Solution manual cost accounting by carter 14e ch12

CHAPTER 12 DISCUSSION QUESTIONS Q12-1 Supervisors’ salaries, indirect labor, overtime premium, supplies, indirect materials, payroll tax, factory insurance, and depreciation Q12-2 The most important reason for variation in factory overhead is the presence of fixed and variable expenses Therefore, as production volume changes from month to month, the costs will likewise However, overhead also will change because of improved or decreased efficiencies and changes in prices paid for overhead items such as supplies and repairs Q12-3 Predetermined rates are used when it becomes obvious that any other method of charging overhead results in inequitable costing and delays the reporting of financial results Charging actual overhead to jobs and products can result in charging unreasonable amounts of overhead to various periods and in delayed reporting of cost data The use of predetermined rates also enhances control through analysis of over- or underapplied factory overhead Q12-4 Six bases used for applying factory overhead are units produced, direct materials cost, direct labor cost, direct labor hours, machine hours, and transactions Important considerations in selecting a base are the relationship (correlation) of the base used and the use of overhead items in manufacturing operations, as well as the clerical practicability of using a particular base Q12-5 Predetermined rates are used to charge overhead and become the basis for determining the cost of a job or product Therefore, the reasonableness of such costs is to a large extent determined by the reasonableness of the rates Since these costs are used for costing inventories and play an important role in establishing sales prices, the selection of proper predetermined rates can be appreciated Q12-6 An objective in selecting the base for a predetermined factory overhead rate is to ensure the application of factory overhead in reasonable proportion to a beneficial or causal relationship to jobs, products, or work performed or to be performed, i.e., for estimating purposes Ordinarily, the base selected should be closely related to functions represented by the applied overhead cost If factory overhead costs are predominantly labor oriented, such as supervision and indirect labor, the proper base would probably be direct labor hours If factory overhead costs are predominantly related to the cost incurred in the ownership and operation of the machinery, the proper base would probably be machine hours Another objective in selecting the base is to minimize clerical cost and effort relative to the benefits attained When two or more bases provide approximately the same applied overhead cost to specific units of production, the simplest base should be used Q12-7 (a) Theoretical capacity is actually the maximum production possible from a given plant with no allowance made for cessation of operations for holidays, weekends, materials shortages, or machine breakdowns (b) Practical capacity is theoretical capacity less an allowance for interruptions such as breakdowns, delays in receiving supplies, and worker absences Practical capacity is usually 75 to 85 percent of theoretical capacity (c) Expected actual capacity is practical capacity adjusted for the lack of sufficient demand in a single operating period and may be used in building operating budgets when expected capacity differs substantially from normal capacity (d) Normal capacity is practical capacity adjusted to give consideration to the lack of sufficient demand over a period long enough to include cyclical and seasonal fluctuations This is usually the basis for long-range planning, standards, and preferably for the determination of overhead rates Q12-8 The underapplied overhead will be higher If maximum capacity is used and lower if normal is used If this cost is charged to the 12-1 12-2 Chapter 12 current period, then maximum capacity will produce a lower, and normal capacity a higher, operating profit Q12-9 (a) Idle capacity costs arise from idle employees and idle facilities Idle employees give rise to costs such as base wages paid, employer’s share of payroll taxes, and other fringe benefit costs Idle facilities cause capacity costs due to deterioration with time, approaching obsolescence, costs for upkeep, readiness, maintenance, repairs, shelter, and protection of valuables such as insurance (b) When idle capacity is present, an attempt should be made to segregate idle employees and idle facilities through proper reclassification The accumulation of the cost attributable to these idle workers or facilities in excess of a reasonable budgeted amount might be in some kind of overhead account to be treated separately as a “management by exception” factor Idle capacity costs should be accounted for separately for these reasons: (1) to prevent distortion and confusion in the analysis of production costs; (2) to facilitate income determination; (3) to control operations; and (4) to plan next year’s budget adequately (c) Excess capacity cost has been identified with those capacity costs that result from greater production capacity than the company could ever hope to use, or from unbalanced equipment or machinery within departments In creating the forecast budget, it is important to isolate the excess capacity cost so that management can be made aware of its responsibility regarding the excess investment in labor and machines Q12-10 (a) Analyze and identify the overhead transactions (b) Journalize the transactions (c) Enter transactions in general and subsidiary ledgers Q12-11 Overhead applied to production is entered as a credit in the factory overhead control account Actual overhead is debited to the same account Therefore, overhead has been overapplied when the account has a credit balance Q12-12 Overhead can be overapplied because (a) actual overhead was less than budgeted; (b) capacity utilized was greater than that estimated in computing overhead rates; (c) the overhead estimate was too high (a mistake); (d) the production estimate was too low (a mistake); (e) combinations of the above Q12-13 Over- or underapplied factory overhead may be prorated among work in process, finished goods, and cost of goods sold, or it may be treated entirely as a period cost The first method would have a smaller effect on cost of goods sold and therefore on the net income for the period Q12-14 The existence of large underabsorbed variances does not necessarily mean that unit costs are incorrect An analysis of the underabsorbed figures will indicate (a) whether actual overhead is too high or whether expenses have been incorrectly estimated; and (b) what part of the underabsorption is caused by unused capacity If actual overhead is considered to be too high and there is idle capacity, unit costs computed are more reasonable than they would be if overhead rates were computed to absorb all of the actual overhead 12-2 Chapter 12 12-3 EXERCISES E12-1 (1) $1,750,000 fixed overhead and $720 variable overhead per ton, calculated as follows: For both the normal capacity and expected actual capacity, the problem states the total budgeted overhead cost and the number of tons of activity The highlow method of estimating cost behavior can be used to determine the overhead budget, using those two points: Activity Level Normal capacity Expected actual Difference Tons 6,000 5,000 1,000 Budgeted Overhead $6,070,000 5,350,000 $ 720,000 $720, 000 Variable = = $720 va riable overhead per ton 1, 000 tons overhead rate Budgeted fixed overhead = = or, budgeted fixed overhead = = $5,350,000 total overhead – ($720 × 5,000) variable overhead $5,350,000 – $3,600,000 = $1,750,000 $6,070,000 total overhead – ($720 × 6,000) variable overhead $6,070,000 – $4,320,000 = $1,750,000 12-4 Chapter 12 E12-1 (Concluded) (2) The predetermined rate at practical capacity would be $938.75 per ton Using the budget for fixed and variable overhead, a predetermined overhead rate can be calculated at any level of activity within the relevant range Assuming practical capacity is within that range, the ca Underapplied overhead $7,400 6,939 $ 461 Chapter 12 12-7 E12-10 Actual factory overhead Applied factory overhead (210,000 machine hours × $4) Overapplied factory overhead $832,000 840,000 $ (8,000) E12-11 (1) Fixed portion of the factory overhead application rate: $150, 000 = $1.50 per machine hour 100, 000 machine hours (2) Variable portion of the factory overhead application rate: $250, 000 = $2.50 per machine hour 100, 000 machine hours (3) Actual factory overhead Applied factory overhead (105,000 × $4.00) Overapplied factory overhead $411,000 420,000 $ (9,000) Actual factory overhead Applied factory overhead (200% of $8,117) Overapplied overhead $ 14,134 16,234 $ (2,100) E12-12 12-8 Chapter 12 E12-13 Work in process Finished goods Cost of goods sold Total (1) (2) (3) Requirements (1) & (2) Requirement (3) Account Percentage Applied Percentage Balance of Total Overhead of Total $ 6,000 % $ 2,000 4% 38,000 31 2/3% 16,000 32% 76,000 63 1/3% 32,000 64% $120,000 100 % $50,000 100% Work in Process (5% of $6,000) Finished Goods (31 2/3% of $6,000) Cost of Goods Sold (63 1/3% of $6,000) Factory Overhead Control 300 1,900 3,800 Factory Overhead Control Work in Process (5% of $6,000) Finished Goods (31 2/3% of $6,000) Cost of Goods Sold (63 1/3% of $6,000) 6,000 Work in Process (4% of $6,000) Finished Goods (32% of $6,000) Cost of Goods Sold (64% of $6,000) Factory Overhead Control 240 1,920 3,840 6,000 300 1,900 3,800 6,000 Chapter 12 12-9 PROBLEMS P12-1 (1) Actual overhead incurred $3,470,000 Applied overhead* 3,325,000 Underapplied overhead $ 145,000 *actual MH × predetermined rate based on expected actual capacity = 9,500 MH × ($3,500,000/10,000 MH) = 9,500 MH × $350 per MH = $3,325,000 (2) The predetermined rate at practical capacity would be $316.67 per machine hour (MH), calculated as follows: First, find the budgeted total fixed overhead and the budgeted variable overhead rate per MH The problem states both the total budgeted overhead cost and the number of MH of activity, at both the normal capacity and expected actual capacity levels, so the high-low method of estimating cost behavior can be used: Activity Level Expected actual Normal capacity Difference Machine Hours 10,000 8,000 2,000 Budgeted Overhead $3,500,000 3,000,000 $ 500,000 $500, 000 Variable = = $250 var iable overhead per MH overhead rate 2, 000 MH Budgeted fixed overhead = = or, budgeted fixed overhead = = $3,500,000 total overhead – ($250 × 10,000) variable overhead $3,500,000 – $2,500,000 = $1,000,000 $3,000,000 total overhead – ($250 × 8,000) variable overhead $3,000,000 – $2,000,000 = $1,000,000 Then, using the budget for fixed and variable overhead, a predetermined overhead rate can be calculated at any level of activity within the relevant range Assuming practical capacity is within that range, the calculation is: 12-10 Chapter 12 P12-1 (Concluded) Predetermined Budgeted total overhead at practical capacity overhead rate at = practical capacity Practical capacity in MH (15,000 MH ) Budgeted fixed overhead + Budgeted variable = Overhead at 15, 000 MH $1, 000, 000 + ($250 × 15, 000) = 15, 000 MH 15, 000 MH = $1, 000, 000 + $3, 750, 000 $4, 750, 000 = = $316.67 per MH 15, 000 MH 15, 000 MH or, $250 variable overhead per MH + ($1,000,000 ÷ 15,000 MH) = $250 per MH + $66.67 per MH = $316.67 per MH (3) If the actual overhead of $3,470,000 were underapplied by $10,000, then Applied Overhead would have a credit balance of $3,470,000 – $10,000, or $3,460,000 The closing entries are: Applied Overhead Factory Overhead Control 3,460,000 Cost of Goods Sold Factory Overhead Control 10,000 (4) Work in process Finished goods Cost of goods sold Total Work in Process (2.5 % of $10,000) Finished Goods Cost of Goods Sold Factory Overhead Control 3,460,000 10,000 Account Percentage Balance of Total $ 200,000 2.5% 400,000 5.0% 7,400,000 92.5% $8,000,000 100.0% 250 500 9,250 10,000 Total Maintenance Indirect labor ($18, 000 − $12, 000) (15, 000 − 10, 000) ($70, 000 − $60, 000) (15, 000 − 10, 000) = = = ($10, 500 − $7, 000) (15, 000 − 10, 000) Supplies used Taxes on factory building = ($ 8, 000 − $6, 000) (15, 000 − 10, 000) (1) Variable Overhead per Unit Heat, light, and power Factory Overhead Cost Depreciation on factory building and equipment P12-2 = = a = a $18,000 = = = = = $70,000 $10,500 a $ 8,000 a a + $1.20 (15,000) a + $2.00 (15,000) a + $ 70 (15,000) a + $ 40 (15,000) $58,000 40,000 1,500 2,000 $14,500 CGA-Canada (adapted) Reprint with permission $4.30 1.20 2.00 70 $ 40 Fixed Overhead (2) Chapter 12 12-11 12-12 Chapter 12 P12-3 (1) Total cost of Job 50: Work in process, December December costs: Materials Direct labor (($102,000 ữ 8,500) ì 3,500) Factory overhead ($4.50 × 3,500) (2) Factory overhead costs applied to Job 52 during December: $4.50 × 2,000 = $9,000 (3) Total factory overhead costs applied during December: $4.50 × 8,500 = $38,250 (4) Actual December factory overhead incurred: Supplies Indirect labor wages Supervisory salaries Building occupancy costs Factory equipment costs Other factory costs $ 54,000 45,000 42,000 15,750 $156,750 $ 3,500 15,000 6,000 3,500 8,000 5,000 $39,000 (5) An insignificant amount of over- or underapplied factory overhead would be treated as a period cost (6) Actual overhead Applied overhead Underapplied overhead $39,000 38,250 $ 750 Chapter 12 12-13 P12-4 (1) Actual factory overhead: Indirect materials and supplies $ 18,000 Indirect labor 53,000 Employee benefits 23,000 Depreciation 12,000 Supervision 20,000 $126,000 (2) Over- or underapplied factory overhead: Total direct labor, 20— $ 70,000 Factory overhead rate per direct labor dollar 160% Applied factory overhead $112,000 Actual factory overhead 126,000 Underapplied factory overhead $ 14,000 (3) Amount included in cost of goods sold for Job 1376: Beginning balance $ 72,500 Materials and labor, 20— 8,000 Applied factory overhead, 20— ($7,000 × 160%) 11,200 $ 91,700 (4) Cost assigned to the work in process account at the end of 20—: Beginning balance (Job 1376) $ 72,500 Cost charged to work in process, 20—: Materials $ 43,000 Labor 70,000 Applied factory overhead 112,000 225,000 $297,500 Less cost of Job 1376, which was completed and sold 91,700 $205,800 12-14 Chapter 12 P12-5 (1) Predetermined factory overhead rate based on normal capacity: (2) $29, 250 45, 000 MH = $.65 variable portion of rate for expected actual and normal capacity $18, 000 60, 000 MH = Predetermined factory overhead rate based on expected actual capacity: $29, 250 45, 000 MH = $ 65 variable portion of rate for expected actual and normal capacity $18, 000 = 45, 000 MH (3) 30 fixed portion of rate based on normal capacity $.95 total rate based on normal capacity 40 fixed portion of rate based on expected actual capacity $1.05 total rate based on expected actual capacity Amount of factory overhead charged to production if the company used the normal capacity rate: 47,000 MH × $.95 = $44,650 (4) Amount of factory overhead charged to production if the company used the expected actual capacity rate: 47,000 MH × $1.05 = $49,350 (5) Actual factory overhead Applied overhead (from (3) normal capacity rate) Underapplied overhead $ 47,100 44,650 $ 2,450 (6) Actual factory overhead Applied overhead (from (4) expected actual capacity rate) Overapplied overhead $ 47,100 49,350 $ (2,250) Chapter 12 P12-6 (1) Work in Process: Direct materials $ 9,000 Direct labor 16,000 Factory overhead (2,000 × $3.60) 7,200 Total $32,200 12-15 Finished Goods: Direct materials $10,000 Direct labor 40,000 Factory overhead (5,000 × $3.60) 18,000 Total $68,000 (2) Supervision Indirect labor Heat, light, and power Depreciation—factory buildings Property tax—factory facilities Insurance on factory buildings Transportation in Repairs and maintenance Depreciation—factory equipment Miscellaneous factory overhead Total actual factory overhead $ 17,500 29,050 23,800 7,500 4,000 3,000 6,500 8,250 7,500 9,900 $117,000 (3) Actual overhead Applied overhead Underapplied overhead $117,000 115,200 $ 1,800 12-16 P12-6 (Concluded) (4) Chapter 12 COLUMBUS COMPANY Cost of Goods Sold Statement For January Materials: Inventory, January Purchases Less returns to suppliers Materials available Inventory January 31 Direct labor Applied factory overhead January manufacturing cost Add work in process, January Less work in process, January 31 Cost of goods manufactured Add finished goods, January Cost of goods available for sale Less finished goods, January 31 Cost of goods sold at normal Add underapplied factory overhead Cost of goods sold at actual $ 21,000 $108,000 5,050 102,950 $123,950 9,000 $114,950 256,000 115,200 $486,150 32,500 $518,650 32,200 $486,450 18,000 $504,450 68,000 $436,450 1,800 $438,250 Chapter 12 12-17 CASES C12-1 (1) High Low Difference Direct Labor Factory Hours Overhead Costs 2,760,000 hours $34,500,000 2,160,000 29,880,000 600,000 hours $ 4,620,000 Variable rate = $4,620,000 ÷ 600,000 hours = $7.70 per direct labor hour High $34,500,000 21,252,000 $13,248,000 Low $29,880,000 16,632,000 $13,248,000 Estimated total factory overhead for next year Total variable factory overhead (2,300,000 × $7.70) Total fixed factory overhead Total factory overhead $17,710,000 13,248,000 $30,958,000 Total cost Variable cost ($7.70 per direct labor hour) Fixed element (2) Utility of cost behavior information: (a) Evaluation of product pricing decisions—The calculation of the factory overhead rate required the company to estimate the variable factory overhead cost In short-term price-cutting situations, the price set should cover at least the variable materials, labor, factory overhead, and nonmanufacturing costs For the longer term, the total cost assigned to the various products may provide some basis for price differentials among the items (b) Cost control evaluation—The calculation of the factory overhead rate required the company to estimate the fixed factory overhead cost and the variable factory overhead cost per direct labor hour The amounts are estimates of what the cost should or will be during the next year The amounts can be used as the basis for preparation of a budget allowance for actual activity to be compared to actual cost incurred Any difference between the budget amounts and actual cost would be a measure of the effectiveness of factory overhead cost control (c) Development of budgets—The estimates of fixed factory overhead cost and the variable factory overhead cost per direct labor hour are useful in budget development They permit the company to calculate the estimated factory overhead cost for different activity levels that are being considered as the budget is developed  ... actual cost would be a measure of the effectiveness of factory overhead cost control (c) Development of budgets—The estimates of fixed factory overhead cost and the variable factory overhead cost. .. among work in process, finished goods, and cost of goods sold, or it may be treated entirely as a period cost The first method would have a smaller effect on cost of goods sold and therefore on the... labor wages Supervisory salaries Building occupancy costs Factory equipment costs Other factory costs $ 54,000 45,000 42,000 15,750 $156,750 $ 3,500 15,000