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

Chapter 3
Systems and Methods of Product Costing
Questions
1.

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.

2.

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.

3.

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
4.

Chapter 3
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).

5.

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 do 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.

6.

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.

7.

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 do not meet these two conditions, alternative points
should be selected.

8.

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.


9.

Chapter 3
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 3
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 3
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 do
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 3
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 do 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 3
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 3
Systems and Methods of Product Costing

50
Exercises
28.

a.
b.
c.
d.
e.
f.
g.
h.
i.

8
3
9
1
6
5
7
4
2

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 3
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.

1.

Chapter 3
Systems and Methods of Product Costing
150 returns:
Total cost = $400 + ($3 × 150) = $850
Cost per unit = $850 ÷ 150 = $5.67

2.

300 returns:
Total cost = $400 + ($3 × 300) = $1,300
Cost per unit = $1,300 ÷ 300 = $4.33

3.

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


b.

37.

Chapter 3
53
Systems and Methods of Product Costing
The variable cost component is negative which
implies
that, as the number of machine hours increases, the
amount of maintenance cost declines. Such a relationship
is implausible. One explanation that would account for

the perceived inverse relationship would be that
Johnstonian performs the maintenance chores when there is
idle time available. As business activity increases,
less and less time is available to perform maintenance
activities.

c.

For a cost prediction formula to work effectively, it is
not required for there to be a positive relationship
between the activity measure and the cost pool. Thus,
the formula developed in part (a) might function
effectively. However, one cannot interpret the
parameters of the model (-$0.09, $1,250) as variable and
fixed costs, respectively.

a.

1.
2.

4.

38.

Number of sales orders generated, number of miles
traveled, nights away from home, number of
clients contacted
Number of pizzas made, number of customers served,
types of pizzas prepared

3.
Number of faculty, number of papers and exams
written, number of students, number of handouts
Number of machine breakdowns, number of hours of
operation for machines, number of machines,
number of maintenance hours worked, number of
clients

b.

The distinction between a cost predictor and a cost
driver is whether the activity measure actually causes
the cost to be incurred. A cost predictor is merely an
activity that changes with changes in the cost. A cost
driver causes costs to be incurred. Of the costs
addressed in part (a), the best choices for cost drivers
would be 1) number of miles traveled, 2) number of pizzas
made, 3) number of papers and exams written, and 4)
number of hours of operation for machines (preventive
maintenance) and number of breakdowns (repairs).

a.

Stainless steel, plastic and fiberglass, knife racks =
$400,000 + $15,000 + $9,200 = $424,200

b.

$200,000 (equipment operators)

c.

$8,000 indirect material (oil and grease)
$168,000 indirect labor (mechanics and supervisors)


39.

a.
b.
c.
d.
e.
f.
g.
h.

Chapter 3
Systems and Methods of Product Costing
Direct
Direct
Direct
Direct
Direct
Indirect
Indirect
Direct

40.

a.

3,000 (18,000 total - 15,000 regular)

b.

Direct labor: 18,000 × $8 = $144,000
Overhead: $168,000 - $144,000 = $24,000

c.

Shift premiums = 10% × $8 = $0.80; 20% × $8 = $1.60
Overtime premium = 50% × $8 = $4
Late shift premiums: (5,000 hours second shift × $0.80)
+ (5,000 hours third shift × $1.60) = $12,000
Overtime premiums (3,000 hours overtime × $4.00) =
$12,000

a.

One month of insurance ($12,000 ÷ 6)
$ 2,000
Bonus to corporate president
40,000*
Utility cost on headquarters ($10,000 × $0.30)
3,000
Total
$45,000
*This solution assumes the bonus was related solely to
this month.

b.

Insurance premium ($2,000 × 5)

$10,000

c.

Property taxes ($7,500 ÷ 3)
Utility cost on factory ($10,000 × 0.70)
Total

$2,500
7,000
$9,500

d.

Because product costs are assigned to products made, they
cannot be classified as expired or unexpired because it
is not known whether the associated products made during
May were sold. If sold, the costs would be expired; if
unsold, the costs would be unexpired and be accumulated
in the Finished Goods account.

a.

Direct labor is labor that can be specifically identified
with, or physically traced to, a cost object or finished

product in an economically feasible manner (e.g., the
labor of machine operators in a production environment).
Indirect labor is all factory labor that is not
classified as direct labor.

54

41.

42.


b.

c.

Chapter 3
55
Systems and Methods of Product Costing
Certain nonproductive time may be a normal and
unavoidable part of total labor time. In such cases, a
pro rata share of nonproductive time should be classified
as direct labor time. In many cases, nonproductive time
is classified as indirect labor because it cannot be
specifically identified with a cost object. For example,
the amount of downtime usually cannot be specifically
identified with a specific cause or particular cost
object; it may result from a parts shortage or a broken
machine. When there is a shortage of work and employees
would therefore be idle, this time can be used for

training.
Direct labor: The items classified as direct labor can
usually be specifically identified with a quantity of
labor. Furthermore, other direct costs, such as payroll
taxes, are incurred by the organization because of its
use of labor.
Manufacturing overhead: The items classified as
manufacturing overhead usually cannot be specifically
identified with direct labor quantities.
Either direct labor or manufacturing overhead: Some cost
items can be classified as either direct labor or
manufacturing overhead, depending on the size of the cost
object. For example, for very large projects employee
time can be easily associated with the projects (e.g.,
time of specific managers, engineers, draftspersons,
janitors, material handlers). Therefore, all costs
associated with these employees can be classified as
direct labor costs. For smaller cost objects, such as a
variety of products or subassemblies, costs are more
difficult to identify with the cost objects and,
therefore, they are classified as manufacturing overhead.

d.

The quantity of labor hours that should be included as
direct labor or manufacturing overhead reflects a measure
of activity. The activity that was performed was either
directly related to the product or indirectly related (or
not easily traceable) to the product. The dollar amount
assigned measures the cost of the activity. Wages and

salaries are not necessarily directly tied to production
activity. For example, assume a direct labor employee
makes $8 per hour and time-and-a-half for overtime. This
employee's activity is no different during the overtime
hours - only the wage rate differs. Thus, measurement of
activity and measurement of cost must be separated.
(CMA adapted)


56
43.

a.

Chapter 3
Systems and Methods of Product Costing
Expected overhead = ($2,760 × 12) + ($4 × 24,000)
= $33,120 + $96,000
= $129,120
Predetermined overhead rate = $129,120 ÷ 24,000 hours
= $5.38 per direct labor hour
Overhead per unit = $5.38 × 2 hours per unit = $10.76

b.

Manufacturing Overhead
Various accounts

10,501
10,501

Work in Process Inventory
10,222
Manufacturing Overhead
10,222
(1,900 DLHs ÷ 2 hours per unit = 950 units; 950 ×
$10.76)
44.

45.

a.

April applied overhead ($270,000 × 175%)
May applied overhead ($247,500 × 175%)
June applied overhead ($255,000 × 175%)

b.

Actual
Applied
April
$480,000 $472,500
May
427,800
433,125
June
450,000
446,250
Total for the quarter

a.
b.

Manufacturing Overhead
Cost of Goods Sold

Overapplied (underapplied)
$(7,500)
5,325
(3,750)
$(5,925)
22,000

Manufacturing Overhead
22,000
Work in Process Inventory
Finished Goods Inventory
Cost of Goods Sold
WIP
$128,000
FG
32,000
CGS
240,000
Total $400,000

$472,500
$433,125
$446,250

22,000
7,040
1,760
13,200

128,000 ÷ 400,000 = 32% × $22,000 = $ 7,040
32,000 ÷ 400,000 = 8% × $22,000 =
1,760
240,000 ÷ 400,000 = 60% × $22,000 = 13,200

c.
The method in part (b) would be more appropriate in
this instance because of the materiality of the amount of
overapplied overhead. It is 5.5 percent of the total of
the balances in all of the accounts containing overhead,
so to close it directly to cost of goods sold would cause
a distortion of the costs remaining in inventory.
46.

a.
Given the relationships within the account balances,
it appears that overhead is applied based on direct labor
cost. Thus, using the information in the WIP account,
the rate is $20,000 ÷ $10,000 or 200%.


Chapter 3
Systems and Methods of Product Costing
b.

The amount should be prorated because it is very
large relative to the balances in Work in Process,
Finished Goods, and Cost of Goods Sold.

47.

48.

57

c.

Work in Process $50,000 × ($50,000 ÷ $285,000) =
Finished Goods $50,000 × ($100,000 ÷ $285,000) =
Cost of Goods Sold $50,000 × ($135,000 ÷ $285,000) =
Total

d.

Work in Process $50,000 × ($20,000 ÷ $110,000) = $ 9,091
Finished Goods $50,000 × ($40,000 ÷ $110,000) =
18,182
Cost of Good Sold $50,000 × ($50,000 ÷ $110,000)= 22,727
Total
$50,000

e.

A debit balance in the manufacturing overhead account can
be the result of several causes including: (1) the

company paid a higher price for the resources comprising
actual overhead than budgeted, (2) the company used a
greater quantity of overhead resources than attached to
inventory for actual output, (3) the company produced at
a lower level of capacity than the planned level of
activity upon which the predetermined overhead rate was
based, or (4) a combination of the above causes.

a.

Beginning WIP
$ 68,000
Direct materials used
$128,000*
Direct labor
162,000
Factory overhead
116,000
406,000
Total current period manufacturing costs
$474,000
Ending WIP
(84,000)
Cost of goods manufactured
$390,000
*Note:
The beginning and ending balances of RM are not
used because no information is given on purchases for the
month.

b.

Beginning FG
Cost of goods manufactured
Cost of goods available for sale
Ending FG
Cost of goods sold

Direct labor ($12,000 + $4,200)
Overhead:
Supplies ($1,800 - $800)
$1,000
Utilities ($900 × 0.8)
720
Office Salaries ($2,600 × 0.20)
520
Depreciation
600
Building rental ($700 × 0.70)
490
Cost of services rendered

$ 8,772
17,544
23,684
$50,000

$ 32,000
390,000
422,000

(24,000)
$398,000
$16,200

3,330
$19,530


58
49.

Chapter 3
Systems and Methods of Product Costing
a.
Champ’s Custom Clocks
Cost of Goods Sold Schedule
For the Month Ended August 31, 2003
Beginning finished goods
$ 125,000
Cost of goods manufactured
2,273,000*
Cost of goods available
$2,398,000**
Ending finished goods
(98,000)
Cost of goods sold
$2,300,000
**
*

$2,300,000 + $98,000 = $2,398,000
$2,398,000 - $125,000 = $2,273,000

b.

Champ’s Custom Clocks
Cost of Goods Manufactured Schedule
For the Month Ended August 31, 2003
Beg. work in process
$
90,000
Direct materials:
Beg. direct materials
$ 30,000
Direct materials purchased
768,500
Direct materials available $798,500
End. direct materials
(42,000)
Direct materials used
756,500
Direct labor
450,000**
Overhead
1,012,500**
Total costs to account for
$2,309,000*
End. work in process ($90,000 × .40)
(36,000)
Cost of goods manufactured

$2,273,000
*Total

costs to account for = $2,273,000 + $36,000 = $2,309,000

Total cost to account for = Beg. WIP + DM used + DL + OH
$2,309,000 = $90,000 + $756,500 + DL + OH
DL + OH = $2,309,000 - $90,000 - $756,000
DL + OH = $1,462,500
OH = 225% of DL = 2.25DL
DL + 2.25DL = $1,462,500
3.25DL = $1,462,500
DL = $450,000
OH = $450,000 × 2.25 = $1,012,500

**

c.

Direct production cost = DM + DL
= $756,500 + $450,000
= $1,206,500

d.

Conversion cost = DL + Overhead
= $450,000 + $1,012,500
= $1,462,500

50.

a.

Systems
Depreciation
Units sold =
Expired cost

Chapter 3
59
and Methods of Product Costing
per unit = $12,500 ÷ 5,000 = $2.50
4,000; units in inventory = 1,000
of depreciation = 4,000 × $2.50 = $10,000

Unexpired cost of depreciation = 1,000 × $2.50 = $ 2,500
Unexpired cost of machine = $100,000 - $12,500 = 87,500
Total unexpired cost
$90,000
b.

51.

a.

Cost in WIP Inventory = $2,500.
Cost in accumulated depreciation account = $12,500
Net plant asset cost = $87,500
Cost in cost of goods sold account = $10,000

X
100
87
80
70
105
115
120
677

Y
$175
162
154
142
185
200
202
$1,220

Let x = mean
Let y = mean
x = 677
y = $1,220 ÷

XY
$17,500
14,094
12,320
9,940

19,425
23,000
24,240
$120,519

of X observations
of Y observations
÷ 7 = 96.71
7 = $174.29

b = ∑XY - n(x)(y)
∑X2 - nx2
= $120,519 - 7(96.71)($174.29)
67,519 - 7(96.71)(96.71)
= $2,529.90
2,049.23
= $1.23
_
_
a = y – b (x)
a = $174.29 - $1.23(96.71)
= $55.34
Y = $55.34 + $1.23(# of shipments)
b.

Y = $55.34(4) + $1.23(340)
= $639.56

X2
10,000

7,569
6,400
4,900
11,025
13,225
14,400
67,519


60
52.

Chapter 3
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 ÷ 9 = 49.56
$355,800 ÷ 9 = $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 3
Systems and Methods of Product Costing
Let x = mean of X observations
Let y = mean of Y observations

61

x = $550,000 ÷ 9 = 61,111.11

y = $355,800 ÷ 9 = $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 3
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.

1 C

2 H

3 D

4 L

5 E

6 G

7 A

8 F

9 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 3
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 3
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 ÷ 8 = 2,087.50
y = $89,546 ÷ 8 = $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 3
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 3
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 3
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