Demonstration Problem

Chapter 13 – Exercise 7

Product Costing – Various Issues

AccountingWhat the Numbers Mean 9e

Problem Definition

• Clay Company 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 2010, the company’s cost accountant estimated that total overhead costs incurred would be $420,000 and that a total of 50,000 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 400 coffee mugs used raw materials that cost $432 and used 40 direct labor hours at a cost of $10.00 per hour. Calculate the cost of each coffee mug produced.

c. At the end of October 2010, 280 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 October 31, 2010, finished goods inventory.

Problem Solution

• Calculate the predetermined overhead rate for Clay Company based on estimated direct labor hours:

Problem Solution

• Calculate the predetermined overhead rate for Clay Company based on estimated direct labor hours:

Predetermined Overhead Application Rate =

Problem Solution

• Calculate the predetermined overhead rate for Clay Company based on estimated direct labor hours:

Predetermined Overhead Application Rate =

Estimated Total Overhead Costs

Problem Solution

• Calculate the predetermined overhead rate for Clay Company based on estimated direct labor hours:

Predetermined Overhead Application Rate =

Estimated Total Overhead Costs

Problem Solution

• Calculate the predetermined overhead rate for Clay 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 Clay Company based on estimated direct labor hours:

Predetermined Overhead Application Rate =

Estimated Total Overhead Costs Estimated Direct Labor Hours

$420,000

=

Problem Solution

• Calculate the predetermined overhead rate for Clay Company based on estimated direct labor hours:

Predetermined Overhead Application Rate =

Estimated Total Overhead Costs Estimated Direct Labor Hours

$420,00050,000 DLH

=

=

Problem Solution

• Calculate the predetermined overhead rate for Clay Company based on estimated direct labor hours:

Predetermined Overhead Application Rate =

Estimated Total Overhead Costs Estimated Direct Labor Hours

$420,00050,000 DLH

=

= $8.40 per direct labor hour

Problem Solution

• Calculate the predetermined overhead rate for Clay Company based on estimated direct labor hours:

Predetermined Overhead Application Rate =

Estimated Total Overhead Costs Estimated Direct Labor Hours

$420,00050,000 DLH

=

= $8.40 per direct labor hour

For every direct labor hour incurred, $8.40 of overhead will be applied to the production run.

Problem Requirements

a. For 2010, the company’s cost accountant estimated that total overhead costs incurred would be $420,000 and that a total of 50,000 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 400 coffee mugs used raw materials that cost $432 and used 40 direct labor hours at a cost of $10.00 per hour. Calculate the cost of each coffee mug produced.

c. At the end of October 2010, 280 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 October 31, 2010, finished goods inventory.

Problem Solution

• Step 1: Calculate the total cost of producing 400 mugs:

Problem Solution

• Step 1: Calculate the total cost of producing 400 mugs:

Raw materials

Problem Solution

• Step 1: Calculate the total cost of producing 400 mugs:

Raw materials $ 432 Calculation:

$432 Raw material amount was given

Problem Solution

• Step 1: Calculate the total cost of producing 400 mugs:

Raw materialsDirect labor

$ 432

Problem Solution

• Step 1: Calculate the total cost of producing 400 mugs:

Raw materialsDirect labor

$ 432400 Calculation:

40 direct labor hours * $10.00 per hour

Problem Solution

• Step 1: Calculate the total cost of producing 400 mugs:

Raw materialsDirect labor Overhead

$ 432400

Problem Solution

• Step 1: Calculate the total cost of producing 400 mugs:

Raw materialsDirect labor Overhead

$ 432400336 Calculation:

40 direct labor hours * $8.40 predetermined

overhead rate

Problem Solution

• Step 1: Calculate the total cost of producing 400 mugs:

Raw materialsDirect labor Overhead Total Manufacturing Cost

$ 432400336

Problem Solution

• Step 1: Calculate the total cost of producing 400 mugs:

Raw materialsDirect labor Overhead Total Manufacturing Cost

$ 432400336

$ 1,168

Problem Solution

• Step 1: Calculate the total cost of producing 400 mugs:

Raw materialsDirect labor Overhead Total Manufacturing Cost

Total cost of producing 400 mugs

$ 432400

336 $ 1,168

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

$1,168

=

Problem Solution

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

Cost per coffee mug produced =

Total manufacturing costs Number of mugs produced

$1,168400 mugs

=

Problem Solution

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

Cost per coffee mug produced =

Total manufacturing costs Number of mugs produced

$1,168400 mugs

=

= $2.92 per coffee mug

Problem Solution

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

Cost per coffee mug produced =

Total manufacturing costs Number of mugs produced

$1,168400 mugs

=

= $2.92 per coffee mug Unit cost of producing each mug

Problem Requirements

a. For 2010, the company’s cost accountant estimated that total overhead costs incurred would be $420,000 and that a total of 50,000 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 400 coffee mugs used raw materials that cost $432 and used 40 direct labor hours at a cost of $10.00 per hour. Calculate the cost of each coffee mug produced.

c. At the end of October 2010, 280 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 October 31, 2010, 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 =

280 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 =

280 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 =

280 mugs * $2.92 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 =

280 mugs * $2.92 per mug =

$817.60

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 =

280 mugs * $2.92 per mug =

$817.60

Cost of coffee mugs sold

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 =

120 mugs

Calculation:

400 mugs produced – 280 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 =

120 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 =

120 mugs * $2.92 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 =

120 mugs * $2.92 per mug =

$350.40

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 =

120 mugs * $2.92 per mug =

$350.40

Cost of coffee mugs not sold reported in the finished goods

inventory

AccountingWhat the Numbers Mean 9e

David H. MarshallWayne W. McManus

Daniel F. Viele

You should now have a better understanding ofusing product costing information.

Remember that there is a demonstration problem for each chapter that is here for your learning benefit.