ACCTG 505 – SUMMER, 2008 – WIDDISON
Assignment Solutions
Table of Contents: (Arranged in order of class presentation.)
Chapter 2. Cost Terms...... 2
Chapter 4. Job-Order Costing...... 5
Chapter 5. Activity-Based Costing/Management...... 8
Chapter 17. Process Costing...... 13
Chapter 15. Cost Allocation – Support Departments...... 17
Chapter 16. Cost Allocation – Joint and Byproducts...... 18
Chapter 3. Cost-Volume-Profit Analysis...... 20
Chapter 6. Master Budget and Responsibility Accounting...... 23
Chapter 7. Flexible Budgets and Variance Analysis I...... 26
Chapter 8. Flexible Budgets and Variance Analysis II...... 29
Chapter 11. Selected Relevance Models...... 33
Chapter 21. Capital Budgeting...... 37
Chapter 22. Control Systems: Transfer Pricing...... 40
Chapter 23. Performance Measurement and Compensation...... 43
If you find any errors or omissions in this packet, please notify the instructor by email -- -- so that she may make the appropriate corrections or additions.
Chapter 2. Cost Terms and Concepts
.2-16(15 min.)Computing and interpreting manufacturing unit costs.
1.(in millions)
SupremeDeluxeRegularTotal
Direct material cost $ 84.00 $ 54.00 $ 62.00 $200.00
Direct manuf. labor costs 14.00 28.00 8.0050.00
Indirect manuf. costs 42.00 84.00 24.00 150.00
Total manuf. costs $140.00 $166.00 $ 94.00 $400.00
Fixed costs allocated at a rate
of $20M$50M (direct mfg.
labor) equal to $0.40 per
dir. manuf. labor dollar
(0.40 $14; 28; 8) 5.60 11.20 3.20 20.00
Variable costs$134.40$154.80$ 90.80$380.00
Units produced (millions) 80 120 100
Cost per unit (Total manuf.
costs ÷ units produced) $1.7500 $1.3833$0.9400
Variable manuf. cost per unit
(Variable manuf.costs
Units produced)$1.6800$1.2900$0.9080
(in millions)
SupremeDeluxeRegularTotal
- Based on total manuf. cost
per unit ($1.75 120;
$1.3833160; $0.94 180)$210.00$221.33$169.20$600.53
Correct total manuf. costs based
on variable manuf. costs plus
fixed costs equal
Variable costs ($1.68 120; $201.60$206.40$163.44$571.44
$1.29160; $0.908 180)
Fixed costs 20.00
Total costs$591.44
The total manufacturing cost per unit in Requirement 1 above includes $20 million of indirect manufacturing costs that are fixed irrespective of changes in the volume of output per month, while the remaining variable indirect manufacturing costs change with the production volume. Given the unit volume changes for August 2007, the use of total manufacturing cost per unit from the past month at a different unit volume level (both in aggregate and at the individual product level) will yield incorrect estimates of total costs of $600.53 million in August 2007 relative to the correct total manufacturing costs of $591.44 million calculated using variable manufacturing cost per unit times units produced plus the fixed costs of $20 million.
2-17(15 min.)Direct and indirect costs, effect of changing the classification of a cost item (continuation of 2-16).
- MOP’s managers might prefer that energy costs be directly traced to various products because in general, the greater the proportion of economically traceable costs, the more accurate will be the estimated cost of each cost object and hence the better the managerial decisions (like product pricing) based on those cost estimates. Since energy costs were substantial ($90 million out of $150 million of manufacturing overhead), tracing them directly to cost objects would significantly increase the accuracy of the cost estimates.
- (in millions)
SupremeDeluxeRegular
Direct materials costs$ 84.0$ 54.0 $62.0
Direct manufacturing labor costs 14.0 28.0 8.0
Direct energy costs 39.8 40.7 9.5
Other manufacturing overhead costs 16.8 33.6 9.6
Total manufacturing costs$154.6$156.3$89.1
Units produced (millions) 80 120 100
Cost per unit$ 1.93$ 1.30$0.89
3.
Cost per unit (before analysis)$1.75$ 1.38 $0.94
Cost per unit (after analysis)$1.93$ 1.30$0.89
Effect of analysis on cost per unithigherlowerlower
Before Shore’s analysis, the Deluxe and Regular product lines were being over-costed and the Supreme line was being under-costed. Shore’s analysis resulted in $60 million of the $150 million of “overhead costs” becoming directly traceable to products. It showed that the Supreme line consumes the most energy relative to the volume of production. With more accurate direct costs, and therefore a more accurate allocation of the overheads of $60 million, Supreme’s cost per unit is more than in the old cost system, while the cost per unit of Deluxe and Regular is less than in the old cost system.
2-20(15-20 min.)Classification of costs, manufacturing sector.
Cost object: Type of car assembled (Corolla or Geo Prism)
Cost variability: With respect to changes in the number of cars assembled
(There may be some debate over classifications of individual items, especially with regard to cost variability.)
Cost Item / D or I / V or FA / D / V
B / I / F
C / D / F
D / D / F
E / D / V
F / I / V
G / D / V
H / I / F
2-27(20–30 min.)Inventoriable costs versus period costs.
1. Manufacturing-sector companies purchase materials and components and convert them into different finished goods.
Merchandising-sector companies purchase and then sell tangible products without changing their basic form.
Service-sector companies provide services or intangible products to their customers—for example, legal advice or audits.
Only manufacturing and merchandising companies have inventories of goods for sale.
2. Inventoriable costs are all costs of a product that are regarded as an asset when they are incurred and then become cost of goods sold when the product is sold. These costs for a manufacturing company are included in work-in-process and finished goods inventory (they are “inventoried”) to build up the costs of creating these assets.
Period costs are all costs in the income statement other than cost of goods sold. These costs are treated as expenses of the period in which they are incurred because they are presumed not to benefit future periods (or because there is not sufficient evidence to conclude that such benefit exists). Expensing these costs immediately best matches expenses to revenues.
3.(a)Mineral water purchased for resale by Safeway—inventoriable cost of a merchandising company. It becomes part of cost of goods sold when the mineral water is sold.
(b)Electricity used at GE assembly plant—inventoriable cost of a manufacturing company. It is part of the manufacturing overhead that is included in the manufacturing cost of a refrigerator finished good.
(c)Depreciation on Google’s computer equipment—period cost of a service company. Google has no inventory of goods for sale and, hence, no inventoriable cost.
(d)Electricity for Safeway’s store aisles—period cost of a merchandising company. It is a cost that benefits the current period and it is not traceable to goods purchased for resale.
(e)Depreciation on GE’s assembly testing equipment—inventoriable cost of a manufacturing company. It is part of the manufacturing overhead that is included in the manufacturing cost of a refrigerator finished good.
(f)Salaries of Safeway’s marketing personnel—period cost of a merchandising company. It is a cost that is not traceable to goods purchased for resale. It is presumed not to benefit future periods (or at least not to have sufficiently reliable evidence to estimate such future benefits).
(g)Bottled water consumed by Google’s engineers—period cost of a service company. Google has no inventory of goods for sale and, hence, no inventoriable cost.
(h)Salaries of Google’s marketing personnel—period cost of a service company. Google has no inventory of goods for sale and, hence, no inventoriable cost.
Acctg 505 – Summer 2008, Widdison – Homework Solutions1
Chapter 4 Job Order Costing
4-16(10 min)Job order costing, process costing.
- Job costingl.Job costing
- Process costingm.Process costing
- Job costingn.Job costing
- Process costingo.Job costing
- Job costingp.Job costing
- Process costingq.Job costing
- Job costingr.Process costing
- Job costing (but some process costing)s.Job costing
- Process costingt.Process costing
- Process costingu.Job costing
- Job costing
4-27(15 min.)Job costing, unit cost, ending work in progress.
1.
Direct manufacturing labor rate per hour / $25Manufacturing overhead cost allocated
per manufacturing labor-hour / $20
Job M1 / Job M2
Direct manufacturing labor costs / $275,000 / $200,000
Direct manufacturing labor hours ($275,000$25; $200,000$25) / 11,000 / 8,000
Manufacturing overhead cost allocated (11,000 $20; 8,000 $20) / $220,000 / $160,000
Job Costs May 2007 / Job M1 / Job M2
Direct materials / $ 75,000 / $ 50,000
Direct manufacturing labor / 275,000 / 200,000
Manufacturing overhead allocated / 220,000 / 160,000
Total costs / $570,000 / $410,000
2.
Number of pipes produced for Job M1 / 1,500Cost per pipe ($570,000 1,500) / $380
3.
Finished Goods Control570,000
Work-in-Process Control570,000
4.Raymond Company began May 2007 with no work-in-process inventory. During May, it started and finished M1. It also started M2, which is still in work-in-process inventory at the end of May. M2’s manufacturing costs up to this point, $410,000, remain as a debit balance in the Work-in-Process Inventory account at the end of May 2007.
4-36(35 min.)General ledger relationships, under- and overallocation.
The solution assumes all materials used are direct materials. A summary of the T-accounts for Needham Company before adjusting for under- or overallocation of overhead follows:
Direct Materials ControlWork-in-Process Control
1-1-200630,000Purchases400,000 / Material used for
manufacturing380,000 / 1-1-200620,000
Direct materials380,000 / Transferred to
finished goods940,000
12-31-200650,000 / Direct manuf.
Labor360,000
Manuf. overhead
Allocated480,000
12-31-2006300,000
Finished Goods Control / Cost of Goods Sold
1-1-200610,000
Transferred in
from WIP940,000 / Cost of goods
sold900,000 / Finished goods
Sold900,000
12-31-200650,000
Manufacturing Overhead Control / Manufacturing Overhead Allocated
Manufacturing
Overhead
Costs540,000 / Manufacturing
overhead
allocated to
work in
process480,000
1.From Direct Materials Control T-account,
Direct materials issued to production = $380,000 that appears as a credit.
2.Direct manufacturing labor-hours=
== 24,000 hours
=
=24,000 hours $20 = $480,000
3.From the debit entry to Finished Goods T-account,
Cost of jobs completed and transferred from WIP = $940,000
4.From Work-in-Process T-account,
= $20,000 + $380,000 + $360,000 + $480,000 – $940,000 = $300,000
5.From the credit entry to Finished Goods Control T-account, Cost of goods sold (before proration) = $900,000
6.= –
=$540,000 – $480,000
=$60,000 underallocated
7.a.Write-off to Cost of Goods Sold will increase (debit) Cost of Goods Sold by $60,000. Hence, Cost of Goods Sold = $900,000 + $60,000 = $960,000.
b. Proration based on ending balances (before proration) in Work in Process, Finished Goods, and Cost of Goods Sold.
Account balances in each account after proration follows:
Account(1) / Account Balance
(Before Proration)
(2) / Proration of $60,000 Underallocated
Manufacturing Overhead
(3) / Account Balance
(After Proration)
(4)=(2)+(3)
Work in Process / $ 300,000 (24%) / 0.24 $60,000 = $14,400 / $ 314,400
Finished Goods / 50,000 ( 4%) / 0.04 $60,000 = 2,400 / 52,400
Cost of Goods Sold / 900,000 (72%) / 0.72 $60,000 = 43,200 / 943,200
$1,250,000100% / $60,000 / $1,310,000
8.Needham’s operating income using write-off to Cost of Goods Sold and Proration based on ending balances (before proration) follows:
Write-off toProration Based
Cost of Goodson Ending
SoldBalances
Revenues $1,090,000 $1,090,000
Cost of goods sold 960,000 943,200
Gross margin 130,000 146,800
Marketing and distribution costs 140,000 140,000
Operating income/(loss) $ (10,000) $ 6,800
9.If the purpose is to report the most accurate inventory and cost of goods sold figures, the preferred method is to prorate based on the manufacturing overhead allocated component in the inventory and cost of goods sold accounts. Proration based on the balances in Work in Process, Finished Goods, and Cost of Goods Sold will equal the proration based on the manufacturing overhead allocated component if the proportions of direct costs to manufacturing overhead costs are constant in the Work in Process, Finished Goods and Cost of Goods Sold accounts. Even if this is not the case, the prorations based on Work in Process, Finished Goods, and Cost of Goods Sold will better approximate the results if actual cost rates had been used rather than the write-off to Cost of Goods Sold method.
Another consideration in Needham’s decision about how to dispose of underallocated manufacturing overhead is the effects on operating income. The write-off to Cost of Goods Sold will lead to an operating loss. Proration based on the balances in Work in Process, Finished Goods, and Cost of Goods Sold will help Needham avoid the loss and show an operating income.
The main merit of the write-off to Cost of Goods Sold method is its simplicity. However, accuracy and the effect on operating income favor the preferred and recommended proration approach.
Acctg 505 – Summer 2008, Widdison – Homework Solutions1
Chapter 5 Activity-based Costing
5-16 (20 min.) Cost Hierarchy
- a. Indirect manufacturing labor costs of $1,000,000 support direct manufacturing labor and are output unit-level costs. Direct manufacturing labor generally increases with output units, and so will the indirect costs to support it.
b. Batch-level costs are costs of activities that are related to a group of units of a product rather than each individual unit of a product. Purchase order-related costs (including costs of receiving materials and paying suppliers) of $500,000 relate to a group of units of product and are batch-level costs.
c. Cost of indirect materials of $250,000 generally changes with labor hours or machine hours which are unit-level costs. Therefore, indirect material costs are output unit-level costs.
d. Setup costs of $600,000 are batch-level costs because they relate to a group of units of product produced after the machines are set up.
e. Costs of designing processes, drawing process charts, and making engineering changes for individual products, $800,000, are product-sustaining because they relate to the costsof activities undertaken to support individual products regardless of the number of units or batches in which the product is produced.
f. Machine-related overhead costs (depreciation and maintenance) of $1,100,000 are output unit-level costs because they change with the number of units produced.
g. Plant management, plant rent, and insurance costs of $900,000 are facility-sustaining costs because the costs of these activities cannot be traced to individual products or services but support the organization as a whole.
2.The complex boom box made in many batches will use significantly more batch-level overhead resources compared to the simple boom box that is made in a few batches. In addition, the complex boom box will use more product-sustaining overhead resources because it is complex. Because each boom box requires the same amount of machine-hours, both the simple and the complex boom box will be allocated the same amount of overhead costs per boom box if Teledor uses only machine-hours to allocate overhead costs to boom boxes. As a result, the complex boom box will be undercosted (it consumes a relatively high level of resources but is reported to have a relatively low cost) and the simple boom box will be overcosted (it consumes a relatively low level of resources but is reported to have a relatively high cost).
3.Using the cost hierarchy to calculate activity-based costs can help Teledor to identify both the costs of individual activities and the cost of activities demanded by individual products. Teledor can use this information to manage its business in several ways:
a.Pricing and product mix decisions. Knowing the resources needed to manufacture and sell different types of boom boxes can help Teledor to price the different boom boxes and also identify which boom boxes are more profitable. It can then emphasize its more profitable products.
b.Teledor can use information about the costs of different activities to improve processes and reduce costs of the different activities. Teledor could have a target of reducing costs of activities (setups, order processing, etc.) by, say, 3% and constantly seek to eliminate activities and costs (such as engineering changes) that its customers perceive as not adding value.
c.Teledor management can identify and evaluate new designs to improve performance by analyzing how product and process designs affect activities and costs.
d.Teledor can use its ABC systems and cost hierarchy information to plan and manage activities. What activities should be performed in the period and at what cost?
5-19(20 min.) Plantwide, department and ABC indirect cost rates.
1.
Actual plant-wide variable MOH rate based on machine hours, $308,6004,000 / $77.15 per machine hourUnited Motors / Holden Motors / Leland Vehicle / Total
Variable manufacturing overhead,allocated based on machine hours ($77.15 120; $77.15 2,800; $77.15 1,080) / $9,258 / $216,020 / $83,322 / $308,600
2.
Department / Variable MOH in 2007 / TotalDriver Units / Rate
Design / $39,000 / 390 / $100 / per CAD-design hour
Production / 29,600 / 370 / $ 80 / per engineering hour
Engineering / 240,000 / 4,000 / $ 60 / per machine hour
United Motors / Holden
Motors / Leland Vehicle / Total
Design-related overhead, allocated on CAD-design hours
(110 $100; 200 $100; 80 $100) / $11,000 / $ 20,000 / $ 8,000 / $ 39,000
Production-related overhead, allocated on engineering hours
(70 $80; 60 $80; 240 $80) / 5,600 / 4,800 / 19,200 / 29,600
Engineering-related overhead, allocated on machine hours
(120 $60; 2,800 $60; 1,080 $60) / 7,200 / 168,000 / 64,800 / 240,000
Total / $23,800 / $192,800 / $92,000 / $308,600
3.
UnitedMotors / Holden
Motors / Leland
Vehicle
a.Department rates
(Requirement 2)
b.Plantwide rate
(Requirement 1) / $23,800
$ 9,258 / $192,800
$216,020 / $92,000
$83,322
Ratio of (a) ÷ (b) / 2.57 / 0.89 / 1.10
The variable manufacturing overhead allocated to United Motors increases by 157% under the department rates, the overhead allocated to Holden decreases by about 11% and the overhead allocated to Leland increases by about 10%.
The three contracts differ sizably in the way they use the resources of the three departments.
The percentage of total driver units in each department used by the companies is:
Department / CostDriver / United
Motors / Holden
Motors / Leland
Vehicle
Design
Engineering
Production / CAD-design hours
Engineering hours
Machine hours / 28%
19
3 / 51%
16
70 / 21%
65
27
The United Motors contract uses only 3% of total machines hours in 2004, yet uses 28% of CAD design-hours and 19% of engineering hours. The result is that the plantwide rate, based on machine hours, will greatly underestimate the cost of resources used on the United Motors contract. This explains the 157% increase in indirect costs assigned to the United Motors contract when department rates are used.
In contrast, the Holden Motors contract uses less of design (51%) and engineering (16%) than of machine-hours (70%). Hence, the use of department rates will report lower indirect costs for Holden Motors than does a plantwide rate.
Holden Motors was probably complaining under the use of the simple system because its contract was being overcosted relative to its consumption of MOH resources. United, on the other hand was having its contract undercosted and underpriced by the simple system. Assuming that AP is an efficient and competitive supplier, if the new department-based rates are used to price contracts, United will be unhappy. AP should explain to United how the calculation was done, and point out United’s high use of design and engineering resources relative to production machine hours. Discuss ways of reducing the consumption of those resources, if possible, and show willingness to partner with them to do so. If the price rise is going to be steep, perhaps offer to phase in the new prices.