CHAPTER 3 & 5

SOLUTIONS TO PROBLEMS
PROBLEM 3-42
NOTE: The 12/31/x1 balances for cash and accounts receivable, although given in the
problem, are irrelevant to the solution.
1.

TWISTO PRETZEL COMPANY

SCHEDULE OF COST OF GOODS MANUFACTURED
FOR THE YEAR ENDED DECEMBER 31, 20X1
Direct material:
Raw-material inventory, 12/31/x0 .............................................
Add: Purchases of raw material ...............................................
Raw material available for use .................................................
Deduct: Raw-material inventory, 12/31/x1 ...............................
Raw material used .....................................................................
Direct labor .......................................................................................
Manufacturing overhead:
Indirect material.........................................................................
Indirect labor .............................................................................
Depreciation on factory building .............................................
Depreciation on factory equipment .........................................
Utilities .......................................................................................
Property taxes ...........................................................................
Insurance ...................................................................................
Rental of warehouse space ......................................................
Total actual manufacturing overhead .................................
Add: Overapplied overhead*................................................
Overhead applied to work in process ......................................
Total manufacturing costs...............................................................
Add: Work-in-process inventory, 12/31/x0 .....................................
Subtotal .............................................................................................
Deduct: Work-in-process inventory, 12/31/x1 ................................
Cost of goods manufactured...........................................................

$10,100
39,000
$49,100
11,000
$38,100
79,000
$ 4,900
29,000
3,800
2,100
6,000
2,400
3,600
3,100
$54,900
3,100
58,000
$175,100
8,100
$183,200
8,300
$174,900

*The Schedule of Cost of Goods Manufactured lists the manufacturing costs applied to work
in process. Therefore, the overapplied overhead, $3,100, must be added to total actual
overhead to arrive at the amount of overhead applied to work in process. If there had been
underapplied overhead, the balance would have been deducted from total actual
manufacturing overhead. The amount of overapplied overhead is found by subtracting
actual overhead, $54,900 (as computed above), from applied overhead, $58,000 (given).
2.

TWISTO PRETZEL COMPANY

SCHEDULE OF COST OF GOODS SOLD
FOR THE YEAR ENDED DECEMBER 31, 20X1
Finished-goods inventory, 12/31/x0 ...................................................................
Add: Cost of goods manufactured* ...................................................................
Cost of goods available for sale ........................................................................
Deduct: Finished-goods inventory, 12/31/x1 ....................................................
Cost of goods sold ..............................................................................................
Deduct: Overapplied overhead .........................................................................
Cost of goods sold (adjusted for overapplied overhead) ................................

$ 14,000
174,900
$188,900
15,400
$173,500
3,100
$170,400

*The cost of goods manufactured is obtained from the Schedule of Cost of Goods
Manufactured.
The

company closes underapplied or overapplied overhead into cost of goods sold. Hence,
the balance in overapplied overhead is deducted from cost of goods sold for the month.
3.

TWISTO PRETZEL COMPANY

INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 20X1
Sales revenue ..............................................................
Less: Cost of goods sold ...........................................
Gross margin ...............................................................
Selling and administrative expenses:
Salaries .................................................................
Utilities ..................................................................
Depreciation..........................................................
Rental of office space ..........................................
Other expenses ....................................................
Total.......................................................................
Income before taxes....................................................
Income tax expense ....................................................

$205,800
170,400
$ 35,400
$13,800
2,500
1,200
1,700
4,000
23,200
$12,200
5,100

Net income ...................................................................

$ 7,100

PROBLEM 3-44
The completed T-accounts are shown below. (Missing amounts in problem are italicized.)
Raw-Material Inventory
21,000
135,000 120,000
Bal. 12/31
36,000
Bal. 1/1

Work-in-Process Inventory
Bal. 1/1
17,000
Direct
material
120,000
Direct
labor
150,000 718,000
Mfg.
overhead 450,000
Bal. 12/31
19,000
Manufacturing Overhead
452,500 450,000
Wages Payable
2,000 Bal. 1/1
147,000
150,000
5,000 Bal. 12/31

Accounts Payable
2,500 Bal. 1/1
136,500
135,000
1,000 Bal. 12/31
Finished-Goods Inventory
Bal. 1/1
12,000
718,000 710,000
Bal. 12/31
20,000

Cost of Goods Sold

710,000
Sales Revenue
810,000
Accounts Receivable
Bal. 1/1
11,000
810,000 806,000
Bal. 12/31 15,000

PROBLEM 3-45
1.

Predetermined overhead rate = budgeted overhead budgeted machine hours

= $840,000 16,000 = $52.50 per machine hour

2.

(a)

Work-in-Process Inventory .................................................. 80,000*

Raw-Material Inventory .............................................

80,000

Work-in-Process Inventory .................................................. 130,800**

Wages Payable ..........................................................

130,800

* $21,000 + $44,000 + $15,000 = $80,000

** $35,000 + $22,000 + $65,000 + $8,800 = $130,800
(b)

(c)

Manufacturing Overhead ...................................................... 238,500

Accumulated Depreciation .......................................
Wages Payable ..........................................................
Manufacturing Supplies Inventory ..........................
Miscellaneous Accounts ..........................................

34,000
60,000
5,000
139,500

Work-in-Process Inventory .................................................. 231,000*

Manufacturing Overhead ..........................................

231,000

* (1,200 + 700 + 2,000 + 500) x $52.50 = $231,000

(d)

Finished-Goods Inventory ................................................... 315,250*

Work-in-Process Inventory ......................................

315,250

* Job 64: $84,000 + $21,000 + $35,000 + (1,200 x $52.50) = $203,000

Job 65: $53,500 + $22,000 + (700 x $52.50) = $112,250
$315,250 = $203,000 + $112,250
(e)

Accounts Receivable 146,950*

Sales Revenue ..........................................................

146,950

* $112,250 + $34,700 = $146,950

Cost of Goods Sold .............................................................. 112,250
Finished-Goods Inventory .......................................
3.

Job no. 66 and no. 67 are in production as of March 31:

Job 66: $44,000 + $65,000 + (2,000 x $52.50) ......................$214,000
Job 67: $15,000 + $8,800 + (500 x $52.50) ........................... 50,050
Total ...........................................................................$264,050

112,250

PROBLEM 3-45 (CONTINUED)

4.

Finished-goods inventory increased by $203,000 ($315,250 - $112,250).

5.

The companys actual overhead amounted to $238,500, whereas applied overhead

totaled $231,000. Thus, overhead was underapplied by $7,500.

PROBLEM 3-47
1.

Traceable costs total $2,500,000, computed as follows:

Total Cost
Professional staff salaries $2,500,000
Administrative support staff
300,000
Travel.
250,000
Photocopying..
50,000
Other operating costs
100,000
Total. $3,200,000

Percent
Traceable

Traceable
Cost

80%
60
90
90
50

$2,000,000
180,000
225,000
45,000
50,000
$2,500,000

JLRs overhead (i.e., the nontraceable costs) total $700,000 ($3,200,000 - $2,500,000).
2.

Predetermined overhead rate = budgeted overhead traceable costs

= $700,000 $2,500,000 = 28% of traceable costs

3.

Target profit percentage = target profit total cost

= $640,000 $3,200,000 = 20% of cost

4.

The total cost of the Martin Manufacturing project is $64,000, and the billing is
$76,800, as follows:
Professional staff salaries
Administrative support staff
Travel..
Photocopying
Other operating costs.
Subtotal
Overhead ($50,000 x 28%).
Total cost.
Markup ($64,000 x 20%).
Billing to Martin

$41,000
2,600
4,500
500
1,400
$50,000
14,000
$64,000
12,800
$76,800

5.

Possible nontraceable costs include utilities, rent, depreciation, advertising, top

management salaries, and insurance.

6.

Professional staff members are compensated for attending training sessions and
firm-wide planning meetings, paid vacations, and completion of general, non-clientrelated paperwork and reports. These activities benefit multiple clients, the
consultant, and/or the overall firm, making traceability to specific clients difficult if
not impossible.

PROBLEM 3-49
1.

Predetermi ned overhead rate

2.

Journal entries:
(a)
(b)
(c)
(d)
(e)
(f)
(g)

budgeted manufactur ing overhead

budgeted machine hours
$1,464,000
$20 per machine hour
73,200

Raw-Material Inventory ......................................

Accounts Payable ....................................

7,850

Work-in-Process Inventory ................................

Raw-Material Inventory ............................

180

Manufacturing Overhead ...................................

Manufacturing-Supplies Inventory..........

30

Manufacturing Overhead ...................................

Cash ..........................................................

800

Work-in-Process Inventory ................................

Wages Payable .........................................

75,000

Selling and Administrative Expense .................

Prepaid Insurance ....................................

1,800

Raw-Material Inventory ......................................

Accounts Payable ....................................

3,000

7,850
180
30
800
75,000
1,800
3,000

(h)
(i)
(j)
(k)

(l)

Accounts Payable ...............................................

Cash ..........................................................

1,700

Manufacturing Overhead ...................................

Wages Payable .........................................

21,000

Manufacturing Overhead ...................................

Accumulated Depreciation: Equipment ..

7,000

Finished-Goods Inventory .................................

Work-in-Process Inventory .....................

1,100

Work-in-Process Inventory................................
Manufacturing Overhead.........................

140,000*

1,700
21,000
7,000
1,100

140,000

*Applied manufacturing overhead = 7,000 machine hours

(m)

$20 per hour.

Accounts Receivable .........................................

Sales Revenue .........................................

176,000

Cost of Goods Sold............................................

Finished-Goods Inventory ......................

139,000

176,000
139,000

PROBLEM 3-52
1.

MARCO POLO MAP COMPANY

SCHEDULE OF COST OF GOODS MANUFACTURED
FOR THE MONTH OF MARCH
Direct material:
Raw-material inventory, March 1 .............................
Add: March purchases of raw material ...................
Raw material available for use .................................
Deduct: Raw-material inventory, March 31 .............
Raw materials used ..................................................
Direct labor .....................................................................
Manufacturing overhead applied (50% of direct labor)
Total manufacturing costs.............................................
Add: Work-in-process inventory, March 1 ...................
Subtotal ...........................................................................

$ 17,000
113,000
$130,000
26,000
$104,000
160,000 *
80,000
$344,000
40,000
$384,000

Deduct: Work-in-process inventory,

March 31 (90% $40,000) ........................................
Cost of goods manufactured.........................................

36,000
$348,000

*Work upward from the bottom of the statement, using the information available. Direct
labor + manufacturing overhead = total manufacturing costs direct material cost =
$344,000 $104,000 = $240,000. Since manufacturing overhead = 50% of direct labor, then
manufacturing overhead = $80,000 and direct labor = $160,000.
Cost

of goods manufactured = cost of goods sold + increase in finished-goods inventory

= $345,000 + $3,000 = $348,000.

2.

MARCO POLO MAP COMPANY

SCHEDULE OF PRIME COSTS
FOR THE MONTH OF MARCH
Raw material:
Beginning inventory ...................................................................
Add: Purchases ..........................................................................
Raw material available for use ...................................................
Deduct: Ending inventory ..........................................................
Raw material used ...............................................................................
Direct labor ..........................................................................................
Total prime costs .................................................................................

3.

MARCO POLO MAP COMPANY

SCHEDULE OF CONVERSION COSTS
FOR THE MONTH OF MARCH
Direct labor ............................................................................................
Manufacturing overhead applied (50% of direct labor) ......................
Total conversion cost ...........................................................................

PROBLEM 3-53
1.

$ 17,000
113,000
$130,000
26,000
$104,000
160,000
$264,000

Predetermi ned overhead rate

budgeted manufactur ing overhead

budgeted machine hours
$235,000
$5 per machine hour
47,000

$160,000
80,000
$240,000

2.

Calculation of applied manufacturing overhead:

Applied manufacturing overhead = machine hrs. used x predetermined overhead rate
$20,000 = 4,000 hrs. x $5 per hr.

3.

4.

5.

Underapplied overhead

$6,000

$26,000

$20,000

Cost of Goods Sold ...........................................................

Manufacturing Overhead ........................................
(a)

6,000
6,000

Calculation of proration amounts:

Account
Work in Process
Finished Goods
Cost of Goods
Sold
Total

Explanation
Job P82 only
Job N08 only

Amount*
$ 2,500
12,500

Percentage
12.5%
62.5%

Job A79 only

5,000
$20,000

25.0%
100.0%

*Machine hours used on job

Account
Work in Process
Finished Goods
Cost of Goods Sold
Total
(b)

actual overhead applied overhead

Calculation
of Percentage
2,500 20,000
12,500 20,000
5,000

20,000

predetermined overhead rate.

Underapplied
Overhead
$6,000
6,000
6,000

Percentage
12.5%
62.5%
25.0%

Amount Added
to Account
$ 750
3,750
1,500
$6,000

Journal entry:
Work-in-Process Inventory ..................................................
Finished-Goods Inventory ...................................................
Cost of Goods Sold ..............................................................
Manufacturing Overhead ...........................................

750
3,750
1,500
6,000

PROBLEM 5-45
1.

a.

Manufacturing overhead costs include all indirect manufacturing costs (all

production costs except direct material and direct labor). Typical overhead costs
include:
Indirect labor (e.g., a lift-truck driver, maintenance and inspection labor,
engineering labor, and supervisors).
Indirect material.

Other indirect manufacturing costs (e.g., building maintenance, machine and

tool maintenance, property taxes, insurance, depreciation on plant and
equipment, rent, and utilities).
b.

Companies develop overhead rates before production to facilitate the costing of

products as they are completed and shipped, rather than waiting until actual
costs are accumulated for the period of production.

2.

The increase in the overhead rate should not have a negative impact on the
company, because the increase in indirect costs was offset by a decrease in
direct labor.

3.

Rather than using a plantwide overhead rate, Borealis Manufacturing could

implement separate activity cost pools. Examples are as follows:
Separate costs into departmental overhead accounts (or other relevant pools),
with one account for each production and service department. Each
department would allocate its overhead to products on the basis that best
reflects the use of these overhead services.
Treat individual machines as separate cost centers, with the machine costs
collected and charged to the products using machine hours.

4.

An activity-based costing system might benefit Borealis Manufacturing because it

assigns costs to products according to their usage of activities in the production
process. More accurate product costs are the result.

PROBLEM 5-46
1.

Predetermined overhead rate = budgeted overhead budgeted direct-labor hours

= $800,000 25,000* = $32 per direct labor hour
*25,000 budgeted direct-labor hours = (3,000 units of Standard)(3 hrs./unit) +
(4,000 units of Enhanced)(4 hrs./unit)

Direct material.
Direct labor:
3 hours x $12
4 hours x $12

Standard

Enhanced

$ 25

$ 40

36
48

Manufacturing overhead:
3 hours x $32
4 hours x $32
Total cost.
2.

96
$157

128
$216

Activity-based overhead application rates:

Activity

Cost

Activity Cost
Driver

Application
Rate

Order
processing

$150,000

500 orders
processed (OP)

= $300 per OP

Machine
processing

560,000

40,000 machine
hrs. (MH)

= $14 per MH

Product
inspection

90,000

10,000 inspection
hrs. (IH)

= $9 per IH

Order processing, machine processing, and product inspection costs of a Standard

unit and an Enhanced unit:
Activity

Standard

Order processing:
300 OP x $300... $ 90,000
200 OP x $300...
Machine processing:
18,000 MH x $14... 252,000
22,000 MH x $14...
Product inspection:
2,000 IH x $9..
18,000
8,000 IH x $9.
Total
$360,000
Production volume (units)
3,000
Cost per unit
$120*
* $360,000 3,000 units = $120
** $440,000 4,000 units = $110

Enhanced

$ 60,000
308,000
72,000
$440,000
4,000
$110**

The manufactured cost of a Standard unit is $181, and the manufactured cost of an
Enhanced unit is $198:

Direct material.
Direct labor:
3 hours x $12
4 hours x $12
Order processing, machine processing,
and product inspection..
Total cost.
3.

Standard

Enhanced

$ 25

$ 40

36
48
120
$181

110
$198

a.

The Enhanced product is overcosted by the traditional product-costing

system. The labor-hour application base resulted in a $216 unit cost; in
contrast, the more accurate ABC approach yielded a lower unit cost of $198.
The opposite situation occurs with the Standard product, which is
undercosted by the traditional approach ($157 vs. $181 under ABC).

b.

Yes, especially since the companys selling prices are based heavily on cost.
An overcosted product will result in an inflated selling price, which could
prove detrimental in a highly competitive marketplace. Customers will be
turned off and will go elsewhere, which hurts profitability. With undercosted
products, selling prices may be too low to adequately cover a products more
accurate (higher) cost. This situation is also troublesome and will result in a
lower income being reported for the company.

PROBLEM 5-48
The information supplied by the ABC project team is in columns A, B, C, D, F, G, and I.

Activity

Activity
Cost
Pool

Cost
Driver

Material $52,500 Production

Handling
Runs

Product
Line

Cost
Driver
Quantity
for
Product
Line

100 $525.00 REG

ADV
GMT
Total

40
40
20
100

Cost
Driver
Quantity

Pool
Rate

Activity
Cost for
Product
Line
$21,000
21,000
10,500
$52,500

Product
Line
Production
Volume

Activity
Cost
per Unit
of
Product

5,000
4,000
1,000

$ 4.20
5.25
10.50

The results of the ABC calculations are in columns E, H and J. The ABC calculations are as
follows:
(1) Compute pool rate for material-handling activity:
Activity cost pool cost driver quantity = pool rate
$52,500

100

= $525.00

(2) Compute total activity cost for each product line:

Product
Line
REG
ADV
GMT

Pool Rate

Cost Driver
Quantity for
x Product Line

$525.00 x
525.00 x
525.00 x

Activity Cost for

Each Product Line

=
=
=
=

40
40
20

$21,000
21,000
10,500

(3) Compute product cost per unit for each product line:

Activity Cost
for Each
Product
Product

Line
Line
REG
ADV
GMT

$21,000
21,000
10,500

Product Line
Production Volume

5,000
4,000
1,000

=
=
=

PROBLEM 5-49
1.

Type A manufacturing overhead cost:

16,000 machine hours x $80 = $1,280,000
$1,280,000 8,000 units = $160 per unit
Type B manufacturing overhead cost:
22,500 machine hours x $80 = $1,800,000
$1,800,000 15,000 units = $120 per unit

Direct material.
Direct labor..

Type A

Type B

$ 35
20

$ 60
20

Activity Cost
per Unit
of Product
$ 4.20
5.25
10.50

Manufacturing overhead.
Unit cost
2.

160
$215

120
$200

Activity-based application rates:

Activity
Driver

Application
Rate

Activity

Cost

Manufacturing
setups

$ 672,000

80 setups (SU)

= $8,400 per SU

1,848,000

38,500 machine
hours (MH)

= $48 per MH

Machine
processing

Product
560,000 175
outgoing = $3,200 per OS
shipping
shipments (OS)
Manufacturing setup, machine processing, and product shipping costs of a Type A unit and
a Type B unit:
Activity

Type A

Manufacturing setups:
50 SU x $8,400.. $ 420,000
30 SU x $8,400..
Machine processing:
16,000 MH x $48...
768,000
22,500 MH x $48...
Product shipping:
100 OS x $3,200
320,000
75 OS x $3,200..
Total . $1,508,000

Type B

$ 252,000
1,080,000
240,000
$1,572,000

Production volume (units).

8,000

15,000

Cost per unit..

$188.50*

$104.80**

* $1,508,000 8,000 units = $188.50

** $1,572,000 15,000 units = $104.80
The manufactured cost of a Type A cabinet is $243.50, and the manufactured cost of
a Type B cabinet is $184.80. The calculations follow:
Type A

Type B

Direct material
Direct labor.
Manufacturing setup, machine
processing, and outgoing shipments..
Total cost.
3.

$ 35.00
20.00

$ 60.00
20.00

188.50
$243.50

104.80
$184.80

Yes, the Type A storage cabinet is undercosted. The use of machine hours
produced a unit cost of $215; in contrast, the more accurate activity-based-costing

approach shows a unit cost of $243.50. The difference between these two amounts is $28.50.

4.

No, the discount is not advisable. The regular selling price of $260, when compared
against the more accurate ABC cost figure, shows that each sale provides a profit to
the firm of $16.50 ($260.00 - $243.50). However, a $30 discount will actually produce
a loss of $13.50 ($243.50 - $230.00), and the more units that are sold, the larger the
loss. Notice that with the less-accurate, machine-hour-based figure ($215), the
marketing manager will be misled, believing that each discounted unit sold would
boost income by $15 ($230 - $215).

PROBLEM 5-56
1.

a.

WGCC's predetermined overhead rate, using direct-labor cost as the single cost
driver, is $5 per direct labor dollar, calculated as follows:
Overhead rate

total manufactur ing-overhead cost

budgeted direct -labor cost

= $3,000,000/$600,000
= $5 per direct-labor dollar
b.

The full product costs and selling prices of one pound of Kona and one pound of
Malaysian coffee are calculated as follows:
Kona
Direct material ........................................
Direct labor.............................................
Overhead (.30 $5) ...............................
Full product cost ...................................
Markup (30%) .........................................

$3.20
.30
1.50
$5.00
1.50

Malaysian
$4.20
.30
1.50
$6.00
1.80

Selling price ...........................................

2.

$6.50

$7.80

A new product cost, under an activity-based costing approach, is $7.46 per pound of
Kona and $4.82 per pound of Malaysian coffee, calculated as follows:
Activity
Purchasing

Cost Driver
Purchase orders

Budgeted
Activity
1,158

Material handling
Quality control
Roasting
Blending
Packaging

Setups
Batches
Roasting hours
Blending hours
Packaging hours

1,800
720
96,100
33,600
26,000

Budgeted
Cost
$579,000

Unit Cost
$500

720,000
144,000
961,000
336,000
260,000

400
200
10
10
10

Kona Coffee
Standard cost per pound:
Direct material .......................................................................................
Direct labor ............................................................................................
Purchasing (4 orders $500/2,000 lb.) ................................................
Material handling (12 setups $400/2,000 lb.) ...................................
Quality control (4 batches $200/2,000 lb.) ........................................
Roasting (20 hours $10/2,000 lb.) .....................................................
Blending (10 hours $10/2,000 lb.) .....................................................
Packaging (2 hours $10/2,000 lb.) ....................................................
Total cost ...............................................................................................

$3.20
.30
1.00
2.40
.40
.10
.05
.01
$7.46

Malaysian Coffee
Standard cost per pound:
Direct material .......................................................................................
Direct labor ............................................................................................
Purchasing (4* orders $500/100,000 lb.) ..........................................
Material handling (30 setups $400/100,000 lb.)................................
Quality control (10 batches $200/100,000 lb.) ..................................
Roasting (1,000 hours $10/100,000 lb.) ............................................

$4.20
.30
.02
.12
.02
.10

Blending (500 hours $10/100,000 lb.) ...............................................

Packaging (100 hours $10/100,000 lb.).............................................
Total cost ...............................................................................................

.05
.01
$4.82

*Budgeted sales purchase order size

100,000 lbs. 25,000 lbs. = 4 orders

3.

a.

The ABC analysis indicates that several activities other than direct labor drive
overhead. The cost computations show that the current system significantly
undercosted Kona coffee, the low-volume product, and overcosted the highvolume product, Malaysian coffee.

b.

The implication of the ABC analysis is that the low-volume products are using
resources but are not covering their share of the cost of those resources. The
Kona blend is currently priced at $6.50 [see requirement 1(b)], which is
significantly below its activity-based cost of $7.46. The company should set longrun prices above cost. If there is excess capacity and many of the costs are fixed,
it may be acceptable to price some products below full activity-based cost
temporarily in order to build demand for the product. Otherwise, the high-volume,
high-margin products are subsidizing the low-volume, low-margin products.