Chapter 4
Accumulating and
Assigning Costs to
Products
QUESTIONS
4-1 The cost of the raw materials entered into production is moved from the raw materials account to the work-in-process inventory account. The cost of manufacturing labor and overhead items are assigned to production by adding them to the work-in-process inventory account. Overhead costs are assigned (or allocated or apportioned) as determined by the cost system. When manufacturing is completed, work is transferred to finished goods inventory, and costs are moved from the work-in-process inventory account to the finished goods inventory account. Finally, when goods are sold their costs are moved from the finished goods inventory account to cost of goods sold.
4-2 Manufacturing organizations face greater challenges in product costing, especially the assignment of overhead costs, than retail or service organizations do. The basic idea behind all manufacturing costing systems is to determine the costs that products accumulate as they consume organization resources during manufacturing, as described above in 4-1. In retail organizations, goods are purchased rather than manufactured; the cost of the goods purchased is entered into an account that accumulates the cost of merchandise inventory in the store. Stores incur various overhead costs such as labor, depreciation on the store, lighting, and heating. The primary focus in retail operations is the profitability of product lines or departments. Therefore, retail organizations, like manufacturing operations, face the issue of how to allocate various overhead costs to determine, for example, the cost of purchasing and selling products, or department costs.
Service organizations that undertake major projects, such as in a consultancy, focus on determining the cost of a project. In such situations, the major direct cost, employee pay, is often a large proportion of the project’s cost. The organization will also assign various overhead costs to determine project profitability
4-3 A cost object is anything for which a cost is computed. Examples of cost objects are activities, products, product lines, customers, patients, departments, or even entire organizations.
4-4 The defining characteristic of a consumable (flexible) resource is that its cost depends on the amount of resource that is used. Examples of consumable resources are wood in a furniture factory, fabric in a clothing factory, and iron ore in a steel mill. The cost of a consumable resource is often called a variable cost because the total cost depends on how much of the resource is consumed. The contrasting defining characteristic of a capacity-related resource is that its cost depends on the amount of resource capacity that is acquired and not on how much of the capacity is used. As the size of a proposed factory or warehouse increases, the associated capacity-related cost will increase. Examples of capacity-related costs are depreciation on production equipment (the capacity-related resource) and salaries paid to employees (the capacity-related resource) in a consultancy. The cost of a capacity-related resource is often called a fixed cost because the cost of the resource is independent of how much of the resource is used.
4-5 Direct and indirect costs are specified in relation to distinct cost objects. A direct cost is a cost that is uniquely and unequivocally attributable to a single cost object. If the cost fails the test of being direct it is classified as indirect with respect to the designated cost object. For example, if the cost object is a unit of product, then direct material (e.g., wood, steel) and direct labor are direct costs, and manufacturing overhead costs (e.g., factory rent, supervisors’ salaries) are indirect costs. However, if a department within a plant is the chosen cost object, then the department manager’s salary is a direct cost for the department (assuming the manager only manages that department) and the cost of heat for the plant is an indirect cost.
4-6 From the time of the Industrial Revolution until the early 20th century, manufacturing operations were mainly labor paced and direct costs comprised the majority of product costs. Since then indirect costs in the form of automation have gradually replaced labor costs and, for many products, are now the major component of total product costs. This increased use of indirect costs in manufacturing has increased the need for costing systems to deal adequately with indirect manufacturing costs.
4-7 In the context of computing a predetermined indirect cost rate, a cost driver is the basis used to allocate indirect costs to production. Once the cost driver is
the indirect cost. In a labor-intensive environment the cost driver of indirect costs in the factory might be labor hours as factory workers use factory space, utilities, and other overhead resources to make products. In a machine-intensive environment the cost driver of indirect costs in the factory might be machine hours because machines consume electricity, lubricant, and other supplies to make products.
4-8 In practice, predetermined indirect cost rates are commonly called predetermined overhead rates or cost driver rates.
4-9 Costs need to be estimated for individual jobs in order to bid for them and to price them competitively. Costs may differ across individual jobs because jobs may differ in their materials content, the hours of labor required to manufacture them, and in the demand they place on capacity-related resources. Estimated costs are also useful for comparison with actual costs for management control purposes.
4-10 Indirect cost rates (also called predetermined indirect cost rates, predetermined overhead rates, or cost driver rates) are determined by dividing expected indirect factory costs by the number of cost driver units.
4-11 Overhead cost for a job is estimated by multiplying the cost driver rate(s) by the number of units of the cost driver(s) associated with the job.
4-12 Indirect cost pools collect overhead costs into separate groups, for each of which a separate cost driver rate is associated.
4-13 Most organizations use multiple indirect cost pools in order to improve costing. Cost distortions arise when an indirect cost pool includes costs with different cost drivers and where different products use the capacities underlying the indirect costs differentially. (The increase in measurement costs for a more detailed cost system, however, must be traded off against the benefit of increased accuracy in estimating product costs.)
4-14 Determination of cost driver rates based on planned or actual short-term usage will result in rates that are too high in periods of low demand and that are too low in periods of high demand. Thus, product costs are distorted in such a costing system. If management uses cost-plus pricing, a death spiral can result, as follows. If expected demand goes down, the cost driver rate will increase, causing the cost-plus price to increase. Increasing prices cause demand to fall, which leads to further price increases as the cost driver rate increases the cost-plus price.
4-15 Unlike direct material costs and direct labor costs, overhead costs cannot be traced easily to each job. When actual costs are recorded for a job during the course of a fiscal period, the total overhead costs for the period and consequently, the actual cost driver rate is not yet determined. Therefore, costs are applied to jobs using predetermined rates.
4-16 Yes. A separate cost driver rate should be determined for each cost pool when multiple cost drivers (where “cost driver” refers to a cause of costs, as discussed in Chapter 3) are involved, or else job cost estimates may be distorted. The increase in measurement costs for a more detailed cost system, however, must be traded off against the benefit of increased accuracy in estimating product costs. Though not covered in the textbook, students may note that if the different cost drivers vary together in the same proportion (for example, if machine hours and direct labors hours are used in the same proportions as the total number of units increases), then any one of them will be sufficient.
4-17 The three options for dealing with the difference between actual and applied capacity (overhead) costs are: (1) Charge the difference to cost of goods sold; (2) Prorate the difference to work in process, finished goods, and cost of goods sold; (3) Decompose the difference into two parts: the difference between actual and budgeted indirect costs, and the difference between budgeted and applied indirect costs.
4-18 Computing the cost driver rate by using the planned level of the cost driver will result in rates that are too high in periods of low demand and that are too low in periods of high demand. If management uses cost-plus pricing, a death spiral can result, as follows. If expected demand goes down, the cost driver rate will increase, causing the cost-plus price to increase. Increasing prices cause demand to fall, which leads to further price increases as the cost driver rate increases the cost-plus price. This cycle can continue until there is no further demand, hence the term “death spiral.”
4-19 Estimating practical capacity begins with an estimate of theoretical capacity. Suppose a machine is nominally available for 100 hours each week. That is, theoretical capacity is 100 hours each week. A common rule of thumb is to allow about 20% of theoretical capacity or, in this case, 20 hours for activities such as maintenance, setup, and repair. In the case of labor hired for the year, theoretical capacity is 2,080 hours (52 weeks, 40 hours per week). However, workers on average have 3 weeks off and, with breaks, work about 35 hours
theoretical capacity. Alternatively, for both machines and labor, detailed records of nonproductive time may provide a more accurate level of practical capacity.
4-20 Conversion costs are the costs of converting raw materials into finished products. They include all manufacturing costs that are not direct materials costs; that is, conversion costs consist of production labor and factory overhead costs.
4-21 Continuous processing plants are characterized by the fact that production flows continuously, semi-continuously, or in large batches from one process stage to the next. At each successive process stage, further progress is made toward converting the raw materials into finished products. Therefore, the product costing system must accumulate conversion costs assigned to individual products for successive process stages. Product costs must also reflect the input materials in each process stage.
The total cost of all products is determined by adding up all material and conversion costs used to produce the products and then dividing by the number of products produced to get a cost per unit. More specifically, the steps are:
1. Identify the physical flow of units
2. Compute the equivalent units for materials and conversion costs 3. Identify the costs of materials and conversion costs
4. Compute the cost per equivalent unit.
4-22 Multistage process costing systems have the same objective as job order costing systems. Both types of systems assign material, labor, and manufacturing overhead costs to products to determine product costs. The two types of systems differ, however, on some dimensions. In a job order environment, production requirements vary across different jobs, so production occurs job by job and costs are measured for individual jobs. In a multistage process environment, production requirements are homogeneous across products or jobs, so production occurs continuously, semi-continuously, or in large batches, and costs are measured for individual process stages.
4-23 Production departments are those directly responsible for transforming raw materials into finished products or for providing services for customers. Service departments do not directly produce goods or services for customers, but instead provide services to the departments or activities that produce
goods or services. In a manufacturing setting, production engineering and machine maintenance are service departments for the production departments.
EXERCISES
4-24 (a) Famous Flange’s previous cost driver rate was $4,000,000 100,000 = $40 per machine hour. With the drop in demand, the cost driver rate is now $4,000,000 80,000 = $50 per machine hour. The company will consequently raise its prices because the products will have higher reported costs. If demand decreases further and the company continues to use the same method to determine its cost driver rate, the rate will continue to increase, and the company will want to raise its prices even more. However, the rising prices may contribute to further declines in demand, leading the company into a downward spiral.
(b)Famous Flange should use the practical capacity quantity of machine hours to determine the cost driver rate in order to avoid the fluctuations described in part (a) and to understand the cost driver rates at the point where the cost of the resources provided (the numerator) is matched with the practical capacity usage provided (the denominator). If resource usage is less than practical capacity, the company should monitor the cost of unused capacity. Famous Flange may be able to reduce the capacity costs or to find other profitable uses for the capacity.
4-25 The practical capacity number of machine hours per month is (6.5 hours per shift) × (2 shifts per day) × (22 days per month) × (40 machines) = 11,440. 4-26 The practical capacity number of labor hours per year is (34 hours per worker
per week) × (30 workers per shift) × (2 shifts per day) × (48 weeks per year) = 97,920.
4-27 (a) Direct material Quantity Price Amount
Part A327 1,000 units $60 $60,000
Part B149 1,000 units 120 120,000
Total direct material cost $180,000
Direct labor Hours Rate Amount
Assembly 6,000 $10 $60,000
Inspection 1,000 12 12,000
Total direct labor cost 7,000 $72,000
Overhead costs Amount
7,000 Direct labor hours
$5 per hour $35,000
Total cost $287,000
Number of units produced 1,000
(b) Selling price per monitor $350
Cost per monitor 287
Gross margin per monitor $ 63
4-28 Direct material Quantity Price Amount
Engine oil 11 ounces $2 $22
Lubricant 2 ounces 3 6
Total direct material cost $28
Direct labor Hours Rate Amount
Direct labor 3 $15 $45
Overhead costs Amount
3 Direct labor hours $10 per hour $ 30
Total cost $103
4-29 (a) Cost driver rate:
labor cost direct labor cost
$5, , $2, , 000 000 500 000 direct 2
(b) Consulting engagement cost:
Labor cost $25,000
Overhead cost
2 labor cost 50,000
Total cost $75,000
4-30 (a) Cost driver rate for the machine department: $350,000/14,000 machine hrs = $25/machine hr Cost driver rate for the finishing department: $280,000/$350,000 = 80% of DL cost (b) Machining Department Finishing Department Total
Direct materials cost $8,000 $1,400 $9,400
Direct labor cost 250 800 1,050
Manufacturing overhead 1,250a 640b 1,890
Total costs of Job 101 $9,500 $2,840 $12,340
a $1,250 = $25 × 50 b $640 = 80% of 800
4-31 (a) Plantwide cost driver rate:
$60,000
4,000 direct labor hours $15 per direct labor hour
(b) Departmental cost driver rates: Cutting Department:
$25,000
4,000 machine hours per machine hour $6.25
Assembly Department:
labor hours $11.67 per direct labor hour
$35, ,
000 3 000 direct
(c) The company may favor the method in (b) if overhead costs in the cutting department have a cause-and-effect relationship with machine hours, while those in the assembly department have a cause-and-effect relationship with direct labor hours. The company may use the method in (a) because it is simpler than the method in (b), which is potentially more accurate.
4-32 (a) Month Actual Machine Hours Monthly Overhead Costs
January 1,350 $51.85 February 1,400 $50.00 March 1,500 $46.67 April 1,450 $48.28 May 1,450 $48.28 June 1,400 $50.00 July 1,400 $50.00 August 1,400 $50.00 September 1,500 $46.67 October 1,600 $43.75 November 1,600 $43.75 December 1,600 $43.75 Total Hours 17,650
(b) The cost driver rate should be determined as the ratio of the estimated cost accumulated in the cost pool to the practical capacity of the cost driver (the basis for assigning overhead). For Morrison’s machine-related overhead costs, the computation is:
$70, $46. 000 12 12 67 months
1,500 machine hours months per machine hour
If the cost driver rate is based instead on actual or budgeted activity quantities that fluctuate over time, then overhead costs assigned to products will be understated in periods of high demand and overstated in periods of low demand, as shown in part (a). If Morrison’s overhead costs are caused by multiple variables (cost drivers, as defined in
Chapter 3), the company may develop a more accurate cost system by using multiple cost driver rates.
4-33 Ingredient A: $0.40 × 10,000 $4,000
Ingredient B: $0.60 × 20,000 12,000 $16,000
Conversion costs: $0.55 × 30,000 $16,500
Total costs $32,500
Number of gallons of blended vegetable juice 27,000
Cost per gallon of blended vegetable juice $1.204
4-34 Direct materials $232,000
Direct labor 120,000
Overhead costs 60,000
Disposal costs of waste product 20,000
Total costs $432,000
Number of pounds of Goody 200,000
Cost per pound of Goody $2.16
4-35
Materials Conversion Completed and transferred out
gallons 6000 100% 6000 6000
Ending work-in-process gallons 4000 25%; 4000 10% 1000 400
Equivalent units of production 7000 6400
4-36 (a) Allocation of machine setup costs:
Assembly Dept.: $40,000 300 $30, 300 100 000 Finishing Dept.: $40,000 100 $10, 300 100 000
(b) Allocation of inspection costs:
Assembly Dept.: $15,000 200 $4, . 200 500 285 71 Finishing Dept.: $15,000 500 $10, . 200 500 714 29
4-37 Service Departments Production Departments S1 S2 P1 P2 Overhead costs $65,000 $55,000 $160,000 $240,000 Allocation of S1 costs (65,000) 15,000 20,000 30,000 Allocation of S2 costs — (70,000 ) 33,600 36,400 Total allocated overhead costs $0 $0 $213,600 $306,400 4-38 (a) P1 P2 S1 $300: ,000 30 $150, 30 30 000 $300,000 $150, 30 30 30 000 S2 : $300,000 25 $100, 25 50 000 $300,000 50 $200, 25 50 000 $250,000 $350,000 (b) S1 S2 P1 P2 Directly identified costs $300,000 $300,000 Allocation of S1 costs ($300,000) 120,000 $90,000 $90,000 Allocation of S2 costs (420,000) 140,000 280,000 Totals $0 $0 $230,000 $370,000 (c) S1$300,000 0 25 . S2 S2$300,000 0 4 1 . S
Therefore, S1 S1 S S1 S1 S2 $300, . $300, . $375, . . $375, $375, . $416, $300, . $416, $466, 000 0 25 000 0 4 000 01 1 0 9 000 000 0 9 667 000 0 4 667 667
Allocation of S1 and S2 costs to P1 and P2
P1 P2
S1: $416,667 30% $125,000 $416,667 30% $125,000 S2: $466,667 25% $116,667 $466,667 50% $233,333
$241,667 $358,333
The summary below incorporates the allocation of 0.25 × S2 = $116,667 to S1 and 0.4 × S1= $166,667 to S2. S1 S2 P1 P2 Directly identified costs $300,000 $300,000 Allocation of S1 costs (416,667) 166,667 $125,000 $125,000 Allocation of S2 costs 116,667 (466,667) 116,667 233,333 Total $0 $0 $241,667 $358,333
PROBLEMS
4-39 (a) Plantwide cost driver rate = $15,000,000/100,000 machine hours = $150 per machine hour
Applied overhead = $150 90,000 = $13,500,000 (b) Actual overhead − applied overhead
= $14,200,000 − $13,500,000 = $700,000
Overhead is underapplied, so an adjustment will be made to increase the previously recorded cost of goods sold by $700,000.
(c) Work in process, finished goods, and cost of goods sold will be increased by $700,000 times 20%, 45%, and 35%, respectively. These increases are $140,000, $315,000, and $245,000, respectively.
(d) Actual overhead − estimated overhead
= $14,200,000 − $15,000,000 = − $800,000 Estimated overhead − applied overhead
= $15,000,000 − $13,500,000 = $1,500,000
(e) The approach in part (d) develops information that helps identify the reasons for the difference between actual and applied costs, and is therefore relevant for internal decision making purposes. The difference between actual and estimated overhead cost is –$800,000. The lower actual cost creates a favorable effect on income, relative to the budgeted cost. The difference between estimated and applied overhead cost results from idle capacity. Recall that the machine hour practical capacity was 100,000 while the actual machine hours used totaled 90,000. This means that idle capacity was 10,000 (100,000 – 90,000) machine hours with an associated idle capacity cost of $1,500,000 (10,000 × $150). Management will likely seek explanations for why actual overhead differed from estimated overhead, and why applied overhead differed from estimated overhead. In response to these explanations, management might revise the overhead budget or explore new product opportunities to use the idle capacity.
4-40 (a) Cost driver rate:
Salaries of mechanics $120,000
Fringe benefits 54,000
General and administrative 18,000
Depreciation 42,000
Total conversion costs $234,000
Billable hours 4,500
Conversion cost per billable hour $52.00
Markup 1.25
Cost driver rate $65.00 per DL hr
(b) Job 254: Job 254
Materials $47.40
Conversion cost plus markup: 0.7 DL hours $65 45.50
4-41
Job 101 Job 102 Job 103
Beginning Work in Process $25,500 $32,400 $0
Department 1 Driver Driver Driver
Direct materials $40,000 $26,000 $58,000
Direct labora 500 DL hrs 6,000 400 DL hrs 4,800 300 DL hrs 3,600
Manufacturing
overheadb $40,000 DM 60,000 $26,000 DM 39,000 $58,000 DM 87,000
Department 2 Driver Driver Driver
Direct materials $3,000 $5,000 $14,000
Direct labora 200 DL hrs 3,600 250 DL hrs 4,500 350 DL hrs 6,300
Manufacturing
overheadb 1200 mh 9,600 1500 mh 12,000 2700 mh 21,600
Department 3 Driver Driver Driver
Direct materials $0 $0 $0
Direct labora 1500 DL hrs 22,500 1800 DL hrs 27,000 2500 DL hrs 37,500
Manufacturing
overheadb $22,500 DL 45,000 $27,000 DL 54,000 $37,500 DL 75,000
Total Costs $215,200 $204,700 $303,000
a Direct labor rates:
Department 1: $12 per DL hr Department 2: $18 per DL hr Department 3: $15 per DL hr
b Cost driver rates:
Department 1: 150% of DM cost Department 2: $8 per machine hr Department 3: 200% of DL cost
(a) Total cost of completed Job 101 $215,200 (b) Total cost of completed Job 102 $204,700
4-42 (a) Allocating costs in proportion to the number of actual passengers can be justified by the argument that the service center costs should be spread equally over all passengers because each passenger uses approximately the same amount of service center resources.
Week Boston Cambridge
1 $4,800 $2,400 2 4,500* 2,700 3 5,118 2,482 4 5,200** 2,600 5 5,100 2,100 * 1 500 2 400 7 200 500 , , , $4, ** 1 700 2 550 7 800 200 , , , $5,
(b) Another alternative is to allocate $3 = $7,200/2,400 per passenger. Using this approach to allocate service center costs is justified by the argument that the service center costs are caused primarily by the capacity that is made available rather than the actual usage of the committed resources.
Week Boston Cambridge Unallocated
1 $4,800* $2,400 –
2 4,500 2,700 –
3 4,950 2,400 $250
4 5,100 2,550 150
5 5,100 2,100 –
* 1,600 passengers $3 per passenger
Another alternative is to allocate normal costs 2:1 (1,600:800) based on long run demand and additional help costs in the proportion of additional demand. This method best reflects the factors that cause the costs to be incurred.
Week Boston Cambridge 1 $4,800 $2,400 2 4,800 2,400 3 5,200* 2,400 4 5,200** 2,600 5 4,800 2,400 * 5,200 = 4,800 + (7,600 – 7,200) **5,200 (1,7007,8001,600(1,700) (8501,600800) )
4-43 (a) Plantwide cost driver rate
$120, $160, ( , ) $280, , $14 000 000 8 000 12,000 000 20 000 direct
direct labor hours
labor hours per direct labor hour Job Cost Sheet: Job #714
Direct materials
Milling $800
Assembly 50
Total direct material cost $850
Direct labor
Milling $100
Assembly 600
Total direct labor cost 700
Manufacturing Overhead
50 Direct labor hours $14 per hour 700
(b) Cost driver rate Milling machine hours per machine hour
$120, $10 000 12,000
Cost driver rate Assembly
direct labor hours per direct labor hour
$160, $13. 000 12,000 33 Job Cost Sheet: Job #714 Direct materials
Milling $800
Assembly 50
Total direct material cost $850.00
Direct labor
Milling $100
Assembly 600
Total direct labor cost 700.00
Overhead
Milling: 18 machine hours $10 per hour $180.00 Assembly: 40 direct labor hours $13.33 per hour 533.20
Total overhead cost 713.20
Total cost $2,263.20
(c)
Part (a) Part (b)
Manufacturing cost $2,250.00 $2,263.20
25% markup 562.50 565.80
Bid price $2,812.50 $2,829.00
(d) The company may favor the method in (b) if overhead costs in the milling department have a cause-and-effect relationship with machine hours, while those in the assembly department have a cause-and-effect relationship with direct labor hours. In this case, the computed total manufacturing cost in part (a) is of similar magnitude to the cost in part (b), and therefore the bid prices are also of similar magnitude. Given this result, one might be inclined to use the simpler method in part (a) rather than the more accurate but more complex method in part (b).
4-44 (a) Cutting Grinding Drilling Total Overhead
cost $504,000 $2,304,000 $2,736,000 $5,544,000
Direct
labor hours 60,000 96,000 144,000 300,000
Plantwide cost driver rate: $5,
, $18.
544,000
300 000 direct labor hours 48 per direct labor hour Overhead cost applied to Job ST101:
$18.48 × (2,000 + 2,500 + 3,000) = $138,600. (b) Cost driver rate: Cutting
$504,
, $0.
000
960 000 525per machine hour Cost driver rate: Grinding
$2,
, $24
304,000
96 000 direct labor hours per direct labor hour Cost driver rate: Drilling
$2, ,
$19 736 000
144,000 direct labor hours per direct labor hour Overhead cost applied to Job ST101:
Dept Rate Units of Driver Used Overhead Cost
Cutting $0.525 20,000 MH $10,500
Grinding $24.00 2,500 DLH 60,000
Drilling $19.00 3,000 DLH 57,000
$127,500
(c) The company may favor departmental cost driver rates if overhead costs in the cutting department have a cause-and-effect relationship with machine
hours, while those in the grinding and drilling departments have a cause-and-effect relationship with direct labor hours. The company may use a plantwide cost driver rate because it is simpler than using multiple departmental rates, though the departmental rate method is potentially more accurate.
4-45 (a) Cost driver rate for machining: $500,
, $25
000
20 000 machine hours per machine hour Cost driver rate for finishing:
$400,
$500, .
000
00080%of direct labor cost
(b) Machining
Department DepartmentFinishing Total
Direct material cost $12,000 $2,000 $14,000
Direct labor cost 300 1,200 1,500
Manufacturing overhead
2,000a 960b 2,960
Total costs of Job 511 $14,300 $4,160 $18,460
a 2 000, $2580 b $96080%of1 200,
(c) Gonzalez Company likely believes that its manufacturing overhead costs are driven by different factors in each manufacturing department. Specifically, overhead costs in the machining department have a cause-and-effect relationship with machine hours, while those in the finishing department have a cause-and-effect relationship with direct labor costs.
4-46 (a)
Mixing and Reaction Pulverizing Blending Chambers and Packing Total conversion costs $424,600 $1,551,000 $559,900 Total number of process hours 8,760 35,040 8,760 Conversion cost per process hour $48.470 $44.264 $63.916 (b) Costs C206 C208 Materials: Raw materials $1,488.00 $1,488.00 Packing materials $175.20 $280.80 $1,663.20 $1,768.80 Conversion costs:
Mixing and blending: 6 hrs $48.470 290.82 290.82 Reaction chamber: 24 hrs $44.264 1,062.34 1,062.34 Pulverizing and packing: 4 hrs $63.916, 255.66
8 hrs $63.916 511.33
Total conversion costs $1,608.82 $1,864.49
Total cost $3,272.02 $3,633.29
4-47 (a)
Materials Conversion Completed and
transferred out units 8000 100% 8,000 8,000
Ending WIP units 4000 40%; 4000 25% 1,600 1,000
EUs of production 9,600 9,000
(b)
Materials Conversion Total
Costs, beginning of October $1,050 $3,240 $4,290
Added during October 8,200 22,620 30,820
To be accounted for $9,250 $25,860 $35,110
EUs of production 9,600 9,000
Cost per equivalent unit $0.96 $2.87 $3.83
Materials Conversion Costs, beginning of October $1,050 $3,240 Corresponding equivalent units 1,400 1,200
Cost per equivalent unit $0.75 $2.70
Costs added during October $8,200 $22,620 Corresponding equivalent units* 8,200 7,800
Cost per equivalent unit $1.00 $2.90
*Equivalent units: Materials Conversion
Completed during October from
beginning WIP 2000 30% = 600 2000 40% = 800
Equivalent units in ending WIP 4000 40% = 1600 4000 25% = 1000 Started and completed during
October:
(12,000 – 2,000 – 4,000) 100% 6000 6000
Total EU s in October 8200 7800
The costs per equivalent increased in October (materials increased from $0.75 to $1 and conversion cost increased from $2.70 to $2.90). The weighted average method produces weighted average equivalent unit costs of $0.96 and $2.87 for materials and conversion cost, respectively.
4-48 (a) Service Departments Production Departments Personnel Maintenance Machining Assembly Directly identified costs $100,000 $200,000 $400,000 $300,000 Allocation of Personnel Dept. costs (100,000) — 11,111a 88,889b Allocation of Maintenance Dept. costs — (200,000 ) 176,471c 23,529d $0 $0 $587,582 $412,418 a $100,000 5 45 c $200, , , 000 7 500 8 500 b $100,000 40 45 d $200, , , 000 1 000 8 500
(b) Cost driver rate: Machining $587, , $58. 582 10 000 machin 7582 e hours per machine hour
Cost driver rate: Assembly $412, , $41. 418 10 000 direct 2418 per d labor hours irect labor hour
Direct materials and labor costs: $ 450.00
Overhead costs from Machining Department
($58.7582 3 machine hours) 176.27
Overhead costs from Assembly Department
($41.2418 5 direct labor hours) 206.21
Total unit cost $ 832.48
Markup (30%) 249.74
(c) Service Departments Production Departments Personnel Maintenance Machining Assembly Directly identified costs $100,000 $200,000 $400,000 $300,000 Allocation of Maintenance Dept. costs 30,000a (200,000) 150,000b 20,000c Allocation of Personnel Dept. costs (130,000) — 14,444d 115,556e $0 $0 $564,444 $435,556 a $200, , , 000 1 500 10 000 d $130,000 5 45 b $200, , , 000 7 500 10 000 e $130,000 40 45 c $200, , , 000 1 000 10 000
(d) Cost driver rate: Machining $ , , $ . 564 444 10 000 56 4444 machine hours per machine hour
Cost driver rate: Assembly $ , , $ . 435 556 10 000 43 5556 direct labor hours per direct labor hour
Direct materials and labor costs: $450.00
Overhead costs from Machining Department
($56.4444 3 machine hours) 169.33
Overhead costs from Assembly Department
($43.5556 5 direct labor hours) 217.78
Total unit cost $837.11
Maintenance Grounds Fabricating Assembly Directly identified costs $18,000 $14,000 $45,000 $25,000 Allocation of Maintenance Dept. costs (18,000) — 12,000a 6,000b Allocation of Grounds Dept. costs — (14,000) 6,000c 8,000d $0 $0 $63,000 $39,000 a $18, , , 000 12 000 18 000 c $14, , , 000 15 000 35 000 b $18, , , 000 6 000 18 000 d $14, , , 000 20 000 35 000
(b) Service Departments Production Departments
Maintenance Grounds Fabricating Assembly Directly identified costs $18,000 $14,000 $45,000 $25,000 Allocation of Maintenance Dept. costs (18,000) 1,385a 11,077b 5,538c Allocation of Grounds Dept. costs — (15,385 ) 6,594d 8,791e $0 $0 $62,671 $39,329 a $18, , , 000 1 500 19 500 d $15, , , 385 15 000 35 000 b $18, , , 000 12 000 19 500 e $15, , , 385 20 000 35 000 c $18, , , 000 6 000 19 500
(c) Service Departments Production Departments Maintenance Grounds Fabricating Assembly Directly identified costs $18,000.0000 $14,000.0000 $45,000.0000 $25,000.0000 Allocation of Maintenance Dept. costs ($19,221.9959) ($19,221.9959) 1,478.6151a 11,828.9206b 5,914.4603c Allocation of Grounds Dept. costs ($15,478.6151) 1,221 .9959d (15,478 .6151) 6,109 .9796e 8,146 .6395f $0 $0 $62,938 .9002 $39,061 .0998
Note: These calculations were done by spreadsheet and rounded.
a 500 , 19 500 , 1 9959 . 221 , 19 $ d 000 , 38 000 , 3 6151 . 478 , 15 $ b 500 , 19 000 , 12 9959 . 221 , 19 $ e 000 , 38 000 , 15 6151 . 478 , 15 $ c 500 , 19 000 , 6 9959 . 221 , 19 $ f 000 , 38 000 , 20 6151 . 478 , 15 $ G M 000 , 38 000 , 3 000 , 18 $ M G 500 , 19 500 , 1 000 , 14 $ Therefore, M M 500 , 19 500 , 1 000 , 14 $ 000 , 38 000 , 3 000 , 18 $ 0.993927126 M = $19,105.26316 M = $19,221.995927 995927 . 221 , 19 $ 500 , 19 500 , 1 000 , 14 $ G G = $15,478.61507
Directly identified costs $750,000 $450,000 $150,000 $110,000 Allocation of Maint. Dept. Costsa (750,000 ) — 500,000a 0a0a 250,000 Allocation of Power Dept. Costsb — (450,000 ) 250,000 200,000 $0 $0 $900,000 $560,000 a 000 , 250 000 , 40 000 , 80 000 , 40 000 , 750 ; 000 , 500 000 , 40 000 , 80 000 , 80 000 , 750 b 000 , 200 000 , 160 000 , 200 000 , 160 000 , 50 4 ; 000 , 250 000 , 160 000 , 200 000 , 200 000 , 450
Cost driver rate: Casting
machine hours per machine hour $900, , $11. 000 80 000 25
Cost driver rate: Assembly
direct labor hours per direct labor hour $560, , $9. 000 60 000 33
Direct labor and material costs $32.000 Overhead costs:
Casting (1 $11.25) $11.250
Assembly (0.5 $9.33) 4.665 15.915
Unit cost $47.915
Number of units per month 1,000.000
Total manufacturing costs per month $47,915.000
Mark up (25%) $11,978.750
Bid price (per month) $59,893.750
(b) Service Dept. Cost Allocation: Sequential Method
Service Departments Production Departments
Maintenance Power Casting Assembly
Directly identified costs $750,000 $450,000 $150,000 $110,000 Allocation of Maint. Dept. costs (750,000) $300,000 300,000 150,000 Allocation of Power Dept. costs — (750,000) 416,667 333,333 $0 $0 $866,667 $593,333
Cost driver rate: Casting $ , , $ . 866 667 80 000
10 833 per machine hour
Cost driver rate: Assembly $ , , $ . 593 333 60 000
Direct labor and material costs $32.000 Overhead costs:
Casting (1 $10.833) $10.833
Assembly (0.5 $9.889) 4.944 15.777
Unit cost $47.777
Number of units per month 1,000.000
Total manufacturing costs per month $47,777.000
Mark up (25%) $11,944.250
Bid price (per month) $59,721.250
(c) M P P M $750, . $450, . 000 01 000 0 4 Therefore, M = $750,000 + 0.1 (450,000 + 0.4 M) M = $795,000 + 0.04 M 0.96 M = $795,000 M P $795, . $828, , . $828, $781, 000 0 96 125 450 000 0 4 125 250 Casting Assembly Directly identified costs $150,000 $110,000 Allocation of Maint. Dept. costs $828,125 40% = $331,250 $828,125 20% = $165,625 Allocation of Power Dept. costs $781,250 50% = $390,625 $781,250 40% = $312,500 $871,875 $588,125
Cost driver rate: Casting $ , , $ . 871 875 80 000
10 8984 per machine hour
Cost driver rate: Assembly $ , , $ . 588 125 60 000
9 8021 per labor hour
Direct labor and material costs $32.0000
Overhead costs:
Casting (1 $10.8984) $10.8984
Assembly (0.5 $9.8021) 4.9011 15.7995
Unit cost $47.7995
Number of units per month 1,000.0000
Total manufacturing costs per month $47,799.5000
Mark up (25%) $11,949.8750
Bid price (per month) $59,749.3750
CASES
4-51 (a) The plantwide cost driver rate is $122,000/(2,400 + 1,440 + 720 +320) = $25.00 per direct labor hour
Unit gross margins:
A B C D Selling Price $ 15.00 $18.00 $20.00 $ 22.00 Materials Cost 4.00 5.00 6.00 7.00 Labor Cost 7.20 5.40 3.60 2.40 Overheada 6.00 4.50 3.00 2.00 Total Cost $ 17.20 $14.90 $12.60 $ 11.40
Total gross margins: A B C D Total Selling Price $ 150,000 $ 144,000 $120,000 $88,000 $502,000 Materials Cost 40,000 40,000 36,000 28,000 144,000 Labor Cost 72,000 43,200 21,600 9,600 146,400 Overhead 60,000 36,000 18,000 8,000 122,000 Total Cost 172,000 119,200 75,600 45,600 412,400 Gross Margin $ (22,000) $ 24,800 $ 44,400 $42,400 $ 89,600
(b) After dropping product A, the plantwide cost driver rate is $122,000/ (1,440 + 720 +320) = $49.1935 per direct labor hour
Unit gross margins:
B C D Selling Price $18.00 $20.00 $ 22.00 Materials Cost 5.00 6.00 7.00 Labor Cost 5.40 3.60 2.40 Overheada $ 8.85 $ 5.90 $ 3.94 Total Cost $19.25 $15.50 $ 13.34 Gross Margin $ (1.25) $ 4.50 $ 8.66
a $49.1935 per direct labor hour
Total gross margins:
B C D Total Selling Price $ 144,000 $120,000 $88,000 $352,000 Materials Cost 40,000 36,000 28,000 104,000 Labor Cost 43,200 21,600 9,600 74,400 Overhead 70,839 35,419 15,742 122,000 Total Cost 154,039 93,019 53,342 300,400 Gross Margin $ (10,039) $ 26,981 $34,658 $ 51,600
(c) After further dropping product B, the plantwide cost driver rate is $122,000/(720 +320) = $117.3077 per direct labor hour
Unit gross margins:
C D Selling Price $20.00 $ 22.00 Materials Cost 6.00 7.00 Labor Cost 3.60 2.40 Overheada $14.08 $ 9.38 Total Cost $23.68 $ 18.78 Gross Margin $ (3.68) $ 3.22
a $117.3077 per direct labor hour
Total gross margins:
C D Total Selling Price $120,000 $88,000 $208,000 Materials Cost 36,000 28,000 64,000 Labor Cost 21,600 9,600 31,200 Overhead 84,462 37,538 122,000 Total Cost 142,062 75,138 217,200 Gross Margin $ (22,062) $ 12,862 $ (9,200)
Now product C appears unprofitable. After further dropping product C, the plantwide cost driver rate is $122,000/320 = $381.25 per direct labor hour
Unit gross margin for product D, the only remaining product: D Selling Price $ 22.00 Materials Cost 7.00 Labor Cost 2.40 Overheada $ 30.50 Total Cost $ 39.90 Gross Margin $(17.90)
a $381.25 per direct labor hour
Total gross margin for D and for the company: D Selling Price $88,000 Materials Cost 28,000 Labor Cost 9,600 Overhead 122,000 Total Cost 159,600 Gross Margin $(71,600)
(d) Youngsborough has encountered a type of death spiral by using planned levels of direct labor hours in the denominator for the cost driver rates. In Youngsborough’s situation, the capacity-related overhead costs are fixed. Dropping unprofitable product A made the cost driver rate increase, in turn making product B look unprofitable. This cycle continued until Youngsborough had no products that appeared profitable.
This situation would likely have been avoided if Youngsborough had used practical capacity direct labor hours in the denominator for the cost driver rate. The cost driver rate would then have remained unchanged when the company dropped product A, so the remaining products would appear as profitable as they were before. Of course, the company would then have underapplied overhead (idle capacity costs), and should explore opportunities to use the idle capacity productively, such as increasing sales of the remaining products or developing new profitable products. Chapter 5 addresses activity-based
cost systems, which can more accurately assign overhead costs when there is large variation in overhead resources that products require. 4-52 (a) Let salaries be denoted as follows: M =manager, S =senior mechanic,
and J = junior mechanic. The estimated total conversion (labor and overhead) costs are:
Personnel costs (1M + 4S + 4J) + Capacity-related (fixed) costs = $75,000 + (4 × $65,000) + (4 × $45,000) + $96,800
= $611,800.
Estimated total number of hours on customer jobs 8 1 750 95% 13 300, , hours
Therefore, the cost driver rate hour per 46 $ hours 300 , 13 800 , 611 $ Furthermore, 46 100 1 06 . 51 x so x = 11.
(b) Class A Repairs Class B Repairs Estimated total conversion costs 611800 60%, $367,080 611800 40%, $244,720 Estimated total hours on customer jobs 13 300 1 2 6 650 , , 13 300 1 2 6 650 , , Conversion cost per customer job hour 367,080 6 650, $55.20 per hour 244,720 6 650, $36.80 per hour Price per
hour $55.2 111 . $61.27 per hour $36.8 111 . $40.85 per hour
(c) Job 101: 4 5. A1 5. B
Job 102: 2B
(Note: A Class A repair hours, B Class B repair hours) Under the present accounting system, costs charged to: Job 101: 6 51 06 . $306 36.
Job 102: 2 51 06 . $102 12.
Under the proposed accounting system, costs charged to: Job 101: 4 5 61 27 1 5 40 85. . . . $337 00.
(if all the calculations are performed in Excel; with the rates shown, the total is $336.99).
Job 102: 2 40 85 . $ .81 70
Therefore, under the present accounting system: Job 101 is undercosted and underpriced.
(d) Depending on competition for repairs, the proportion of Class B repairs may increase and the proportion of Class A repairs may decrease because of the price change.
(e) The current costing system is simple to administer and results in pricing at a uniform labor rate (that includes coverage of overhead costs). The proposed costing system more accurately reflects resource usage, but is more complex to administer and to communicate to customers in pricing.
