____ (A) Property Tax on the Factory Building

1.Classification of costs

Using the code letters below, indicate in the space provided how each of the following costs should be classified in the indicated Pen manufacturing company:

Code Letters
DM = Direct materials / WP = Work in process
DL = Direct labor / FG = Finished goods
MO = Manufacturing overhead / PC = Period cost

Costs

____ (a) Property tax on the factory building.

____ (b) The chief financial officers salary.

____ (c) Plastic used to manufacture pens

____ (d) Janitors at the factory

____(e.) Manufactured pens waiting to be sold to customers

____(f.) Advertising logos

____(g.) Partially completed pens

Answer:

(a.) MO (b.) PC (c.) DM (d.) MO (e.) FG (f.) PC (g.) WP

2.Classification of costs

Using the code letters below, indicate in the space provided how each of the following costs should be classified in the indicated manufacturing company:

Code Letters
DM = Direct materials / WP = Work in process
DL = Direct labor / FG = Finished goods
MO = Manufacturing overhead / PC Period cost

Costs

____ (a)Research and development costs incurred by Triomph, manufacturer of derailleurs, brakes, and other component parts for bicycles'in its efforts to develop new products.

____ (b)Salaries paid by Triomph to the plant managers supervising production operations.

____ (c)An inventory of Triomph Group 105 components purchased by Ross Bicycle Corporation for use in the manufacture of Ross's Model 1200 aluminum bicycle.

____ (d)An inventory of Model 1200 bicycle frames manufactured by Ross. Prior to sale, these frames will be painted and equipped with derailleurs, brakes, and other component parts.

____(e.)Salaries paid by Ross to its sales personnel.

____(f.)Salaries paid by Ross to employees who install derailleurs, brakes, and other component parts on the bicycle frames.

____(g.)An inventory of Triomph Group 105 derailleurs awaiting sale to customers.

Answer:

(a.) PC (b.) MO (c.) DM (d.) WP (e.) PC (f.) DL (g.)FG

3.Flow of manufacturing costs

The "flow" of manufacturing costs through the ledger of LB Enterprize. Co. during the month of August is summarized in the following T accounts. Certain amounts have been omitted and are represented by question marks.

Materials Inventory / Work in Process Inventory
Beg. Bal. 29,000
42,000
End. Bal.36,000 / _____? / Beg. Bal.8,000
120,000
End. Bal.5,000 / _____?
Direct Labor / Finished Goods Inventory
20,000 / Beg. Bal.0
27,000
End. Bal._____? / Beg. Bal.69,000
_____?
End. Bal.76,000 / ?
Manufacturing Overhead / Cost of Goods Sold
34,000 / 34,000 / ?

From the data supplied above, determine each of the following amounts. Some of the required amounts already appear in the T accounts; others require a short computation.

(a) The amount of direct materials purchased during the month: $______

(b) The amount of direct labor cost assigned to production: $______

(c) The amount of accrued wages payable to direct labor workers at August 31: $______

(d) The cost of finished goods manufactured during the month: $______

(e) The cost of goods sold during the month: $______

Answer:

(a.) / $42,000 (shown)
(b.) / $27,000 (shown)
(c.) / $27,000 DL cost incurred - $20,000 paid = / $ 7,000
(d.) / $8,000 beg. WP inv. + $120,000 - $5,000 end. WP inv. = / $123,000
(e.) / $69,000 beg. FG inv. + $123,000 from part d - $76,000 end. FG inv. = / $116,000

4.Product cost vs. period cost

Briefly define the terms product cost and period cost. Explain why the distinction between these two types of costs is important.

Answer:

Product costs are the costs of purchasing or manufacturing an inventory of merchandise. Period costs are those charged to expense in the period in which they are incurred without regard to the volume of production in that period.

The distinction is important because whether a cost is considered a product or a period cost will affect the amount of periodic income. Product costs become a part of the cost of inventory at the end of any period and are carried forward and charged against revenue in the period in which the product with which they are associated is sold. Period costs become an immediate charge against revenue and reduce net income in the period in which they are incurred.

5.Indicate whether each of the following is a product or a period cost

(a)Electricity for lighting a factory building

(b)Costs of delivering finished bicycles to dealers

(c)Cost of a store detective in a retail establishment.

(d)Cost of eggs in a bakery

(e)Cost of chocolate to a candy manufacturer.

(f)Salary of injection molding machine operator in a plastics factory.

(g)Salary of a sewing machine operator in a clothing factory.

(h)Depreciation of a freezer in an ice cream plant.

Answer:

(a)Product

(b)Period

(c)Period

(d)Product

(e)Product

(f)Product

(g)Product

(h)Product

6.Job order cost system

Blue Water designs and builds custom pools and spas to the customer's order and uses a job order system. The predetermined overhead rate for the current year is 70% of direct labor cost.

At the end of the current year, Blue Water's direct labor cost totaled $140,000 and actual overhead amounted to $95,000.

A pool built for Mollie Rose required $19,000 of direct materials and $3,500 of direct labor. It was completed in May of the current year.

(a) Compute the total cost of the Rose pool as shown on the job cost sheet at date of completion. $______

(b) Compute the amount of under- or overapplied manufacturing overhead for Blue Water's operations for the current year.

$______underapplied/overapplied (Underline the correct term)

(c) What disposition is made of over- or underapplied overhead at the end of the year (assume that the amount is not material)?

Answer:

(a) $19,000 materials + $3,500 labor + $2,450 ($3,500 x .7) = $24,950

(b) $95,000 actual overhead - $98,000 ($140,000 x .7) applied = $3,000 overapplied overhead

(c) Balance of overhead account at year-end is closed into the Cost of Goods Sold account if amount is not material. Underapplied overhead would increase Cost of Goods Sold. Overapplied overhead would decrease Cost of Goods Sold.

7.Allocating activity cost pools to products

Acadia Corporation makes plastic and wooden picture frames. The company has assigned $58,000 in monthly manufacturing overhead costs to two cost pools as follows: $38,000 to power costs, and $20,000 to production set-up costs. Additional monthly data is provided below:

Plastic / Wooden
Frames / Frames
Sales revenue...... / $156,000 / $106,000
Direct materials...... / 54,000 / 12,240
Direct labor...... / 22,240 / 48,480
Machine hours...... / 58,280 / 3,720
Production runs...... / 30 / 10
Units produced and sold...... / 26,000 / 6,000

Power costs are allocated to products using machine hours as an activity base. Set-up costs are allocated to products based on the number of production runs each product line requires.

(a) Allocate manufacturing overhead from the activity cost pools to each product line.

(b) Compare the total per-unit cost of manufacturing plastic frames and wooden frames.

(c) On a per-unit basis, which product line appears to be most profitable?

Computations:

Answer:

(a) / Plastic / Wooden
Power cost pool allocation...... / $35,720 / $2,280
Set-up cost pool allocation...... / 15,000 / 5,000
Total overhead allocation...... / $50,720 / $7,280
(b)
Plastic / Wooden
Total manufacturing costs...... / $126,960 / $68,000
Units produced and sold...... / 26,000 / 6,000
Costs per unit...... / $ 4.88 / $ 11.33
(c)
Plastic / Wooden
Profitability per unit...... / $ 1.12 / $ 6.34

Wooden frames appear to be more profitable than plastic frames.

Computations

(a) / Power cost pool allocation
Machine hours, plastic frames...... / 58,280 / 94%
Machine hours, wooden frames...... / 3,720 / 6%
Total machine hours...... / 62,000 / 100%
Power costs, plastic frames ($38,000 x 94%)...... / $ 35,720
Power costs, wooden frames ($38,000 x 6%)...... / $ 2,280
Set-up cost pool allocation
Production runs, plastic frames...... / 30 / 75%
Production runs, wooden frames...... / 10 / 25%
Total machine hours...... / 40 / 100%
Set-up costs, plastic frames ($20,000 x 75%)...... / $ 15,000
Set-up costs, wooden frames ($20,000 x 25%)...... / $ 5,000
(b)
Plastic / Wooden
Direct materials...... / $ 54,000 / $12,240
Direct labor...... / 22,240 / 48,480
Manufacturing overhead...... / 50,720 / 7,280
Total manufacturing costs...... / $126,960 / $68,000
Units produced and sold / 26,000 / 6,000
Manufacturing cost per unit...... / $ 4.88 / $ 11.33
(c)
Plastic / Wooden
Total revenue ...... / $156,000 / $106,000
Units produced and sold...... / 26,000 / 6,000
Selling price per unit...... / $ 6 / $ 17.67
Manufacturing cost per unit...... / $ 4.88 / 11.33
Profitability per unit...... / $ 1.12 / $ 6.34

8.Application of overhead - missing information

Lion Corporation manufactures a single product. Overhead is applied to production during the year using a predetermined rate based on direct labor cost. During the month of April, 50,000 units of output were produced at a total direct labor cost of $425,000. The amount of overhead applied to these units was $2,125,000. Assuming total direct labor cost for the year had been estimated to be $4,125,000, calculate the amount of manufacturing overhead Lion Corporation had estimated it would incur during the year.

Estimated total manufacturing overhead cost for the year. $______

Computations

Answer:

Estimated total manufacturing overhead cost for the year = $20,625,000

Computations: $2,125,000 = Predetermined overhead rate x $425,000

Predetermined overhead rate = $2,125,000  $425,000 = 500%

Predetermined overhead rate = Estimated manufacturing overhead  Estimated direct labor cost

500% = Estimated manufacturing overhead  $4,125,000

Estimated manufacturing overhead = 500% x $4,125,000 = $20,625,000

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