Solution Manual For Managerial Accounting, 7th Edition

Preview (31 of 361 Pages)

100%

Purchase to unlock

Loading page image...

Chapter 1Managerial Accounting in the Information AgeQUESTIONS1.The goal of managerial accounting is to provide information needed for planning,control, and decision making.2.Budgetedperformanceisausefulbenchmarkforevaluatingcurrentperiodperformance.3.This question asks students to identify three differences between financial andmanagerial accounting. In the text, five differences are noted:a)Managerial accounting is directed at internal rather than external users ofaccounting information.b)Managerial accounting may deviate from generally accepted accountingprinciples (GAAP).c)Managerial accounting may present more detailed information.d)Managerial accounting may present more nonmonetary information.e)Managerial accounting places more emphasis on the future.4.Examples of nonmonetary information that might appear in managerial accountingreports include: the quantity of material consumed in production, the number ofhours worked by the office staff, and the number of product defects.5.Total variable costs change in proportion to business activity while total fixed costsdo not change.6.Salaries of theemployees in the grocery departmentwould be a controllable costfor the manager ofthe grocerydepartment at aWalmart store. Depreciation relatedto the buildinghousing the grocery departmentwould be a noncontrollable cost.7.Incremental analysis involves a comparison of the revenues that change and thecoststhatchangewhenadecisionalternativeisconsidered.Ifincrementalrevenue exceeds incremental cost,thedecision alternative should be undertaken.8.“You get what you measure!” suggests that managers’ behaviors are affected byperformance measures.9.Information flows up and down the value chainandbetweencompaniesandtheirsuppliers and betweencompaniesandtheircustomers. Information technology ishelpingcompaniestrack buying patterns of customers and send targeted sellingmessages to themelectronically. Information technology is also helping companiesbetter manage their supply chains and gain internal efficiencies.10.A legal action is not necessarily ethical. Ethical actions involve “what’s right” whilelegal actions involve operating within boundaries of the law.

Loading page image...

JiambalvoManagerial Accounting1-2EXERCISESE1. [LO3]Suppose the company selected is Microsoft.Measure 1:Number of errors in a piece of software.Favorable outcome:Number of errors is reduced.Unfavorable outcome:Software products are not released on a timely basis.Measure 2:Sales to new customers as a percent of total sales.Favorable outcome:Sales staff works hard to develop new clients.Unfavorable outcome:Company loses existing customers who receive lessattention from the sales staff.Measure 3:Average time spent handling customer service calls.Favorable outcome:Customer service representatives handle more callsper hour.Unfavorable outcome:Customer questions are not fully addressed andcustomer satisfaction decreases.E2.[LO2]The only costs that are relevant to a decision are incremental costs—thatis, costs that change when an action is taken. The cost of the old copier isasunkcostand will not change. Therefore, it is irrelevant to Rachel’s decision.E3.[LO4]The code suggests that Guthrie clarify the ethical issue by confidentialdiscussion with an objective advisor (this might be the IMA Ethics Counselingservice) to obtain a better understanding of possible courses of action.Guthrie should then discuss the problem with the manager to whom his bossreports (since his boss is involved in the ethical dilemma).If the issue is notsuccessfully resolved, Guthrie should consider disassociating from Bellwether.E4.[LO4]Possible answers include:The CRM system notes that a customer makes significant wine purchases atdinners. At her next stay, the hotel provides a complimentary bottle of a limitedrelease high-end wineresultingin increased customer loyalty.The CRM system notes that a customer has had three bookings in the last year.When the customer checks in, the hotel offers a complimentary room upgradewhich results in increased customer loyalty.The CRM system identifies the top 1,000 guests in terms of annual billings anddoes a direct mailing of certificates that can be redeemed for a free night's stayresulting in increased customer loyalty.The CRM system notes that a customer has traveled with a small dog and wantsthe staff to walk the dog in the park in the early morning. The reservationist asks if

Loading page image...

Chapter 1Managerial Accounting in the Information Age1-3this service is needed when booking an upcoming stay and makes sure a staffperson is available.E5.[LO1]Megan can prepare a profit budget for each store (planning). At the end ofthe accounting period, she can compare actual profit to the budget for each store(control). Significant differences from the budget should be investigated todetermine their causes.E6.[LO1]“c” is false.There are many possible reasons, other than lack of effectivemanagement, why actual costs are greater than planned. Typically, performancereports only suggest areas that should be investigated.E7.[LO1]Deidre should not be concerned that cost of sales has increased. Cost ofsales is a variable cost and it is expected that it will increase when sales increase.In the budget, cost of sales ($400,000) is 67% of sales ($600,000). Actual cost ofsales ($425,000) is 61% of actual sales ($700,000). Thus, while cost of sales hasincreased, it has not increased disproportionate to the increase in sales.E8.[LO 1].Managerial accounting focuses on accounting information for internaldecision-making. This focus differs from financial accounting in a number of ways.For example managerial accounting: 1) focuses on internal users, 2) can deviatefrom generally accepted accounting principles (GAAP), 3) presents more detailedinformation, 4) presents more nonmonetary information, and 5) places emphasison the future.E9.[LO1]For purposes of awarding bonuses, it may be advisable to record saleswhen orders are placed so that the sales force is rewarded on a timely basis. If thecompany waited until the order was delivered, the sales force might be rewardedmore than a year after obtaining a customer order. The point is that for internalreporting purposes, companies need not follow GAAP.E10.[LO2]a.variableb.fixedc.variabled.fixedE11.[LO2]a.variableb.variablec.fixedd.fixede.variable

Loading page image...

JiambalvoManagerial Accounting1-4E12.[LO2]A cost is controllable by a manager whose actions affect the cost. Thus,for example, advertising may be a controllable cost for a store manager (whodecides how much to spend on advertising) but it would be anon-controllable costfor the manager of a department at the store (who is not consulted about theamount to spend on advertising).E13.[LO2,3]Takesha should not consider how much he paid for the old machinebecause that is a sunk cost. He should consider the value of the old machine inthe used lab machine market—an incremental cash inflow equal to the marketvalue of the old machine that will result if he buys a new lab machine.E14.[LO2]Incremental revenue per day$2,500Less incremental costs:Labor$700Parts500Transportation100Office staff2001,500Incremental Profit per Day$1,000Opportunity cost = $1,000 per dayx52 days = $52,000Rent and depreciation do not enter into the calculation of the opportunity costsince these costs are not incremental (they will be incurred whether or not Kendecides to stay open on Saturday).E15.[LO2]If Zachary visits his friend, he will incur a $560 (16 hoursx$35)opportunity cost.E16.[LO2,3]The incrementalproductioncost per gallon is likely to be less than $6because part of the $6 amount relates to fixed costs such as depreciation ofequipment.Sincethe incremental cost per gallon is less than $6, the incrementalcostto produce15,000 gallons is less than $90,000.E17.[LO3]a.When a second shift is added, material costs, workers’ salaries, and benefitsare likely to increase.b.Depreciation of the building will not increase when a second shift is added.E18.[LO3]The owner of LA Porsche may link Hulmut’s annual bonus to the averagecustomer satisfaction rating. Thus, there is a link between the measure andHulmut’s financial welfare.Some actions that Hulmut can take that mayhelpratings would be to 1) provide a comfortable waiting area for customers, 2)providefree coffee and snacks in the waiting area,and3) providetransportationservice forcustomers while their carsareunder repair.

Loading page image...

Chapter 1Managerial Accounting in the Information Age1-5E19.[LO5]The IMA’s Statement of Ethical Professional Practice does not directlyaddress this issue so students may take either side of this issue.Shauna does have obligations: Students could argue that the practice ofentertaining customers with lavish vacations is a type of bribe that would violatethe Integrity standard (refrain from engaging in any conduct that would prejudicecarrying out duties ethically).Shauna does not have obligations: Students could argue that the practice ofentertaining customers is not against the law and does not reduce one’s ability tocarry out duties ethically.E20.[LO5].Responses will vary. Examples of Controller duties are as follows: Costaccounting,preparation of financial statements in accordance withGAAP,budgeting, variance analysis, advisor to senior leadership. Examples of skills areas follows: BA in Accounting, CPA, 5-10 years accounting experience, 5 yearsmanagement experience, excellent written and verbal communicationskills.E21.Student answers will vary.

Loading page image...

JiambalvoManagerial Accounting1-6PROBLEMSP1.[LO1,2]a.Santiago’s SalsaBudgeted Production CostsMay 202030,000ProductionJars of SalsaIngredient cost*$24,000Labor cost**14,400Rent5,000Depreciation6,000Other1,000Total$50,400*($20,000 ÷ 25,000) x 30,000**($12,000 ÷ 25,000) x 30,000b.With a wage rate of $20, 720 hours ($14,400 ÷ $20) will be needed in May.InApril, only 600 hours were needed ($12,000 ÷ $20). Thus, 120 additional hourswill be needed in May. The company can plan on hiring a part-time worker inMay (approximately 30 hours per week).Unless management anticipates the need for the part-time worker (by preparinga budget), he or she may not be hired on a timely basis.c.The actual cost per unit in April was $1.76 ($44,000 ÷ 25,000 units). The costper unit in May is anticipated to be only $1.68 ($50,400 ÷ 30,000 units). Unitcost declines because some costs are fixed and do not increase with increasesin volume.

Loading page image...

Chapter 1Managerial Accounting in the Information Age1-7P2.[LO2,3]a.The variable costs are $1.28 per jar of salsa as follows:25,000ProductionJars of SalsaIngredient cost$20,000Labor cost12,000Total$32,000$32,000 ÷ 25,000 jars of salsa = $1.28 per jar of salsa.Thus, the incremental cost of producing an extra 50,000 jars of salsa is $64,000(i.e., $1.28 × 50,000).b.The incremental revenue associated with a price reduction of $0.40 is $100,000as follows:Original Revenue (325,000 × $5.00)$1,625,000Revenue with price change (375,000×$4.60)1,725,000Incremental revenue associated with price change$100,000c.Yes, the price should be lowered since the incremental cost of this action($64,000 in part a) is less than the incremental revenue ($100,000 in part b).P3.[LO1,2]Sales DepartmentBudgeted Costs, 2020(Assuming Sales of $11,000,000)Salaries (fixed)$400,000Commissions (variable)165,000Advertising (fixed)100,000Charge for office space (fixed)3,000Office supplies & forms (variable)2,200Total$670,200Commissions [($150÷$10,000) x $11, 000,000] = $165,000Office supplies & forms [($2,000÷$10,000,000) x $11,000,000] = $2,200

Loading page image...

JiambalvoManagerial Accounting1-8P4.[LO1]a.Sales exceeded the budget by 10.7% ($75,000 ÷ $700,000), while cost ofmerchandise increased by 22.9% and salaries increased by only 11.4%. Thus,the investigation should focus oncost of merchandise since a 22.9% increaseis disproportionate to the increase in sales.b.Electricity would not be a controllable cost for the manager of sporting goods,and it is doubtful that including it on a performance report for sporting goodswould be useful.P5.[LO1,2]Cyril should expect some costs to be greater than budgeted.Variableproduction costs will increase with the number of units produced, while fixedproduction costsare not expected toincrease. In the example, it is reasonableto assume that materials, direct labor and utilities are variable costs while theremaining costs (supervisory salaries, machine maintenance, depreciation ofbuilding, depreciation of equipment and janitorial) are fixed. (Note that a casecan be made for other classifications.)P6.[LO1,2,3]a.The information on the income statement, balance sheet and statement of cashflow is highly summarized for the entity as a whole. Linda needs product levelinformation which is much more detailed.b.Examples of nonfinancial measures might be: Web site visits, number of repeatcustomers, delivery time,andcustomer satisfaction.c.Lindacouldimprovecustomersatisfactionratingsbyofferingdiscounts,improving delivery time,improving customer service,andimproving quality.d.Examples of costs in Linda’s operation are cost of contact lenses (variable),depreciationof computing equipment(fixed), salariesof information technologystaff(fixed),andshipping (variable).P7.[LO3]a.Managers may focus (too much) on new customers and ignore currentcustomers who account for most of the company’s sales.b.Managers could decrease cost of goods sold by overproducing (i.e., producingmore than needed for current sales and reasonable inventory) in an effort todecrease unit cost and cost of sales. However, this would result in an inventorybuildup and excess inventory holding costs.

Loading page image...

Chapter 1Managerial Accounting in the Information Age1-9c.Managers may be able to decrease selling and administrative expense in theshort-run by cutting the number of employees. However, this may hurtemployee morale and customer service. If that is the case, it may, in the longrun, hurt company profitability.P8.[LO2,3]a. Incremental revenue will be $640 ($160x4).b.Incremental costs would include, for example, the cost of soap and shampoo,the cost of cleaning the room, and the cost of cleaning towels and bedding.c.Most likely, the incremental revenue will exceed the incremental costs, whichare relatively low (e.g., shampoo and soap are inexpensive and cleaningpersonnel are paid fairly low wages).P9.[LO5]Answers based on Sears Holding Company Code of Conduct.a.“For example, youmay not share pricing data among competing vendors.”b.“Additionally, associates may not use Company time or resources to supportpersonal political activitiesor use their position to coerce or pressure associatesto make contributions or support a candidate or political cause.”c.“Under no circumstances may an associate accept, keep, or purchase a sampledirectly from a vendor."d.“You must not disclose Sears Holding Company proprietary or confidentialinformation to anyone not authorized to receive it or with no need to know theinformation.”

Loading page image...

JiambalvoManagerial Accounting1-10Case 1-1. [LO2,5]LOCAL 635SummaryUnion is disputing “cost of meal” charges to hotel employees.•Distinguishes among fixed, variable, sunk, and opportunity costs.•Makes the point that there is no generally accepted meaning of the term “cost.”Questions to ask students:1.What is the source of conflict between Local 635 and the Riverside Hotel?2.What are some examples of variable, fixed, sunk, and opportunity costs in thecontext of the Local 635 case?3.What do you think is the incremental cost of an employee meal?4.I contend that it is possible that the incremental cost is more than $300. How is thispossible?5.How should the contract be worded to avoid similar problems in the future?DiscussionI start this case by asking a student to explain the source of conflict between Local 635and the Riverside Hotel. The student is likely to explain that while employees arefocused on the incremental cost of a meal, management is focused on various fixedcosts as well as the incremental costs. This leads to a major take away—there is nogenerally accepted meaning of the term cost. We know what’s meant by fixed cost,variable cost, opportunity cost, sunk cost, etc., but there is ambiguity as to what exactlycostmeans.To begin working on the vocabulary of managerial accounting, I ask students forexamples of variable, fixed, sunk, and opportunity costs in the context of the Local 635case. The primary variable cost is the cost of food items (e.g., the cost of meat andsalad ingredients). A fixed cost would be the depreciation on the oven (which is also asunk cost). An opportunity cost would arise if a worker ate the last prime rib and thehotel lost a sale.I then ask the class to estimate the incremental cost of an employee meal. Moststudents think it is less than $15. I then suggest that it ispossiblethat the incrementalcost is more than $300!When asked to explain how this is possible, students focus onopportunity costs. Suppose an employee eats the last prime rib just before a steady

Loading page image...

Chapter 1Managerial Accounting in the Information Age1-11customer, who always eats prime rib, comes into the restaurant. If this customerbecomes disgruntled and never returns to the restaurant, the hotel could easily be out$300 or more in the next few months.Howshouldthecontractberewritten?Studentsgenerallyrecommendthatmealsubsidies be based on some percent of menu prices. For example, meals could be freeas long as 70% of the total of menu prices is less than $15.To wrap up, it should be noted that to ensure quality and customer satisfaction, kitchenworkers must be motivated to do a good job. Thus, the hotel should be motivated tosettle this dispute quickly in a way that seems fair to workers.

Loading page image...

JiambalvoManagerial Accounting1-12Case 1-2.[LO3]BOSWELL PLUMBING PRODUCTSSummaryA senior manager is requesting information on the “cost” of a product.•Makes the point that appropriate cost information depends on the manager.Questions to ask students:1.What did the senior manager ask Nick and how did he reply?2.Why is Nick’s response “Why do you want to know?” appropriate from the standpointof incremental analysis?3.What cost information would be relevant to a decision to drop the product that wouldnot be relevant to a decision to increase a production run by 100 units?DiscussionA senior manager has asked Nick Somner to tell her the cost of the D45 valve. Nickreplies, “Why do you want to know?” This response is appropriate from the standpoint ofincremental analysis. The cost information that the senior manager needs to make adecision depends on the decision she is facing. Thus, “Why do you want to know?” isjust Nick’s way of asking “What decision are you facing?” If the senior manager isthinking of dropping the product, Nick should provide information on the incrementalcosts that will be saved if the product is dropped. If she is thinking of increasing aproduction run, Nick should provide the incremental cost associated with this action.For example, if the product is dropped, the company may save the cost of setting up theproduction line, the cost of ordering materials, and the cost of supervision. None ofthese costs are relevant to a decision to increase a production run by 100 units sincenone of these costs will change with the addition of 100 units to a planned productionrun.

Loading page image...

Chapter 2Job-Order Costing for Manufacturing and Service CompaniesQUESTIONS1.Manufacturing costs include all costs associated with the production of goods.Examples of manufacturing costs are: labor costs of workers directly involved withmanufacturing goods, cost of all materials directly traced to products, indirectfactory labor, indirect materials used in production, depreciation of productionequipment, and depreciation of the manufacturing facility.Nonmanufacturing costs are all costs that are not associated with the production ofgoods. These typically include selling costs and general and administrative costs.2.Product costs are assigned to goods produced and become an expense wheninventory is sold. Period costs are not assigned to goods produced. Period costsare identified with accounting periods and are expensed in the period incurred.3.Two common types of product costing systems are (1) job-order costing systemsand (2) process costing systems.Job-ordercostingsystemsaregenerallyusedbycompaniesthatproduceindividual products or batches of unique products. Companies that use job-ordercosting systems include custom home builders, airplane manufacturers, and ship-building companies.Process costingsystems areused by companies that produce large numbers ofidentical items passingthrough uniform and continuous production operations.Process costing tends to be used by beverage companies and producers ofchemicals, paints, and plastics.4.A job cost sheet is a form that is used to accumulate the cost of producing a job.The job cost sheet contains information on direct materials, direct labor, andmanufacturing overheadrelated to a particularjob.5.Actual overhead is not known until the end of the accounting period. If managersused actual overhead rates to apply overhead to jobs, they would have to wait untilthe end of the period to determine the cost of jobs. In order to make timelydecisions,managersneedtoknowthecostofjobsbeforetheendoftheaccounting period.

Loading page image...

JiambalvoManagerial Accounting2-26.An important characteristic of a good overhead allocation base is that it should bestrongly related to overhead cost. Assume that setup costs are classified asmanufacturingoverhead. The number of setups that a job requires would be abetter allocation base for setup costs than would the number of direct labor hoursworked on that job. Number of setups is more closely related to setup costs than isthe number of direct labor hours and, therefore,thenumber of setups is a betterallocation base.7.In highly automated companies where direct labor cost is a small part of totalmanufacturing costs, it is unlikely that overhead costs vary with direct labor.Further, in such companies, predetermined overhead rates based on direct labormay be quite large. Thus, even a small change in labor (the allocation base) couldhave a large effect on the overhead cost allocated to a job.Companies that are capital-intensive should consider using machine hours as anallocation base (or better still, they should considertheuse of an activity-basedcosting system, which is discussed in more detail in Chapter6).8.It is necessary to apportionover-orunder-applied overhead among Work inProcessInventory, Finished GoodsInventory, and Cost of Goods Sold accounts ifthe amount in theManufacturingOverhead account is material.This assumes thatthe balances in Work in Process and Finished Goods are relatively large.If acompany used a just-in-time systems and these balances were quite small, then itwould be reasonable to just close over-or under-applied overhead to Cost ofGoods Sold.9.An unexpected increase in production would typically result in overhead beingoverapplied.Overheadisappliedusingapredeterminedratewhichequalsestimated total overhead cost (including variable and fixed overhead) divided bytheestimatedleveloftheallocationbase.Overheadappliedequalsthepredetermined rate times the actual use of the allocation base. An unexpectedincrease in production means that the fixed component of the predeterminedoverhead rate will be multiplied by a larger number than anticipated.Thus, morefixed overhead will be applied than the company is likely to incur.10.As companies move to computer-controlled manufacturing systemsand greater use ofrobotics, direct labor will likely decrease (due to decreased need for workers) andmanufacturing overhead will likely increase (due to higher depreciation costsassociated with the computer-controlled systems).

Loading page image...

Chapter 2Job-Order Costing and Modern Manufacturing Practices2-3EXERCISESE1.[LO4]Managers at Company A will perceive that overhead cost allocated to jobsincreases with the amount of direct labor used. If they are evaluated on how well theycontrol the cost of jobs, they will try to cut back on labor, which not only reduces laborcosts but also overhead allocated to jobs they supervise. Following similar logic,managers at Company B will cut back on machine time and managers at Company Cwill make a special effort to control material costs (by reducing waste, searching forlower prices, etc). Note that the measure of performance (reduction in job costs)combined with the approach to allocating overhead drives managers to focus ondifferent factors—this is a good example of “You get what you measure!”E2.[LO5,7]If over-or underapplied overhead is large, we typically allocate it toWork inProcess,FinishedGoods andCost ofGoodsSold based on the relative balances inthese accounts. However, if a company uses JIT, the balances inWork inProcessandFinishedGoods are likely to be quite small compared to the balance inCost ofGoodsSold. Thus, there will be only a small difference between assigning all of theover-or under-applied overhead to cost of goods sold versus apportioning it amongthe three accounts based on their relative balances.E3.[LO4, 5]The predetermined overhead rate at Precision Custom Molds is $100 perdirect labor hour ($20,000,000 ÷ 200,000). Given Job 525 has 25 direct labor hours,$2,500 of overhead would be applied to it ($100 x 25).E4.[LO3]a.Pd.Jb.Pe.Pc.Jf.JE5.[LO 1, 2]a.Ye.Nb.Nf.Yc.Yg.Yd.Yh.N

Loading page image...

JiambalvoManagerial Accounting2-4E6.[LO2,4]Note that direct materials are charged to Work in ProcessInventorywhile indirect materials are charged to Manufacturing Overhead.Work in ProcessInventory200,000Raw MaterialsInventory200,000Manufacturing Overhead10,000Raw MaterialsInventory10,000E7.[LO2,4]Note that direct materials are charged to Work in ProcessInventorywhile indirect materials are charged to Manufacturing Overhead.Work in ProcessInventory1,500Raw MaterialsInventory1,500(250 + 350 + 400 + 500 = 1,500)Manufacturing Overhead100Raw MaterialsInventory100E8.[LO2,4]Note that direct labor is charged to Work in ProcessInventorywhileindirect labor is charged to Manufacturing Overhead.Work in ProcessInventory70,000Wages Payable70,000Manufacturing Overhead50,000Wages Payable50,000

Loading page image...

Chapter 2Job-Order Costing and Modern Manufacturing Practices2-5E9.[LO2,4]a.Job No. 201110 hrs.$10/hr$1,10090 hrs.$21/hr.1,89040hrs.$12/hr.480Total$3,470Job No. 20250hrs.$20/hr.$1,000Job No. 20370hrs.$18/hr.$1,260b.Labor Report for the month of February (by job):TimeJobTicketHoursRateCost201210111010.00$1,10020121029021.001,89020121034012.004802403,47020221045020.001,00020321057018.001,260Total labor charges$5,730Work in ProcessInventory5,730Wages Payable5,730E10.[LO5](1)Predetermined overhead allocation rate based on direct labor hours:$900,000 ÷ 60,000 DLH = $15 per direct labor hour(2)Predetermined overhead allocation rate based on direct labor costs:$900,000 ÷ $1,800,000 = $0.50 per dollar of direct labor(3)Predetermined overhead allocation rate based on machine hours:$900,000 ÷30,000 machine hours = $30per machine hour

Loading page image...

JiambalvoManagerial Accounting2-6E11.[LO4,5,6]a.The use of predetermined overhead rates makes it possible to cost jobsimmediately after they are completed. If a company used an actual overheadrate, then job costs would not be available until the end of the accounting period.If Franklin Computer Repair charges customers based on job cost, it would bedetrimental to customer service and company cash flowsto have to wait until theend of the accounting period to bill customers.b.The overhead rate is:$500,000 ÷ $800,000 = $0.625 per dollar of technician wages.Total job cost = $200 + $100 + ($100 x$0.625) = $362.50E12.[LO4,5]a.Predetermined overheadrates:Allocation basePredetermined OverheadRateDirect labor hours$1,000,000 ÷20,000 DLH = $50per direct labor hourDirect labor cost$1,000,000 ÷ $625,000 = $1.60 per dollar of direct labor costMachine hours$1,000,000 ÷ 20,000 MH = $50per machine hourDirect material cost$1,000,000 ÷ $800,000 = $1.25per dollar of direct materialb.Cost of Job No. 253 using different allocation bases:CostDLHDL costMHDM costDirect Materials$3,000$3,000$ 3,000$3,000Direct labor3,7503,7503,7503,750Manufacturing Overhead*7,5006,0005,0003,750Total$14,250$12,750$11,750$10,550*Overhead rates in “a” above x actual activity.

Loading page image...

Chapter 2Job-Order Costing and Modern Manufacturing Practices2-7E13.[LO2,4,5]a.Overhead applied is equal to $3$100,000 of direct labor = $300,000.Work in ProcessInventory$300,000Manufacturing Overhead$300,000b.Actual overhead is $260,000Manufacturing Overhead260,000Raw MaterialsInventory40,000Wages Payable80,000Utilities Payable25,000Accumulated Depreciation60,000RepairsPayable55,000E14.[LO5, 7]a.Overhead applied is $300,000 while actual overhead is $260,000. Thus,Manufacturing Overhead has a $40,000 credit balance. The journal entry to closethe account to Cost of Goods Sold is:Manufacturing Overhead40,000Cost of Goods Sold40,000b.Closing the balance in Manufacturing Overhead leads to product costs that areconsistent with actual overhead costs rather than estimated overhead costs.c.Because Star Plastics uses a just-in-time inventory system, the balances in Workin Process and Finished Goods are likely to be quite small compared to Cost ofGoods Sold. Thus, there is not likely to be a significant difference betweencharging the entire amount of overapplied overhead to Cost of Goods Soldversus apportioning it among Work in Process, Finished Goods and Cost ofGoods Sold.E15.[LO4, 5]Cost Summary: Job 325Direct Material$10,000Direct Labor (250 hours x $16/hour)4,000Manufacturing Overhead:($25 per direct labor hour x 250 hours)6,250Total$20,250

Loading page image...

JiambalvoManagerial Accounting2-8E16.[LO4,5,6]Estimated overhead = $600,000 which is allocated based on cost of attorney andparaprofessional time.Budgeted salaries:(5$300,000) + (9 x $100,000) = $2,400,000Predetermined overhead rate = $600,000 ÷ $2,400,000 = $0.25per dollar ofattorney and paraprofessional time.If client services require $45,000 in salaries, then indirect costs assigned are:$45,000$0.25= $11,250.E17.[LO5]Since the Manufacturing Overhead account has an ending credit balance(before adjustment), manufacturing overhead for the period is overapplied. Theproblem states that the balance is material—this suggests that we prorate thebalance among Work in Process Inventory, Finished Goods Inventory, and Costof Goods Sold.% ofTotalAccountsBalanceTotalOverappliedAdjustmentWork in ProcessInventory$500,00025$90,000$22,500Finished GoodsInventory600,0003090,00027,000Cost of Goods Sold900,0004590,00040,500Total$2,000,000$90,000Manufacturing Overhead90,000Work in ProcessInventory22,500Finished GoodsInventory27,000Cost of Goods Sold40,500E18.[LO7]Examples of negative events that would require a company holdinginventory are as follows:1.Strikes at a supplier would interrupt delivery of critical materials.2.Unanticipated machine break-downswould interrupt production.3.Naturaldisasters or terrorist attacks would interruptthedelivery of materials.E19.[LO4]Estimated manufacturing overhead was $2,000,000 and eighty percentwas fixed. When the sequence of material movements was changed and 30,000of machine hours were saved, $1,600,000 (80% of $2,000,000) would remainunchanged. If variable manufacturing overhead is approximately $4 per hour($400,000÷100,000) the new variable portion would be $280,000($4 x (100,000–30,000))which would make the total overhead $1,880,000. The savings is only$120,000 or $4 per hour,which ismuch less than $20 per hour.

Loading page image...

Chapter 2Job-Order Costing and Modern Manufacturing Practices2-9PROBLEMSP1.[LO3]a.Satterfield’s Custom GlassSchedule of Cost of Goods ManufacturedFor the Year Ended December 31, 2020Beginning balance in work in processinventory$210,000Add current manufacturing costs:Direct material$2,500,000Direct labor3,000,000Manufacturing overhead1,700,0007,200,000Total7,410,000Less ending balance in work in processinventory300,000Cost of goods manufactured$7,110,000b.Satterfield’s Custom GlassIncome StatementFor the Year Ended December 31, 2020Sales$8,500,000Less cost of goods sold:Beginning finished goodsinventory$500,000Add cost of goods manufactured7,110,000Cost of goods available for sale7,610,000Less ending finished goodsinventory400,0007,210,000Gross profit1,290,000Less nonmanufacturing expenses:Selling& admin. expenses1,350,000Net income(loss)$(60,000)

Loading page image...

JiambalvoManagerial Accounting2-10P2.[LO3]a.Terra Cotta DesignsSchedule of Cost of Goods ManufacturedFor the Year Ended December 31, 2020Beginning balance in work in processinventory$650,000Add current manufacturing costs:Direct material:Beginning balance$ 450,000Purchases1,500,000Ending balance(200,000)$1,750,000Direct labor2,500,000Manufacturing Overhead650,0004,900,000Total5,550,000Less ending balance in work in processinventory350,000Cost of goods manufactured$5,200,000b.Terra Cotta DesignsIncome StatementFor the Year Ended December 31, 2020Sales$7,000,000Less cost of goods sold:Beginning finished goodsinventory$ 750,000Add cost of goods manufactured5,200,000Cost of goods available for sale5,950,000Less ending finished goodsinventory350,0005,600,000Gross profit1,400,000Less nonmanufacturing expenses:Selling expenses500,000General & admin. expenses850,0001,350,000Net income$50,000

Loading page image...

Chapter 2Job-Order Costing and Modern Manufacturing Practices2-11P3.[LO4]a.Cost of Jobs:100510061007100810091010Direct materials$650$850$1,550$650$450$350Direct labor1,6002,0003,3001,400900700Mfg. overhead2,880*3,6005,9402,5201,6201,260Total$5,130$6,450$10,790$4,570$2,970$2,310*$1,600 x 180%b.Raw Material Inventory5,500Accounts Payable5,500(To record purchase of steel)Raw Material Inventory2,400Cash2,400(To record purchase of supplies)Work in Process Inventory4,500Manufacturing Overhead1,000Raw Material Inventory5,500(To record materials used in production)Work in Process Inventory9,900Manufacturing Overhead6,500Wages Payable16,400(To record labor)Work in Process Inventory17,820Manufacturing Overhead17,820(To record overhead applied to production: $9,900 x 180%))Finished Goods Inventory26,940Work in Process Inventory26,940(To recordcost ofjobs completed: Jobs 1005, 1006, 1007, and 1008))Accounts Receivable40,410Cost of Goods Sold26,940Sales(26,940 x 150%)40,410Finished Goods Inventory26,940(To record the sale of finished goods: Jobs 1005, 1006, 1007, and 1008))

Loading page image...

JiambalvoManagerial Accounting2-12P4.[LO2,3,4]a.The beginning balance in Work in Process is $14,500:Job 258$5,000Job 2596,000Job 2603,500Total$14,500The ending balance in Work in ProcessInventoryis $8,400:Job 345$2,500Job 3465,900Total$8,400b.The beginning balance in Finished GoodsInventoryis $9,000:Job 257$9,000The ending balance in Finished GoodsInventoryis $11,700:Job 341$1,500Job 3423,300Job 3432,400Job 3444,500Total$11,700c.Cost of goods sold is determined as follows:Beginning balance in work in processinventory$14,500Add current manufacturing costs:Direct material$750,000Direct labor1,650,000Manufacturing overhead2,150,0004,550,000Total4,564,500Less ending balance in work in processinventory8,400Cost of goods manufactured$4,556,100Beginning finished goods inventory$9,000Add cost of goods manufactured4,556,100Cost of goods available for sale4,565,100Less ending finished goodsinventory11,700Cost of goods sold$4,553,400Job 257 through Job 340 likely relate to the balance of Cost of Goods Sold.

Loading page image...

Chapter 2Job-Order Costing and Modern Manufacturing Practices2-13P5.[LO4,5]a.Predetermined overhead rate based on labor hours:$12,000,000 ÷ 300,000 hours = $40per labor hourOverhead assigned to the model K25 shoe based on labor hours:$40x 11,000 hours = $440,000Predetermined overhead rate based on labor cost:$12,000,000 ÷ $4,800,000 = $2.50 per labor dollarOverhead assigned to the model K25 shoe based on labor cost:$2.50 x $165,000 = $412,500b.Direct labor cost is the preferred allocation base because workers paid a higherrate work on more complex jobs, and more complex jobs lead to moreoverhead cost.P6.[LO4,5]a.Predetermined overhead rate based on direct labor cost:$600,000 ÷ $300,000 labor cost = $2.00per labor dollarPredetermined overhead rate based on direct labor hours:$600,000 ÷10,000 hours = $60.00per labor hourPredetermined overhead rate based on machine hours:$600,000 ÷5,000 machine hours = $120per machine hour

Loading page image...

JiambalvoManagerial Accounting2-14b.Overhead based on labor costJob 9823Job 9824Direct material$1,000$2,000Direct labor2,7006,500Overhead*5,40013,000Total$9,100$21,500* Labor cost x $2Overhead based on labor hoursJob 9823Job 9824Direct material$1,000$2,000Direct labor2,7006,500Overhead*6,00012,000Total$9,700$20,500*Directlabor hours x $60Overhead based on machine hoursJob 9823Job 9824Direct material$1,000$2,000Direct labor2,7006,500Overhead*4,80013,200Total$8,500$21,700*Machinehours x $120c.Given that depreciation on equipment accounts for 75 percent of overheadcosts, an allocation based on machine hours seems reasonable. However,users of the job cost information should keep in mind thatmost ofoverheadapplied to jobsis not an incremental costsince depreciation is a fixed cost.

Loading page image...

Chapter 2Job-Order Costing and Modern Manufacturing Practices2-15P7.[LO5]a.Net Income, if over-applied overhead is immaterial and assigned to Cost of GoodsSold.OH applied = .75 x $700,000 =$525,000Actual OH =450,000$ 75,000Therefore, overhead was over-applied by$75,000Sales$2,500,000CGS($1,000,000-$75,000)925,000Gross Profit1,575,000Selling& Admin.Expenses1,000,000Net Income$575,000b.Net Income, if over applied overhead is material and prorated among appropriateaccounts.AdjustedBalanceProportionAdjustmentBalanceWIPInventory$50,0000.04$3,000$47,000FGInventory200,0000.1612,000188,000COGS1,000,0000.8060,000940,000Total$1,250,0001.00$75,000$1,175,000Sales$2,500,000CGS940,000Gross Profit1,560,000Selling Expenses400,000Admin Expenses600,000Net Income$560,000c.Assigningthe entire amount ofoverapplied overhead to Cost of Goods Sold resultsinhighernet income than proratingoverapplied overhead among Work in Process,Finished Goods, and Cost of Goods Sold.

Loading page image...

JiambalvoManagerial Accounting2-16P8.[LO5]a.If overapplied overhead is assigned to Cost of Goods Sold, the adjustedbalance will be:$440,000-$50,000 = $390,000.b.If overapplied overhead is assigned to Work in ProcessInventory, FinishedGoodsInventory, and Cost of Goods Sold, the adjusted balances will be:AdjustedBalanceProportionAdjustmentBalanceWIPInv.$66,0000.12$6,000$60,000FGInv.44,0000.084,00040,000COGS440,0000.8040,000400,000Total$550,0001.00$50,000$500,000P9.[LO4,5,6]a.Indirect cost per hour of service is $65:50 professionals1,600 hours = 80,000 hours per year.$5,200,000 indirect cost ÷ 80,000 hours = $65 per hour.b.Estimated cost of services for a potential client:Average salary per billable hour = $120,000 per year ÷ 1,600 hours = $75perhour.Professional service (100 hours$75 per hour)$ 7,500Indirect costs (100 hours$65per hour)6,500Total$14,000P10.[LO2,4]a.$30,000 + $40,000-$15,000 = $55,000b.$80,000 + $55,000 +$45,000 + $63,000-$82,000 = $161,000c.$95,000 + $161,000-$110,000 = $146,000d.$70,000-$60,000 = $10,000

Loading page image...

Chapter 2Job-Order Costing and Modern Manufacturing Practices2-17P11.[LO4,5]a.The predetermined overhead rate is $2.25per direct labor dollar($9,000,000 ÷4,000,000 = $2.25).b.Work in ProcessInventory5,750,000Raw Materials Inventory5,750,000c.Work in ProcessInventory4,500,000Wages payable4,500,000d.Work in ProcessInventory10,125,000Manufacturing Overhead10,125,000($4,500,000$2.25= $10,125,000)e.Cost of Goods Sold875,000Manufacturing overhead875,000($11,000,000-$10,125,000 = $875,000)P12.[LO4,5]a.Job 201$17,000 × $3.25 =$55,250Job 202$20,500 × $3.25 =66,625Job 203$9,000 × $3.25 =29,250$ 151,125b.Job 201$9,500 × $3.33=$31,635$3,000 × $4.76 =14,280$4,500 × $2.40 =10,80056,715Job 202$5,000 × $3.33=16,650$6,500 × $4.76 =30,940$9,000 × $2.40 =21,60069,190Job 203$2,000 × $3.33 =6,660$5,000× $4.76 =23,800$2,000×$2.40 =4,80035,260Total$161,165c.It appears that the relation between overhead and labor cost is different in thethree production departments. Thus, it is preferable to use separate overheadrates for each.

Loading page image...

JiambalvoManagerial Accounting2-18P13.[LO4,5]Approximately 66 percent of overhead costs($160,000 + $135,000) ÷$450,000)are related to machinery. Without additional information, it appears thatmachine hours would be an appropriate overhead allocation base.The predetermined overhead allocation rate = $450,000 ÷ 15,000 machine hours= $30 per machine hour.P14.[LO5,6]Overhead is overappliedApplied overhead ($6 x 35,000)$210,000Actual overhead200,000Overapplied overhead$ 10,000P15.[LO5, 6]a.The predetermined overhead rate is $17 per repair technician hour ($170,000 ÷10,000 = $17).b.Overhead applied = $177,000 = $119,000Overhead applied is $119,000 while actual overhead is $140,000. Thus,overhead is underapplied by $21,000$119,000–$140,000 = $(21,000)c.The journal entry to close the account to Cost of Goods Sold is:Cost of Goods Sold21,000Manufacturing Overhead21,000P16.[LO4, 5, 6]a.The predetermined overhead rate is $2,750 per hour of operating room use.($5,500,000 ÷ 2,000 hours = $2,750). The total overhead charge to Candice for3 hours of operating room usage is $8,250 ($2,750 x 3 hours).

Preview Mode

This document has 361 pages. Sign in to access the full document!

Report

Study Now!

Document Details

Related Documents

Accounting

Master Managerial Accounting Techniques

Controlling and Reporting of Real Assets

Sarbanes Oxley Act, GAAP and IFRS

Accounting Audit Final Exam MCQs 2015

Team A Week 5 Problems

IFRS or US GAAP Which is the Best Reporting Standard

Understanding Key Concepts in Managerial Accounting

Financial Reporting, Regulations, and Corporate Governance

Midterm Exam on Governmental and Not-for-Profit Accounting

Company

Explore

Study Tools