Solution Manual For Managerial Accounting, 7th Edition
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Chapter 1
Managerial Accounting in the Information Age
QUESTIONS
1. The goal of managerial accounting is to provide information needed for planning,
control, and decision making.
2. Budgeted performance is a useful benchmark for evaluating current period
performance.
3. This question asks students to identify three differences between financial and
managerial accounting. In the text, five differences are noted:
a) Managerial accounting is directed at internal rather than external users of
accounting information.
b) Managerial accounting may deviate from generally accepted accounting
principles (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 accounting
reports include: the quantity of material consumed in production, the number of
hours worked by the office staff, and the number of product defects.
5. Total variable costs change in proportion to business activity while total fixed costs
do not change.
6. Salaries of the employees in the grocery department would be a controllable cost
for the manager of the grocery department at a Walmart store. Depreciation related
to the building housing the grocery department would be a noncontrollable cost.
7. Incremental analysis involves a comparison of the revenues that change and the
costs that change when a decision alternative is considered. If incremental
revenue exceeds incremental cost, the decision alternative should be undertaken.
8. “You get what you measure!” suggests that managers’ behaviors are affected by
performance measures.
9. Information flows up and down the value chain and between companies and their
suppliers and between companies and their customers. Information technology is
helping companies track buying patterns of customers and send targeted selling
messages to them electronically. Information technology is also helping companies
better manage their supply chains and gain internal efficiencies.
10. A legal action is not necessarily ethical. Ethical actions involve “what’s right” while
legal actions involve operating within boundaries of the law.
Managerial Accounting in the Information Age
QUESTIONS
1. The goal of managerial accounting is to provide information needed for planning,
control, and decision making.
2. Budgeted performance is a useful benchmark for evaluating current period
performance.
3. This question asks students to identify three differences between financial and
managerial accounting. In the text, five differences are noted:
a) Managerial accounting is directed at internal rather than external users of
accounting information.
b) Managerial accounting may deviate from generally accepted accounting
principles (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 accounting
reports include: the quantity of material consumed in production, the number of
hours worked by the office staff, and the number of product defects.
5. Total variable costs change in proportion to business activity while total fixed costs
do not change.
6. Salaries of the employees in the grocery department would be a controllable cost
for the manager of the grocery department at a Walmart store. Depreciation related
to the building housing the grocery department would be a noncontrollable cost.
7. Incremental analysis involves a comparison of the revenues that change and the
costs that change when a decision alternative is considered. If incremental
revenue exceeds incremental cost, the decision alternative should be undertaken.
8. “You get what you measure!” suggests that managers’ behaviors are affected by
performance measures.
9. Information flows up and down the value chain and between companies and their
suppliers and between companies and their customers. Information technology is
helping companies track buying patterns of customers and send targeted selling
messages to them electronically. Information technology is also helping companies
better manage their supply chains and gain internal efficiencies.
10. A legal action is not necessarily ethical. Ethical actions involve “what’s right” while
legal actions involve operating within boundaries of the law.
Chapter 1
Managerial Accounting in the Information Age
QUESTIONS
1. The goal of managerial accounting is to provide information needed for planning,
control, and decision making.
2. Budgeted performance is a useful benchmark for evaluating current period
performance.
3. This question asks students to identify three differences between financial and
managerial accounting. In the text, five differences are noted:
a) Managerial accounting is directed at internal rather than external users of
accounting information.
b) Managerial accounting may deviate from generally accepted accounting
principles (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 accounting
reports include: the quantity of material consumed in production, the number of
hours worked by the office staff, and the number of product defects.
5. Total variable costs change in proportion to business activity while total fixed costs
do not change.
6. Salaries of the employees in the grocery department would be a controllable cost
for the manager of the grocery department at a Walmart store. Depreciation related
to the building housing the grocery department would be a noncontrollable cost.
7. Incremental analysis involves a comparison of the revenues that change and the
costs that change when a decision alternative is considered. If incremental
revenue exceeds incremental cost, the decision alternative should be undertaken.
8. “You get what you measure!” suggests that managers’ behaviors are affected by
performance measures.
9. Information flows up and down the value chain and between companies and their
suppliers and between companies and their customers. Information technology is
helping companies track buying patterns of customers and send targeted selling
messages to them electronically. Information technology is also helping companies
better manage their supply chains and gain internal efficiencies.
10. A legal action is not necessarily ethical. Ethical actions involve “what’s right” while
legal actions involve operating within boundaries of the law.
Managerial Accounting in the Information Age
QUESTIONS
1. The goal of managerial accounting is to provide information needed for planning,
control, and decision making.
2. Budgeted performance is a useful benchmark for evaluating current period
performance.
3. This question asks students to identify three differences between financial and
managerial accounting. In the text, five differences are noted:
a) Managerial accounting is directed at internal rather than external users of
accounting information.
b) Managerial accounting may deviate from generally accepted accounting
principles (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 accounting
reports include: the quantity of material consumed in production, the number of
hours worked by the office staff, and the number of product defects.
5. Total variable costs change in proportion to business activity while total fixed costs
do not change.
6. Salaries of the employees in the grocery department would be a controllable cost
for the manager of the grocery department at a Walmart store. Depreciation related
to the building housing the grocery department would be a noncontrollable cost.
7. Incremental analysis involves a comparison of the revenues that change and the
costs that change when a decision alternative is considered. If incremental
revenue exceeds incremental cost, the decision alternative should be undertaken.
8. “You get what you measure!” suggests that managers’ behaviors are affected by
performance measures.
9. Information flows up and down the value chain and between companies and their
suppliers and between companies and their customers. Information technology is
helping companies track buying patterns of customers and send targeted selling
messages to them electronically. Information technology is also helping companies
better manage their supply chains and gain internal efficiencies.
10. A legal action is not necessarily ethical. Ethical actions involve “what’s right” while
legal actions involve operating within boundaries of the law.
Jiambalvo Managerial Accounting1-2
EXERCISES
E1. [LO 3] 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 less
attention from the sales staff.
Measure 3: Average time spent handling customer service calls.
Favorable outcome: Customer service representatives handle more calls
per hour.
Unfavorable outcome: Customer questions are not fully addressed and
customer satisfaction decreases.
E2. [LO 2] The only costs that are relevant to a decision are incremental costs—that
is, costs that change when an action is taken. The cost of the old copier is a sunk
cost and will not change. Therefore, it is irrelevant to Rachel’s decision.
E3. [LO 4] The code suggests that Guthrie clarify the ethical issue by confidential
discussion with an objective advisor (this might be the IMA Ethics Counseling
service) to obtain a better understanding of possible courses of action.
Guthrie should then discuss the problem with the manager to whom his boss
reports (since his boss is involved in the ethical dilemma). If the issue is not
successfully resolved, Guthrie should consider disassociating from Bellwether.
E4. [LO 4] Possible answers include:
The CRM system notes that a customer makes significant wine purchases at
dinners. At her next stay, the hotel provides a complimentary bottle of a limited
release high-end wine resulting in 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 upgrade
which results in increased customer loyalty.
The CRM system identifies the top 1,000 guests in terms of annual billings and
does a direct mailing of certificates that can be redeemed for a free night's stay
resulting in increased customer loyalty.
The CRM system notes that a customer has traveled with a small dog and wants
the staff to walk the dog in the park in the early morning. The reservationist asks if
EXERCISES
E1. [LO 3] 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 less
attention from the sales staff.
Measure 3: Average time spent handling customer service calls.
Favorable outcome: Customer service representatives handle more calls
per hour.
Unfavorable outcome: Customer questions are not fully addressed and
customer satisfaction decreases.
E2. [LO 2] The only costs that are relevant to a decision are incremental costs—that
is, costs that change when an action is taken. The cost of the old copier is a sunk
cost and will not change. Therefore, it is irrelevant to Rachel’s decision.
E3. [LO 4] The code suggests that Guthrie clarify the ethical issue by confidential
discussion with an objective advisor (this might be the IMA Ethics Counseling
service) to obtain a better understanding of possible courses of action.
Guthrie should then discuss the problem with the manager to whom his boss
reports (since his boss is involved in the ethical dilemma). If the issue is not
successfully resolved, Guthrie should consider disassociating from Bellwether.
E4. [LO 4] Possible answers include:
The CRM system notes that a customer makes significant wine purchases at
dinners. At her next stay, the hotel provides a complimentary bottle of a limited
release high-end wine resulting in 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 upgrade
which results in increased customer loyalty.
The CRM system identifies the top 1,000 guests in terms of annual billings and
does a direct mailing of certificates that can be redeemed for a free night's stay
resulting in increased customer loyalty.
The CRM system notes that a customer has traveled with a small dog and wants
the staff to walk the dog in the park in the early morning. The reservationist asks if
Chapter 1 Managerial Accounting in the Information Age 1-3
this service is needed when booking an upcoming stay and makes sure a staff
person is available.
E5. [LO 1] Megan can prepare a profit budget for each store (planning). At the end of
the accounting period, she can compare actual profit to the budget for each store
(control). Significant differences from the budget should be investigated to
determine their causes.
E6. [LO 1] “c” is false. There are many possible reasons, other than lack of effective
management, why actual costs are greater than planned. Typically, performance
reports only suggest areas that should be investigated.
E7. [LO 1] Deidre should not be concerned that cost of sales has increased. Cost of
sales 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 of
sales ($425,000) is 61% of actual sales ($700,000). Thus, while cost of sales has
increased, it has not increased disproportionate to the increase in sales.
E8. [LO 1]. Managerial accounting focuses on accounting information for internal
decision-making. This focus differs from financial accounting in a number of ways.
For example managerial accounting: 1) focuses on internal users, 2) can deviate
from generally accepted accounting principles (GAAP), 3) presents more detailed
information, 4) presents more nonmonetary information, and 5) places emphasis
on the future.
E9. [LO 1] For purposes of awarding bonuses, it may be advisable to record sales
when orders are placed so that the sales force is rewarded on a timely basis. If the
company waited until the order was delivered, the sales force might be rewarded
more than a year after obtaining a customer order. The point is that for internal
reporting purposes, companies need not follow GAAP.
E10. [LO 2]
a. variable
b. fixed
c. variable
d. fixed
E11. [LO 2]
a. variable
b. variable
c. fixed
d. fixed
e. variable
this service is needed when booking an upcoming stay and makes sure a staff
person is available.
E5. [LO 1] Megan can prepare a profit budget for each store (planning). At the end of
the accounting period, she can compare actual profit to the budget for each store
(control). Significant differences from the budget should be investigated to
determine their causes.
E6. [LO 1] “c” is false. There are many possible reasons, other than lack of effective
management, why actual costs are greater than planned. Typically, performance
reports only suggest areas that should be investigated.
E7. [LO 1] Deidre should not be concerned that cost of sales has increased. Cost of
sales 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 of
sales ($425,000) is 61% of actual sales ($700,000). Thus, while cost of sales has
increased, it has not increased disproportionate to the increase in sales.
E8. [LO 1]. Managerial accounting focuses on accounting information for internal
decision-making. This focus differs from financial accounting in a number of ways.
For example managerial accounting: 1) focuses on internal users, 2) can deviate
from generally accepted accounting principles (GAAP), 3) presents more detailed
information, 4) presents more nonmonetary information, and 5) places emphasis
on the future.
E9. [LO 1] For purposes of awarding bonuses, it may be advisable to record sales
when orders are placed so that the sales force is rewarded on a timely basis. If the
company waited until the order was delivered, the sales force might be rewarded
more than a year after obtaining a customer order. The point is that for internal
reporting purposes, companies need not follow GAAP.
E10. [LO 2]
a. variable
b. fixed
c. variable
d. fixed
E11. [LO 2]
a. variable
b. variable
c. fixed
d. fixed
e. variable
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Jiambalvo Managerial Accounting1-4
E12. [LO 2] 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 (who
decides how much to spend on advertising) but it would be a non-controllable cost
for the manager of a department at the store (who is not consulted about the
amount to spend on advertising).
E13. [LO 2, 3] Takesha should not consider how much he paid for the old machine
because that is a sunk cost. He should consider the value of the old machine in
the used lab machine market—an incremental cash inflow equal to the market
value of the old machine that will result if he buys a new lab machine.
E14. [LO 2]
Incremental revenue per day $2,500
Less incremental costs:
Labor $700
Parts 500
Transportation 100
Office staff 200 1,500
Incremental Profit per Day $1,000
Opportunity cost = $1,000 per day x 52 days = $52,000
Rent and depreciation do not enter into the calculation of the opportunity cost
since these costs are not incremental (they will be incurred whether or not Ken
decides to stay open on Saturday).
E15. [LO 2] If Zachary visits his friend, he will incur a $560 (16 hours x $35)
opportunity cost.
E16. [LO 2, 3] The incremental production cost per gallon is likely to be less than $6
because part of the $6 amount relates to fixed costs such as depreciation of
equipment. Since the incremental cost per gallon is less than $6, the incremental
cost to produce 15,000 gallons is less than $90,000.
E17. [LO 3]
a. When a second shift is added, material costs, workers’ salaries, and benefits
are likely to increase.
b. Depreciation of the building will not increase when a second shift is added.
E18. [LO 3] The owner of LA Porsche may link Hulmut’s annual bonus to the average
customer satisfaction rating. Thus, there is a link between the measure and
Hulmut’s financial welfare. Some actions that Hulmut can take that may help
ratings would be to 1) provide a comfortable waiting area for customers, 2) provide
free coffee and snacks in the waiting area, and 3) provide transportation service for
customers while their cars are under repair.
E12. [LO 2] 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 (who
decides how much to spend on advertising) but it would be a non-controllable cost
for the manager of a department at the store (who is not consulted about the
amount to spend on advertising).
E13. [LO 2, 3] Takesha should not consider how much he paid for the old machine
because that is a sunk cost. He should consider the value of the old machine in
the used lab machine market—an incremental cash inflow equal to the market
value of the old machine that will result if he buys a new lab machine.
E14. [LO 2]
Incremental revenue per day $2,500
Less incremental costs:
Labor $700
Parts 500
Transportation 100
Office staff 200 1,500
Incremental Profit per Day $1,000
Opportunity cost = $1,000 per day x 52 days = $52,000
Rent and depreciation do not enter into the calculation of the opportunity cost
since these costs are not incremental (they will be incurred whether or not Ken
decides to stay open on Saturday).
E15. [LO 2] If Zachary visits his friend, he will incur a $560 (16 hours x $35)
opportunity cost.
E16. [LO 2, 3] The incremental production cost per gallon is likely to be less than $6
because part of the $6 amount relates to fixed costs such as depreciation of
equipment. Since the incremental cost per gallon is less than $6, the incremental
cost to produce 15,000 gallons is less than $90,000.
E17. [LO 3]
a. When a second shift is added, material costs, workers’ salaries, and benefits
are likely to increase.
b. Depreciation of the building will not increase when a second shift is added.
E18. [LO 3] The owner of LA Porsche may link Hulmut’s annual bonus to the average
customer satisfaction rating. Thus, there is a link between the measure and
Hulmut’s financial welfare. Some actions that Hulmut can take that may help
ratings would be to 1) provide a comfortable waiting area for customers, 2) provide
free coffee and snacks in the waiting area, and 3) provide transportation service for
customers while their cars are under repair.
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Chapter 1 Managerial Accounting in the Information Age 1-5
E19. [LO 5] The IMA’s Statement of Ethical Professional Practice does not directly
address this issue so students may take either side of this issue.
Shauna does have obligations: Students could argue that the practice of
entertaining customers with lavish vacations is a type of bribe that would violate
the Integrity standard (refrain from engaging in any conduct that would prejudice
carrying out duties ethically).
Shauna does not have obligations: Students could argue that the practice of
entertaining customers is not against the law and does not reduce one’s ability to
carry out duties ethically.
E20. [LO 5]. Responses will vary. Examples of Controller duties are as follows: Cost
accounting, preparation of financial statements in accordance with GAAP,
budgeting, variance analysis, advisor to senior leadership. Examples of skills are
as follows: BA in Accounting, CPA, 5-10 years accounting experience, 5 years
management experience, excellent written and verbal communication skills.
E21. Student answers will vary.
E19. [LO 5] The IMA’s Statement of Ethical Professional Practice does not directly
address this issue so students may take either side of this issue.
Shauna does have obligations: Students could argue that the practice of
entertaining customers with lavish vacations is a type of bribe that would violate
the Integrity standard (refrain from engaging in any conduct that would prejudice
carrying out duties ethically).
Shauna does not have obligations: Students could argue that the practice of
entertaining customers is not against the law and does not reduce one’s ability to
carry out duties ethically.
E20. [LO 5]. Responses will vary. Examples of Controller duties are as follows: Cost
accounting, preparation of financial statements in accordance with GAAP,
budgeting, variance analysis, advisor to senior leadership. Examples of skills are
as follows: BA in Accounting, CPA, 5-10 years accounting experience, 5 years
management experience, excellent written and verbal communication skills.
E21. Student answers will vary.
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Jiambalvo Managerial Accounting1-6
PROBLEMS
P1. [LO 1, 2]
a. Santiago’s Salsa
Budgeted Production Costs
May 2020
30,000
Production Jars of Salsa
Ingredient cost* $24,000
Labor cost** 14,400
Rent 5,000
Depreciation 6,000
Other 1,000
Total $50,400
*($20,000 ÷ 25,000) x 30,000
**($12,000 ÷ 25,000) x 30,000
b. With a wage rate of $20, 720 hours ($14,400 ÷ $20) will be needed in May. In
April, only 600 hours were needed ($12,000 ÷ $20). Thus, 120 additional hours
will be needed in May. The company can plan on hiring a part-time worker in
May (approximately 30 hours per week).
Unless management anticipates the need for the part-time worker (by preparing
a 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 cost
per unit in May is anticipated to be only $1.68 ($50,400 ÷ 30,000 units). Unit
cost declines because some costs are fixed and do not increase with increases
in volume.
PROBLEMS
P1. [LO 1, 2]
a. Santiago’s Salsa
Budgeted Production Costs
May 2020
30,000
Production Jars of Salsa
Ingredient cost* $24,000
Labor cost** 14,400
Rent 5,000
Depreciation 6,000
Other 1,000
Total $50,400
*($20,000 ÷ 25,000) x 30,000
**($12,000 ÷ 25,000) x 30,000
b. With a wage rate of $20, 720 hours ($14,400 ÷ $20) will be needed in May. In
April, only 600 hours were needed ($12,000 ÷ $20). Thus, 120 additional hours
will be needed in May. The company can plan on hiring a part-time worker in
May (approximately 30 hours per week).
Unless management anticipates the need for the part-time worker (by preparing
a 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 cost
per unit in May is anticipated to be only $1.68 ($50,400 ÷ 30,000 units). Unit
cost declines because some costs are fixed and do not increase with increases
in volume.
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Chapter 1 Managerial Accounting in the Information Age 1-7
P2. [LO 2, 3]
a. The variable costs are $1.28 per jar of salsa as follows:
25,000
Production Jars of Salsa
Ingredient cost $20,000
Labor cost 12,000
Total $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 $100,000
as follows:
Original Revenue (325,000 × $5.00) $1,625,000
Revenue with price change (375,000 × $4.60) 1,725,000
Incremental revenue associated with price change $ 100,000
c. 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. [LO 1, 2]
Sales Department
Budgeted Costs, 2020
(Assuming Sales of $11,000,000)
Salaries (fixed) $400,000
Commissions (variable) 165,000
Advertising (fixed) 100,000
Charge for office space (fixed) 3,000
Office supplies & forms (variable) 2,200
Total $670,200
Commissions [($150 ÷ $10,000) x $11, 000,000] = $165,000
Office supplies & forms [($2,000 ÷ $10,000,000) x $11,000,000] = $2,200
P2. [LO 2, 3]
a. The variable costs are $1.28 per jar of salsa as follows:
25,000
Production Jars of Salsa
Ingredient cost $20,000
Labor cost 12,000
Total $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 $100,000
as follows:
Original Revenue (325,000 × $5.00) $1,625,000
Revenue with price change (375,000 × $4.60) 1,725,000
Incremental revenue associated with price change $ 100,000
c. 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. [LO 1, 2]
Sales Department
Budgeted Costs, 2020
(Assuming Sales of $11,000,000)
Salaries (fixed) $400,000
Commissions (variable) 165,000
Advertising (fixed) 100,000
Charge for office space (fixed) 3,000
Office supplies & forms (variable) 2,200
Total $670,200
Commissions [($150 ÷ $10,000) x $11, 000,000] = $165,000
Office supplies & forms [($2,000 ÷ $10,000,000) x $11,000,000] = $2,200
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Jiambalvo Managerial Accounting1-8
P4. [LO 1]
a. Sales exceeded the budget by 10.7% ($75,000 ÷ $700,000), while cost of
merchandise increased by 22.9% and salaries increased by only 11.4%. Thus,
the investigation should focus on cost of merchandise since a 22.9% increase
is 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 goods
would be useful.
P5. [LO 1, 2]
Cyril should expect some costs to be greater than budgeted. Variable
production costs will increase with the number of units produced, while fixed
production costs are not expected to increase. In the example, it is reasonable
to assume that materials, direct labor and utilities are variable costs while the
remaining costs (supervisory salaries, machine maintenance, depreciation of
building, depreciation of equipment and janitorial) are fixed. (Note that a case
can be made for other classifications.)
P6. [LO 1, 2, 3]
a. The information on the income statement, balance sheet and statement of cash
flow is highly summarized for the entity as a whole. Linda needs product level
information which is much more detailed.
b. Examples of nonfinancial measures might be: Web site visits, number of repeat
customers, delivery time, and customer satisfaction.
c. Linda could improve customer satisfaction ratings by offering discounts,
improving delivery time, improving customer service, and improving quality.
d. Examples of costs in Linda’s operation are cost of contact lenses (variable),
depreciation of computing equipment (fixed), salaries of information technology
staff (fixed), and shipping (variable).
P7. [LO 3]
a. Managers may focus (too much) on new customers and ignore current
customers who account for most of the company’s sales.
b. Managers could decrease cost of goods sold by overproducing (i.e., producing
more than needed for current sales and reasonable inventory) in an effort to
decrease unit cost and cost of sales. However, this would result in an inventory
buildup and excess inventory holding costs.
P4. [LO 1]
a. Sales exceeded the budget by 10.7% ($75,000 ÷ $700,000), while cost of
merchandise increased by 22.9% and salaries increased by only 11.4%. Thus,
the investigation should focus on cost of merchandise since a 22.9% increase
is 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 goods
would be useful.
P5. [LO 1, 2]
Cyril should expect some costs to be greater than budgeted. Variable
production costs will increase with the number of units produced, while fixed
production costs are not expected to increase. In the example, it is reasonable
to assume that materials, direct labor and utilities are variable costs while the
remaining costs (supervisory salaries, machine maintenance, depreciation of
building, depreciation of equipment and janitorial) are fixed. (Note that a case
can be made for other classifications.)
P6. [LO 1, 2, 3]
a. The information on the income statement, balance sheet and statement of cash
flow is highly summarized for the entity as a whole. Linda needs product level
information which is much more detailed.
b. Examples of nonfinancial measures might be: Web site visits, number of repeat
customers, delivery time, and customer satisfaction.
c. Linda could improve customer satisfaction ratings by offering discounts,
improving delivery time, improving customer service, and improving quality.
d. Examples of costs in Linda’s operation are cost of contact lenses (variable),
depreciation of computing equipment (fixed), salaries of information technology
staff (fixed), and shipping (variable).
P7. [LO 3]
a. Managers may focus (too much) on new customers and ignore current
customers who account for most of the company’s sales.
b. Managers could decrease cost of goods sold by overproducing (i.e., producing
more than needed for current sales and reasonable inventory) in an effort to
decrease unit cost and cost of sales. However, this would result in an inventory
buildup and excess inventory holding costs.
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Chapter 1 Managerial Accounting in the Information Age 1-9
c. Managers may be able to decrease selling and administrative expense in the
short-run by cutting the number of employees. However, this may hurt
employee morale and customer service. If that is the case, it may, in the long
run, hurt company profitability.
P8. [LO 2, 3]
a. Incremental revenue will be $640 ($160 x 4).
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, which
are relatively low (e.g., shampoo and soap are inexpensive and cleaning
personnel are paid fairly low wages).
P9. [LO 5]
Answers based on Sears Holding Company Code of Conduct.
a. “For example, you may not share pricing data among competing vendors.”
b. “Additionally, associates may not use Company time or resources to support
personal political activities or use their position to coerce or pressure associates
to make contributions or support a candidate or political cause.”
c. “Under no circumstances may an associate accept, keep, or purchase a sample
directly from a vendor."
d. “You must not disclose Sears Holding Company proprietary or confidential
information to anyone not authorized to receive it or with no need to know the
information.”
c. Managers may be able to decrease selling and administrative expense in the
short-run by cutting the number of employees. However, this may hurt
employee morale and customer service. If that is the case, it may, in the long
run, hurt company profitability.
P8. [LO 2, 3]
a. Incremental revenue will be $640 ($160 x 4).
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, which
are relatively low (e.g., shampoo and soap are inexpensive and cleaning
personnel are paid fairly low wages).
P9. [LO 5]
Answers based on Sears Holding Company Code of Conduct.
a. “For example, you may not share pricing data among competing vendors.”
b. “Additionally, associates may not use Company time or resources to support
personal political activities or use their position to coerce or pressure associates
to make contributions or support a candidate or political cause.”
c. “Under no circumstances may an associate accept, keep, or purchase a sample
directly from a vendor."
d. “You must not disclose Sears Holding Company proprietary or confidential
information to anyone not authorized to receive it or with no need to know the
information.”
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Jiambalvo Managerial Accounting1-10
Case 1-1. [LO 2, 5]
LOCAL 635
Summary
Union 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 the
context 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 this
possible?
5. How should the contract be worded to avoid similar problems in the future?
Discussion
I start this case by asking a student to explain the source of conflict between Local 635
and the Riverside Hotel. The student is likely to explain that while employees are
focused on the incremental cost of a meal, management is focused on various fixed
costs as well as the incremental costs. This leads to a major take away—there is no
generally 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 exactly
cost means.
To begin working on the vocabulary of managerial accounting, I ask students for
examples of variable, fixed, sunk, and opportunity costs in the context of the Local 635
case. The primary variable cost is the cost of food items (e.g., the cost of meat and
salad ingredients). A fixed cost would be the depreciation on the oven (which is also a
sunk cost). An opportunity cost would arise if a worker ate the last prime rib and the
hotel lost a sale.
I then ask the class to estimate the incremental cost of an employee meal. Most
students think it is less than $15. I then suggest that it is possible that the incremental
cost is more than $300! When asked to explain how this is possible, students focus on
opportunity costs. Suppose an employee eats the last prime rib just before a steady
Case 1-1. [LO 2, 5]
LOCAL 635
Summary
Union 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 the
context 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 this
possible?
5. How should the contract be worded to avoid similar problems in the future?
Discussion
I start this case by asking a student to explain the source of conflict between Local 635
and the Riverside Hotel. The student is likely to explain that while employees are
focused on the incremental cost of a meal, management is focused on various fixed
costs as well as the incremental costs. This leads to a major take away—there is no
generally 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 exactly
cost means.
To begin working on the vocabulary of managerial accounting, I ask students for
examples of variable, fixed, sunk, and opportunity costs in the context of the Local 635
case. The primary variable cost is the cost of food items (e.g., the cost of meat and
salad ingredients). A fixed cost would be the depreciation on the oven (which is also a
sunk cost). An opportunity cost would arise if a worker ate the last prime rib and the
hotel lost a sale.
I then ask the class to estimate the incremental cost of an employee meal. Most
students think it is less than $15. I then suggest that it is possible that the incremental
cost is more than $300! When asked to explain how this is possible, students focus on
opportunity costs. Suppose an employee eats the last prime rib just before a steady
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Chapter 1 Managerial Accounting in the Information Age 1-11
customer, who always eats prime rib, comes into the restaurant. If this customer
becomes disgruntled and never returns to the restaurant, the hotel could easily be out
$300 or more in the next few months.
How should the contract be rewritten? Students generally recommend that meal
subsidies be based on some percent of menu prices. For example, meals could be free
as 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, kitchen
workers must be motivated to do a good job. Thus, the hotel should be motivated to
settle this dispute quickly in a way that seems fair to workers.
customer, who always eats prime rib, comes into the restaurant. If this customer
becomes disgruntled and never returns to the restaurant, the hotel could easily be out
$300 or more in the next few months.
How should the contract be rewritten? Students generally recommend that meal
subsidies be based on some percent of menu prices. For example, meals could be free
as 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, kitchen
workers must be motivated to do a good job. Thus, the hotel should be motivated to
settle this dispute quickly in a way that seems fair to workers.
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Jiambalvo Managerial Accounting1-12
Case 1-2. [LO 3]
BOSWELL PLUMBING PRODUCTS
Summary
A 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 standpoint
of incremental analysis?
3. What cost information would be relevant to a decision to drop the product that would
not be relevant to a decision to increase a production run by 100 units?
Discussion
A senior manager has asked Nick Somner to tell her the cost of the D45 valve. Nick
replies, “Why do you want to know?” This response is appropriate from the standpoint of
incremental analysis. The cost information that the senior manager needs to make a
decision depends on the decision she is facing. Thus, “Why do you want to know?” is
just Nick’s way of asking “What decision are you facing?” If the senior manager is
thinking of dropping the product, Nick should provide information on the incremental
costs that will be saved if the product is dropped. If she is thinking of increasing a
production 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 the
production line, the cost of ordering materials, and the cost of supervision. None of
these costs are relevant to a decision to increase a production run by 100 units since
none of these costs will change with the addition of 100 units to a planned production
run.
Case 1-2. [LO 3]
BOSWELL PLUMBING PRODUCTS
Summary
A 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 standpoint
of incremental analysis?
3. What cost information would be relevant to a decision to drop the product that would
not be relevant to a decision to increase a production run by 100 units?
Discussion
A senior manager has asked Nick Somner to tell her the cost of the D45 valve. Nick
replies, “Why do you want to know?” This response is appropriate from the standpoint of
incremental analysis. The cost information that the senior manager needs to make a
decision depends on the decision she is facing. Thus, “Why do you want to know?” is
just Nick’s way of asking “What decision are you facing?” If the senior manager is
thinking of dropping the product, Nick should provide information on the incremental
costs that will be saved if the product is dropped. If she is thinking of increasing a
production 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 the
production line, the cost of ordering materials, and the cost of supervision. None of
these costs are relevant to a decision to increase a production run by 100 units since
none of these costs will change with the addition of 100 units to a planned production
run.
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Chapter 2
Job-Order Costing for Manufacturing and Service Companies
QUESTIONS
1. Manufacturing costs include all costs associated with the production of goods.
Examples of manufacturing costs are: labor costs of workers directly involved with
manufacturing goods, cost of all materials directly traced to products, indirect
factory labor, indirect materials used in production, depreciation of production
equipment, and depreciation of the manufacturing facility.
Nonmanufacturing costs are all costs that are not associated with the production of
goods. These typically include selling costs and general and administrative costs.
2. Product costs are assigned to goods produced and become an expense when
inventory is sold. Period costs are not assigned to goods produced. Period costs
are identified with accounting periods and are expensed in the period incurred.
3. Two common types of product costing systems are (1) job-order costing systems
and (2) process costing systems.
Job-order costing systems are generally used by companies that produce
individual products or batches of unique products. Companies that use job-order
costing systems include custom home builders, airplane manufacturers, and ship-
building companies.
Process costing systems are used by companies that produce large numbers of
identical items passing through uniform and continuous production operations.
Process costing tends to be used by beverage companies and producers of
chemicals, 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, and
manufacturing overhead related to a particular job.
5. Actual overhead is not known until the end of the accounting period. If managers
used actual overhead rates to apply overhead to jobs, they would have to wait until
the end of the period to determine the cost of jobs. In order to make timely
decisions, managers need to know the cost of jobs before the end of the
accounting period.
Job-Order Costing for Manufacturing and Service Companies
QUESTIONS
1. Manufacturing costs include all costs associated with the production of goods.
Examples of manufacturing costs are: labor costs of workers directly involved with
manufacturing goods, cost of all materials directly traced to products, indirect
factory labor, indirect materials used in production, depreciation of production
equipment, and depreciation of the manufacturing facility.
Nonmanufacturing costs are all costs that are not associated with the production of
goods. These typically include selling costs and general and administrative costs.
2. Product costs are assigned to goods produced and become an expense when
inventory is sold. Period costs are not assigned to goods produced. Period costs
are identified with accounting periods and are expensed in the period incurred.
3. Two common types of product costing systems are (1) job-order costing systems
and (2) process costing systems.
Job-order costing systems are generally used by companies that produce
individual products or batches of unique products. Companies that use job-order
costing systems include custom home builders, airplane manufacturers, and ship-
building companies.
Process costing systems are used by companies that produce large numbers of
identical items passing through uniform and continuous production operations.
Process costing tends to be used by beverage companies and producers of
chemicals, 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, and
manufacturing overhead related to a particular job.
5. Actual overhead is not known until the end of the accounting period. If managers
used actual overhead rates to apply overhead to jobs, they would have to wait until
the end of the period to determine the cost of jobs. In order to make timely
decisions, managers need to know the cost of jobs before the end of the
accounting period.
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Jiambalvo Managerial Accounting2-2
6. An important characteristic of a good overhead allocation base is that it should be
strongly related to overhead cost. Assume that setup costs are classified as
manufacturing overhead. The number of setups that a job requires would be a
better allocation base for setup costs than would the number of direct labor hours
worked on that job. Number of setups is more closely related to setup costs than is
the number of direct labor hours and, therefore, the number of setups is a better
allocation base.
7. In highly automated companies where direct labor cost is a small part of total
manufacturing costs, it is unlikely that overhead costs vary with direct labor.
Further, in such companies, predetermined overhead rates based on direct labor
may be quite large. Thus, even a small change in labor (the allocation base) could
have a large effect on the overhead cost allocated to a job.
Companies that are capital-intensive should consider using machine hours as an
allocation base (or better still, they should consider the use of an activity-based
costing system, which is discussed in more detail in Chapter 6).
8. It is necessary to apportion over- or under-applied overhead among Work in
Process Inventory, Finished Goods Inventory, and Cost of Goods Sold accounts if
the amount in the Manufacturing Overhead account is material. This assumes that
the balances in Work in Process and Finished Goods are relatively large. If a
company used a just-in-time systems and these balances were quite small, then it
would be reasonable to just close over- or under-applied overhead to Cost of
Goods Sold.
9. An unexpected increase in production would typically result in overhead being
overapplied. Overhead is applied using a predetermined rate which equals
estimated total overhead cost (including variable and fixed overhead) divided by
the estimated level of the allocation base. Overhead applied equals the
predetermined rate times the actual use of the allocation base. An unexpected
increase in production means that the fixed component of the predetermined
overhead rate will be multiplied by a larger number than anticipated. Thus, more
fixed overhead will be applied than the company is likely to incur.
10. As companies move to computer-controlled manufacturing systems and greater use of
robotics, direct labor will likely decrease (due to decreased need for workers) and
manufacturing overhead will likely increase (due to higher depreciation costs
associated with the computer-controlled systems).
6. An important characteristic of a good overhead allocation base is that it should be
strongly related to overhead cost. Assume that setup costs are classified as
manufacturing overhead. The number of setups that a job requires would be a
better allocation base for setup costs than would the number of direct labor hours
worked on that job. Number of setups is more closely related to setup costs than is
the number of direct labor hours and, therefore, the number of setups is a better
allocation base.
7. In highly automated companies where direct labor cost is a small part of total
manufacturing costs, it is unlikely that overhead costs vary with direct labor.
Further, in such companies, predetermined overhead rates based on direct labor
may be quite large. Thus, even a small change in labor (the allocation base) could
have a large effect on the overhead cost allocated to a job.
Companies that are capital-intensive should consider using machine hours as an
allocation base (or better still, they should consider the use of an activity-based
costing system, which is discussed in more detail in Chapter 6).
8. It is necessary to apportion over- or under-applied overhead among Work in
Process Inventory, Finished Goods Inventory, and Cost of Goods Sold accounts if
the amount in the Manufacturing Overhead account is material. This assumes that
the balances in Work in Process and Finished Goods are relatively large. If a
company used a just-in-time systems and these balances were quite small, then it
would be reasonable to just close over- or under-applied overhead to Cost of
Goods Sold.
9. An unexpected increase in production would typically result in overhead being
overapplied. Overhead is applied using a predetermined rate which equals
estimated total overhead cost (including variable and fixed overhead) divided by
the estimated level of the allocation base. Overhead applied equals the
predetermined rate times the actual use of the allocation base. An unexpected
increase in production means that the fixed component of the predetermined
overhead rate will be multiplied by a larger number than anticipated. Thus, more
fixed overhead will be applied than the company is likely to incur.
10. As companies move to computer-controlled manufacturing systems and greater use of
robotics, direct labor will likely decrease (due to decreased need for workers) and
manufacturing overhead will likely increase (due to higher depreciation costs
associated with the computer-controlled systems).
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Chapter 2 Job-Order Costing and Modern Manufacturing Practices 2-3
EXERCISES
E1. [LO 4] Managers at Company A will perceive that overhead cost allocated to jobs
increases with the amount of direct labor used. If they are evaluated on how well they
control the cost of jobs, they will try to cut back on labor, which not only reduces labor
costs 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 C
will make a special effort to control material costs (by reducing waste, searching for
lower prices, etc). Note that the measure of performance (reduction in job costs)
combined with the approach to allocating overhead drives managers to focus on
different factors—this is a good example of “You get what you measure!”
E2. [LO 5, 7] If over- or underapplied overhead is large, we typically allocate it to Work in
Process, Finished Goods and Cost of Goods Sold based on the relative balances in
these accounts. However, if a company uses JIT, the balances in Work in Process
and Finished Goods are likely to be quite small compared to the balance in Cost of
Goods Sold. Thus, there will be only a small difference between assigning all of the
over- or under-applied overhead to cost of goods sold versus apportioning it among
the three accounts based on their relative balances.
E3. [LO 4, 5] The predetermined overhead rate at Precision Custom Molds is $100 per
direct 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. [LO 3]
a. P d. J
b. P e. P
c. J f. J
E5. [LO 1, 2]
a. Y e. N
b. N f. Y
c. Y g. Y
d. Y h. N
EXERCISES
E1. [LO 4] Managers at Company A will perceive that overhead cost allocated to jobs
increases with the amount of direct labor used. If they are evaluated on how well they
control the cost of jobs, they will try to cut back on labor, which not only reduces labor
costs 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 C
will make a special effort to control material costs (by reducing waste, searching for
lower prices, etc). Note that the measure of performance (reduction in job costs)
combined with the approach to allocating overhead drives managers to focus on
different factors—this is a good example of “You get what you measure!”
E2. [LO 5, 7] If over- or underapplied overhead is large, we typically allocate it to Work in
Process, Finished Goods and Cost of Goods Sold based on the relative balances in
these accounts. However, if a company uses JIT, the balances in Work in Process
and Finished Goods are likely to be quite small compared to the balance in Cost of
Goods Sold. Thus, there will be only a small difference between assigning all of the
over- or under-applied overhead to cost of goods sold versus apportioning it among
the three accounts based on their relative balances.
E3. [LO 4, 5] The predetermined overhead rate at Precision Custom Molds is $100 per
direct 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. [LO 3]
a. P d. J
b. P e. P
c. J f. J
E5. [LO 1, 2]
a. Y e. N
b. N f. Y
c. Y g. Y
d. Y h. N
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Jiambalvo Managerial Accounting2-4
E6. [LO 2, 4] Note that direct materials are charged to Work in Process Inventory
while indirect materials are charged to Manufacturing Overhead.
Work in Process Inventory 200,000
Raw Materials Inventory 200,000
Manufacturing Overhead 10,000
Raw Materials Inventory 10,000
E7. [LO 2, 4] Note that direct materials are charged to Work in Process Inventory
while indirect materials are charged to Manufacturing Overhead.
Work in Process Inventory 1,500
Raw Materials Inventory 1,500
(250 + 350 + 400 + 500 = 1,500)
Manufacturing Overhead 100
Raw Materials Inventory 100
E8. [LO 2, 4] Note that direct labor is charged to Work in Process Inventory while
indirect labor is charged to Manufacturing Overhead.
Work in Process Inventory 70,000
Wages Payable 70,000
Manufacturing Overhead 50,000
Wages Payable 50,000
E6. [LO 2, 4] Note that direct materials are charged to Work in Process Inventory
while indirect materials are charged to Manufacturing Overhead.
Work in Process Inventory 200,000
Raw Materials Inventory 200,000
Manufacturing Overhead 10,000
Raw Materials Inventory 10,000
E7. [LO 2, 4] Note that direct materials are charged to Work in Process Inventory
while indirect materials are charged to Manufacturing Overhead.
Work in Process Inventory 1,500
Raw Materials Inventory 1,500
(250 + 350 + 400 + 500 = 1,500)
Manufacturing Overhead 100
Raw Materials Inventory 100
E8. [LO 2, 4] Note that direct labor is charged to Work in Process Inventory while
indirect labor is charged to Manufacturing Overhead.
Work in Process Inventory 70,000
Wages Payable 70,000
Manufacturing Overhead 50,000
Wages Payable 50,000
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Chapter 2 Job-Order Costing and Modern Manufacturing Practices 2-5
E9. [LO 2, 4]
a. Job No. 201
110 hrs. $10/hr $1,100
90 hrs. $21/hr. 1,890
40 hrs. $12/hr. 480
Total $3,470
Job No. 202
50 hrs. $20/hr. $1,000
Job No. 203
70 hrs. $18/hr. $1,260
b. Labor Report for the month of February (by job):
Time
Job Ticket Hours Rate Cost
201 2101 110 10.00 $1,100
201 2102 90 21.00 1,890
201 2103 40 12.00 480
240 3,470
202 2104 50 20.00 1,000
203 2105 70 18.00 1,260
Total labor charges $5,730
Work in Process Inventory 5,730
Wages Payable 5,730
E10. [LO 5]
(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 = $30 per machine hour
E9. [LO 2, 4]
a. Job No. 201
110 hrs. $10/hr $1,100
90 hrs. $21/hr. 1,890
40 hrs. $12/hr. 480
Total $3,470
Job No. 202
50 hrs. $20/hr. $1,000
Job No. 203
70 hrs. $18/hr. $1,260
b. Labor Report for the month of February (by job):
Time
Job Ticket Hours Rate Cost
201 2101 110 10.00 $1,100
201 2102 90 21.00 1,890
201 2103 40 12.00 480
240 3,470
202 2104 50 20.00 1,000
203 2105 70 18.00 1,260
Total labor charges $5,730
Work in Process Inventory 5,730
Wages Payable 5,730
E10. [LO 5]
(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 = $30 per machine hour
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Jiambalvo Managerial Accounting2-6
E11. [LO 4, 5, 6]
a. The use of predetermined overhead rates makes it possible to cost jobs
immediately after they are completed. If a company used an actual overhead
rate, 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 be
detrimental to customer service and company cash flows to have to wait until the
end 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) = $362.50
E12. [LO 4, 5]
a. Predetermined overhead rates:
Allocation base Predetermined Overhead Rate
Direct labor hours $1,000,000 ÷ 20,000 DLH = $50 per direct labor hour
Direct labor cost $1,000,000 ÷ $625,000 = $1.60 per dollar of direct labor cost
Machine hours $1,000,000 ÷ 20,000 MH = $50 per machine hour
Direct material cost $1,000,000 ÷ $800,000 = $1.25 per dollar of direct material
b. Cost of Job No. 253 using different allocation bases:
Cost DLH DL cost MH DM cost
Direct Materials $ 3,000 $ 3,000 $ 3,000 $ 3,000
Direct labor 3,750 3,750 3,750 3,750
Manufacturing Overhead* 7,500 6,000 5,000 3,750
Total $14,250 $12,750 $11,750 $10,550
*Overhead rates in “a” above x actual activity.
E11. [LO 4, 5, 6]
a. The use of predetermined overhead rates makes it possible to cost jobs
immediately after they are completed. If a company used an actual overhead
rate, 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 be
detrimental to customer service and company cash flows to have to wait until the
end 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) = $362.50
E12. [LO 4, 5]
a. Predetermined overhead rates:
Allocation base Predetermined Overhead Rate
Direct labor hours $1,000,000 ÷ 20,000 DLH = $50 per direct labor hour
Direct labor cost $1,000,000 ÷ $625,000 = $1.60 per dollar of direct labor cost
Machine hours $1,000,000 ÷ 20,000 MH = $50 per machine hour
Direct material cost $1,000,000 ÷ $800,000 = $1.25 per dollar of direct material
b. Cost of Job No. 253 using different allocation bases:
Cost DLH DL cost MH DM cost
Direct Materials $ 3,000 $ 3,000 $ 3,000 $ 3,000
Direct labor 3,750 3,750 3,750 3,750
Manufacturing Overhead* 7,500 6,000 5,000 3,750
Total $14,250 $12,750 $11,750 $10,550
*Overhead rates in “a” above x actual activity.
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Chapter 2 Job-Order Costing and Modern Manufacturing Practices 2-7
E13. [LO 2, 4, 5]
a. Overhead applied is equal to $3 $100,000 of direct labor = $300,000.
Work in Process Inventory $300,000
Manufacturing Overhead $300,000
b. Actual overhead is $260,000
Manufacturing Overhead 260,000
Raw Materials Inventory 40,000
Wages Payable 80,000
Utilities Payable 25,000
Accumulated Depreciation 60,000
Repairs Payable 55,000
E14. [LO 5, 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 close
the account to Cost of Goods Sold is:
Manufacturing Overhead 40,000
Cost of Goods Sold 40,000
b. Closing the balance in Manufacturing Overhead leads to product costs that are
consistent with actual overhead costs rather than estimated overhead costs.
c. Because Star Plastics uses a just-in-time inventory system, the balances in Work
in Process and Finished Goods are likely to be quite small compared to Cost of
Goods Sold. Thus, there is not likely to be a significant difference between
charging the entire amount of overapplied overhead to Cost of Goods Sold
versus apportioning it among Work in Process, Finished Goods and Cost of
Goods Sold.
E15. [LO 4, 5]
Cost Summary: Job 325
Direct Material $10,000
Direct Labor (250 hours x $16/hour) 4,000
Manufacturing Overhead:
($25 per direct labor hour x 250 hours) 6,250
Total $20,250
E13. [LO 2, 4, 5]
a. Overhead applied is equal to $3 $100,000 of direct labor = $300,000.
Work in Process Inventory $300,000
Manufacturing Overhead $300,000
b. Actual overhead is $260,000
Manufacturing Overhead 260,000
Raw Materials Inventory 40,000
Wages Payable 80,000
Utilities Payable 25,000
Accumulated Depreciation 60,000
Repairs Payable 55,000
E14. [LO 5, 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 close
the account to Cost of Goods Sold is:
Manufacturing Overhead 40,000
Cost of Goods Sold 40,000
b. Closing the balance in Manufacturing Overhead leads to product costs that are
consistent with actual overhead costs rather than estimated overhead costs.
c. Because Star Plastics uses a just-in-time inventory system, the balances in Work
in Process and Finished Goods are likely to be quite small compared to Cost of
Goods Sold. Thus, there is not likely to be a significant difference between
charging the entire amount of overapplied overhead to Cost of Goods Sold
versus apportioning it among Work in Process, Finished Goods and Cost of
Goods Sold.
E15. [LO 4, 5]
Cost Summary: Job 325
Direct Material $10,000
Direct Labor (250 hours x $16/hour) 4,000
Manufacturing Overhead:
($25 per direct labor hour x 250 hours) 6,250
Total $20,250
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Jiambalvo Managerial Accounting2-8
E16. [LO 4, 5, 6]
Estimated overhead = $600,000 which is allocated based on cost of attorney and
paraprofessional time.
Budgeted salaries: (5 $300,000) + (9 x $100,000) = $2,400,000
Predetermined overhead rate = $600,000 ÷ $2,400,000 = $0.25 per dollar of
attorney and paraprofessional time.
If client services require $45,000 in salaries, then indirect costs assigned are:
$45,000 $0.25 = $11,250.
E17. [LO 5] Since the Manufacturing Overhead account has an ending credit balance
(before adjustment), manufacturing overhead for the period is overapplied. The
problem states that the balance is material—this suggests that we prorate the
balance among Work in Process Inventory, Finished Goods Inventory, and Cost
of Goods Sold.
% of Total
Accounts Balance Total Overapplied Adjustment
Work in Process Inventory $ 500,000 25 $90,000 $22,500
Finished Goods Inventory 600,000 30 90,000 27,000
Cost of Goods Sold 900,000 45 90,000 40,500
Total $2,000,000 $90,000
Manufacturing Overhead 90,000
Work in Process Inventory 22,500
Finished Goods Inventory 27,000
Cost of Goods Sold 40,500
E18. [LO 7] Examples of negative events that would require a company holding
inventory are as follows:
1. Strikes at a supplier would interrupt delivery of critical materials.
2. Unanticipated machine break-downs would interrupt production.
3. Natural disasters or terrorist attacks would interrupt the delivery of materials.
E19. [LO 4] Estimated manufacturing overhead was $2,000,000 and eighty percent
was fixed. When the sequence of material movements was changed and 30,000
of machine hours were saved, $1,600,000 (80% of $2,000,000) would remain
unchanged. 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 is much less than $20 per hour.
E16. [LO 4, 5, 6]
Estimated overhead = $600,000 which is allocated based on cost of attorney and
paraprofessional time.
Budgeted salaries: (5 $300,000) + (9 x $100,000) = $2,400,000
Predetermined overhead rate = $600,000 ÷ $2,400,000 = $0.25 per dollar of
attorney and paraprofessional time.
If client services require $45,000 in salaries, then indirect costs assigned are:
$45,000 $0.25 = $11,250.
E17. [LO 5] Since the Manufacturing Overhead account has an ending credit balance
(before adjustment), manufacturing overhead for the period is overapplied. The
problem states that the balance is material—this suggests that we prorate the
balance among Work in Process Inventory, Finished Goods Inventory, and Cost
of Goods Sold.
% of Total
Accounts Balance Total Overapplied Adjustment
Work in Process Inventory $ 500,000 25 $90,000 $22,500
Finished Goods Inventory 600,000 30 90,000 27,000
Cost of Goods Sold 900,000 45 90,000 40,500
Total $2,000,000 $90,000
Manufacturing Overhead 90,000
Work in Process Inventory 22,500
Finished Goods Inventory 27,000
Cost of Goods Sold 40,500
E18. [LO 7] Examples of negative events that would require a company holding
inventory are as follows:
1. Strikes at a supplier would interrupt delivery of critical materials.
2. Unanticipated machine break-downs would interrupt production.
3. Natural disasters or terrorist attacks would interrupt the delivery of materials.
E19. [LO 4] Estimated manufacturing overhead was $2,000,000 and eighty percent
was fixed. When the sequence of material movements was changed and 30,000
of machine hours were saved, $1,600,000 (80% of $2,000,000) would remain
unchanged. 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 is much less than $20 per hour.
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Chapter 2 Job-Order Costing and Modern Manufacturing Practices 2-9
PROBLEMS
P1. [LO 3]
a. Satterfield’s Custom Glass
Schedule of Cost of Goods Manufactured
For the Year Ended December 31, 2020
Beginning balance in work in process inventory $ 210,000
Add current manufacturing costs:
Direct material $2,500,000
Direct labor 3,000,000
Manufacturing overhead 1,700,000 7,200,000
Total 7,410,000
Less ending balance in work in process inventory 300,000
Cost of goods manufactured $7,110,000
b. Satterfield’s Custom Glass
Income Statement
For the Year Ended December 31, 2020
Sales $8,500,000
Less cost of goods sold:
Beginning finished goods inventory $ 500,000
Add cost of goods manufactured 7,110,000
Cost of goods available for sale 7,610,000
Less ending finished goods inventory 400,000 7,210,000
Gross profit 1,290,000
Less nonmanufacturing expenses:
Selling & admin. expenses 1,350,000
Net income (loss) $( 60,000)
PROBLEMS
P1. [LO 3]
a. Satterfield’s Custom Glass
Schedule of Cost of Goods Manufactured
For the Year Ended December 31, 2020
Beginning balance in work in process inventory $ 210,000
Add current manufacturing costs:
Direct material $2,500,000
Direct labor 3,000,000
Manufacturing overhead 1,700,000 7,200,000
Total 7,410,000
Less ending balance in work in process inventory 300,000
Cost of goods manufactured $7,110,000
b. Satterfield’s Custom Glass
Income Statement
For the Year Ended December 31, 2020
Sales $8,500,000
Less cost of goods sold:
Beginning finished goods inventory $ 500,000
Add cost of goods manufactured 7,110,000
Cost of goods available for sale 7,610,000
Less ending finished goods inventory 400,000 7,210,000
Gross profit 1,290,000
Less nonmanufacturing expenses:
Selling & admin. expenses 1,350,000
Net income (loss) $( 60,000)
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Jiambalvo Managerial Accounting2-10
P2. [LO 3]
a. Terra Cotta Designs
Schedule of Cost of Goods Manufactured
For the Year Ended December 31, 2020
Beginning balance in work in process inventory $ 650,000
Add current manufacturing costs:
Direct material:
Beginning balance $ 450,000
Purchases 1,500,000
Ending balance (200,000) $1,750,000
Direct labor 2,500,000
Manufacturing Overhead 650,000 4,900,000
Total 5,550,000
Less ending balance in work in process inventory 350,000
Cost of goods manufactured $5,200,000
b. Terra Cotta Designs
Income Statement
For the Year Ended December 31, 2020
Sales $7,000,000
Less cost of goods sold:
Beginning finished goods inventory $ 750,000
Add cost of goods manufactured 5,200,000
Cost of goods available for sale 5,950,000
Less ending finished goods inventory 350,000 5,600,000
Gross profit 1,400,000
Less nonmanufacturing expenses:
Selling expenses 500,000
General & admin. expenses 850,000 1,350,000
Net income $ 50,000
P2. [LO 3]
a. Terra Cotta Designs
Schedule of Cost of Goods Manufactured
For the Year Ended December 31, 2020
Beginning balance in work in process inventory $ 650,000
Add current manufacturing costs:
Direct material:
Beginning balance $ 450,000
Purchases 1,500,000
Ending balance (200,000) $1,750,000
Direct labor 2,500,000
Manufacturing Overhead 650,000 4,900,000
Total 5,550,000
Less ending balance in work in process inventory 350,000
Cost of goods manufactured $5,200,000
b. Terra Cotta Designs
Income Statement
For the Year Ended December 31, 2020
Sales $7,000,000
Less cost of goods sold:
Beginning finished goods inventory $ 750,000
Add cost of goods manufactured 5,200,000
Cost of goods available for sale 5,950,000
Less ending finished goods inventory 350,000 5,600,000
Gross profit 1,400,000
Less nonmanufacturing expenses:
Selling expenses 500,000
General & admin. expenses 850,000 1,350,000
Net income $ 50,000
Loading page 23...
Chapter 2 Job-Order Costing and Modern Manufacturing Practices 2-11
P3. [LO 4]
a. Cost of Jobs:
1005 1006 1007 1008 1009 1010
Direct materials $ 650 $ 850 $ 1,550 $ 650 $ 450 $ 350
Direct labor 1,600 2,000 3,300 1,400 900 700
Mfg. overhead 2,880* 3,600 5,940 2,520 1,620 1,260
Total $5,130 $6,450 $10,790 $4,570 $2,970 $2,310
*$1,600 x 180%
b.
Raw Material Inventory 5,500
Accounts Payable 5,500
(To record purchase of steel)
Raw Material Inventory 2,400
Cash 2,400
(To record purchase of supplies)
Work in Process Inventory 4,500
Manufacturing Overhead 1,000
Raw Material Inventory 5,500
(To record materials used in production)
Work in Process Inventory 9,900
Manufacturing Overhead 6,500
Wages Payable 16,400
(To record labor)
Work in Process Inventory 17,820
Manufacturing Overhead 17,820
(To record overhead applied to production: $9,900 x 180%))
Finished Goods Inventory 26,940
Work in Process Inventory 26,940
(To record cost of jobs completed: Jobs 1005, 1006, 1007, and 1008))
Accounts Receivable 40,410
Cost of Goods Sold 26,940
Sales (26,940 x 150%) 40,410
Finished Goods Inventory 26,940
(To record the sale of finished goods: Jobs 1005, 1006, 1007, and 1008))
P3. [LO 4]
a. Cost of Jobs:
1005 1006 1007 1008 1009 1010
Direct materials $ 650 $ 850 $ 1,550 $ 650 $ 450 $ 350
Direct labor 1,600 2,000 3,300 1,400 900 700
Mfg. overhead 2,880* 3,600 5,940 2,520 1,620 1,260
Total $5,130 $6,450 $10,790 $4,570 $2,970 $2,310
*$1,600 x 180%
b.
Raw Material Inventory 5,500
Accounts Payable 5,500
(To record purchase of steel)
Raw Material Inventory 2,400
Cash 2,400
(To record purchase of supplies)
Work in Process Inventory 4,500
Manufacturing Overhead 1,000
Raw Material Inventory 5,500
(To record materials used in production)
Work in Process Inventory 9,900
Manufacturing Overhead 6,500
Wages Payable 16,400
(To record labor)
Work in Process Inventory 17,820
Manufacturing Overhead 17,820
(To record overhead applied to production: $9,900 x 180%))
Finished Goods Inventory 26,940
Work in Process Inventory 26,940
(To record cost of jobs completed: Jobs 1005, 1006, 1007, and 1008))
Accounts Receivable 40,410
Cost of Goods Sold 26,940
Sales (26,940 x 150%) 40,410
Finished Goods Inventory 26,940
(To record the sale of finished goods: Jobs 1005, 1006, 1007, and 1008))
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Jiambalvo Managerial Accounting2-12
P4. [LO 2, 3, 4]
a.
The beginning balance in Work in Process is $14,500:
Job 258 $5,000
Job 259 6,000
Job 260 3,500
Total $14,500
The ending balance in Work in Process Inventory is $8,400:
Job 345 $2,500
Job 346 5,900
Total $8,400
b.
The beginning balance in Finished Goods Inventory is $9,000:
Job 257 $9,000
The ending balance in Finished Goods Inventory is $11,700:
Job 341 $ 1,500
Job 342 3,300
Job 343 2,400
Job 344 4,500
Total $11,700
c.
Cost of goods sold is determined as follows:
Beginning balance in work in process inventory $ 14,500
Add current manufacturing costs:
Direct material $ 750,000
Direct labor 1,650,000
Manufacturing overhead 2,150,000 4,550,000
Total 4,564,500
Less ending balance in work in process inventory 8,400
Cost of goods manufactured $4,556,100
Beginning finished goods inventory $ 9,000
Add cost of goods manufactured 4,556,100
Cost of goods available for sale 4,565,100
Less ending finished goods inventory 11,700
Cost of goods sold $4,553,400
Job 257 through Job 340 likely relate to the balance of Cost of Goods Sold.
P4. [LO 2, 3, 4]
a.
The beginning balance in Work in Process is $14,500:
Job 258 $5,000
Job 259 6,000
Job 260 3,500
Total $14,500
The ending balance in Work in Process Inventory is $8,400:
Job 345 $2,500
Job 346 5,900
Total $8,400
b.
The beginning balance in Finished Goods Inventory is $9,000:
Job 257 $9,000
The ending balance in Finished Goods Inventory is $11,700:
Job 341 $ 1,500
Job 342 3,300
Job 343 2,400
Job 344 4,500
Total $11,700
c.
Cost of goods sold is determined as follows:
Beginning balance in work in process inventory $ 14,500
Add current manufacturing costs:
Direct material $ 750,000
Direct labor 1,650,000
Manufacturing overhead 2,150,000 4,550,000
Total 4,564,500
Less ending balance in work in process inventory 8,400
Cost of goods manufactured $4,556,100
Beginning finished goods inventory $ 9,000
Add cost of goods manufactured 4,556,100
Cost of goods available for sale 4,565,100
Less ending finished goods inventory 11,700
Cost of goods sold $4,553,400
Job 257 through Job 340 likely relate to the balance of Cost of Goods Sold.
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Chapter 2 Job-Order Costing and Modern Manufacturing Practices 2-13
P5. [LO 4, 5]
a. Predetermined overhead rate based on labor hours:
$12,000,000 ÷ 300,000 hours = $40 per labor hour
Overhead assigned to the model K25 shoe based on labor hours:
$40 x 11,000 hours = $440,000
Predetermined overhead rate based on labor cost:
$12,000,000 ÷ $4,800,000 = $2.50 per labor dollar
Overhead assigned to the model K25 shoe based on labor cost:
$2.50 x $165,000 = $412,500
b. Direct labor cost is the preferred allocation base because workers paid a higher
rate work on more complex jobs, and more complex jobs lead to more
overhead cost.
P6. [LO 4, 5]
a. Predetermined overhead rate based on direct labor cost:
$600,000 ÷ $300,000 labor cost = $2.00 per labor dollar
Predetermined overhead rate based on direct labor hours:
$600,000 ÷ 10,000 hours = $60.00 per labor hour
Predetermined overhead rate based on machine hours:
$600,000 ÷ 5,000 machine hours = $120 per machine hour
P5. [LO 4, 5]
a. Predetermined overhead rate based on labor hours:
$12,000,000 ÷ 300,000 hours = $40 per labor hour
Overhead assigned to the model K25 shoe based on labor hours:
$40 x 11,000 hours = $440,000
Predetermined overhead rate based on labor cost:
$12,000,000 ÷ $4,800,000 = $2.50 per labor dollar
Overhead assigned to the model K25 shoe based on labor cost:
$2.50 x $165,000 = $412,500
b. Direct labor cost is the preferred allocation base because workers paid a higher
rate work on more complex jobs, and more complex jobs lead to more
overhead cost.
P6. [LO 4, 5]
a. Predetermined overhead rate based on direct labor cost:
$600,000 ÷ $300,000 labor cost = $2.00 per labor dollar
Predetermined overhead rate based on direct labor hours:
$600,000 ÷ 10,000 hours = $60.00 per labor hour
Predetermined overhead rate based on machine hours:
$600,000 ÷ 5,000 machine hours = $120 per machine hour
Loading page 26...
Jiambalvo Managerial Accounting2-14
b. Overhead based on labor cost
Job 9823 Job 9824
Direct material $1,000 $ 2,000
Direct labor 2,700 6,500
Overhead* 5,400 13,000
Total $9,100 $21,500
* Labor cost x $2
Overhead based on labor hours
Job 9823 Job 9824
Direct material $1,000 $ 2,000
Direct labor 2,700 6,500
Overhead* 6,000 12,000
Total $9,700 $20,500
*Direct labor hours x $60
Overhead based on machine hours
Job 9823 Job 9824
Direct material $1,000 $ 2,000
Direct labor 2,700 6,500
Overhead* 4,800 13,200
Total $8,500 $21,700
*Machine hours x $120
c. Given that depreciation on equipment accounts for 75 percent of overhead
costs, an allocation based on machine hours seems reasonable. However,
users of the job cost information should keep in mind that most of overhead
applied to jobs is not an incremental cost since depreciation is a fixed cost.
b. Overhead based on labor cost
Job 9823 Job 9824
Direct material $1,000 $ 2,000
Direct labor 2,700 6,500
Overhead* 5,400 13,000
Total $9,100 $21,500
* Labor cost x $2
Overhead based on labor hours
Job 9823 Job 9824
Direct material $1,000 $ 2,000
Direct labor 2,700 6,500
Overhead* 6,000 12,000
Total $9,700 $20,500
*Direct labor hours x $60
Overhead based on machine hours
Job 9823 Job 9824
Direct material $1,000 $ 2,000
Direct labor 2,700 6,500
Overhead* 4,800 13,200
Total $8,500 $21,700
*Machine hours x $120
c. Given that depreciation on equipment accounts for 75 percent of overhead
costs, an allocation based on machine hours seems reasonable. However,
users of the job cost information should keep in mind that most of overhead
applied to jobs is not an incremental cost since depreciation is a fixed cost.
Loading page 27...
Chapter 2 Job-Order Costing and Modern Manufacturing Practices 2-15
P7. [LO 5]
a. Net Income, if over-applied overhead is immaterial and assigned to Cost of Goods
Sold.
OH applied = .75 x $700,000 = $525,000
Actual OH = 450,000
$ 75,000
Therefore, overhead was over-applied by $75,000
Sales $2,500,000
CGS ($1,000,000 - $75,000) 925,000
Gross Profit 1,575,000
Selling & Admin. Expenses 1,000,000
Net Income $ 575,000
b. Net Income, if over applied overhead is material and prorated among appropriate
accounts.
Adjusted
Balance Proportion Adjustment Balance
WIP Inventory $ 50,000 0.04 $ 3,000 $ 47,000
FG Inventory 200,000 0.16 12,000 188,000
COGS 1,000,000 0.80 60,000 940,000
Total $1,250,000 1.00 $75,000 $1,175,000
Sales $2,500,000
CGS 940,000
Gross Profit 1,560,000
Selling Expenses 400,000
Admin Expenses 600,000
Net Income $ 560,000
c. Assigning the entire amount of overapplied overhead to Cost of Goods Sold results
in higher net income than prorating overapplied overhead among Work in Process,
Finished Goods, and Cost of Goods Sold.
P7. [LO 5]
a. Net Income, if over-applied overhead is immaterial and assigned to Cost of Goods
Sold.
OH applied = .75 x $700,000 = $525,000
Actual OH = 450,000
$ 75,000
Therefore, overhead was over-applied by $75,000
Sales $2,500,000
CGS ($1,000,000 - $75,000) 925,000
Gross Profit 1,575,000
Selling & Admin. Expenses 1,000,000
Net Income $ 575,000
b. Net Income, if over applied overhead is material and prorated among appropriate
accounts.
Adjusted
Balance Proportion Adjustment Balance
WIP Inventory $ 50,000 0.04 $ 3,000 $ 47,000
FG Inventory 200,000 0.16 12,000 188,000
COGS 1,000,000 0.80 60,000 940,000
Total $1,250,000 1.00 $75,000 $1,175,000
Sales $2,500,000
CGS 940,000
Gross Profit 1,560,000
Selling Expenses 400,000
Admin Expenses 600,000
Net Income $ 560,000
c. Assigning the entire amount of overapplied overhead to Cost of Goods Sold results
in higher net income than prorating overapplied overhead among Work in Process,
Finished Goods, and Cost of Goods Sold.
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Jiambalvo Managerial Accounting2-16
P8. [LO 5]
a. If overapplied overhead is assigned to Cost of Goods Sold, the adjusted
balance will be:
$440,000 - $50,000 = $390,000.
b. If overapplied overhead is assigned to Work in Process Inventory, Finished
Goods Inventory, and Cost of Goods Sold, the adjusted balances will be:
Adjusted
Balance Proportion Adjustment Balance
WIP Inv. $ 66,000 0.12 $ 6,000 $ 60,000
FG Inv. 44,000 0.08 4,000 40,000
COGS 440,000 0.80 40,000 400,000
Total $550,000 1.00 $50,000 $500,000
P9. [LO 4, 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 = $75 per
hour.
Professional service (100 hours $75 per hour) $ 7,500
Indirect costs (100 hours $65 per hour) 6,500
Total $14,000
P10. [LO 2, 4]
a. $30,000 + $40,000 -$15,000 = $55,000
b. $80,000 + $55,000 +$45,000 + $63,000 - $82,000 = $161,000
c. $95,000 + $161,000 - $110,000 = $146,000
d. $70,000 - $60,000 = $10,000
P8. [LO 5]
a. If overapplied overhead is assigned to Cost of Goods Sold, the adjusted
balance will be:
$440,000 - $50,000 = $390,000.
b. If overapplied overhead is assigned to Work in Process Inventory, Finished
Goods Inventory, and Cost of Goods Sold, the adjusted balances will be:
Adjusted
Balance Proportion Adjustment Balance
WIP Inv. $ 66,000 0.12 $ 6,000 $ 60,000
FG Inv. 44,000 0.08 4,000 40,000
COGS 440,000 0.80 40,000 400,000
Total $550,000 1.00 $50,000 $500,000
P9. [LO 4, 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 = $75 per
hour.
Professional service (100 hours $75 per hour) $ 7,500
Indirect costs (100 hours $65 per hour) 6,500
Total $14,000
P10. [LO 2, 4]
a. $30,000 + $40,000 -$15,000 = $55,000
b. $80,000 + $55,000 +$45,000 + $63,000 - $82,000 = $161,000
c. $95,000 + $161,000 - $110,000 = $146,000
d. $70,000 - $60,000 = $10,000
Loading page 29...
Chapter 2 Job-Order Costing and Modern Manufacturing Practices 2-17
P11. [LO 4, 5]
a. The predetermined overhead rate is $2.25 per direct labor dollar
($9,000,000 ÷ 4,000,000 = $2.25).
b. Work in Process Inventory 5,750,000
Raw Materials Inventory 5,750,000
c. Work in Process Inventory 4,500,000
Wages payable 4,500,000
d. Work in Process Inventory 10,125,000
Manufacturing Overhead 10,125,000
($4,500,000 $2.25 = $10,125,000)
e. Cost of Goods Sold 875,000
Manufacturing overhead 875,000
($11,000,000 - $10,125,000 = $875,000)
P12. [LO 4, 5]
a. Job 201 $17,000 × $3.25 = $ 55,250
Job 202 $20,500 × $3.25 = 66,625
Job 203 $9,000 × $3.25 = 29,250
$ 151,125
b. Job 201 $9,500 × $3.33 = $ 31,635
$3,000 × $4.76 = 14,280
$4,500 × $2.40 = 10,800
56,715
Job 202 $5,000 × $3.33 = 16,650
$6,500 × $4.76 = 30,940
$9,000 × $2.40 = 21,600
69,190
Job 203 $2,000 × $3.33 = 6,660
$5,000 × $4.76 = 23,800
$2,000 × $2.40 = 4,800
35,260
Total $161,165
c. It appears that the relation between overhead and labor cost is different in the
three production departments. Thus, it is preferable to use separate overhead
rates for each.
P11. [LO 4, 5]
a. The predetermined overhead rate is $2.25 per direct labor dollar
($9,000,000 ÷ 4,000,000 = $2.25).
b. Work in Process Inventory 5,750,000
Raw Materials Inventory 5,750,000
c. Work in Process Inventory 4,500,000
Wages payable 4,500,000
d. Work in Process Inventory 10,125,000
Manufacturing Overhead 10,125,000
($4,500,000 $2.25 = $10,125,000)
e. Cost of Goods Sold 875,000
Manufacturing overhead 875,000
($11,000,000 - $10,125,000 = $875,000)
P12. [LO 4, 5]
a. Job 201 $17,000 × $3.25 = $ 55,250
Job 202 $20,500 × $3.25 = 66,625
Job 203 $9,000 × $3.25 = 29,250
$ 151,125
b. Job 201 $9,500 × $3.33 = $ 31,635
$3,000 × $4.76 = 14,280
$4,500 × $2.40 = 10,800
56,715
Job 202 $5,000 × $3.33 = 16,650
$6,500 × $4.76 = 30,940
$9,000 × $2.40 = 21,600
69,190
Job 203 $2,000 × $3.33 = 6,660
$5,000 × $4.76 = 23,800
$2,000 × $2.40 = 4,800
35,260
Total $161,165
c. It appears that the relation between overhead and labor cost is different in the
three production departments. Thus, it is preferable to use separate overhead
rates for each.
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Jiambalvo Managerial Accounting2-18
P13. [LO 4, 5] Approximately 66 percent of overhead costs ($160,000 + $135,000) ÷
$450,000) are related to machinery. Without additional information, it appears that
machine hours would be an appropriate overhead allocation base.
The predetermined overhead allocation rate = $450,000 ÷ 15,000 machine hours
= $30 per machine hour.
P14. [LO 5, 6]
Overhead is overapplied
Applied overhead ($6 x 35,000) $210,000
Actual overhead 200,000
Overapplied overhead $ 10,000
P15. [LO 5, 6]
a. The predetermined overhead rate is $17 per repair technician hour ($170,000 ÷
10,000 = $17).
b. Overhead applied = $17 7,000 = $119,000
Overhead 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 Sold 21,000
Manufacturing Overhead 21,000
P16. [LO 4, 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 for
3 hours of operating room usage is $8,250 ($2,750 x 3 hours).
P13. [LO 4, 5] Approximately 66 percent of overhead costs ($160,000 + $135,000) ÷
$450,000) are related to machinery. Without additional information, it appears that
machine hours would be an appropriate overhead allocation base.
The predetermined overhead allocation rate = $450,000 ÷ 15,000 machine hours
= $30 per machine hour.
P14. [LO 5, 6]
Overhead is overapplied
Applied overhead ($6 x 35,000) $210,000
Actual overhead 200,000
Overapplied overhead $ 10,000
P15. [LO 5, 6]
a. The predetermined overhead rate is $17 per repair technician hour ($170,000 ÷
10,000 = $17).
b. Overhead applied = $17 7,000 = $119,000
Overhead 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 Sold 21,000
Manufacturing Overhead 21,000
P16. [LO 4, 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 for
3 hours of operating room usage is $8,250 ($2,750 x 3 hours).
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Subject
Accounting