Demonstration Problem

Chapter 13 – Exercise 7
Product Costing -
Various Issues
 Problem Definition
• Gale Co. produces ceramic coffee mugs and
pencil holders. Manufacturing overhead is
assigned to production using an application
rate based on direct labor hours.
 Problem Requirements
a. For 2002, the company’s cost accountant estimated that
total overhead costs incurred would be $408,750 and that a
total of 54,500 direct labor hours would be worked.
Calculate the amount of overhead to be applied for each
direct labor hour worked on a production run.
b. A production run of 750 coffee mugs used raw materials that
cost $810 and used 90 direct labor hours at a cost of $9.50 per
hour. Calculate the cost of each coffee mug produced.
c. At the end of April 2002, 530 coffee mugs made in the above
production run had been sold and the rest were in ending
inventory. Calculate (1) the cost of coffee mugs sold that would
have been reported in the income statement and (2) the cost
included in the April 30, 2002, finished goods inventory.
 Problem Solution
• Calculate the predetermined overhead rate for
Gale Company based on estimated direct labor
hours:
 Problem Solution
• Calculate the predetermined overhead rate for
Gale Company based on estimated direct labor
hours:
Predetermined Overhead Application Rate =
 Problem Solution
• Calculate the predetermined overhead rate for
Gale Company based on estimated direct labor
hours:
Predetermined Overhead Application Rate =
Estimated Total Overhead Costs
 Problem Solution
• Calculate the predetermined overhead rate for
Gale Company based on estimated direct labor
hours:
Predetermined Overhead Application Rate =
Estimated Total Overhead Costs
 Problem Solution
• Calculate the predetermined overhead rate for
Gale Company based on estimated direct labor
hours:
Predetermined Overhead Application Rate =
Estimated Total Overhead Costs
Estimated Direct Labor Hours =
 Problem Solution
• Calculate the predetermined overhead rate for
Gale Company based on estimated direct labor
hours:
Predetermined Overhead Application Rate =
Estimated Total Overhead Costs
Estimated Direct Labor Hours =

$408,750
 Problem Solution
• Calculate the predetermined overhead rate for
Gale Company based on estimated direct labor
hours:
Predetermined Overhead Application Rate =
Estimated Total Overhead Costs
Estimated Direct Labor Hours =

$408,750
=
54,500 DLH
 Problem Solution
• Calculate the predetermined overhead rate for
Gale Company based on estimated direct labor
hours:
Predetermined Overhead Application Rate =
Estimated Total Overhead Costs
Estimated Direct Labor Hours =

$408,750
= $7.50 per direct labor hour
54,500 DLH
 Problem Solution
• Calculate the predetermined overhead rate for
Gale Company based on estimated direct labor
hours:
Predetermined Overhead Application Rate =
Estimated Total Overhead Costs
Estimated Direct Labor Hours =

$408,750
= $7.50 per direct labor hour
54,500 DLH
For every direct labor hour incurred, $7.50 of
overhead will be applied to the production run.
 Problem Requirements
a. For 2002, the company’s cost accountant estimated that
total overhead costs incurred would be $408,750 and that a
total of 54,500 direct labor hours would be worked.
Calculate the amount of overhead to be applied for each
direct labor hour worked on a production run.
b. A production run of 750 coffee mugs used raw materials that
cost $810 and used 90 direct labor hours at a cost of $9.50 per
hour. Calculate the cost of each coffee mug produced.
c. At the end of April 2002, 530 coffee mugs made in the above
production run had been sold and the rest were in ending
inventory. Calculate (1) the cost of coffee mugs sold that would
have been reported in the income statement and (2) the cost
included in the April 30, 2002, finished goods inventory.
 Problem Solution
• Step 1: Calculate the total cost of
producing 750 mugs:
 Problem Solution
• Step 1: Calculate the total cost of producing
750 mugs:

Raw materials
 Problem Solution
• Step 1: Calculate the total cost of producing
750 mugs:

Raw materials $ 810 Calculation:

$810 Raw material
amount was given
 Problem Solution
• Step 1: Calculate the total cost of producing
750 mugs:

Raw materials $ 810

Direct labor
 Problem Solution
• Step 1: Calculate the total cost of
producing 750 mugs:

Raw materials $ 810

Direct labor 855 Calculation:
90 direct labor hours
* $9.50 per hour
 Problem Solution
• Step 1: Calculate the total cost of producing
750 mugs:

Raw materials $ 810

Direct labor 855
Overhead
 Problem Solution
• Step 1: Calculate the total cost of producing
750 mugs:

Raw materials $ 810

Direct labor 855
Overhead 675 Calculation:
90 direct labor hours *
$7.50 predetermined
overhead rate
 Problem Solution
• Step 1: Calculate the total cost of producing
750 mugs:

Raw materials $ 810

Direct labor 855
Overhead 675
Total Manufacturing Cost
 Problem Solution
• Step 1: Calculate the total cost of producing
750 mugs:

Raw materials $ 810

Direct labor 855
Overhead 675
Total Manufacturing Cost $ 2,340
 Problem Solution
• Step 1: Calculate the total cost of producing
750 mugs:

Raw materials $ 810

Direct labor 855
Overhead 675 Total cost of
Total Manufacturing Cost $ 2,340 producing
750 mugs
 Problem Solution
• Step 2: Calculate the cost of producing
each mug:
 Problem Solution
• Step 2: Calculate the cost of producing
each mug:

Cost per coffee mug produced =

 Problem Solution
• Step 2: Calculate the cost of producing
each mug:

Cost per coffee mug produced =

Total manufacturing costs
 Problem Solution
• Step 2: Calculate the cost of producing
each mug:

Cost per coffee mug produced =

Total manufacturing costs
 Problem Solution
• Step 2: Calculate the cost of producing
each mug:

Cost per coffee mug produced =

Total manufacturing costs
Number of mugs produced =
 Problem Solution
• Step 2: Calculate the cost of producing
each mug:

Cost per coffee mug produced =

Total manufacturing costs
Number of mugs produced =

$2,340
 Problem Solution
• Step 2: Calculate the cost of producing
each mug:

Cost per coffee mug produced =

Total manufacturing costs
Number of mugs produced =

$2,340
750 mugs
 Problem Solution
• Step 2: Calculate the cost of producing
each mug:

Cost per coffee mug produced =

Total manufacturing costs
Number of mugs produced =

$2,340
= $3.12 per coffee mug
750 mugs
 Problem Solution
• Step 2: Calculate the cost of producing
each mug:

Cost per coffee mug produced =

Total manufacturing costs
Number of mugs produced =

$2,340 Unit cost of

= $3.12 per coffee mug producing
750 mugs each mug
 Problem Requirements
a. For 2002, the company’s cost accountant estimated that
total overhead costs incurred would be $408,750 and that a
total of 54,500 direct labor hours would be worked.
Calculate the amount of overhead to be applied for each
direct labor hour worked on a production run.
b. A production run of 750 coffee mugs used raw materials that
cost $810 and used 90 direct labor hours at a cost of $9.50 per
hour. Calculate the cost of each coffee mug produced.
c. At the end of April 2002, 530 coffee mugs made in the above
production run had been sold and the rest were in ending
inventory. Calculate (1) the cost of coffee mugs sold that would
have been reported in the income statement and (2) the cost
included in the April 30, 2002, finished goods inventory.
 Problem Solution

• Step 1: Calculate the cost of coffee mugs sold

that would be reported in the income
statement
 Problem Solution

• Step 1: Calculate the cost of coffee mugs sold that

would be reported in the income statement

Cost of coffee mugs sold =

 Problem Solution

• Step 1: Calculate the cost of coffee mugs sold that

would be reported in the income statement

Cost of coffee mugs sold =

Mugs sold
 Problem Solution

• Step 1: Calculate the cost of coffee mugs sold that

would be reported in the income statement

Cost of coffee mugs sold =

Mugs sold *
 Problem Solution

• Step 1: Calculate the cost of coffee mugs sold that

would be reported in the income statement

Cost of coffee mugs sold =

Mugs sold * Unit cost =
 Problem Solution

• Step 1: Calculate the cost of coffee mugs sold that

would be reported in the income statement

Cost of coffee mugs sold =

Mugs sold * Unit cost =
530 mugs
 Problem Solution

• Step 1: Calculate the cost of coffee mugs sold that

would be reported in the income statement

Cost of coffee mugs sold =

Mugs sold * Unit cost =
530 mugs *
 Problem Solution

• Step 1: Calculate the cost of coffee mugs sold that

would be reported in the income statement

Cost of coffee mugs sold =

Mugs sold * Unit cost =
530 mugs * $3.12 per mug =
 Problem Solution

• Step 1: Calculate the cost of coffee mugs sold that

would be reported in the income statement

Cost of coffee mugs sold =

Mugs sold * Unit cost =
530 mugs * $3.12 per mug =
$1,653.60
 Problem Solution

• Step 1: Calculate the cost of coffee mugs sold that

would be reported in the income statement

Cost of coffee mugs sold =

Mugs sold * Unit cost =
530 mugs * $3.12 per mug = Cost of coffee
mugs sold
$1,653.60 reported in
the income
statement
 Problem Solution

• Step 2: Calculate the cost of coffee mugs that

would be reported in the finished goods
inventory
 Problem Solution

• Step 2: Calculate the cost of coffee mugs that

would be reported in the finished goods inventory

Cost of coffee mugs not sold =

 Problem Solution

• Step 2: Calculate the cost of coffee mugs that

would be reported in the finished goods inventory

Cost of coffee mugs not sold =

Mugs produced
 Problem Solution

• Step 2: Calculate the cost of coffee mugs that

would be reported in the finished goods inventory

Cost of coffee mugs not sold =

(Mugs produced –
 Problem Solution

• Step 2: Calculate the cost of coffee mugs that

would be reported in the finished goods inventory

Cost of coffee mugs not sold =

(Mugs produced – Mugs sold)
 Problem Solution

• Step 2: Calculate the cost of coffee mugs that

would be reported in the finished goods inventory

Cost of coffee mugs not sold =

(Mugs produced – Mugs sold) *
 Problem Solution

• Step 2: Calculate the cost of coffee mugs that

would be reported in the finished goods inventory

Cost of coffee mugs not sold =

(Mugs produced – Mugs sold) * Unit cost =
 Problem Solution

• Step 2: Calculate the cost of coffee mugs that

would be reported in the finished goods inventory

Cost of coffee mugs not sold =

(Mugs produced – Mugs sold) * Unit cost =
220 mugs
Calculation:
750 mugs produced – 530 mugs sold
 Problem Solution

• Step 2: Calculate the cost of coffee mugs that

would be reported in the finished goods inventory

Cost of coffee mugs not sold =

(Mugs produced – Mugs sold) * Unit cost =
220 mugs *
 Problem Solution

• Step 2: Calculate the cost of coffee mugs that

would be reported in the finished goods inventory

Cost of coffee mugs not sold =

(Mugs produced – Mugs sold) * Unit cost =
220 mugs * $3.12 per mug =
 Problem Solution

• Step 2: Calculate the cost of coffee mugs that

would be reported in the finished goods inventory

Cost of coffee mugs not sold =

(Mugs produced – Mugs sold) * Unit cost =
220 mugs * $3.12 per mug =
$686.40
 Problem Solution

• Step 2: Calculate the cost of coffee mugs that

would be reported in the finished goods inventory

Cost of coffee mugs not sold =

(Mugs produced – Mugs sold) * Unit cost =
220 mugs * $3.12 per mug = Cost of coffee
mugs not sold
$686.40 reported in the
finished goods
inventory
Accounting: What
the Numbers
Mean, 5e