Solution manual cost and managerial accounting by barfield 3rd systems and methods of product costing

Chapter Systems and Methods of Product Costing Questions Historical costs are used in cost accounting to provide the needed information to determine amounts for balance sheet inventory items and cost of goods sold in the income statement These amounts are objective and verifiable, which are necessary qualities for information needed in financial reporting Replacement costs are useful for decision making since they contain up-to-date, relevant information Such costs, however, may need to be estimated or derived from sources external to the accounting system For a specific asset, replacement cost may differ substantially from historical cost Budgeted costs are estimated future costs Budgeted costs are used for purposes of planning, control, and decision making The relevant range of activity for a company would generally be the normal range of operations A company could determine that range based on prior year data modified, if necessary, for estimated or known changes in production or other activity measures Managers need to understand the concept of relevant range because of its use in cost behavior assumptions Costs are assumed to react in a specific way within the relevant range variable costs will remain constant per unit and fixed costs will remain constant in total If the company operates outside of its relevant range, such assumptions no longer hold true and managers will possibly need to modify their decisions because of the fluctuations that may result from the changes in cost behavior A cost is termed variable because of the way it reacts in total to changes in levels of activity, not because of the way it reacts on a per unit basis Total variable cost, within a relevant range of activity, will change or vary in direct proportion to changes in activity This direct, proportional relationship results from the fact that the cost remains constant for each unit of activity 43 44 Chapter Systems and Methods of Product Costing No, fixed costs will change in an organization over time The assumption made is that fixed costs, within the relevant range, will not change with changes in the activity measure However, fixed costs will change because of decisions made by managers (e.g., to acquire a new asset or to hire another factory supervisor) or because of changed economic conditions (such as rising rent costs or an increased supply of rental property) Although both variable and mixed costs change in total with activity measure changes, the difference is that variable costs change in direct proportion to such activity changes and mixed costs not Since a mixed cost has both a fixed and variable component, the cost per unit at different activity levels is not constant as it is with a variable cost It is not necessary for a causal relationship to exist between the cost predictor and the cost All that is required is that there be a strong correlation between movement in the predictor and the cost Alternatively, a cost driver is an activity that actually causes costs to be incurred The distinction between cost drivers and predictors is important because it relates to one of the objectives of managers: to control costs By focusing cost control efforts on cost drivers, managers can exert control over costs Exerting control over predictors that are not cost drivers will have no cost control effect No, these are not always the best points of observation The points must be within the relevant range of activity Secondly, to be useful, the points must be reflective of the entire data set of observation points If the high and low points not meet these two conditions, alternative points should be selected An outlier is an observation that is atypical of the other observations in the data, and thus, it should not be used in data analysis If an outlier is used in the high-low method to analyze a mixed cost, the consequence will be that the estimated variable and fixed elements of the mixed costs will not be representative of the majority of observations and, thus, the cost formula may not be useful for estimation purposes Chapter 45 Systems and Methods of Product Costing A product cost is one that is associated with inventory In a retailer, product costs are the costs of purchasing inventory and the related freight-in costs less any purchase discounts In a manufacturing company, product costs would include direct materials, direct labor, and overhead In a merchandising company, product costs are the costs of purchasing inventory and the related freight-in costs In a service company, product costs are those costs that are incurred to generate the services provided such as supplies, service labor, and service-related overhead costs 10 In all three types of organizations, a period cost is any cost that is not a product cost These costs are noninventoriable and are incurred in the nonfactory or non-production areas of a manufacturing company or in the nonsales or nonservice areas, respectively, of a retailer or service company In general, these costs are incurred for selling and administrative activities Many period costs are expensed when incurred, although some may be capitalized as prepaid expenses or other nonfactory assets 11 No Unexpired costs appear on the balance sheet, and expired costs appear on the income statement Both product and period costs can be unexpired or expired Unexpired product costs are shown in a company's inventory account(s) and as other production assets such as manufacturing equipment Expired product costs are included in cost of goods sold or services rendered Unexpired period costs are included in the asset section as prepaid expenses or other nonfactory (nonproduction) assets Upon expiration, period costs are shown as selling and/or administrative expenses 12 A direct cost is one that can be distinctly traced object Thus, if the cost object is not specified, be no identification of direct costs If the cost product, direct labor and direct materials are two are direct to the production of that product 13 Some materials or labor that should, in theory, be accounted for as direct may be accounted for as indirect because the cost of tracing the materials and labor to the product is not justifiable The benefit realized from the time and effort expended to trace such costs is limited Additionally, some costs that might theoretically be considered direct costs are intentionally treated as indirect costs so that information is not distorted For example, the cost of overtime could easily be tracked to specific products, however, doing so might cause greatly different costs to attach to identical products assuming some were produced during regular hours and some were produced during overtime hours The unintended consequence might be that greatly different profit margins could be realized for the similar products to the cost there can object is a costs that 46 14 Chapter Systems and Methods of Product Costing Conversion is the process that converts raw materials and other inputs into salable products (output) A demand for cost accounting is created by the need to track costs through the conversion process, into finished goods, and eventually into cost of goods sold This role is related to the determination of which costs are expired and which costs are unexpired 15 Manufacturing firms have three inventory accounts: Raw Materials, Work in Process, and Finished Goods Raw Materials consist of inputs that have been purchased and could include inventoriable supplies as well as production components Work in Process is the inventory account that is used for all production work that has been started but not completed Finished Goods Inventory contains all completed inventory that is available for sale to customers 16 Allocation of manufacturing overhead is necessary for both external reporting and internal purposes Although manufacturing overhead is a product cost, it is comprised of cost items that are indirectly related to the production of goods and services Overhead must be attached to products through an allocation process because it cannot be directly traced to a firm's products or services Generally accepted accounting principles, regulators and tax authorities require manufacturing overhead to be allocated to products Internal decision making, performance evaluation, planning, and controlling also require cost allocation 17 The only difference between the two systems is in their treatment of overhead Under a normal cost system, a level of activity is chosen and the budgeted amount of overhead is determined before a period begins Overhead is then applied to products as production occurs by using a predetermined overhead application rate Under an actual cost system, actual overhead is applied to production Because actual overhead cannot be determined until the period ends, the overhead allocation occurs and product cost can be determined only at period-end The major advantage of using a normal cost system is that it allows a product's cost to be determined (estimated) at the time of production Another major advantage is that a normal cost system provides a product cost that is stable across fluctuating levels of production and sales A normal cost system has several disadvantages For example, if a firm selects a flawed estimate of activity or uses inappropriate cost formulas to determine budgeted overhead, product costs will be distorted Also, a normal cost system requires a more sophisticated accounting system and requires a periodic reconciliation between applied and actual overhead 18 There are several reasons for using predetermined overhead Chapter 47 Systems and Methods of Product Costing rates First, the company does not need to wait to assign overhead costs to products or services until the end of the period when actual costs are known Second, such rates eliminate overhead cost fluctuations that have nothing to with volume levels Last, predetermined overhead rates provide a means to control distortions in product costs caused by changes in volume between or among periods, and the resulting product/service cost changes caused by differences in fixed cost per period 19 When a normal cost system is used, costs are removed from the Manufacturing Overhead account by debiting Work in Process Inventory and crediting Manufacturing Overhead The predetermined overhead rate multiplied by actual activity specifies the amount of costs transferred from the Overhead account to Work in Process 20 In a normal cost system, overhead can be applied as production occurs, when goods or services are completed and transferred to Finished Goods, or at the end of an accounting period The preferred alternative would be to apply overhead as production occurs This method would provide accurate, current information on the costs of products in process as well as products competed and sold In tracking overhead, separate accounts can be maintained for variable and fixed overhead, or a single overhead account can be maintained An additional choice is whether to maintain separate accounts for the actual and applied overhead amounts or to combine them into a single account Further, overhead may be applied based on a plantwide rate or departmental rates The best information would be obtained when separate variable and fixed rates are used at the departmental level This approach will provide the best association between cost incurrence and cost assignment 21 If overhead were materially underapplied for the year, the amount should be allocated to the accounts that contain applied overhead: Work in Process Inventory, Finished Goods Inventory, and Cost of Goods Sold This process assigns the underapplied overhead amount to the accounts that were affected by the under application and causes their costs to increase 48 22 23 Chapter Systems and Methods of Product Costing Two things work together to create under- or overapplied overhead: actual costs incurred differ from budgeted costs, and actual volume differs from specified volume in determining the predetermined fixed overhead rate For variable overhead, under- or overapplied overhead is caused by the difference between actual variable overhead cost per unit and budgeted variable overhead cost per unit For fixed overhead, underor overapplied overhead is caused by the difference between actual fixed overhead cost and the total fixed overhead applied to production using the predetermined overhead rate If there is a difference either in actual and budgeted fixed overhead costs or in the actual and specified level of activity, fixed overhead will be under- or overapplied Under- or overapplied overhead is the difference between total actual overhead costs and total applied overhead costs Not all factors are equally controllable by management For example, production volume may be largely a function of sales volume Consequently, marketing personnel may have more control over production volume than production managers Many fixed costs may be uncontrollable because they are a result of past investment decisions made Or, unexpected occurrences relative to supply or demand may create a difference in a variable cost per unit The cost of goods manufactured schedule provides an accounting of activity in work in process In doing so, the schedule provides data on the beginning inventory, current period manufacturing costs, and the ending inventory The bottom line, "the cost of goods manufactured," is the amount of cost extracted from Work in Process and entered in Finished Goods Inventory Thus, the cost of goods manufactured provides an accounting of direct materials and conversion costs incurred during the period as well as the amount of change in Work in Process Inventory 24 Chapter 49 Systems and Methods of Product Costing Cost of goods manufactured represents the production cost of the goods completed and transferred from Work in Process to Finished Goods Inventory during the period It is composed of the beginning balance of Work in Process plus total manufacturing costs for the period (direct materials, direct labor, and overhead) minus the ending balance of Work in Process Cost of Goods Sold is the total product cost of the units that were removed from Finished Goods because of sales to customers during the period It consists of the beginning balance of Finished Goods plus the Cost of Goods Manufactured during the period minus the ending balance of Finished Goods There could be an instance when the amounts are identical For example, if the beginning Finished Goods balance equals the ending Finished Goods balance, then Cost of Goods Manufactured and Cost of Goods Sold would be identical This circumstance is most likely to occur in an organization that practices rigorous just-in-time management of inventory 25 Departmental overhead rates are superior to plant-wide overhead rates in that overhead application bases can be identified that more accurately reflect the causes of costs in each department In effect, use of departmental rates permits more cost drivers to be identified and used as allocation bases Separation of variable and fixed costs allows managers to make decisions that rely on knowledge of cost behavior For example, some decisions require a manager to identify costs that will change if a particular decision alternative (e.g., whether to manufacture and sell additional units) is implemented Frequently variable costs will respond differently than fixed costs to managerial actions Use of a total overhead rate does not easily allow managers to determine the impact of such differences 26 The regression method has the major advantage of utilizing all data to determine the fixed and variable costs elements of the mixed costs This contrasts with the high-low method, which uses only two data points 27 Students will have different answers No solution provided Chapter Systems and Methods of Product Costing 50 Exercises 28 a b c d e f g h i 29 a b c d e f g h i j k V, V, F, V, V, V, F F, V, V, V, 30 a b c d e f g h i Mfg., Mer Mfg., Mfg., Mfg., Mfg Ser Mfg., Mfg., a b c d e f g h i j high low high high low high high high moderate moderate or low 31 PD PT PD PT PT PT (could be mixed) PT PD (could be product) PT (could be fixed) PT PT Mer., Ser Mer Mer., Ser Mer., Ser Ser Chapter 51 Systems and Methods of Product Costing a Cardboard, $0.60; cloth materials, $1; plastic, $0.75; depreciation, $0.90; supervisors' salaries, $2.40; utilities, $0.45; total cost, $6.10 32 33 b Cardboard, variable; cloth materials, variable; plastic, variable; depreciation, fixed; supervisors' salaries, fixed; and utilities, mixed c If the company produces 2,500 hats this month, the total cost per unit will decrease The variable costs (cardboard, cloth, plastic) will remain constant per unit The total cost for depreciation and supervisors' salaries will remain fixed and, thus, will result in a lower cost per unit The utility cost will rise in total, but because it is mixed, it is impossible (without other information) to estimate its total or per unit cost Without knowing the cost formula for utility costs, it is impossible to determine the total cost of making 2,500 hats Cost of rubber material (variable) $ Volume Cost of steel mesh (variable) $ Volume Cost of depreciation on factory building (fixed) $ Volume Cost of utilities (mixed) $ Volume 52 34 a b 35 Chapter Systems and Methods of Product Costing 150 returns: Total cost = $400 + ($3 × 150) = $850 Cost per unit = $850 ÷ 150 = $5.67 300 returns: Total cost = $400 + ($3 × 300) = $1,300 Cost per unit = $1,300 ÷ 300 = $4.33 600 returns: Total cost = $400 + ($3 × 600) = $2,200 Cost per unit = $2,200 ÷ 600 = $3.67 The cost per unit is changing because of the effect of the fixed cost As production increases, the fixed cost per unit declines a High activity Low activity Differences MHs Total Cost = Variable Cost + Fixed Cost 34,000 $ 610 $272 $338 (31,000) (586) 248 338 3,000 $ 24 Variable rate = $24 ÷ 3,000 MHs = $0.008 per MH High activity variable cost = 34,000 × $.008 = $272 Low activity variable cost = 31,000 × $.008 = $248 Fixed cost at high activity = $610 - $272 = $338 Fixed cost at low activity = $586 - $248 = $338 Budget formula: b 36 TC = FC + VC(X) TC = $338 + $0.008MH TC = $338 + $0.008(32,375) = $338 + $259 = $597 a MHs High activity 9,000 Low activity (3,000) Difference 6,000 Total Cost = Variable Cost + Fixed Cost $ 440 $(810) $1,250 (980) (270) 1,250 $(540) Variable rate = $(540) ÷ 6,000 MHs = $(0.09) per MH High activity variable cost = 9,000 × $(0.09) = $(810) Low activity variable cost = 3,000 × $(0.09) = $(270) Fixed cost at low activity = $980 – $(270) = $1,250 Total maintenance cost = $1,250 - $0.09MH 60 52 Chapter Systems and Methods of Product Costing Labor costs as a function of number of charters: X 10 14 22 28 40 62 100 90 80 446 Let Let x = y = Y $ 16,000 18,400 24,000 28,400 37,000 56,000 68,000 60,000 48,000 $355,800 XY $ 160,000 257,600 528,000 795,200 1,480,000 3,472,000 6,800,000 5,400,000 3,840,000 $22,732,800 X2 100 196 484 784 1,600 3,844 10,000 8,100 6,400 31,508 x = mean of X observations y = mean of Y observations 446 ÷ = 49.56 $355,800 ÷ = $39,533.33 b = ∑XY - n(x)(y) ∑X2 - nx2 = $22,732,800 - 9(49.56)($39,533.33) 31,508 - 9(49.56)(49.56) = $5,099,353.50 9,402.26 = $542.35 _ _ a = y – b (x) a = $39,533.33 - $542.35(49.56) = $12,654.46 Y = $12,654.46 + $542.35(# of charters) Labor costs as a function of gross receipts: X $ 12,000 18,000 26,000 36,000 60,000 82,000 120,000 100,000 96,000 $550,000 Y $ 16,000 18,400 24,000 28,400 37,000 56,000 68,000 60,000 48,000 $355,800 XY thousands $ 192,000 331,200 624,000 1,022,400 2,220,000 4,592,000 8,160,000 6,000,000 4,608,000 $27,749,600 X2 millions 144 324 676 1,296 3,600 6,724 14,400 10,000 9,216 46,380 Chapter Systems and Methods of Product Costing Let x = mean of X observations Let y = mean of Y observations 61 x = $550,000 ÷ = 61,111.11 y = $355,800 ÷ = $39,533.33 b = ∑XY - n(x)(y) ∑X2 - nx2 = $27,749,600,000 - 9(61,111.11)(39,533.33) 46,380,000,000 - 9(61,111.11)(61,111.11) = $6,006,268,895.30 12,768,890,111.10 = $0.47 _ _ a = y – b (x) a = $39,533.33 - $0.47(61,111.11) = $10,811.11 Y = $10,811.11 + $0.47(gross receipts) 53 a Paper ($10 ÷ 500) Ink and glue ($1 ÷ 500) Boxes ($32 ÷ 500) Direct labor ($16 ÷ 500) Design labor ($40 ÷ 500) Overhead ($20,400 ÷ 200,000) Total cost per box $0.020 0.002 0.064 0.032 0.080 0.102 $0.300 b All costs except overhead are variable, so they will remain constant per unit at $0.30 - 0.102 = $0.198 OH will decrease to $20,400 ÷ 300,000 = $0.068 per box Total cost = $0.198 + $0.068 = $0.266 c Current level of cost Cost per unit @ 300,000 boxes Additional amount that can be spent on design labor Current cost of design labor Total amount that can be spent per box Total amount per batch: $0.114 × 500 = $0.300 0.266 $0.034 0.080 $0.114 $57 62 d Chapter Systems and Methods of Product Costing Current gross margin: Sales: ($5 × 200,000) $1,000,000 CGS: ($0.30 × 200,000) 60,000 Gross margin $ 940,000 Gross margin CGS at 300,000 volume ($0.266 × 300,000) Total sales Selling price per box: (rounded) $ 940,000 79,800 $1,019,800 $1,019,800 ÷ 300,000 = $3.40 e Yes For example, the design labor of $40 would not change as batch size increases Accordingly, larger batch sizes would reduce the design labor cost per box 54 C H D L E G A F J 55 Type of VariCost able Fixed Direct Indirect Period Product Paint($600) X X X Spirits ($40) X X X Brushes ($150)X X X Overalls($100) X X X Ad ($50) X X Assistant ($350) X X X Op.costs* ($0.35) X X X Map ($15) X X Tolls ($15) X X X Bid ($3,000) Phone ($1.60) X *Some operating costs would be direct if miles to and from particular jobs are recorded 56 Chapter Systems and Methods of Product Costing a.Indirect materials: variable; at either level, $1.60 per animal day 63 Indirect labor: mixed; $2,000 + $3.00 per animal day at 6,000 units $20,000 at (4,000) units (14,000) 2,000 $ 6,000 $6,000 ÷ 2,000 = $3 Total cost $20,000 Variable $3.00 per animal day × 6,000 = (18,000) Fixed $ 2,000 Maintenance: mixed; $1,000 + $0.40 per animal day at 6,000 units $ 3,400 at (4,000) units (2,600) 2,000 $ 800 $800 ÷ 2,000 = $0.40 Total cost $3,400 Variable $0.40 per animal day × 6,000 = (2,400) Fixed cost $1,000 Utilities: variable; at either level, $0.50 per animal day All other: at at mixed; $600 + $0.80 per animal day 6,000 units $ 5,400 (4,000) units (3,800) 2,000 $ 1,600 $1,600 ÷ 2,000 = $0.80 Total cost $5,400 Variable $0.80 per unit × 6,000 = $2,400 = (4,800) Fixed $ 600 Total fixed cost = $2,000 + $1,000 + $600 = $3,600 Total variable cost = $1.60 + $3.00 + $0.40 + $0.0 + $0.80 = $6.30 Total OH cost formula: $3,600 + $6.30 per animal day b $3,600 ÷ ($6.70 - $6.30) = 9,000 animal days c $6.70 × 9,000 = $60,300 d VOH rate remains constant at FOH rate ($3,600 ÷ 12,000) Total OH rate at 12,000 animal days $6.30 0.30 $6.60* This rate assumes that 12,000 days is still within the relevant range of activity and, therefore, no variable costs will change per unit and no fixed costs will change in total * Chapter Systems and Methods of Product Costing a It is a mixed cost because the total amount changes as volume changes and the cost per unit also changes A fixed cost would remain constant in total as volume changes; a variable cost would remain constant per unit as volume changes 64 57 b High point Low point Difference Machine Hours 2,700 (1,400) 1,300 Variable rate = Fixed amount = Repairs & Maintenance $13,154 (9,000) $ 4,154 $4,154 ÷ 1,300 = $3.20 $9,000 - $3.20(1,400) = $4,520 Y = $4,520 + $3.20MH c X 1,400 1,700 2,000 1,900 2,300 2,700 2,500 2,200 16,700 Y $ 9,000 9,525 10,900 10,719 11,670 13,154 13,000 11,578 $89,546 XY $ 12,600,000 16,192,500 21,800,000 20,366,100 26,841,000 35,515,800 32,500,000 25,471,600 $191,287,000 X2 1,960,000 2,890,000 4,000,000 3,610,000 5,290,000 7,290,000 6,250,000 4,840,000 36,130,000 x = 16,700 ÷ = 2,087.50 y = $89,546 ÷ = $11,193.25 b = ∑XY - n(x)(y) ∑X2 - nx2 = $191,287,000 - 8(2,087.50)($11,193.25) 36,130,000 - 8(2,087.50)(2,087.50) = $4,359,725 1,268,750 = $3.44 _ _ a = y – b(x) a = $11,193.25 - $3.44(2,087.50) = $4,012.25 Y = $4,012.25 + $3.44MH d Part (c) computations provide the better answer The least squares regression approach takes into consideration all of the available data and employs a mathematical algorithm to minimize the variance around the fitted regression line 58 a Chapter 65 Systems and Methods of Product Costing Production: Variable cost (b) = Change in cost ÷ Change in volume (for any two points) = $12,150 ÷ 3,000 = $4.05 per MH* Fixed cost (a) = $7,950 (given) Installation: Variable cost (b) = $14,250 ÷ 1,000 = $14.25 per DLH* Fixed cost (a) = $6,150 (given) *Note: These answers would be the same regardless of the level of activity chosen b Predicted costs: Number of pools 10 Production (500 MH per pool) Variable (5,000 × $4.05) Fixed Total prod Installation (250 DLH per pool) Variable (2,500 × $4.05) Fixed Total install Total 59 $20,250 7,950 $28,200 $35,625 6,150 $41,775 $69,975 c Overhead rate = $69,975 ÷ 10 pools = $6,997.50 per pool a If GP CGS = = = b Direct Material used Direct Labor Overhead: Indirect labor $62,000 Factory insurance 2,000 Factory utilities 14,300 Factory depreciation 21,700 Factory rent 84,000 Total costs to account for Ending WIP Cost of goods manufactured c rate is 35% of sales, then CGS is 65% of sales .65(Sales) 65 × $954,000 $620,100 S&A expenses = Gross margin - Net income = ($954,000 × 0.35) - $50,300 = $283,600 $298,000 215,000 184,000 $697,000 (30,500) $666,500 66 d Chapter Systems and Methods of Product Costing Direct Materials Inventory 370,000 Accounts Payable 370,000 Work in Process Inventory 298,000 Direct Materials Inventory 298,000 Work in Process Inventory Accrued Wages Payable 215,000 215,000 Overhead Control Accrued Wages Payable 62,000 Overhead Control Prepaid Insurance 62,000 2,000 2,000 Overhead Control Cash 14,300 Overhead Control Accumulated Depreciation 21,700 Overhead Control Cash 84,000 Work in Process Inventory Manufacturing Overhead (Amount is from part b) 14,300 21,700 84,000 184,000 184,000 Finished Goods Inventory 666,500 Work in Process Inventory (Amount is from part b) 666,500 Cost of Goods Sold 620,100 Finished Goods Inventory (Amount is from part a) 620,100 S&A Expenses 283,600 Accounts Payable (or Cash) (Amount is from part c) 283,600 Accounts Receivable Sales 954,000 954,000 60 a Chapter Systems and Methods of Product Costing Work in Process Inventory 175,000 Raw Materials Inventory 175,000 Work in Process Inventory Cash (35,000 ×$16) 560,000 560,000 Overhead Control Wages Payable 75,000 Overhead Control Accumulated Depreciation 35,200 Overhead Control Cash 14,000 75,000 35,200 14,000 Overhead Control Supplies Inventory 9,600 9,600 Work in Process Inventory 175,000 Overhead Control To apply overhead to WIP using the predetermined overhead rate (35,000 DLH × $5) Finished Goods Inventory 840,000 Work in Process Inventory b Beginning balance Direct materials Direct labor Applied overhead Goods completed Ending balance c 175,000 840,000 $ 53,780 175,000 560,000 175,000 $963,780 (840,000) $123,780 Actual overhead: Indirect labor Depreciation Supervisor Indirect materials Applied overhead Overapplied overhead $75,000 35,200 14,000 9,600 $ 133,800 (175,000) $( 41,200) 67 68 61 a b 62 Chapter Systems and Methods of Product Costing $370,000 ÷ $1,850 = 200 units sold Units completed = Units sold + Units in ending FG = 200 + 30 = 230 Direct materials used Direct labor Overhead: Indirect labor $45,300 Insurance 3,000 Utilities 8,900 Depreciation 17,900 Total current period manufacturing costs WIP ending Cost of goods manufactured $212,000 118,000 75,100 $405,100 (55,500) $349,600 c $349,600 ÷ 230 units = $1,520 cost per unit d 200 × $1,520 = $304,000 e Sales – CGS = GM $370,000 - $304,000 = $(66,000) a - b Raw Materials Inventory Beg bal 10,000 Issued direct (#2) Purch (#1)95,000 Issued indirect (#2) _ _ End bal 82,300 Beg bal DM (#2) IM (#2) DL (#3) IL (#3) Util (#5) Depr (#6) Rent (#7) End bal Work in Process Inventory 18,000 | CGM 20,200 | 2,500 | 60,000 | 9,000 | 4,690 | 8,000 | 6,600 | | | 8,300 Finished Goods Inventory 4,000 | CGS 120,690 | | | End bal (#9) 8,900 Beg bal CGM 20,200 2,500 120,690 115,790 Chapter Systems and Methods of Product Costing Total product cost = Cost of Goods Manufactured = $120,690 69 Period costs for August (all on Income Statement): Office Salaries Expense (#4) $24,100 Utilities Expense (#5) 2,010 Depreciation Expense (#6) 2,000 Rent Expense (#7) 4,400 Total period cost $32,510 c Sales = CGS + period costs + NI = $115,790 + $32,510 + $27,700 = $176,000 63 a Brooke’s Collectibles Schedule of Cost of Goods Manufactured For the Month Ended July 31, 2003 Beg work in process Beg Raw materials Raw materials purchased Raw materials available Raw materials ending Raw materials used Indirect materials used Direct materials used (given) Direct labor ($98,500 × 0.85) Overhead: Various (given) Indirect materials (from above) Indirect labor ($98,500 × 0.15) Total current period manufacturing Ending work in process Cost of goods manufactured 64 finished of goods of goods finished of goods goods manufactured available for sale goods sold $ 36,600 $ 23,300 82,000 $105,300 (17,400) $ 87,900 (23,900) 64,000 83,725 $75,000 23,900 14,775 costs b Beg Cost Cost End Cost a Total overhead = $624,240 + $324,000 = $948,240 Total MHs = 72,000 + 9,300 = 81,300 $948,240 ÷ 81,300 MH = $11.66 per MH Applied overhead = $11.66 X 8.15 = $95.03 113,675 $298,000 (30,000) $268,000 $ 18,000 268,000 $286,000 (26,200) $259,800 b Fabrication: $624,240 ữ 72,000MH = $8.67 per MH ì Finishing: $324,000 ữ 48,000DLH = $6.75 per DLH ì Total OH applied per unit using departmental rates $69.36 13.50 $82.86 70 65 a Chapter Systems and Methods of Product Costing Cost of Goods Sold for the first 18 days of June: $230,000 × (1 - 0.30) = $161,000 Cost Beg Cost Cost End Cost * of FG of of FG of Goods Sold for the first 18 days of June: $ 29,000 Goods Manufactured 174,500** Goods Available $203,500* (42,500) Goods Sold $161,000 CGA = $161,000 + $42,500 = $203,500 CGM = $203,500 - $29,000 = $174,500 ** Cost of Goods Manufactured for the first 18 days of June: Beg WIP DM DL OH Total costs to account for Less ending WIP Cost of Goods Manufactured (from above) $ 48,000 76,000 44,000 42,000 $210,000 (35,500)*** $174,500 Ending WIP = $210,000 - $174,500 = $35,500 *** b The insurance company would want to substantiate the quantity and cost of the inventory The company would require nonfinancial records including labor, material, and production The insurance company might also require some verification of the market value (current value or replacement value) of the inventory Further, it might require the company to substantiate the number of units in the WIP inventory and the average percentage of completion The market value data could be obtained from industry publications and the unit data might be obtained from production records or internal receiving and shipping documents Chapter Systems and Methods of Product Costing 71 Reality Check 66 67 a To remain competitive in the global market, businesses must control costs Provision of health care is creating a crisis for American businesses In many cases, health care costs are twice as high for U.S industries as for their foreign competitors There is nothing unethical about businesses being concerned about these costs and seeking ways to control them Before cutting coverage, businesses have an ethical obligation to identify alternatives For example, emerging alternatives include managed health care, sharing insurance premiums with employees, and forming alliances with other businesses to directly contract for health care services Businesses should be careful to gather employee input on solutions before making any decisions that will adversely affect health care coverage b There are no correct or incorrect answers to this question It is expected that each student will have a relatively unique ranking of the alternatives This subpart is intended to demonstrate to the students how difficult it is to cut health care insurance coverage because each worker has different needs and different priorities c By bringing some health care services in-house, a firm can replace a portion of the variable costs (per employee) with fixed costs A company may be able to achieve similar benefits by directly contracting with health service providers on a (partly) fixed fee basis Likewise, companies can implement health awareness campaigns and provide fitness facilities that will generate long-term health benefits and lower health care costs Such approaches will result in an increase in fixed costs and lower variable costs a The benefits of outsourcing the financing function include possibly higher quality service by using world-class service vendors, lower costs due to reduced staffing requirements, and the ability to re-deploy internal resources to other areas The drawbacks may consist of loss of competency in a crucial operational area, loss of flexibility, loss of personal associations with sources of capital, and loss of reputation There could also be a loss of talent that would be required to execute certain organizational strategies For example, a strategy that depends on mergers and acquisitions may require a very competent internal staff to determine optimal finance arrangements 72 b Chapter Systems and Methods of Product Costing The benefits of outsourcing data-processing include lower operating costs, faster processing because of the vendor’s use of advanced technology, and the ability to redeploy internal technology to other uses The drawbacks of outsourcing data-processing include loss of control over a potentially vital resource (information) and loss of competency in a vital area Also, the company may lose economies of scale in technology acquisition assuming computerbased technology could be acquired to support dataprocessing and other functions such as product design and engineering Outsourcing travel arrangements would have the effect of reducing the fixed costs associated with staffing a travel office This should cause total costs of travel to decline A greater variety of travel vendors may be accessed by outsourcing The drawbacks associated with outsourcing travel arrangements would include some loss of flexibility in determining travel arrangements, loss of some control over determining which firms provide travel services (e.g., which airline is used), and possibly higher variable travel costs Also, it may be more difficult to develop long-term initiatives to lower travel costs Outsourcing manufacturing would result in much of the costs of prevention, appraisal, and failure being buried in the purchase price of the outsourced product An important consideration would be that the company would lose some control over quality expenditures If the vendor spends heavily on failure prevention, the customer will also spend heavily on failure prevention (because this cost must be recovered in the selling price); if the vendor fails to invest in prevention, the customer will spend heavily on appraisal (and therefore internal failure costs) or external failure costs c Chapter 73 Systems and Methods of Product Costing The biggest impact on corporate culture would be determined by how management dealt with the internal workers who were displaced by the outsourcing If the workers were simply fired, a climate of mistrust would be created between the remaining workers and managers Workers who were not displaced would be fearful that their jobs offered no security The consequence would be low morale and high turnover However, if the workers were retrained and then redeployed in the firm, the culture could change in a positive way By keeping the workers, management would be signaling to the workers that they are valued and that managers are willing to retrain workers as competitive conditions change Workers would then be more willing to accept change (and changes are inevitable) Working to develop a culture that accepts changes could provide a competitive advantage 68 Each student will have a different answer No solution provided 69 a A fixed overhead cost of $28 per unit is obtained by dividing total fixed overhead cost ($1,400,000) by the total number of units actually produced (50,000) A fixed overhead cost of $17.50 is obtained by dividing the $1,400,000 by the actual capacity of 80,000 units The price bid by Global Tool should include a fixed overhead cost of $28 per unit, which reflects the actual level of activity unless Global Tool has another contract to produce the additional 30,000 units A fixed overhead cost of $17.50 is more likely to cause Global Tool to obtain the contract because the amount will lower the per unit cost of the bid ($15 DM & DL + $4 VOH + $17.50 FOH = $36.50 × 1.50 = $54.75) b Invoice for $3,535,000 ÷ 50,000 units = $70.50 $15 + $4 + $28 = $47 + 50% = $70.50 Global Tool's bid of $54.75 was based on a predetermined fixed overhead rate of $17.50 per unit The invoice for $3,535,000 was prepared using a predetermined fixed overhead rate of $28 per unit The difference between the rates is a function of the denominator (capacity) The explanation is that the expected production of 80,000 used to compute the original bid price was not achieved, which caused per unit cost to increase 74 c Chapter Systems and Methods of Product Costing No, since production totaled 80,000 units, the fixed overhead cost per unit is $17.50 Thus, the price to Manatuka should be reduced to $2,737,500 ($54.75 × 50,000) Additionally, since the margin is most likely less than 50 percent on products sold to other buyers, Global Tool should charge a reasonable price to the government contractor d Although capacity remained at 50,000 units, it was ethical to bill $3,525,000 since the company was merely applying a fixed overhead rate that approximated actual fixed overhead The fact that Global Tool was able to secure another contract should not affect the company's ability to recover all costs from Manatuka If management is aware of the existence of other contracts before the bill is presented, the price could be adjusted or, if future production levels are significant, Global Tool could consider rebating a portion of Manatuka's contract cost e Global Tool should consider the following: • relationship between the bid price and the final contract price • ability of companies to manipulate bid prices especially in cost-plus contracts • effect on other companies' abilities to compete for contract • future sales to same bidder • effects on profits and stock prices if the contract were settled at $54.75 per unit versus $70.50 per unit The ethical dilemma is overcome if Global Tool has no other customer and no prospect of other customers to purchase the goods that would have been produced by the excess capacity In such a case, the $28 overhead rate is totally ascribable to the Manatuka contract ... 65 a Chapter Systems and Methods of Product Costing Cost of Goods Sold for the first 18 days of June: $230,000 × (1 - 0.30) = $161,000 Cost Beg Cost Cost End Cost * of FG of of FG of Goods Sold... relevant range of activity and, therefore, no variable costs will change per unit and no fixed costs will change in total * Chapter Systems and Methods of Product Costing a It is a mixed cost because... 120,690 115,790 Chapter Systems and Methods of Product Costing Total product cost = Cost of Goods Manufactured = $120,690 69 Period costs for August (all on Income Statement): Office Salaries Expense