cost accounting solutions, Chap006
6
Fundamentals of Product and Service Costing
Solutions to Review Questions
6-1.
Cost allocation is the assignment of costs in cost pools to cost objects. The cost objects may be products, services, customers, processes, or anything for which we want to know the cost. Product costing uses cost allocation to calculate product costs. Product costing is an application of cost allocation where products are the cost objects.
6-2.
Cost management systems should satisfy the following criteria:
?Cost systems should have a decision focus.
?Different cost information is used for different purposes.
?Cost information for managerial purposes must meet the cost-benefit test. Cost
6-3.
Cost flow diagrams serve two purposes. First, they help describe how a cost management system works, just like a flow chart helps you understand how a process works. Second, cost flow diagrams help managers identify and understand quickly the effect of changes in the system design on reported costs.
6-4.
A job costing accounting system traces costs to individual units or to specific jobs (typically custom products). A process costing accounting system is used when identical units are produced through a series of uniform production steps. Operation costing is used when goods have some common characteristics (process costing) and some individual characteristics (job costing).
6-5.
The predetermined overhead rate is the value at which overhead is applied to one unit of the cost allocation base. It is used in product costing to apply the overhead to the units produced.
6-6.
Continuous flow processing is used when a single product is mass produced in a continuing process. Examples would include products such as paint, gasoline, paper, or any others that are mass produced in a continuing process.
6-7.
The basic cost flow model appears as follows:
Beginning balance + Transfers in – Transfers out = Ending balance Beginning balance is the balance of inventory at the beginning of the period. Transfers in represent inventory purchased or transferred in from another department (for example, raw materials would be goods transferred in to work in process) for the period. Transfers out are goods transferred from one department to another (for example, work in process would be transferred out to finished goods). Ending balance represents the amount of inventory in a department at the end of the accounting period.
Solutions to Critical Analysis and Discussion Questions
6-8.
Although there may be no one correct way to allocate cost, cost allocation can provide managers with information about the costs of the resources they use. Ignoring costs that cannot be directly assigned leads to the possibility that managers forget that it is a real resource that is being used.
6-9.
There are three important points to consider:
1. The cost system should meet the needs of the users (the decision makers).
2. The cost system must provide the appropriate data for its intended purpose.
Different cost information is used for different purposes.
3. Cost information for managerial purposes must meet the cost-benefit test. The costs
of implementing the system should be less than the benefits derived from the
system (i.e. better decisions).
6-10.
The basic cost flow model is as follows:
Beginning balance + Transfers in – Transfers out = Ending balance
This model is used for finding one unknown or for comparing perpetual inventory system output to a physical inventory count. An example of finding one unknown is if the beginning balance is known (from the previous period ending balance), transfers in are known, and ending inventory is counted physically—and we are asked to find the cost of goods sold for the period (transfers out).
6-11.
It is sometimes difficult (and frustrating) for managers when the cost accountant says that the cost depends on the decision being made. Many people feel that there is one cost that is ―correct.‖ However, as we saw in Chapter 2, costs behave in different ways and this behavior is affected by the decision being made.
6-12.
Reasons to agree with approach: If the products are not contributing to company profits, then the products should be eliminated. This will increase overall company profits. Reasons not to agree with approach: The reported product costs and the associated product profits depend on the allocation of indirect costs. Under a different allocation process, the results could be very different. In addition, many of the indirect costs are unavoidable. If the products are eliminated, the costs will be allocated to the remaining products.
6-13.
The way the ―products‖ are defined will depend, at least in par t, on the decision the dean is interested in making. They may be defined as degree programs vs. non-degree programs. They may be the different degree programs. They might be the credit hour (although it is unlikely you would be able to get much information at this level).
You might ask about the time frame of the analysis (to determine fixed and variable costs), the source of the data, and how to treat costs that the school does not directly pay for but where the school consumes the resources (e.g., university buildings).
This is a very difficult analysis in a university setting because of the high proportion of common costs and the difficulty in defining products.
6-14.
The two most important criteria in determining an allocation base are (1) causality and (2) m easurability. We would like an allocation base that ―causes‖ costs. This is rarely possible, but it is a good criterion to use. Second, we need to be able to measure the allocation base at reasonable cost.
6-15.
Although it would be ideal for the cost allocation base to have cause-and-effect relation with overhead costs, it is unlikely to happen for several reasons. One reason is that some of the overhead is fixed and therefore does not depend on volume (at least within certain volume ranges). This does not make the choice of the allocation base unimportant. First, it is helpful to have an intuitive link between the allocation base (machine hours, for example) and overhead resource (machine depreciation). It serves as a reminder of the service being provided. Second, it is often the case that the cost is not solely fixed and there might be some variable component. Finally, cost might be fixed over a certain range, but not over the entire relevant range.
6-16.
The allocation base determines the costs assigned to the cost objects. If these costs are used to make decisions and if they are based on inappropriate or improper allocation bases, they could lead the manager to make bad decisions.
6-17.
There are many reasons why two companies may have different cost systems. First, firms may be pursuing different strategies (cost containment versus product differentiation) and want different information from the cost system. A second reason is that some firms may be subject to regulations (for example, utilities) and the regulations dictate the information needed from the cost system.
6-18.
A firm can have a two-stage system and use the same allocation base to allocate costs in the second stage. There will be different costs reported if the allocation base (direct labor, say) is used differently by the products in the second stage cost pools.
Solutions to Exercises
6-19.(20 min.) Basic Cost Flow Model: Office Mart.
a. $150,000 (see item 5)
b. $620,000 = $600,000 + $20,000 (see items 2 & 3)
c. $100,000 (see item 5)
d. $670,000. BB + TI – TO = EB
$150,000 + $620,000 – X = $100,000
X = $150,000 + $620,000 – $100,000
X = $670,000
6-20.(20 min.) Basic Cost Flow Model: Generic Electric.
a. $100.5 million = $24.0 million + $40.5 million + (.8 x $45.0 million)
b. $72.36 million = .72 x $100.5 million
c. BB + TI – TO = EB
0 + $100.5 million – $72.36 million = EB
EB = $28.14 million
6-21.(20 min.) Basic Cost Flow Model.
Based on the basic formula:
BB + TI –TO = EB
a. $51,000 + X –$57,000 = $48,000
X = $54,000
b. $28,400 + $88,000 –X = $24,800
X = $88,000 + $28,400 – $24,800
X = $91,600
c. $67,000 + X –$170,000 = $56,000
X = $56,000 + $170,000 – $67,000
X = $159,000
6-22.(20 min.) Basic Cost Flow Model.
Based on the basic formula:
BB + TI –TO = EB
A. X + $260,000 – $270,000 = $250,000
X = $250,000 + $270,0000 –
$260,000
X = $260,000
B. $7,100 + $22,000 –X = $6,200
X = $7,100 – $6,200 + $22,000
X = $22,900
C. $156,000 + X – $280,000 = $128,000
X = $128,000 + $280,000 – $156,000
X = $252,000
6-23.(20 min.) Basic Cost Flow Model.
Based on the basic formula:
BB + TI –TO = EB
A. X + $12,000 –$18,000 = $14,000
X = $14,000 + $18,000 – $12,000
X = $20,000
B. $90,000 + $330,000 –X = $93,000
X = $90,000 + $330,000 – $93,000
X = $327,000
C. $65,000 + X – $230,000 = $30,000
X = $30,000 + $230,000 – $65,000
X = $195,000
6-24.(10 min.) Basic Product Costing: Enviro Corporation.
Materials ............................................ $714,000
Labor ................................................. 61,200
Manufacturing overhead ................... 244,800
Total cost .................................. $1,020,000 ÷ Gallons produced ........................... ÷ 850,000
= Cost per gallon ............................... $1.20
6-25.(10 min.) Basic Product Costing: Big City Bank.
Labor .................................................. $ 35,000
Manufacturing overhead .................... 77,000
Total .......................................... $ 112,000 ÷ Checks processed ........................... ÷ 2,800,000
= Cost per check ................................ $0.04
6-26.(20 min.) Basic Cost Flow Model: Kim and Smith Refiners.
Total
a.
Sold
b.
Work-in-
Process,
March 31
Production:
Gallons ........................................ 900,000 800,000 100,000 Percentage complete ................ 100% 80% Equivalent gallons ..................... 880,000 800,000 80,000 Costs:
Materials .................................... $188,000
Labor ....................................... 48,400
Manufacturing overhead ........... 98,000
Total cost incurred ..................... $334,400
Cost per equivalent barrel .............. $0.38
Cost assigned to product ................ $218334,40
$304,000b$30,400c
a $0.38 = $334,400 ÷ 880,000 equivalent units.
b $304,000 = 800,000 equivalent units x $0.38.
c $30,400 = 80,000 equivalent units x $0.38.
6-27.(20 min.) Basic Cost Flow Model—Ethical Issues: Old Tyme Soda.
Total
a.
Sold
b.
Work-in-
Process,
November 30
Production:
Barrels ............................................ 10,000 8,800 1,200 Percentage complete .................... 100% 30% Equivalent barrels ......................... 9,160 8,800 360 Costs:
Materials ....................................... $18,072
Manufacturing overhead ............... 20,400
Total cost incurred ........................ $38,472
Cost per equivalent barrel .................. $4.20
Cost assigned to product ................... $38,472 $36,960$1,512
a $4.20 = $38,472 ÷ 9,160 equivalent units.
b $36,960 = 8,800 equivalent units x $4.20.
c $1,512 = 360 equivalent units x $4.20.
He would raise the estimated degree of completion.
6-28.(15 min.) Process Costing: Van Goe.
Total Transferred
to Finished
Goods
Work-in-
Process,
January 31
Production:
Gallons ........................................ 300,000 240,000 60,000 Percentage complete ................ 100% 80% Equivalent gallons ..................... 288,000 240,000 48,000 Costs:
Materials .................................... $328,800
Conversion costs ....................... 420,000
Total cost incurred ..................... $748,800
Cost per equivalent barrel .............. $2.60
Cost assigned to product ................ $218748,80
$624,000b$124,800c
a $2.60 = $748,800 ÷ 288,000 equivalent units.
b $624,000 = 240,000 equivalent units x $2.60.
c $124,800 = 48,000 equivalent units x $2.60.
6-29.(15 min.) Process Costing: Opech, Inc.
Total Shipped Work-in-Process, May 31
Production:
Barrels (millions) ....................... 300 270 30 Percentage complete ................ 100% 70% Equivalent barrels (millions) ...... 291 270 21 Costs:
Materials (millions) .................... $5,000
Conversion costs (millions) ....... 6,640
Total cost incurred (millions) ..... $11,640
Cost per equivalent barrel .............. $40
Cost assigned to product ................ $21811,64
$10,800b$840c
a $40 = $11,640 ÷ 291 equivalent units.
b $10,800 = 270 equivalent units x $40.
c $840 = 21 equivalent units x $40.
6-30.(15 min.) Process Costing: Oholics, Ltd.
Total Completed Work-in-Process, April 30
Production:
Pounds ...................................... 20,000 19,000 1,000 Percentage complete ................ 100% 60% Equivalent pounds ..................... 19,600 19,000 600 Costs:
Materials .................................... $33,000
Conversion costs ....................... 40,500
Total cost incurred ..................... $73,500
Cost per equivalent pound .............. $3.75
Cost assigned to product ................ $21873,50
$71,250b$2,250c
a $3.75 = $73,500 ÷ 19,600 equivalent units.
b $71,250 = 19,000 equivalent units x $3.75.
c $2,250 = 600 equivalent units x $3.75.
6-31.(15 Minutes) Predetermined Overhead Rates: Tiger Furnishings. Predetermined overhead rate = $34.82 per direct labor hour.
Basic Dominator Total Units produced ...................... 1000 250 1250 Machine-hours ...................... 4000 2000 6,000 Direct labor-hours .................. 3,000 2,000 5,000 Direct materials ..................... $10,000 $3,750 $13,750 Direct labor ............................ 64,500 35,500 100,000 Manufacturing overhead ....... 174,100 Total Costs ............................ $287,850
Burden Rate: .........................
Total overhead ............... $174,000
÷ Direct labor-hours ......... ÷ 5,000 = $34.82 6-32.(15 Minutes) Predetermined Overhead Rates: Tiger Furnishings. Predetermined overhead rate = 174.1% of direct labor cost.
Basic Dominator Total Units produced ...................... 1000 250 1250 Machine-hours ...................... 4000 2000 6,000 Direct labor-hours .................. 3,000 2,000 5,000 Direct materials ..................... $10,000 $3,750 $13,750 Direct labor ............................ 64,500 35,500 100,000 Manufacturing overhead ....... 174,100 Total Costs ............................ $287,850
Burden Rate: .........................
Total overhead ............... $174,100
÷ Direct labor cost ............ ÷ $100,000 =174.1%
6-33.(15 Minutes) Predetermined Overhead Rates: Tiger Furnishings. Predetermined overhead rate = $29.0167 per machine-hour (rounded).
Basic Dominator Total Units produced .................. 1,000 250 1,250
Machine-hours .................. 4,000 2,000 6,000
Direct labor-hours .............. 3,000 2,000 5,000
Direct materials ................. $10,000 $3,750 $13,750
Direct labor ........................ 64,500 35,500 100,000
Manufacturing Overhead ... 174,100
Total Costs ........................ $287,850
Burden Rate: .....................
Total overhead ........... $174,100
÷ Machine-hours .......... ÷ 6,000 =$29.0167 6-34.(20 Minutes) Cost Flow Diagram: Tiger Furnishings.
6-35.(30 Minutes) Operation Costing: Howrley-David, Inc.
The unit costs are:
Fatboy: ............ $4,000
Screamer: ....... $5,000
Fatboy Screamer Total Number of units ......................... 2,000 4,000 6,000
Materials cost per unit ............... $2,000 $3,000
Costs ......................................... $ 4,000,000 $12,000,000 $16,000,000 Conversion costs:
Direct Labor ...................... $ $6,000,000
Indirect materials .............. $1,800,000
Other overhead ................ $4,200,000 Total operation cost .$12,000,000
Conversion cost per unit in plant .......($12,000,000 ÷ 6,000 units) = $2,000 per unit.
Operation cost
(@ $2,000 per unit) ................... $4,000,000a$8,000,000b$12,000,000 Material cost .............................. $4,000,000 $12,000,000
Total cost ................................... $8,000,000 $20,000,000
Number of units ......................... ÷ 2,000 ÷ 4,000
Unit cost .................................... $4,000 $5,000
a $4,000,000 = 2,000 units x $2,000 per unit.
b $8,000,000 = 4,000 units x $2,000 per unit.
6-36.(30 Minutes) Operation Costing: Organic Grounds.
The unit costs are:
Star: ................$10.60
Bucks: .............$12.60
Star Bucks Total Number of pounds ..................... 5,000 20,000 25,000
Materials cost per pound ........... $4.00 $6.00
Costs ......................................... $20,000 $120,000 $140,000 Conversion costs:
Direct Labor ...................... $ 50,000
Indirect materials .............. $15,000
Other overhead ................ $100,000 Total operation cost .$165,000
Cost per pound in plant ............. ($165,000 ÷ 25,000 units) = $6.60 per pound.
Conversion cost
(@ $6.60 per pound) ................. $33,000a$132,000b$165,000 Material cost .............................. $20,000 $120,000
Total cost ................................... $53,000 $252,000
Number of pounds ..................... ÷ 5,000 ÷ 20,000
Cost per pound .......................... $10.60 $12.60
a $33,000 = 5,000 units x $6.60 per pound.
b $132,000 = 20,000 units x $6.60 per pound.
Solutions to Problems
6-37.(30 Minutes) Product Costing: Tiger Furnishings.
The unit costs are: Basic: $186.79 and Dominator: $404.22
Basic Dominator Total Direct materials ...........................................................$10,000 $3,750 $13,750 Direct labor ..................................................................64,500 35,500 100,000 Manufacturing overhead
(@174,1% of Direct labor cost)a ...............................112,295 61,806 174,100b Total costs ...................................................................$186,795 $101,056 $287,850b
Units produced ............................................................÷
1,000
÷250
Unit cost ......................................................................$186.80 $404.22
a 174.1% = $174,100 ÷ $100,000.
b Adjusted for rounding error.
6-38.(30 Minutes) Product Costing: Tiger Furnishings.
The unit costs are: Basic: $186.79 and Dominator: $404.22
Basic Dominator Total Direct materials .................................................$10,000 $3,750 $13,750 Direct labor ........................................................64,500 35,500 100,000 Manufacturing overhead
(@174,1% of Direct labor cost167) a...............$116,067b$58,033c174,100 Total Costs ........................................................$190,567 $97,283 $287,850 Units Produced ..................................................÷ 1,000 ÷ 250
Unit cost ............................................................$190.57 $389.13
a $29.0167 per machine-hour = $174,100 ÷ 6,000 machine-hours.
b $116,067 = 4,000 machine-hours x $29.0167 per machine-hour.
c $58,033 = 2,000 machine-hours x $29.0167 per machine-hour.
6-39.(30 Minutes) Product Costing—Ethical Issues: Tiger Furnishings.
a. The unit costs are different because the twp products use the machine hours and
direct labor costs in different proportions. The Basic model is more machine
intensive (it uses relatively more machine hours than labor compared to the
Dominator model). This means that when the company moves to machine hours to allocate costs, the Basic model will be assigned more overhead costs resulting in higher reported product costs.
b. Without knowing more about the production process at Tiger Furnishings, it is not
possible to say which of these is better. Because you get different results, it may pay to use a two stage system to split overhead between that which is driven more by machine hours and that driven more by direct labor.
6-40. (30 Minutes) Two-Stage Allocation and Product Costing: Mets Products. a. The overhead rates are $9 per machine hour and 30% of direct-materials cost.
Account
Machine-Hour
Related Materials Related
Utilities …………………………. ................. $ 4,000
Supplies ................................................... $2,800
Machine depreciation and maintenance .. 8,800
Purchasing and storing materials .............
3,200 Miscellaneous ............................................ 3,400 ___________ Total overhead ..................................... $ 16,200 $ 6,000
÷ Total machine hours ............................... ÷ 1,800 hours
÷ Total materials cost ................................
÷ $20,000 Overhead rate ..........................................
$9 / hour
30%
b. The cost per unit of output is $2.86 for baseball caps and $4.00 for T-shirts.
Baseball
Caps T-shirts Total
Machine hours used .................................1,000 800 1,800
Direct materials costs …………………. $12,000 $8,000 $20,000 Direct labor costs ……………………… 4,000 2,400 6,400
Manufacturing overhead costs ……….
Machine-hour related overhead a
..........9,000 7,200
16,200 Materials-related overhead b
................. 3,600 2,400 6,000 Total cost .................................................$28,600 $20,000 $48,600 Units produced ……………………….. ÷ 10,000 ÷ 5,000 15,000
Cost per unit .............................................$2.86 $4.00
a
$9,000 = 1,000 machine hours x $9 per machine hour;
$7,200 = 800 machine hours x $9 per machine hour. b
$3,600 = $12,000 materials cost x 30%; $2,400 = $8,000 materials cost x 30%.