Problem 2-15

Cost Behavior To Units of Product

Cost Item Variable Fixed Direct Indirect
1. Electricity to run production equipment.....................… X X
2. Rent on a factory building.........................................… X X
3. Cloth used to make drapes.......................................... X X
4. Production superintendent’s salary.............................. X X
5. Wages of laborers assembling a product..................... X X
6. Depreciation of air purification equipment used to
make furniture........................................................... X
X
7. Janitorial salaries......................................................… X X
8. Peaches used in canning fruit...................................... X X
9. Lubricants for production equipment.........................… X X
10. Sugar used in soft drink production.............................. X X
11. Property taxes on the factory....................................... X X
12. Wages of workers painting a product........................... X X
13. Depreciation on cafeteria equipment........................... X X
14. Insurance on a building used in producing helicopters. X X
15. Cost of rotor blades used in producing helicopters...... X X

Problem 2-24

1.
Visic Corporation
Schedule of Cost of Goods Manufactured

Direct materials:
 Raw materials inventory, beginning........................ $ 20,000
Add: Purchases of raw materials............................ 480,000
Raw materials available for use.............................. 500,000
Deduct: Raw materials inventory, ending.............… 30,000
Raw materials used in production........................… $470,000
Direct labor................................................................ 90,000
Manufacturing overhead.........................................… 300,000
Total manufacturing costs......................................... 860,000
Add: Work in process inventory, beginning............… 50,000
910,000

Deduct: Work in process inventory, ending............... 40,000

Cost of goods manufactured..................................… $870,000

2. A.
Total sales = $1,300,000 = 26,000 units sold
Unit selling price $50 per unit sold

Units in the finished goods inventory, beginning...... 0

Units produced during the year................................ 29,000
Units available for sale............................................ 29,000
Units sold during the year (above) .......................... 26,000
 Units in the finished goods inventory, ending.......... 3,000

B.
The average production cost per unit during the year is:

Cost of goods manufactured = $870,000 = $30 per unit

Number of units produced 29,000 units

The cost of the units in the finished goods inventory at the end of
the year is: 3,000 units × $30 per unit = $90,000.

3.
Visic Corporation
Income Statement

Sales.............................................................. $1,300,000
Cost of goods sold:
Finished goods inventory, beginning............ $0
Add: Cost of goods manufactured............... 870,000
Goods available for sale.............................. 870,000
Finished goods inventory, ending................ 90,000 780,000
Gross margin.................................................. 520,000
Selling and administrative expenses.............. 380,000
Net operating income..................................… $ 140,000

Problem 2-25

Case 1 Case 2 Case 3 Case 4

Direct materials......................................... $ 4,500 $ 6,000 $ 5,000 $ 3,000
Direct labor............................................... 9,000 3,000 7,000 4,000
Manufacturing overhead........................... 5,000 4,000 8,000 9,000
Total manufacturing costs......................... 18,500 13,000 20,000 16,000
Beginning work in process inventory......... 2,500 2,000 3,000 4,500
Ending work in process inventory.............. (3,000 ) (1,000 ) (4,000 ) (3,000
)
Cost of goods manufactured..................... $18,000 $14,000 $19,000 $17,500

Sales......................................................... $30,000 $21,000 $36,000

$40,000
Beginning finished goods inventory........... 1,000 2,500 3,500 2,000
Cost of goods manufactured..................... 18,000 14,000 19,000 17,500
Goods available for sale........................... 19,000 16,500 22,500 19,500
Ending finished goods inventory............... (2,000 ) (1,500 ) (4,000 ) (3,500 )
Cost of goods sold.................................... 17,000 15,000 18,500 16,000
Gross margin............................................ 13,000 6,000 17,500 24,000
Selling and administrative expenses......... (9,000 ) (3,500 ) (12,500) (15,000)
Net operating income................................ $ 4,000 $ 2,500 $ 5,000 $ 9,000

Problem 3-27

1. A. Predetermined overhead rate = (raw materials used in production/estimated overhead)

= (800,000/500,000)
= 160%
B..

Raw Materials, beginning 20,000

Add: Purchases 510,000

Raw Materials available 530,000

deduct: Raw materials, ending 80,000

Raw materials used in production 450,000

Actual Manufacturing overhead

costs:

Indirect labor 170,000

property taxes 48,000

depreciation of equipment 260,000

maintenance 95,000

insurance 7,000

rent, building 180,000

total actual costs 760,000

applied manufacturing overhead

720,000
costs (450000 x 160%)

Underapplied overhead 40,000

2.
Gitano Products
Schedule of Cost of Goods Manufactured

Direct Materials:
Raw materials, beginning 20,000
Add: Purchases 510,000
Totals Raw materials available 530,000
Deduct: Raw materials, ending 80,000
Raw materials used in production 450,000
Direct Labor 90,000
Applied manufacturing overhead
(450,000 x 160%) 720,000
Total manufacturing costs 1,260,000
Add: Work in process, beginning 150,000
1,410,000
Deduct: Work in process, end 70,000
Cost of Goods Manufactured 1,340,000

3 Gitano Products
Cost of Goods Sold
The underapplied overhead can either be closed to Cost of Goods Sold or allocated between work
in process, finished goods and cost of goods sold based on applied overhead over the year.

4 Direct Materials 8,500

Direct Labor 2,700
Applied overhead (8,500 x 160%) 13,600
Total manufacturing Costs 24,800

Price to be charged ( 24,800 x 125%) = 31,000

5 Direct Materials 24,000

Direct Labor (70,000-24,000-38,400) 7,600?
Mnaufacturing Overhead (24,000 x 160%) 38,400
Work in Process inventory 70,000

Case 4B-7

1. Step-down method:
Personnel Custodial Services Maintenance Printing Binding
Total cost before allocations.... $360,000 $141,000 $201,000 $525,000 $373,500

Allocations:

Personnel (15/200, 25/200,

40/200, 120/200)*1.............… (360,000) 27,000 45,000 72,000 216,000

Custodial services

(20/140, 80/140, 40/140)*2..… . (168,000) 24,000 96,000 48,000

Maintenance

(150/180, 30/180)*3............… (270,000) 225,000 45,000

Total overhead cost

after allocations.............… $0 $0 $0 $918,000 $682,500

Divide by machine-hours.................................. ¸ /150,000

Divide by direct labor-hours.............................. ¸ /175,000

Predetermined overhead rate........................... $6.12 $3.90

*1 Based on 15 + 25 + 40 + 120 = 200 employees

*2 Based on 20,000 + 80,000 + 40,000 = 140,000 square feet

*3 Based on 150,000 + 30,000 = 180,000 machine-hours

2. Direct method:

Personnel Custodial Services Maintenance Printing Binding

Total costs before allocations.......… $360,000 $141,000 $201,000 $525,000 $373,500

Allocations:

Personnel (40/160, 120/160)*1....… (360,000) 90,000 270,000

Custodial Services

(80/120, 40/120)*2..........… (141,000) 94,000 47,000

Maintenance

(150/180, 30/180)*3.................... (201,000) 167,500 33,500

Total overhead cost

after allocations................ $0 $0 $0 $876,500 $724,000

Divide by machine-hours...............................… /150,000

Divide by direct labor-hours...........................… /175,000

Predetermined overhead rate........................... $5.84 $4.14

*1 Based on 40 + 120 = 160 employees

*2 Based on 80,000 + 40,000 = 120,000 square feet

*3 Based on 150,000 + 30,000 = 180,000 machine-hours

3. a. The amount of overhead cost assigned to the job would be:
Step-down method:
Printing department:
$6.12 per machine-hour × 15,400 machine-hours........ $ 94,248
Binding department:
$3.90 per direct labor-hour × 2,000 direct labor-hours. 7,800
Total overhead cost.......................................................... $102,048
Direct method:
Printing department:
$5.84 per machine-hour × 15,400 machine-hours........ $ 89,936
Binding department:
$4.14 per direct labor-hour × 2,000 direct labor-hours. . 8,280
Total overhead cost.......................................................… $ 98,216

b. The step down method provides a better basis for computing predetermined overhead rates than
the direct method because it gives recognition to the services provided between service
departments. If this services between departments are not recognized, it understates the overhead
rate in printing department and overstates overhead rate in binding department which will lead to
inaccuracy of its costs.
Problem 5-15

1. Maintenance cost at the 75,000 direct labor-hour level of activity can be

isolated as follows:
Level of Activity
50,000 DLHs 75,000 DLHs
Total factory overhead cost.................. ¥14,250,000 ¥17,625,000
Deduct:
Indirect materials @ ¥100 per DLH*.. 5,000,000 7,500,000
Rent................................................... 6,000,000 6,000,000
Maintenance cost................................. ¥ 3,250,000 ¥ 4,125,000
* ¥5,000,000 ÷ 50,000 DLHs = ¥100 per DLH

2. High-low analysis of maintenance cost:

Direct Labor- Maintenance
Hours Cost
High level of activity......... 75,000 ¥4,125,000
Low level of activity.......... 50,000 3,250,000
Change............................ 25,000 ¥ 875,000

Variable cost element:

Change in cost = ¥875,000 = ¥35 per DLH
Change in activity 25,000 DLH

Fixed cost element:

Total cost at the high level of activity.................... ¥4,125,000
Less variable cost element
(75,000 DLHs × ¥35 per DLH)........................… 2,625,000
Fixed cost element............................................... ¥1,500,000
Therefore, the cost formula for maintenance is ¥1,500,000 per year plus
¥35 per direct labor-hour or
Y = ¥1,500,000 + ¥35X

3. Total factory overhead cost at 70,000 direct labor-hours is:

Indirect materials
(70,000 DLHs × ¥100 per DLH)...........… ¥ 7,000,000
Rent.......................................................… 6,000,000
Maintenance:
Variable cost element
(70,000 DLHs × ¥35 per DLH)............. ¥2,450,000
Fixed cost element................................. 1,500,000 3,950,000
Total factory overhead cost....................… ¥16,950,000

Problem 6-24

1. (1) Dollars
(2) Volume of output, expressed in units, % of capacity, sales,
or some other measure
(3) Total expense line
(4) Variable expense area
(5) Fixed expense area
(6) Break-even point
(7) Loss area
(8) Profit area
(9) Sales line

2. a. Line 3: Remain unchanged.

Line 9: Have a steeper slope.
 Break-even point: Decrease.

b. Line 3: Have a flatter slope.

Line 9: Remain unchanged.
Break-even point: Decrease.

c. Line 3: Shift upward.

Line 9: Remain unchanged.
Break-even point: Increase.

d. Line 3: Remain unchanged.

Line 9: Remain unchanged.
Break-even point: Remain unchanged
.
e. Line 3: Shift downward and have a steeper slope.
Line 9: Remain unchanged.
Break-even point: Probably change, but the direction is uncertain.

f. Line 3: Have a steeper slope.

Line 9: Have a steeper slope.
Break-even point: Remain unchanged in terms of units; increase
in terms of total dollars of sales.
g. Line 3: Shift upward.
Line 9: Remain unchanged.
Break-even point: Increase.

h. Line 3: Shift upward and have a flatter slope.

Line 9: Remain unchanged.
Break-even point: Probably change, but the direction is uncertain.
Problem 7-19

1. Under the absorption costing, net operating income depends on both production and sales. The
controller’s explanation was accurate but he should have pointed out that the reduction resulted in a
large amount of underapplied overhead which was added to the cost of goods sold in the second
quarter. The company was not able to absorbed all the fixed manufacturing overhead beacuse of
producing fewer units than planned which means that fixed manufacturing overhead per unit
increases which also increases the cost of production, thereby reducing income.

2. First Second
Quarter Quarter
Unit sales......................................................... 12,000 15,000

Sales.............................................................… $480,000 $600,000

Variable expenses:
Variable cost of goods sold @ $8 per unit..… 96,000 120,000
Variable selling and administrative expenses
@$5 per unit............................................... 60,000 75,000
Total variable expenses.................................... 156,000 195,000
Contribution margin.......................................... 324,000 405,000
Fixed expenses:
Fixed manufacturing overhead...................... 180,000 180,000
Fixed selling and administrative expenses*. . 140,000 140,000
Total fixed expenses......................................... 320,000 320,000
Net operating income....................................... $ 4,000 $ 85,000

*Selling and administrative expenses, first

quarter........................................................ $200,000
Less variable portion
(12,000 units × $5 per unit)......................... 60,000
Fixed selling and administrative expenses.... $140,000
3. To answer this part, it is helpful to prepare a schedule of inventories,
production, and sales in units:
Beginning Units Units Ending
Inventory Produced Sold Inventory
First quarter............… 4,000 15,000 12,000 7,000
Second quarter......... 7,000 9,000 15,000 1,000

Using these inventory data, the reconciliation would be as follows:

First Second
Quarter Quarter
Variable costing net operating income............. $ 4,000 $ 85,000
Deduct fixed manufacturing overhead
released from inventory during the First
Quarter (4,000 units × $12 per unit).............. (48,000)
Add (deduct) fixed manufacturing overhead
deferred in (released from) inventory from
the First Quarter to the Second Quarter
(7,000 units × $12 per unit)........................... 84,000 (84,000)
Add fixed manufacturing overhead deferred in
inventory from the Second Quarter to the
future (1,000 units × $12 per unit)................. 12,000
Absorption costing net operating income......… $ 40,000 $ 13,000

Alternative solution:
Variable costing net operating income............. $ 4,000 $85,000
Add fixed manufacturing overhead deferred in
 inventory to the Second Quarter (3,000 unit
increase × $12 per unit)................................. 36,000
Deduct fixed manufacturing overhead
released from inventory due to a decrease in
inventory during the Second Quarter (6,000
unit decrease × $12 per unit)......................... (72,000)
Absorption costing net operating income......… $40,000 $13,000

4. The advantages of using variable costing for internal reporting include

the following:

● Variable costing aids in forecasting and reporting income for decisionmaking

purposes.
● Fixed costs are reported in total which makes them more visible and
easier to understand.
● Profits vary directly with sales volume and are not affected by
changes in inventory levels.
● Analysis of cost-volume-profit relationships is facilitated and
management is able to determine the break-even point and total profit
for a given volume of production and sales.

The disadvantages of using the variable costing method for internal

reporting purposes include the following:

● Variable costing is usually not considered acceptable for external

financial reporting and cannot be used for income taxes in the United
States. As a result, additional record-keeping costs may be required.
● It may be difficult to determine what costs are fixed and what costs
are variable.
5. a. Under lean production, the company would have produced only
enough units during the quarter to meet sales needs. The
computations are:

Units sold...................................................................... 15,000

Less units in inventory at the beginning of the quarter.. 7,000
Units produced during the quarter under lean
production.................................................................. 8,000

b. Starting with the Third Quarter, there would be little or no difference between the
incomes reported under variable costing and under absorption costing. The reason is that
there would be no inventories on hand and therefore no way to shift fixed
manufacturing overhead cost between periods under absorption costing.

Case 9-29

1.

A. Lack of coordinated goals - Tom Emory as the manager of the machines shop in the
company’s factory believes that the company’s goal is the high-quality output, while the
budgetary control system is pressuring them to have low cost which appears to be their goal.
The two department’s goal does not conform with each other and now the employees do not
know what are the goals are and thus cannot make decisions.

B. Uncontrollable Factors - Actual performance relative to budget is greatly influenced by

uncontrollable factors (i.e., rush orders, lack of prompt maintenance). Thus, the variance
reports serve little purpose for performance evaluation or for locating controllable factors to
improve performance. As a result, the system does not encourage coordination among
departments.
 C. The Short-Run Perspectives. Monthly evaluations and budget tightening on a monthly
basis results in a very short-run perspective. This results in inappropriate decisions (i.e.,
inspect forklift trucks rather than repair inoperative equipment, fail to report supplies
Usage).

D. System Does Not Motivate. The budgetary system appears to focus on performance
evaluation even though most of the essential factors for that purpose are missing. The focus on
evaluation and the weaknesses take away an important benefit of the budgetary system
—employee motivation.

2. The improvements in the budgetary control system should correct the deficiencies described
above. The system should:
a. more clearly define the company’s objectives.
b. develop an accounting reporting system that better matches controllable factors with
supervisor responsibility and authority.
c. establish budgets for appropriate time periods that do not change monthly simply as a
result of a change in the prior month’s performance.

The entire company from top management down should be educated in

sound budgetary procedures.
1. The general ledger entry to record the purchase of materials for the
month is:

Raw Materials
(12,000 meters at $3.25 per meter)..................... 39,000
Materials Price Variance
(12,000 meters at $0.10 per meter F)........ 1,200
Accounts Payable
(12,000 meters at $3.15 per meter)............ 37,800

2. The general ledger entry to record the use of materials for the month is:
Work in Process
(10,000 meters at $3.25 per meter)..................... 32,500
Materials Quantity Variance
(500 meters at $3.25 per meter U)...................… 1,625
Raw Materials
(10,500 meters at $3.25 per meter)............ 34,125

3. The general ledger entry to record the incurrence of direct labor cost for
the month is:

Work in Process (2,000 hours at $12.00 per hour) 24,000

Labor Rate Variance
(1,975 hours at $0.20 per hour U)....................... 395
Labor Efficiency Variance
(25 hours at $12.00 per hour F)................. 300
Wages Payable
(1,975 hours at $12.20 per hour).............… 24,095