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PROBLEM 4-33 (30 MINUTES)
1. a. Equivalent units:Percentage
ofCompletion
with RespectTax to
Returns Conversion(physical (labor and Equivalent Units
units) overhead) Labor OverheadReturns in process, February 1...... 300 20%Returns started in February............ 900Total returns to account for............ 1,200
Returns completedduring February......................... 800 100% 800 800
Returns in process, February 28.... 400 75% 300 300 Total returns accounted for............ 1,200 ____ ____ Total equivalent units of activity.... 1,100 1,100
b. Costs per equivalent unit: Labor Overhead Total
Returns in process, February 1................... £ 3,500 £ 4,000 £ 7,500Costs incurred during February.................. 90,000 51,000 141,000Total costs to account for............................. £93,500 £55,000 £148,500Equivalent units............................................. 1,100 1,100Costs per equivalent unit............................. £85.00 £50.00 £135.00
2. Cost of returns in process on February 28:
Labor: equivalent unitscost per equivalent unit300£85.00.................................................... £25,500
Overhead: equivalent unitscost per equivalent unit300£50.00.................................................... 15,000
Total cost of returns in process on February 28.......................................... £40,500
McGraw-Hill/Irwin © 2009 The McGraw-Hill Companies, Inc.Managerial Accounting, 8/e 5-1
PROBLEM 4-34 (50 MINUTES)
The missing amounts are shown below. A completed production report follows.
Units started during January................................................................................. 55,000Units completed and transferred out during January......................................... 60,000Total equivalent units: conversion........................................................................ 66,000
Work in process, January 1: conversion.............................................................. $ 110,600Costs incurred during January: direct material................................................... 400,000Cost per equivalent unit: conversion.................................................................... 14.10Cost of goods completed and transferred out during January.......................... 1,320,000Cost remaining in ending work-in-process inventory: direct material.............. 158,000
PRODUCTION REPORT: CANANDAIGUA CARPET COMPANYWeighted-Average Method
Physical Units
Percentage of
Completion with
Respect to Conversion
Equivalent UnitsDirect
Material ConversionWork in process, January 1.............. 25,000 25%Units started during January........... 55,000Total units to account for................. 80,000
Units completed and transferred out during January....................... 60,000 100% 60,000 60,000
Work in process, January 31............ 20,000 30% 20,000 6,000 Total units accounted for.................. 80,000 _____ _____ Total equivalent units........................ 80,000 66,000
McGraw-Hill/Irwin © 2009 The McGraw-Hill Companies, Inc.Managerial Accounting, 8/e 5-2
PROBLEM 4-34 (CONTINUED)
Direct Material Conversion Total
Work in process, January 1................................ $232,000 $110,600 $ 342,600Costs incurred during January.......................... 400,000 820,000 1,220,000Total costs to account for................................... $632,000 $930,600 $1,562,600Equivalent units................................................... 80,000 66,000Costs per equivalent unit.................................... $7.90 $14.10 $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 ¿ )¿¿
¿¿..............................
60,000$22.00
$1,320,000
Cost remaining in January 31 work-in-process inventory:
Direct material:
(number of ¿ ) (equivalent ¿ ) (units of ¿ ) ¿¿
¿¿..................................
20,000$7.90 $ 158,000
Conversion:
(number of ¿ ) (equivalent ¿ ) (units of ¿ ) ¿¿
¿¿............................................
6,000$14.10 84,600
McGraw-Hill/Irwin © 2009 The McGraw-Hill Companies, Inc.Managerial Accounting, 8/e 5-3
Total cost of January 31 work in process................................................ $242,600
Check: Cost of goods completed and transferred out... $1,320,000Cost of January 31 work-in-process inventory. . 242,600Total costs accounted for..................................... $1,562,600
PROBLEM 4-35 (45 MINUTES)
1. PRODUCTION REPORT: MIXING DEPARTMENT(Weighted-Average Method)
November 20x5Percentage
ofCompletion
with Equivalent UnitsPhysical Respect to Direct
Units Conversion Material ConversionWork in process, November 1....... 5,000 70%Units started during November.... 17,000Total units to account for.............. 22,000
Units completed and transferredout during November.......... 16,000 100% 16,000 16,000
Work in process, November 30 6,000 30% 6,000 1,800Total units accounted for............... 22,000 ____ _ _ ____Total equivalent units..................... 22,000 17,800
DirectMaterial Conversion Total
Work in process, November 1....... $ 31,600 $ 55,220 $ 86,820Costs incurred during November. 85,000* 210,000† 295,000Total costs to account for.............. $116,600 $265,220 $381,820Equivalent units.............................. 22,000 17,800Costs per equivalent unit.............. $5.30 $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
McGraw-Hill/Irwin © 2009 The McGraw-Hill Companies, Inc.Managerial Accounting, 8/e 5-4
PROBLEM 4-35 (CONTINUED)
Cost of goods completed and transferred out during November:
( number of units ¿ )¿¿
¿¿..............................16,000$20.20 $323,200
Cost remaining in November 30 work-in-process inventory
Direct material:
(number of ¿ ) (equivalent ¿ ) (units of ¿ ) ¿¿
¿¿.................................. 6,000$5.30 $31,800
Conversion
( number of ¿ ) ( equivalent ¿ ) ( units of ¿ )¿¿
¿¿............................................1,800$14.90 26,820
Total cost of November 30 work in process...................................................... $58,620
Check: Cost of goods completed and transferred out......... $323,200 Cost of November 30 work-in-process inventory. . . 58,620 Total costs accounted for.......................................... $381,820
2. a. Work-in-Process Inventory: Mixing Department............. 85,000Raw-Material Inventory............................................ 85,000
b. Work-in-Process Inventory: Mixing Department............. 70,000Wages Payable.......................................................... 70,000
c. Work-in-Process Inventory: Mixing Department............. 140,000*Manufacturing Overhead......................................... 140,000
*$140,000 = (1.50)($70,000) + ($35,000)
McGraw-Hill/Irwin © 2009 The McGraw-Hill Companies, Inc.Managerial Accounting, 8/e 5-5
d. Work-in-Process Inventory: Finishing Department......... 323,200Work-in-Process Inventory: Mixing Department.. . 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
McGraw-Hill/Irwin © 2009 The McGraw-Hill Companies, Inc.Managerial Accounting, 8/e 5-6
EXERCISE 5-32 (CONTINUED)
Activity Classification Activity Classification(1) P (11) B(2) P (12) B(3) P (13) U(4) P (14) U(5) P (15) U(6) P (16) U(7) P (17) B(8) B (18) F(9) B (19) F(10) B
McGraw-Hill/Irwin © 2009 The McGraw-Hill Companies, Inc.Managerial Accounting, 8/e 5-7
EXERCISE 5-33 (30 MINUTES)
1. ZODIAC MODEL ROCKETRY COMPANYCOMPUTATION OF SELLING COSTS
BY ORDER SIZE AND PER MOTOR WITHIN EACH ORDER SIZE
Order SizeSmall Medium Large Total
Sales commissionsa
(Unit cost: $675,000/225,000 = $3.00 per box).....................................................
box)............................................................................$ 6,000 $135,000 $534,000 $ 675,000
Catalogsb
(Unit cost: $295,400/590,800 = $.50 per catalog).................................................
catalog)......................................................................127,150 105,650 62,600 295,400
Costs of catalog salesc
(Unit cost: $105,000/175,000 = $.60 per motor)...................................................
skein).........................................................................47,400 31,200 26,400 105,000
Credit and collectiond
(Unit cost: $60,000/6,000 = $10.00 per order)................................................
order)......................................................................... 4,850 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
McGraw-Hill/Irwin © 2009 The McGraw-Hill Companies, Inc.Managerial Accounting, 8/e 5-8
Medium, 45,000$3Large, 178,000$3
bCatalogs distributedunit costcCatalog salesunit costdNumber of retail ordersunit costeSmall: (2,00012) + 79,000 = 103,000 Medium: (45,00012) + 52,000 = 592,000 Large: (178,00012) + 44,000 = 2,180,000fTotal 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.
McGraw-Hill/Irwin © 2009 The McGraw-Hill Companies, Inc.Managerial Accounting, 8/e 5-9
Sufficient information about product profitability, thus increasing the difficulties associated with management decision making.
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.
McGraw-Hill/Irwin © 2009 The McGraw-Hill Companies, Inc.Managerial Accounting, 8/e 5-10
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 Type of ActivityI: Machine-related costs Unit-levelII: Setup and inspection Batch-levelIII: Engineering Product-sustaining-levelIV: Plant-related costs Facility-level
2. Calculation of pool rates:
I: Machine-related costs:
$1,800,00018,000 machine hrs.
= $100 per machine hr.
McGraw-Hill/Irwin © 2009 The McGraw-Hill Companies, Inc.Managerial Accounting, 8/e 5-11
II. Setup and inspection:
$720,00080 runs = $9,000 per run
III. Engineering:
$360,000200 change orders
= $1,800 per change order
IV. Plant-related costs:
$384,0003,840 sq. ft .
= $100 per 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 change order × 200 change orders × 75%1,000 units
= $270,0001,000 units
= $270 per unit
McGraw-Hill/Irwin © 2009 The McGraw-Hill Companies, Inc.Managerial Accounting, 8/e 5-12
Ends: $1,800 per change order × 200 change orders × 25%5,000 units
= $90,000 5,000 units
= $18 per unit
IV. Plant-related costs:
Odds: $100 per sq . ft .× 3,840 sq . ft .× 80%1,000 units
= $307,2001,000 units
= $307.20 per unit
Ends: $100 per sq . ft .× 3,840 sq . ft .× 20%5,000 units
= $76,8005,000 units
= $15.36 per unit
PROBLEM 5-54 (CONTINUED)
4. New product cost per unit using the ABC system:
Odds EndsDirect material.......................................................................$ 160.00 $240.00Direct labor............................................................................120.00 180.00Manufacturing overhead:
Machine-related..............................................................800.00 200.00Setup and inspection.....................................................360.00 72.00Engineering.....................................................................270.00 18.00Plant-related.................................................................... 307.20 15.36
Total cost per unit.................................................................$2,017.20 $725.36
5. New target prices:
McGraw-Hill/Irwin © 2009 The McGraw-Hill Companies, Inc.Managerial Accounting, 8/e 5-13
Odds EndsNew product cost (ABC).......................................................$2,017.20 $725.36Pricing policy......................................................................... 120% 120% New target price.....................................................................$2,420.64 $870.43 (rounded)
6. Full assignment of overhead costs:
Odds EndsManufacturing overhead costs:
Machine-related..............................................................$ 800.00 $ 200.00Setup and inspection.....................................................360.00 72.00Engineering.....................................................................270.00 18.00Plant-related.................................................................... 307.20 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 EndsTraditional volume-based costing system:
reported product cost.................................................... $ 664.00 $996.00Activity-based costing system:
reported product cost.................................................... 2,017.20 725.36Amount of cost distortion per unit...................................... $(1,353.20 ) $270.64
Traditionalsystem
undercostsodds by
$1,353.20per unit
Traditionalsystem
overcostsends by$270.64per unit
McGraw-Hill/Irwin © 2009 The McGraw-Hill Companies, Inc.Managerial Accounting, 8/e 5-14
Production volume................................................................ 1,000 5,000 Total amount of cost distortion for entire
product line..................................................................... $(1,353,200) $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 =total manufacturing-overhead cost
budgeted direct-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 Colombian
Direct material........................................ $2.90 $ 3.90Direct labor............................................. .40 .40Overhead (.40$10).......................... 4.00 4.00Full product cost.................................... $7.30 $8.30Markup (30%).......................................... 2.19 2.49Selling price............................................ $9.49 $10.79
2. 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 Cost DriverBudgeted Activity
Budgeted Cost Unit Cost
Purchasing Purchase orders 2,316 $2,316,000 $1,000Material handling Setups 3,600 2,880,000 800
McGraw-Hill/Irwin © 2009 The McGraw-Hill Companies, Inc.Managerial Accounting, 8/e 5-15
Quality control Batches 1,440 576,000 400Roasting Roasting hours 192,200 3,844,000 20Blending Blending hours 67,200 1,344,000 20Packaging Packaging hours 52,000 1,040,000 20
PROBLEM 5-55 (CONTINUED)
Jamaican Coffee
Standard cost per pound:
Direct material......................................................................................... $2.90Direct labor.............................................................................................. .40Purchasing (4 orders* $1,000/2,000 lb.)........................................... 2.00Material handling (12 setups $800/2,000 lb.)................................... 4.80Quality control (4 batches $400/2,000 lb.)....................................... .80Roasting (10 hours $20/2,000 lb.)..................................................... .10Blending (5 hours $20/2,000 lb.)....................................................... .05Packaging (1 hours $20/2,000 lb.).................................................... .01Total cost................................................................................................. $11.06
*Budgeted sales ÷ purchase order size 2,000 lbs. ÷ 500 lbs. = 4 orders
Colombian Coffee
Standard cost per pound:
Direct material......................................................................................... $3.90Direct labor.............................................................................................. .40Purchasing (2 orders* $1,000/100,000 lb.)....................................... .02Material handling (15 setups $800/100,000 lb.)............................... .12Quality control (5 batches $400/100,000 lb.)................................... .02
McGraw-Hill/Irwin © 2009 The McGraw-Hill Companies, Inc.Managerial Accounting, 8/e 5-16
Roasting (500 hours $20/100,000 lb.)............................................... .10Blending (250 hours $20/100,000 lb.)............................................... .05Packaging (50 hours $20/100,000 lb.).............................................. .01Total cost................................................................................................. $4.62
*Budgeted sales ÷ purchase order size 100,000 lbs. ÷ 50,000 lbs. = 2 orders
3. 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.
McGraw-Hill/Irwin © 2009 The McGraw-Hill Companies, Inc.Managerial Accounting, 8/e 5-17