The job cost sheet for 1,000 units of toy trucks is: $\begin{array}{|ll|} \hline\text { Job Number } 555\\ \hline \text { Date Started } & 4 / 13 \\ \hline \text { Date Completed } & 6 / 18\\ \hline \end{array}$ $\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\text { Raw Materials }$$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$ \text { Direct Labor } $ $\begin{array}{|r|r|r|r|rr|r|} \hline\text { Date } & \text { Type } & \text { Cost Qty. } & \text { Amount } & \text { Cost Hours } & \text { Amount } \\ \hline 4 / 13 & 565 & \$ 31,000 & \$ 3,000 & \$ 18 & 20 & \$ 360 \\ \hline 5 / 24 & 889 & 14,000 & 4.000 & 12 & 10 & 120 \\ \hline 6 / 18 & 248 & 21,000 & \underline{2,000} & 15 & \underline{100} & \underline{1.500} \\ \hline \text { Totals } & & & \$ 9,000 & & 130 & \$ 1,980\\ \hline \end{array}$ \[\begin{array} { | l | r | } \hline \text { Total direct materials } & \$ 9,000 \\ \hline \text { Total direct labor } & 1,980 \\ \hline \text { Overhead (130 direct labor hours } @ \$ 10 / \text { hour) } & 1,300 \\ \hline \text { Total Job Cost } & \$ 12,280 \\ \hline \end{array}\] All of the materials for the job were purchased on 4/10. The batch of 1,000 toy trucks is sold on 7/10. What are the costs of this job order in the raw materials account, the work-in-process account, the finished goods account, and the cost of goods account on 4/30, 5/31, 6/30 and 7/31?

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Barbara Karloff Inc. recently set up as a microbrewery to manufacture a variety of beers, ales and stouts to customer specifications. The standard sizes per batch are as follows: stout, 5,000 gallons; ale, 8,000 gallons; and beer, 10,000 gallons. A beer batch takes six days to process, ale ten days and stout 14 days, the difference primarily attributable to the number of steps in the brewing process and the amount of time needed to mature the brew to the intended flavor specifications. By tradition, a new batch is started at 7 a.m., the start of a work day. It costs $1,800 in labor and variable overheads to set up each batch. The brewery's monthly fixed overheads are $220,000, which is allocated to products based on gallons. Other costing data appears below. \[\begin{array} { | l | r | r | r | } \hline \text { Per gallon of output } & \text { Beer } & \text { Ale } & \text { Stout } \\ \hline \text { Basic direct materials } & \$ 0.40 & \$ 0.60 & \$ 0.90 \\ \hline \begin{array} { l } \text { Variable conversion } \\ \text { costs } \end{array} & \$ 0.80 & \$ 1.00 & \$ 1.20 \\ \hline & \text { Bottle } & \text { Label } & \text { Case/Crate/Pack } \\ \hline \text { Other direct materials } & \$ 0.05 & \$ 0.03 & \$ 0.25 \\ \hline \end{array}\] Basic direct materials are applied at the start of the process. Direct materials costs are charged when used in production and variable conversion costs are applied evenly throughout the production process. All products are sold in 12-ounce bottles. Beer is sold with 24 bottles per case, but ale is packed by the dozen in mini-crates, and stout in 6-packs. In April, the first month of operations, BKI finished five batches of beer, three of ale and one of stout. Dribbles of liquids from one batch that do not completely fill a bottle are poured away. Bottles from a batch that do not make up a complete case, crate or pack are donated to the company monthly picnic. In reviewing the production records, you find that a batch of stout was started on the 23rd, a batch of ale on the 27th, and a batch of beer on the 29th. These batches constitute ending work in process (EWIP). With respect to conversion costs, which is true for the first month of operations?

A) The conversion costs traced directly to stout are $11,226 B) Total conversion costs are $320,784 C) Beer's direct conversion costs amount to $1.016 per gallon D) $3.945 is ale's conversion cost per gallon E) None of the above A) The conversion costs traced directly to stout are $11,226 B) Total conversion costs are $320,784 C) Beer's direct conversion costs amount to $1.016 per gallon D) $3.945 is ale's conversion cost per gallon E) None of the above

Hercules Hair Restorer Inc. (HHRI) makes many varieties of hair restoration products which are sold under well-known marketing labels. A single batch contains 10,000 8 oz. bottles and takes two days to make. Typically 15 batches are completed per month, for different brands. Basic cost data for the month of January appears below. \(\begin{array}{|c|c|c|c|c|c|} \hline \text { Hair by } & \text { Bottle } & \text { Batch } & \text { Cost } & \text { January's other } \\ \text { Zeus } & && \text {per} & \text { expenses }\\ \hline \text { Oil, fl. oz. } & 2 & & \$ 3 & \text { Supervision } & \$ 8,000 \\ \hline \begin{array}{l} \text { Lotion, fl. } \\ \text { oz. } \end{array} & 4 & & \$ 1 & \begin{array}{l} \text { Indirect } \\ \text { materials } \end{array} & \$ 2,200 \\ \hline \begin{array}{l} \text { Zeus } \\ \text { potion, fl. } \\ \text { oz. } \end{array} & 1 / 4 & & \$ 24 & \begin{array}{l} \text { Equipment } \\ \text { deprec \& } \\ \text { repairs } \end{array} & \$ 14,520 \\ \hline \begin{array}{l} \text { Alcemena } \\ \text { scent } \end{array} & 1 / 16 & & \$ 48 & \begin{array}{l} \text { Plant } \\ \text { manager's } \\ \text { salary } \end{array} & \$ 6.500 \\ \hline \begin{array}{l} \text { Bottle. } \\ \text { cap, label } \end{array} & 1 & & \$ 0.4 & \text { Utilities } & \$ 1.800 \\ \hline \begin{array}{l} \text { Direct } \\ \text { labor, hour } \end{array} & & 50 & \$ 14 & & \$ 33,020 \\ \hline \begin{array}{l} \text { Machine } \\ \text { hours } \end{array} & 8 & & & & \\ \hline \end{array}\) Why is actual costing of overheads less accepted than normal costing?

A) It is impossible to determine overheads per job until the end of the year B) Monthly allocation of actual overheads leads to unusually low or high product costs when monthly output differs from the annual average C) It exacerbates the problem of under/over applied overheads D) Actual costing is widely used in practice E) (a) and (b) only A) It is impossible to determine overheads per job until the end of the year B) Monthly allocation of actual overheads leads to unusually low or high product costs when monthly output differs from the annual average C) It exacerbates the problem of under/over applied overheads D) Actual costing is widely used in practice E) (a) and (b) only

Snyder Stampings allocates overhead to products based on machine hours. It uses a flexible overhead budget to calculate a predetermined overhead rate at the beginning of the year. This rate is used during the year to allocate overhead to the various stampings produced. The following table summarizes operations for the last year: \[\begin{array} { | l | r | } \hline \text { Budgeted fixed overhead } & \$ 3,800,000 \\ \hline \text { Over-absorbed overhead variance } & \$ 220,000 \\ \hline \text { Actual machine hours } & 46,000 \\ \hline \text { Variable overhead per machine hour } & \$ 100 \\ \hline \text { Actual overhead incurred } & \$ 8,750,000 \\ \hline \end{array}\] Required: In setting the overhead rate at the beginning of the year, what budgeted volume of machine hours was used?

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The following figures were taken from the records of Welling Co. for the current year. At the end of the year, two jobs were still in process. Details about the two jobs include: \[\begin{array} { | l | r | r | } \hline & \text { Job A } & \text { Job B } \\ \hline \text { Direct labor } & \$ 10,000 & \$ 28,000 \\ \hline \text { Direct materials } & \$ 32,000 & \$ 22,000 \\ \hline \text { Machine hours } & 2,000 & 3,500 \\ \hline \text { Direct labor hours } & 1,000 & 2,000 \\ \hline \end{array}\] Welling Co. applies overhead at a budgeted rate, calculated at the beginning of the year. The budgeted rate is the ratio of budgeted overhead to budgeted direct labor costs. Budgeted figures for the current year were: \[\begin{array} { | l | r | } \hline \text { Budgeted direct labor costs } & \$ 250,000 \\ \hline \text { Budgeted overhead } & \$ 187,500 \\ \hline \end{array}\] Actual figures were \[\begin{array} { | l | r | } \hline \text { Direct labor } & \$ 350,000 \\ \hline \text { Overhead } & \$ 192,500 \\ \hline \text { Finished goods inventory } & \$ 75,000 \\ \hline \text { Cost of goods sold } & \$ 550,000 \\ \hline \end{array}\] There were no opening inventories. It is the practice of the company to prorate any over/under-absorption of overhead to finished goods inventory, work in process, and cost of goods sold based on the total dollars in these categories. Required: a. Compute the cost of work in process before over/under-applied overheads are prorated. b. Prepare a schedule of finished goods inventory, work in process, and cost of goods sold after over/under-applied overheads are prorated. c. What is the difference in operating income if the over/under-applied overhead is charged to cost of goods sold instead of being prorated to finished goods inventory, work in process, and cost of goods sold?

a. Cost of work in process before prorat

Exam 9: Absorption Cost System

Micro Enterprises planned to produce 120,000 lerts per year. Annual overheads, of which 32.5% are variable, are estimated at $320,400. Each lert takes 1.2 machine hours and 3 labor hours to produce. The firm allocates overhead by direct labor hours. In March, when 11,500 lerts were produced, 33,500 direct labor hours were recorded and expenditures on overheads amounted to $31,200. Which is true for this month?

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Question 1

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Comprehensive Absorption Costing Problem The Denna Water plant in Sarasota, Florida, bottles purified and flavored waters in a variety of sizes (20, 36, 48, and 64 ounces) for sale through vending machines and retail stores. Volume is measured as bottled ounces. The plant's annual budgeted fixed manufacturing overhead amounts to $1.8 million, and variable manufacturing overhead is projected at $0.005 per bottled ounce. Projected volume in the Sarasota plant next year is 200 million ounces. Actual volume for the year accumulated to 210 million ounces and total manufacturing overhead incurred (both fixed and variable) was $2.85 million. Required: a. Calculate the Denna Sarasota plant overhead rate. b. How much overhead was absorbed to products in the Sarasota plant? c. Calculate the Denna Sarasota plant's over- or under-absorbed overhead. d. Describe the effect on income when the over- or under-absorbed overhead calculated in (c) is written off to cost of goods sold.

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Question 2

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a. Overhead rate = ($1.8 million + $0.005 × 200 million oz.)/200 million oz.
= $1.8 million/200 million oz. + $0.005
= $0.009 + $0.005
= $0.014
b. $\begin{array} { | l | r | } \hline \text { Owerhead absorbed: } & \\\hline \text { Actual Volume (millions) } & 210 \\\hline \text { OH rate/ounce } & \$ 0.014 \\\hline \text { Overhead absorbed (millions) } & \$ 2.940 \\\hline\end{array}$ c. $\begin{array} { | l | r | } \hline \text { Ower/under absorbed(millions): } & \\\hline \text { Overhead absorbed } & \$ 2.940 \\\hline \text { Less: Actual overhead incurred } & 2.850 \\\hline \text { Over absorbed overhead } & \$ 0.090 \\\hline\end{array}$ d. $90,000 more overhead was charged to products (WIP, Finished goods, and Cost of Goods Sold) than was actually incurred. So, when this over-absorbed overhead is written off to CGS, it lowers CGS and raises net income before taxes.

Rose Bach has recently been hired as controller of Lempco Inc., a sheet-metal manufacturer. Lempco has been in the sheet-metal business for many years and is currently investigating ways to modernize its manufacturing process. At the first staff meeting Bach attended, Bob Kelley, chief engineer, presented a proposal for automating the drilling department. Kelley recommended that Lempco purchase two robots that could replace the eight direct labor workers in the department. The cost savings outlined in Kelley's proposal include two elements. First, direct labor cost in the drilling department is eliminated. Second, manufacturing overhead cost in the department is reduced to zero because Lempco charges manufacturing overhead on the basis of direct labor dollars using a plantwide rate. The president of Lempco felt that Kelley's explanation of the cost savings made no sense. Bach agreed and explained that as firms become more automated, they should rethink their manufacturing overhead systems. The president asked Bach to look into the matter and prepare a report for the next staff meeting. To refresh her knowledge, Bach reviewed articles on manufacturing overhead allocation for an automated factory and discussed the matter with some of her peers. She also gathered the historical data presented below on the manufacturing overhead rates experienced by Lempco over the years. Bach also wanted to have some departmental data to present at the meeting. Using Lempco's accounting records, she was able to estimate the annual averages presented below for each manufacturing department in the 1990s. Historical Data Average Average Date Annual Average Annual Manufacturing Direct Manufacturing Overhead Labor Cost Overhead Cost Application Rate 1950 \ 1,000,000 \ 1,000,000 100\% 1960 1,200,000 3,000,000 250 1970s 2,000,000 7,000,000 350 1980s 3,000,000 12,000,000 400 1990s 4,000,000 20,000,000 500 $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\text { Annual Averages }$ cutting Department Girinding Department Drilling Department Direct labor \ 2,000,000 \ 1,750,000 \ 250,000 Manufacturing overhead 11,000,000 7,000,000 2,000,000 Required: a. Disregarding the proposed use of robots in the drilling department, describe the shortcomings of Lempco's current system for applying overhead. b. Do you agree with Bob Kelley's statement that the manufacturing overhead cost in the drilling department will be reduced to zero if the automation proposal is implemented? Explain. c. Recommend ways to improve Lempco's method for applying overhead by describing how it should revise its overhead accounting system: (i) in the cutting and grinding departments. (ii) to accommodate the automation of the drilling department.

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Question 3

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a. Lempco Inc. is currently using a plantwide overhead rate that is applied on the basis of direct labor dollars. In general, a plantwide manufacturing overhead rate is acceptable only if a similar relation between overhead and direct labor exists in all departments, or if the company manufactures products which receive proportional services from each department.
In some cases, departmental overhead rates are preferable to plantwide overhead rates because plantwide overhead rates do not provide:
• a framework for reviewing overhead costs (performance evaluation) on a departmental basis, identifying departmental cost overruns, or taking corrective action to improve departmental cost control.
• sufficient information about product profitability, thus increasing the difficulties associated with management decision making.
b. Because Lempco uses a plantwide overhead rate applied on the basis of direct labor dollars, the elimination of direct labor in the Drilling Department through the introduction of robots may appear to reduce the overhead cost of the Drilling Department to zero. However, this change will not reduce fixed manufacturing expenses such as depreciation, plant supervision, etc. In reality, the use of robots is likely to increase fixed expenses because of increased depreciation expense. Under Lempco's current method of allocating overhead costs, the remaining departments will merely absorb these costs.
c. (i) In order to improve the allocation of overhead costs in the Cutting and Grinding Departments, Lempco should:
• establish separate overhead accounts (pools) and rates for each of these departments.
• select an application basis for each of these departments that best reflects the relation of the departmental activity to the overhead costs incurred (e.g., direct labor hours, machine hours, etc.)
• identify, if possible, fixed and variable overhead costs and establish fixed and variable overhead rates.
(ii) In order to accommodate the automation of the Drilling Department in its overhead accounting system, Lempco should:
• establish separate overhead accounts (pools) and rates for the Drilling Department.
• identify, if possible, fixed and variable overhead costs and establish fixed and variable overhead rates.
• apply overhead costs to the Drilling Department on the basis of robot or machine hours.

The job cost sheet for 1,000 units of toy trucks is: Job Number 555 Date Started 4/13 Date Completed 6/18 $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\text { Raw Materials }$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\text { Direct Labor }$ Date Type Cost Qty. Amount Cost Hours Amount 4/13 565 \ 31,000 \ 3,000 \ 18 20 \ 360 5/24 889 14,000 4.000 12 10 120 6/18 248 21,000 15 Totals \ 9,000 130 \ 1,980 Total direct materials \ 9,000 Total direct labor 1,980 Overhead (130 direct labor hours @\ 10/ hour) 1,300 Total Job Cost \ 12,280 All of the materials for the job were purchased on 4/10. The batch of 1,000 toy trucks is sold on 7/10. What are the costs of this job order in the raw materials account, the work-in-process account, the finished goods account, and the cost of goods account on 4/30, 5/31, 6/30 and 7/31?

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Question 4

Micro Enterprises planned to produce 120,000 lerts per year. Annual overheads, of which 32.5% are variable, are estimated at $320,400. Each lert takes 1.2 machine hours and 3 labor hours to produce. The firm allocates overhead by direct labor hours. You review the accounting records at the end of the year. You learn that Micro made 125,000 lerts in the year, using 356,000 direct labor hours. Actual overhead expenditures totaled $333,333.

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Question 5

Micro Enterprises planned to produce 120,000 lerts per year. Annual overheads, of which 32.5% are variable, are estimated at $320,400. Each lert takes 1.2 machine hours and 3 labor hours to produce. The firm allocates overhead by direct labor hours. In February, when 11,000 lerts were produced, 32,000 direct labor hours were recorded and expenditures on overheads amounted to $29,650. Which is true for this month?

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Question 6

Hercules Hair Restorer Inc. (HHRI) makes many varieties of hair restoration products which are sold under well-known marketing labels. A single batch contains 10,000 8 oz. bottles and takes two days to make. Typically 15 batches are completed per month, for different brands. Basic cost data for the month of January appears below. $Hercules Hair Restorer Inc. (HHRI) makes many varieties of hair restoration products which are sold under well-known marketing labels. A single batch contains 10,000 8 oz. bottles and takes two days to make. Typically 15 batches are completed per month, for different brands. Basic cost data for the month of January appears below. The new CEO has decided that 25% of the production target of 200 batches per year will be a new product, whose information appears below. \begin{array} { | l | c | c | c | } \hline \text { Hair by Jove (new product) } & & & \\ \hline & \begin{array} { c } \text { Qty per } \\ \text { Bottle } \end{array} & \begin{array} { c } \text { Qty per } \\ \text { Batch } \end{array} & \begin{array} { c } \text { Unit } \\ \text { Cost } \end{array} \\ \hline \text { Oil, fl. oz. } & 13 / 2 & & \$ 3.00 \\ \hline \text { Lotion. fl. oz. } & 3 & & \$ 0.90 \\ \hline \text { Jove potion. fl. oz. } & 1 / 8 & & \$ 24.00 \\ \hline \text { Hera scent } & 1 / 8 & & \$ 60 \\ \hline \text { Bottle, cap. label } & 1 & & \$ 0.40 \\ \hline \text { Direct labor. hour } & & 60 & \$ 14.00 \\ \hline \text { Machine hours } & & 6 & \\ \hline \end{array} If HHRI makes 204 batches in the planned sales mix, which is true (to nearest $)?$ The new CEO has decided that 25% of the production target of 200 batches per year will be a new product, whose information appears below. Hair by Jove (new product) Qty per Bottle Qty per Batch Unit Cost Oil, fl. oz. 13/2 \ 3.00 Lotion. fl. oz. 3 \ 0.90 Jove potion. fl. oz. 1/8 \ 24.00 Hera scent 1/8 \ 60 Bottle, cap. label 1 \ 0.40 Direct labor. hour 60 \ 14.00 Machine hours 6 If HHRI makes 204 batches in the planned sales mix, which is true (to nearest $)?

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Question 7

First Eastern Bank is a large, multi-branch bank offering a wide variety of commercial and retail banking services. Eastern uses an absorption costing system to monitor the costs of various services and provide information for a variety of decisions. One set of services is a retail loan operation providing residential mortgages, car loans, and student college loans. All loan applications are filed by the applicant at a branch bank, where the branch manager fills out the loan application. From there, the loan application is sent to the loan processing department, where the applicant's credit history is checked and a recommendation is made regarding loan approval based on the applicant's credit history and current financial situation. This recommendation is forwarded to the loan committee of senior lending officers, who review the file and make a final decision. Thus, there are three stages to making a loan: application in a branch, the loan processing department, and the loan committee. Mr. and Mrs. Jones visit the West Street branch and file an application for a residential mortgage. The Jones's loan application is processed through the three stages. • West Street Branch Bank. The branch manager spends one hour taking the application. The branch manager spends 1,000 hours per year of her total time taking loan applications and the remainder of her time providing other direct services to customers. Total overhead in the West Street Branch is budgeted to be $259,000, excluding the manager's salary, and is allocated to direct customer services using the branch manager's time spent providing direct customer services. The branch manager's annual salary is $42,600. • Processing department. The processing department budgets its total overhead for the year to be $800,000, which is allocated to loans processed using direct labor hours. Budgeted direct labor hours for the year are 40,000 hours. Direct labor hours in the processing department cost $18 per hour. The Jones's loan requires five direct labor hours in the loan processing department. • Loan committee. Ten senior bank executives are on the loan committee. The loan committee meets 52 times per year, every Wednesday, all day, to approve all loans. The average salary and benefits of each member of the loan committee are $104,000. The loan committee spends 15 minutes reviewing the Jones's loan application before approving it. For costing purposes, all employees are assumed to work eight-hour days, five days per week, and 52 weeks per year. Required: Calculate the total cost of taking the application, processing, and approving the Joneses' mortgage.

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Question 8

Hercules Hair Restorer Inc. (HHRI) makes many varieties of hair restoration products which are sold under well-known marketing labels. A single batch contains 10,000 8 oz. bottles and takes two days to make. Typically 15 batches are completed per month, for different brands. Basic cost data for the month of January appears below. $Hercules Hair Restorer Inc. (HHRI) makes many varieties of hair restoration products which are sold under well-known marketing labels. A single batch contains 10,000 8 oz. bottles and takes two days to make. Typically 15 batches are completed per month, for different brands. Basic cost data for the month of January appears below. HHRI appoints a new CEO, who decides to increase production targets to 200 batches per year. She also hires a management accountant who decides to apply normal costing and does some research into cost behavior. Basic product data still applies. New information appears below. \begin{array} { | l | r | c | } \hline \text { Estimated owerheads for year } & & \text { \% fixed } \\ \hline \text { Supervision } & \$ 96,000 & 100 \% \\ \hline \text { Indirect materials } & \$ 30,800 & 60 \% \\ \hline \text { Equipment depreciation } & \$ 126,240 & 100 \% \\ \hline \text { Equipment repairs } & \$ 48,000 & 30 \% \\ \hline \text { Plant managers salary } & \$ 84,500 & 100 \% \\ \hline \text { Utilities } & \underline{\$ 27,000} & 20 \% \\ \hline & \$ 412,540 & \\ \hline \end{array} If HHRI uses a plant-wide rate based on a single cost pool, which of the following statements is true?$ HHRI appoints a new CEO, who decides to increase production targets to 200 batches per year. She also hires a management accountant who decides to apply normal costing and does some research into cost behavior. Basic product data still applies. New information appears below. Estimated owerheads for year \% fixed Supervision \ 96,000 100\% Indirect materials \ 30,800 60\% Equipment depreciation \ 126,240 100\% Equipment repairs \ 48,000 30\% Plant managers salary \ 84,500 100\% Utilities 20\% \ 412,540 If HHRI uses a plant-wide rate based on a single cost pool, which of the following statements is true?

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Question 9

Barbara Karloff Inc. recently set up as a microbrewery to manufacture a variety of beers, ales and stouts to customer specifications. The standard sizes per batch are as follows: stout, 5,000 gallons; ale, 8,000 gallons; and beer, 10,000 gallons. A beer batch takes six days to process, ale ten days and stout 14 days, the difference primarily attributable to the number of steps in the brewing process and the amount of time needed to mature the brew to the intended flavor specifications. By tradition, a new batch is started at 7 a.m., the start of a work day. It costs $1,800 in labor and variable overheads to set up each batch. The brewery's monthly fixed overheads are $220,000, which is allocated to products based on gallons. Other costing data appears below. Per gallon of output Beer Ale Stout Basic direct materials \ 0.40 \ 0.60 \ 0.90 Variable conversion costs \ 0.80 \ 1.00 \ 1.20 Bottle Label Case/Crate/Pack Other direct materials \ 0.05 \ 0.03 \ 0.25 Basic direct materials are applied at the start of the process. Direct materials costs are charged when used in production and variable conversion costs are applied evenly throughout the production process. All products are sold in 12-ounce bottles. Beer is sold with 24 bottles per case, but ale is packed by the dozen in mini-crates, and stout in 6-packs. In April, the first month of operations, BKI finished five batches of beer, three of ale and one of stout. Dribbles of liquids from one batch that do not completely fill a bottle are poured away. Bottles from a batch that do not make up a complete case, crate or pack are donated to the company monthly picnic. In reviewing the production records, you find that a batch of stout was started on the 23rd, a batch of ale on the 27th, and a batch of beer on the 29th. These batches constitute ending work in process (EWIP). With respect to conversion costs, which is true for the first month of operations?

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Question 10

DigitalEar invented and patented a new digital behind-the-ear hearing aid with adaptive noise reduction and automatic feedback cancellation. DigitalEar produces four different models of its DigitalEar device. The following table summarizes the planned production levels, costs, and selling prices for the four DigitalEar devices for this year: $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\text {Digital Ear Hearing Aid Models}$ Budgeted production and sales (units) 12,000 8,000 5,000 3,000 Selling price \ 500 \ 600 \ 700 \ 1,000 Direct labor (DL) hours per unit 2.0 2.8 3.0 3.5 Direct material per unit \ 110 \ 120 \ 130 \ 150 Direct labor cost (wages, benefits, and payroll taxes) per DL \ 25 \ 25 \ 25 \ 25 hour DigitalEar allocates both fixed and variable manufacturing overhead to the four devices using a single overhead rate, which includes both fixed and variable manufacturing overhead. The number of direct labor hours in each device is used as the allocation base for assigning overhead to hearing aids. Budgeted volume measured using direct labor hours is calculated using the budgeted sales of each device. Variable manufacturing overhead is budgeted at $12.00 per direct labor hour and fixed manufacturing overhead is budgeted this year at $2,157,000. Required: a. Calculate DigitalEar's budgeted manufacturing overhead rate per direct labor hour for this year. b. Using absorption costing, calculate the budgeted manufacturing cost per unit for each of DigitalEar's four hearing aid devices. c. During the year, actual manufacturing overhead incurred (fixed plus variable) was $3,110,000, and the actual number of direct labor hours used producing the four hearing aids was: A21 B45 C24 D88 Actual direct labor hours 26,000 23,800 18,600 12,250 Calculate the over- or under-absorbed overhead DigitalEar for this year. d. Assuming that the entire over- or under-absorbed overhead you calculated in part (c) is written off to cost of goods sold, does this write-off increase or decrease net income before taxes? Explain.

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Question 11

Athletic Inc. is a wholesale distributor supplying a wide range of moderately priced sporting equipment to large chain stores. About 60 percent of Athletic's products are purchased from other companies and the remainder are manufactured by Athletic. The company has a plastics department that is currently manufacturing molded fishing tackle boxes. Athletic is able to manufacture and sell 8,000 tackle boxes annually, making full use of its direct labor capacity at available workstations. Presented below are the selling price and costs associated with Athletic's tackle boxes. Selling price per box \ 86.00 Costs per box Molded plastic \ 8.00 Hinges, latches, handle 9.00 Direct labor \ \ 15.00/hr.) 18.75 Mlanufacturing overhead 12.50 Selling and administrative cost 17.00 65.25 Profit perbox \ 20.75 Because Athletic believes it could sell 12,000 tackle boxes if it had sufficient manufacturing capacity, the company has looked into the possibility of purchasing the tackle boxes for distribution. Maple Products, a steady supplier of quality products, would be able to provide up to 9,000 tackle boxes per year at a price of $68 per box delivered to Athletic's facility. Bart Johnson, Athletic's product manager, has suggested that the company could make better use of its plastics department by manufacturing skateboards. To support his position, Johnson has a market study that indicates an expanding market for skateboards and a need for additional suppliers. Johnson believes that Athletic could expect to sell 17,500 skateboards annually at $45 per skateboard. Johnson's estimate of the costs to manufacture the skateboards follows. Selling price per skateboard \ 45.00 Costs per skateboard Molded plastic 5.50 Wheels, hardware 7.00 Directlabor \ \ 15.00/hr.) 7.50 Mlanufacturing overhead 5.00 Selling and administrative cost 9.00 34.00 Profit per skateboard \ 11.00 In the plastics department, Athletic uses direct labor hours as the application base for manufacturing overhead. Included in manufacturing overhead for the current year is $50,000 of factorywide, fixed manufacturing overhead that has been allocated to the plastics department. For each product that Athletic sells, regardless of whether the product has been purchased or is manufactured by Athletic, a portion of the selling and administrative cost is fixed at $6 per unit. Total selling and administrative costs for the purchased tackle boxes would be $10 per unit. Required: Prepare an analysis based on the data presented that will show which product or products Athletic Inc. should manufacture and/or purchase to maximize the company's profitability. Show the associated financial impact. Support your answer with appropriate calculations.

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Question 12

The Cope Company had an over-absorbed overhead balance at year-end. The firm wrote off one-third of it to Cost of Goods Sold, thereby raising net income by $100,000, and the remainder was charged to inventory accounts. Overhead is allocated to products using direct labor dollars. The firm uses a flexible budget to calculate its overhead rate. Before the year began, the variable overhead rate and budgeted volume were estimated to be $7.00 per direct labor dollar and $1 million, respectively. Actual overhead incurred for the year was $9.7 million, and actual direct labor cost was $1,250,000. Required: What budgeted fixed overhead amount did the Cope Company use in calculating the overhead rate?

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Question 13

The Talbott Company has received an order (#324) for 100 widgets. On January 20 the shop supervisor requisitioned 100 units of part 503 at a cost of $5 per unit and 500 units of part 456 at a cost of $3 per unit to begin work on the 100 widgets. On the same day 20 hours of direct labor at $20 per hour are used to work on the widgets. On January 21, 200 units of part 543 at $6 per unit are requisitioned and 10 hours of direct labor at $15 per hour are performed on the 100 units of widgets to complete the job. Overhead is allocated to the job based on $5 per direct labor hour. Required: Prepare a job order cost sheet for the 100 widgets.

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Question 14

Hercules Hair Restorer Inc. (HHRI) makes many varieties of hair restoration products which are sold under well-known marketing labels. A single batch contains 10,000 8 oz. bottles and takes two days to make. Typically 15 batches are completed per month, for different brands. Basic cost data for the month of January appears below. Hair by Bottle Batch Cost January's other Zeus per expenses Oil, fl. oz. 2 \ 3 Supervision \ 8,000 Lotion, fl. oz. 4 \ 1 Indirect materials \ 2,200 Zeus potion, fl. oz. 1/4 \ 24 Equipment deprec \& repairs \ 14,520 Alcemena scent 1/16 \ 48 Plant manager's salary \ 6.500 Bottle. cap, label 1 \ 0.4 Utilities \ 1.800 Direct labor, hour 50 \ 14 \ 33,020 Machine hours 8 Why is actual costing of overheads less accepted than normal costing?

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Question 15

PPX is a specialized packaging company that packages other manufacturers' products. Other manufacturers ship their products to PPX in bulk. PPX then packages the products using high-speed, state-of-the-art packaging machines and ships the packaged products to wholesalers. A typical order involves packaging small toys in see-through plastic and cardboard containers. PPX uses a flexible budget to forecast annual plantwide overhead, which is then allocated to jobs based on machine hours. The annual flexible overhead budget is projected to be $6 million of fixed costs and $120 per machine hour. The budgeted number of machine hours for the year is 20,000. At the end of the year, 21,000 machine hours were used and actual overhead incurred was $9.14 million. Required: a. Calculate the overhead rate set at the beginning of the year. b. Calculate the amount of over/under-absorbed overhead for the year. c. The company's policy is to write off any over/under-absorbed overhead to cost of goods sold. Will net income rise or fall this year when the over/under-absorbed overhead is written off to cost of goods sold?

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Question 16

Hercules Hair Restorer Inc. (HHRI) makes many varieties of hair restoration products which are sold under well-known marketing labels. A single batch contains 10,000 8 oz. bottles and takes two days to make. Typically 15 batches are completed per month, for different brands. Basic cost data for the month of January appears below. $Hercules Hair Restorer Inc. (HHRI) makes many varieties of hair restoration products which are sold under well-known marketing labels. A single batch contains 10,000 8 oz. bottles and takes two days to make. Typically 15 batches are completed per month, for different brands. Basic cost data for the month of January appears below. Hercules Hair Restorer Inc. (HHRI) appoints a new CEO, who decides to increase production targets to 200 batches per year. She also hires a management accountant who decides to apply normal costing and does some research into cost behavior. Basic product data (from Q1) still applies. New information appears below. \begin{array} { | l | r | c | } \hline \text { Estimated owerheads for year } & & \text { \% fixed } \\ \hline \text { Supervision } & \$ 96,000 & 100 \% \\ \hline \text { Indirect materials } & \$ 30,800 & 60 \% \\ \hline \text { Equipment depreciation } & \$ 126,240 & 100 \% \\ \hline \text { Equipment repairs } & \$ 48,000 & 30 \% \\ \hline \text { Plant managers salary } & \$ 84,500 & 100 \% \\ \hline \text { Utilities } & \$ 27,000 & 20 \% \\ \hline & \$ 412,540 & \\ \hline \end{array} If HHRI uses for overhead allocation a dual rate system, whereby fixed overheads are allocated on the basis of direct labor hours and variable overheads are allocated on the basis of machine hours, which is true?$ Hercules Hair Restorer Inc. (HHRI) appoints a new CEO, who decides to increase production targets to 200 batches per year. She also hires a management accountant who decides to apply normal costing and does some research into cost behavior. Basic product data (from Q1) still applies. New information appears below. Estimated owerheads for year \% fixed Supervision \ 96,000 100\% Indirect materials \ 30,800 60\% Equipment depreciation \ 126,240 100\% Equipment repairs \ 48,000 30\% Plant managers salary \ 84,500 100\% Utilities \ 27,000 20\% \ 412,540 If HHRI uses for overhead allocation a dual rate system, whereby fixed overheads are allocated on the basis of direct labor hours and variable overheads are allocated on the basis of machine hours, which is true?

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Question 17

Snyder Stampings allocates overhead to products based on machine hours. It uses a flexible overhead budget to calculate a predetermined overhead rate at the beginning of the year. This rate is used during the year to allocate overhead to the various stampings produced. The following table summarizes operations for the last year: Budgeted fixed overhead \ 3,800,000 Over-absorbed overhead variance \ 220,000 Actual machine hours 46,000 Variable overhead per machine hour \ 100 Actual overhead incurred \ 8,750,000 Required: In setting the overhead rate at the beginning of the year, what budgeted volume of machine hours was used?

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Question 18

What conditions are likely to exist when operating managers are compensated based on accounting earnings and accelerated depreciation methods are used to compute overhead charges to operating departments?

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Question 19

The following figures were taken from the records of Welling Co. for the current year. At the end of the year, two jobs were still in process. Details about the two jobs include: Job A Job B Direct labor \ 10,000 \ 28,000 Direct materials \ 32,000 \ 22,000 Machine hours 2,000 3,500 Direct labor hours 1,000 2,000 Welling Co. applies overhead at a budgeted rate, calculated at the beginning of the year. The budgeted rate is the ratio of budgeted overhead to budgeted direct labor costs. Budgeted figures for the current year were: Budgeted direct labor costs \ 250,000 Budgeted overhead \ 187,500 Actual figures were Direct labor \ 350,000 Overhead \ 192,500 Finished goods inventory \ 75,000 Cost of goods sold \ 550,000 There were no opening inventories. It is the practice of the company to prorate any over/under-absorption of overhead to finished goods inventory, work in process, and cost of goods sold based on the total dollars in these categories. Required: a. Compute the cost of work in process before over/under-applied overheads are prorated. b. Prepare a schedule of finished goods inventory, work in process, and cost of goods sold after over/under-applied overheads are prorated. c. What is the difference in operating income if the over/under-applied overhead is charged to cost of goods sold instead of being prorated to finished goods inventory, work in process, and cost of goods sold?

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Question 20

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What conditions are likely to exist when operating managers are compensated based on accounting earnings and accelerated depreciation methods are used to compute overhead charges to operating departments?

Introduction

The Nature of Costs

Opportunity Cost of Capital and Capital Budgeting

Organizational Architecture

Responsibility Accounting and Transfer Pricing

Budgeting

Cost Allocation: Theory

Cost Allocation: Practices

Criticisms of Absorption Cost Systems: Incentives to Overproduce

Criticisms of Absorption Cost Systems: Inaccurate Product Costs

Standard Costs: Direct Labor and Materials

Overhead and Marketing Variances

Management Accounting in a Changing Environment

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