soid. Nevertheless,the investment required to replace the fleet should
be evaluatedusing ono of the capital expenditureevaluationtechniques
that considersthe time valuo of money (e.9.,the net present value
method or the discountedcash flow rate of return method).
Frorn a qualitative perspective, factors such as spill-over businesst
offering a futl line to customers, ulUmato profitability vvhenthe economy
improvls, possiblo advantags to a competitor from tho sate of the divi-
sion, €tc,, may override quantitative analysis.
(41 Tho bonus schemo should bo basod on nesidualincomo rather than rate
of return on capital employedin order to avoid the problem of manageF;
making suboptimal decisions from the corporationb overall perspective.
(5) The divisionalperformancemeasuresshould be computed without allo'
cations of corporate headquarters costs or assets, because such alloca-
tions are arbitraryand divisionalmanagerscannot control such costs or
the uss of such assets.Also, capital investments(such as the ones faced
by the Marine Divisionand the Airtine Division)should be evaluatedby
using the capital budgetingevaluationmethods (such as the net present
value method or tho internal rate of return method)'
CGA-Canada (adapted). Reprint with pei-mission'
7

708 Chapter25 i

c25-5,
.
(l) Generaf crfteria that should be used in selecUng psrformance measunes
to evaluateoperatlngmanagorsIncludo tho following:
(al The measunesshould be controllableby the manager and reflect the
scfions and docisions made by the managor in the current period.
(bl The measunesshould be mutually agreed upon, clearly understood,
and accepted by all the parties Involved.
(c) The measunosshould (ll reward long-term performance; (2) tie
incentive compensation to achieving strateglc (nonfinancial)goals,
such as target market share, productivity levels, improvement in
product quallty, product development, and personnel developmeng
and (3) evaluate opsraUng profits before gains from financiaf trans-
actions; before deductions for approved erpenditures on research
and development,quality fmprovements,and preventive mainte-
nance;and before deductionsfor the ifcremental amount of accel-
erated depreciation,
(21 A major expansionof Star Paperb plant was compfeted in April, 2oA.
Thls erpansionincluded addiUonsto the production-line machinery and
the replacementof obsoleteand fully depreciatedequipmenl As a
result, the value of the divisionb asset base increased considerably.
Whlfe productivity undoubtedly increased during the first year in the
erpanded plant, the increaso was not immediate nor sufficient to offset
the Increase In the value of the capital employed,
.Apparent
(3) weaknesses in the performance evaluation pnocessat Royal
Industries include the following:
(al There was no mutual agreementon the use of return on capital
employedas the only measurementof perforrnance.
(bl The feedback from Fortner was insufficient Fortner indicated that
Harris would receive feedback about the questions raised concern-
ing the appropriatenessof using the return on capital employed to
evaluate performance, but feedback was not prtrvided.
(c) There is only one single measureof performance that may give a
distorted picture of actual performance at Star Paper. A single rtoa-
suro could oncouragedivision managementto make decisions that
could lmprove short-run return at the expense of long-nrn profits.
Examplesinclude deferring maintenance,avoiding plant moderniza-
tion, eliminatingemployeetraining, discontinuing research and
development,etc.
(4) Multiple performanceevaluationcriteria woutd be appropriate for the
evaluation of the Star Paper Division. The criteria suggested by Harris
take into account more of the results of the key decision being made by
the manager'angnot in conflict with each other, and emphasizethe bat-
anco of profits with the control of current assets. These thrse measunes
are controllableby division managersand, in conjunction with return on
capital omployed,provido a monocomplete picture of business success.

\*
 25
.Chapter 709

,-('
(1) The 2oB bonus pool availablefor the managementteams of each division
follow:
Meyera Service Company
Bonus Pool = l0oh r income belore income tar and bonuses
= .1OI S417,OOO
= S41r7OO
Wellington Products lnc.
Bonus Pool = loh r (Revenue- Cost of Product|
= .01 I ($10,0001000 - $4,95010001
= .Ol I $5r05Or0OO
= S50'5OO
(21 TVyoof the advantagesand two of tho disadvantagesto Renslen Inc. of
the bonus pool incentiveplan at Meyers SeruiceCompanl follow:
Advantaoes
(al The managementteam will bs moUvatedby tho bonus plan because
they have the opportunity to earn addiUonalcompensation lf they
work hard as a team and take some risks for the company.
(bl Becausemanagementsharos in the benefits of efficient operations,
there is an incenUveto control all costs (product costs as well as
overhead costs) and to promote sales.
Disadvantaqes
(al The plan may rnotivate managementto increase tho rbottom line"
only and concentrate on the short run. The pfan may encourage
managersto sacrifice quality or avoid new product developmentfor
the sake of curent profits.
(b) Managementmay postponenecessaryexpenditunossuch as main-
tenance or nessarchand developmentin order to increase currsnt
net Incomo.
TVvoof the advantagesand two of the disadvantagesto Renslon Inc. of
tho bonus pool incentivoptan at WellingrtonProducts Inc. follovn
Advantages
(al Tho managementteam will be motivated by the bonus plan because
each managerhas the opportunityto earn additional compensation
by working hard and taking some risks for the company.
(bl The managerswifl be encouragedto sell the most profitable mix of
products.
Disadvantages
(al The plan omits accountabilityfor all costs except lor production
costs. Therefore, manager:i may leel no obligation to control the
costs that aro shown below tho gross profit line.
(bl The ptan may cause managersto focus all energiesto maximizing
currsnt sales and production regardlessof the impact this could
have on the manufacturingplanL There is a strong motivationto
defer maintenance,employeetraining, quality improvement,etc.,
becausethe incentiveis to producoand sell high volume.
 7lo Chapter 25 :

C25-G (Goncluded)

(3) (a) Having two differont incontive plans lor the two operating divisions '
coutd result In behavioralproblems and may reduce teamwork/syn-
ergy between the two divisionsif the managers of either division
believe they are belng trsated untairly. '
ThemanagementteamatMeyersServicomaybe|ievethatthey
havo to work harder to achievetheir bonusos because they are
responslble for all costs and must achieve overall efficient opera-
tions to earn substantialbonuses.
The managementteam at Wellington Products may believe that
they have less of an opportunltyto affect the size of the bonuses
they receive becauseonty changes in sales and/or product costs
will increaso the gross ProfiL
These perceptionsof Ineguitycoul4lead to decreased motivation
that could'result in decreaseddivisionalperformanco,
(b) In order to justlfy having dlfferent IncenUve plans for the two divi-
sions, Renslenmanagementcould argue the foflowing:
(f l The goals and products of the two buslnesses are different
(one is a servlce organizationwhile the other is a manufacturing
organizationl and, therefore, should be measured on different crite'
ria. For example, the control of manufacturing costs and improved
productivity may be the most important factor in maintaining
Wellington Prcducts'competitiveness, while lt may be critical for
Meyers Service to control all costs to maintain profitability.
(21 The plans wenoIn place when the businesseswere acquired
and had proved satisfactory previously.

\
 7fl
Chapter25

'>-7

prob'
(rl ln termg ol what is best for the total company in the long run, omar
aUtygt,ould not supply Defco with Electrical Fitting X1726for ths 55 Per
unii pri"". In this ;s;, I appears that Omar and Defco 6erve different
oper-
miriets and do not represent closely related operating units. Omar
inter-
ates at capacity;Defco does not. No mention is made of any other
is probably bet-
divisionatbusiness, In the long run, Gunnco Gorporation
ter served lf omar is permitted to continue dealing with its regular cus'
tomers at the market price. lf Delco is having difficulties, the solution
p-uiury doeg not lie with temporary help !f" sxpenso of another divi'
"! purposed
iion, *ttos" gales to regular custorners could be lost' The
greater long-
courso of acuon should not be toltowed unless it will yield a
run pront for the total company (Gunnco)T"n will any o-theralternative. '
l2l Gunnco would be $5.5o better oif, in the short run, if Omar supptied
Defco Electrical Fitting 11726tor $5 and sold the brake unit for 949'5O'
Assuming that the $s ier unit for fixed factory overhead and administra-
Uve erpensos r"pr"r"nts an allocation of tho costs Delco incurs, regard-
less of the brake unit order, Gunncowould lose $2.50 in cash flow for
oach fitting sotd to Defco, but would gain $B from each brake unit sold
by Defco.
(l ln tha short nrn, there ls an advantagoto Gunnco of transferring
Efectrical Fitting 11726at the SS price and, thus, selling the brake unit
for $49.50. To ilafe this happen, Gunnco witt have to overrule the deci-
sion ol Omarb managomenl This action would be counter to the purpos-
es of decentralizeddecision making.lf such action wens necessaryon a
regular basis,the decentralizeddecision making inherent in the division-
aliied organizationwould be a sham. Then the organizationalstructure is
inappropriatefor the situation.
On the other hand, if this is an occurnenceof relative infrequency'tha
interventionof corporate managementwill not indicate inadequateorga-
nizational structuro. lt may, however,create problems with division man'
agements,tn the case at hand, if Gunnco managementrequires that
Electrical Fitting 11726 be transferred at $5r the result will be to
enhanceDefcob operatingresutts at the sxpense of Omar.This certainly
is not in keeping with the concept that a managerb performanceshould
be measuredon tho results achievedby the decision he or she controls.
Omar is operatingat capacity and wouid lose S2.5O(S7'5O- 35) for each-
f
titting sold to Defco.The managementperformanceof Omar is measured
by reiurn on investmentand doitar profits. Sellingto Defco at 35 per unit
would adversely affect thoso performanco measures'
7 =
.,h

Chapter25
712

c25-8

(1) Thc Lorar ElegtricCompanywlll earn higher profits lf the necessaryint.

gratodcircutts$Cs)aro sold to the SystomsDivision rather than to regu-
lgr customors.Ttrelimprovedproftt will be $l.OOper clock systemas
rhown belor*
Contrlbutlonmargln from clock gystem:
Propogedgalea prlcc rtattaaaaaa $7.50
Less varlabloProducUoncosts:
Intcgratedclrcutts 1C378(5 O S-f q ..-.-.-..-' $ '75 i

Outsldcoompono11t8 "...."........."'o""""""" 2.75

Clrcuh bOard otchlng.'...D.....D...'.......oD."'.."' ,40
Argemb$ tesUng,iackgglnlf"'.'.-..'F......-- 1,35 5.2s
ContrfbutJonmarginpor'unlton clock system s2.25
ContrlbutionmarginforgoneIn DevicesDivision:
Salgg price of lC 378..........',..r.',....o..'.......'D.D.. $ .ao b
'r-.
Variablg production costs..'.'r....D..'......-.'.'.,..... ,15
CorrtrlbuUonmargin per clrcult...Dr.D.'..o..'...'.'.. $ ,25
Unlts tor clOck Eystem....r.'F"...'.'......".o.'D....... r 5
Contrl b utl on m a rg| !l Io9t..'.-.......r..r.......oo..r.'.... 1,25
Net advantagcto Lorax Companylf clock system
le producgd by SytstemsDlvlsion..r""..D,...r'....r :
$l.OO/unit

f2) lnteruention by cxccutivo msnagsment generally ls not advisable' oxcept

In unugual clrcumstances, becausc h takes aytay the delegated decision
powor glven to dlvision managementand influences the measunesused
to ludgc the pcrfornancc of dlvlsion managemenl h conflicts with
Important objectivce of decentralizaUon-division auton o my ovor o p erat-
Ing declalons and doclslons made by those closest to the operating
rccnc. Such lnterfercncc cgn rcsult in lower moralc and poorer perfor- a
mancc by dlvlslon mansgement because they will be evaluated uslng
moaauncsthat arc not substantlally within their control. However, a divi'
clon should ns,tbo allowed to make a decislon that ls not in the best
Interest ol thc total compsny oyor tre long nrn.

; f3) Thc descrlbed policy would avoid the need lor lntervention by erecutive
msnsgsmont or an arbiffiion committee, Howeyer,the polisy is undesir'
i
abfe becauac other unfavorable consequsnces outweigh this benelit.
With thc described policy, there would be no analysis to determine the
most profitable use of an ltem raquired to be transferred at variable cosL
In sddltion, e division managerwould have less control over the divisionb
operaUons,and there would be an "uncontrollable'influencoon the
managerbporformancomoasure;this could result In lower moral tor
msnagora.