Chapter 03 ManAcc Solutions

Chapter 3Systems Design: Job-Order Costing Solutions to Questions 3-1 By definition, manufacturing overhead consists of costs that cannot be practically traced to products or jobs. Therefore, if these costs are to be assigned to products or jobs, they must be allocated rather than traced. 3-2 Job-order costing is used in situations where many different products or services that require separate costing are produced each period. Process costing is used in situations where a single, homogeneous product, such as cement, bricks, or gasoline, is produced for long periods. 3-3 The job cost sheet is used to record all costs that are assigned to a particular job. These costs include direct materials costs traced to the job, direct labor costs traced to the job, and manufacturing overhead costs applied to the job. When a job is completed, the job cost sheet is used to compute the unit product cost. 3-4 A predetermined overhead rate is used to apply overhead to jobs. It is computed before a period begins by dividing the period’s estimated total manufacturing overhead by the period’s estimated total amount of the allocation base. Thereafter, overhead is applied to jobs by multiplying the predetermined overhead rate by the actual amount of the allocation base that is incurred for each job. The most common allocation base is direct labor-hours. 3-5 A sales order is issued after an agreement has been reached with a customer on quantities, prices, and shipment dates for goods. The sales order forms the basis for the production order. The production order specifies what is to be produced and forms the basis for the job cost sheet. The job cost sheet, in turn, is used to summarize the various production costs incurred to complete the job. These costs are entered on the job cost sheet from materials requisition forms, direct labor time tickets, and by applying overhead. 3-6 Some production costs such as a factory manager’s salary cannot be traced to a particular product or job, but rather are incurred as a result of overall production activities. In addition, some production costs such as indirect materials cannot be easily traced to jobs. If these costs are to be assigned to products, they must be allocated to the products. 3-7 If actual manufacturing overhead cost is applied to jobs, then the company must wait until the end of the accounting period to apply overhead and to cost jobs. If the company computes actual overhead rates more frequently to get around this problem, the rates may fluctuate widely. Overhead cost tends to be incurred somewhat evenly from month to month (due to the presence of fixed costs), whereas production activity often fluctuates. The result would be high overhead rates in periods with low activity and low overhead rates in periods with high activity. For these reasons, most companies use predetermined overhead rates to apply manufacturing overhead costs to jobs. 3-8 The measure of activity used as the allocation base should drive the overhead cost; that is, the base should cause the © The McGraw-Hill Companies, Inc., 2008. All rights reserved. Solutions Manual, Chapter 3 71 overhead cost. If the allocation base does not really cause the overhead, then costs will be incorrectly attributed to products and jobs and product costs will be distorted. 3-9 Assigning manufacturing overhead costs to jobs does not ensure a profit. The units produced may not be sold and if they are sold, they may not be sold at prices sufficient to cover all costs. It is a myth that assigning costs to products or jobs ensures that those costs will be recovered. Costs are recovered only by selling to customers—not by allocating costs. 3-10 The Manufacturing Overhead account is credited when overhead cost is applied to Work in Process. Generally, the amount of overhead applied will not be the same as the amount of actual cost incurred, since the predetermined overhead rate is based on estimates. 3-11 Underapplied overhead occurs when the actual overhead cost exceeds the amount of overhead cost applied to Work in Process inventory during the period. Overapplied overhead occurs when the actual overhead cost is less than the amount of overhead cost applied to Work in Process inventory during the period. Underapplied or overapplied overhead is disposed of by either closing out the amount to Cost of Goods Sold or by allocating the amount among Cost of Goods Sold and ending inventories in proportion to the applied overhead in each account. The adjustment for underapplied overhead increases Cost of Goods Sold (and inventories) whereas the adjustment for overapplied overhead decreases Cost of Goods Sold (and inventories). 3-12 Manufacturing overhead may be underapplied for several reasons. Control over overhead spending may be poor. Or, some of the overhead may be fixed and the actual amount of the allocation base was less than estimated at the beginning of the period. In this situation, the amount of overhead applied to inventory will be less than the actual overhead cost incurred. 3-13 Underapplied overhead implies that not enough overhead was assigned to jobs during the period and therefore cost of goods sold was understated. Therefore, underapplied overhead is added to cost of goods sold. Likewise, overapplied overhead is deducted from cost of goods sold. 3-14 Yes, overhead should be applied to value the Work in Process inventory at yearend. Since $6,000 of overhead was applied to Job A on the basis of $8,000 of direct labor cost, the company’s predetermined overhead rate must be 75% of direct labor cost. Thus, $3,000 of overhead should be applied to Job B at year-end: $4,000 direct labor cost  75% = $3,000 applied overhead cost. 3-15 Direct material............................. $10,000 Direct labor................................... 12,000 Manufacturing overhead: $12,000  125%........................ 15,000 Total manufacturing cost.............. $37,000 Unit product cost: $37,000  1,000 units............... $37 3-16 A plantwide overhead rate is a single overhead rate used throughout all production departments in a plant. Some companies use multiple overhead rates rather than plantwide rates to more appropriately allocate overhead costs among products. Multiple overhead rates should be used, for example, in situations where one department is machine intensive and another department is labor intensive. 3-17 When automated equipment replaces direct labor, overhead increases and direct labor decreases. This results in an increase in the predetermined overhead rate—particularly if it is based on direct labor. 3-18 When the predetermined overhead rate is based on the amount of the allocation base at capacity and the plant is operated at less than capacity, overhead will ordinarily be underapplied. This occurs because actual activity is less than the © The McGraw-Hill Companies, Inc., 2008 72 Managerial Accounting, 12th Edition activity the predetermined overhead rate is based on. Capacity—a period expense. This would highlight the amount rather than burying it in other accounts. 3-19 Critics of current practice advocate disclosing underapplied overhead on the income statement as Cost of Unused © The McGraw-Hill Companies, Inc., 2008. All rights reserved. Solutions Manual, Chapter 3 73 Exercise 3-1 (10 minutes) a. Job-order costing b. Job-order costing c. Process costing d. Job-order costing e. Process costing* f. Process costing* g. Job-order costing h. Job-order costing i. Job-order costing j. Job-order costing k. Process costing l. Process costing * Some of the listed companies might use either a process costing or a job-order costing system, depending on the nature of their operations and how homogeneous the final product is. For example, a plywood manufacturer might use job-order costing if it has a number of different plywood products that are constructed of different woods or come in markedly different sizes. © The McGraw-Hill Companies, Inc., 2008. All rights reserved. 74 Managerial Accounting, 12th Edition Inc. Chapter 3 75 ..60 Time ticket for Harry Kerst Time Starte Complete d Ended d 9:00 12:15 3.00 Mary Rosas. . Solutions Manual.25 AM PM Time ticket for Mary Rosas Time Starte Complete d Ended d 2:15 4:30 PM 2.00 s Nibs 960 $0.00 Job Number ES34 Amount $31...Exercise 3-2 (15 minutes) 1.5 0 © The McGraw-Hill Companies..00 Rate $14. The costs for Job ES34 would have been recorded as follows: Materials requisition form: Quanti Unit ty Cost Blank 40 $8. All rights reserved. 31. 39... and the job cost sheet for Job ES34. The direct materials and direct labor costs listed in the exercise would have been recorded on four different documents: the materials requisition form for Job ES34..50 Job Number ES34 Job Cost Sheet for Job ES34 Direct $896. .0 materials. the time ticket for Mary Rosas. 0 Direct labor: Harry Kerst.. 2008. 2.00 Amount $39. the time ticket for Harry Kerst..25 PM Total Cost $320 576 $896 Rate $12.50 $966... Inc. 76 Managerial Accounting.© The McGraw-Hill Companies. 12th Edition . 2008.. All rights reserved. ............ Inc........Exercise 3-3 (10 minutes) The predetermined overhead rate is computed as follows: Estimated total manufacturing overhead..... ÷ Estimated total direct labor hours (DLHs)................000 DLHs $14........... Solutions Manual.......00 0 40..... Chapter 3 77 ....... $586.65 per DLH © The McGraw-Hill Companies... All rights reserved...... 2008.................. = Predetermined overhead rate.................. ........... Raw Materials.. 108..000 c ..........000 Wages Payable... 12.....000 b Work in Process...00 0 d Manufacturing Overhead.... All rights reserved..... 197........000 Accounts Payable..... 197.. 72. 84. Work in Process...00 0 Manufacturing Overhead.... 105....... Manufacturing Overhead..... 3. 86.. 78 Managerial Accounting.000 Raw Materials. 86.... 0 Various Accounts..Exercise 3-4 (15 minutes) a ..00 ..... 2008.000 .... 12th Edition .00 0 © The McGraw-Hill Companies... Inc......... ..... All rights reserved...06 0 © The McGraw-Hill Companies...Exercise 3-5 (10 minutes) Actual direct labor-hours... 12. Chapter 3 79 ..1 0 = Manufacturing overhead applied... Inc... $291.600 $23... 2008.... Solutions Manual... × Predetermined overhead rate......... ..000 Raw materials available for use.....................000 50... 12th Edition .........000 123... Manufacturing overhead applied: 10.. Total manufacturing cost.. ending.......... 7..... 2008..... 2.000 Deduct raw materials inventory...000 MH × $5 per MH... 32.........000 129.. $ 8........500 $121...... Add: Work in process. Overapplied overhead cost................. Direct labor.... 80 Managerial Accounting.... All rights reserved...............000 Raw materials used in production.. beginning. 40.... ending..................000 $  2........... Actual manufacturing overhead costs........................................................... beginning..000 40................50 0 © The McGraw-Hill Companies............. Inc................000 $  33.................... Direct materials: Raw materials inventory........ Cost of goods manufactured.000 Add purchases of raw materials.000 7. Manufacturing overhead cost applied to work in process...000 6...Exercise 3-6 (15 minutes) 1..000 50.. Deduct: Work in process............ $  48.. 000(b) 73.000 (f) Finished Goods 379. All rights reserved. Chapter 3 81 .000 152.000 134.000(f) 379.000 178.000 379. 2008.000(g) 28. Cash (a) (c) (d) (b) (c) (e) 75.000 (d) 126.000 (f) Cost of Goods Sold 379.000 © The McGraw-Hill Companies.Exercise 3-7 (20 minutes) Parts 1 and 2.000 (a) Raw Materials 75. Solutions Manual.000 (g) 28. Inc.000 Manufacturing Overhead (b) 6.000 126.000 Work in Process 67.000(e) 178.000 379.000 28.000 351.000 (c) 18..000(f) 379. 50 incurred.........250 Manufacturing overhead overapplied. 82 Managerial Accounting........ All rights reserved......... ... $4............. × Predetermined overhead rate..050 $21.........55 0 Less: Manufacturing overhead 172.....050 and the gross margin would increase by $4.050...Exercise 3-8 (10 minutes) 1 Actual direct labor-hours..... $176. 8........ the cost of goods sold would decrease by $4...........4 0 = Manufacturing overhead applied..... Inc...... © The McGraw-Hill Companies...... 0 $ 4........ Because manufacturing overhead is overapplied.......... 12th Edition ... 2008.05 0 2.... ...... $ 4...500 Studio overhead.....900 With this information.......000 direct staff costs =160% of direct staff costs 2..... 2008.900 Direct staff costs.....Exercise 3-9 (30 minutes) 1...... 0 Studio overhead cost ($13........ Solutions Manual...... Inc. therefore.... 21....000 = Total amount of the allocation base $200.......... we can now complete the job cost sheet for the Krimmer Corporation Headquarters project: Costs of subcontracted work.. $40...........500 × 160%)...100 Costs of subcontracted work............. Chapter 3 83 ...... Since $320.50 Less: Direct staff costs..000 balance in the Work in Process account at that point must apply to it....000 $13.........00 Total cost to January 31........600 35... 0 © The McGraw-Hill Companies... All rights reserved. Recognizing that the predetermined overhead rate is 160% of direct staff costs. the entire $40... The Krimmer Corporation Headquarters project is the only job remaining in Work in Process at the end of the month... $ 4... the apparent predetermined overhead rate was 160%: Studio overhead applied $320..600 $40..............000 of studio overhead cost was applied to Work in Process on the basis of $200........ the following computation can be made: Total cost added to the Krimmer Corporation Headquarters project.... 21......... 13...000 of direct staff costs......... ........ c................. Accounts Payable........ Inc..000 130.....000 450.. 210..........00 0 130......................000 49..............000 105..000 (g) 510......5 = $675.......................00 0 152..........000 © The McGraw-Hill Companies...00 0 450.....000 21... h............ 2008.......... Sales.........................000 2.....000 (c) 510......000 190...........000 × 1... 84 Managerial Accounting... b.............. Accounts Payable.. e...000 300.......................... Manufacturing Overhead (b) 38.000 152...........000 machine-hours  $4 per machine-hour = $300... Accumulated Depreciation.................... Manufacturing Overhead....... Manufacturing Overhead....00 0 300.. Work in Process......Exercise 3-10 (30 minutes) 1.... Manufacturing Overhead.000 675........ Finished Goods..000 (f) 300.000 Work in Process 35........000 49. $450.......00 0 38.............. All rights reserved...... Cost of Goods Sold.... Manufacturing Overhead.......000 510.. d........ 75....... g........000 70. a...... Salaries and Wages Payable...00 0 210........ Finished Goods...... Raw Materials Inventory... Work in Process....000...................... Raw Materials Inventory....... (c) 21..... 12th Edition ..........000 Bal.................... Work in Process................ Accounts Receivable.....000 (b) (d) 105..000 105....00 0 f......00 0 675........ Manufacturing Overhead.......... Work in Process........ Inc. 2008. All rights reserved.000 26. (Overapplied overhead) 300.(e) 130.000 (f) 6. Solutions Manual.000 © The McGraw-Hill Companies.. Chapter 3 85 .000 Bal. .. Inc.... 1.... 22...00 Applied overhead 0 0 costs 2. $ 3.......... 12th Edition ..............500 Overhead applied........ The balance in the Work in Process account consists entirely of the costs associated with the Nguyen project: Direct materials cost.........Exercise 3-11 (30 minutes) 1.. $10............ Overhead applied..400 Total cost in work in process..........600* * $16... Williams Chandler $ 4.600* Work in Process.. The balance in the Overhead account is determined as follows: Actual overhead costs Overhead 16. 2008...... 5......000 $3. © The McGraw-Hill Companies.. All rights reserved................600 $16....00 18..600 Direct labor cost..... 22..... Total cost..................400 3.... Williams Chandler 200 80 × $45 × $45 $9.. Direct labor cost.................800 $1. Predetermined overhead rate.............................................. 2.....000 3..........000 9..... the credit balance in the Overhead account is called overapplied overhead......400 1... Overhead applied..400 Completed Projects....200 + $6.400 Nguyen 120 × $45 $5..500 4......000 Overapplied overhead As indicated above. Designer-hours................600 Direct materials cost...... 86 Managerial Accounting.....200 $6........800 2... as follows: Predetermined= Estimated total manufacturing overhead cost overhead rate Estimated total amount of the allocation base = $840. Solutions Manual. The computations are: Predetermined= Estimated total manufacturing overhead cost overhead rate Estimated total amount of the allocation base = $840. 2008.. As suggested. Since manufacturing overhead is mostly fixed. Inc. 1. Chapter 3 87 .000 200. © The McGraw-Hill Companies. The predetermined overhead rate could also be set on the basis of direct labor cost or direct materials cost. The problem can be “solved” by using a predetermined overhead rate. All rights reserved.20 per unit.000 units =$4. This exercise can also be used as a launching pad for a discussion of the appendix to the chapter. Many students will use units of product in computing the predetermined overhead rate. the cost per unit increases as the level of production decreases. the costing problem does indeed lie with manufacturing overhead cost. which should be based on expected activity for the entire year.Exercise 3-12 (30 minutes) Note to the instructor: This exercise is a good vehicle for introducing the concept of predetermined overhead rates.000 $240.000 direct labor cost =350% of direct labor cost. All rights reserved.. 2008. 88 Managerial Accounting. Inc.000 direct materials cost =140% of direct materials cost. © The McGraw-Hill Companies.Predetermined= Estimated total manufacturing overhead cost overhead rate Estimated total amount of the allocation base = $840. 12th Edition .000 $600. ....20 per unit. 96.... 0 0 0 0 Number of units produced. 2008.000 84.000 Manufacturing overhead: Applied at $4.00 Direct materials...00 $  $180.....40 $8...000 252... 80..000 72.000 0 Direct labor....000 24.. Inc. 0 0 60...... 350% of direct labor cost. $8. or 140% of direct materials cost.....000 60.....000 $672.000 168.40 $8............. 336........ All rights reserved.40 $8.40 © The McGraw-Hill Companies.000 20............ Using a predetermined overhead rate...........00 $120. Chapter 3 89 .......000 40..00 $168...00 Total cost..00 $336......00 $504...000 48.....000 Estimated unit product cost.. Solutions Manual.. the unit costs would be: Quarter First Second Third Fourth $240..Exercise 3-12 (continued) 2. .....800 Finished goods..............000 Cost of goods sold.....200 Total cost..............00 0 3.......... 30......000 Cost of Goods Sold.....000 8% 10 82 100 % Using these percentages.........000). Work in Process (8% × $30...........00 0 2.......... Finished Goods (10% × $30.... 30....000)................. 90 Managerial Accounting.... The overapplied overhead will be allocated to the other accounts on the basis of the amount of overhead applied during the year in the ending balance of each account: Work in process................ 336... All rights reserved. $410...............400 3. 12th Edition . Item Actual manufacturing overhead costs for the (a): year... Manufacturing Overhead........ Cost of Goods Sold (82% × $30...Exercise 3-13 (15 minutes) 1 . 41... Item Overhead cost applied to work in process for (b): the year. Item (d): Cost of goods sold for the year....60 0 © The McGraw-Hill Companies. the journal entry would be as follows: Manufacturing Overhead........ Inc.......000)...................... $ 32..... Item (c): Cost of goods manufactured for the year.................000 24.......... 30.... 2008.... 2....... .. 2...... The overhead applied to Ms...............00 Overhead applied........................000 3........... ×5 ×5 Overhead applied to Ms.........or overapplied overhead. Miyami’s account would be computed as follows: 2005 2006 $144............. If the actual overhead cost and the actual professional hours charged turn out to be exactly as estimated there would be no underapplied or overapplied overhead...... Chapter 3 91 ... Miyami’s account....... 144. $60 $64 Actual professional staff hours charged to clients’ accounts (by assumption).... $ 0 $ 0 3.00 Estimated overhead cost (a)..... ×5 ×5 Overhead applied to Ms..400 2. × 2.... 2005 2006 Predetermined overhead rate (see above).. Miyami’s account................. Miyami’s account............00 Estimated overhead cost (a)...00 $144........00 $144. Solutions Manual.................................... $300 $320 2............... the computations would be: $144........ 0 0 Professional staff hours available (b).. 0 0 Actual overhead cost incurred (by assumption).... All rights reserved...... Inc...000 144... 0 0 Estimated professional staff hours (b).......... $60 $64 Professional staff hours charged to Ms.............000 Predetermined overhead rate (a) ÷ (b).............00 $144.........250 $144...000 Under. Miyami’s account............. $48 $48 Professional staff hours charged to Ms... 2008................250 Predetermined overhead rate (a) ÷ (b). $240 $240 © The McGraw-Hill Companies.. If the predetermined overhead rate is based on the professional staff hours available...... 3......400 × 2.....Exercise 3-14 (30 minutes) 1........ ..000 Underapplied overhead.........800 2006 $48 × 2............Problem 3-14 (continued) 4.............400 $115...20 Overhead applied (a) × (b)................00 0 144.....250 $108...... All rights reserved............................. 0 Actual overhead cost incurred (by assumption)..... $ 28. If the actual overhead cost and the actual professional staff hours charged to clients’ accounts turn out to be exactly as estimated overhead would be underapplied as shown below.......... 2005 Predetermined overhead rate (see 3 above) (a). 12th Edition .... Inc.. 144..................000 The underapplied overhead is best interpreted in this situation as the cost of idle capacity..... 2008..000 $ 36............. 92 Managerial Accounting... © The McGraw-Hill Companies...... $48 Actual professional staff hours charged to clients’ accounts (by assumption) (b)... Proponents of this method of computing predetermined overhead rates suggest that the underapplied overhead be treated as a period expense that would be separately disclosed on the income statement as Cost of Unused Capacity....... × 2... ....50 per machine-hour 60... © The McGraw-Hill Companies.50 per MH.... Inc..... Yes...000 =125% of direct labor cost $640. It appears... for example... Overhea d Applied $765 200 $965 3..... Milling Department: Predetermined= Estimated total manufacturing overhead cost overhead rate Estimated total amount of the allocation base = $510........ 2008. Assembly Department: $160 × 125%..... they would be charged substantially less overhead cost if a plantwide rate based on direct labor cost were used.........Exercise 3-15 (15 minutes) 1.... Solutions Manual....000 direct labor cost 2. Milling Department: 90 MHs × $8.. if some jobs require a large amount of machine time and little labor cost.... All rights reserved.. but required only a small amount of labor cost....000 machine-hours Assembly Department: Predetermined= Estimated total manufacturing overhead cost overhead rate Estimated total amount of the allocation base = $800.......000 =$8.. that this would be true of Job 407 which required considerable machine time to complete..... Total overhead cost applied..... Chapter 3 93 .. Exercise 3-16 (30 minutes) 1. The predetermined overhead rate is computed as follows: Predetermined= Estimated total manufacturing overhead cost overhead rate Estimated total amount of the allocation base = $170,000 =$2.00 per machine-hour 85,000 machine-hours 2. The amount of overhead cost applied to Work in Process for the year would be: 80,000 machine-hours × $2.00 per machinehour = $160,000. This amount is shown in entry (a) below: (Utilities) (Insurance) (Maintenance) (Indirect materials) (Indirect labor) (Depreciation) Balance (Direct materials) (Direct labor) (Overhead) Manufacturing Overhead 14,000 (a) 160,000 9,000 33,000 7,000 65,000 40,000 8,000 Work in Process 530,000 85,000 (a 160,000 ) 3. Overhead is underapplied by $8,000 for the year, as shown in the Manufacturing Overhead account above. The entry to close out this balance to Cost of Goods Sold would be: Cost of Goods Sold................................ Manufacturing Overhead..................... 8,000 8,000 © The McGraw-Hill Companies, Inc., 2008. All rights reserved. 94 Managerial Accounting, 12th Edition Exercise 3-16 (continued) 4. When overhead is applied using a predetermined rate based on machine-hours, it is assumed that overhead cost is proportional to machine-hours. When the actual level of activity turns out to be 80,000 machine-hours, the costing system assumes that the overhead will be 80,000 machine-hours × $2.00 per machinehour, or $160,000. This is a drop of $10,000 from the initial estimated total manufacturing overhead cost of $170,000. However, the actual total manufacturing overhead did not drop by this much. The actual total manufacturing overhead was $168,000—a drop of only $2,000 from the estimate. The manufacturing overhead did not decline by the full $10,000 because of the existence of fixed costs and/or because overhead spending was not under control. These issues will be covered in more detail in later chapters. © The McGraw-Hill Companies, Inc., 2008. All rights reserved. Solutions Manual, Chapter 3 95 Exercise 3-17 (30 minutes) 1. a. Raw Materials......................... Accounts Payable............... b. Work in Process....................... Manufacturing Overhead........ Raw Materials.................... c. Work in Process....................... Manufacturing Overhead........ Wages and Salaries Payable............................ 315,00 0 216,00 0 54,000 270,000 80,000 110,00 0 190,000 d. Manufacturing Overhead........ Accumulated Depreciation. 63,000 e. Manufacturing Overhead........ Accounts Payable............... 85,000 f. Work in Process....................... Manufacturing Overhead.... 315,000 300,00 0 63,000 85,000 300,000 Predetermined= Estimated total manufacturing overhead cost overhead rate Estimated total amount of the allocation base = $4,320,000 =$7.50 per machine-hour 576,000 machine-hours 40,000 MHs × $7.50 per MH = $300,000. Manufacturing Overhead Work in Process 2 . (b) 54,000 (f) (c) 110,000 (d) 63,000 (e) 85,000 300,000 (b) (c) (f) 216,000 80,000 300,000 3. The cost of the completed job would be $596,000 as shown in © The McGraw-Hill Companies, Inc., 2008. All rights reserved. 96 Managerial Accounting, 12th Edition the Work in Process T-account above. The entry for item (g) would be: Finished Goods............................. Work in Process....................... 596,000 596,000 4. The unit product cost on the job cost sheet would be: $596,000 ÷ 8,000 units = $74.50 per unit. © The McGraw-Hill Companies, Inc., 2008. All rights reserved. Solutions Manual, Chapter 3 97 .................. Accounts Payable... Prepaid Insurance........000 18..................00 0 120......................000 f.....000 = =£2. 110.......000 MHs 50... 2008...... 10.000 5...... © The McGraw-Hill Companies............... Manufacturing Overhead. 20...... Manufacturing Overhead.................... Insurance Expense........ All rights reserved........ Accounts Payable................ Manufacturing Overhead..................Problem 3-18 (45 minutes) 1.........................000 Estimated total manufacturing overhead cost £99...000 actual MHs × £2.000 e....000 c..... 90..000 110........... Salaries and Wages Payable....... Accumulated Depreciation........000 220. Manufacturing Overhead..................000 g....00 0 20..00 0 160..... Work in Process..........000 5......... Manufacturing Overhead... Work in Process..... Depreciation Expense....000 60............. Raw Materials..000 15.............. 160.. Sales Commissions Expense.........................000 10.000 140.. Salaries Expense.....000 50.... 12th Edition ............... Advertising Expense......000 d........ Raw Materials. Manufacturing Overhead......... b..20 per MH Estimated total amount of the allocation base 45..... a........ Work in Process.........000 25....000 20......000 overhead applied....... Accounts Payable........ 98 Managerial Accounting... 13.. 15..................... Inc...........................20 per MH = £110......000 h.................... ...... Sales........000 308.000 10..000 (h) 110......... Chapter 3 99 .... Solutions Manual. (a) Bal......... 13....000 (b 140.......... (j) Raw Materials 10..00 0 498.000 Bal. Bal.. All rights reserved...000 (c) 60. Inc. Work in Process..000 310.000 (i) 310..000 14....000 120......000 Manufacturing Overhead (b) 20. Finished Goods... Accounts Receivable......Problem 3-18 (continued) i.......... Finished Goods................. (b) (c) (h) Bal.. 2008......... Cost of Goods Sold... 310.00 0 © The McGraw-Hill Companies...........000 (d) 13......000 Bal.000 for the year... The entry to close this balance to Cost of Goods Sold would be: Cost of Goods Sold.........000 498..000 ) 160.........000 Work in Process 4... 13..000 90............000 (e) 10.... j..............000 (g) 20.. 2................00 0 310..000 (j) 308.000 3.000 30........ (i) Bal.00 0 308.000 Manufacturing Overhead. 13.000 Finished Goods 8......000 Cost of Goods Sold 308.000 110......... Bal..... Manufacturing overhead is underapplied by £13. ......000 £20.....000 £ 82..................................... Depreciation expense............00 0 321................... Sovereign Millwork............ 12th Edition .... All rights reserved.... Advertising expenses. 2008......000 177.........000 © The McGraw-Hill Companies..... Administrative salaries. Gross margin...................... Selling and administrative expenses: Sales commissions...................... £498...000 15....... Inc..Problem 3-18 (continued) 4... Net operating income.............000 95. Ltd....... Cost of goods sold (£308........000).................................000 + £13............ Insurance expense.............................000 5.00 0 50........000 5...... Income Statement For the Year Ended June 30 Sales........ 100 Managerial Accounting..... ...........000 e. 152.......................... 160..... Prepaid Insurance.000 Salaries and Wages Payable....................000 Accounts Payable.............. 60.... 0 Accounts Payable.............00 0 Manufacturing Overhead..00 0 190................... Chapter 3 101 ........000 Accumulated Depreciation..... Manufacturing Overhead.. 50..... 36....................000 g... Inc..... Advertising Expense.000 80... Administrative Salaries Expense... 2008...........00 0 303..... 42..00 0 27..... 42...000 1.....000 =$4......00 0 d......... 0 Manufacturing Overhead........000 10....000 36........... 40.......... Work in Process.............. c............000....... Insurance Expense.........00 1..000 170. 9..............00 h... All rights reserved........ Sales Commissions Expense.................................. 9..................... Manufacturing Overhead. 51.000 MHs © The McGraw-Hill Companies.....00 b...... 50...... Solutions Manual.. $153.. 200.. Work in Process...000 Raw Materials.........................Problem 3-19 (60 minutes) 200.. 38............. 0 170............000 Accounts Payable...25 per MH.............000 f..000 Depreciation Expense.. a...000 MHs×$4................ Work in Process........... Manufacturing Overhead.. Manufacturing Overhead..... Raw Materials.25 per MH=$170. ...00 0 Finished Goods...... Finished Goods.000 (i) 480......00 0 Bal.....Problem 3-19 (continued) 480...00 i....... 700...000 (h) 170...00 0 Raw Materials Bal.....000 3..00 0 Finished Goods Bal..... 2008............ 700.00 0 (c) 160...... 30... 102 Managerial Accounting..... 475.. Work in Process Bal.00 j... 0 Sales......... All rights reserved.000 (g) 51..........000 (d) 42... Inc.....00 0 (h) 170.............000 Cost of Goods Sold (j) 475...000 (b) 190.........00 0 475.. 480.........00 Cost of Goods Sold. 12..000 (e) 9... 10. 26..... 0 Work in Process..... 16...00 © The McGraw-Hill Companies..00 0 Bal.... 0 2...000 (j) 475.....00 0 (c) 27...000 Manufacturing Overhead (b) 38......000 (b) 152........000 (i) 480.. Accounts Receivable...........000 (a) 200...000 Bal..... 12th Edition . Solutions Manual...........0 Bal.. 2008.. 3........... 35.000 3......... Inc....... The journal entry to close this balance to Cost of Goods Sold is: Manufacturing Overhead..000.. Chapter 3 103 .000 Cost of Goods Sold... All rights reserved.. Manufacturing overhead is overapplied by $3........ 3..000 © The McGraw-Hill Companies. ......... Depreciation..........................00 0 472.....................................................000 $36.........000 9................................. $700..... Advertising.Problem 3-19 (continued) 4........ 12th Edition . 104 Managerial Accounting.......................... Net operating income...................... Inc.........................000 176........ ............000 $ 52......000 1.000 228...000 – $3... Administrative salaries... Selling and administrative expenses: Sales commissions..000)..... Insurance.... Gross margin... Ravsten Company Income Statement For the Year Ended December 31 Sales...... 2008.......... All rights reserved...........000 50.........................00 0 80...........000 © The McGraw-Hill Companies.. Cost of goods sold ($475.. 000 Bal.000 (l) Accounts Payable 100. Cash 8.000 (m) 4. 3. Prepaid Insurance 4.000 (d) 28.000 32.000 Bal. (k) Bal. Work in Process 18. 16.000 Bal.000 (l) 197.000 Accounts Receivable Bal.000 Bal. All rights reserved.000 (j) 200.000 Manufacturing Overhead (b) 8.Problem 3-20 (60 minutes) 1.000 Accumulated Depreciation Bal.000 Bal.000 30.000 (j) 120. 13. 30.000 15.000 20.000 (c) 14. 78.000 © The McGraw-Hill Companies.000 (b) 40.000 × 150% = $60.000 (k) 197.000 (c) 14.000 (a) 45. Chapter 3 105 . (a) Bal. 7.600 *$40..000 (e) 93.000 Plant and Equipment Bal. Inc.000 Bal.000 Bal.000 (f) 3. (i) Bal.000 190.000 Bal. Salaries & Wages Payable (l) 90. Finished Goods 20.000 130.000.000 Bal.400 Retained Earnings Bal.000 (e) 18.000 (f) 2.000 45. Solutions Manual. (b) (e) (h) Bal. 42. Raw Materials 7. 230. 70.000 (h)* 60.400 Bal.000 12.600 (d) 21.400 Bal. and 2.000 60. 1. 4.600 (g) 18. 2008.000 (i) 130. Bal.000 40. 25.... .400 Depreciation Expense (d) 7.......... 150. 4.....00 0 124..000 Insurance expense...000 3..000 Miscellaneous Expense (g) 18.........................400 Administrative salaries expense......... Gross margin..000). All rights reserved.Problem 3-20 (continued) Capital Stock Bal..000 Sales Commissions Expense (e) 10.... Inc...... Selling and administrative expenses: Depreciation expense.......000 76......000 © The McGraw-Hill Companies........000..........000 + $4...........................000 Net operating income......000 4..... Entry (m) above records the closing of this underapplied overhead balance to Cost of Goods Sold................ 18...000 61... 2008.. 106 Managerial Accounting...... 12th Edition .... Overhead is underapplied by $4.000 Administrative Salaries Expense (e) 25............... Cost of goods sold ($120............ 10............000 Sales (j) 200........ 600 Miscellaneous expense...............000 Sales......... $ 15. Durham Company Income Statement For the Year Ended December 31 $200...000 Sales commissions expense.......... $ 7...........000 (f) Insurance Expense 600 (j) (m) Cost of Goods Sold 120. 3.000 Bal. 240.000 (i)* 96.000 21. 15.000 (b) 90.000 (d) 12.000 (e) 30. Solutions Manual. 250.000 (a) 80.000 55.000 = 80% of direct labor cost.000 Bal. 125. 500.000 (k) 300. Finished Goods 45. Cash 15.000 Bal. 75.000 Bal.000 (k) 450. 45. (j) Bal.800 Bal.000 12. Bal.000 (h) 17. (a) Raw Materials 25. 200 Accumulated Depreciation Bal.000 Bal.80 = $96.000 Bal. and 2.000 (m) Accounts Payable 150. $100. 2008.000 (b) (c) (d) (e) (f) (h) Manufacturing Overhead 5. Prepaid Insurance 5. 40. Chapter 3 107 . (b) (c) (i) Bal..000 * Accounts Receivable Bal.000 17. (l) Bal.000 120.000 (f) 4.000 (g) 40.000 (m) 85.000 85.000 25.000 Bal. Inc.000 225.Problem 3-21 (60 minutes) 1.000 96.000 Bal.000 $80.000 30.000 × 0.000 80.000 Bal.000 (c) 445.000 (j) 310.000 Bal.000 (l) 445.000 310. All rights reserved. Work in Process 30.000.000 150. 210.000 © The McGraw-Hill Companies. $120.000 Capital Stock Bal.000 Buildings & Equipment Bal.000 4. 74.000 Retained Earnings Bal. ..394 $75......... The allocation would be: $ 21.. This balance would be allocated between Work in Process. .......... Cost of goods sold ($300.... Income Statement For the Year Ended December 31 Sales...8% × $3...000 for the year.. Selling and administrative expenses: $450......00 0 100...000 Sales (k) 450.... 168 Finished Goods (14..000 Work in Process (5....000).......000).. 12th Edition . 438 Cost of Goods Sold (79....000 (g) Shipping Expense 40..6 % Finished Goods......... Inc.. 0 5.. Fantastic Props....000 (f) Insurance Expense 800 (k) Cost of Goods Sold 300..394 4.00 Cost of Goods Sold... 2008.....6% × $3.................394)..00 Salaries expense..8 $376..Problem 3-21 (continued) (c) Salaries Expense 75........ Finished Goods...000 14.00 Work in Process...... 55............. Inc.. 0 79.. Manufacturing overhead was overapplied by $3... 0 © The McGraw-Hill Companies..000 – $2...606 152. 12/31........000 (e) Depreciation Expense 5...... and Cost of Goods Sold in proportion to the ending balances in these accounts.0 % Manufacturing Overhead..6% × $3... 12/31...... All rights reserved... 12/31.......... 3.....000).................00 0 297...6 300........ 108 Managerial Accounting....... 2......000 3.................. Gross margin..................... ....594 © The McGraw-Hill Companies........ 5.......800 $  Net operating income............ Inc..000 120................................. 31............. All rights reserved..000 Insurance expense........Depreciation expense.......... Solutions Manual..... 800 Shipping expense.. 40...... 2008.......... Chapter 3 109 ............ and overhead at November 30......................000 * Manufacturing Overhead. c....... (a) (b) (d) Bal..600 Manufacturing Overhead (a) 4. Raw Materials 40...000 Job 105 materials.Problem 3-22 (60 minutes) 1.... 19...000 * Bal.........000 19... Manufacturing Overhead.. Manufacturing Overhead....000 (a) 33...... This entry is posted to the T-accounts as entry (b) above......000 (c) 19..300 = $29........500 This entry is posted to the T-accounts as entry (a) above..........000 *$4..... Work in Process.. 20. Work in Process.000..........500 $77........000 (b) 8..800* (e) 60. Job 106 materials...500 20.. labor....... and overhead at November 30.......000 + $6....000 This entry is posted to the T-accounts as entry (c) above............. Total Work in Process inventory at November 30.....500 Finished Goods Bal..000 $50.... 110 Managerial Accounting.500.000 = $20... © The McGraw-Hill Companies. 2008. a.......000 (d) 32..... Accounts Payable.. All rights reserved...... 28......000 + $10..... 12th Edition .....700 Salaries & Wages Payable (b) 28. 8.. *$8........300 27............200 + $21...................800 33.....000 98.........000 32........... Raw Materials............500 * 4... Inc.. Bal.. 29.. Work in Process 77..............000 Salaries and Wages Payable...... 85.....000 (e) 60.... labor................. b..................000 Accounts Payable (c) 19.....700 29.... 2. ........200 Total cost......................... 60...000).700 The entry to record the transfer of the completed job would be as follows: Finished Goods. in the case of Job 105: November overhead cost $20.000 The overhead cost applied to each job during December was: Job 105: $4.....000 × 160%)...............600 Job 107: $10....... Inc........ Chapter 3 111 .......................... 16.......000 + $4.........000 Total applied overhead.............400 Job 106: $6..... For example....... 60... 4............... All rights reserved....... Manufacturing Overhead........000 × 160%.000 32. 2008........ Solutions Manual......000 × 160%......... 17....... The total cost of Job 105 was: Direct materials..............Problem 3-22 (continued) 3...800 = =160% of direct labor cost November direct labor cost $13.... 9.............000 The entry is posted to the T-accounts as entry (d) above...... $32............000 Manufacturing overhead applied ($17. $ 6..... $16.700 This entry is posted to the T-accounts as entry (e) above...... 27............................ © The McGraw-Hill Companies.............000 × 160%.700 Work in Process................ $60.500 Direct labor ($13... the company uses a predetermined overhead rate of 160% of direct labor cost..... 32. This figure can be determined by relating the November applied overhead cost on the job cost sheets to the November direct labor cost shown on these sheets........................... Apparently............000 The entry to record the application of overhead cost to jobs would be as follows: Work in Process.... ..... As shown in the above T-accounts........... 12th Edition .... the balance in Work in Process at December 31 was $98.30 0 Job 107 $21... Inc..50 0 13....... Direct labor..800 $51........000 16..000 20. Manufacturing overhead... 112 Managerial Accounting........Problem 3-22 (continued) 5..80 0 23...30 0 10... All rights reserved..600. Job 106 $17......000 36. Total cost....30 0 Total $38.......800 $98... 2008....000 $47........ The breakdown of this amount between Jobs 106 and 107 is: Direct materials......60 0 © The McGraw-Hill Companies.... .100 630 840 $1..... Total cost of Case 618–3: Materials and supplies.. 2008.......000 hours Litigation predetermined overhead rate: Estimated total overhead cost Predetermined= overhead rate Estimated total amount of the allocation base = 2. All rights reserved............090 $2.... Departments Research & Documents Litigation $   50 $   30 410 2...470 $4.. Overhead cost applied.....Problem 3-23 (30 minutes) 1.........510 1...060 © The McGraw-Hill Companies.......... Direct attorney cost..... $1..... Chapter 3 113 ... Inc... Total cost.. $320............. 840 Total overhead cost........000 direct attorney cost attorney cost Research & Documents overhead applied: 18 hours × $35 per hour.................. Solutions Manual....... Research & Documents predetermined overhead rate: Estimated total overhead cost Predetermined= overhead rate Estimated total amount of the allocation base = $700....... $  630 Litigation overhead applied: $2.000 =$35 per hour 20..000 =40% of direct $800..470 3...100 × 40%.....970 Total $   80 2.. ..............................000 Departmental overhead cost applied: 23....000 Underapplied (or overapplied) overhead.000 hours × $35 per hour..........000 © The McGraw-Hill Companies......Problem 3-23 (continued) 4.......... 2008........ All rights reserved... $ (35.... 114 Managerial Accounting.....000 $300.. 805...000 × 40%. 290........ Department Research & Document s Litigation Departmental overhead cost incurred..000 $725. $770............. Inc............ 12th Edition ..................000) $ 10... 12......................... 60........................ Manufacturing Overhead...... 40......Problem 3-24 (90 minutes) 1...000 Salaries and Wages Payable. 140.. 820.... 12. a....... Inc.......... 600 Prepaid Insurance....... All rights reserved.................000................ Work in Process.000 d. 18......800 DLH × $7...................600 i......... 100.......... Chapter 3 115 ................. 156.......... Work in Process....000 $135...000 Accounts Payable.................. Prepaid Insurance.......................000 Manufacturing Overhead........ Manufacturing Overhead.....000 DLH © The McGraw-Hill Companies.... Marketing Expense......000 =$7......... 12........50 per DLH = $156..000 g.... Raw Materials....... 200........ 100... 28............................. 20.000 Manufacturing Overhead....000 h. Salaries Expense. Solutions Manual. 38.... 2008... 156..000 Salaries and Wages Payable...000 Depreciation Expense....50 per DLH......... 40...000 Cash.000 f..000 b.................... 820..... 38.......000 c....400 Insurance Expense..........000 Manufacturing Overhead............................... 150........000 Accumulated Depreciation................ 39...000 Accounts Payable................ Work in Process.............................000 Manufacturing Overhead. 817. 150...........000 Raw Materials............... 830.600 Accounts Payable............000 e........................ 13........ ........... 0 1.. 12th Edition ........00 0 Accounts Receivable Bal.....415..000 1..000 (l) 1...415.00 0 Bal...00 0 817..00 0 (k) 1..318.000 6.... Work in Process 21.......000 156.415.420. 0 Work in Process.... (l) Bal..........00 0 Cash 9..... 0 Accounts Receivable.000 Salaries and Wages Payable.. 0 Sales...000 (j) 1..................000 (e) 1....... 1..00 0 Finished Goods....00 0 1......000 © The McGraw-Hill Companies.000 1..........00 Cost of Goods Sold.......00 k...........000 28.... Cash.......... (b) (c) (i) Bal......00 l........415...... m...000 140....000 (b) 830.. 2.. 35.............. 2008..106.............00 (m) 0 68.... All rights reserved.............000 820................ 116 Managerial Accounting........ 1.. Accounts Payable................106......318..106... 1....00 0 1...... Finished Goods.......120......420. 30......... Inc...420..Problem 3-24 (continued) 1.......... 970..... (a) Bal.. Bal..00 0 Raw Materials 16....000 Cash..... 1...... Bal.120.000 Bal. 348.000 38. Accounts Receivable.00 j. 5. (e) Prepaid Insurance 7. Solutions Manual.000 38. 2008.000 (k) 1.00 0 24.000 © The McGraw-Hill Companies.000 (g) 40.106. 128.120.. Finished Goods 38.00 0 1.000 Bal. Inc. 168. All rights reserved. Chapter 3 117 .000 Bal. (j) Bal.Bal.000 Buildings and Equipment Bal. 300.000 (e) 40.000 Accumulated Depreciation Bal.000 Bal. 000 Bal.000 Capital Stock Bal. (f) Marketing Expense 100.00 0 Sales (k) 1.000 60.000 39. All rights reserved.000 Salaries & Wages Payable (m) 348. Inc.000 (d) 150. 60.600 Retained Earnings Bal. 22.600 Bal. 30.400 28.00 0 © The McGraw-Hill Companies.000 Bal..000 (i) 156. 3. 12th Edition .000 (f) 100.000 Accounts Payable 970.000 Cost of Goods Sold 1.000 Bal.000 (c) 200.000 (d) Salaries Expense 150. 3.600 Bal.120. 200.000 (a) 820.000 (e) Insurance Expense 600 (k) (m) (g) Depreciation Expense 12.000 (h) 12.420.Problem 3-24 (continued) (b) (c) (e) (g) (h) Manufacturing Overhead 13. 118 Managerial Accounting.000 5. 2008.000 12. ............... $150..... Selling and administrative expenses: Salaries expense........ Inc....00 0 303.................................000 Depreciation expense............. 4....... All rights reserved....................... Gross margin...... Manufacturing overhead is overapplied by $3. 600 Marketing expense....... 2008........ 100......... Cost of goods sold ($1......... $1....Problem 3-24 (continued) 3................................. Solutions Manual............ Inc........000 for the year................00 0 1...000).......................................60 12...... Cost of Goods Sold.......000 – $3.....420... 3.000 0 $ 40...000 3................ Chapter 3 119 .117............000 Insurance expense...120.......... Income Statement For the Year Ended December 31 Sales...................... Net operating income......000 Celestial Displays...000 262.......40 0 © The McGraw-Hill Companies. The entry to close this balance to Cost of Goods Sold would be: Manufacturing Overhead........ .......200 direct materials cost × 180%.....40 per unit 25 units © The McGraw-Hill Companies............. 2...000 =180% of materials cost $400.............160 $4. All rights reserved. Inc..Problem 3-25 (30 minutes) 1.810 = $312...160 $3. $  940 Direct labor..82 hour.. Preparation Department predetermined overhead rate: Predetermined= Estimated total manufacturing overhead cost overhead rate Estimated total amount of the allocation base = $416... $3...........200 980 Total $2.... 0 Fabrication Department overhead applied: $1...690 2.............820 Total cost.470 Fabricatio n $1.....000 =$5... 0 3..000 machine-hours Fabrication Department predetermined overhead rate: Predetermined= Estimated total manufacturing overhead cost overhead rate Estimated total amount of the allocation base = $720...980 $7.... 710 Manufacturing overhead......810 Unit product cost for Job 127: Average cost per unit = $7....... 12th Edition ..........140 1...............................20 per machine$1... 120 Managerial Accounting.. 2008.......20 per machine-hour 80.......98 Total overhead cost.......000 materials cost 2.340 3........... Preparation Department overhead applied: 350 machine-hours × $5. Total cost of Job 127: Preparati on Direct materials........ 1...... .. Preparati on Manufacturing overhead cost incurred.........400 Fabricatio n $740. Solutions Manual............................................000) © The McGraw-Hill Companies.......000 machine-hours × $5...........600 $420...000 Manufacturing overhead cost applied: 73. Inc........ Chapter 3 121 ...........................Problem 3-25 (continued) 4. $ 10.. All rights reserved............ 2008.... 379... $390.....000 direct materials cost × 180%.......000 756...........000 $(16. Underapplied (or overapplied) overhead.....20 per machine-hour.... .. Actual hours of studio service provided (b)....... Hours of studio service at capacity (b)..00 0 0 1..... 12th Edition .. If the predetermined overhead rate is based on the hours of studio service at capacity.................000 90... 2008. Slug Fest job’s studio hours .............. 2005 2006 $90............. $2. The overhead applied to the Slug Fest job would be computed as follows: 2005 2006 $90...................600 Overhead is underapplied for both years as computed below: Predetermined overhead rate (see above) (a)................... 1......................... Inc........................ Actual hours of studio service provided (b). Predetermined overhead rate (a) ÷ (b)...... 90.....00 $72... Overhead applied to the Slug Fest job ........00 Underapplied overhead....800 $50 $50 × 30 × 30 $1................00 Overhead applied (a) × (b)...00 Estimated studio overhead cost (a)..000 0 2.. All rights reserved.. $ 9...... × 30 × 30 Overhead applied to the Slug Fest job ................00 $90...000 750 Predetermined overhead rate (a) ÷ (b)...................................... 2005 $50 900 2006 $50 600 © The McGraw-Hill Companies.....800 1......................... 0 0 Estimated hours of studio service (b).. the computations would be: Estimated studio overhead cost (a)...... $90 $120 Slug Fest job’s studio hours .00 $90.....500 $1............................500 Overhead is underapplied for both years under this method as well: Predetermined overhead rate (see above) (a)..... 0 0 Actual studio cost incurred....Problem 3-26 (60 minutes) 1.... 2005 $90 2006 $120 900 600 $81.000 $18.700 $3....................... 122 Managerial Accounting............ ... Inc......................... 0 0 Actual studio cost incurred. All rights reserved.....00 $30. Solutions Manual.......000 $45.....00 $60.... 90... Chapter 3 123 ...000 90........ 0 0 © The McGraw-Hill Companies..............$45.........00 Underapplied overhead........ 2008...00 Overhead applied (a) × (b). proponents of this method suggest that underapplied overhead be treated as a period expense that would be separately disclosed on the income statement as Cost of Unused Capacity. managers may be misled into thinking that they are actually losing money on the Slug Fest job and they might refuse such jobs in the future—another sure road to disaster. It is true that the underapplied overhead under the alternative approach is much larger than under the conventional approach and is growing. This results in costs that seem to increase as the volume declines. 4. 12th Edition . All rights reserved. The competition is able to offer the latest equipment. This is much less likely to happen if the lower cost of $1. However. and attractive prices. the apparent cost of the Slug Fest job has increased between 2005 and 2006. © The McGraw-Hill Companies. When the predetermined overhead rate is based on capacity. Skid Road Recording’s managers may be misled into thinking that the problem is rising costs and they may be tempted to raise prices to recover their apparently increasing costs. Under the alternative approach. Under the conventional approach in which the predetermined overhead rate is based on the estimated studio hours. the overhead cost of the Slug Fest job is stable at $1. if it is properly labeled as the cost of idle capacity. Inc. That happens because the company is losing business to competitors and therefore the company’s fixed overhead costs are being spread over a smaller base. Skid Road Recording’s fundamental problem is the competition that is drawing customers away. This would almost surely accelerate the company’s decline. excellent service. underapplied overhead is interpreted as the cost of idle capacity. management is much more likely to draw the appropriate conclusion that the real problem is the loss of business (and therefore more idle capacity) rather than an increase in costs. The company must do something to counter this threat or it will ultimately face failure. Under the conventional method. Indeed..500 is reported. 124 Managerial Accounting.500 and lower than the costs reported under the conventional method. 2008.Problem 3-26 (continued) 3. at least this method will be less likely to send managers misleading signals. Solutions Manual. All rights reserved. Inc. © The McGraw-Hill Companies.. 2008.While basing the predetermined rate on capacity rather than on estimated activity will not solve the company’s basic problems. Chapter 3 125 . $ 40.... 0 6......000 4....... Total factory wages accrued during the year (credits to the Factory Wages Payable $175.000 Indirect labor cost... 850...... 60.. $320.... The predetermined overhead rate was: Predetermined=Manufacturing overhead cost applied overhead rate Direct materials cost = $400..... 1/1.... 126 Managerial Accounting........ 12/31.....000 = $70.....Problem 3-27 (45 minutes) 1...000 Raw materials inventory...000) would have been debited to Manufacturing Overhead as indirect materials.......000 Materials requisitioned for production.......................................... $390.........000 – $320.............. All rights reserved..... 12th Edition ...........000 Goods available for sale............... the difference of $70.... 130..........000— the credits to Work in Process......00 account)....00 Cost of goods sold..... The Cost of Goods Sold for the year was: Finished goods inventory.000 Add: Cost of goods manufactured (from Work in Process)..000 Finished goods inventory.. Inc............. 1/1......000 =125% of direct materials cost $320.......000 © The McGraw-Hill Companies......... Of the $390.......... 110......... ............................000 2. 2008.. 450......... 5.... 0 Less direct labor cost (from Work in Process).. $ 65.000 Materials available for use........ 3........... The cost of raw materials put into production was: Raw materials inventory.........000 in materials requisitioned for production.. 12/31.......000 was debited to Work in Process as direct materials. The cost of goods manufactured for the year was $810.000 ($390........... 810....000 Debits (purchases of materials)..000 $720.............. Therefore.... 420. $ 30.. .... Manufacturing overhead was overapplied by $15. Less: Direct materials cost (given).. $(15...... 12/31. $90............. Work in Process................... The computations are: Balance.............. The ending balance in Work in Process is $90.............000........... Solutions Manual........ Manufacturing overhead cost ($32.... Direct labor cost (remainder).000 (32....................000 Overapplied overhead...................... $385..........000) (40.....000) 8................ Inc...000 Applied manufacturing overhead cost (from Work in Process—this would be the credits to the Manufacturing Overhead account)..... 2008................ Direct labor makes up $18. Chapter 3 127 ....000.....Problem 3-27 (continued) 7........... All rights reserved.000 × 125%)............... 400................000 of this balance........ and manufacturing overhead makes up $40................................ computed as follows: Actual manufacturing overhead cost for the year (debits).000...000) $18...000 © The McGraw-Hill Companies. 000 $342. Direct labor........... Deduct: Work in process...................000 338..00 0 80.....................................000 Rent..............Problem 3-28 (60 minutes) 1..... 123.....000 Add purchases of raw materials....... building..................000 382............. 42............................ 36.... $ 21......... a.. Inc........000 direct labor cost b. ending...... Manufacturing overhead applied to work in process.............000 Total raw materials available...000 Property taxes......... $ 7......... ............. Pacific Manufacturing Company Schedule of Cost of Goods Manufactured Direct materials: Raw materials inventory........ $  3....................... factory..................000 Maintenance... 128 Managerial Accounting.. All rights reserved........ 18.. ending......000 Depreciation of equipment...000 Deduct raw materials inventory....... 120...... 154............................... beginning........ 11..................................000 × 150%..................000 40.... beginning.... 12th Edition ......... Actual manufacturing overhead costs: Insurance..........00 0 © The McGraw-Hill Companies.000 Total actual costs... Cost of goods manufactured.................000 44.000 120...000 Indirect labor..... $138... Add: Work in process...... 9.000 =150% of direct labor cost $84........................000 Underapplied overhead............................. 2008... 16. Predetermined= Estimated total manufacturing overhead cost overhead rate Estimated total amount of the allocation base = $126.........000 Applied manufacturing overhead costs: $80....000 2....... 133........000 Raw materials used in production........ Total manufacturing cost...... .... Solutions Manual.00 0 8.000 $40.200)......000 The amount of direct materials cost in Work in Process was: Total ending work in process. Inc.....180 price to customer.. Direct materials...000 Goods available for sale....... $20........... $ 3.000 Direct materials............. Cost of goods sold: Finished good inventory.................. $ 68..........000 Underapplied or overapplied overhead may be closed directly to Cost of Goods Sold or allocated among Work in Process.............. Chapter 3 129 .............. 4..........................000 The completed schedule of costs in Work in Process was: Direct materials.. $20..........000 Deduct: Finished goods inventory..........000 direct labor cost × 150% =$12...........000 20... Work in process inventory...............................300 Total manufacturing cost.........................000 Cost of goods sold..... 2008.. 12.. 60........ 410............................................... Manufacturing overhead.... Direct labor...................... Finished Goods.............. Deduct: $40.Problem 3-28 (continued) 3...700 × 140% = $19...................... All rights reserved.......000 $  Direct labor.. 6.....000 12.......00 0 © The McGraw-Hill Companies...... The amount of overhead cost in Work in Process was: $8..........000 Manufacturing overhead................. beginning.... 4........................... 5...... $350....000 Add: Cost of goods manufactured.......200 Direct labor.. and Cost of Goods Sold in proportion to the overhead applied during the year in the ending balance of each of these accounts...................... 342... $13... 8.................700 $13....200 Overhead applied (150% × 4..... ending.. ......... 270...00 0 4% 26 70 100 % The entry to record the allocation of the underapplied overhead is: Work In Process (4% × $270........800 Finished Goods (26% × $270.......000 3. $1. ...000 4.................... 2008...530... 1.................... All rights reserved........350..000 Underapplied overhead cost..000).... 12th Edition ....000 computer hours 2......... Finished goods.000 Manufacturing Overhead...................000 actual computer hours × $18 per computer hour.000 Manufacturing Overhead........ 270.00 0 $1...... Total.. Actual manufacturing overhead cost............... Inc. The predetermined overhead rate was: Predetermined= Estimated total manufacturing overhead cost overhead rate Estimated total amount of the allocation base = $1..... Cost of Goods Sold..... 189.......080................ Cost of goods sold...080.... 70....................000 Manufacturing overhead cost applied to Work in Process during the year: 60..................000 =$18 per computer hour 85.......000)............20 0 280........ The underapplied overhead would be allocated using the following percentages: Overhead applied during the year in: Work in process............ ..000 © The McGraw-Hill Companies............................ $ 43.......800 756... 270.........200 Cost of Goods Sold (70% × $270...... $ 270.. 130 Managerial Accounting...000).........Problem 3-29 (30 minutes) 1. 10.. ..800....... Solutions Manual.........000 Difference in cost of goods sold....000).......000).. All rights reserved.....Problem 3-29 (continued) 5. Finished Goods........ 0 Cost of goods sold if the underapplied overhead is allocated among the accounts ($2.... Cost of goods sold if the underapplied overhead is closed directly to cost of goods sold $3.......800....070. © The McGraw-Hill Companies........00 ($2.....000 + $270..... Chapter 3 131 ... $ 81.000 + $189.......000 Thus.989.......... net operating income will be $81... and Cost of Goods Sold rather than closed directly to Cost of Goods Sold...... Inc.. 2............. 2008.....000 greater if the underapplied overhead is allocated among Work In Process............ 000 Rent Expense........................... 15........000 j..... 150... 50.... 451.000 Salaries and Wages Payable.... 12th Edition ......000 e............ Advertising Expense.... 145...........000 g..............................000 applied..... All rights reserved... 240............ $150.. 130... 15.... 17.......000 Accounts Payable.......000 Accounts Payable............000 Accumulated Depreciation....... Manufacturing Overhead...........000 Raw Materials.................000 Manufacturing Overhead.....000 Salaries Expense.. Raw Materials.. 72.................000 d.................. 240.000 direct materials cost × 160% = $240........................000 Estimated total manufacturing overhead cost $248.......... 2008.......... 21......000 Accounts Payable..... 150. 142.........000 Accounts Payable..... 18... 17....... 5........... 45.......... 90..........000 =160% of direct materials cost. Manufacturing Overhead...... 130...000 = Estimated direct materials cost $155..............000 Accounts Payable. © The McGraw-Hill Companies......... a........000 i... 142...... 21...000 Manufacturing Overhead........000 f.000 Accounts Payable............000 c........ Manufacturing Overhead........000 h..........Problem 3-30 (120 minutes) 1..... Work in Process....000 b... 216.. Manufacturing Overhead.....000 Depreciation Expense............... Inc............ 90....... Work in Process....................... Miscellaneous Expense...... Work in Process.... 132 Managerial Accounting..................... .000 Bal.000 590. Work in Process 24.... 1......000 Accounts Receivable............000 Bal..000 (b) 150......000 (d) 90.....000 (c) 21...000...00 0 600....................Problem 3-30 (continued) k.....000 600......000.000 Sales........000 (d) Salaries Expense 145.000 (a) Bal.000.. 3........... 2008.000 Miscellaneous Expense 1... Finished Goods....000 Bal..000 10.000 (i) 17..........000 (k) 590.. Salaries & Wages Payable (d) 451....000 Advertising Expense © The McGraw-Hill Companies.000 590.. Work in Process. All rights reserved...... Accounts Receivable 1. Solutions Manual..000 240.00 0 (l) Bal.000 (g) Depreciation Expense 5... (b) (d) (j) Bal.. 590..... Cost of Goods Sold.........000 Raw Materials 18... Chapter 3 133 ..000 (h) 72....... Manufacturing Overhead (c) 21...000 25....000 (g) 45.. 142.000 216..000 150.. Inc....000 Accounts Payable (a) 142...000 (h) 90..000 Accumulated Depreciation (g) 50.. 2......000 (f) 130...000 Bal.000 (j) 240..000 40. (k) Finished Goods 35.......000 (e) 15...000 (l) 600.. Finished Goods....000 (e) 15... Inc. 2008.(i) 17.. 12th Edition .000 (f) 130.000 © The McGraw-Hill Companies. 134 Managerial Accounting. All rights reserved. ...000 630.... ending....... 25....................... (l) Cost of Goods Sold 600..........000 Add underapplied overhead..... ending..... 3..... ending.....................................................000 606......... $603.............000 216... Inc................... Add: Work in process..............000 Deduct: Work in process... beginning......000 10........... Manufacturing Overhead.... Chapter 3 135 ..... 600.. 625....000 © The McGraw-Hill Companies...... Materials used in production......000 Schedule of cost of goods sold: Finished goods inventory...................... Manufacturing overhead applied to work in process......... Materials available for use.......... $  18.......000 Add: Cost of goods manufactured..000 Adjusted cost of goods sold...000 24...... 4......000 Sales (l) 3........ $ 35.000 3.. 590..000 160... Cost of goods manufactured....... Total manufacturing cost..... $150... 2008........ Direct labor...........................000 40. Raw materials inventory...............000.......... beginning.....00 0 Southworth Company Schedule of Cost of Goods Manufactured Direct materials: Raw materials inventory......... Cost of Goods Sold..000 Unadjusted cost of goods sold.......................000 240......000 Finished goods inventory. Purchases of raw materials...000 1.......Problem 3-30 (continued) (h) Rent Expense 18.000 3....000 142..........000 Goods available for sale...................000 $590.................. beginning.... Solutions Manual................... All rights reserved.. ...............000 Advertising expense.......................... 18...... Total manufacturing cost.................760).......000 6...........080 ÷ 500 units = $48.. Cost of goods sold.....760 13..........000 397.......................000 315.........600)........... $ 82.....................000.....600 4.000 Rent expense..... All rights reserved......... Manufacturing overhead cost applied (160% × $3.......... Direct labor (400 hours × $11 per hour)........760 10.......... Selling and administrative expenses: Salaries expense................... 2008..400 5..... Inc...00 0 603........................................................... Southworth Company Income Statement $1........ $ 3...... 5........ 12th Edition .....................320 $24... © The McGraw-Hill Companies............. 136 Managerial Accounting............................ 130..............................................000 Depreciation expense................ Add markup (75% × $13........ 17...............000 Net operating income... Gross margin..................... Total billed price of Job 218...........................16 per unit......... Direct materials.........000 Miscellaneous expense.............000 Sales....080 $24......... $145...Problem 3-30 (continued) 5........ ..000 Predetermined overhead rate (a) ÷ (b)... 2. $21.000 $100......440.. The bulk of the labor cost on the Hastings job is in the Assembly Department...000 Estimated direct labor cost (b).000 direct labor cost b.... a....700 Machining Department: $1..... $21.500 × 180%..250 Total applied overhead.......... 6.. $11...800 Assembly Department: $13...Problem 3-31 (60 minutes) 1.... Chapter 3 137 ... All rights reserved........... a.750 3...000 400% 25% Cutting Department: $6...... The department has an overhead rate of only 25% of direct labor cost as compared to much higher rates in the other two departments..000 × 25%. as shown above....... Inc... © The McGraw-Hill Companies...... Predetermined= Estimated total manufacturing overhead cost overhead rate Estimated total amount of the allocation base = $1.......... 3. which incurs very little overhead cost...... 180% b................... use of departmental overhead rates results in a relatively small amount of overhead cost charged to the job.000 $200.. $540.....000 $400.....920.....200 × 160% = $33........000 =160% of direct labor cost $900.............700 × 400%.. Solutions Manual.. $300.......... Cutting Machining Assembly Departme Departme Departme nt nt nt Estimated manufacturing overhead cost (a).. Therefore........ $800.. 2008...... ............. Too much overhead cost was assigned to the job for the kind of work being done on the job in the plant... Manufacturing overhead applied (above)..................... the company will tend to charge too little overhead cost to jobs that require a large amount of labor in the Cutting or Machining Departments....... The company’s bid price was: Direct materials..500 Direct labor.............200 21...................... $ 18..............620 Bidding rate.................. 138 Managerial Accounting........................... Bidding rate..............43 Total bid price....5 $110...............................Problem 3-31 (continued) However...................................................... © The McGraw-Hill Companies.... $ 18............920 Total manufacturing cost............. Lenko Products would have been the low bidder on the Hastings job since the competitor underbid Lenko by only $10................................ 73................. 21. as shown in Part 1....175 Note that if departmental overhead rates had been used..... the bid price would have been: Direct materials............. use of a plantwide overhead rate in effect redistributes overhead costs proportionately between the three departments (at 160% of direct labor cost) and results in a large amount of overhead cost being charged to the Hastings job...........450 × 1. This may explain why the company bid too high and lost the job......... 0 If departmental overhead rates had been used...............500 21...... Direct labor..... 4......750 61... All rights reserved...... Total bid price......... 33.. Inc.... 12th Edition .... × 1............ If a plantwide overhead rate is being used..........000......... 2008.....5 $ 92.................................200 Manufacturing overhead applied (above)........ Total manufacturing cost.............. The reason is that the plantwide overhead rate (160%) is much lower than the rates if these departments were considered separately................ 85..000 Underapplied overhead cost...000 0 Applied overhead cost: $320.......000 × 180%..00 Actual overhead cost...... Chapter 3 139 ......$ 90.....000) © The McGraw-Hill Companies..501........000 overhead cost............000 $92......00 $1.... Department Machinin Assemb Total Cutting g ly Plant $560...........482..00 Actual overhead cost..000 $  (19....Problem 3-31 (continued) 5.. 2008..000 1..000 $340.....482.... 1....... 0 $830....000 × 400%.. Solutions Manual...000) $ 7.... All rights reserved....000 Underapplied (overapplied) $(16. 576............. ) $(10........000 b.. 840....... a..... $1.... 0 Applied overhead cost ($870... Inc..000 × 25%........392..000 $210............000 × 160%)... ..000 0 Gross margin....950..00 (75..............875.......... ...000 units × $70 per unit)......... Traditional approach: Actual total manufacturing overhead cost incurred (assumed to equal the original estimate)..... 2. Inc...000 Manufacturing overhead applied (80. $ 75... 2...000 Gross margin... 2........... Income Statement: New Approach Revenue (75.250.00 0 $1........00 0 $1............000 © The McGraw-Hill Companies..00 (75..000 units × $20 per unit)........ Income Statement: Traditional Approach Revenue (75. Inc...000 units × $18 per unit)...000 400..000 units × $25 per unit)....... 0 Manufacturing overhead applied 1............ 1...... $2...225..... Cost of goods sold: Variable manufacturing $5. 0 3......000. 0 Manufacturing overhead applied 2..... ..... $ 0 TurboDrives..................00 (75....000 Cost of unused capacity [(100....850.400.... 12th Edition .000 units × $25 per unit).000 Net operating income........025.350.....250.000...Case 3-32 (120 minutes) 1.........000 Selling and administrative expenses. 1......000 Overhead underapplied or overapplied......500..000 units × $70 per unit)......000 New approach: TurboDrives................ 140 Managerial Accounting.....350. Cost of goods sold: Variable manufacturing $5..... 2008..00 (75.000 units × $18 per unit). All rights reserved. Inc.. Selling and administrative expenses... All rights reserved. 1..units  80..00 0 $ 50... Inc..000 units) × $20 per unit].......950.. Solutions Manual.......00 0 © The McGraw-Hill Companies.. Chapter 3 141 . Net operating income............. 2008...... ..........................................Case 3-32 (continued) 2..........000 units × $18 per unit)..000 TurboDrives......000.......... 5.............. Additional net operating income required to attain target net operating income ($210... Selling and administrative expenses.000 Manufacturing overhead applied [(80....... All rights reserved.000) (a)....... $5.......... Income Statement: Traditional Approach Revenue (75......... 142 Managerial Accounting..350......000 2......875. Inc.000 $ 210.......950............000 $75........... 2008.... Additional output required to attain target net operating income (a) ÷ (b)............... $135....... $ 135.....000 1...... $2...........135................. 2... 0 Manufacturing overhead applied (75................ the reported net operating income can be increased by increasing the production level.... Cost of goods sold: Variable manufacturing $1.... Inc...... 1. more units © The McGraw-Hill Companies.000 $25 per unit Overhead applied per unit of output (b)..000 units × $25 per unit)...400 units Actual total manufacturing overhead cost incurred............160...250..... Net operating income......000 Gross margin...000 Note: If the overapplied manufacturing overhead were prorated between ending inventories and Cost of Goods Sold....400 units) × $25 per unit]...000 Less: Manufacturing overhead overapplied..........090....... which then results in overapplied overhead that is deducted from Cost of Goods Sold...............000 units × $70 per unit).........00 (75.................00 0 3...000 Overhead overapplied...... 12th Edition ......... Traditional approach: Under the traditional approach............. 135........000 units + 5.... © The McGraw-Hill Companies. All rights reserved..000.would have to be produced to attain the target net profit of $210. Inc. Solutions Manual. Chapter 3 143 . 2008. ..000 units × $20 per unit)..... The reason for this is that the reported profit per unit sold is higher under the new method by $5........... 240......... Cost of goods sold: Variable manufacturing $5.. 88......88........000 units × $70 per unit)..... 0 Manufacturing overhead applied 1.00 (75..... 2.............250.....000 $50.. $160.. $20 per unit Additional output required to attain target net operating income (a) ÷ (b)........Case 3-32 (continued) New approach: Under the new approach...........500........000 units Estimated number of units produced..000 Gross margin. Income Statement: New Approach Revenue (75... the reported net operating income can be increased by increasing the production level which then results in less of a deduction on the income statement for the Cost of Unused Capacity.000 units TurboDrives. Additional net operating income required to attain target net operating income ($210......00 (75........850.000 units ......... Net operating income is more volatile under the new method than under the old method..............000) (a)...... All rights reserved.......000 Net operating income......350.... 0 2.....000 units Actual number of units to be produced.......000 Overhead applied per unit of output (b)..................... As a consequence.950........ 8.00 0 $1..........000 units × $18 per unit).... Inc.......... Inc........................... 2008........ 144 Managerial Accounting........................ 1............000 Selling and administrative expenses..............000 Cost of unused capacity [(100.. swings in sales in either direction will have a © The McGraw-Hill Companies...........000 units) × $20 per unit]...... $ 210...... 12th Edition ......400............. the difference in the predetermined overhead rates............. 80...000 3.. Chapter 3 145 .more dramatic impact on reported profits under the new method. 2008. All rights reserved. © The McGraw-Hill Companies. Inc.. Solutions Manual. The drop in sales has had a more dramatic effect on net operating income under the new method as noted above in part (3). In the case. If they understand the effects of excess production on net operating income and are not misled. there does not seem to be any reason to use the hat trick. Under the new method. the production would have to be increased by 8. since the predetermined overhead rate is lower under the new method. As the computations in part (2) above show. Why would the owners want to tie up working capital in inventories just to artificially attain a target net operating income for the period? And increasing the rate of production toward the end of the year is likely to increase overhead costs due to overtime and other costs. 146 Managerial Accounting. 12th Edition . However. the target net operating income can be attained by producing an additional 5. Building up inventories all at once is very likely to be much more expensive than increasing the rate of production uniformly throughout the year. Under the old method. One can argue that whether the “hat trick” is unethical depends on the level of sophistication of the owners of the company and others who read the financial statements. the “hat trick” is a bit harder to perform under the new method.000 units. In addition. producing excess inventories has less of an effect per unit on net operating income than under the traditional method and hence more excess production is required. It is certainly unethical if the purpose is to fool users of financial reports such as owners and creditors or if the purpose is to meet targets so that bonuses will be paid to top managers.Case 3-32 (continued) 4. This is a consequence of the difference in predetermined overhead rates. All rights reserved.400 units. it can be argued that the hat trick is ethical. we assumed that there would not be an increase in overhead costs due to the additional production. 5. but that is likely not to be true. 2008. if that were the case. Inc.. In our opinion the hat trick is unethical unless there is a good reason for increasing production other than to artificially boost the current period’s net operating income. © The McGraw-Hill Companies. .30 per DLH The revised predetermined overhead rate is higher than the original rate because the automated milling machine will increase the overhead for the year (the numerator in the rate) and will decrease the direct labor-hours (the denominator in the rate)..... Solutions Manual.... .820......000 6..000 46... Chapter 3 147 ........... .. 52....... This double-whammy effect increases the predetermined overhead rate.................. Acquisition of the automated milling machine will increase the apparent costs of all jobs—not just those that use the new facility.000 Predetetermined= Estimated total manufacturing overhead overhead rate Estimated total amount of the allocation base = $2. this would not happen.... 0 Original estimated total direct labor-hours.............. 2008...000 Plus: Cost of new technician/programmer... Such products will now appear to be less profitable and the managers of these © The McGraw-Hill Companies.. 300..... The predetermined overhead rate is now considerably higher than it was......000 46......... Inc... 2.820....... 0 Plus: Lease cost of the new machine. 45............ ............ Less: Estimated reduction in direct laborhours.... All rights reserved... The revised predetermined overhead rate is determined as follows: Original estimated total manufacturing $2...00 Estimated total manufacturing overhead..Case 3-33 (45 minutes) 1.000 DLHs =$61.......000 $2..... This is because the company uses a plantwide overhead rate... 3... This will penalize products that continue to use the same amount of direct labor-hours.. If there were a different overhead rate for each department.......475.00 overhead.... Estimated total direct labor-hours. 148 Managerial Accounting. There may be pressure to increase the prices of these products even though there has in fact been no increase in their real costs.products will appear to be doing a poorer job. All rights reserved. 2008.. 12th Edition . © The McGraw-Hill Companies. Inc. . predetermined overhead rates should not be misinterpreted as variable costs.. 2008. this is by no means automatic... Second..Case 3-33 (continued) 4..00 Lease cost of the new machine...000 345. While it may have been a good idea to acquire the new equipment because of its greater capabilities...................000 hours × $30 per hour). a reduction in direct labor requirements does not necessarily lead to a reduction in direct labor hours paid...... that would have added only $120.000 hours × $30 per hour) in cost savings... Solutions Manual....... 60.000 and the machine would still be an unattractive proposal........000 Less: labor cost savings (2.. A differential cost analysis would reveal that the automated equipment would increase total cost by about $285. The entire 6... All rights reserved........ There are two morals to this tale..000 a year if the labor reduction is only 2.......... Chapter 3 149 ...00 Net increase in annual costs..... The original calculations implicitly assumed that overhead would decrease because of the reduction in direct labor-hours.000 (4.. the calculations of the cost savings were in error.. In reality....... Cost consequences of leasing the automated equipment: Increase in manufacturing overhead cost: $300. First.. The net increase in annual costs would have been $165.. However..... the overhead increased because of the additional costs of the new equipment..... 0 Cost of new technician/programmer.... They are not.000 $285... © The McGraw-Hill Companies.... 0 Even if the entire 6...... It is often very difficult to actually reduce the direct labor force and may be virtually impossible in some countries except through natural attrition.........000-hour reduction in direct labor-hours occurred...................000 hours..... Inc......... 45.000-hour reduction may ultimately be realized as workers retire or quit. First. 12th Edition . In December.Case 3-34 (45 minutes) 1. the practice results in distortions in the pattern of net operating income over the year. Shaving 5% off the estimated direct labor-hours in the predetermined overhead rate will result in an artificially high overhead rate. the practice of understating direct labor-hours results in artificially inflating the overhead rate. analyses. Therefore. While Cristin is in an extremely difficult position. 2. or recommendations. since all of the adjustment is taken to Cost of Goods Sold. This question may generate lively debate. which is likely to result in overapplied overhead for the year. her responsibilities under the IMA’s Statement of Ethical Professional Practice seem to be clear. inventories are still overstated at year-end.” Cristin should discuss this situation with her immediate supervisor in the controller’s office at corporate headquarters.. some of the facts are indisputable. The cumulative effect of overapplying the overhead throughout the year is all recognized in December when the balance in the Manufacturing Overhead account is closed out to Cost of Goods Sold. This means that retained earnings is also overstated. 2008. Inc. this effect would be dissipated over the course of the year. The Credibility standard states that management accountants have a responsibility to “disclose all relevant information that could reasonably be expected to influence an intended user’s understanding of the reports. This step may bring her into direct conflict with the general manager of the division. the adjustment for overapplied overhead provides a big boost to net operating income. Where should Cristin Madsen’s loyalties lie? Is she working for the general manager of the division or for the corporate controller? Is there anything wrong with the “Christmas bonus”? How far should Cristin go in bucking her boss on a new job? While individuals can certainly disagree about what Cristin should do. 150 Managerial Accounting. All rights reserved. This has the effect of inflating the cost of goods sold figures in all months prior to December and overstating the costs of inventories. so it © The McGraw-Hill Companies. In addition. If the balance were closed out every month or every quarter. .would be a very difficult decision for her to make. Solutions Manual. All rights reserved. Inc. © The McGraw-Hill Companies. 2008. Chapter 3 151 . but top management of the company supported the general manager because “he comes through with the results” and could be relied on to hit the annual profit targets for his division. what else might he be doing that is questionable or even perhaps illegal? © The McGraw-Hill Companies. 12th Edition . 2008..Case 3-34 (continued) In the actual situation that this case is based on. 152 Managerial Accounting. Inc. Personally. we would be very uncomfortable supporting a manager who will resort to deliberate distortions to achieve “results. All rights reserved. the corporate controller’s staff were aware of the general manager’s accounting tricks.” If the manager will pull tricks in this area. For example. Students may mention other risks beyond those specifically mentioned in the 10-K. Page 8 of the 10-K says ‘We believe our marketing strategy. The annual report mentions in numerous places that Toll Brothers focuses on Luxury Homes and Communities and high quality construction. geologically speaking. Control activities: Vertically integrate by operating manufacturing facilities (see page 12 of the 10-K for a discussion of Toll Brothers’ manufacturing facilities). the National Housing Quality Award (1995)..” Page 2 of the 10-K says “We are the only publicly traded national home builder to have won all three of the industry’s highest honors: America’s Best Builder (1996). Toll Brothers can © The McGraw-Hill Companies. Control activities: Diversify geographic markets served so that a downturn in one region of the country will not cripple the company. Control activities: Pay engineers to certify that targeted properties can support home construction. In addition. has enhanced our reputation as a builder-developer of high-quality upscale housing. Solutions Manual. All rights reserved. cannot support home construction. and Builder of the Year (1988). soil conditions may be too unstable to support the weight of a home. Toll Brothers succeeds first and foremost because of its product leadership customer value proposition.Research and Application 3-35 (240 minutes) 1. 2.  Risk: Raw material costs may increase thereby depressing profit margins.” Toll Brothers seeks to realize manufacturing efficiencies for the benefit of its shareholders.  Risk: Large sums of money may be spent buying land that. but its customers choose Toll Brothers for its leadership position in the luxury home market. Buying raw materials at wholesale prices cuts out a middleman in the value chain. Toll Brothers faces numerous business risks as described in pages 10-11 of the 10-K. Here are four risks faced by Toll Brothers with suggested control activities:  Risk: Downturns in the real estate market could adversely impact Toll Brothers’ sales. Inc. 2008. which emphasizes our more expensive “Estate” and “Executive” lines of homes. Chapter 3 153 . . All rights reserved.purchase raw materials in large volumes to realize purchase price discounts. 2008. 154 Managerial Accounting. Inc. 12th Edition . © The McGraw-Hill Companies. 3. etc. electrical wiring. and Second Homes (see pages 5 and 9 of the annual report). siding. kitchen cabinets. exterior finishes such as stone.. Examples of direct materials used in Toll Brothers’ manufacturing facilities include lumber and plywood for wall panels. For example. Toll Brothers’ standard floor plans differ from one another particularly across its main product lines such as Move-Up.g. Front porches may be more prevalent in South Carolina than in Ohio. cement for the foundation. extra fireplaces. Active Adult. All rights reserved. and finished lofts (see page 4 of 10-K).000 to the price of a home (see page 1 of the annual report). 2008. Toll Brothers introduced 87 new home models (see page 4 of the 10-K). and floor trusses. HighDensity Suburban. The standard bill of materials (e. Bigger homes would require more lumber. Different grades © The McGraw-Hill Companies. Inc. or brick. Urban In-Fill. homes are further distinguished from one another by customer upgrades that add an average of $103. differences in the square footage of homes would drive numerous differences in their bills of materials. as well as other items such as windows and doors (see page 12 of the 10-K). Control activities: Employ a project manager within each community who serves in a quality assurance capacity. Beyond the fact that Toll Brothers offers a wide variety of floor plans. 4. Empty Nester. prior to considering a specific customer’s upgrade requests) for each home would differ. roofs. Examples of direct materials used at the home sites include shingles.Research and Application 3-35 (continued)  Risk: Subcontractors may perform substandard work resulting in warranty claims and dissatisfied customers. sheet rock. etc. Toll Brothers would use job-order costing because its homes are unique rather than homogeneous. In 2004. Bills of materials are also likely to differ across geographic regions of the country. homes in Florida typically do not have basements whereas homes in New England are likely to have basements. Upgrades include items such as additional garages. stucco.. For example. Each home being built would be a considered a job. Solutions Manual. bathroom fixtures. Chapter 3 155 . guest suites. All rights reserved. 2008. 156 Managerial Accounting. Inc.of windows and insulation may be used in homes in the North than in the South. © The McGraw-Hill Companies.. 12th Edition . The company employs its own direct laborers in its manufacturing facilities in Morrisville. road construction costs.g. It appears that Toll Brothers does not use cost-plus pricing to establish selling prices for its base models. Toll Brothers incurs two types of direct labor costs. Page 5 of the annual report says “When there is strong demand. All rights reserved.. Inc. model home costs (including construction. an internally developed value analysis program that compares our homes with homes offered by other builders in each local marketing area. we benefit from exceptional pricing power because we have greater ability to raise prices than those builders who target buyers on tight budgets: it’s easier to hit doubles. 7.. Page 8 of the 10-K says “In determining the prices for our homes. 6. community entrances. These costs are incurred to create housing communities but they cannot be easily and conveniently traced to specific homes. The labor cost embedded in a subcontractor’s fixed price contract is directly traceable to the home being built. triples © The McGraw-Hill Companies. Work at the home sites is performed by subcontractors. the value to the customer and competitive conditions determine prices—not the cost of building a particular home.Research and Application 3-35 (continued) 5. There are numerous examples of overhead costs mentioned in the annual report and 10-K. we utilize. tennis courts. Toll Brothers would not use employee time tickets at its home sites because the subcontractors are not employees of Toll Brothers. The costs of these workers can be traced to specific items such as roof trusses that can in turn be traced to particular houses. Inc. marinas. Some examples are: land acquisition costs.” In other words. and project manager salaries. swimming pools. 2008. grading and clearing). Pa. Va. land development costs (e. the direct laborers are not employed by Toll Brothers. However. in addition to management’s extensive experience. Solutions Manual. underground utility installation costs. and they are paid a fixed price that is unaffected by the amount of hours worked. golf courses. Chapter 3 157 . furnishing and staffing). and Emporia. 12th Edition . All rights reserved. 2008. © The McGraw-Hill Companies.and home runs selling to luxury buyers.. Inc. 158 Managerial Accounting.” This quote implies that pricing is driven by the customers’ willingness and ability to pay and not by the cost of building a particular house. Page 16 also says.178 billion). land deposits and costs of future development ($237 million). the allocation of overhead appears to take place in two stages. each home is assigned an equal share of overhead costs. construction in progress ($2. 2008.. © The McGraw-Hill Companies. Page 29 of the annual report shows the components of the company’s ending inventory balance of $3. common area development and related costs of master planned communities (including the cost of golf courses. and other ($12 million). Chapter 3 159 . First.878 billion.” In other words. higher priced communities within a master planned community are assigned a greater portion of master planned community overhead costs.Research and Application 3-35 (continued) 8. sample homes and sales offices ($208 million). Inventoriable costs include land and land development costs ($1. it appears that Toll Brothers assigns overhead to cost objects in two ways. Overhead costs (as well as direct costs) flow through the construction in progress account and hit cost of home sales when a customer has a closing and takes possession of the home. Based on information contained in the 10-K. In master planned communities. All rights reserved. “The estimated land. Inc. all overhead costs related to a particular community within the master planned community are assigned equally to each home site. land development and related costs (both incurred and estimated to be incurred in the future) are amortized to the cost of homes closed based upon the total number of homes to be constructed in each community. Then. Solutions Manual.” In other words.242 billion). net of their estimated residual value) are allocated to individual communities within a master planned community on a relative sales value basis. The company needs to assign overhead costs to homes so that it can derive a cost of sales number for the income statement and an inventory number for the balance sheet. Construction in progress is similar to work in process for a manufacturing company. First. the overhead costs common to all communities contained with the master planned community are assigned to communities based on relative sales value. page 16 of the 10-K says “Land.