accounting to managers 2 (3)

EXERCISES

9.

Job vs. Process Costing LO1

Product (service) costing systems are customized to provide accurate and timely cost data. A company should select a costing system that is appropriate for its production process. The following is a list of different organizations and selected products or services they provide.

· a. Physical therapy clinic (mobility therapy)

· b. Graphic design studio (logo design)

· c. Auto repair shop (miscellaneous auto repairs)

· d. Local bakery (wheat bread)

· e. Dairy (whole milk)

· f. Oil refinery (motor oil)

· g. Construction contractor (custom-built homes)

Required

Indicate whether each of the preceding organizations would most likely choose job costing or process costing.

10.

Job Costing LO2

Love’s Pottery Barn had the following costs for June:

Required

What was the cost of direct material used during June?

11.

Direct Labor vs. Indirect Labor LO2, 3

Jim Wilson is a typical manufacturing employee who commonly works 40 hours per week and is paid $14 per hour. During the last pay period, Jim performed the following activities:

Required

Jim’s employer uses job costing to measure and track production costs. The company is very concerned with maintaining accurate cost data. Determine the amount of labor costs that should be allocated to direct labor and indirect labor as manufacturing overhead.

12.

Job Costing LO3

Walter Meyer Productions had the following costs for March :

Required

How much manufacturing overhead was incurred during March?

13.

Identification of Cost Drivers LO3

Overhead costs are rarely directly linked to the production of a specific product or group of products. Generally, overhead costs are only indirectly linked to production, so they must be allocated. Understanding the relationship between overhead costs and production activities is challenging for most businesses. Consider the following:

· a. Architectural design firm: designer hours, _____

· b. Caterer and party consultancy firm: number of party guests, _______

· c. Furniture manufacturer: direct labor hours, ______

· d. Printer and copy shop: size of print or copy job, ______

· e. Textbook binder: machine hours, ___

· f. Automobile repair shop: technician labor hours, ______

· g. Winemaker: pounds of grapes used, _______

Required

Identify one additional potential cost driver that each of the organizations in “a” through “g” could use to allocate overhead to its products or services.

14.

Overhead Costs, Cost Pools, Cost Drivers

LO3, 4

The following statements describe various aspects of overhead costs and the roles of cost pools and cost drivers in the allocation of overhead.

· a. Overhead costs cause cost drivers.

· b. In traditional manufacturing environments, most overhead costs are directly related to production activities

· c. Overhead rates are calculated by multiplying manufacturing overhead costs by the volume of cost pool activity

· d. Companies that are labor intensive are likely to allocate overhead costs such as utilities expense on the basis of direct labor hours.

· e. More overhead costs in a just-in-time environment are direct in nature as opposed to indirect.

· f. A “good” allocation base is one that drives the incurrence of overhead costs.

· g. Companies generally allocate overhead equally to all products produced during a given period.

Required

Indicate whether each of the preceding statements is true or false

44.

Problems with Overhead Application: Decision Focus LO3, 4

Bergan Brewery uses the latest in modern brewing technology to produce a prizewinning beer. In both 2011 and 2012, Bergan produced and sold 100,000 cases of beer and had no raw materials, work in process, or finished goods inventory at the beginning or end of either year. At the end of 2011, the company installed machines to perform some of the repetitive tasks previously performed with direct labor. At the beginning of 2012, Bergan’s bookkeeper estimated that net income would increase from $530,000 in 2011 to $706,000 in 2012:

*

For 2012, overhead was applied at the 2011 rate of $9.50 per direct labor hour for an estimated 2,000 hours of direct labor. A total of 10,000 direct labor hours were worked in 2011. Bergan’s bookkeeper estimates that 5,000 machine hours will be worked in 2012.

However, when actual overhead was used to calculate net income at the end of the year, net income decreased from $530,000 in 2011 to $435,000 in 2012:

Required

· A. What potential problems do you see in the bookkeeper’s income estimate for 2012?

· B. On the basis of the information given, would you change the cost driver or predetermined overhead rate for 2012? What cost driver would you suggest? What would be the new predetermined overhead rate?

· C. Using the cost driver and predetermined overhead rate you suggested in B, and assuming that 5,000 machine hours will be incurred, recalculate Bergan’s estimated net income for 2012.

· D. Bergan has set a goal of increasing net income to $550,000 in 2013. However, sales are expected to be flat. How might the company reach its goal of increasing income to $550,000? What qualitative factors should be considered in its decision?