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Solution Manual Cost Accounting William PDF
Solution Manual Cost Accounting William PDF
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Tnblgof Conrerur
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
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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
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CHAPTER 1
DtscusstoN OUESTIONS
corlr: irturr cgrtrol taPortt; Ptaprt.t cort
Ot-1. Plrnnhg ir hl drvobprnrnt of e cqrrirron rl
by dudier tor plrnnhg end d*irbn tridhg; rnd
of eglbnr. taaoutc.tr md mer'ur'm'ntt
of obi'cilivtt cm b' coordinrt.t cott rnd budgrt drte wilh olhrr
which thr lchirvrmrnt
Pbnnhg trkor hto eccornl thr irtrr' cr.trylnril.
a.r.$.d
Etitlt botwren thr orgrni:atkxr errd itr rnvi' O1.7. F Pdrrct roorrdr rnd derign, thr rrrnufr'
Urhg cbperirr|.ntr nord ortinrtd cl nrlrrirl.
tqln nl ir whrt'l|r b b br donr'
Cqrtrol ir thr preolr by which trlrnrg"r hbor, rnd rtrrdlirr PtE.3l] str; lor m.'ruting
grutl lhrt rr6urcrr rta obtrir'd rnd urd in srd officirncy ol rchrduling. producing. rnd
rn ollbbnt and .ttactiw ttlrnn.r !o crtty ot',l ttrt htP.siing pmductr, tho drprrtm.ntt n'od lo
pbn rnd rccornglirh thl orgrnizeti'cri'! obi'c' bd |ha codt irun d. Thr plr:anrl drprrr'
tnlrt rrrpplba mpfoyror'wrg. r.1.3- Thr trs'
tivor. Cotrtrol inpliot thrt prrlocnrrc' 'tr{lut..
|Ury dfrytm-t n..dt rccounting, budg.lrlg.
tn.ntr rto rrvilwod to drt.rmin. if corrrctivo
rtbn ir nquircd rd nhtrd rlgo.tr h rhrduling culr roqur'
Plennirg rnd cantrol rn htrnrbt'd' Canttol tnatrtl. Tho rnrrtothg dlgertmrnl n.'dt cott
out wilhh thr ortlblirhrd plrnnhg irlsnrtirr h riting prE.t. Tho ptblic rrblitu
ir crrrird qr Ptc... r'F'.
tnrnrworl elrd rrrrrr !o ovrludo enfqnrrrcr dagrtltn-n nreir'hfornrtbn
obieclivor rto PtoaL, end divUrndr h sdrr to infotm thl puts
b th. Phn rc ttrd o,Fnirrtisd
rfiirwd. Ia Tha Lgal'dapstrnrnt noods st hfo'mrtbn
br frqirg rrny dteirs ol thr snpany h can'
Of -2. Shod.rrrge plenr ucully d.d with r plrird of e
qu.ttar or I y..1, while long[nga plmr ururlly b.mfy wlh lhr lrw.
Ol€. ltodrm trctlrluor h csrrnunrcatlcnt giv. th'
covrr thr.. to livo yern. Shon'rrngr Pbnt |''
d.tdl.d rnangh b prrmit pnprntin of e csn' contrdbr end rntf lh. m.ant to tnnttnil hfor'
mdin in thr torrn cl cruttr. sutye.t. end foo'
Pl.l. l.l of finrnchl rtrt.moritt u cf r lulun
dd., tiilb bng'nngo plenr cubnindr h r wry crtto in r wry ntvrr bdorr poriblr' Profit
turnrnrrizrd rt ol lrpoc{rd ruultr or t hw 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
qurrditie<! obiostivtr, lrdr u firrtcld rdbr. drbyrd or misrd rntiroly bxaurr ttn'ly hfot'
Ol-3. Lorg.rrngr plrnl contrh quenlitalive rtlultt' tilli*1 thrt mi!fit frrvr imprw.d lh' cosl 'nd
wtrilr rtrdogtc ptrnr rn tfir l..|t quryltiti.bl. cil prolit poitbn of thr cornpeny w.s poorty cdtl'
r.[ pbnr. Lary'nngr plrnr urudty lrlrnd lhrco mr,'rEsiad.
to tivo yorn hto tho futsrc, wtrib rlntogb pbnr Ol-9. Thr budgot ir rn oclonlbt colt plennrng tool
tily csrlomPbta thodar fi much longnr prri' brcaser it (r) lupplilr hfonnation and lrrvrl
odr. tmgFrrngr plrnr covrrirg r throo'lofivr' rl e rtrlderd of prrlormarc. lor c€t cdtttol by
yo|r poricd would br ytgr'd.vrty lht.. lo thr luprrviroc rciponriOto lor cg (b) ptwitor
fivo yln, or might br ryrtrrnrlialty updetrd Jr ..tt mrthod for enticipeting prolitr rt rn
reclr you lo mdnlrh I compbtr pbn, wtrilo $ticiPlt.d nlor'bvol; (c) hrlpr in foncarling
rtntrgic plrnr rrc lofirrbt.d rl inrgub irlrr' trbl, cotl3. rrponra3. and pro{ils lor t pricd
vrb by en crmtLlly myrtrmrtic Prcort. of orc Yorr or rrlr. h rdYs'tc..
01-4. Accounlebility ir klmticrl with ruPonribilily Ol-tO. Thlr dendudr rill not nocr*arily bo rbb lo
pt.vonl rilntg.m.nt ftrud' but th'y do give
rccounling. Accosntrbilily dmlr with lhr dir'
inttnrrl accounbtrtt scnr guilanct on how lo
c|rrtgo of gr irdivitulr rrrponrltility to echirvr
urignrd otrirctivu wibh hr e*l md .rP.ns' preerd il thry rncountar ! qu'stiaublr prr'
.. dbrd fot.ito prdonnmcr end egrord to by ticr.
or
thr irdivilll 01-ll. CASB rtandard$ (l) rnuncialr a principlr
01 .5. Thr cqfrolbr 6o nct ccnllol. bst ri! lh. csr' pnrriy'rl lo b. lollow.'{ (b) Glablbh Prtdictt
trol tut of tht mrnrgorirl lovrll by irruing is 5rj rpptiod; (c) rpcfy crilrrie to br ornpbyrd
' ttpodt pohthg out dcvielisc lrqn thl prcdctlr' h rlcthg lrqrr allrnretivr principbr rnd prl:'
min d courta oa &iim. t!.! in orlinrting rccutnubtng, end rcporrr'g
Ol€. Thr st d.plrtrnoflt ko.pt d.teil.d ncordr ol cgltrrst cosb. Th. tttndatds at' btcktd tsf lho
.nattrdr. lrbor, lrsfory ovorhoad, |rld m..k.t' lutt torc. trld .l{.ct ol thr tew.
hg rnd tdnhrttntiva axpon3.t: analyrs tirrr
Chapter 1
. EXERCISES
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
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. 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.
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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
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.!
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l> Chaptert
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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
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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
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I\- Chapter t
t t
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i C1-4 (Concluded)
calcutate the percentage increase being budgeted and compare it with
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according to the second sentence of the case'
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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
I
I
S.
II
L
I CHAPTER 2
l-
DrscussloN ouEsTloNs
I
13
Chapter 2
14
L Cluptar 2
t5
@-17. (r) Cepital expcndilunr are irdended lo beno. arnounlr until thc improperty capilalized
I lil nprt Oran ql. accounting pcricd. Thr ilom has bocn canplelely writlcn ofl.
! (c) Tho basic critrrkxt for classifying eutbys
oxprndiluru rhould lhoroforr br rccordrd
by e cfrargr to an ac!.t ac@snt for dls' er rovonu. or capital cxpondituros is the
I
tin !o thc periodt bcncfiled. prriod of brncfit. Thr amount ot detail
I
Fbvrnuo cxprnditurcr brncfil thr n.cossary lo mairnah subsUiary rccotds.
L oporationc of |hr cunrnt perird mly. Thry tfu rratcriality of lho ctgrnditurcs, and thc
rhould bo rocordrd by chargrr lo thr canrirtrncy wilh which vari<rur crprndi'
I appmprialr ctp.ilta accounts. turu roc'rrtftun period lo pcriod arc dtlr
i
! (b) It e ccpilal elgcndituro ir irnproperty clar' crileria generally eqrridered in ertablish'
rifird ar .n axpantc' 8tlelr, rrtainrd h9 a capitalizatbn poli;Y.
oamings, and hcsnr for thl perird will bo Firmr lnqurntty ortablirh ctt stbiltary
rrnount bckrw wtrich all oxpendilurrts ate
Is undrrstEted. In future pcrids, hqnr will
br overstaled by any arnount thst would oxpenscd, inespectivr ol their period ol
havr bcen arrpdiecd had thc epcndiluro benefiL Thr level at which thb arnount b
born proprrly capitalizrd. Anrtr and rot b dctrmined by itr materiality h rrb'
I rrtained eamings will bo undersialod st tirr to the rizr of hr firm. The obirtivr o{
tr tulurc balanc. !h..13 by ruccoraivrly sucfi a policy is to avoid lho rxpcnso ol
rrnaller amounts unlil the erct ha! becn maintaining exccssivcly detailed sub'
fulty countebalrnced. rUiary rccordc. E:genditurer for iternt thal
II
!
t
I
\,
I
b
II
t-
Chaotar 2
t6
gERCISES
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
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
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:
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
\,
I
Chaoter 2
t8
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,
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)
II
L
L
2l
L Ctuotar2
CASES
L c2-1
! (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
For an order consisting of one glass of orange iuice, the profit margin will
afso be 75oh,calculated as follows:
(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
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
25
26 Chapter 3
03.10. Hotuoscodssttcitymcrn:i t|d tha distibulbn ol malt tnd coflfidcncc intervai cstimltes. blsed
observationsaroundthc rogrcrsionlinc is not on thc Etandlrd olrotr atc unrcliabb molsuros.
unilormlor dl valuesof thc indcpcndonlvari- O$12. Muldcollinaarity moatrs f|at two or moro of tho
able. tf hetaroscedasticityb prcocnt. thc den- Indcpendent veriables in a mutliple regrassion
rlard eror of tp Blimde and confdcnct intlr' andFb aro conohed witfi one anodtor. When
val catitnd63,btsed on thc Etmdsrd 3fior, lre thc degrcc of multicollinearityis high. the rela.
unreliabhtnolsuros. lionship bctlloon onc or moro of tho corrol8led
03-11. Serialconeladonmourt thd rdtcr tlun bcing indcpcndont vadables and the depondonl vati
random,the obsenralionsarcundthc rcgresion ablc may be obscured. However, this circum'
line are conelatedn'l$ onc ltlcfficr. ll ecrid col' clt lcc would normdly not aflecl the astimate of
relationb prssctlt thc stlrrtttd cnor of t|c 6ti' 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 $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 - -
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
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
E3-8
ra = (.9497F =.9O19
(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
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 $13O,OOO
E3rlO
il(v r - y'r)'
6 t -
n -2
.;- r ( x r- , ) '
Y t - t m X S r i l + :n
I >(x,-i)t
. . (t'uotlu;#?oo
)'
ssoo=(t.tztXsoz
){, #
S5oo- (1.771X$ez)ffi '.
35oO; (1.771X$62
X1.1547)
$ 5 O Or $ 1 2 6 . 7 9
33
Ctvptar3
lb
PROBLEMS
P3-l
P3-1 (Concluded)
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
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
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
, - 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)
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
I
I 39
L
Clwter 3
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
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
8 t - Column 5 total -
12-2 !+ff - sz'.zs*22
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 - $345 llxed coat por month
!
I
l-
I
I
E
Clupter 3
12
P3-5 (Contlnue{)
I P3-5 (Continued)
S
(Zl The coefflclent of coretatlon (r) and tlre coefficlent of determination (rz)'
t
I
uslng data from the requiromcnt (lXa) answen
x(r, - ,)(v, - Y)
!
- -
c o t u m n6 t o t a l
I r - x)'>(v, - y)' . ' / ( c o t u m n5 . t o t a l ) ( c o t u m n7 total )
E
l:(t
3'45o'ooo -@
.l 72r92Or0OOrO0OrOOo
L 3r+50,O00 '
'9598
I 3r5g4 r44g
b r2 - .9212
I
I
b
(3) The standard error of the estlmate:
r3-5 (Goncluded) ,
4)The9o%conffdence|nterua|fore|ectr|c}tycosilsat2'oooguestdays
would be:
ooo - 3,5oo)2
)f * #,
(t.atzX330.75 * tz, 34,OOO,OOO
))
(sg{s+ ($.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
I
I
g
I
Chapter 3
P3-6 (Continued)
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
( t - f) ' =
a + D x * tesst"' .,/.t* * *
I
Y " >(r-i)'
b
I $48o.25 * (2.zza)($e,ozz)(t.oos)
$48O .25 * $2O.58
P3-7
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 -
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
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)
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)
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: slstomenl and shown in the statemont ol
(a) Direct nraterblg reqtbn nrtained eemings. However, the effec-tof nmre'
(b) Direct lsbor ceclbn curring and nonoperaling transaclions is not
(c) Frlory ovefiead entirelYeliminated.
(O Work h Pr@oer hventories lnfonnalion revoaled by a serios of income
I 3tatcmentsb morc rignilinnt in iudghg eaming
(c) Fhbhed grood hvmtorbr
iho bahnc" rhoet ir t 3tal.ment ct finsncbl power than informatbn revcaled by ane hcqnc
*2.
pcrttbt; the hcqrr ctBternont b a dalement of statcmstl. The incqne of a bushess rnay folbw
sttYity. The incqne lbtement is ccnplementary or .Yen exaggetat€ the ups and downs ol the
to thc babnce sheet, munthg in padicubr for bueinesgcyclo and, therefore, lhe inccne of any
tho ctrange in hr prcprietary equrty Bs a resull crc year will ncl representeaming powor.
of operatims during the year. In |hat respecl' the Changes in law or local zoning ordinances
incornc atatemenl ir eeaentiallynothing more may result in a marked change in lhe eaming
than a major rection of the retained eamings powerol a bushess. Ukewise,changesin public
accounl. Thereforc, tht rsvenue and expense taste, devebpment of new prodtrts' apPgarance
accounls in the income 3talemont have been ol new conrpetilion, acquisition ol subsiJiaries'
lcrmed'cxplanatoqf ac@unl3, explainingthe changes in management and lhe like, all may
cbb and lkrw of r.YcnueE and cxpensee lhat change earning power and yet not be clearly
bod to thc new hcqno (or bce) and to the new rellecled, il reflected at all, ir one incorne stale'
rrtahed camhgs balancc h the balance sheet. menl.
O4-3. Thr ordinary babncr rhecl and incqne slate- The accounting use of historical. rather lhan
menl aro htended to ptwkJe hlormalist as lo curront, dollars in measuring depreciation and
financial peilion and resulb of operation of a cost of goods sold may resull in distoding any
burinesl, in sctordancc wilh several assump' view of earning power obtained frorn a single
liqs that arc made h preparhg |he stalements. incorne statemenl.
Frqn the standpoinl cil the criticisms rnade, the ln regnrd to plant ass€ls, il can be said lhat
most important cil these assumptions are lhal their value to a going concetn is usually depen'
cocl lost appropdale arnortization of cost mea' dent uPon the eaming power of the business.
rurca unelgired cct, and that a business mey Such s value is not necessarilythe same as lQ'
bo a$umod lo bc gohg to conlinue operatbns uidation value, cost, cost legs amortization.
indclinilely into lhe future. Accountingstate- repbcement value, or any other kind of value'
mcntg sre usually prepared on lhe heory lhal a The phrase.true value'has no definileconnota'
cale or gome other definite event is essenlial tion.
bcfore revenur is recognized.Basically,the O4-4. Actusldescribes the way cosls are measured.
aseot sUe of a balancc aheet coctaha a preson- i.e., at actual historical arnounts; /ull absaption
tstbn o{ the anrounts cl cost incurred, which can describos which elemenis of cost are allocaled
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 to hvenlory accounls, i,e., all elements of rnanu-
incornc slalement presents the srnounl of rov- lacluring cost are fully allocated to hventories;
cnue recognizedas having been realized during p/ootss describes how cqsl infonnation is accu'
thc period, less the podioo cl all cosls incuned mubted, i.e., costs are accumulatedfor each
thsl doe3 not appear to be lairly delerrablelo procossor deparlment in the laclory.
'I ftnurc perinds. O4-5. Prime costing systems albcate only lhe prime
Thc ircome staternonl is prirrnrity a m€asure costs, direct material and direcl bbor, lo hvento-
cd what lres been camcd, and not a measure of ry accounts. Direct costing syst€ms, abo called
'camhg power.' variable costing syslems, albcale the variable
For plant assots, the balance
rheot b pdnarily a rnasure cl accountabilityfor manulacluringccts, direcl materbl, direci labor,
cxp.nditureE,rhowing acguisitioncosls lees and variable factory overhead lo lhe inventory
codr sllocalod to past operatbns. This rneasure accounts.Absorpticn costing systems albcate lo
of accounlability may br quile diflerent from Ilvenlories parl or all of tixed frtory overhead,
1rur velue.' in addiliooto all varlrble manufacluringcosts.
To hcreese ilg usefuhess as one elemerd in 04€. Actual costing m€asuros product costs at actual
judChC eaming porver, the ircsne stalement is hislorical arnounts, while standard ceting mea-
picparcd with a dietinclion between operating sures product costs by ueing predetermined
and nonoperaling items. For the samo roason, arnountsol resourceg to be coosurrnedand pre-
c.rtain iterns may be climinoled frorn the incorne determinedpriceso{ those resources.
ChaPter 4
62
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
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
E4-S(Concluded)
(g) FactoryOverheadControl.."""'r""""""""" l8,ooo _
AccountsPayable...........,.............."""" 18,OOO
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
(bl 17,5OO
' 17,5OO
(c) 1,800
1,800
(d) 27,OOO
Accrued Payroll.....,.'...... 27 |OOO
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
PROBLEMS
P4-1
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
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,@'
Letx = directlabor
1.5r = S24O,OOO
x = $l60'000 direct labor
.5x = $8O,OOO factory overhead
P4-4
CompanYA: s4,oo0,ooo
Salgs """"t"""""t"tt""ttt"tt""t"""ttt"""""t"
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"
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,@
P4-5 (Concluded)
1
,<
Chapter 4
76
P4-6
84,OOO
Work in Process laaaata
Material8... 84,OOO
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
P4-7 (Concluded)
t_ CommonStock Factory Overhead Control
I (b)
(cl
26,53O (e) 47,330
! l2r 5OO
(d) 8r3OO
I 47,33tO
!
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 unil cct lor each Ptocess (deparrment)are nec'
amounl controlled by the citcumstancer, e3sarylor product cosling PutPosss'
assumptions' and limitations ol lha melhod O5-4. A icb order cost sheet is used:
under which il was ccrnfiled' Product cosb ato
("i to keep track of the direct rnaterials and
cornposiles ol historbal outlay thal have, per' direct labor used on a icb plus atl aPPro-
haps, been modifki by estlnateo or slandards, Priateshare cl frtorY overhead;
by processer assigning or proratlng expendi' (b) to comPara actual cost3 to estimaled
tures to periods, or by lracing the direct costs cqsts:
(c) as a subsidiary ledger for the work in
and allocating the indirect cosls lo particular
producls so thal the total period outby b spread procoss accounl.
over the aggr€gatt or'ipli. Despile these shorl- O5-5. The work in procesr accounl is a conlrol account
comings, product costs aro uselul in cosling 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
invenlories, cornpaling prices and tolal unit cost' assigned or applied to jobs. The individualiob
measuringcurrent profil or loss, and indicating cgst shoots lorm the work in process acco{'nt's
the rninimumcosl below which a sales price subsidiary ledger, indicathg the direct malerbls'
cannot go in the long run. Sorne confusion will direct labor, and factory overhead charged to
result al times in usitlg cosl intonnatbn h mak' each irb.
ing management decisions unless informatioo 05€. Job order cosl sheets serve a control funclion'
relevant only to the decisbo is used. Comparisonsare made between estimates ol
pb cosrs and cosls actually accumulated lor lhe
O5-2. The primary obiectivc h irb order costing is lo
job. ln addition, cost control is enhanced by
determine the cost ol materiats,labor, and faclo'
accumulatingdirecl materials and labor as well
ry overhead used to produce a specific otder or
conltact. Cost estimatss ato made when the as factory overhead co3l3 by cost cenlers or
order is taken, and the iob order praeduros ate departments,and by comparinglhe aclual cosls
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 to cGt conterbudgets.
through prodrrction,thereby giving an opportuni' O5-7. Actual lactory overhead consisls of the day'by'
ty lo controlcosts. day cosls that ato actuatly experienced and
O5-3. The typ€ of cost accumulaiionmelhod used by a incurred by the cornpany. Applied lactory over-
cotrlpany will be determinedby the tlpe ct man' head is the overhead charged to pbs based on
ufacturingoperatbns pedormed.A rnanufactur' the predelerminedfactory overhead rate. This
ing companyshoulduso Processc6l accumub- rale is crealed by divirJingtotal €stirnated over'
tion lor product ccthg putpos€3when like units head by toial estimatednurnberol units (or any
are continuoustynrass Produced;when cuslorn' other appropriatebase). ThE dilference between
rnade or unQue gpods are produced' icb order aclual and applied factory overhead is lhe ovet-
costing would be more aPProPriale.Process or underaPPliedfaclory overhead,
costing is otten used in industriessuch as chem- 05€. The characteristicof a service business lhal
icals, food processing,oil, mining, rubber, and rnakes likelythe use ol job order costing is lhat
electrical appliances. With a continuous mass all jobs are not alike and cost informationfor
produclianol like units,lhe cenler ol atlenllcn is each iob is desired.
the individualprocess (usuallya dopartmonl)'
8l
Chapter5
s24,07O
221832
1OrO24
s56,926
S 4,420
2,600
2,OOO
s 9,o2o
E5-3
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
E5-4
E5-4 (Concluded)
(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
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
E5-6
I
E5-7
E5-8
Debit Credit
(f ) Work in Process (35'OOO+ 45'OOO+54'OOO)........ 134,OOO
Matgfials ...........r......rrr.........or................tt....
134,OOO
I
I Chapter 5 85
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
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
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
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)
(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
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
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
- " 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
P5-6
_ t l
Chatsr 5
96
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 '
94,5O1.65 (c) 1 1 1 , 3 6 4 , 0 0| ( c l 1 11 , 3 6 4 . 0 0
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
P5-8
(b) PayrO11...........D.t..."t""t'rt'r""""t""""'r"r"t"t"""'
I I O,OOo
ACCrugd PayfOll ..r....r..'..........................'."... 11O,OOO
P5-B (Continued)
P5-8 (Continuedl
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 and the partiallycompletedunils or Parls atg
determine the costs of the products manufac' broughttogethetin subsequenldeparlments'
tured by the conrpany. Determinhg the cost of Selective refers to the fact that a product does
the productr manutacturedis necessary h order not necossatily rnove through every dopatiment'
to properly cost ending invenlories for exlemal DependinguPon the characler or shape of the
reporting Purpo3o! (i'e., teporting to credilors fhal product, ditlerent deparlments are angagecl
and ownen of thd company, lhe SEC' and the in ccnptethg the desired Prcduct
IRS) and lo evalual. the ptofilabilityof the man' 06-5. Materials Costs-{n irb order costhg, rnaterials
nrade to
ulacturing ac-tivity.In order to cost products, the fiuisitbnr are uged and charges are
costs musl be determinedfor malerials, labor, jobs; in procoss costing, charges for malerials
and taclory ovefiead used to process each unit isgued to productinn are rnade to departmenls'
of producl lhtough eaclr deparlmenl. with inlrequentusc of rnaterbls requisilians'
06-2. The products rnanufacturedwilhh a departmenl LaborCosts-Time ticketsare used h iob oder
(or cost center) during the period can be helero- -osting lo accumulatelabor costs for each job; in
geneousil pb order costingis used,but musl be 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
honrogeneous if process costing is used. In icb 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
order cosling, producls are accounted lor in racordsarg nol nocossary.
batches. The cost cil each unil ol product manu- Factorv Overhead-Job order costing requires
factuted on a pb is determinedby dividing lhe 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
total cost charged to the pb by the number ol overhead to jobs; in process costing, actual
unils produced on the iob. Since the nranufactur' overhead may be used. (However, predeter'
ing cosl ol each iob is accountedfor sepamtely' minEd rales are otten used in order lo smooth
accuralo and uselul product cosl can be deter' ovefiead that is not hcurred at the sarne rata a3
mined even when the producls rnanulac{uradon productior activity to the products manulactured
dilferent ircbsare substantiallydiflerent' By con' throughoulthe Year.)
trast, in procesr cosling, all nranulacturingcostg SummarizinoCosts-A iob order cosl sheet is
are charged to the departrnent,and the unit cost *Ja to accumulatelhe costs of an order in iob
is determinedby dividingthe cost chargedto the ordercosting;a cct of productionrePorlis usod
deparlmentby the numberol units produced'As in processcosting.In iob order costing,costs
a consequence,the unils ol producl manufac- aro summarizedon completionof the job; in
tured within a departmentmusl be essentially processcosting,costs charged to lhe depart-
alike in order tor the cost allaated to each unil menl and cosls accountedfor are summarizedin
lo be meaningrtul(i.e., to reasonablyreflectthe the cost of productionreport each month (or
actualc6l of the resourcesused to manulacture sornetimeseach week).
the prcducl). 06€. Predeterminedoverhead tatos can and should
06-3. (a) Process be used if the pattem of overhEadcost incur'
(b) Process,unlesssignilicantlyditferentrnod' rence does not follow the pattern of produclion
els are manulactured activity.Some items of overhead are fixed and
(c) Process not responsiveto changes in production aclivity'
(d) Job order It production volume varies each month, then
(e) Process predeterminedoverhead rates should be used'
(t) Process Some items of overheadare incurredonly at
(S) Job order cerlaintimes duringthe year, but benefilproduc-
(h) Process,unless dillerent fabrics are used 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 ,
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 insurance,propertytaxes, vacalion pay, eic')'
conversioncosls may be accounledfor These items can be recordedas prepaid
using proce*s, but the materialsusing iob oxpensesand amortizedunilormlyto each
order rnonth it actual overhead is charged to produc'
06-4. Three productfkrw fonnats are: sequential,par' tion. Altematively,estimatesof such costs can
allel,ard seleclive, be includedin the predeterminedovefiead rale'
Seouentialmaans that the producl flows or is and the actualcosi chargedto overheadwhen
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 incurred.The use of predeterminsd ralesis often
oporalions,9oin9 lrom one d€parlmsntto tho 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
nen. 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
Parallelmoans that certainoperationalphases only one overheadcharge to aach department
take place simultaneouslyin othor departments each monlh. ln contrast.the capitalizalbnand
l5,
I
I
L,
I Clppter6 143
!
arnorli:alion of .ach itcm ol astual ovcrhead dsparfnml, as well as tho eet of ending hven-
I
nogld rcquirc nurrr.,orr. chargcr rach rnoth. tory.
t OO-7. A sl of prodtgtioh npod b an offetivo rnqth- 06-9. Scparalo deparlmenlal cosl of production
ly (c wookly) ourynary of tho cod of rnatorbb, ropgrtt arc uced to accumulalo costs more
labor, ard overhcad consrrm.d by eadr deparl- accuralely and to prwUe rnore detailed data lor
I rrJrl or cocl c.nl.r, abng with a rrcord cl tho c6t cqrtrol purpooo. than a planl-wUe cct of
b
guenlity ol productr menufrclurcd. ll providor ;roductbn rcport couki prwirto. In sornc ceses
hfsnnlbn necrslary lo col prodrctr, prep.r. (c.9., a msnuteglurhg plant tul hss a sel*live
irumel .nlrier lo rccord lhr trandcr of coslr prodwtim flow for its producta), a planl-wide
bolwecn departmcnlr, end cmtrol cob. c6t of prcduclirn reporl cannot bo us€d.
\,
06€. The rectbns ccnnurly lound in a cocl of pro 06-10. An cquivalenl unit cil produclicr ir thc anrornt cil
ducttn reporl arc: (a) e quantity achcdub incJi- a nrsounco(r.9, malcrbb, labof, or ovrfiead)
calhg thc soursr and dispeitim oil thr unib of lhat wouH bc required to csnplcto qrr unit of
producl, (b) a cel charged lo the departrnent thr producl with respecl to thc cost clemenl
t clbn, indicathg the cost h total and pcr unil behg cansidered- Thc lolal number of equiva-
for lho c€l lrenlf.rrod in from tho procoding lonl unite. with rcspecl to a particular elementof
dopartmont, as woll as rnatcriab, labor and ovcr- cod, ropresonlslhe number ol unils of the prcd-
hoad cfnrgod lo the depadrnent, and (c) a el usl lhal could have been cornpletod with lhe
eounled for seclisr indicalhg the anpunt of resource3used durhg the perird.
cod assigned to thr unitr tranderred oti c/ the
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
Cost from
l2l Factory
Precedlng
Department Materialg Overhead
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
I
l> ClppterO 105
:
I E6-3 Tlndol FabricatorEInc.
b
Cutting and Forming DePartment
' of Produstion RePort
Cost
For November
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
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
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
' 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
' 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
. 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
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
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
. 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
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
, 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
%
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
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
P0.2
.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
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
_
WorkinProcess-FinishingDepartment........,..... 241375
Work In Process-Castlng Departmont........ 24.375
FinishedGoodslnventory-.................,................. 28rOOO
Work In Process-FlnishlngDepartment...... 28,OOO
Ctpptcr 6
123
P€.3
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
.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
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" "" "" """ """""" """"" ""
P6-4 ,
(11 PersonaCologneCompany
BlendingDepartment
Cost of ProductionRoport
For June
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
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
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
P6-5
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
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
- 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
P6.6 APPENDIX
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
- cogt addsd durlng thc current perlod dtvldedby thc numbor ol cqulvalent unlts of cost addod
durlng the current Perlod
i-.'<--
Clwtor6 t35
UptonManufacturingCompany
AssemblyDepartment
Cost of ProductionRepod
For October
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
P6.7 APPENDIX
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:
- Cost added during the current period divided by the number of equivatent units of cost added
durlng the current Perlod
CluptcrG 139
Marston ManufasturingCompany
FinlshlngDepartrtent
Cost ol ProdustionReport
For August
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
ft Coat added durlng the current perlod dlvided by the number of equlvalent unltc of cost added
durlng tlrc currtnt Perlod
Work in Process-FinishingDepartment........r...., 1 3 6 , 4 0 0
Work in Process-FabricatingDepartment" 136,4OO
P6.8 APPENDIX
(1) TWonkaBeverageGomPanY
MashingDePartment
Cost of ProductionRePort
For SePtember
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:
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)
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
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
E7-7 ,
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
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
E7-8 ,
(r) JuniperComPanY
FinishingDepartment
Cost of ProductionReport
For July
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
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
E7.1OAPPENDIX
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
' Cort added during thc curront period divlded by thc number of cquivalent unlts of cost added
durlng lfic curent perlod
E7-1I APPENDIX
Cort Accountad for lr Followr Unltr Currcnt 116Unlt Cot Total Cort
. 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
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
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
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
P7-2
S9O,OOOtotal job cost =
(1) S18 per unit
5 ,OOOu n i ts o n j o b
P7-3
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
. 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
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 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
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
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
P7-S(Continued)
HometownBrewery Company
CanningDepartment
Cost of Production Report
For January
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
P7-AAPPENDD(
(r) HandyTool Gompany
Fabrlcatlng Departmont
Cost of Productlon Report
For April
r Humbsr of cqulvalent unltr of cott added durlng thc cument perlod determlned ar lollowg:
- Cort rddcd durlng trc currcnt pcrtod dlvlded by thc number ot oqulvalent unltr of cost added
durhg thc curront pedod
;
,70 Chapter 7
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
. 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
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
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
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
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)
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
I
|}
Chapter I
PGRGISES
E8-2
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
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
the
Conctusion: Based on tho Information given, S should be sold at
split-oft poinL
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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
(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.
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:
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
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
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
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
$ l 6 5 ,OOO Gamma
(3144,OOOPounds
-4'OOOPoundslost
_4O'OOOpounds'
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
(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
. 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
-
*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
Chapter8
tw
P8-6 (Goncluded|
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:
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
Chapter I
C8-1 (Gonctuded)
c8.2
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:
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.|
CHAPTER 9
DISCUSSIONOUESTIONS
O9-1. The mosl lreguentlyused documentsin the pro- costs, only lhose thd vary with adivity are rele-
curemenl and use ol materials are purchasereg- vant lo the E@ model.
uisitions, purchase orders, receivingreports, O9-9. The @nsequencos of maintaining inadequare
materials requisilions,bills ol malerials, and invenlory levels indude hi;her purcfrasing,han-
malerials ledger recods. dling, and transportation costs, bss ol quantity
O9-2. The invoice shouH be routed to the Accounting discounls, produclion disruptions, inllation-relat-
Department immedidely upon receipt.A copy of ed price increases when purchases are
lhe purchaseorder and a copy of the receiving deferred,and bst sales and customer goodwill.
report'with an inspection report should be com- Mgasursmentof the costs of lost orders and
pared by lhe accountingclerK When lhe invoice z bst repeat business is not easy because mea-
is found lo be correcl in all aspectsor has been suremenl may be largely subjective. On the
adjusted for errors or rejects, the accounting other hand, the other factors listedcan be mea-
clerk approves the invoice, anaches il to the sured with fair certaintyand grealer ease.
underlying documents il they are in hard-copy 09-10. In computingoptimum produaion run size, CO
lorm, and sends these documenls to another ropresenlsan estimaleol lhe setup cost and CU
clerk for lhe preparationof the voucher. is lhe variablemanulacluringcost per unit.
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 09-11. (a) The order point is the low poinr ol stock
incrrred lo get the produc.tready for sale to lhe levef that, when reached,means a replen-
customer. lt includesnot only the net purchase ishingorder shouldbe placed.
prica bul also the olher associatedcosts, such (b) Lead time is the intervalbetweenplacingan
as freiThl-in,incurredup to ths lime produclsare order and deliveryof lhe orderedgmds.
ready for sale to the customer. (c) Salety stodt is the minimum inventorythar
Q9-4. No, administrationcosts are assumedto expir€ provides a cushion against reasonably
with lhe passageof time and do not anachlo the expecledmaximumdemands and against
product. Furthermore,administralivecosts do varialionsin leadtime.
not relale directlyto inventories,but are incursd 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
for the benefitof all lunciionsof the business. compuler simulationthat integratoseach prod,
O9-5. The three key questionsto anstv€rin designing rjct'sbill ol mderials, inventoryslalus, and man-
an inventorycontrolsyg€m are: ufacturingprocess into a feasible production
(a) how much to order-economic order plan.
quanlity 09-13. Eftectiveutilizationof capital, which inctudes
(b) when to order-order point inveslmentin inventory,is the responsibility of
(c) satetystock required 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
09€. The firm benefilslrom lhese techniquesby hav- interestis in linancialcontrol.Atthoughgeneral
ing a crnsistenl, standardizedapproachto its or top-levelmanagernsnlis inlerestedin provid-
inventorymanagsment.lnventorycosts and ser- ing customerswith gmd productsand services,
vica lo customsrswill be optimallybalanced. the schedulingof produaioninrolves unit control
O9-7. The purpose ol an economic ordor quantily primarilyand is the responsibilityof production
model is to determinethe optimumquantityto and purchasingdepartm€nts.
order or producewhen filling inventoryneeds. 09-14. ln the control ol materials,the opposingneeds
The optimumquantilyis delined as lhat quanlity are the mainlenanceof an inventoryol sufficient
lhal minimizssthe cost of inventorymanage- size and diversity lor efficient operations,and
ment. the mainlenanceof an investmenlin inventoryat
Q9-8. The decision concerninghow much to order or a level that will maximizeearningsand minimiza
produce at a given lime involvesa compromise costs.
belweeninventorycarryingcosts and orderingor O9-15. When a relativelyfew malerialsit€ms account
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 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
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 investmonl selectivecontrol is indicatod.Hbh.
invontoriesthat could have b€en investedelse- value ilems would be under tight control,whilu
where, propertytar and insurance,warehousing low-valueitems would be under simple physical
or slorage, handling,deterioration,and obsoles- conlrols.
cence.Orderingcosts includeths cost of prepar- Automaticcontrol refers lo orderingwhen a
ing the requisilionand purchaseorder,receiving malerialsrecordshowsthat lhe balanceon hand
lhe order, and accounlingfor lhe order.Setup has dropped to the order point.At this time, the
@sts involvethe costs ol seningup equipment 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
to make lhe actualproductionruns.For all these delerminedby balancingthe cost to order with
203
(-
_\
2U Chapter 9
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
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 """'
E9-4
2 x100 x $5
(1) EOQ =
S55 x 15o/o
1,440,000
(3)
,al
EoQ = rl =
r $25
= J5iloob- = 24O units
L
207
Chapter 9
E9-4 (Continuedl
= 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
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
CUTCCTEOQ
Annual carrying cost = 2
$2O x 12oh r 8OO - 960
^ / 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
36O units
ChapterI 209
E9-4 (Qoncluded)
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
. 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
(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)
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
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
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
214 Chapter g
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:
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
(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
I .F
I o
ir
o
I
f
o
o
L 3
o
t E 6 o
x o
o o o o F
C'(\|FOCDF
: 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:
o
o
lo o o u) o o o o o o
lo o o N o o o lo o o
tr to @- cl lt'- o_ o_ (\t \|F q o
.g! tut N q, CT' o o @ (\l
o lp (\| F F N
o IU'
o oo o ou) o o o oc) o o o o oo
t; o o o o O N o o o o o oou) o o o
q 0_ @- o_ o _ q o_ q o _ o- ol q q n - o- q o _
E6 u, r o F
F F F
F F
F
CD € ? q,N ClNr
F
CI' @!t
0
F
o o o o o oo o oo oo ooo o oo
lH
ET, o o r o o o tf) g' q g g g o o o o gq
o s 6 rn
ct ct o;
N N r
d d;
N N N
o
N
O N
N N
O(\|
N N
O N r
N N N
ci o o
N N N
* a ou) o o o oo o o o oo o o o o o o
uto u) ro u) o o o oo oou) C) o o
t\ F!t u) u ? ( ? rt tt ut $ r !tFu) rf $ N
o
oo loo o oc)
oo N O o u)o
Efi qq ro- 0- @_ 'o-ot
E6 l\rt
g
F(' @ F(\I
tt o o o o o o o
q) v l
tr)o u?o q qq
g
:'
o 5.g d ct
F N
a
;ci
N N
c.|
N
F
NOt
(\l
*a oo o o o o o
oo u)lo o roo
\'N g,F v t(lr
o
o lt) o o o
Efi o N o u) o
= o @_ q q n_ o_
l- F t\
IYO !t
F
ro g
o tt
:'g o o o o o o
! : .= Vl q rq q q o
o
o
('
o
s6 o
o
F
N
N
ol
F
N
ct
N
o cc
x *e o o o o o
o o u) o u? o
z ct \t (l, ro 1', ol
u l o
o . = F
o . J
(t to GI Lo (o
o o @ N
ol
@
(\| (?
u)
I o (t N
d s t o E
T r
I
I
Chaptor 9
n
o o o o o o o o (o
o o
o
(,
o q q o!t o F F @
c ct o rt o o o F l-
o
g o o (\|o o o @ F @
rt
qt o q q q ? @ l- G| l'
@ lo N o qt o o o N Co (\|
.F
? N F
.F N
o
F o (D (D F F G' G, t' ll o
(o
o o N N F F G| (\| u) u)
a?
5g q q rt
+t o qt (' F F F
c
o ct Fo oF o c;
a
.F ? F
a
? ct
N
N N N $l 6| N N
g 0
I o o o o€, o
o rO o o oo oo
F aF
u) u) 0 o o u)
lo o tt o ro o \t o
o ;
o o o o
(o ul 6| F
I
ut o o; o
EE
F O
o
Go-
F
c'
$t
o
o|
lo-
co
lo
\
g'
7 F
I
o F a) rt
tt N F N
g?
u)
o E6 q q l-
n
o s6 o
tfi
o
N
?
6|
?
N
o o o o
*a o
(o o
u)
o
rt
lO
tO
o
o u) o o o
Efi o ({ o lo o
= o q |o- o- ro- o_
F F F F rt
F O ? F
!l g
o tt
E o o o o o o
ul q q g
5
(,
.t
o
o 3u)
EE o
q
?
c|
N
N
F
(\|
o
N
o o o
o G
o o o o
x 6 *a o
o ro o
u)
ro
u)
o
9
- L
3 g
It (t, N
u l o
CL
E (, u) (! ro q' N (o co
o C, N C! (! (?
lo tE 6
t
o =
R O i
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
Chapter 9
222
o o o o o o 0 o o o o o
o 0 o 0 o 0 o q q o o c, (o
o o o o o o
a a
o o
a
o o
a
o
a
6l u)
o o o o rt 0 o (o rt \t F o
-g o_ u) o- N q GI c, c' .r- F F @
G o rt F (\l F
o o? F t t
F N l|
F t rF .F
R o o o o o o o o o o (D (o
o o o o o o o o q o o o, gt o)
c EE q
o 3 c ) u)
o q (o
a
u| lo to
q q q q 0
u) lo F F t\ F
0
F
o
F
a
, o o o o o o o o o o o o
o o o o o o o ?0
Fe o o 0q,
o_ lo
0
q \t u) o- \t (o tl)- @
N t-
o N F N ? N t
Y
o o o o o o o o
o o o o o o Na Nt j
c6 ct ct (o \tct
o
a
0 o
a
\t (\| (o F(o
F
o o
F6 u) u)
N gi,
q o
q, rtl
-a- q
t |o
o g'
\t !'
&
tl o o o o o o (o (o
o o o o o g' o
o
n
E E
=c,
0
q q
u) u,
q E
u) u,
q
F
\t'.
F
q q
F F
n 6
o o o o o o o o
;a 0
|(|
0
F
0 o
(o g,
o o
(o qt
o
F
o
F
o
o o o o
o o o o
EE 0-
F O ?o
6l
F
o-
N
F
o-
o
F
! 6
o It
o
o .: ,-o (o o
u)
o 's o o F
t) = o
o o
CD
(E G
o o o o
^
=
g .
o *a o
0
o
st
o
u)-
o
sI
I o N F
lll
o . ?
o . g
N ro N u) ctl N u| (,
N u) o
o c, $l d
G'
ti qt ri (o
l:
q
o ?(s o
I
O - l.L E
.t
Chapter g 223
P9-7,APPENDIX (Continued)
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
=
21,600,000
1 $50' x 10.870
(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
1
c9-2
Explanationof costs:
-
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
228
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
= 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
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
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.
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
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
Y - )
- . 1
I
:. ;
!
ChapterlO . e
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
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
-
. 242 Chapter 10 .
P1o-4 (Continued) . -
I P l O -4 (Go n cl u d e d )
Plo-5
*
Chapter tO .
PIO-S(Goncluded) : -
CHAPTER11
L
DISCUSSIONQUESTIONS
I
Ol 1-'1. Yes, lo lhe exlentthat il is practicalto m€asure is conlinued, A shdrter workweek or
! the r,ralueadded or the productivityof a worker. sorne other syslem of sharing lhe work
However, msasurement of lhe cootribution of wouH be indicated.
each individualis never exacl. Also, a business (b) Ordinarity,it is not a propiliour tine to hi-
cannot pay more for materials or labor than the tiato an hcentive wagr ptan wtrena phnt
sales price will recover.Materials,workers,and is operating far below capacity,because
machines produce products and services. the worker is alreadyfearful d sornething
,l There must be a differencebelween revenue less than full employrnent.ll a ,eason-
irnd oosts consumed;othenrvise, lhe business able day's work is being receivedfor the
b cannol sun/ive. going rate ol pay, po.stponementof the
Otl-2. Productivitymay be defined as the measure- . incenlive plan is indicated. However,
menl of produclion performanceusing the there is a nalural tendencyfor workerslo
expenditureof hurnanelfort as a yardstick.ln a
reduce output durhg such perlgds,there-
broadersense,it may be describedas the etfi.
by increasingcosls, wilh a lendencylo
ciencywith which resourcasare converledinto
bring about further reductionin the vol-
cornmoditiesancVorservicesthat people wanl.
ume lhat can be soH. With luft e4plana-
Ql 1-3. Productivityis importantto a lirm becausehigh
lion and underslandhg of thc situation,
productivityreducesthe unit cost ol the outpul
the incentivewage could be htroduced
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
- with a planl operatingat 6006capacity.
importantto workersbecauselheir real earn- O11-8. In the straightpieceworkplan, each worker is
ings should be increasedwhen productivityis paiC a certain amount for eadr unit produced,
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
while being guaranteeda base hourlywage.ln
bEcauseincreasedproductivityenablessociety
the 100% bonus plan, €ach workor L pai<Jfor
to gel moro and better oulput from the basic
the standardtime to cornpletethe job or unils if
resourcesof lhe econorny.
the job or units are finished in slandardtime or
Ql 1-4. To measurelabor efficiency,it is necessaryto
less. In the group bonus plan, workersin i
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 group are paid lheir standard hourlywage. lf
means determininghow much a workershould
the group produces unils in oxc€ss of the stan-
be able to produce,or how much a worKcr6w
dard, lhe workers are paid for the time saved.
should be able lo produce.The standardis
Q11-9. An organizational or gainsharingincentiveplan
delerminedby time and motionstudy,lest runs
is designed to provide incentive pay to all
by skilledworkers,and averagesoi past per-
employeesby way of an organization-wide
formanceby skilledworkers.
plan thal rewardsfor improvedproductivity.
Q11-5. The purposeof an incentivswage plan is to
01 1-1O. The basicconceplunderlyingthe relatbnship
inducea workerlo producemore,iesultingin a
involvedin the cumulativeaveragelime learn.
higher wage and reducedconversioncosl oe,
ing curve modetis that everytime the cumula.
unit. Freguenily,machineoutpul is limitedby
live quantity of unils produced is doubled, the
worker performance.lt employeeperlormance
cumuhliveaveragslim€ per unil is reducedby
can be increased,machinecost per unit of pro-
a givenpgrcentage.
duclion will decreasa.An incentivewage ptan
0 1 1 - 1 1 The
. learning curve lheory is used to solve
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 .problemssuch as determininglabor
carelessness, and may generatea cost.con- costs in
bids for governmenl conlracls, determhing bt
sciouslaborforce.
Ql 1-6. Generally,hourly earnings go costs tor various slagos ol production runs,
up with predictinglabor-hourrequirements,permitting
increasedproduction,and laborco.-st per unit ol
outpul is reduced.High productionrates also lhe calculationsof slandard labor cost varil
reduceoverheadcosl per unit of output,which ances,assistingin lhe evalualionof a manag-
is oftenthe mostsignificant er's performance,and providinga basis for
_ savings. cost control.
Ql 1-7. (a) Duringperiodsol curfailejactivity,
it is Q1 1-12. The financial accounting aspecl is concemed
iust as n€cessaryto keepcosls down as wilh a record of earnings of each employee
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 ,
and payment of the workers. Financiat
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 accounting records income, FICA, and other
yno payroll laxes and deductions wilhheld; proviCer
lowercoslsper unit at full capacily,than
lor disbursing lunds lo workers and to taxing
the laborcost per unitshouldbe lowerin
and other agencies; reporls io each employee
a slackperiodif the incentive wagescate al least annually the arriount ol wages eamed
245
246 Chapter 11
and tho arnountl withheld for various PurP€' 01 1-17. Bar codes are symbols thal can be processed
es; and recordgthe payroll liability and pay' electronicallyto identifynumbers,letlers, or
ment each PaYrollPeriod special characlers. Bar-codedempbyee idenlF
Thc cost accannting8sP€cl is concemod with lication cards or badges, and lask identilica-
time worked oo each Fb or h each cost conlet, tbns can be used to replace clock cards and
in order to detetminethe labor houn and bbor time tickets to collect payroll data ard to mea'
cosil ol Ptoduclion. sure worker activitY.
Ot1-13. tui eflbient labor force beghs with the design Q11-18. AppendixOne method would be lo charge the
ol the producl gnd en analysir of produclion premium costs directly to lho Prod'
teclrnQuceand i9b reguiremenls.Wi|h he per' usts in thc same rtrarne, as straighl'
sonnel departmentadeqtntely informed aboul lime labor cosls. This would be
job specifications,it is lhe lunclion ol this 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
deportneot !o locura the pcrsanel qualiliedlo have to be rushed to ccnPlelbn. A
do each iob. The produclion planning deparl' secmd method woub be to tr€at the
menl keeps the work llowing smoothly. Ths ptgmium as an ovefiead elem€nt lo
timekeeping, payroll, and cost accounting be ctrarged to all ptoduclirxt through
departmentscontributeto lhe lotal elficiencyby the allocationol overhead. lt would
accountingfor the time purchasedand by rnak' be appropriatewhen lho ovatlim€ is
ing paymentlor the work as well as charging a recurring condilion normally inci'
the cost to lhe proper dePartmentand producl. dsnt to the levelof oPeratiens'
Q11-14. (a) Delermininglabor hours worked by each 011-19. AppendixThebonus and vacationpay should
empbyee is prirnaritylor payroll PurPo3- be accruedovet the benefitedtime
es and linancialaccounting, period.When the bonus and vaca-
(b) Determinatirn ol labot hourc consumed tinn pay are pairJ,the accrued liabilily
on each irb or h a department is a part account is debited and the cash and
ol cosl determinalion for a job or withholdingaccounls are crediled.
pnocoss.lt shouH also be a measure of Ol 1-20. AppendixThe recornmendedmethod in com'
labor efliciency,since hours consumed puting costs under a pension plan is
and productiveoutput can be cornpared. to detemine aciuariatlylhe eventual
Ol 1-15. (a) The cbck card showgthe amounlol time pensionpaymenlslo covered empkry'
an employeespenl in lhe plant €ach day ees and to cfrargethese luture pay'
ol a payrollperiod. lt is evidence that lhe menls as a cost gt curt€ntproduction
empbyee'stime has been purchased. over the exPectedgeriodof aclive
(b) The time ticket shows tho amounl ol lime serviceof coveredemployees'Costs
an employee spends each daY on 6ach based on Past services should be
icb or in each department. ll is an ilem' writlen oll over some reasonable
ized invoice ol the time thal the employ' period on a systematicand rational
ee selb to lhe empbyer. basis that doos not distorl the operat'
01 1-16. Since the clock cards show the time employ' ing resultsof anY one Year.These
oes are h the pbnt, the lirst step is to make costs are incurred in contemplation
sure no error exists on the time tickets. lf the of lhe presenland lutureseryicesnol
total time shown on the time tickets is cortecl, only of the individualemployee'bul
trren the workers speot time in the phnt when also ol lhe organi:ationas a whole'
nol working or not assigned lo specific'jobs ot Benefits ol the Plan-such as
dopartments,gr when assigned lo mainte- improvedmorale. removalof super'
nance or repairwork For the time thal is idle or annuated employees'and attraction
assignedto indirect bbor, a chargo is made to 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
FactoryOverhead. 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
!
I
I
248 Chapter 11
. bq s - < l r O C {
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I
ChWtar ll
219
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
E11-9 APPENDIX
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
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
152,235+165=$13.55
2 $2,O4O
+ 150 = $i3.OO
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256 Chaptar l1
Pl l-3 (ConcludeUf
Hours worked 40
.aaaraaaaaaaa
Clpptor l1 257
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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...........
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)
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 )
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
(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
(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
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.
(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
(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)
\
!
GH4pTgR 72
DISCUSSIONQUESTIONS
012-1. Supervircrs' salaries, hdirect labor, overlimo Anotrer otriectivo in selecthg the base b to
prcrniurn, lupplier, indirrct nratorials, payroll
minimizo clericel st and dfort relativo to tho
tarq tactory hlurancc, and deprrciatian. bonrlitr ottaincd. When two or more ber.s
Ql2-2. Thr nst inportant r.elon fa variatbn in fae- pro\rid. apprcximatcly thr rgrno applicrJ ovor_
lory ovrfiead b tho pnroncc of lired and rarF hood cst to specilb unils 6t prodrrtbn, the
ablo rrpenrer. Thordorc, ar prcduction vol- rirplcsl ba$ lhouH be usrd.
urno changs frqn nrnth to rrcrth, tho coCc Q12-7. (a) Theqrfrcal capecity b actuslly tho nrari-
will do likowicc. Howcvor, ovcrhead alco wifl rnum produclion possible frorn e givon
''
cltrtgo bccause of inrprovcd or dccrcssed cflF pbnl wit|r no allo*arrr rnade for ccsla.
ciencies and ctrangos in pricer paU for over-
lion of operations for hotidays, wrok_
head ilrns LEh s! rupplies ard repairs.
endr, malerials shorleges, or machino
012.3. Predclerminod ralcs aro ured when it
bnakdorns.
beconres obvious that 8ny other melhod of (b) precticsl capacity ig theoretical capechy
charghg overhead resullr in inequilabfccoct-
lege an ellow.ancefor interruptimr euch
hg and delays tho reporthg ct firancisl results.
as brealdo*,na, delayr in recciving rup
Charghg aclual overhead io ic6s and producir plict, and worker abgencer. prjcticsl
can resufl h charging unreasonablearnounls
capacily is usualty 75 to 85 pcrcent of
of owrhead to varbur perirdr and in dehyed
theorelical capacity.
rcporling of corl data. Thc urr ol prcdclcr- (c) Erprctrd ectual caprcity ir prtctical
mined ralcs alao onhances control through
capacity adjusted lor tho lach of autfbiont
analyria ol over. or underappliedlaclory over-
dcmrnd h a tinglo oporathg period and
head
may br usod h building oporating bu+
012-4. Sir bases used for applying taciory overhead
gelr tdrcn expected capacity ditfen gub.,
aro unitr prodrced, direst rnateriatr cost, direci
stantially lun norrnel capaciV.
labor cosl, direct labor houc, machhe hours,
(d) Normal.capacityis practical capacity
and transaclions. lmportant consideratioogin
adjusted to give consideratbn to t o toci
seleclhg a base are the relatbnship (conela-
of suflicient dernand over a pcrird bng
tion) ol the base used and lhe use d ovefiead
enough lo hclude cyclical and reassral
items in manufacturingoperalbns, as woll as
fluc.luatbns.This is usually the basis for
the clerical prac-ticability ol using a particuhr 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
bge.
012-5. Predetermhedrde! are used to charge preferably for the determinalbn cJ owr-
over- head rates.
head and becornethe basis for determiningthe
012-8. The underappliedoverhead will be higher
cost cil a lcb or producl.Thereforo,the reason- lf
marinum capacity is used and bwer if normal
ablenessof such costs is to a hrge exlent
is used. ll this cost is charged lo lhc currrnl
determhed by the reasonablenessol-the rat€.
perird, then nraxirnumcapacity will prcducr
Shce these cqsts are used for costing hvenlo a
krwer, and normal capacrty a higher, operating
ries and play sn important ole h esiabtishing
prcrtii.
sales prices, the selectbn ol proper predeter-
O12-9. (a) ldle capacity costs arisc from
mined rates can be appreciated. idlc
Q12€. An objectivein seleciing the baso lor prede_ employees and idte tacilitiec. ldle
a employeer give rise lo colte auch ar
lermined factory ovefiead rale b lo engurelhe
application of factory overhead in reasonable base wages paid, employor,r sharc of
proporikmto a benefbial or causal relatbnship payroll laxes, and other lringo benefit
lo jobr, producls, or work perlormed or lo cosls. ldle facilities cause capacity 6te
be due lo delerbratbn with time, appreh-
porformcd.i,c., for rrtimaling purpose!.
Ordiurily, the base selostodehojj be'closety 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 ,
rolded to ttnctions represenledby the applioC readiness,maintenance,repairs, lhelter,
overhcad cost. lf tactory overheadcosls 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
are hsurance.
predorninantlylabq oriente4 such as
supervi- (b) When iile capacity b prescnl, an
sirt and indirect hbor, the proper base would dtenrpt
probably be dirccl bbor hours. lf taclory should be made to regregalr idlo
over- employees and idle lacilitier through
head costs are predominantlyretated
to the proper recbssiticatbn. Tho rcurnula$on
cosl incurredin the ownershipand operatbn
ol ol lhe cost attributabtelo theso Ulc work-
thc madrinery, the proper base would probably
be machhe hours. srs or facililiec in excess _cla reasonablc
budgnted arnounl migrht be in aorno ki,rd
271
\
t-
272 Chapter l2
ol overhead account to be lreated sepa- accounl Therefore, ovefiead has beon oer-
rately aa e'rnanagemenl by erceplion' applied when lhc account lras a crcdil balanc..
faclor. ldb capacily corlr should bt Q12-1z- Ovcrhead cen br ovcrappliod beceuso (a)
accounlod lor soparalely lor lhoro rea- actual oveficad waa bss than budg.l.d; (b)
!ons: (1) to Pttv.nl dittortkn end srlu- capeity utli:.d war greetor |h8n that eslirnaF
rirr h thr rna[air of ptoduclin cctt; od h cnpdhg ovofirad rale; (c) lho wcr-
(2) to bililetr ircqne dclominalixt; (3) hcad cdinatc war lo hiCh (a mirtate); (d) lhr
to csrtrol ogcraticts; 8nd (4) lo phn nrrt produclian ortimab wat l€ low (a mirtakc);
year'r hdget edrquatdy. (r) corn|liulkns of thr abor.
(c) Exeorc crpe.*ty cod h8! bem iJentilhJ Q12-13. Over. or undcrapplicd faclory ovcrhead may
with thoo capacity.cootr thol rcrull frqn be proralod arrrcng work h proc.ss, finished
grealrr produclion capacily lhan lhc goods, and cosl of goodr sold, or it may bc
cqnpsny couH rvcr lrqe lo usa, or frcrn lrcaled rntirrly ar a period cogl. The firsl
unbalancrd rquipmenl or machincry method would have a smsller effcl oo cct ct
withh dcparUnenls.In creatng lhc fote goods soH and |hcrelqc qr lho net ircorne for
casl budgrl, il ir irportanl lo bobto the the pcriod.
.xc.r capacily cosl ro lhal manago- 012-14. Thr cxislcncc ol largc undcrabcorbed vari-
mcnl can bo made aware cil ilr responsi- ancis doot nol necossarily mcan ihat unil
bility rcaardng the excess invesUnentin costs ar. incorrecl. An analysis of thc under-
labor and machhec. absorbod figwer will irdlplc (a) whether actu-
Q12-10. (a) Anaty":r and identifythe ovefiead trans- al ororhead ir loo high or whcthcr oxponseg
actisrs. havo been incorreclty estirnated; and (b) what
(b) Joumali:,cthc lransrlisrs. part of thc underabsorplion is caused by
(c) Enlcr transaclbnr in general and gub- unusod capacity. ll Eclual ovrhead is cmtiJ-
sktbry lodgen. ered lo b. t@ high and thcro ic Ule capacity,
Ol2-1 1. Ovefiead applicd lo prcduclicn ir enlered as a unil coctr ccnpulcd ate morc rearcnablo lhan
credil h |he lactory orerhead control accounL they would bc if overhead rale! wero cornput-
Aclual ovrrhrad it debiled lo lhc same 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:
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
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
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
>
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
,:
Chapter l2
El2 - 7
(1l Work in Process.'.'..............................o......o................1
,45OrOOO
Matef|a18..........r..r.........r.......o.....o....rrr.o.....o........ l r45OrOOO
E12 - 8
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
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
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
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
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
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
I
I
-
: C@ter 12 281
I
I
I
t - :
o o 0 0 o ototl i
o o o o totl g
n- o- o-
tfll
i to- vl
I
t t N 7 o o
5 - ' F
0
I'
E L
- -
o o -
o
A
o ' cot
I o o o o
>
0 0 o- o-
u ) u ) rD ra) 3
t-
Y . Y Y Y ]P
g
I
I
o o o o
t t F E N
b CL
N o
s3gl
0 0 'aD I tr
I
+ + + + 4
6 6 6 6 !l
! o
i l i l i l l l l l n
o,
i l t l G
!t
o 6 0 q t o 6 (E
0 6
o o o o
o- ro- o- o- G
tt
q ' o o o ct
F F F tr
r h 0 o 9 o
oI
o o o o orl
F o N g
;ll o
!l
a
N
th
ll I n
^l^ ^l- ^l^ ^l^
o lo o lo o lo o lo
o lo o lo
8_18- xt_18- o- lt o- r
0 t l 0-
o lo lo o lo N lo
=tr5l
-Eg . " 1 "* l -
r l , , l ,
@ l?'
el
I l r
r
{al
r l r
lp
il 318818
t
o lo
o lo
o lo
o lo
l
3lF
3 1 3gl: o- l t o-
o l l o po l n
o- l l o-
sl: F I r
rv l vh l ol
v l v
l p
: :
!
o i
: c :
L
o r r !
3 :
: € i
tor P - 3 L
o
!t . J l -
o ( J 0 o
$FE.'iiFi5
o 6 r t o
5 b o c
o c t!
o o 6 c
O
o. o , c ) G
CL
o . ! '=
X n .o
E IEF f a
:t
F S =
Chwter t2
P12-3
Clnpts 12
283
P724,
2U
Ctlpter 12
P12-5
47,OOO
MH r $.9S = $44,650
(4) Amount of factory overheadchargedto production if the company used
the expeeted actual capacity ratel
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
e l
t
CHAPTER13
DISCUSSIONQUESTIONS
01},1. Departmentalovefiead ralot aro prcfrrrrd to a of a company'soperalions,processes,and
. sirgle talc becausc they irprovr tre cmlrcl of machinery;(b) locatbn of operatbns. process-
orcfiead by deparlnenl headr rosponrbb for es, and machhery; (c) responsibilitieslor pro-
csrtrollablr ovrrtrrad, and lhry incroar lhr duclion and cosls; (d) rclalionshipol opcra.
' accuracy ol product and job corting whcn lions lo llow of product; and (e) number ol
productr or iobt rovo througfi variql prduc- deparlments or work centers. Thc number of
h9 depsdmonb. 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
01$2. Deparlmrnlalizing faclory ovrrhrad ir an emphasis placed on cosl control and on the
exlension of mclhodt used in ralablishing a develognenl of overhead rates.
single ralc becausr (a) an application baso Qt}€. Physbally different segrnentsof a department
musl be selected and crtimaled; (b) ovefiead or clst pools for ditferent kjrds ol costs wilhin
estlnales musl bo rnadc; and (c) adual wer- a deparlment rnay be driven by activity baser
head musl be accwnubl.d sd cqnparod with that are guite dillerenl, lhur callhg for lhc usr
applied overhead.Thcsc rteps an reguiredfor ol subdepartm€nF tor taclory overhead accu-
each producing deparimenl, whereas wilh a mulalion, application, and analysis for each
single rale, mly tolal factory dale ere neccr- physicalsegmenl or cest pool.
sary. Q1$7. No. A more correcl method is the use of thc
Ot3-3. The surn cil departnatal over- or underapglied planl assel records lo c€mpute deparlmental
ovefiead would be diflerent. Every direct labor depreciation,property tax, and fire hsurancc
hour *ouH havc thc sarno arnount of applied charges, provided the recordg arr sufficienlly
overhead whcn a planl-wiJr ovrfiead rato b detailed lor this pufpos. and thc rvork hvolve'd
used, assuming lhal thr applicatbn base ir is nol too complex. Swh a rnethodwouH give
direcl labor hours. However,tho usc crfdepart- proper recognitionlo lhe various depreciation
menlal ralec resulls in ditlcrcnt amounts ol rales used and fire insurancepremiumspaid
applied ovorhoad, depending on thr labor becauseol varying tlpea of equipmenl
houn in cach dcparlmcnl and tho indivirJual 0198. Factors involved in selectingthe mosl egui-
departmenlal ovcrhead ratos. For cxarnple, a table rale lor applyhg factory overheadinclude
firm wilh an ovorall ratc ol $2 would have consideralionof the nature of a department's
S20,0@ ol applierJovefiead la 10,000 hours; operalions,the relationshipol overhead ele-
the seme firm wilh departmcntal rates ol 9l ments to operalians involved, and any clerical
and $3 lor its twe produchg dopartnents could difticuties arising through the use of a particu-
have more or lcss applied orerheed, depcnd- lar rate.
ing an the breakdown c, labor houn receivhg 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
lhe S't ard 33 overheadcharge. deparlmenlalfactory overheadrales ar6:
Thc lotsl cet cf gmdr lold ard tdsl hvcnto- (a) Estimatingdirect overhoad ol producing
ry rtould also be differerd, becausr departmen- departmentsand lhe direcl costs of ser-
tal rate! could cauro diffrrcnt unil cogts. vice departments.
Thereforc, invenlory and cost of gods sold (b) Preparinga lactory surv€y for the pur-
would be hfluenced by productss<ld q still qr pose of distributingindirectdepartmental
hard. This hpuH not be thc case il a blanket cosb and servics deparlmentcosts.
ralc were uced. (c) Estirnatingand allocatingindirect deparl-
Q13{. A prodrrcingdepartment b dhestly csrcomed mentalcosls.
with manufrturhg prodrctr or dc*rg ucrk qr (d) Dislribulingservicedeparlmentcoste.
various jobr. A service departmentrenden (e) Compulingdeparlmentalfactory over-
servico to variour deparlmenls and ig not head rates.
directly asrociated with manufacturing opcra- Ol$10. The questlcnrlhgt musl be resolvedin allocal-
tbns" Tho naturc cl tho nprt dono by a Otp.rf- ing service deparlment cosl! to benefiting
ment dclcrmhca rrhrther I b a rcrvicr or ptr ' departmontsinclude:
ducing deprrlmont. Exemplcr ol producing (a) Determhingwhich departmentsare bon-
depa.,tm.nl! arr cuilhg, fhirhing, m*hining. elited.
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 (b) Selectingan allocatiqrbase.
dgpartmontr arc mainlenancc,medbal, power- ( 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 . ,
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 direcl,slep,or simultaneous.
accoonting Ql3-11. (a) Direct-No servicedepartmenl costsare
Q13-5. The kinds o{ deparlmentsertablishodto con- allocatedto otherservicedeparlments.
trol snd chargo ets depend on (a) simibrity (b) Step-Service departmentcosts are allo-
288
I
l
lr
1I
Chapter 13
289
I celcd in thr order of th. d.partmonlr monl of r taelory, onc appnoach lo accuratt
, !.rying tho grcatest number of depart- producl cosling is to use muhiple overhead
mentr and rrcriving tcrvic. lrom tho cosl p@lr and mulliplo bases wilhin a sirgb
I arnallesl numbor, or in thc ordcr of thc rospcrbility c.nlcr.
b brgesl rorvb. deportmont st allcatod 0 1 $ r 5 . Nqrmanufacturing businorses (lrch ar rrtail
lo oth.r cervict dcparlmrnts. Onco a ltdcr, fluncbl iuilildilu, irsuranc. cdnps-
r.rvicr dcpartmenlie cortr havr bcen niot, oducalionrl i,nttitutirnr, tnd horpitela)
t
rllocalod, no cortr of othrr r.ivico rhouH b. divu.d into dopartrrrnb to brrdgrt
b dcpadmontr an a.lteatrd to it. and control stl. For oranlpb, a rrtail rtoo
(c) Simullanoour-Tho full rcciprcal inter- mighl br dcprrUn nlalhed as folkrp* a*ninir-
relalio'rshipe ol bcnolitr amo.tg servico lralirr, occllplrlc)r, ralc prwnclin and advcr-
d.partrnontr an csrs idcrcd. tirhg,, purc{rarhg, relfing, and dclivcry. Ar h
t: Tho rinultanoour method b thr mat accu mmulrturhg butirosser, departmcntal cootf
ralt lor prduci coclhg ard for iJerdifying tcfal afr proreled lo ?ov3nuc-producingralor
c6lt tor ogeraling particulnrgeryice depart- dopadrncntsby urhg a cfrargingor billi.rgratc.
mmtc. Howevcr, thir mrthod b atao thc nrod Departnentalizatinn ir particub rty n""J""rry
b difficull to conrput.. lor hcpitab and cducatioral hstitutbnr, whbi
01$12. Contrcl of crtrtrheadia achieved by oornparhg must budgel lheir costr on a deparlmenlal
aclual rcsulla with ptanned or estimatod berb fo ccrtrol costs and to chargc adcquatr
rreullr. To makr arrh cornpericcrr, both tlgor rut rccorcring feee,
of orrcrhead must br aocumubled and rcport- or$16. Govomrnent agencies employ targc numbcn
od in lho sarn. rE.tnor. Sincr thc ernputdbn of people, and as they spend brgei and targer
c{ overhead rater with required ovcrhead osti- surnt ol lax money for varbus seruicer, lax-
rndcs procodeclho ircun.ncc and accumuh- payor! arr domending more otficient urr of
lbo of astual o\rcrhcad, th. cqnputatiort prc> lhd nrmey. Thercfore,rervices CrouH bo ren-
duro dolermho tho accounlinglq aslual wcr- dered al thc l*ost coct with thc
head. Arrdcst cffl.
cioncy. Govcmmcntal activilier stpuU b. hrd.
01313. Oepartmentalover- or underappliedovefiead gnlod and lheir csts controlled on a reaponsi-
it determhed by curqrsring astual and appliod bility accounting baeis. The efficioncy of ter-
ovcrhced. vicer ahouH bc mcasurcd by ushg stch unit3
01$14. ll a cornpfer product lhe is produced in a nqr.
of measurementas per capita, per milo, q por
deparlrnentalizedfactory or in a single depart- loi1.
I
\
i
290 Chagter 13
EXERCISES
Et3-1
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
Job,437 ovorheadcost:
DepartmentPl
(3 x $6.5O) ..........""""t""t""t' $19.50
DepartmentP2
(2 x $4.48)"""""""'t"""" """' 8.96
$?glg
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
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
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)
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
s
Er3-g'
t sgt l o
A
o
o
* l3 3ll
ltBiF'tr
o
l o
u-| o-
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lq'
r a Y
c,
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il
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o o o
o o o
q
fl
tr
o
i o
lo
tr r ulo-
o
o
o_
o
o
o- 9rr
t-
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TE
l|o
t ?
tg+
Qo co
$ll
"l
CL CL
qt o
o o o otl o ro o A
o o lo o o
o
.9 o(o
q,
8il o
.E-^ l1d9
o 0 0
to all d u
lO
t
@ ifil o llo
lg+ Y
o o
to o oI l o oo tl
" 1 3s 8Jl
lo o
!t ll
-ll
l o
o- lt oo -
oo
oo
oo
Nrr
ll
ll
ll
tl
l, 9F, l N ll
tn.tl @ 3 l l
l o o o olotl o o to I toil
l o o o l;l\il|
'13 o o N tNil
€El'lF
@- q 0_16lll O O I lrll
o rr Nloll -t dl
N O @ tOlt
tg'il = rt r ll0ll
€O EE
l F
Ig, t{f^tl F t$ll
5 f
F 3
a 3 - l llQoo ooo ' o\ot
-ld
l F
tg+
F (Il
(oo tt (ooui l
c -vl l l r -.{ll l
-lOll
rstl
t'l"lF o
o
o
n
o
o
o
lo
N
l o l to tl
F l t\ ll
c0 l o t l
- l
o l otl
- l oll
Ftl
q I glll
El;
lo rorl
toJl
8il =lo loll
iorl
I
lsll rf lr'3S
o lall
a i8ll
q
5
?
6 9
. - F
! b
a + ,
'tr h
'li o.
o
-
P
j
;gsir:*
EEES$$Fg
E
Ei3
3
" i o I
(1' i€ E EEgF;s;
5 3 , . o o u rE
tlt tr ul { O s
Chapter13
297
Et3-12
and
$3OO,000
= S75 per m achine hour
4,OOOmachinehours
$1,OOO
300
1.500
s2.BOO
2ln Chagter t3
I
E13-t 4
and
s6oo,0oo=
$ 2 '00Oper ton
30O tonr
iL Chapter t3
I
L
PROBLEMS
Pl3-l
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)'
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
P l 3 -l (C o n cl u d e d )
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
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
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
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
Pt3-8
! i
1
= 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
: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
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
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.
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
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 volumr product'r cost b gencrally distortcd
lhorough applicalion of cost traceability. downwad by tradilinal ctinq and thr high-
Tnditioal corthg traccr crly dirccl matcrial volurnc prcdrrfr cct b diCodod rpwerd
rrd dirrsl labor to odput; ABC ncogni:er that 01+10. In assigning pbntdvol co€il! to prcclrtr, ABC
rnany cther cosils aro traceabb, it'ncl to ouput, offen little or no advantagt ovor traditbnat
Utenlooftercod obieEtrcalled activitiec. clh9.
Q1+2. The rcle ol aciiviilbs h assigrrhg cctr to prod, 01+11. Thr dillercncc bctwecn CM and ABC tr pri-
uclr, uring ABC, ir to rcrvo ar thc link rnarily rrplahed by thc fact thd AgC b a bng
b.lwcon products and cogls; activitiecarc run decicion-makingtechnique, while CM ic
nquired to producr cr.rtput,and it b hc activi- ahql-run analysis.
licr lhat consumo rcaourccg,thur causing Ot+12. lf a procl.rctb dirqrthued, lhe cocir reported
codr to be hcuned This dtten lrorn traditbn- lor that producl by ABC will rpt necessarily bo
el cooting h whicfi output ir ossurnod !o cause rvoided, bocaucr ABC only measuns how
cod!. rasource3 arc cgrsumed by products, not how
Q14.3. Examples of rignificant, costly activities in spending will be affecled by discontinuinga
manufacluringefr rctting up, changing prdusl. AvoHhg a cosl requircs ttrat lesr br
dcrigns, recciving matorials, reguisitioning spstl ql sorrp rosqtnoo(s),and ABC docc,pt
malerials, moving materials and products, predbl changos h spending Cfhis it also lrur
oderhg lrorn yendo6, and inspecting. of Iraditboal absorption costhg.)
014-4. Thc two circumgtancer that mugt be presenl 01+13. The relstbnshipbetweenABCand ABM b hat
for a traditbna, cocthg ryrtcm to repod distort- ABM uses inlormation obtainod fronr ABC to
ed prodwt c€st! arc a oqnplax cosi strusture rnake improvornentsh thc finrr
and a diverss prodrrt line. Q1+14. The area ol ABM that lollows directly from
Q1+5. A conrplex€sl Elrustureis presenl if a signifi- ABC's revisbn of product ccts b the strategic
cant parl o{ overhead cocl b not relatedto the realigrnmentof thc tirm,r prbhg rtructuro and
volume ol ouput product line, permitting thr firm to retain or
Q146. A dversc prdwt lhe is me h sfibh diflerent
regnh high-volumebusiness h spitc of prbhg
producls consumr different mixes s{ volume- pressur€, and pronrpling managomentlo reex-
relcled and nonnolume-relaledccts. amine lhe roles ol sorne lorv-volumeprcducts.
Q1+7. Thr four leveb cil cqb and drivers in ABC are Q1+15. The high costs ol eqne activitiea,especially
tho tnit level, the batch level, the product level, non-value-addedactivities, can focus aientirr
and the plant level. m lhe need to reduce or elimirate them.
O1+8. ll a productconrumer l0% of all unit.level
014-16. ABC can lead to improveddociriona h design-
astivities and 3ogl of all batch.level activities, ing a producl becauco ABC tella thr coot c{
lradilbnal costing will under-report its cost by
each activity required h prcduchg thc product
assigning10% of all overhead costs lo tho
This informationpermits designen lo makc
product, including l096 of batch-level costs,
design decisionr more acsuralely, eo that the
whon 3096 of batch-level costs should be
npsl cosl-ettsctivedesign can bc selecled
assigned to tho produc{. Q1+17. The link between ABC and TeM is that ABG
Q14-9. When both bw-vdume and higft-rolume prod.
reveals the cosls ol each activily, including
uctr arc produced h a cornpany using tradi-
lhose that do not add value, and TeM aeeksto
li<mal cethg, lht lorutolume prodrrt is likely
reduce or elimhalo non-value-addedasliviliec.
to havr ils coet distorted by a hrger percont-
Thus, ABC can focus attenticn h a TOM ollort
agr than lhe high-volumeproduct. The low-
and can prbritize TOM's imprwernentl.
319
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:
El4-7
$ 12 , 6 0 0 = Sieo perunit
1OOunits of Product f 456
(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
sl4, O00
= $140 per unit
1OO units of Product # 456
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.
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
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
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 $1 .25 per.direct labor
l1l Making only the changes suggested by the study, the structure of the
ABG system would be:
Pool Driver
maChingOpgfatiOn.......r.....,...,..., maChing hOUfS
setup and material handlio$ ,...... 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)
Pt4-3
tl) DRAPERCOMPANY
Product Costs from Eristing CostingSystem
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
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
(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
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
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)
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 $399,965
+ I O O + 2'OOO
s816.35 S 199.98
(5) The proposed new costing system is an ABC system because it uses cost
drivers that include non-unit-level drivers. The unit-level driver is
machine hours, the batch-level drivers are setup hours and loads han-
dled' and the product-level driver is design hours. Vendor orders could
be either a batch- or product-level driver, depending on whether orders
are placed for each batch; the case does not tell whether this is so.
(6) For the low-volume product, #33, the proposed ABC system shows a sub-
stantially higher cost than did either of the other two systems. This is the
general result when ABC implemented and compared with traditional
systems. At the usual selling price of S8OO,the ABC system says this
product is a money loser. Equally,or perhaps more importantly,the pro-
p o s e d A B G syste m sh o w s th a t the high- volum epr oduct can be pr iced
very competitively.
.t r:t
Chapter 11
C 1 4 -2 (C o n cl u d e d )
f/) Based on the results of the ABC study, Warrentonb management should
consider meeting the competitorb prices on #44; this pricing strategy
can be profitable in the tong run and should avoid loss of market shat€.
The strategy for #33 is not as ctear. Some customers may not accept the
price increase needed to make il33 reasonably profitable, and Warrenton
could lose some customers who also buy large amoqnts of #44 if
managementdiscontinues il33 or hikes its price too much. Management
should consider several possibilitiesfor low-volume products such as
f3 3 :
CHAPTER15
DlscusstoN
ouEsTtoNs
01$t. Profil plarning oncompasses(a) sales estirnat- requirement in harmony with the sales
hg and sales plannhg prograrns;(b) budgeting budget
progra,nr lor contol cf all costs, both rnanufac- (e) plan production with the production man-
turhg lnd nqrrnanufacturing;(c) planning and ager based on the sales budget
programming addilions to or deletions lrom (f) -meel with heads of all dopartments-toth
working capilal an'dplant hveslmenl; and, (d) a producing and service-relative to direct
review of all laclors that have an impacl m rnalerials, direcl labor, and lactory over-
retum on inveslmcnt, both from a shorl.lerm head coslr required for the production
viewpoinl of one year and longer periods of budgeted
lime. Thr profil-planningfunction must not be (S) establish materials purchase require-
merely financial in scope. ll must disckrse the menls based on production planning, a
melhodg and programs by which the financial doparlment's malerials raquiremenls, or
groalsare to be achieved. tho produclbn budgel
O1$2. A budgel is the oxp€ctedtarg€t that manage- (h) eslablish €xpsnso budgels wilh market-
mont strives lo achieve, whereas a lorecasl is ing, administrative, and financial division
a level of revenue or cosl that an organizalion heads
predictswill occur. (i) budget capilal expenditures and prepare
Olt3. The three approaches lor setling profit objec. a researeh and development budg€t.
lives are: 0) develop a cash budget
(a) A oriori. Managementspecifies a given (k) coodinate and surnnrarize ccrnpany.wide
ratc of rolum to be achievedin the long budgets into a masler budget..+umma-
run ard then draws up plans lor achieving rized in the budgeled incorne stalEmont
that rale. and balance sheel I
(b) A msteriori. lr/lanagemenldraws up plans O1$7. Thc periodic budget ropresents a formal com-
and.then sels lhe rate resultingfrorn the
t-
munication channel within a company for the
plans. lollowing r€asons:
(c) Praomalic.Managemenluses a target (a) The periodic budget involves a lormal
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 comrnitment on lhe parl of management
empiricallyand sanctionedby experierrce. lo lake posilive actions to make actual
Qt$4. Long-rangephnning deals wilh specilic areas events conespond to the formal budgel.
of the cornpany's plans, such as future sales, (b) The periodic budget is usually raviewed
long.lerm c-f ilal expenditures,research and and approved by a higher authority and,
developmenlastivilies,financialrequiremenls, qrco approvod, is changed only in unusu-
and the protil goal. Short-rangebudgeting a.lspecified circumslances.
plrces the plannhg and particulariycontrol into (c) The periodic bucjget conlains explicit
perirds of three. 3ix, or tw€lvo mstths. slaiemonts of the imolementation of man-
Ql$'5. A budget is a detailedfinancialstalementof agomenl objectives for a period ol time,
the organizalion'sstrategy. lt converts generEll published to all parlies wilh conlrol
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 responsibility.
action, measuredfinancially.lt is related to (d) Comparison ol actual results with the
control,becauseit is the fundamentalguideline periodic budgel forms lhe basis tor man-
for whal the organizationshould do. Thus, it is agoment control, motivation, and pedor-
lhe benchmarkagainst which aclual perfor. rrance evaluaticn.
manco is cornpared.This processof ccnpari- Q15-8. Budgels are required for planning, moniloring,
son is a vital gart ol the conirol function in lhe and molivating, and because they include esli-
organizaticr. mat6s, they always involve uncertainty. The
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 procass ol budget preparation forces idenlifica-
phnnhg, organizing,and controllor lhe deveF lion ol variables and attsmpts at eslimation.
opmenl ol a budgetary conlrol program, il is Reiteralion should improve the process, and
neco3saryto: the process should cause a positive atlhude to
(a) organizethe budgetcommiilee atlain goals. Of course, a poorly estimaled
(b) organizethe entirebudg€tarycontrolpro- budget can causs dysfunctionalbehavior.
gra!71 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
(c) plan sales wilh the sales manager incentive lor going after bids. The inclusion of
(d) determine the linished.gods inventory budgsted and actual conlribulion margin data [ ;
a0
Chaptor l5 u1
h periodic roporb c{fers an early hdkxtion c/ bck o{ understandingof the lorccs that
' bobtf, par ccrlributbn, or the pesible noed lo cause ma Bgcrs to 8cl as they do. ll musl
reduce bid prices, or olher corroctive action bc recognrizedthat the tradilbnal assumP
thst rnay be reguire'd. tims undedying thc budget and budgel
CGA-Canada(adantcd).Beprinl with permis' Proces! atc nol .ntir.ly valid.Such
airr. agsurnPliatsincludo:
Q15-9. All omployeec (including txoculivr manago' (l) Managcn tulqnaticslly acc.Pt cqn'
rncnt) must accoPt fir inportancr of budgeting pany obiecfiveeas lhcir qwn.
and bo willing to parlicipalr fully in budgol (2) Tighl gtandardsate best bocaur they
prcparatbn and irnpbmentatirxr,or hc budgnt ropr.rent hard-to-reach goals, which
. will nst rtork. rrwt pcople strivc lo achicvc.
a1$10. (a) Etlective ur cl budgrthg rholH rocult in (3) Uppor levolc of managcmentan bol
botter perlorrrlinc. by the organizatbn equFped lo ostablishoperathg subobirc-
because ol betlcr pe rformance by the tives.
rnanagonr.Tho behavirral bonefit lies h ll is necesssry to rccognizethc bchav-
the ability crfthr budget and he btdgeling brsl influence (psychobgi=l and rcb
proqgss to rnolivalc tnatragtB to accorn' bgbal) 6r tho rrprk ol menagers.
plish thc orgranizatbnobjec'lives.This is The rnost corr[Tronspecific neoorrvrpn-
done by ushg the budget ss a vehble for dali'on is thc use cd parlbipative budgel-
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 , hg, sinco il prwide lor an opportuniiylo
etablishhg subobjectiveein accord with identify objeclivos of thc managcr and
rnanagerobjectives,and providinga thq- ccrrrpany,hcreaseg the ability of both to
qrghly undcrctood ccrrvno.r bssie for por- develop opcralhg activitier to reach thr
fonnenco rrreuuilTlont ard fcedbck. objcclive, and onhancesiho likolihoodol
(b) The budgeting procoss has been sublect setting objectives at levels elfcctive in
to criticism by behavioralscienlislr and molivaling managors loward company
clhers on sevcral counls: goals.
(1) The mosl scrbus charge is that the 01tl1. Conrnercbl €xponsosare grouped into lunc-
budgeling pr€oer faib to recognhc thal tions by their actions or operalhg units. Thesc
individuals may not accopt company functisrs are boked upon ae departmenlsend
objective as their own. The resull is hck should br gel along organizalional lincg in
cl eflort to achievethese objectives. order to identify lhe expente with an autho'
(2) The level of objectivessel may be rized and responsible individual. Grouphg by
eslablishedwithout regard lo how this will prcducls and by lenitqies may be desirabL al
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 well.
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 015.12. The budgeled incornestalement summarizer
underachievcmentol polenlially obtein- in one stalernent the result! of lhe complelo
able levels ol performance and/or plan of aclion. lt expressesin financiallerms
dostruclbn of employeenrorale. the erd resuhs of proposed plans. ll can also
(3) The budgetie used as a pressure be used lo lesl the adequrcy or inadeguacyof
device lo force conlormity lo and accop- those phns.
tance of lhe objectives eslablished in the 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
budgel. This often resuhs in employees expectedlinancial conditionai the end of I
finding ways lo beat' the budget rather particubr perird. One ol the measurecof tho
than actuallyimpoving pedormancc. adequary ol propoeed operaling and linancbl
(a) The budget b adrnhbtercd by hdivU- planr is the etfed ol the cxecution of thcro
uals noi direclly hvolved in the operaling pbns on the linancial condilbn of the buainesr.
elivrty ol thc organizatbn and not partic- lf the budgeied balance gheel shoflg a polen-
ubrty skillful h dealing wiih people. lial unsatisfactorycondilion, propooedplant
(c) Thc rnosl coriour problem lhat must be csn be reviewed end perhapo revised lo ptc.
overcome h qdor to rclve the problems ducs sallsfaclory resulls.
idenlifiedby tho crilicismsin (b) is the
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
E15-5
E15-5 (Concluded|
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
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
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.............
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
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
Pl5-4
t l O , O O Or . 9 = I ' O O O
212'OOO r.9 = lO'8OO
P l 5 -4 (C o n cl u d e d )
(4) Materials Requirements for Production
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
Gra i n R = 1 4 0 x 2 ,3 OO,OO0
= 1,463,636lbs. = 20' 909 bushels @ 70 l bs . eac h
220
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
Chaotar 15
356
P15-5
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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Chaptar15
w
P15-6 (Concluded)
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
Chapter 15 365
P15-7 (Continuedf
Schedule 7
Factory Overhoad Budget
(Applied Overhead|
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
Materials:
Units Cost
ry Units Gost Total
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
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
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Chaptor 15 371
P15-8,(Continued)
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
1
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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
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
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.
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' temalic approach lo lhe synchronization ol
od to bcnelil futun pcrio6. ll ia nornally asro- caglr regorlrce3 with needs. n a$bt! mansge-
cblrd wilh thr acquiritbn or imprwemrnl of rnent h rnakhg hlelligenl dccbionc corccrning
plant asrcte. Thr rral dislinclist betweln a capilal expcnditures, dividend polbies, hvegl-
copital and rcvenul cxpendilure is not lhe ment3, and other financial matler3, and often
immediato charging of the expendilurc to exerls a caulionary influencc on any ol lhe
ilcotnc, as gppood to ita gradual atrprtizatim, abovc phns. Porirdic roporb wnparhg aciual
but thr bngth cil limr required lor ils recovery with planned receipls and disbursemenl! per-
in castr. Bccovericr ol rvenur expenditurel, mil effeciivc ard cqrtinuous csrtrol ol cash by
rtrch ee product c6ll, aro expected to lako signalhg signili:ant deviations fronr the firan-
placr in a matlor ol weeks or, at the mosl, cial planr for |he perird.
monthr. Thc tinancial rccovery of capital O1S5. (a) Nqrmanulasluring busiresses musl plan
e:gendilures b measured h lerms of years. la the tulure jusl as carelully as rrralu-
O1&2. Purpoces cil e reoearch and devebpmonl Pte faclurhg cqtcerns. Seasonal pattemr in
Itarn are: ngyonuqrand expenditur€smust be po-
(a) A planned gearch lor new knowlodgc vided for, and requircd rquipmcnt
pertainingto the industry withoul reler' replacementand expansionsmusl be
ence lo a specific applicatict. budgeled.
(b) Crealion of a new producl or improve' (b) Not-for-profitorganizationsgenerally
ment of an exislhg ptoduct. operale on relatively fired incomes lhal
(c) lrwcnlkxr cf a new or impoved procost are received at ono time. Such recoipl
or machhery lo mEke a fhishe'd produci patlernr aro common for organi:ations
orgnponenl that rely sr tax dollars lor support.These
Bcs,rsrg fc a research and devclopmont Pro- funds must be allcaled throughoutthc
grarn arg: year in order to mainlain operalions.
(a) To protcct thc cabc dolbr, that ic, to Careful budgel plans are a necessity for
meet csnpotitbn. lmproving lhe quality such albcalbns.
of pedonnancr cl produds or achieving 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 ,
cod savhgr in eilher openting or capilal Eudgeting Syslem, and is an analytical lool
erpenditurer falb hlo this categpry. focueed on lhe outPul ot final results ralher
(b) To do research to promole new saleg than input or inilial dolbrs expended.The oul'
dollars,eiiher by enterhg a new market put is directly relatablelo planned goals or
or by aignili:anlly expanding an existing objectives.
msrket. O1&7. Zerobase budgeting[ZBB) is a planning and
(c) To invesligate problems with respecl lo budgeting lool using cost.benefil analysis of
environmentalprotrtbn, saletv"-rvorking projects snd functbng to imprwc an orgraniza'
cordilirns, elc. lion's regoutce allocation. Budgel requecls
Q1S3. Budgetary prccecbres for research and deveh consist of declsbn packageslhal are analy:ed,
opment expendituro are designed to: evalualed, and ranked in a priority order based
(a) lorce management to lhink aboul on cost-benelil analysis. lvlanagernenlcan then
phnncd elgendilures; evaluate pqssble astivitier for the corning peri'
(b) coordinate rosearch and developmenl od, selecting those that will best achieve orga'
plans with thr inmediste ard lang-range nizalioal grels.
pbns of the conpany Traditional budgeling tends lo concontralo
(c) lorcc lhs research and developmenl on the differential change fmm the gdot yean,
stafl to considcr major nonlinancial assumhg hat existhg astivitiec arc essenlial,
aspects cil lhc prograrn, such as person- must be cmtinued, are currently performed in
nel, equipmcnl. and facililies require- a et-officient and optimum tr16tr1er.and will
rnenb. be cost-effectivo h the canhg yest Cost! arc
Q1S4, A cash budgct involveo detailed estimates of devebped monr on a line-ilem tather lhan atr
anticipaled cash rcceipls and dicbursemenlr activity basis. ZBB orgranizerall budget cootr
for a rpccified perird cil time. lt Lr designed to h the lorm of activilies ancl/oroperaliau (deci''
assbl monagemenl h coordinaling cssh tlow sion packages) and evalualec tho effeclivc'
lrcrn operaticr3 an a basis lor financial plans ness of each decision package as if it were a
rt '- and conlrol. The cash budget provides a sys- new aclivity.
85
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
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
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:
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
$5O9,8OO
E16-4
(rl CROCKETTCOMPAT$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
l2l Alternate paths and times and the critical path and the erpected project
time:
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
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
E16-8'
(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
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
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
P l 6 -3
E II/!A1gP'4"- BIHG COMPA}IY
TVIAY1I
Ca*r Budget
For thr Ycan Ending March 31
208 20c
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
2 6ooo,ooo r Eoo/c|-
sgo,ooo
. :
Chapter16
Pl6-3 (Concluded)
-
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""-"""""""""""""
Pl O?4(Concluded)
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 $234 '......r............o..o.............'....... 304.2
':'::'*fli^d*Tl#$,
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...,.......
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
"
'
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
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:
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
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
(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
\,
110
I
1
Clnpter 17 411
!
(c) Yct. Thr chargr for goods purchaced formed during the period into budgeted
' tro.n anothor diviridt is conlrotlablo by Maintcnance Dopartment cost for thc
thc diVisbn managcment, provided that samo period. Using lhis predetermined
thr quanlity of g@ds purchascd b car- ralo, cach usor deparlmcnl's maintc-
trollabL by tho divbbn managcrncnt and nanor cost rouU deperd qr lhc nunber
lhat thr prb. it an rxtemally sCsblished of furrs of servbe il reeived. By using
rnarkcl prict. thc predetermhed ralr, lho aciual cqt
417-10.(e) Thr highor al.ctric pcrfler cob rnay be could be compared with totel charges
thr resull of any ono or snbination of madc to u3ere and thc dilfcrrrrcr decqrF
b
thr folbring posed into spending and idb capacily
(t) ircroaser h tir prbes paU tor tuel, variances lor tho Mainlcnanco
labor, rnsinlcnorco, rlc., Department. These variances arr useful
(2) incflicicnt oporaling praclices or 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
b macfiho lailurcr withh thc porrer deport- liahtenanco Dopartrned scnivity.
,nont, A fudher refinement would be to
(3) lhr acquirition ol erpensive new requirc ho lr,lahtenanco Dopartmcnt to
i crFacity, ancl/or lubrnit estirnatescil cct lo users beforc
(4) incrcarcd production of electricity -
b providirg services. This rvoutd not mly
requircd to rroot uror demand. give the dopartment reccivhg the sorvbe
(b) To lho oxtont thd any incffbiencies exist
rqne idea of the cogt of tho work, bul
h tho po'vor drpartmcnt tho cunent slb, would afso restrain the Maintenance
b calbn rctremr wilt pass them on to the Department from spending loo much
wcr dcparfncntr. Wlth the kind of alb, time on a icb.
catirn usod by Errmonr Cornpany, il is Q17-12. The flexiblc budget (a) provides the monthly
I nol possiblo lo drlermine wtrat caused budg€t allowance regardless ol the flucluating
tb lhc cost incroatr. A better syslem of nurlhly volume of produclitxr; (b) permits not
handhg lhis depsrtment'scosl wouH be having to estimate the operating activity ol a
I to chargc user deparlments for acluat rnooh in advancc ol the period lor wtrich the
I
uragrr on lho basir ol a predetermined budgot is prepared; and (c) recognizeslhe
b variablc rdc, and lor available usage on fixed and variable nature ol costs, wfrich leads
thr basb ol tho power doparlmont,s abili- to easy adjustments when evaluating actual
ty to provUo rowbo at maxinum capaci- perfornancc,
ty. Bndgetrd fixcd cogt rhould be allocat. Q17-13. A spendhg variance is the dilferencebelween
cd on lhc barir of ability to provide actual cost and the budget albwance (i.e., the
oeryico, becausr the Electric power
budgeted anrowtl sdiusted lor the aclual level
Dopartnrentcanncl control aclual usage.
of aciivity erperiencod). tt is caus€d by difter-
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
the variotrs ilemr ol cost budgotod and actualty
Electric Powcr Dcpartment, which are
incurred.To the extent that a manager has
ureful in cvaluating lhe department,s
conlrol over eilher price or quanlity, or bolh,
optraling effir:iercy.
Ot7-11. (a) Highcr total cort incurred the manager has control over the_amounl of
by the the spendingvariance.However,il the mrnagcr
Mahlonsrrcr Drpartrnent (i.o., hcreases
doeg not have conlrol over both prices and
ir lht priceoandor quantiliesol the varF
quanlities,lhe rnanagerhas mly lirnitedcsrtrol
our ilem! ol corl in the Maintenanco
over lhc amounl ol thc spending variancc.
Dcportrmrn), fowcr tolaf hours of mshte-
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
nancr rorvicr provided lo all ure r
somr control over spending variances, they
6partn.nt! during the period, o, a com-
arp us€d lo evaluale efficiency h responaibitity
binatlxr of both could rcsull in a higher
reportirg.
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 ling cosl, a spending narbnco tor each ilem or
artd nd be drargredlo the usorc. classilicationof cost should be reportedlo
(b) An improvcd mcthod responsible management each period.
tor distributing Itemizcd varianccl tell responeiblc manago-
i/binlmancr Dtpartnent cost would bi
l lo rslablbh a prcdetermined rate lo be menl which ilem war inefficientlyured. Thic
chargod lor oach hour of maintenance detoilod hto.rnatbn phpohts wtreie thc roarsh
torvbo prwirJod to users. Thc ratc wor,rld iJentily causos shoutd begin.
io
at7-15. An idlo capacity variance is
bo octablirh.d annually by dividing thc lhe amounl of
oudgclcd hours of servico to bc por_ ovor- or underappliedbudgeted tired faclory
overhead. In responsibilityreporthg, it
b used
Chaptor t7
112
l
: 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!
El7-2
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.
E17-3(Concluded)
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
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
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
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,
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%
PROBLEMS
P77-7
I
L Cllo,pty 17 425
I
I P17-2
(f l Maintenancs Department
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.
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)
P17-2(Concluded)
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
s8,9OO
7,5OO
Fixed cost sl,4OO
t
Chapter 17
P77-5.
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
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
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)
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)
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 rucfr standards, employees rnay bocanr dir.
rnelru{ac{uring prodrdr durhg a specifb pod- couragcd ralher lhan rrolivated, and budgetr
od mdcr cunonl or anthipded opcrathg cr- or pbns arr likely to be distodod end unroli-
dtkrrr. Stsndardr airJ in phrning and wrtrol- abL,
lirp opcntims. Qt&7. Behavinral bsuer lhat need b br cqrsUend
Q1&2. A ftw uscr cil etgrdard catr are: wfien selec.ling tho level of portorrnsnc. to b.
(r) oatablirhhgbrrdgntt ircorporated into ctandards inctudo tho fdl*,
(b) conlrclling coetr by nrotivating .rnploy-
hg:
oot and rnrarurhg rtfpbncier (a) Thc standards musl bo fcgitimatc. Tho
(c) rirplityhg coting preeduroo and epc.
atandads noed not rellect thr actual cogl
diilhg cod roportr
ol a ahgb ilem or o7clo. Fbrrew?, lhcy
(d) aaaigning cortr lo materials, work in
iteally will repraent the coci bst thould
proc.sr, and finklhrd god inventqicr
bo incuncd in the productbn of a giron
(r) forming the barir lor ostablishing con-
produgt or the perlorrrlance ol a jiven
lrecl bidr and for retthg saler prbes operatian.
Ot&3. To tol rabr pricct, exccutivesneed cogt hfor- (b) The standardr musl be attainable. tt/trcn
malion lumished by tho accounting depart-
the atandards arc set too high, thc
rnont Sinct $ardard cod! repr$€nt the ost
ropealod failure to chievc them wilt tond
that shorrld bc a&ained h a weil-nanaged plant
lo reduca thc rrotivatbn lor attahment.
oporalrd al nollral capacity, thcy arr ideally
Thc cqrvenr b sbo trur. Standadr h8t
cuitrd lor fumishing hfonnati:n that will enablc
aro loo looro represonl an invitatiqr to
lhr aalor depaimont to prbc products.
relar.
Eudgetr are urcd for planning and coordi-
(c) The participant shoutd havc d voice or
nalhg lulurc activitics and tor curlrolling cur-
influencr in the establirhment of rlan-
rrnl rliviticr. ttlhcn budget figurec erc baged
qr rtendad c€lq the aocuracy derda and reeulting pedormancr mea-
ol lho resulting sures. Innolvement in the formutatbn ot
brrdgct i! strwrgly hfluenced by the retiability J
standards gives the participant a gmalor
tho rtandard costc. With standards avaihLb,
prodtrction figurer can be translated into sense ol understanding and commil-
the ment.
manufacturhg costr"
Q18-8. (a) The role of the accounting department in
Q18-4. Sbrdards are m htegral pE t of
irb order and 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
proce$ co3l accumulation, but do nol
com- determine their ability to be quantified
pdr a lydom that ouH b. utilized h licu
of and lo provide dollar valuee for
sro of lhc accumulaftxr rnothoclr. C,ets rnay ryecific
be r.cumuhtcd wilh or without thc use d stan- unil standards.
(b) In the establishment of ctandards. tht
ct rdr.
Q1&5. Critcria to bc used wtron rolecthg lole of the depariment in wtrbh thc pcr-
thc opera- formance is being mearured ir to prwido
lirnal activitiea lor which rtEndar& are lo
be hformatim lor realistic dandards, and to
rrl includc thc fdbrrhg:
(e) Thr activity should be repetitive albw tor subsequent perfonnance evalu-
in atkrn lor the purposc of delecthg prob-
nalur., with thr repetition occurring in
lems and irprwhg perfomance.
reldively short qrcles.
(b) The hpd-and output (product (c) The role ol the industrial engineering
or rervice) . department h thc estsblishment of ctan-
of thc aclivily shoub be measurabteand
unilonn darde b to provide reliable nreasurer c,
(c) Tho obmonlt ol coal, ruch as phyaical activitieg related lo thc rtan-
direcl dardr ol performance, and lo vcrity tho
meltriab, d,act labor, snd facto.y orer-
hoa4 mud b. dsthed cfoarly at the unit consirterry of the pertomancr botwcon
lovol of act vity. departrnents.
Qt8-8. Norrtel or currntly attainablo Q1&9. Thr factory overhead variablo etficiorrcy
standards arc varF
proforablo to th.oretbal or Ueal siandafdr anco b ! ,nea3ur. of tho efficient or ineflbirnt
for uac ol lhe tase. thet wac used in allocating
(a) porformancc rvalualion and/or emptoyee
rnolivation, qn!, (b) budgeting and ptanning. fectory overhead to production. To thc crnont
Thoorctirl or Ueal ctan&rds-are nol realisti- that the activity used as an allocatircnbaso
cllly attainabtr. Ar a con3oquenc. of using driver variable lactory overhead, lhc variablo
efliciency varisncc is a mearurc oil tho
cort
/t43
Chapter l8
444
savings or cost ircJnence that is attributableto age/s tirne b not wetod on lho prcest
tho etlicieot or hefficient uso cl lhal acfivity' ol kJentilyingimportant problems or in
Thr factory overhead spending variance ir a workhg m unirnPottant ones. Thc man'
01&10.
mealurr cl the ctficient or inefficientuse of the ager should bo able lo concenlratb
varbur itsns of tsctory ovefiead ll ir caused etforls on inPottant problems' becausc
by dilfcrmcea in thc prices paiJ lor thc itens cf the teclnkPc highlightr lhern.
ovcrhcad actually used (i.c., lhr differences (c) lt may br difficult to determine which
variancor ere rigrrilicant. Also. by focus'
between tho ac'tual quantity at thc aclual prbe
and the sctual quantity at the standard prico for ing on varianceg abovc a cadain level,
all ilomr ol lactory. overhead) and lhe ditf er' other sscful hformatbn, suclr as trends'
encee h the quantities ol the varbus ilerru of rnay not be notbed at atl oatly stago.
tactory ovefiead adually used (i.e.' the difler' ll thc evaluatbn lYltrn b h anY waY
ences between the standard quantity allorved dircctly tied to thc variances, subordi-
for the actual level of the aclivity base at the nals! ttlsy be ternpled lo cover up n€$a'
etandatd price and the actual quanlity used at tive exceptbns or not tePort lhem al all.
thr gtandard price lor all items ol lactory over' Jn addilirn, subodinatea tnay not receivo
head). 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
01&11. The factory overhead volumc variance is a rnahtenance cf coat leveLg,but only rep'
measute ol the under' or over'utilizalion of rimands tor those itemc which exceed
pbnt failitier' lt it tho diflererre between the the range. Subordinate morale rnay sut'
total budgeted lixed factory overhead and the fer because of the lack ol Positive reh'
amounl charged to (or chargeable to) aclual lorcemenl for work well done. Using toF
production based on the standard quantily erance limits rnay also atfest supervisory
allowed for thc activity base used lo allocate emgloyeer in an unsatislactory m'vlner'
overhead. Thc volume vatiance may oo Supervisorsmay feel that lhey ars nol
thought of as ttle emount cl under' or ov€raP' getthg a cornplete review of operalions
plied budgetedfixed lactory overhead. because they are always keying on prcb-
01&12. Atter variances have been dEtermined'rnar:' lems. ln addiliqt, superisors may think
agemenlshould: that they are excessively critical of their
(a) decide whether each variance ig suffi' 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
ciently signilicant to require invesligation supervisorYrnoralernaYresuh.
and explanaliro 01&14. Overemphasison prico variancescan resull in
(b) hvettigate and obtain, frorn the resPo.r- a large number of lorr cast vendors, high levels
sible department head, explanationsof of invenlory, and poor quality materials and
signilicantvariances parts. Since lhe emphasig is on price rather
(c) take coneclive acticn and recognize and than quslity or reliability, purchasing will likely
reward desirable performance,whsro have a large number ol bw cct vendors avaiF
sppropriale . able, who can be played cre against the other
(d) revise standardsif needed to got the lowest pqssible prices. ln addition'
018-13. (a) Featuresol lolerance limils include: purchasingwill likely purchase invenlory in
('l) A standard cost control syslem is largo quantities to take advantage ol purchase
established,specilyingexPoctedperfor- discounls and to redwe the need to place rush
rnance levels. orders that resull in premium prices. Inventory
(2) An hforrnation syslem is designed lo tends to becorne unnecessarilylarge, resulting
highlightthe areas most in need ol hves' in excessive€rryhg costs, and rnaterial qualF
tigntkrnand poesibleconeslivc action. ty tends to decline, resulting in poor producl
(3) Variancc rangos for areas and ilems quality andor excessivespoitage,scrap, and
are compuled. Managemenl does not rework
spend tirne on parts of the operations Overemphasison efticiency variances can
thal producr satislactory pcrlormance reault in long production rung, largc work in
leveb wilhh theso ranges. ptocoss inventories, and attemptr to control
(4) lvlanagemenl's Ettenlion and etlods quality through hspestbn alone. Long produc'
arr csrcentraled on signifi-nt variancec tion runr reguire lewer mschino set ups and
frorn expccted resuhs. which sigoal the reduce tho amounl ol inelficiency resulting
prosonca of unplanned condilions need- frorn thc leaming tequired to changc produc'
ing investigalion. tion lrorn one product to snother. Large work in
(b) Tolerance limils have potenlial benefits ptocoss inventorier resull frgn bng prodrrclion
because they may resuh in more eftec' runs, and large invenloriegare likely to be
live use ol management time. Thc rnan' viewed by departmentmanagors as buftero
Clppter 18
45
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............
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'
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
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......................"""""""""'
Elg-g ,
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""'
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
Materialsyield variance:
ela42
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
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
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
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
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'
$ 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'
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
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,
P18-2(Concludedl
(31
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
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
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
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.
(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""
Chapts 18 167
Pl8-5 (Concluded)
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
lm Chapter18
Pt8-7
CI-AFFYMAilUFACTURINGCOMPA}TY
Department 2
Factory ChlerheadVarlance RePort
For Month
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
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
Pt &e APPENDTX
(Conctudedf
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.
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.
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.
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.
CASES
cl8-1
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
)18-4
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.
cl8-5,
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.
,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
Selcr.....253OO 300
62,220 25,060 .75 lOO.5Ounfiv.
o25
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
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
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
Cl8-? [ConUnued]
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-
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
KP Chagtor 19
=79-7
llt Work In Process (4rgOOSH x $10 FO tiato),.,............... 7618OO
Applled Factory Overhead 76,8OO
:19-8
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
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
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
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 ($12 fired rate r (4,OOOBH - {,125 SH}} 1,5OO
iD
Factory Overhead Control ....,r...............,.................,....... 5,OOO
'''
I
1# Chapter 19
P19-2
Materials Labor Overhead
Units completed gnd transferred out this period 2r4OO 2r4OO 2r4OO
Less all unltg In bgglnningInventofi,...............,r 300 300 300
Equlvatentunlta gtsrted and completed thla
period 2r1OO 2rloo 2,1oo
Add equiyalent unlts requlred to completc
beginnlngInventory o too 150
Add eguivalent unlts In endlng lnventory r......-.. 2ao 100 50
Equivalentunitg ol producUonthis period......... 213OO 2r3OO 2r3OO
Multlply by standard guanUtyof lnput per unit
of product 5 unlts 3/4 DLH 2MH
Standard quantity of Input allowed for work
producedduring the period l_l.5oo 1_J25 !.600
I
\-
Ctaplstg
I 197
L Plg€'
I
Conversion
- Materials -Efoo
Cost
-Unltsggmqfot-odand transfermd out this period ....... 5,ooo
L'8gsall unfts In beglnnlng lnventoty........:......:.:.,......
I 3,OOO 3.OOO
b
Equlualentunlts startod and compteteOthis perlod...
Add equlvalent u-nftsrcqutred to complete 2,OOO 2'OOO
beginnlng lnvantofl ...r.......D...t...................
I Add egulvalent unlts ln ending Inventory....D...o....r...., o 2rOOO
b
Equlualent unlts of producUon Urtg penoA 2,OOO 1.500
Multlpfyby ---'
....,........,... 4,O0o 5,5OO
standardquaniltyof lnput p"i uiii
Of prOdUCt................Dor..ea11..11....1..i.......!.....
_
Standardquanilty of fnput altowed for work 6 unlts 1t2 hour
produceddurlng thc perfod,............o.,........
24.OOO Z,ISO
Materlals($'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
'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
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
$ 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
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.
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:
Pl9-5 (Goncludedl
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
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
P1s-7iContinueCl
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.'..........
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
C,lWter 19
509
I
lr
Pt 9-9 )APPEHDIX
(Conctr.rdedl
I
5to Chagtor 19
I
\-
i
I
f-
Chaptcr tg
5tl
L l
CASES
L cl9-t
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. nd aflect the per unil Ptodttt cosl.
and clhcr cost3 ditccuy assignrabb to e product (c) Dirrct costing toports Ete mote oasily
ir r procrduro by which only undcctood by managemcnl becausc lhc
Aj1qgl-Cailigg
prirn costt plur variabb faclory ovrrhoad aro Etal.mmi! f ollo* mrna genronl's doctsbn'
rttigrt d !o ! Ptoducl or irvrntory; ell firrd cods rnsking Ptoc.r33s morc closely than do
porbd cstc. a\rorption 6l gal.ments.
aro srrUorcd
O*Z Ptoduc{ €ir rt esrcietd wilh thc mrnulac' (d) Rrpodhg thc tctal fixed ccl lor thc perird
turo of e product end ircludo di?cct mat.tieb' in tho incorrrr rlatcrnent dirccts manag.-
dirrl labor, and lactory orcrhead. Thcs. catr rncnfs dlentian lo the relatirnship of such
arc chstgod againsl rcvcnuc Es s€sl of goods 6l to Prolils.
rold. or shovn on thr bahnco sheel as invenle (o) Thr dirninatbn ol allocated jcint fixed cet
rier of work in ptocett and finished gooda' prrmitr a mot. objeclive appraisal ol
P.riod costs are asseiatcd with thc passage cil incornr conlributions according to prod-
timc and sre included as cxponggs in lhe in' ucls. tafes areas, kinds of cuslorners, elc.
cdrrc stalemerd. Under dircct esting, lired frc' Cot-nclurnr rclaticnships are highli ghled.
tory overhead is trealed as a pcriod coet nther (f) Thr rinilarity ol lho undertying concepts ol
than !s a produc'l cosl. diroc'l cosling and flexible budgels facili-
O2O3. Under direct costing, only Ystiabl. manulac' tatca th. adopibn and use of theso meth-
turing 6ts are ircludcd in invcntory. Undcr ab' ods for reporting and cost conlrol.
rcptioo costing (thr cunrnt. gcncrally acccpled (S) Dircct coeling provides a means ol cGting
method of cor'ling invtnlory for extemal rcporl' invrnloqy lhat ir similar to managemenl's
hg), all nranufeeturing coets, bolh variablt and cqrcopl of invenlory cosl as lhe currenl
tixed, are included h invontory. oul-of-pockel erpenditurei necessary lo
O2G4. lt iB argued that lired manulacturing cosls 8te produco or replace the hvenlory.
thc exp€nses of mahtahing productive capacfy. (h) Cle&al costs ate lower under direcl cosl-
Such expenses ara mo.c closoly associatod with ing because the m€lhod is simpler and
thc passage ol time than with produciict activity dosr nol require involved allocalions ol
and rhould, thereforc, bc chargcd lo Period fired cosis o special analyses of absorp-
erp.nre ralher than to tho product. tion data.
O2$5. The direcl costing method ir useful lor hlemal (i) The cornputation ot product cosls is sim-
roporting because il locuses attention on lho pler and rnore reliablo under direct ccling
fixed-variable cosl relalbnshp and the contribu- because a basis lor allocatinglhe fixed
lion margin concept. lt facililates managerial costs, which involves eslimales and per-
decisioo making, product pricing, and cosl con- aonal ludgment, is sliminatod.
Irol. lt allows corlain calculalidrs lo bo readily 0,20-7. Argumenls 8gainsl lhe use of direcl cosling
rnade, guch as break-even pohts-and contribu- include the follaring:
tian mirgins of products, cales lerrilorios, oper- (a) Separalian of costs inlo fixed and variable
alrng divisions, otc. Tho leus on the contribution might be difficult, especially when such
margrn (salos revonue less variabie costs) en- cosls aro semivariable in nalure. More-
ables managemont lo cmphasizo prolitabilily in over, all coslsincluding fixed c6ts{tc
mshing shorl-run busincss decisions. Fixed variable at sorne level ol produclion and in
cosls aro ncl oasiv cstlrollable in the short run the bng run.
and hence may not bo parlicuhdy relevanl for (b) Long-range pricing ol products and olh€r
rho.l.run bushess decisistr. long-range policy decisions require a
O2O€. Argumenls lor thc urr c{ direcl cosling hclude knowledge ol complele manufacturing
tho lollrwing: cost, wtrich would reguire addilirnal sepa-
(a) For profit-planning end decition.making rsto computalions to allocale lixed over-
purpo3es, mlnlgem.nl requir6r cosl- head.
volumo-profil rolelionship data that 6r. (c) Thc pricing of invenloricr by tho direct
moro rradily eveilabb from direcl cort cotling method i3 not accoptable lor in-
ltal.mcntr than from ab3orption cort co.r|c lax cornpulation purpo!os.
rtalements. (d) Direcl costing has not been recognized as
(b) Sincc lixcd laclory overhead is abrcrbed conlorming with generally acccpled ac-
as a perird cogt, fluctuatbns in production cotnling principles applied h lhc prepara'
and diffcrcncrr briwcen thr numbcr ol tbn of financial statomonls for rtockholcl-
unils produccd ahd tho numbcr rold do orr and lho gencral public.
513
511 Clnpter fr
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
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
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
L (3) Sal gs
aa..raaaa...aaa...a.aaaraa.ra..r.aaaaa..r..r.o......
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
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)
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
8 g : g E 3 E 3
. ' t t r l | | o J l g l t - t , | a
= - l J
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9
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L I 173
L. E2&|4
I
, (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 . . . . . . . . . . . . . . . . .
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
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.
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
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
-
, 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)
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.
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*
P2O-10(Concluded|
(31 Estimated sales volume to yield net Income proiected In pro forma
lncome statement with Independentsales agents receiving 25ohcommis-
sion:
29ohxsales = s250,000
sales = $1,25o,Ooo
Chapterfr
537
CASES
c20-l'
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
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)
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€
t12 Chapterfr
C2O-3(Goncludedl
@1-1. Dillcrential6t b thr ditference h the cct of @,1-7. Variablc corl ir important bccauso it can
allrrnative choicoc. Thc cconqrrist calb ruch always be idantified as a differential cost.
cdb marginal, and the engineer calls them However, dillerentbl ccls msy also includr
ircnrncntal. addltiqtal fixed cctr.
A21-Z Marginal cosl (or ditlerential cost) is the cost O21€. Sunh coeilsare incccrerable ccts that ar not
ircunod by increasingthc present outptrt The relevanl b futuro decisisrs.
coeil,lhenfore, would nol have been hcuned il O2t-9. A fixed corl would bc relevant in deciding
-additional
lhr u n i t r h a d n o t b e e n m a d e. bctwecn altcmstiver il the lhed erpenditun ir
Marginal cosling (or diract costing), on the an oul-of-pockot cost required in ordor to
o,trer hand, is a cclhg approach h wtridr crly undertake an allemative (e.g., the cet d rcnt-
' variablc rnanulacluring cost! are charged to ing eguipment needed lo provido sulficienl
prcducls, and thur to invenlory, while fixed capacity in deciding whelher or not to accepl
manufacluring coelt ar. lreated ar period an offer); or if a fired erponcfture can bt avcii
coslr and are charged olf withourtbecoming ed by undertakhg an altemalive (e.g., supervi.
psrl of hventory cools. eory ralaries that will be discontinued in the
@1€. Incremcntal coslr are important in decision evenl of a plant cbeing).
rnakhg, bccausc the least cosily or most prof- Q21-10. Oppoatnrty coctr are the measurablovalue ol
. itablo allemative cannol be determined unless an opporlunity blgassed by rejecling an alter-
incremental costs are known. lncremenlal nalive use ol resources.
coslr are lhe costs that musl be incurred in 021-1 1. Appendir Lhear prograrnming b a rnathemati-
order to cornpletesn €ctivity that is being con- cal lechnique decigned lo argial
riicred. These co3tt must bc known h oder decision makers in detcrmining thc
lo onrpare each arrailableEliernative. allocalbn of resources that would be
O21-{. Differentialcets do nol clrrespond to any pe.
reguired to mEximizeor mhimize the
eibb accounting calegory, because they are
objeclive lunctim; i.e., it b a tool that
oriented loward the future rather than the past
can be used by business ,nenagerll
and lhey treat producl costs on a differential
lo determinethe mix of inpuishecer-
rather than a total cost basis. Furlhernroro,cor.
sary lo maxirnize contributbn rnargin
tain costs relevant for ditferentialcost analysis
or minimize cost. Linear program-
(o.9., opporlunitycost and imputed cost) are
ming is an algorithm that maximizes
nol recordod h lhe accounls. Conversely,cer-
or minimizes a function ol several
tain costs recorded h the rccounts (e.g., fixed
variables subject lo one or,Tpre con.
cosls thal will remain urchanged) are inelevanl
slraints.The functionbeing opti-
for dilferential cost analysis. The diflerential
mized and the conslraintl sro
cod corrceptis a corcept for cosl analysis and
agsumed to be linear wilh respect to
nol cosl accumulatbn purposes. produclion activity.
O2t-5. The flexiblebudget b uselul h differenlialcet
Q21-12. AppendixThe unit costs usod in linear pro_
analyses,because lhe incrementgbelween
gramming problems are the lracc-
each ditferenttevel ol ouiput representtho ccl
able variable costs. Costs murl be
thal must be incurred il additisral business is
traceable lo the prcduct and variablc
undertaken.As bog ar lired costs rernah con_
with respect to prcducticr quantily in
rtant under all rates o{ oulpul, variablecosts
order to affect changes in total po-
are alwala the ditferontial costs. lf fixed costg . duclion
change in the flexiblebudget,differentialcosts cost and total contribution
will includethe incremenlalelementof fixed margin when changes in productbn
quantity and mix occur.
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 AB, BC, CD, and DA b calfedthr
cannot bc changed by a luture decision. sohrlbn space because il repre-
Historical costr obtained frorn accounling rec. senls thooe quantilies and cqnbi.
ords oflen include arbitrarilyallocatedfixed nalions ol standard and doluro
cosl thal rnay not be relevantto dilferentialcoet models lhal can be produccd,
analysis. given the availablecaprity o{ thc
grinding and polishingmrhiner.
g3
!
I
544 Ct@ter 2t
E)GRCISES
F27-7
546 Chagter2l
E21-2 (Concluded)
(31 Saler price rcguirsd to achieve a 2Oohmark up on production cost:
E21-3
q
Chapbr2l
547
:
! l
F214
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.
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:
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
= 1,000 DLH
= .sPlo9?= = $.ooe
l rOwr.rrvuu
1 - -
; \
sfl Chwter2l
E21-e(Concluded)
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
' 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
E27-11 APPENDIX
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:
E21.12 APPENDX'
OU
L + R ( 60 boxesdaily'demand
50
4E
40
30
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
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
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
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
FEASIELE
AREA
.2r . .5y>6.000
5.000
x. Pounds Ot Hardwood Der BalCh
PROBLEMS
P21-1
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
P27-3
,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
P21-3 (Concludod)
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)
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
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.
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:
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
3tl ol
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Chapter2l
P21-g(Concluded)
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.
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
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.
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
(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
(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
Chapter 2l
C21-g(Concluded)
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.
nt
ClWter2l 585
C21-5APPENDIX
-
ffi Chagter2l
C21-5 APPENDIX(Goncludedl
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
588
fuptsP
589
(b) docmrod nrrchhr trtup and rhorlor (b) Firancial accounting ir desiTrcd b rner-
, nrmufaclurhg aTcb tirnra (wt bh prot ido
ruro prricdb oamings. Capilal rrpondi-
lho company with tho ability to adjust
turc eva.luatbn is cqrcomed with tho lile
outpul quanlity end veririy guickly to
of a given prc,iecl, rrhiclr reldorn corro-
mo.l rapidly changing curlomcr
rpqrds to urual accorrrting p.rkdr.
dornane). (c) Financial tccounling mcalunr tho
A2,4. Tar &procbtion ie guito likoly to diffcr fronr
rccultr of oporati<xrr ol a ccrrpany or a
boofc dcprcciatbn boceurc thc cool r.covery
aegmenl of a company. Although thir
podcrd ueod fc tex purpooor ir. uaually rhorfci
ontity romelimrr corrorpondr with r
than tho oconornic lilr ol tho'assrt uted for
capital cxpenditun prciect, il b urualty
finarcial @unting purp6er. Abo, an ecccl.
composed of rnany interminglod capilat
onled melhod of depnciation is tlpbaly used
for tex purpo..r, whrrosr tfre iiraigirt-tinr erpenditure prciedt.
(d) Fiuncial accorrrthg capitalizer .p.ndi-
molhod ir npn c{trn trcod for bok purpoer.
lurcr if lhr cxpenditure ir dermed to
Q2-5. Book dopreciatbn lhorrH not be cqrsiJored in
havs a futuro rraluoor benefit to the csrr
ulindhg tho friun c8!h tbr, lrrn a projoct pany. Capitalization ir an attcmpt
belurr bok deprcciatinn har no elbcl qr to
malch expendilurer with revcnue! g.n.
lho rnornt or linhg of cash tbm.
^)2-1O. traled by thoao rrprndiluroc. Whtn
Tax deprccidbn stould bo conrbered in ostF
lulun nalue or boncfit cannd bo roliably
maling lho luturc cach llowr frorn a proioct
rneasured,financial accornthg treats thc
bocaurc lax deprccialion reduces tarsblo
expendituro ar a porlad axpcnla rath.r
ircqno and, thereforo, tax liability. Tax depro-
than ar an ascel acquisilbn.
ciation rccult! h a tar ravhgs, i.j., a reduction o)2-12. Benefitr of folblving up prciect
oatar liabilitythat is a caqh outtbw. The timing regulls irctude:
(a) comparis.on ol actual with projected
of cssh flnn's lr affoctod by the tar d€p.scratbo
rnothod and thc recovory period used- resulls to hsure lhat a project b meethg
@2-11. Fiunciel accotrnthg dora sro nol mtirely ruit. expecled performance, or taking cofiec.
ablt for ucc h evaluathg capital expendilure tive astbn or lermhathg a projecl that b
propocsb becauss: nol achievhg expectedpedormancc;
(b) evaluation of accuracy ol projcctionr
(a) Finenciel accounling uter lhc accrual
buir. Capilal oxponcftun docioicrr trorn different depsrtrnerrtr;
9en- (c) improvemcnt of futuro capital projcct
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 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
delerminedsr the rccrual basis.
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
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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(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
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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
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Year lnflows Adiustment (1) r (21
I $15,ooo (l +.1o) = 1.1oo Stg,soo
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610 ChWtor22
P22-7(Conctudedt
,}r (lt l2l (31
lnflatlon- ' e
Adiusted
Lost Periodic
Lost Periodic Gontribution v
Contrlbutlon Arnual 696 Margin Saved
Margln Saved InflaUon with GIM
Year with GIM Adlustment (1) r (21 '|U
. 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)
c22-2
c22-3
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)
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
C22-8,(Concluded)
618
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:
w Chapter23
F,.3-3
E23-4
$34,OOOinitial cash outflow
t1l = 3.4 years to payback
SlO, OOOannuafcash inflow
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
E23-8
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
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)
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%.
ts-t I
i
r-l
e8
Chapter23
P23-2
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)
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}
(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
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
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
640 Chapter 23
P23-7(Concludedl
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:
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
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)
" 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
\
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: slstomenl and shown in the statemont ol
(a) Direct nraterblg reqtbn nrtained eemings. However, the effec-tof nmre'
(b) Direct lsbor ceclbn curring and nonoperaling transaclions is not
(c) Frlory ovefiead entirelYeliminated.
(O Work h Pr@oer hventories lnfonnalion revoaled by a serios of income
I 3tatcmentsb morc rignilinnt in iudghg eaming
(c) Fhbhed grood hvmtorbr
iho bahnc" rhoet ir t 3tal.ment ct finsncbl power than informatbn revcaled by ane hcqnc
*2.
pcrttbt; the hcqrr ctBternont b a dalement of statcmstl. The incqne of a bushess rnay folbw
sttYity. The incqne lbtement is ccnplementary or .Yen exaggetat€ the ups and downs ol the
to thc babnce sheet, munthg in padicubr for bueinesgcyclo and, therefore, lhe inccne of any
tho ctrange in hr prcprietary equrty Bs a resull crc year will ncl representeaming powor.
of operatims during the year. In |hat respecl' the Changes in law or local zoning ordinances
incornc atatemenl ir eeaentiallynothing more may result in a marked change in lhe eaming
than a major rection of the retained eamings powerol a bushess. Ukewise,changesin public
accounl. Thereforc, tht rsvenue and expense taste, devebpment of new prodtrts' apPgarance
accounls in the income 3talemont have been ol new conrpetilion, acquisition ol subsiJiaries'
lcrmed'cxplanatoqf ac@unl3, explainingthe changes in management and lhe like, all may
cbb and lkrw of r.YcnueE and cxpensee lhat change earning power and yet not be clearly
bod to thc new hcqno (or bce) and to the new rellecled, il reflected at all, ir one incorne stale'
rrtahed camhgs balancc h the balance sheet. menl.
O4-3. Thr ordinary babncr rhecl and incqne slate- The accounting use of historical. rather lhan
menl aro htended to ptwkJe hlormalist as lo curront, dollars in measuring depreciation and
financial peilion and resulb of operation of a cost of goods sold may resull in distoding any
burinesl, in sctordancc wilh several assump' view of earning power obtained frorn a single
liqs that arc made h preparhg |he stalements. incorne statemenl.
Frqn the standpoinl cil the criticisms rnade, the ln regnrd to plant ass€ls, il can be said lhat
most important cil these assumptions are lhal their value to a going concetn is usually depen'
cocl lost appropdale arnortization of cost mea' dent uPon the eaming power of the business.
rurca unelgired cct, and that a business mey Such s value is not necessarilythe same as lQ'
bo a$umod lo bc gohg to conlinue operatbns uidation value, cost, cost legs amortization.
indclinilely into lhe future. Accountingstate- repbcement value, or any other kind of value'
mcntg sre usually prepared on lhe heory lhal a The phrase.true value'has no definileconnota'
cale or gome other definite event is essenlial tion.
bcfore revenur is recognized.Basically,the O4-4. Actusldescribes the way cosls are measured.
aseot sUe of a balancc aheet coctaha a preson- i.e., at actual historical arnounts; /ull absaption
tstbn o{ the anrounts cl cost incurred, which can describos which elemenis of cost are allocaled
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 to hvenlory accounls, i,e., all elements of rnanu-
incornc slalement presents the srnounl of rov- lacluring cost are fully allocated to hventories;
cnue recognizedas having been realized during p/ootss describes how cqsl infonnation is accu'
thc period, less the podioo cl all cosls incuned mubted, i.e., costs are accumulatedfor each
thsl doe3 not appear to be lairly delerrablelo procossor deparlment in the laclory.
'I ftnurc perinds. O4-5. Prime costing systems albcate only lhe prime
Thc ircome staternonl is prirrnrity a m€asure costs, direct material and direcl bbor, lo hvento-
cd what lres been camcd, and not a measure of ry accounts. Direct costing syst€ms, abo called
'camhg power.' variable costing syslems, albcale the variable
For plant assots, the balance
rheot b pdnarily a rnasure cl accountabilityfor manulacluringccts, direcl materbl, direci labor,
cxp.nditureE,rhowing acguisitioncosls lees and variable factory overhead lo lhe inventory
codr sllocalod to past operatbns. This rneasure accounts.Absorpticn costing systems albcate lo
of accounlability may br quile diflerent from Ilvenlories parl or all of tixed frtory overhead,
1rur velue.' in addiliooto all varlrble manufacluringcosts.
To hcreese ilg usefuhess as one elemerd in 04€. Actual costing m€asuros product costs at actual
judChC eaming porver, the ircsne stalement is hislorical arnounts, while standard ceting mea-
picparcd with a dietinclion between operating sures product costs by ueing predetermined
and nonoperaling items. For the samo roason, arnountsol resourceg to be coosurrnedand pre-
c.rtain iterns may be climinoled frorn the incorne determinedpriceso{ those resources.
ChaPter 4
62
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
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
E4-S(Concluded)
(g) FactoryOverheadControl.."""'r""""""""" l8,ooo _
AccountsPayable...........,.............."""" 18,OOO
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
(bl 17,5OO
' 17,5OO
(c) 1,800
1,800
(d) 27,OOO
Accrued Payroll.....,.'...... 27 |OOO
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
PROBLEMS
P4-1
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
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,@'
Letx = directlabor
1.5r = S24O,OOO
x = $l60'000 direct labor
.5x = $8O,OOO factory overhead
P4-4
CompanYA: s4,oo0,ooo
Salgs """"t"""""t"tt""ttt"tt""t"""ttt"""""t"
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"
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,@
P4-5 (Concluded)
1
,<
Chapter 4
76
P4-6
84,OOO
Work in Process laaaata
Material8... 84,OOO
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
P4-7 (Concluded)
t_ CommonStock Factory Overhead Control
I (b)
(cl
26,53O (e) 47,330
! l2r 5OO
(d) 8r3OO
I 47,33tO
!
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 _$3e2,499
l
Ghapter 25
DfscusstoNQuEsTtoHs
ezs-1, Porcontago d gral'tl lo ralo b a nrasuro of (b) lt lies lognther the rnany phasos ot fiAan.\-
cun.nl operating activilirs. Fevenuo produc- cial phnning. sales cbjrlives, c6l st-
liwr, coal incurrcnco, Ind corl control arl trol, and the prolit gnal.
rnbodied in lhir ratio. Thr capitatrmployd (c) ll aids in detecting the strengthl end.
lumovrr ratr ir ! moa3uro of lhc anrount of weaknesses wilh respect to lho usr or
agsol investment rehtivr to tho activhy lcvel cl nonuse of hdivijual assob.
th. cornpany. This rato highlights the succcgs (O h serves as a yardstbk h measurirg por-,
o{ adrievirg ealeg vc{urnr with mirimum acsot fonnance and proviCesa basis lor evalu-
' hvcaUnont ard measurcr a
lhc salesaeneraliqr ating inprovem€nl ovo, time ard arrstg
activity and overafl anscl menagemont. divbi:ns.
e2s-2. Capitsl omployedcqrsbtr ol nqrcurrent a$ets
{o) }t devebps a keener eenge of resoqtsi_
(invrstmentr in buildingr, machinrry, and . bility and leam eflort in divbisrol ,nan- -
oquipmrnt) ar wrll !r currrnl asrctr. Somt agcrr by enablirg thcm to measurc and
finnr do ttcrtur. cuncnt aerr1tsbut p6fer rork- tvaluale their orvn astivilies in he light c/
.
ing c-Fital; lhat is, lho nol balsnce of curnnt lhe brdget and with ,Dspeclto thr resuttr
egrtt ard currcnl linbililicr. achieved by other divisisrsl rnanagors. r'
Q25-3. Tr+o major objectivet that managemonl may 025-6. The five lrequently encountered limitatbos of
havc in mind when setting up a system for using the rate-of.retum_on-capilal-employed
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 follow:
crngbyed an: (a) lt may not be reasonable to expcct thr v
(a) lo lecuro a summary msasurc of lho
aame rolum on capital employed lrom
profilability of operations, products, and
each division if the divisions selt thcir
lacililies connecled with each divbirn; respective products in rne*ets that difler
O) to obtain hforrnation as to the success ol _
widely with respect to product develop-
division manag.rr in conducting thcir menl, compelilion, and conrumo
. portirrr of thc canrpant'c rtivilies.
drmand Lack ol egreernont on thr gti-
Q25-4. Dpfuncibnal astbnr that managemenl could
mum rale ol rclurn might discourlg. \r
lak. lo irnprovc rhorl-term relum on caoital
rnarugen who believe lhe rate is ret at
ornpbyed at the expsrse ol bng-run prolitabili-
an unlair level.
ty hclude: (b) Valuatiqrs of assets cil differentvintager
(a) Defer or reduce preventivemainlenarrce,
in ditferentdivisions might givo rito to *
which reducel currenl cxpenaebul
comparison difficuttieg and misundcr-
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
atandings.
ircreaa irg I r.rturr cosi. (c) Proper albcation ol conrrnon c€lc and
(b) Rcducr cxponditurr on research snd
assots requirea dstailed information F
drvclopmcnt, which reduces curronl
aboul tho budgeted and actual uro of
expcnr. bul makor thr cornpany less
cofilmon lacilities. Thc cost of kecping
canpelilivt h tho luturc.
track ol guch detaila rnay be higrh.
(c) Rcduco or arrc*J rrnpbycr trainhg and
(d) For the sake of making itrr curiont pcri:a -
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
rale of relum on capitaf empbycd -loot
cxp.nlro bul makcc lhe company less
good,'managers may be influenced to
cqryctiiivo h thr future.
(d) Sell ard then nnt nreded assets, mEke decisions that are not h thr best _
I,ltich bngl,run hlerests of the firm. Thir prob-
9e!s lhcm ofl thc balancc sheet but may 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 -
cosl the cornpsny rnorc h the bng run.
(o) Deler, reduce, or arcid nrodemizaticn expecl lo be in pcitbns for mly a rhorl
of time belore behg reassignod,thur, por- rv
facilities,rspocially rubstantial inyost-
rncnb h eutornaled manulacluring frili- sonally avoiding rcsponaibilityfor ,
lior, wtrich kecpr asrol cosl on thr bal_ lmg-run corsequoncet.
(e) A single moasure of performanco,ruch
anca sheot lotr bU rnalcs thc corngany l-
as rotum on capilal employed, rnay nrult
lcss carpetitivo h tht futurc.
425-5. Uac od lhc rato-o{-rolum-ori-cspilal.emptoyoc, in a fixation on improving thc compo.
hag the folbwing livr claimod achranlaoes: ncnts of the one moasurc to thc neglect
(a) ll focuses menagemont'satte-nlion 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
on activilies. product research and dovclop- \t
oaming thc bcst pro{it possibleon the
rnent, managerial devebpmonl, progror-
capital (tolal assets) avaihblo.
. sivc personnel polbict, groodonployoe
688
689
Chapter25
l1
moralo, and good custqncr and public appreciation righls, and pcrlormancc sharlg
relolbnr arc juol ar irnportanl in oaming sro valuabb only if thc cqnpany imprwee h
a grealcr prc/it and assprhg csltinuour tho bng+rn. Since adbns thal resull h shorl-
growllt tcrm ?nprovements catl have a negativc lmgr
Q25-7. Multiplc pcrformanco moaauro3 aro usod lo term irrpact hng-lerm incentiver probabty arc
oycrcorno tho limitetkrnl cl r rhgh financial nPrc oltrlivr.
rnasur.. Multpll prrlorrnam tnealut$ PttF Q2s9. Ttrc basb methods used h pticing irlrcqrpa'
vidc central rnanagerncnl with a nprc cornpt"' nY Itansil96 ar.:
hensive pictutr ol divisimal prdormancr by (a) trander prbhC basod cr ccl
considering a widcr rangr of managomenl (b) rnatkel-bas€dtranslorPricing
respansbililie3, nsllinamial activilies ar well (c) cosiflus transfer Ptiing
as fiuncbl performancl. Muhipleperfonnancr (d) negrctiatedkansler pticing
mcalurcr cen bo derigncd to provido an (e) arbilrarYtransfer Prbhg
incenlivo to divisimal tnanagon to cnlngo h 425-1o. A markot-baced lranster prico provides an
activitieo that havo long'lerm bcnlfil lo lhr incentive for divisional managemenl lo mini'
company but which may havo r nlgalivr mize cosir h qder to rnaximize dMsimal prof'
impact on rhort-run protit. Ersmpler includr ilr. In csrtrast, e ccl?luc transler pricc pro-
baric roaearch, now producl drvrlopmrnl, vkJcs no incontive tor divisioosl managcmonl
guality improvcmrnt, produclion innovalion, to bo coot etlbiont. ln last il lhe ptdit rnartup
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 ir a percentagoof cosl, there is gubslanlial
dovelopmcnl. ln additiqr, mulliple moasutcs incentive to bc inelficienl h order to increase
miligalr tho problem cil trying to evalualc divF total divisicnd PrclfiL
sional performincc on the bagis ol a single a2s-1 1. (a) Negol'aledlransfer pticing:
profil measuro that may be cornputedon diller' ('t) Advanlage: The profit'center man'
enl bsser in each divisicn. agots haYe conlrol over lho lransler
Q25-8. Cornrnanforml of managsmenl incentive csn' prices and can be held responsible lor
pensatbn phnr irclude: heir resuftingirnpact on profils.
, (a) Co^rh bonuror, whbh erl urually paiJ in (2) Disadvantage: lndividual manageru,
a lurrp rum rl thc ond of lhr pcrird and in heir endeavor to msximize profits cil
an basod qt a cornbirgtion of ccrporde their om divbbns, may rnekc decisiru
porlormancr, individual porformancr, delrimental lo thc overall prolil of the
and thr managernenllevol. lirm.
(b) Stock bcnusea, wtrbh arc delermined in (b) ArbitrarYlransfer Pricing:
essentiallylho same way a! cash bqtus- (l) Acfvantage:ll'rs Po.ssiblefor execu'
ca. tivo management to eet transfer pricea
(c) Delrrod canpmsalion, ufibh ir paid in thot will guide profilcenler managors lo
cash andor dock ttst do€s ncl vest urdil make decisisrs that will maximiza total
a future perird. In tryno c8ses, tht rnan- firm Profits.
agcr io rcguircd lo invrsl annually and (2) Dioadvanlage:The profit'center
thc oqrany rnatchcr lhc stlrbuli<n. manager! do not havc aulhorily in an
(d) Steh qlinr, whi*t givo thr tnatragor a aree aflecting the prcfil pedonnancr lor
right lo purcharr rtock al a rrt price which they will be evalualed.
wilhin r rct pcrird Tho hccnlivo b to CGA-Canada(adapled). Fteprintwilh permis-
hclp thr cornpany insrcalr tho market rbn.
pricc ol itr clock s! much ar possible Q25-12. Under the dual lransfer pricing approach' lhe
withh thr oplbo porird produchg (selllng)division hcludes a profit h
(e) Stek appreciot'ur rigrts, wtri*r art sini- carputhg itl revenue f rorn irdracornpanycales
br lo ttck optbru crcopt that thc nran- while the consuming (buying) divigionir
agcr is not roquired to purchasc rtock, assigned only variablo costs of lhe produchg
bul ircloed rccoiver an anpunt equal to division, plus an equitablo porlion ol fixed
ils apprcciati:n at lho cnd ol a rel perF costs. Thc producing division lhu+ uses-g
od. 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 '
(t) Prrlormencr rharer. which arc rtock rnanc., whitc tho ccnsuming divisbn has avaiF
awardl paid to lho rnsnagcr only aller ablc a price more uselul for decisbn'making
rorrr long*un groalhar boen schioved. purposos. The producing divisbn's prolil wor.lld
Cash and stock borru.r.t ara barrd on one 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
prri'cd rosultr ard thoroforo provi<Jea rhorl- tinsrcbl stalemont3.
tcrm irccntivr, ln csdrast,.ctek cptbn!. stock
690 Chapter25
EXERCISES
E25-l
Sales
(11 Capital-emPloYed
${,6OO,OOO
=.8
turnover rato Gapitalemployed s2,ooo,ooo
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)
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.
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)
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
E25-5
PROBLEMS
P25-1
, -5-1(Goncluded)
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
>-5-4
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
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
704 Chapter25
C25-2 (Concluded)
,3
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)
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
; 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.