Cost Accounting

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Rethink the solutions to the problems as most of them are incorrect.

For example:

· Part 2 Section A – The content (numbers) and formatting are incorrect. The Production Cost Report should have 5 columns:

· 1) Total

· 2) Prior Department Costs

· 3) Materials

· 4) Labor

· 5) Mfg Overhead

· Part 2 Section B – This is not a report. It is a paragraph. This section asks for a “Report to Management” which includes your findings for materials, labor and manufacturing overhead with the goal and outcome stated. There is no example. You are to “design” you own official report.

· Part 2 Section C - See the above for section A as this is the same issue.

· Part 2 Section D - See the above for section A as this is the same issue.

Please rework and resubmit the graded project for grading.

Part 1: Job Costing

Crandall Corporation

Direct labor rate – $21 per hour

Predetermined rate on direct labor hours is used to assign overheads to jobs

Start of year 3: Two jobs not yet delivered

Job-AT 360- completed on December 2015- year 2- ship out Jan 21 year 3

Job-AT 365- still in progress

Year 2 predetermined rate : $155 per dlh

A. Amounts in the beginning finished goods and work in process accounts for year 3

WIP Inventory

Year 2

Direct labor (Note 1) $ 2,478,000

Overheads $15,340,000

Total production costs $17,818,000

Beginning of year 3: Finished Goods

Job-AT-360

Opening Inventory 0

Add purchases 0

Less total cost of production

Direct materials $680,000

Direct labor (2) $100,800

Overheads (3) $744,000

($1,524,800)

Less ending inventory 0

Beginning finished goods (Job –AT 360) on year 3 ($1,524,800)

For the Work-In-Process (Job-AT 365)

Beginning Inventory 0

Add purchases 0

Less total cost of production

Direct materials $947,000

Direct labor (4) $130,200

Overheads (5) $961,000

Less finished goods 0

Total beginning WIP (Job AT 365) ($ 2,038,200)

B. Direct materials cost- $210,000

Additional -800 hours

The total cost charged to Job-AT 365 will be:

Opening WIP $ 2,038,200

Add:

Direct materials $210,000

Direct labor (6) $147,000

Overheads (7) $1.085, 000

Final Total cost $3,480,200

C. The over applied/ under applied overhead for year 3 will be :

Actual overhead = $18,609,400

Budgeted overhead =

Predetermined rate for year 3= Year 2 actual overheads/ direct labor hours

Predetermined rate = $15,340,000/118,000= $130 per direct labor hour

The budgeted overhead will be: 130* 150,000= $19,500,000

The under-applied overhead = $ 19,500,000- $ 18,609,400 = $890,600

D. Proration of the $890,600 overhead amount :

At the end of year 3:

Total direct labor hours: 34,000

The cost of goods sold overheads will be: 13,500/34,000* 890,600= $353,620.59

Finished goods inventory overheads will be: 13,000/34,000*890,600= $ 340,523.53

WIP inventory overheads will be: 7,500/34,000*890,600=$ 196,455.88

Journal entry: Dr Cr

Cost of goods sold a/c $353,620.59

Finished goods a/c $340,523.53

WIP overheads a/c 196,455.88

Overhead expense $ 890,600

(To record proration of the overhead cost)

E. Direct materials: $156,000

Direct labor hours : 8,000

Variable overhead determination:

Labor hours Indirect labor cost

144,000 $4,580,000

118,000 $ 5,603,340

Under the high-low method ; Y= a+bX

b = $( 5,603,340 – 4,580,000)=1,023,340/(144,000-118,000)= $39.36 per hour –Is the variable component

The fixed portion will be: 5,603,340- 39.36*118,000= 958,860

Y= 958,860+39.36 X

Total overhead costs for the bid : 958,860+(39.36*8,000)= $ 990,348

Total costs will be : 156,000+ (21*8,000) +990,338 = $ 1,314,348.This is the minimum price the company should bid in order to avoid losses.

Part Two : Process Costing

Interpid Industries

Costing method – Weighted Average costing method

Departments : Forming, sterilization and Assembling

A. Production Cost Report using the Weighted Average Method:

Forming Assembly Sterilization

Costs to be accounted for

Beginning WIP Inventory-250,000 units

Costs transferred from forming $387,600

Costs added by sterilization department

Direct materials 317,200

Direct labor 0.4*120,050=48,020

Manufacturing overhead 0.3*67,100= 20,130

During June

Units transferred in 580,000

Cost of transfer $1,870,000

Direct materials $974,800

Direct labor $318,600

Manufacturing overhead $202,000

Units transferred out 480,000

WIP ending inventory 350,000

Computation of

Units transferred out 480,000

WIP ending inventory 350,000

Computation of units accounted for

Forming Assembly Sterilization

Beginning WIP 250,000 units

Units transferred in 580,000 units 480,000 units

Ending WIP 350,000 units

Computation of equivalent units

Prior department costs $387,600*100%

Direct materials 317,200*100%

Direct labor 120,050*40%

Manufacturing overhead 67,100*30%

Ending WIP

Direct materials 350,000*80%

Direct labor 350,000*65%

Manufacturing overhead 350,000*50%

Total costs to be accounted for:

Beginning WIP

Prior department costs $387,600

Add

Direct materials $317,200

Direct labor $48,020

Manufacturing overhead $ 20,130

Costs during the month

Transferred units $1,870,000

Direct materials $974,800

Direct labor $ 318,600

Manufacturing overhead $202,000

Total costs for June $387,600 $3,365,400 $385,350 = $ 4,138,350

Total units = 1,660,000

Cost per equivalent unit = $ 4,138,350/ 1,660,000

=$ 2.49 per unit

The production costs report will be

Interpid Industries

Production Cost Report

For the month ended 30th June

Forming Assembly Sterilization

Beginning Inventory

Prior department $387,600

Direct materials $317,200

Direct labor $48,020

Manufacturing overhead $ 20,130

Costs during the month

Transferred units $1,870,000

Direct materials $974,800

Direct labor $ 318,600

Manufacturing overhead $202,000

Total costs for June $387,600 $3,365,400 $385,350

B. Costs per unit : Assembling department

Materials $ 1.65

Labor $ 0.62

Overhead $0.48

Total costs in the assembling department :

Materials : $1.65*480,000*0.80 = 633,600

Labor : $ 0.62*480,000*0.65 = 193,440

Overhead : $0.48*480,000*0.30= 69,120

Total costs: $ 896,160

Report to the Management

By setting the unit targets for materials , labor and overheads at $1.65 , $0.62 and $ 0.48 respectively, the overall total cost in the assembly department will reduce as shown in the above computation. This is in line with the overall managerial cost goal which is to keep the costs as low as possible. The product to this effect has achieved the management’s targets in the costing department. Further concerns to make this as effective as possible will be to capitalize on the degree of completion so that the costs are kept as low as possible.

C. Computation of units

Beginning inventory units : 250,000

Costs associated

Prior department costs $ 387,600

Sterilization department costs

Direct materials $ 315,700

Direct labor $ 48,020

Manufacturing overhead $ 20,130

Total costs associated $771,450

Cost per equivalent unit $ 771,450/ 250,000= $ 3.086

Interpid Industries

Production Cost Report

For the period ended 30th June

Forming Assembly Sterilization

Beginning Inventory

Prior department costs $ 387,600

Direct materials $974,800 $ 315,700

Direct labor $318,600 $ 48,020

Manufacturing overhead $ 202,000 $ 20,130

$387,600 $ 1,495,400 $ 383,850

Transferred units $ 1,789,880 $1,481,280

Ending WIP $ 1,080,100

Total Costs $ 387,600 $3,285,280 $2,945,230

D. Report to the Management

The setting of unit targets in the assembly department at $ 1.65 for direct materials, $ 0.62 for labor and $ 0.48 for manufacturing overhead will help achieving the overall cost goal of keeping the costs of production as low as possible. Using the FIFO method, the total cost of production in the assembly department was $ 3,285,280.However by setting these targets, the total cost becomes $ 896,160 which is way too low.

Part 3: Activity –Based Costing

A. Under the current system

Deluxe Premium Standard

Total direct costs $ 850,000 $ 850,000 $ 850,000

Overhead costs(Note1) $ 170,931.65 $ 341,861.8 $264,667.2

Total Costs $ 1,020,931.65 $1,191,861.8 $1,114,667.2

The overhead rate will be : $ ( 5,420,000+5,420,000+10,940,000)= $ 21,780,000/ ( 12400+8500+18600)

= $ 551.39 per direct labor hour

Note:

1. The overhead costs are a product of the overhead rate* the number of deliveries for each product

B. Cost driver rates associated with the cost pools

Cost pool Costs Activity drivers Cost driver rate

Utilities $ 5,420,000 180,000 machine hours 5,420,000/ 180,000= $30.11 per machine hour

Delivery $ 5,420,000 10,000 deliveries 5,420,000/10,000= $ 542 per delivery

Assembly $ 10,940,000 2,000,000 pounds of material $ 10,940,000/2,000,000= $5.47 per pound of material

C. What Computation of the unit product costs under the ABC system

Deluxe Premium Standard

Total direct costs $ 850,000 $ 850,000 $ 850,000

Total overheads:

Utilities $ 30.11* 210,000 $30.11*95,000 $30.11*154,000

Delivery $542 *310 $542*620 $ 542*480

Assembly $5.47*1,800,000 $ 5.47*1,200,000 $5.47*2,600,000

Total production costs( x) $ 17,187,120 $ 10,610,490 $9,020,460

Number of units produced( y) 18,000 12,000 24,000

Unit production cost(x/y) $954.84 $884.21 $375.53

Workings:

1. 118,000*21= $2,478,000

2. 4800*21= $ 100,800

3. 155*4800= $744,000

4. 6200*21= $130,200

5. 155*6200= $961,000

6. (6200+800)* 21=$147,000

7. 155*7000= $ 1,085,000