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PROBLEM 4-33 (30 MINUTES)

1.

a.

Equivalent units:

Tax
Returns
(physical
units)
Returns in process, February 1 ..... 300
Returns started in February ........... 900
Total returns to account for ........... 1,200
Returns completed
during February ........................
Returns in process, February 28 ...

800

Percentage
of
Completion
with Respect
to
Conversion
(labor and
overhead)
20%

100%
75%

400
Total returns accounted for ........... 1,200
Total equivalent units of activity ...

Equivalent Units
Labor
Overhead

800
300

800
300

____
1,100

____
1,100

Overhead
4,000
51,000
55,000
1,100
50.00

Total
7,500
141,000
148,500

b. Costs per equivalent


unit:

Returns in process, February 1 ...................


Costs incurred during February ..................
Total costs to account for ............................
Equivalent units ............................................
Costs per equivalent unit .............................
2.

Labor
3,500
90,000
93,500
1,100
85.00

135.00

Cost of returns in process on February 28:


Labor:

equivalent unitscost per equivalent unit


30085.00 .......................................................
Overhead: equivalent unitscost per equivalent unit
30050.00 .......................................................
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25,500
15,000

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Total cost of returns in process on February 28 .........................................

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40,500

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PROBLEM 4-34 (50 MINUTES)


The missing amounts are shown below. A completed production report follows.
Units started during January ................................................................................
Units completed and transferred out during January .........................................
Total equivalent units: conversion .......................................................................

55,000
60,000
66,000

Work in process, January 1: conversion .............................................................

$
110,600
400,000
14.10
1,320,000
158,000

Costs incurred during January: direct material ..................................................


Cost per equivalent unit: conversion ...................................................................
Cost of goods completed and transferred out during January ..........................
Cost remaining in ending work-in-process inventory: direct material ..............

PRODUCTION REPORT: CANANDAIGUA CARPET COMPANY


Weighted-Average Method
Percentage
of
Completion
with
Equivalent Units
Physical
Respect to
Direct
Units
Conversion
Material Conversion
Work in process, January 1 ............
25,000
25%
Units started during January ..........
55,000
Total units to account for ................
80,000
Units completed and transferred
out during January ......................
Work in process, January 31 ..........
Total units accounted for ................
Total equivalent units ......................

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60,000
20,000
80,000

100%
30%

60,000
20,000
_____
80,000

60,000
6,000
_____
66,000

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PROBLEM 4-34 (CONTINUED)

Work in process, January 1 ..............................


Costs incurred during January .........................
Total costs to account for .................................
Equivalent units .................................................
Costs per equivalent unit ..................................

Direct
Material
$232,000
400,000
$632,000
80,000
$7.90

Conversion
$110,600
820,000
$930,600
66,000
$14.10

Total
$
342,600
1,220,000
$1,562,600
$22.00

*$7.90 = $632,000 80,000


$14.10 = $930,600 66,000
**$22.00 = $7.90 + $14.10
Cost of goods completed and transferred out during January:

number of units total cost per


............................. 60,000$22.00
transferred out equivalentunit

$1,320,000

Cost remaining in January 31 work-in-process inventory:


Direct material:

number of
cost per

equivalent
equivalent

unitsof
unit of
................................ 20,000$7.90

direct
material
direct
material

$ 158,000

Conversion:

number of cost per

equivalent
equivalent

unitsof
unit of
.......................................... 6,000$14.10

conversion
conversion

Total cost of January 31 work in process ...............................................


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84,600

$242,600

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5-4

Check:

Cost of goods completed and transferred out ..


Cost of January 31 work-in-process inventory .
Total costs accounted for ...................................

$1,320,000
242,600
$1,562,600

PROBLEM 4-35 (45 MINUTES)


1.

PRODUCTION REPORT: MIXING DEPARTMENT


(Weighted-Average Method)
November 20x5
Percentage
of
Completion
with
Equivalent Units
Physical
Respect to
Direct
Units
Conversion
Material
Conversion
Work in process, November 1 .......
5,000
70%
Units started during November ....
17,000
Total units to account for ..............
22,000
Units completed and transferred
out during November ..........
Work in process, November 30
Total units accounted for ..............
Total equivalent units ....................

Work in process, November 1 .......


Costs incurred during November .
Total costs to account for .............
Equivalent units .............................
Costs per equivalent unit ..............

16,000
6,000
22,000

100%
30%

Direct
Material
$ 31,600
85,000*
$116,600
22,000
$5.30

16,000
6,000
____ _
22,000

16,000
1,800
_ ____
17,800

Conversion
Total
$ 55,220
$ 86,820
210,000
295,000
$265,220
$381,820
17,800
$14.90
$20.20

*$85,000 = $16,000 + $44,000 + (5,000 12,000)($60,000)


$210,000 = $70,000 + (1.50)($70,000) + $35,000

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PROBLEM 4-35 (CONTINUED)


Cost of goods completed and transferred out during November:

number of units total cost per


............................. 16,000$20.20
transferre
d
out
equivalent
unit

$323,200

Cost remaining in November 30 work-in-process inventory


Direct material:

number of
cost per

equivalent equivalent
unitsof
unit of
.................................

direct
material
direct
material

6,000$5.30

$31,800

number of cost per

equivalent equivalent
unitsof
unit of
........................................... 1,800$14.90

conversion
conversion

26,820

Total cost of November 30 work in process .....................................................

$58,620

Conversion

2.

Check: Cost of goods completed and transferred out ........


Cost of November 30 work-in-process inventory
Total costs accounted for .....................................

$323,200
58,620
$381,820

a. Work-in-Process Inventory: Mixing Department ............


Raw-Material Inventory ...........................................

85,000

b. Work-in-Process Inventory: Mixing Department ............


Wages Payable ........................................................

70,000

c. Work-in-Process Inventory: Mixing Department ............


Manufacturing Overhead ........................................

140,000*

85,000

70,000

140,000

*$140,000 = (1.50)($70,000) + ($35,000)


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d. Work-in-Process Inventory: Finishing Department ........


Work-in-Process Inventory: Mixing Department ..

323,200
323,200

EXERCISE 5-32 (20 MINUTES)


The activities of the Seneca Falls Winery may be classified as follows:
U: Unit-level
B: Batch-level
P: Product-sustaining-level
F: Facility-level

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EXERCISE 5-32 (CONTINUED)

Activity
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)

Classification
P
P
P
P
P
P
P
B
B
B

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Activity
(11)
(12)
(13)
(14)
(15)
(16)
(17)
(18)
(19)

Classification
B
B
U
U
U
U
B
F
F

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EXERCISE 5-33 (30 MINUTES)


1.

ZODIAC MODEL ROCKETRY COMPANY


COMPUTATION OF SELLING COSTS
BY ORDER SIZE AND PER MOTOR WITHIN EACH ORDER SIZE
Small

Order Size
Medium
Large

Sales commissionsa
(Unit cost: $675,000/225,000
= $3.00 per box)....................................................
$ 6,000
$135,000
box)

Total

$534,000

$ 675,000

Catalogsb
(Unit cost: $295,400/590,800
= $.50 per catalog) ...............................................
127,150
105,650
catalog)

62,600

295,400

Costs of catalog salesc


(Unit cost: $105,000/175,000
= $.60 per motor) ..................................................
47,400
skein)
31,200

26,400

105,000

Credit and collectiond


(Unit cost: $60,000/6,000
= $10.00 per order) ...............................................
4,850
order)
24,150

31,000

60,000

Total cost for all orders of a


given size .....................................................................
$185,400
$296,000

$654,000

$1,135,400

Units (motors) solde ....................................................


103,000
592,000

2,180,000

Unit cost per order of a given


sizef ..............................................................................
$1.80
$.50

$.30

aRetail

sales in boxesunit cost:


Small, 2,000$3
Medium, 45,000$3
Large, 178,000$3
bCatalogs distributedunit cost
cCatalog salesunit cost
dNumber of retail ordersunit cost
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eSmall:

(2,00012) + 79,000 = 103,000


Medium: (45,00012) + 52,000 = 592,000
Large: (178,00012) + 44,000 = 2,180,000
fTotal cost for all orders of a given size units sold
EXERCISE 5-33 (CONTINUED)
2.

The analysis of selling costs shows that small orders cost more than large orders.
This fact could persuade management to market large orders more aggressively
and/or offer discounts for them.

PROBLEM 5-51 (30 MINUTES)


1.

Valdosta Vinyl Company (VVC) is currently using a plantwide overhead rate that is
applied on the basis of direct-labor dollars. In general, a plantwide
manufacturing-overhead rate is acceptable only if a similar relationship between
overhead and direct labor exists in all departments or the company manufactures
products that receive the same proportional services from each department
In most cases, departmental overhead rates are preferable to plantwide overhead
rates because plantwide overhead rates do not provide the following:

A framework for reviewing overhead costs on a departmental basis, identifying


departmental cost overruns, or taking corrective action to improve departmental
cost control.

Sufficient information about product profitability, thus increasing the difficulties


associated with management decision making.

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5-10

2.

Because the company uses a plantwide overhead rate applied on the basis of
direct-labor dollars, the elimination of direct labor in the Molding Department through
the introduction of robots may appear to reduce the overhead cost of the Molding
Department to zero. However, this change will not reduce fixed manufacturing costs
such as depreciation and plant supervision. In reality, the use of robots is likely to
increase fixed costs because of increased depreciation. Under the current method of
allocating overhead costs, these costs merely will be absorbed by the remaining
departments.

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5-11

PROBLEM 5-51 (CONTINUED)


3.

a.

In order to improve the allocation of overhead costs in the Cutting and Finishing
departments, management should move toward an activity-based costing system.
The firm should:

Establish activity-cost pools for each significant activity.


Select a cost driver for each activity that best reflects the relationship of the
activity to the overhead costs incurred.

b.

In order to accommodate the automation of the Molding Department in its


overhead accounting system, the company should:

Establish a separate overhead pool and rate for the Molding Department.
Identify fixed and variable overhead costs and establish fixed and variable
overhead rates.

Apply overhead costs to the Molding Department on the basis of robot or


machine hours.

PROBLEM 5-54 (50 MINUTES)


1.

Activity Cost Pool


I:
Machine-related costs
II: Setup and inspection
III: Engineering
IV: Plant-related costs

2.

Calculation of pool rates:

Type of Activity
Unit-level
Batch-level
Product-sustaining-level
Facility-level

I: Machine-related costs:

$1,800,000
= $100 per machine hr.
18,000 machinehrs.
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5-12

II. Setup and inspection:


$720,000
= $9,000 per run
80 runs

III. Engineering:

$360,000
= $1,800 per change order
200 changeorders

IV. Plant-related costs:

$384,000
= $100 per sq. ft.
3,840 sq. ft.
PROBLEM 5-54 (CONTINUED)
3.

Unit costs for odds and ends:


I: Machine-related costs:
Odds: $100 per machine hr.8 machine hr. per unit

= $800 per unit

Ends: $100 per machine hr.2 machine hr. per unit

= $200 per unit

II: Setup and inspection:


Odds: $9,000 per run 25 units per run

= $360 per unit

Ends: $9,000 per run 125 units per run

= $72 per unit

III: Engineering:
Odds:

$1,800 per changeorder 200 changeorders 75%


1,000 units
=

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$270,000
= $270 per unit
1,000 units

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5-13

Ends:

$1,800 per changeorder 200 changeorders 25%


5,000 units
=

$90,000
= $18 per unit
5,000 units

IV. Plant-related costs:


Odds:

$100 per sq. ft. 3,840 sq. ft. 80%


1,000 units
=

Ends:

$307,200
= $307.20 per unit
1,000 units

$100 per sq. ft. 3,840 sq. ft. 20%


5,000 units
=

$76,800
= $15.36 per unit
5,000 units

PROBLEM 5-54 (CONTINUED)


4.

New product cost per unit using the ABC system:


Odds
Direct material ......................................................................
$
160.00
Direct labor ...........................................................................
120.00
Manufacturing overhead:
Machine-related .............................................................
800.00
Setup and inspection ....................................................
360.00
Engineering....................................................................
270.00
Plant-related...................................................................
307.20
Total cost per unit ................................................................
$2,017.20

5.

Ends
$240.00
180.00
200.00
72.00
18.00
15.36
$725.36

New target prices:


Odds
New product cost (ABC) ......................................................
$2,017.20
Pricing policy ........................................................................
120%

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Ends
$725.36
120%

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5-14

New target price ...................................................................


$2,420.64
6.

$870.43 (rounded)

Full assignment of overhead costs:


Odds
Manufacturing overhead costs:
Machine-related .............................................................
$ 800.00
Setup and inspection ....................................................
360.00
Engineering ...................................................................
270.00
Plant-related ..................................................................
307.20

Ends
$
200.00
72.00
18.00

15.36
Total overhead cost per unit ...............................................
$1,737.20
$
305.36
Production volume ...........................................................
1,000

5,000
Total overhead assigned .....................................................
$1,737,200 $1,526,800
Total = $3,264,000

PROBLEM 5-54 (CONTINUED)


7.

Cost distortion:
Odds
Traditional volume-based costing system:
reported product cost ................................................... $
Activity-based costing system:
reported product cost ...................................................
Amount of cost distortion per unit .....................................

664.00

$996.00

2,017.20
$(1,353.20)

725.36
$270.64

Traditional
system
undercosts
odds by
$1,353.20
per unit
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Ends

Traditional
system
overcosts
ends by
$270.64
per unit

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5-15

Production volume ............................................................... 1,000


Total amount of cost distortion for entire
product line .................................................................... $(1,353,200)

5,000
$1,353,200

Sum of these two


amounts is zero.
PROBLEM 5-55 (45 MINUTES)
1.

a.

GSCC's predetermined overhead rate, using direct-labor cost as the single cost
driver, is $10 per direct labor dollar, calculated as follows:
Overhead rate

totalmanufacturing-overheadcost
budgeteddirect-labor cost

= $12,000,000/$1,200,000
= $10 per direct-labor dollar
b.

The full product costs and selling prices of one pound of Jamaican and one
pound of Colombian coffee are calculated as follows:
Jamaican
Direct material ........................................
Direct labor.............................................
Overhead (.40$10) .............................
Full product cost ...................................
Markup (30%) .........................................
Selling price ...........................................

2.

$2.90
.40
4.00
$7.30
2.19
$9.49

Colombian
$

3.90
.40
4.00
$8.30
2.49
$10.79

The new product cost, under an activity-based costing approach, is $11.06 per pound
of Jamaican and $4.62 per pound of Columbian coffee, calculated as follows:

Activity
Purchasing
Material handling
Quality control
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Cost Driver
Purchase orders
Setups
Batches

Budgeted
Activity
2,316
3,600
1,440

Budgeted
Cost
$2,316,000
2,880,000
576,000

Unit Cost
$1,000
800
400

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5-16

Roasting
Blending
Packaging

Roasting hours
Blending hours
Packaging hours

192,200
67,200
52,000

3,844,000
1,344,000
1,040,000

20
20
20

PROBLEM 5-55 (CONTINUED)


Jamaican Coffee
Standard cost per pound:
Direct material .......................................................................................
Direct labor ............................................................................................
Purchasing (4 orders* $1,000/2,000 lb.) ...........................................
Material handling (12 setups $800/2,000 lb.) ...................................
Quality control (4 batches $400/2,000 lb.) ........................................
Roasting (10 hours $20/2,000 lb.) .....................................................
Blending (5 hours $20/2,000 lb.) .......................................................
Packaging (1 hours $20/2,000 lb.) ....................................................
Total cost ...............................................................................................
*Budgeted sales purchase order size
2,000 lbs. ................................... 500 lbs.

$2.90
.40
2.00
4.80
.80
.10
.05
.01
$11.06

4 orders

Colombian Coffee
Standard cost per pound:
Direct material .......................................................................................
Direct labor ............................................................................................
Purchasing (2 orders* $1,000/100,000 lb.) .......................................
Material handling (15 setups $800/100,000 lb.)................................
Quality control (5 batches $400/100,000 lb.) ....................................
Roasting (500 hours $20/100,000 lb.) ...............................................
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$3.90
.40
.02
.12
.02
.10

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Blending (250 hours $20/100,000 lb.) ...............................................


Packaging (50 hours $20/100,000 lb.)...............................................
Total cost ...............................................................................................
*Budgeted sales purchase order size
100,000 lbs. .......................... 50,000 lbs.
3.

.05
.01
$4.62

2 orders

a.

The ABC analysis indicates that several activities other than direct labor drive
overhead. The cost computations show that the current system significantly
undercosted Jamaican coffee, the low-volume product, and significantly
overcosted the high-volume product, Colombian coffee.

b.

The implication of the ABC analysis is that the low-volume products are using
resources but are not covering their share of the cost of those resources. The
Jamaican blend is currently priced at $9.49 [see requirement 1(b)], which is
significantly below its activity-based cost of $11.06. The company should set
long-run prices above cost. If there is excess capacity and many of the costs are
fixed, it may be acceptable to price some products below full activity-based cost
temporarily in order to build demand for the product. Otherwise, the high-volume,
high-margin products are subsidizing the low-volume, low-margin products.

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5-18