During week three you will be reading about applying overhead costs to a job or batch. Problem 3-54 on page 126 in your textbook has a great ethical issue around the under application of manufacturing overhead. Please read the scenario presented in that p

CHAPTER 3

Product Costing and Cost Accumulation in a Batch Production Environment

Focus on ethics (Located before the Chapter Summary in the text.)

Did Boeing exploit accounting rules to conceal cost overruns and production snafus?

According to the circumstances alleged in the Business Week article cited in the text, Boeing did not handle its cost overruns, production problems, and the merger with McDonnell-Douglas in a transparent manner. Boeing allegedly acted to conceal its worsening operational problems through “earnings management” to ensure that the merger would be approved by the stockholders of both companies. While the method of “program accounting” is common in the aircraft industry, in this rather extreme case that accounting method did not result in a fair portrayal of the company’s financial and operational situation. As a result, the merger was approved on the basis of alleged misleading information, and it is the investors who will bear the brunt of this action.

The company’s top executives and their accountants must share the responsibility for these actions, the former for providing the data and the latter for approving it for public release. No accounting system should be used as a tool to cover up operational problems and mislead shareholders. One wonders also what the auditors were doing to assess the accuracy of the accounting information.

Answers to Review Questions

3-1 (a) Use in financial accounting: In financial accounting, product costs are needed to determine the value of inventory on the balance sheet and to compute the cost-of-goods-sold expense on the income statement.

1. Use in managerial accounting: In managerial accounting, product costs are needed for planning, for cost control, and for decision making.

1. Use in cost management: In order to manage, control, or reduce the costs of manufacturing products or providing services, management needs a clear idea of what those costs are.

(d) Use in reporting to interested organizations: Product cost information is used in reporting on relationships between firms and various outside organizations. For example, public utilities such as electric and gas companies record product costs to justify rate increases that must be approved by state regulatory agencies.

3-2 In a job-order costing system, costs are assigned to batches or job orders of production. Job-order costing systems are used by firms that produce relatively small numbers of dissimilar products. In a process-costing system, production costs are averaged over a large number of product units. Process-costing systems are used by firms that produce large numbers of nearly identical products.

3-3 Concepts of product costing are applied in service industry firms to inform management of the costs of producing services. For example, banks record the costs of producing financial services for the purposes of planning, cost control, and decision making.

3-4 a. Material requisition form: A document upon which the production department supervisor requests the release of raw materials for production.

b. Labor time record: A document upon which employees record the time they spend working on each production job or batch.

c. Job-cost record: A document on which the costs of direct material, direct labor, and manufacturing overhead are recorded for a particular production job or batch. The job-cost sheet is a subsidiary ledger account for the Work-in-Process Inventory account in the general ledger.

3-5 Although manufacturing-overhead costs are not directly traceable to products, manufacturing operations cannot take place without incurring overhead costs. Consequently, overhead costs are applied to products for the purpose of making pricing decisions, in order to ensure that product prices cover all of the costs of production.

3-6 The primary benefit of using a predetermined overhead rate instead of an actual overhead rate is to provide timely information for decision making, planning, and control.

3-7 An advantage of prorating overapplied or underapplied overhead is that it results in the adjustment of all the accounts affected by misestimating the overhead rate. These accounts include the Work-in-Process Inventory account, the Finished-Goods Inventory account, and the Cost of Goods Sold account. The resulting balances in these accounts are more accurate when proration is used than when overapplied or underapplied overhead is closed directly into Cost of Goods Sold. The primary disadvantage of prorating overapplied or underapplied overhead is that it is more complicated and time-consuming than the simpler alternative of closing overapplied or underapplied overhead directly into Cost of Goods Sold.

3-8 An important cost-benefit issue involving accuracy versus timeliness in accounting for overhead involves the use of a predetermined overhead rate or an actual overhead rate. Since an actual overhead rate is computed after costs have been incurred and activity has been recorded, it is more accurate than a predetermined rate. However, a predetermined overhead rate is more timely than an actual rate, since the predetermined rate is computed earlier and in time to be used for making decisions, planning, and controlling operations.

3-9 The difference between actual and normal costing systems involves the procedure for applying manufacturing overhead to Work-in-Process Inventory. Under actual costing, applied overhead is the product of the actual overhead rate (computed at the end of the period) and the actual amount of the cost driver used. Under normal costing, applied overhead is the product of the predetermined overhead rate (computed at the beginning of the period) and the actual amount of the cost driver used.

3-10 When a single volume-based cost driver is used to apply manufacturing overhead, the managerial accountant's primary objective is to select a cost driver that varies in a pattern similar to the pattern in which manufacturing overhead varies. Moreover, if a single cost driver is used, it should be some productive input that is common to all of the firm's products.

3-11 The benefit of using multiple overhead rates is that the resulting product-costing information is more accurate and more useful for decision making than is the information that results from using a single overhead rate. However, the use of multiple cost drivers and overhead rates is more complicated and more costly.

3-12 The development of departmental overhead rates involves a two-stage process. In stage one, overhead costs are assigned to the firm's production departments. First, overhead costs are distributed to all departments, including both service and production departments. Second, costs are allocated from the service departments to the production departments. At the end of stage one, all overhead costs have been assigned to the production departments.

In stage two, the costs that have been accumulated in the production departments are applied to the production jobs that pass through the departments.

3-13 a. Overhead cost distribution: Assignment of all manufacturing-overhead costs to department overhead centers.

b. Service department cost allocation: Allocation of service department costs to production departments on the basis of the relative proportion of each service department's output that is used by the various production departments.

c. Overhead application (or overhead absorption): The assignment of all manufacturing overhead costs accumulated in a production department to the jobs that the department has worked on.

These three processes are used in developing departmental overhead rates.

3-14 Job-order costing concepts are used in professional service firms. However, rather than referring to production “jobs,” such organizations use terminology that reflects their operations. For example, hospitals and law firms assign costs to “cases,” and governmental agencies often refer to “programs” or “missions.” It is important in such organizations to accumulate the costs of providing the services associated with a case, project, contract, or program. Such cost information is used for planning, cost control, and pricing, among other purposes.

3-15 A cost driver is a characteristic of an event or activity that results in the incurrence of costs by that event or activity. A volume-based cost driver is one that is closely associated with production activity, such as the number of units produced, direct-labor hours, or machine hours.

3-16 When direct material, direct labor, and manufacturing-overhead costs are incurred, they are applied to Work-in-Process Inventory by debiting the account. When goods are finished, the costs are removed from that account with a credit, and they are transferred to Finished-Goods Inventory by debiting that account. Subsequently, when the goods are sold, Finished-Goods Inventory is credited, and the costs are added to Cost of Goods Sold with a debit.

3-17 Hospitals use job-order costing concepts to accumulate the costs associated with each case treated in the hospital. For example, the costs of treating a heart patient would be assigned to that patient's case. These costs would include the hospital room, food and beverages, medications, and specialized services such as diagnostic testing and X rays.

3-18 Some manufacturing firms are switching from direct-labor hours to machine hours or throughput time as the basis for overhead application as a result of increased automation in their factories. With increased automation comes a reduction in the amount of direct labor used in the production process. In such cases, direct labor may cease to be a cost driver that varies in a pattern similar to the way in which manufacturing-overhead costs are incurred.

3-19 Overapplied or underapplied overhead is caused by errors in estimating the predetermined overhead rate. These errors can occur in the numerator (budgeted manufacturing overhead), or in the denominator (budgeted level of the cost driver).

3-20 Overapplied or underapplied overhead can be closed directly into Cost of Goods Sold, or it can be prorated among Work-in-Process Inventory, Finished-Goods Inventory, and Cost of Goods Sold.

3-21 A large retailer would assign overhead costs as part of the cost of goods sold. At a retailer, such costs tend to be the support costs associated with moving products to be sold, controlling those products (theft prevention), and management of the operation.

3-22 A non-profit organization would assign overhead costs as part of the cost of services delivered. At a non-profit organization, such costs would include the support costs required to be able to deliver the services that are included in their mission. These can include such items as supervision, transportation, security, and governmental reporting.

Solutions to Exercises

Exercise 3-23 (10 minutes)

1. Process

1. Job-order

1. Job-order (contracts or projects)

1. Process

1. Process

5. Job-order

6. Process

7. Job-order (contracts or projects)

8. Process

9. Job-order

Exercise 3-24 (15 minutes)

1.
	(a)	At 200,000 chicken volume:
	(b)	At 300,000 chicken volume:
	(c)	At 400,000 chicken volume:

Exercise 3-24 (continued)

2. The predetermined overhead rate does not change in proportion to the change in production volume. As production volume increases, the $100,000 of fixed overhead is allocated across a larger activity base. When volume rises by 50%, from 200,000 to 300,000 chickens, the decline in the overhead rate is 28.33% [(.60 – .43)/.60]. When volume rises by 33.33%, from 300,000 to 400,000 chickens, the decline in the overhead rate is 18.6% [(.43 – .35)/.43].

Exercise 3-25 (5 minutes)

	Work-in-Process Inventory	5,480
	Raw-Material Inventory		4,600
	Wages Payable (40 x $17)		680
	Manufacturing Overhead (40 x ($5)		200
	Finished-Goods Inventory	5,480
	Work-in-Process Inventory		5,480

EXERCISE 3-26 (30 MINUTES)

Job-order costing is the appropriate product-costing system for feature film production, because a film is a unique production. The production process for each film would use labor, material and support activities (i.e., overhead) in different ways. This would be true of any type of film (e.g., filming on location, filming in the studio, or using animation).

Exercise 3-27 (20 minutes)

1.	Raw-material inventory, January 1	$134,000
	Add: Raw-material purchases	191,000
	Raw material available for use	$325,000
	Deduct: Raw-material inventory, January 31	124,000
	Raw material used in January	$201,000
	Direct labor	300,000
	Total prime costs incurred in January	$501,000
2.	Total prime cost incurred in January	$501,000
	Applied manufacturing overhead (60% $300,000)	180,000
	Total manufacturing cost for January	$681,000

Exercise 3-27 (continued)

3.	Total manufacturing cost for January	$681,000
	Add: Work-in-process inventory, January 1	235,000
	Subtotal	$916,000
	Deduct: Work-in-process inventory, January 31	251,000
	Cost of goods manufactured	$665,000

4.	Finished-goods inventory, January 1	$125,000
	Add: Cost of goods manufactured	665,000
	Cost of goods available for sale	$790,000
	Deduct: Finished-goods inventory, January 31	117,000
	Cost of goods sold	$673,000
	Since the company accumulates overapplied or underapplied overhead until the end of the year, no adjustment is made to cost of goods sold until December 31.
5.	Applied manufacturing overhead for January	$180,000
	Actual manufacturing overhead incurred in January	175,000
	Overapplied overhead as of January 31	$ 5,000
	The balance in the Manufacturing Overhead account on January 31 is a $5,000 credit balance. NOTE: Actual selling and administrative expense, although given in the exercise, is irrelevant to the solution.

Exercise 3-28 (15 minutes)

1.	Applied manufacturing overhead	=	total manufacturing costs30%
		=	$2,500,00030%
		=	$750,000
	Applied manufacturing overhead	=	direct-labor cost80%
	Direct-labor cost	=	applied manufacturing overhead80%
		=	$750,000.8
		=	$937,500

2.	Direct-material cost	=	total manufacturing cost
			– direct labor cost
			– applied manufacturing overhead
		=	$2,500,000 – $937,500 – $750,000
		=	$812,500
3.	Let X denote work-in-process inventory on December 31.
Total		work-in-process		work-in-process		cost of
manufacturing	+	inventory,	–	inventory,	=	goods
cost		Jan.1		Dec. 31		manufactured
$2,500,000	+	.75X	–	X	=	$2,425,000
				.25X	=	$2,500,000 – $2,425,000
				X	=	$300,000
Work-in-process inventory on December 31 amounted to $300,000.

Exercise 3-29 (25 minutes)

JOB-COST RECORD
	Job Number	TB78	Description	teddy bears
	Date Started	4/1	Date Completed	4/15
			Number of Units Completed	1,000
	Direct Material
	Date	Requisition Number	Quantity	Unit Price	Cost
	4/1	101	400	$.80	$320
	4/5	108	500	.30	150
	Direct Labor
	Date	Time Card Number	Hours	Rate	Cost
	4/1 – 4/8	Various time cards	500	$12	$6,000
	Manufacturing Overhead
	Date	Activity Base	Quantity	Application Rate	Cost
	4/15	Direct-labor hours	500	$2	$1,000
	Cost Summary
	Cost Item	Amount
	Total Direct Material Total Direct Labor Total Manufacturing Overhead	$  470 6,000 1,000
	Total Cost	$7,470
	Unit Cost	$ 7.47
	Shipping Summary
	Date	Units Shipped	Units Remaining In Inventory	Cost Balance
	4/30	700	300	$2,241*

*300 units remaining in inventory$7.47 = $2,241

Exercise 3-30 (30 minutes)

1.	Crunchem Cereal Company Schedule of Cost of Goods Manufactured For the Year Ended December 31, 20x1
	Direct material:
	Raw-material inventory, January 1	$ 30,000
	Add: Purchases of raw material	278,000
	Raw material available for use	$308,000
	Deduct: Raw-material inventory, December 31	33,000
	Raw material used		$275,000
	Direct labor		120,000
	Manufacturing overhead		252,000	*
	Total manufacturing costs		$647,000
	Add: Work-in-process inventory, January 1		39,000
	Subtotal		$686,000
	Deduct: Work-in-process inventory, December 31		42,900
	Cost of goods manufactured		$643,100

*Applied manufacturing overhead is $252,000 ($120,000210%). Actual manufacturing overhead is also $252,000, so there is no overapplied or underapplied overhead.

2.	Finished-goods inventory, January 1	$ 42,000
	Add: Cost of goods manufactured	643,100
	Cost of goods available for sale	$685,100
	Deduct: Finished-goods inventory, December 31	46,200
	Cost of goods sold	$638,900

3. In the electronic version of the solutions manual, press the CTRL key and click on the following link: Build a Spreadsheet 03-30.xls Exercise 3-31 (20 minutes)

1.	Raw-Material Inventory		Work-in-Process Inventory
	227,000			18,000
			174,000			DM 174,000
	53,000			DL 324,000
				MOH 180,000
	Wages Payable				120,000
		324,000		576,000
	Manufacturing Overhead		Finished-Goods Inventory
		180,000		30,000
				120,000
	Sales Revenue				132,000
		195,000		18,000
	Accounts Receivable		Cost of Goods Sold
	195,000			132,000

2.	Reimel Furniture Company, Inc. Partial Balance Sheet as of December 31, 20x2
	Current assets
	Cash		XXX
	Accounts receivable		XXX
	Inventory
	Raw material		$ 53,000
	Work in process		576,000
	Finished goods		18,000
	Reimel Furniture Company, Inc. Partial Income Statement for the Year Ended December 31, 20x2
	Sales revenue		$195,000
	Less: Cost of goods sold		132,000
	Gross margin		$ 63,000

Exercise 3-32 (20 minutes)

1.	Raw material:
	Beginning inventory	$ 71,000
	Add: Purchases	?
	Deduct: Raw material used	326,000
	Ending inventory	$ 81,000
	Therefore, purchases for the year were	$336,000
2.	Direct labor:
	Total manufacturing cost	$686,000
	Deduct: Direct material	326,000
	Direct labor and manufacturing overhead	360,000
	Direct labor + manufacturing overhead	=	$360,000
	Direct labor + (60%) (direct labor)	=	$360,000
	(160%) (direct labor)	=	$360,000
	Direct labor	=	$360,000
			1.6
	Direct labor	=	$225,000
3.	Cost of goods manufactured:
	Work in process, beginning inventory		$ 80,000
	Add: Total manufacturing costs		686,000
	Deduct: Cost of goods manufactured		?
	Work in process, ending inventory		$ 30,000
	Therefore, cost of goods manufactured was		$736,000

Exercise 3-32 (Continued)

4.	Cost of goods sold:
	Finished goods, beginning inventory		$ 90,000
	Add: Cost of goods manufactured		736,000
	Cost of goods available for sale		$826,000
	Deduct: Cost of goods sold		?
	Finished goods, ending inventory		$110,000
	Therefore, cost of goods sold was		$716,000

Exercise 3-33 (20 minutes)

Calculation of proration amounts:

			Calculation of
Account	Amount	Percentage	Percentage
Work in Process	$ 35,250	25%	35,250 $141,000
Finished Goods	49,350	35%	49,350 $141,000
Cost of Goods Sold	56,400	40%	56,400 $141,000
Total	$141,000	100%

	Underapplied			Amount Added
Account	Overhead	x	Percentage	to Account
Work in Process	$16,000*	x	25%	$4,000
Finished Goods	16,000	x	35%	5,600
Cost of Goods Sold	16,000	x	40%	6,400

*Underapplied overhead = actual overhead – applied overhead

$16,000 = $157,000 – $141,000

Journal entry:
Work-in-Process Inventory	4,000
Finished-Goods Inventory	5,600
Cost of Goods Sold	6,400
Manufacturing Overhead		16,000

Exercise 3-34 (15 minutes)

NOTE: Actual selling and administrative expense, although given in the exercise, is irrelevant to the solution.

1.

2.	To compute actual manufacturing overhead:
	Depreciation		$ 231,000
	Property taxes		21,000
	Indirect labor		82,000
	Supervisory salaries		200,000
	Utilities		59,000
	Insurance		30,000
	Rental of space		300,000
	Indirect material:
	Beginning inventory, January 1	$ 48,000
	Add: Purchases	94,000
	Indirect material available for use	$142,000
	Deduct: Ending inventory, December 31	63,000
	Indirect material used		79,000
	Actual manufacturing overhead		$1,002,000
			actual		applied
	Overapplied	=	manufacturing	–	manufacturing
	overhead		overhead		overhead
		=	$1,002,000 – ($13.3080,000*) = $62,000

*Actual direct-labor hours.

3.	Manufacturing Overhead	62,000
	Cost of Goods Sold		62,000

4. In the electronic version of the solutions manual, press the CTRL key and click on the following link: Build a Spreadsheet 03-34.xls

EXERCISE 3-35 (20 MINUTES)

NOTE: Budgeted sales revenue, although given in the exercise, is irrelevant to the solution.

1.		Predetermined overhead rate	=
	(a)		=	$36.40 per machine hour
	(b)		=	$18.20 per direct-labor hour
	(c)		=	$1.30 per direct-labor dollar or 130% of direct-labor cost

*Budgeted direct-labor cost = 20,000$14

2.	Actual manufacturing overhead	–	applied manufacturing overhead	=	overapplied or underapplied overhead
	(a)	$340,000 – (11,000)($36.40)	=	$60,400 overapplied overhead
	(b)	$340,000 – (18,000)($18.20)	=	$12,400 underapplied overhead
	(c)	$340,000 – ($270,000†)(130%)	=	$11,000 overapplied overhead

†Actual direct-labor cost = 18,000$15

Exercise 3-36 (5 minutes)

1.	Work-in-Process Inventory	340,000
	Manufacturing Overhead		340,000
2.	Work-in-Process Inventory	400,400
	Manufacturing Overhead		400,400

EXercise 3-37 (10 minutes)

Budgeted overhead rate = budgeted overhead / budgeted direct professional labor

160% = 400,000 euros / 250,000 euros

Contract to redecorate mayor’s offices:
Direct material	3,500 euros
Direct professional labor	6,000 euros
Overhead (160% 6,000 euros)	9,600 euros
Total contract cost	19,100 euros

exercise 3-38 (15 minutes)

1.	Memorandum
	Date:	Today
	To:	President
	From:	I.M. Student
	Subject:	Cost driver for overhead application
	I recommend direct-labor hours as the best volume-based cost driver upon which to base the application of manufacturing overhead. Since our products are made by hand, direct labor is a very significant production input. Moreover, the incurrence of manufacturing overhead cost appears to be related to the use of direct labor.

Exercise 3-38 (Continued)

2.	Memorandum
	Date:	Today
	To:	President
	From:	I.M. Student
	Subject:	Cost driver for overhead application
	I recommend either machine hours or units of production as the most appropriate cost driver for the application of manufacturing overhead. Since our production process is highly automated, machine hours are the most significant production input. Also, our chips are nearly identical, so the amount of overhead incurred in their production does not vary much across product lines. The incurrence of manufacturing overhead cost appears to be related closely both to machine time and units of production.

Exercise 3-39 (15 minutes)

Work-in-Process Inventory: Tanning Department	6,000a
Manufacturing Overhead		6,000
Work-in-Process Inventory: Assembly Department	540b
Manufacturing Overhead		540
Work-in-Process Inventory: Saddle Department	3,200c
Manufacturing Overhead		3,200

Exercise 3-40 (10 minutes)

Overhead distribution: Allocation of the hospital's building maintenance and custodial costs to all of the hospital's departments.

Service-department cost allocation: Allocation of the hospital's Personnel Department costs to the direct-patient-care departments in the hospital.

Overhead application: Assignment of the overhead costs in the maternity ward to each patient-day of care provided to new mothers.

EXERCISE 3-41 (15 MINUTES)

1.	Total staff compensation = $280,000 + $420,000 = $700,000
2.	Overhead rate = total budgeted overhead/total budgeted staff compensation
	= $756,000/$700,000
	= 108%
3.	Applied overhead = 108% × total direct professional labor
	= 108% × ($1,200 + $2,000)
	= $3,456
4.	Applied overhead using single cost driver = $3,456
	Applied overhead using two cost drivers = $3,480 ($1,080 + $2,400) See the illustration in the text.

solutions to Problems

Problem 3-42 (45 minutes)

NOTE: The 12/31/x1 balances for cash and accounts receivable, although given in the problem, are irrelevant to the solution.

1.	Twisto Pretzel Company Schedule of Cost of Goods Manufactured For the Year Ended December 31, 20x1
	Direct material:
	Raw-material inventory, 12/31/x0	$10,100
	Add: Purchases of raw material	39,000
	Raw material available for use	$49,100
	Deduct: Raw-material inventory, 12/31/x1	11,000
	Raw material used		$38,100
	Direct labor		79,000
	Manufacturing overhead:
	Indirect material	$ 4,900
	Indirect labor	29,000
	Depreciation on factory building	3,800
	Depreciation on factory equipment	2,100
	Utilities	6,000
	Property taxes	2,400
	Insurance	3,600
	Rental of warehouse space	3,100
	Total actual manufacturing overhead	$54,900
	Add: Overapplied overhead*	3,100
	Overhead applied to work in process		58,000
	Total manufacturing costs		$175,100
	Add: Work-in-process inventory, 12/31/x0		8,100
	Subtotal		$183,200
	Deduct: Work-in-process inventory, 12/31/x1		8,300
	Cost of goods manufactured		$174,900

*The Schedule of Cost of Goods Manufactured lists the manufacturing costs applied to work in process. Therefore, the overapplied overhead, $3,100, must be added to total actual overhead to arrive at the amount of overhead applied to work in process. If there had been underapplied overhead, the balance would have been deducted from total actual manufacturing overhead. The amount of overapplied overhead is found by subtracting actual overhead, $54,900 (as computed above), from applied overhead, $58,000 (given).

Problem 3-42 (Continued)

2.	Twisto Pretzel Company Schedule of Cost of Goods Sold For the Year Ended December 31, 20x1
	Finished-goods inventory, 12/31/x0	$ 14,000
	Add: Cost of goods manufactured*	174,900
	Cost of goods available for sale	$188,900
	Deduct: Finished-goods inventory, 12/31/x1	15,400
	Cost of goods sold	$173,500
	Deduct: Overapplied overhead†	3,100
	Cost of goods sold (adjusted for overapplied overhead)	$170,400

*The cost of goods manufactured is obtained from the Schedule of Cost of Goods Manufactured.

†The company closes underapplied or overapplied overhead into cost of goods sold. Hence, the balance in overapplied overhead is deducted from cost of goods sold for the month.

3.	Twisto Pretzel Company Income Statement For the Year Ended December 31, 20x1
	Sales revenue		$205,800
	Less: Cost of goods sold		170,400
	Gross margin		$ 35,400
	Selling and administrative expenses:
	Salaries	$13,800
	Utilities	2,500
	Depreciation	1,200
	Rental of office space	1,700
	Other expenses	4,000
	Total		23,200
	Income before taxes		$12,200
	Income tax expense		5,100
	Net income		$ 7,100

Problem 3-43 (20 minutes)

1.

2.	Journal entries:
	(a)	Raw-Material Inventory	33,000
		Accounts Payable		33,000
	(b)	Work-in-Process Inventory	460
		Raw-Material Inventory		460
	(c)	Manufacturing Overhead	100
		Manufacturing-Supplies Inventory		100
	(d)	Manufacturing Overhead	8,000
		Accumulated Depreciation: Building		8,000
	(e)	Manufacturing Overhead	400
		Cash		400
	(f)	Work-in-Process Inventory	34,000
		Wages Payable		34,000
To record direct-labor cost [(1,000 + 700) x $20].
		Work-in-Process Inventory	20,400
		Manufacturing Overhead		20,400

To apply manufacturing overhead to work in process ($20,400 = 1,700$12 per hour).
	(g)	Manufacturing Overhead	910
		Property Taxes Payable		910
	(h)	Manufacturing Overhead	2,500
		Wages Payable		2,500
	(i)	Finished-Goods Inventory	14,400
		Work-in-Process Inventory		14,400

Problem 3-43 (continued)

	(j)	Accounts Receivable	13,500
		Sales Revenue		13,500
		Cost of Goods Sold	10,800*
		Finished-Goods Inventory		10,800
		*$10,800 = (9/12)($14,400)

Problem 3-44 (25 minutes)

The completed T-accounts are shown below. (Missing amounts in problem are italicized.)

Raw-Material Inventory		Accounts Payable
Bal. 1/1	21,000					2,500	Bal. 1/1
	135,000	120,000			136,500	135,000
Bal. 12/31	36,000					1,000	Bal. 12/31
Work-in-Process Inventory		Finished-Goods Inventory
Bal. 1/1	17,000			Bal. 1/1	12,000
Direct material	120,000			Bal. 12/31	718,000 20,000	710,000
Direct labor	150,000	718,000
Mfg. overhead	450,000
Bal. 12/31	19,000			Cost of Goods Sold
					710,000
Manufacturing Overhead
	452,500	450,000		Sales Revenue
				810,000
Wages Payable
		2,000	Bal. 1/1		Accounts Receivable
	147,000	150,000			Bal. 1/1	11,000
		5,000	Bal. 12/31			810,000	806,000
		Bal. 12/31	15,000

PROBLEM 3-45 (35 MINUTES)

1. Predetermined overhead rate = budgeted overhead ÷ budgeted machine hours = $840,000 ÷ 16,000 = $52.50 per machine hour

2. (a) Work-in-Process Inventory 80,000* Raw-Material Inventory 80,000

Work-in-Process Inventory 130,800** Wages Payable 130,800

* $21,000 + $44,000 + $15,000 = $80,000 ** $35,000 + $22,000 + $65,000 + $8,800 = $130,800

(b) Manufacturing Overhead 238,500 Accumulated Depreciation 34,000 Wages Payable 60,000 Manufacturing Supplies Inventory 5,000 Miscellaneous Accounts 139,500

(c) Work-in-Process Inventory 231,000* Manufacturing Overhead 231,000

* (1,200 + 700 + 2,000 + 500) x $52.50 = $231,000

(d) Finished-Goods Inventory 315,250* Work-in-Process Inventory 315,250

* Job 64: $84,000 + $21,000 + $35,000 + (1,200 x $52.50) = $203,000

Job 65: $53,500 + $22,000 + (700 x $52.50) = $112,250

$315,250 = $203,000 + $112,250

(e) Accounts Receivable…………………………………………… 146,950*

Sales Revenue 146,950

* $112,250 + $34,700 = $146,950

Cost of Goods Sold 112,250

Finished-Goods Inventory 112,250

3. Job no. 66 and no. 67 are in production as of March 31:

Job 66: $44,000 + $65,000 + (2,000 x $52.50) $214,000

Job 67: $15,000 + $8,800 + (500 x $52.50) 50,050

Total $264,050

PROBLEM 3-45 (CONTINUED)

4. Finished-goods inventory increased by $203,000 ($315,250 - $112,250).

5. The company’s actual overhead amounted to $238,500, whereas applied overhead totaled $231,000. Thus, overhead was underapplied by $7,500.

PROBLEM 3-46 (35 MINUTES)

1. Predetermined overhead rate = budgeted overhead ÷ budgeted direct-labor cost = $5,460,000 ÷ $4,200,000 = 130% of direct labor cost

2. Additions (debits) total $15,605,000 [$5,600,000 + $4,350,000 + ($4,350,000 x 130%)].

3. The finished-goods inventory consisted of job no. 2143, which cost $351,500 [$156,000 + $85,000 + ($85,000 x 130%)].

4. Since there is no work in process at year-end, all amounts in the Work-in-Process account must be transferred to Finished-Goods Inventory. Thus:

Finished-Goods Inventory 15,761,800*

Work-in-Process Inventory 15,761,800

*Beginning balance in Work-in-Process Inventory + additions to the account:

$156,800 + $15,605,000 = $15,761,800

5. Finlon’s applied overhead totals 130% of direct-labor cost, or $5,655,000 ($4,350,000 x 130%). Actual overhead was $5,554,000, itemized as follows, resulting in overapplied overhead of $101,000.

Indirect materials used	$ 65,000
Indirect labor	2,860,000
Factory depreciation	1,740,000
Factory insurance	59,000
Factory utilities	830,000
Total	$5,554,000

Manufacturing Overhead 101,000

Cost of Goods Sold 101,000

PROBLEM 3-46 (CONTINUED)

6. The company’s cost of goods sold totals $15,309,300:

Finished-goods inventory, Jan. 1…………….	$ 0
Add: Cost of goods manufactured…………..	15,761,800
Cost of goods available for sale……………...	$15,761,800
Less: Finished-goods inventory, Dec. 31…..	351,500
Unadjusted cost of goods sold……………….	$15,410,300
Less: Overapplied overhead………………….	101,000
Cost of goods sold……………………………...	$15,309,300

7. No, selling and administrative expenses are operating expenses of the firm and are treated as period costs rather than product costs. Such costs are unrelated to manufacturing overhead and cost of goods sold.

PROBLEM 3-47 (30 MINUTES)

1. Traceable costs total $2,500,000, computed as follows:

	Total Cost	Percent Traceable	Traceable Cost
Professional staff salaries………	$2,500,000	80%	$2,000,000
Administrative support staff……	300,000	60	180,000
Travel……………………………….	250,000	90	225,000
Photocopying……………………..	50,000	90	45,000
Other operating costs……………	100,000	50	50,000
Total…………………………….	$3,200,000		$2,500,000

JLR’s overhead (i.e., the nontraceable costs) total $700,000 ($3,200,000 - $2,500,000).

2. Predetermined overhead rate = budgeted overhead ÷ traceable costs = $700,000 ÷ $2,500,000 = 28% of traceable costs

3. Target profit percentage = target profit ÷ total cost

= $640,000 ÷ $3,200,000 = 20% of cost

PROBLEM 3-47 (CONTINUED)

4. The total cost of the Martin Manufacturing project is $64,000, and the billing is $76,800, as follows:

Professional staff salaries… ………	$41,000
Administrative support staff………	2,600
Travel…………………………………..	4,500
Photocopying…………………………	500
Other operating costs……………….	1,400
Subtotal……………………………	$50,000
Overhead ($50,000 x 28%)………….	14,000
Total cost………………………….	$64,000
Markup ($64,000 x 20%)…………….	12,800
Billing to Martin………………………	$76,800

5. Possible nontraceable costs include utilities, rent, depreciation, advertising, top management salaries, and insurance.

6. Professional staff members are compensated for attending training sessions and firm-wide planning meetings, paid vacations, and completion of general, non-client-related paperwork and reports. These activities benefit multiple clients, the consultant, and/or the overall firm, making traceability to specific clients difficult if not impossible.

PROBLEM 3-48 (30 MINUTES)

NOTE: Actual selling and administrative expense, although given in the exercise, is irrelevant to the solution.

1. Machining Dept. overhead rate = budgeted overhead ÷ budgeted machine hours

= $4,000,000 ÷ 400,000 = $10 per machine hour

Assembly Dept. overhead rate = budgeted overhead ÷ budgeted direct-labor cost

= $3,080,000 ÷ $5,600,000 = 55% of direct-labor cost

PROBLEM 3-48 (CONTINUED)

2. The ending work-in-process inventory is carried at a cost of $153,530, computed as follows:

Machining Department:
Direct material……………………………………	$24,500
Direct labor……………………………………….	27,900
Manufacturing overhead (360 x $10)…………	3,600	$ 56,000
Assembly Department:
Direct material……………………………………	$ 6,700
Direct labor……………………………………….	58,600
Manufacturing overhead ($58,600 x 55%)…..	32,230	97,530
Total cost……………………………………………...		$153,530

3. Actual overhead in the Machining Department amounted to $4,260,000, whereas applied overhead totaled $4,250,000 (425,000 hours x $10). Thus, overhead was underapplied by $10,000 during the year.

4. Actual overhead in the Assembly Department amounted to $3,050,000, whereas applied overhead totaled $3,179,000 ($5,780,000 x 55%). Thus, overhead was overapplied by $129,000.

5. The company’s manufacturing overhead was overapplied by $119,000 ($129,000 - $10,000). As a result, excessive overhead flowed from Work-in-Process Inventory, to Finished-Goods Inventory, to Cost of Goods Sold, meaning that the Cost of Goods Sold account must be decreased at year-end.

6. The Work-in-Process account is charged with applied overhead, or $7,429,000 ($4,250,000 + $3,179,000).

7. The firm’s selection of cost drivers (or application bases) seems appropriate. There should be a strong correlation between the cost driver and the amount of overhead incurred. In the Machining Department, much of the overhead is probably related to the operation of machines. Similarly, in the Assembly Department, a considerable portion of the overhead incurred is related to manual assembly (i.e., labor) operations.

Problem 3-49 (25 minutes)

1.

2.	Journal entries:
	(a)	Raw-Material Inventory	7,850
		Accounts Payable		7,850
	(b)	Work-in-Process Inventory	180
		Raw-Material Inventory		180
	(c)	Manufacturing Overhead	30
		Manufacturing-Supplies Inventory		30
	(d)	Manufacturing Overhead	800
		Cash		800
	(e)	Work-in-Process Inventory	75,000
		Wages Payable		75,000
	(f)	Selling and Administrative Expense	1,800
		Prepaid Insurance		1,800
	(g)	Raw-Material Inventory	3,000
		Accounts Payable		3,000
	(h)	Accounts Payable	1,700
		Cash		1,700
	(i)	Manufacturing Overhead	21,000
		Wages Payable		21,000
	(j)	Manufacturing Overhead	7,000
		Accumulated Depreciation: Equipment		7,000
	(k)	Finished-Goods Inventory	1,100
		Work-in-Process Inventory		1,100

Problem 3-49 (Continued)

	(l)	Work-in-Process Inventory	140,000*
		Manufacturing Overhead		140,000
		*Applied manufacturing overhead = 7,000 machine hours$20 per hour.
	(m)	Accounts Receivable	176,000
		Sales Revenue		176,000
		Cost of Goods Sold	139,000
		Finished-Goods Inventory		139,000

Problem 3-50 (45 minutes)

1.	Huron Corporation Schedule of Cost of Goods Manufactured For the Year Ended December 31, 20x2
	Direct material:
	Raw material inventory, 12/31/x1	$ 89,000
	Add: Purchases of raw material	731,000
	Raw material available for use	$820,000
	Deduct: Raw-material inventory, 12/31/x2	59,000
	Raw material used		$761,000
	Direct labor		474,000
	Manufacturing overhead:
	Indirect material	$ 45,000
	Indirect labor	150,000
	Depreciation on factory building	125,000
	Depreciation on factory equipment	60,000
	Utilities	70,000
	Property taxes	90,000
	Insurance	40,000
	Total actual manufacturing overhead	$580,000
	Deduct: Underapplied overhead*	2,500
	Overhead applied to work in process		577,500
	Total manufacturing costs		$1,812,500
	Add: Work-in-process inventory, 12/31/x1		-0-
	Subtotal		$1,812,500
	Deduct: Work-in-process inventory, 12/31/x2		40,000
	Cost of goods manufactured		$1,772,500

*The Schedule of Cost of Goods Manufactured lists the manufacturing costs applied to work in process. Therefore, the underapplied overhead, $2,500, must be deducted from total actual overhead to arrive at the amount of overhead applied to work in process. If there had been overapplied overhead, the balance would have been added to total manufacturing overhead.

The amount of underapplied overhead is found by subtracting the applied manufacturing overhead, $577,500, from the total actual manufacturing overhead, $580,000.

Problem 3-50 (Continued)

2.	Huron Corporation Schedule of Cost of Goods Sold For the Year Ended December 31, 20x2
	Finished-goods inventory, 12/31/x1	$   35,000
	Add: cost of goods manufactured	1,772,500
	Cost of goods available for sale	$1,807,500
	Deduct: Finished-goods inventory, 12/31/x2	40,000
	Cost of goods sold	$1,767,500
	Add: Underapplied overhead*	2,500
	Cost of goods sold (adjusted for underapplied overhead)	$1,770,000

*The company closes underapplied or overapplied overhead into cost of goods sold. Hence the $2,500 balance in underapplied overhead is added to cost of goods sold for the month.

3.	Huron Corporation Income Statement For the Year Ended December 31, 20x2
	Sales revenue	$2,105,000
	Less: Cost of goods sold	1,770,000
	Gross margin	$ 335,000
	Selling and administrative expenses	269,000
	Income before taxes	$   66,000
	Income tax expense	25,000
	Net income	$   41,000

4. In the electronic version of the solutions manual, press the CTRL key and click on the following link: Build a Spreadsheet 03-50.xls

Problem 3-51 (15 minutes)

1. $40,000. Since there was no work-in-process inventory at the beginning of 20x2, all of the costs in the year-end work-in-process inventory were incurred during 20x2.

2. The direct-material cost would have been larger, probably by roughly 20 percent, because direct material is a variable cost.

3. Depreciation is a fixed cost, so it would not have been any larger if the firm's volume had increased.

Problem 3-51 (Continued)

4. Only the $30,000 of equipment depreciation would have been included in manufacturing overhead on the Schedule of Cost of Goods Manufactured. The $30,000 of depreciation related to selling and administrative equipment would have been treated as a period cost and expensed during 20x2.

Problem 3-52 (30 minutes)

1.	Marco Polo Map Company Schedule of Cost of Goods Manufactured For the Month of March
	Direct material:
	Raw-material inventory, March 1	$ 17,000
	Add: March purchases of raw material	113,000
	Raw material available for use	$130,000
	Deduct: Raw-material inventory, March 31	26,000
	Raw materials used		$104,000
	Direct labor		160,000	*
	Manufacturing overhead applied (50% of direct labor)		80,000
	Total manufacturing costs		$344,000
	Add: Work-in-process inventory, March 1		40,000
	Subtotal		$384,000
	Deduct: Work-in-process inventory,
	March 31 (90%$40,000)		36,000
	Cost of goods manufactured		$348,000	†

*Work upward from the bottom of the statement, using the information available. Direct labor + manufacturing overhead = total manufacturing costs – direct material cost = $344,000 – $104,000 = $240,000. Since manufacturing overhead = 50% of direct labor, then manufacturing overhead = $80,000 and direct labor = $160,000.

†Cost of goods manufactured = cost of goods sold + increase in finished-goods inventory = $345,000 + $3,000 = $348,000.

Problem 3-52 (Continued)

2.	Marco Polo Map Company Schedule of Prime Costs For the Month of March
	Raw material:
	Beginning inventory	$ 17,000
	Add: Purchases	113,000
	Raw material available for use	$130,000
	Deduct: Ending inventory	26,000
	Raw material used	$104,000
	Direct labor	160,000
	Total prime costs	$264,000

3.	Marco Polo Map Company Schedule of Conversion Costs For the Month of March
	Direct labor	$160,000
	Manufacturing overhead applied (50% of direct labor)	80,000
	Total conversion cost	$240,000

Problem 3-53 (30 minutes)

1.
2.	Calculation of applied manufacturing overhead:
	Applied manufacturing overhead = machine hrs. used x predetermined overhead rate $20,000 = 4,000 hrs. x $5 per hr.
3.	Underapplied overhead	=	actual overhead – applied overhead
	$6,000	=	$26,000 – $20,000
4.	Cost of Goods Sold	6,000
	Manufacturing Overhead		6,000

Problem 3-53 (continued)

5.

(a)

Calculation of proration amounts:

Account	Explanation	Amount*	Percentage	Calculation of Percentage
Work in Process	Job P82 only	$ 2,500	12.5%	2,500 20,000
Finished Goods	Job N08 only	12,500	62.5%	12,500 20,000
Cost of Goods
Sold	Job A79 only	5,000	25.0%	5,000 20,000
Total		$20,000	100.0%
*Machine hours used on jobpredetermined overhead rate.

Account	Underapplied Overhead		Percentage	Amount Added to Account
Work in Process	$6,000		12.5%	$  750
Finished Goods	6,000		62.5%	3,750
Cost of Goods Sold	6,000		25.0%	1,500
Total				$6,000
(b)	Journal entry:
	Work-in-Process Inventory	750
	Finished-Goods Inventory	3,750
	Cost of Goods Sold	1,500
	Manufacturing Overhead		6,000

Problem 3-54 (40 minutes)

1. In accordance with the IMA Statement of Ethical Professional Practice, the appropriateness of Marc Jackson’s three alternative courses of action is described as follows:

(a) Follow Brown's directive and do nothing further. This action is inappropriate as Jackson has ethical responsibilities to take further action in accordance with the following standards of ethical conduct.

Problem 3-54 (continued)

Competence:

· Maintain an appropriate level of professional expertise by continually developing knowledge and skills.

· Perform professional duties in accordance with relevant laws, regulations, and technical standards.

· Provide decision support information and recommendations that are accurate, clear, concise, and timely.

· Recognize and communicate professional limitations or other constraints that would preclude responsible judgment or successful performance of an activity.

Integrity:

· Mitigate actual conflicts of interest. Regularly communicate with business associates to avoid apparent conflicts of interest. Advise all parties of any potential conflicts.

· Refrain from engaging in any conduct that would prejudice carrying out duties ethically.

· Abstain from engaging in or supporting any activity that might discredit the profession.

Credibility:

· Communicate information fairly and objectively.

· Disclose all relevant information that could reasonably be expected to influence an intended user’s understanding of the reports, analyses, or recommendations.

· Disclose delays or deficiencies in information, timeliness, processing, or internal controls in conformance with organization policy and/or applicable law.

(b) Attempt to convince Brown to make the proper adjustments and to advise the external auditors of her actions. This action is appropriate as Jackson has taken the ethical conflict to his immediate superior for resolution. Unless Jackson suspects that his superior is involved, this alternative is the first step for the resolution of an ethical conflict.

Problem 3-54 (continued)

(c) Tell the Audit Committee of the Board of Directors about the problem and give them the appropriate accounting data. This action is not appropriate as a first step since the resolution of ethical conflicts requires Jackson to first discuss the matter with his immediate superior.

2. The next step that Jackson should take in resolving this conflict is to inform Brown that he is planning to discuss the conflict with the next higher managerial level. Jackson should pursue discussions with successively higher levels of management, including the Audit Committee and the Board of Directors, until the matter is satisfactorily resolved. At the same time, Jackson should “clarify relevant concepts by confidential discussion with an objective advisor to obtain an understanding of possible courses of action.” If the ethical conflict still exists after exhausting all levels of internal review, Jackson may have no course other than to resign from the organization.

Problem 3-55 (25 minutes)

1.
	Quarter	Predetermined Overhead Rate	Calculations
	1st	$4 per hour	$100,000/25,000
	2nd	5 per hour	$80,000/16,000
	3rd	4 per hour	$50,000/12,500
	4th	5 per hour	$70,000/14,000
2.
		January	April
	Direct material	$100	$100
	Direct labor	300	300
	Manufacturing overhead:
	20 hrs$4 per hr	80
	20 hrs$5 per hr	____	100
	Total cost	$480	$500
3.
		January	April
	Total cost	$480	$500
	Markup (10%)	48	50
	Price	$528	$550
4.
5.
		January	April
	Direct material	$100.00	$100.00
	Direct labor	300.00	300.00
	Manufacturing overhead (20 hrs $4.44)	88.80	88.80
	Total cost	$488.80	$488.80

Problem 3-55 (Continued)

6.	Total cost	$488.80
	Markup (10%)	48.88
	Price	$537.68

Notice that with quarterly overhead rates, the firm may underprice its product in January and overprice it in April.

Problem 3-56 (45 minutes)

1.	Predetermined overhead rate:
	$5.05 per direct-labor hour
	*Budgeted manufacturing overhead = variable overhead + fixed overhead $606,000 = $390,000 + $216,000

2.	Cost of job 77:
	Cost in beginning work-in-process inventory	$ 54,000
	Direct material	45,000
	Direct labor (3,500 hours$24.00 per hour)*	84,000
	Applied manufacturing overhead
	(3,500 hours$5.05 per hour)	17,675
	Total cost	$200,675
3.	Manufacturing overhead applied to job 79:
	Direct-labor hourspredetermined overhead rate 2,000 hours$5.05 per hour
	$10,100

Problem 3-56 (continued)

4.	Total manufacturing overhead applied during November:
	Total direct-labor hourspredetermined overhead rate 8,500 hours$5.05
	$42,925
5.	Actual manufacturing overhead incurred during November:
	Indirect material (supplies)	$12,000
	Indirect-labor wages	15,000
	Supervisory salaries	6,000
	Building occupancy costs, factory facilities	6,400
	Production equipment costs	8,100
	Total	$47,500
6.	Underapplied overhead for November:
	Actual manufacturing overhead – applied manufacturing overhead
	$47,500 – $42,925
	$4,575 underapplied

Problem 3-57 (75 minutes)

1.
2.	Journal entries:
	(a)	Raw-Material Inventory	5,000
		Accounts Payable		5,000
	(b)	Raw-Material Inventory	4,000
		Accounts Payable		4,000

	(c)	Work-in-Process Inventory	11,250*
		Raw-Material Inventory		11,250
		*(250 sq. ft.$5 per sq. ft.) + (1,000 lbs.$10 per lb.)
		Manufacturing Overhead**	100
		Manufacturing-Supplies Inventory		100
		**Valve lubricant is an indirect material, so it is considered an overhead cost.
	(d)	Work-in-Process Inventory	34,000
		Manufacturing Overhead	13,000
		Wages Payable		47,000
		Work-in-Process Inventory	35,700*
		Manufacturing Overhead		35,700
		*Applied manufacturing overhead = 1,700 direct-labor hours$21 per hour.
	(e)	Manufacturing Overhead	12,000
		Accumulated Depreciation: Building and
		Equipment		12,000
	(f)	Manufacturing Overhead	1,200
		Cash		1,200

Problem 3-57 (continued)

	(g)	Manufacturing Overhead	2,100
		Accounts Payable		2,100
	(h)	Manufacturing Overhead	2,400
		Cash		2,400
	(i)	Manufacturing Overhead	3,100
		Prepaid Insurance		3,100
	(j)	Selling and Administrative Expenses	8,000
		Cash		8,000

	(k)	Selling and Administrative Expenses	4,000
		Accumulated Depreciation: Buildings and
		Equipment		4,000
	(l)	Selling and Administrative Expenses	1,000
		Cash		1,000
	(m)	Finished-Goods Inventory	34,050*
		Work-in-Process Inventory		34,050
		*Cost of Job T81:
		Direct material (250$5)	$ 1,250
		Direct labor (800$20)	16,000
		Manufacturing overhead (800$21)	16,800
		Total cost	$34,050
	(n)	Accounts Receivable	26,600*
		Sales Revenue		26,600
		*(76 2)$700 per trombone	.
		Cost of Goods Sold	17,025**
		Finished-Goods Inventory
				17,025
		**17,025 = $34,050 2

Problem 3-57 (continued)

3.	T-accounts and posting of journal entries:
Cash		Accounts Payable
Bal	10,000						13,000	Bal
		1,200	(f)				5,000	(a)
		2,400	(h)				4,000	(b)
		8,000	(j)				2,100	(g)
		1,000	(l)

Accounts Receivable		Wages Payable
Bal.	21,000						8,000	Bal.
(n)	26,600						47,000	(d)
		Accumulated Depreciation:
Prepaid Insurance		Buildings and Equipment
Bal.	5,000						102,000	Bal.
		3,100	(i)				12,000	(e)
							4,000	(k)
Manufacturing-Supplies Inventory		Manufacturing Overhead
Bal.	500				(c)	100	35,700	(d)
		100	(c)		(d)	13,000
					(e)	12,000
					(f)	1,200
					(g)	2,100
					(h)	2,400
					(i)	3,100
Raw-Material Inventory		Cost of Goods Sold
Bal.	149,000				(n)	17,025
(a)	5,000	11,250	(c)
(b)	4,000
					Selling and Administrative
Work-in-Process Inventory		Expenses
Bal.	91,000				(j)	8,000
(c)	11,250	34,050	(m)		(k)	4,000
(d)	34,000				(l)	1,000
(d)	35,700

Problem 3-57 (continued)

Finished-Goods Inventory		Sales Revenue
Bal.	220,000						26,600	(n)
(m)	34,050	17,025	(n)

4.	(a)	Calculation of actual overhead:
		Indirect material (valve lubricant)	$   100
		Indirect labor	13,000
		Depreciation: factory building and equipment	12,000
		Rent: warehouse	1,200
		Utilities	2,100
		Property taxes	2,400
		Insurance	3,100
		Total actual overhead	$33,900
	(b)	Overapplied overhead	=
			=	$33,900 – $35,700*
			=	$1,800 overapplied
		*$35,700 = 1,700 direct-labor hours$21 per hour.
	(c)	Manufacturing Overhead	1,800
		Cost of Goods Sold		1,800

Problem 3-57 (Continued)

5.	Scholastic Brass Corporation Schedule of Cost of Goods Manufactured For the Month of March
	Direct material:
	Raw-material inventory, March 1	$149,000
	Add: March purchases of raw material	9,000
	Raw material available for use	$158,000
	Deduct: Raw-material inventory, March 31	146,750
	Raw material used		$ 11,250
	Direct labor		34,000
	Manufacturing overhead:
	Indirect material	$    100
	Indirect labor	13,000
	Depreciation on factory building and equipment	12,000
	Rent: Warehouse	1,200
	Utilities	2,100
	Property taxes	2,400
	Insurance	3,100
	Total actual manufacturing overhead	$33,900
	Add: overapplied overhead*	1,800
	Overhead applied to work in process		35,700
	Total manufacturing costs		$ 80,950
	Add: Work-in-process inventory, March 1		91,000
	Subtotal		$171,950
	Deduct: Work-in-process inventory, March 31		137,900
	Cost of goods manufactured†		$  34,050

*The Schedule of Cost of Goods Manufactured lists the manufacturing costs applied to work in process. Therefore, the overapplied overhead, $1,800, must be added to actual overhead to arrive at the amount of overhead applied to work in process during March.

†Cost of Job T81, which was completed during March.

Problem 3-57 (Continued)

6.	Scholastic Brass Corporation Schedule of Cost of Goods Sold For the Month of March
	Finished-goods inventory, March 1	$220,000
	Add: Cost of goods manufactured	34,050
	Cost of goods available for sale	$254,050
	Deduct: Finished-goods inventory, March 31	237,025
	Cost of goods sold	$ 17,025
	Deduct: Overapplied overhead*	1,800
	Cost of goods sold (adjusted for overapplied overhead)	$ 15,225

*The company closes underapplied or overapplied overhead into cost of goods sold. Hence the balance in overapplied overhead is deducted from cost of goods sold for the month.

7.	Scholastic Brass Corporation Income Statement For the Month of March
	Sales revenue	$26,600
	Less: Cost of goods sold	15,225
	Gross margin	$11,375
	Selling and administrative expenses	13,000
	Income (loss)	$ (1,625)

Problem 3-58 (20 minutes)

JOB-COST RECORD
	Job Number	T81	Description	Trombones
	Date Started	March 5	Date Completed	March 20
			Number of Units Completed	76
	Direct Material
	Date	Requisition Number	Quantity	Unit Price	Cost
	3/5	112	250	$5.00	$1,250
	Direct Labor
	Date	Time Card Number	Hours	Rate	Cost
	3/8 to 3/12	3-08 through 3-12	800	$20	$16,000
	Manufacturing Overhead
	Date	Activity Base	Quantity	Application Rate	Cost
	3/8 to 3/12	Direct-labor hours	800	$21	$16,800
	Cost Summary
	Cost Item	Amount
	Total direct material Total direct labor Total manufacturing overhead	$ 1,250 16,000 16,800
	Total cost	$34,050
	Unit cost	$448.03*
	Shipping Summary
	Date	Units Shipped	Units Remaining In Inventory	Cost Balance
	March	38	38	$17,025†

*Rounded

†$17,025 = $34,050 ÷ 2

Problem 3-59 (55 minutes)

The answers to the questions are as follows:
	1.	$216,000	6.	$60,000
	2.	$19,000	7.	$150,000
	3.	$70,000	8.	$40,000
	4.	$38,000	9.	$15,000
	5.	$80,000	10.	Zero
The completed T accounts, along with supporting calculations, follow.
Raw-Material Inventory		Accounts Payable
Bal. 10/31	15,000						12,000	Bal. 10/31
	70,000	40,000				81,000	70,000
Bal. 11/30	45,000						1,000	Bal. 11/30
Work-in-Process Inventory		Finished-Goods Inventory
Bal. 10/31	8,000				Bal. 10/31	35,000
Direct		150,000				150,000	180,000
material	40,000				Bal. 11/30	5,000
Direct
labor	80,000				Cost of Goods Sold
Overhead	60,000					180,000
Bal. 11/30	38,000

Manufacturing Overhead		Sales Revenue
	60,000	60,000					216,000
Wages Payable		Accounts Receivable
		1,000	Bal. 10/31		Bal. 10/31	8,000
	79,500	80,000				216,000	205,000
		1,500	Bal. 11/30		Bal. 11/30	19,000
Supporting Calculations:
1.	Sales revenue	=	cost of goods sold120%
		=	$180,000120%
		=	$216,000

Problem 3-59 (continued)

2.	Ending balance in accounts receivable	=	beginning balance + sales revenue – collections
		=	$8,000 + $216,000 – $205,000
		=	$19,000

3.	Purchases of raw material	=	addition to accounts payable
	Addition to accounts payable	=	ending balance + payments – beginning balance
		=	$1,000 + $81,000 – $12,000
		=	$70,000

4.	November 30 balance in work-in-process inventory	=	direct material	+	direct labor	+	manufacturing overhead
		=	$20,500 + (500)($20) + (500)($15*)
		=	$38,000
	*Predetermined overhead rate	=
		=
		=	$15 per direct-labor hour
	†Budgeted direct-labor hours	=
5.	Addition to work in process for direct labor	=	November credit to wages payable
	November credit to wages payable	=	ending balance + payments – beginning balance
		=	$1,500 + $79,500 – $1,000
		=	$80,000

Problem 3-59 (continued)

6.	November applied overhead	=	direct labor hourspredetermined overhead rate
		=	4,000*$15
		=	$60,000
	Direct labor hours	=
		=

7.	Cost of goods completed during November	=	beginning balance in work in process	+	additions during November	–	ending balance in work in process
		=	$8,000 + ($40,000 + $80,000 + $60,000) – $38,000
		=	$150,000
8.	Raw material used in November	=	November credit to raw-material inventory	=	$40,000 (given)

9.	October 31 balance in raw-material inventory	=	November 30 balance in raw-material inventory	+	direct material used	–	purchases
		=	$45,000 + $40,000 – $70,000
		=	$15,000
10.	Overapplied or underapplied overhead = actual overhead – applied overhead
	= $60,000 – $60,000
	= 0

Problem 3-60 (50 minutes)

1.	Schedule of budgeted overhead costs:
		Department A	Department B
	Variable overhead
	A  20,000$16	$320,000
	B  20,000$4		$ 80,000
	Fixed overhead	200,000	200,000
	Total overhead	$520,000	$280,000
	Grand total of budgeted overhead (A + B):	$800,000
2.	Product prices:
		Basic System	Advanced System
	Total cost	$1,100	$1,500
	Markup, 10% of cost	110	150
	Price	$1,210	$1,650
3.	Departmental overhead rates:
		Department A	Department B
	Budgeted overhead (from requirement 1)	$520,000	$280,000
	Budgeted direct-labor hours	20,000	20,000
	Predetermined overhead rates	$520,000	$280,000
		20,000	20,000
		$26 per	$14 per
		direct-labor	direct-labor
		hour	hour

Problem 3-60 (Continued)

4.	New product costs:
		Basic	Advanced
		System	System
	Direct material	$ 400	$ 800
	Direct labor	300	300
	Manufacturing overhead:
	Department A:
	Basic system 5$26	130
	Advanced system 15$26		390
	Department B:
	Basic system 15$14	210
	Advanced system 5$14	_ ____	70
	Total	$1,040	$1,560
5.	New product prices:
		Basic	Advanced
		System	System
	Total cost	$1,040	$1,560
	Markup, 10% of cost	104	156
	Price	$1,144	$1,716

Problem 3-60 (Continued)

6.	TeleTech Corporation
	Memorandum
Date:	Today
To:	President, TeleTech Corporation
From:	I. M. Student
Subject:	Departmental overhead rates

Until now the company has used a single, plantwide overhead rate in computing product costs. This approach resulted in a product cost of $1,100 for the basic system and a cost of $1,500 for the advanced system. Under the company's pricing policy of adding a 10 percent markup, this yielded prices of $1,210 for the basic system and $1,650 for the advanced system.

When departmental overhead rates are computed, it is apparent that the two production departments have very different cost structures. Department A is a relatively expensive department to operate, while Department B is less costly. It is important to recognize the different rates of cost incurrence in the two departments, because our two products require different amounts of time in the two departments. The basic system spends most of its time in Department B, the inexpensive department. The advanced system spends most of its time in Department A, the more expensive department. Thus, using departmental overhead rates shows that the basic system costs less than we had previously realized; the advanced system costs more. The revised product costs are $1,040 and $1,560 for the basic and advanced systems, respectively. With a 10 percent markup, these revised product costs yield prices of $1,144 for the basic system and $1,716 for the advanced system. We have been overpricing the basic system and underpricing the advanced system.

I recommend that the company switch to a product costing system that incorporates departmental overhead rates.

solutions to cases

Case 3-61 (45 minutes)

1.	A job-order costing system is appropriate in any environment where costs can be readily identified with specific products, batches, contracts, or projects. This situation typically occurs in a manufacturing setting when relatively small numbers of heterogeneous products are produced.
2.	The only job remaining in CompuFurn’s work-in-process inventory on December 31 is job PS812. The cost of job PS812 can be calculated as follows:
	Job PS812 balance, 11/30 ………		$250,000
	December additions:
	Direct material	$124,000
	Purchased parts	87,000
	Direct labor	200,500
	Manufacturing overhead (19,500 machine hrs$5*)	97,500	509,000
	Work-in-process inventory, 12/31		$759,000
3.	The cost of the chairs remaining in CompuFurn’s finished-goods inventory on December 31 is $455,600, calculated as follows: · Units of chairs in finished-goods inventory on December 31:
		Chair Units
	Finished-goods inventory, 11/30	19,400
	Add: Units completed in December	15,000
	Units available	34,400
	Deduct: Units shipped in December	21,000
	Finished-goods inventory, 12/31	13,400

Case 3-61 (Continued)

	Since CompuFurn uses the first-in, first-out (FIFO) inventory method, all units remaining in finished- goods inventory were completed in December.
	· Unit cost of chairs completed in December:
	Work in process inventory, 11/30	$431,000
	December additions:
	Direct material	$ 3,000
	Purchased parts	10,800
	Direct labor	43,200
	Manufacturing overhead (4,400 machine hrs$5)	22,000	79,000
	Total cost		$510,000
Unit cost = = = $34 per unit
· Cost of finished-goods inventory	= unit cost quantity
	= $34 13,400
	= $455,600

4.	Overapplied overhead is $7,500, calculated as follows:
	Machine hours used:
	January through November	830,000
	December	49,900
	Total	879,900
	Applied manufacturing overhead = 879,900 machine hours $5 = $4,399,500 Actual manufacturing overhead:
	January through November	$4,140,000
	December	252,000
	Total	$4,392,000
	Overapplied overhead	= applied overhead actual overhead
		= $4,399,500 $4,392,000
		= $7,500

Case 3-61 (Continued)

5. If the amount of overapplied or underapplied overhead is not significant, the amount is generally treated as a period cost and closed to Cost of Goods Sold. If the amount is significant, the amount is sometimes prorated over the relevant accounts, i.e., Work-in-Process Inventory, Finished-Goods Inventory, and Cost of Goods Sold.

Case 3-62 (50 minutes)

1.	Manufacturers use predetermined overhead rates to allocate to production jobs the production costs that are not directly traceable to specific jobs. As a result, management will have timely, accurate job-cost information. Predetermined overhead rates are easy to apply and avoid fluctuations in job costs caused by changes in production volume or overhead costs throughout the year.
2.	The manufacturing overhead applied through November 30 is calculated as follows:
	Machine hourspredetermined overhead rate	=	overhead applied
	73,000$15	=	$1,095,000

3.	The manufacturing overhead applied in December is calculated as follows:
	Machine hourspredetermined overhead rate	=	overhead applied
	6,000$15	=	$90,000
4.	Underapplied manufacturing overhead through December 31 is calculated as follows:
	Actual overhead ($1,100,000 + $96,000)	$1,196,000
	Applied overhead ($1,095,000 + $90,000)	(1,185,000)
	Underapplied overhead	$   11,000

Case 3-62 (continued)

5.	The balance the Finished-Goods Inventory account on December 31 is comprised only of Job No. N11-013 and is calculated as follows:
	November 30 balance for Job No. N11-013	$55,000
	December direct material	4,000
	December direct labor	12,000
	December overhead (1,000$15)	15,000
	Total finished-goods inventory	$86,000

6.	FiberCom’s Schedule of Cost of Goods Manufactured for the year just completed is constructed as follows:
	FiberCom Company Schedule of Cost of Goods Manufactured For the Year Ended December 31
	Direct material:
	Raw-material inventory, 1/1		$  105,000
	Raw-material purchases ($965,000 + $98,000)		1,063,000
	Raw material available for use		$1,168,000
	Deduct: Indirect material used ($125,000 + $9,000)	$134,000
	Raw-material inventory 12/31	85,000	219,000
	Raw material used		$ 949,000
	Direct labor ($845,000 + $80,000)		925,000
	Manufacturing overhead:
	Indirect material ($125,000 + $9,000)	$134,000
	Indirect labor ($345,000 + $30,000)	375,000
	Utilities ($245,000 + $22,000)	267,000
	Depreciation ($385,000 + $35,000)	420,000
	Total actual manufacturing overhead		1,196,000
	Deduct: Underapplied overhead		11,000
	Overhead applied to work in process		$1,185,000
	Total manufacturing costs		$3,059,000
	Add: Work-in-process inventory, 1/1		60,000
	Subtotal		$3,119,000
	Deduct: Work-in-process inventory, 12/31*		150,200
	Cost of goods manufactured		$2,968,800
	*Supporting calculations follow.

Case 3-62 (Continued)

	*Supporting calculations for work in process 12/31:
		D12-002	D12-003	Total
	Direct material	$37,900	$26,000	$ 63,900
	Direct labor	20,000	16,800	36,800
	Applied overhead:
	2,500 hrs.$15	37,500		37,500
	800 hrs.$15	______	$12,000	12,000
	Total	$95,400	$54,800	$150,200

3-58 Solutions Manual

© 2017 by McGraw-Hill Education.  All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Managerial Accounting, 11/e 3-57

© 2017 by McGraw-Hill Education.  All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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