Exercise 2-2 (15 minutes)

Product Period
Cost Cost
1. The cost of the memory chips used in a
radar set................................................... X
2. Factory heating costs.................................... X
3. Factory equipment maintenance costs........... X
4. Training costs for new administrative
employees................................................. X
5. The cost of the solder that is used in
assembling the radar sets.......................... X
6. The travel costs of the company’s
salespersons.............................................. X
7. Wages and salaries of factory security
personnel.................................................. X
8. The cost of air-conditioning
executive offices........................................ X
9. Wages and salaries in the department that
handles billing customers........................... X
10. Depreciation on the equipment in the
fitness room used by factory workers.......... X
11. Telephone expenses incurred by factory
management............................................. X
12. The costs of shipping completed radar sets
to customers............................................. X
13. The wages of the workers who assemble
the radar sets............................................ X
14. The president’s salary................................... X

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15. Health insurance premiums for factory
personnel.................................................. X

Problem 2-21 (45 minutes)

1. Maintenance cost at the 70,000 machine-hour level of activity can be isolated as follows:
Level of Activity
40,000 MH 70,000 MH
Total factory overhead cost............. $170,200 $241,600
Deduct:
Utilities cost @ $1.30 per MH*...... 52,000 91,000
Supervisory salaries.....................   60,000   60,000
Maintenance cost........................... $ 58,200 $ 90,600

*$52,000 ÷ 40,000 MHs = $1.30 per MH

2. High-low analysis of maintenance cost:

Machine- Maintenance
Hours Cost
High activity level.............. 70,000 $90,600
Low activity level............... 40,000  58,200

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 Change............................. 30,000 $32,400

Variable cost per unit of activity:

Total fixed cost:

Total maintenance cost at the low activity level............ $58,200
Less the variable cost element
(40,000 MHs × $1.08 per MH)..................................  43,200
Less the variable cost element
(40,000 MHs × $1.08 per MH)..................................  43,200

Fixed cost element...................................................... $15,000

Therefore, the cost formula is $15,000 per month plus $1.08 per machine-hour or:
Y = $15,000 + $1.08X

Problem 2-21 (continued)

3. Variable Rate per
Machine-Hour Fixed Cost
Maintenance cost.............. $1.08 $15,000
Utilities cost...................... 1.30
Supervisory salaries cost....          60,000
Totals............................... $2.38 $75,000

Thus, the cost formula is: Y = $75,000 + $2.38X.

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4. Total overhead cost at an activity level of 45,000 machine-hours:
Fixed costs.......................................................... $ 75,000
Variable costs: $2.38 per MH × 45,000 MHs..........  107,100
Total overhead costs............................................ $182,100

Problem 2-24 (45 minutes)

1.

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 Selling or
Cost Behavior Administrative Product Cost
Cost Item Variable Fixed Cost Direct Indirect
Direct materials used (wood, glass)..... $430,000 $430,000
Administrative office salaries............... $110,000 $110,000
Factory supervision............................. 70,000 $ 70,000
Sales commissions.............................. 60,000 60,000
Depreciation, factory building.............. 105,000 105,000
Depreciation, admin. office equipment. 2,000 2,000
Indirect materials, factory................... 18,000 18,000
Factory labor (cutting and assembly). . . 90,000 90,000
Advertising......................................... 100,000 100,000
Insurance, factory............................... 6,000 6,000
Administrative office supplies............... 4,000 4,000
Property taxes, factory........................ 20,000 20,000
Utilities, factory..................................    45,000                                              45,000
Total costs......................................... $647,000 $413,000 $276,000 $520,000 $264,000

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Problem 2-24 (continued)
2. The average product cost per bookcase will be:
Direct.................................. $520,000
Indirect...............................  264,000
Total................................... $784,000
$784,000 ÷ 4,000 bookcases = $196 per bookcase

3. The average product cost per bookcase would increase if the production
drops. This is because the fixed costs would be spread over fewer units,
causing the average cost per unit to rise.

4. a. Yes, there probably would be a disagreement. The president is likely

to want a price of at least $196, which is the average cost per unit to
manufacture 4,000 bookcases. He may expect an even higher price
than this to cover a portion of the administrative costs as well. The
neighbor will probably be thinking of cost as including only materials
used, or perhaps materials and direct labor.
b. The term is opportunity cost. Since the company is operating at full
capacity, the president must give up the full, regular price to sell a
bookcase to the neighbor. Therefore, the president’s cost is really the
full, regular price.

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Chapter3
Exercise 3-8 (30 minutes)
1. Cost of Goods Manufactured
Direct materials:
Raw materials inventory, beginning............... $  8,000
Add: Purchases of raw materials....................  132,000
Total raw materials available......................... 140,000
Deduct: Raw materials inventory, ending.......   10,000
Raw materials used in production.................. 130,000
Direct labor...................................................... 90,000
Manufacturing overhead applied to work in
process inventory............................................  210,000
Total manufacturing costs................................. 430,000
Add: Beginning work in process inventory..........    5,000
435,000
Deduct: Ending work in process inventory..........    20,000
Cost of goods manufactured.............................. $415,000

2. Cost of Goods Sold

Finished goods inventory, beginning.................. $ 70,000
Add: Cost of goods manufactured......................  415,000
Cost of goods available for sale......................... 485,000
Deduct: Finished goods inventory, ending..........   25,000
Unadjusted cost of goods sold........................... 460,000
Add: Underapplied overhead.............................   10,000
Adjusted cost of goods sold............................... $470,00
0

3.
Eccles Company
Income Statement

Sales............................................................... $643,000
Cost of goods sold ($460,000 + $10,000).........  470,000
Gross margin................................................... 173,000
Selling and administrative expenses:

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 Selling expenses........................................... $100,000
Administrative expense..................................   43,000   143,000
Net operating income...................................... $  30,000

Exercise 3-19 (30 minutes)

1. a. Raw Materials.............................. 315,000
Accounts Payable.................... 315,000
b. Work in Process........................... 216,000
Manufacturing Overhead.............. 54,000
Raw Materials......................... 270,000
c. Work in Process........................... 80,000
Manufacturing Overhead.............. 110,000
Wages and Salaries Payable.... 190,000
d. Manufacturing Overhead.............. 63,000
Accumulated Depreciation....... 63,000
e. Manufacturing Overhead.............. 85,000
Accounts Payable.................... 85,000
f. Work in Process........................... 300,000
Manufacturing Overhead......... 300,000

40,000 MHs × $7.50 per MH = $300,000.

Manufacturing Overhead Work in Process

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(b) 54,000 (f) 300,000 (b) 216,000
(c) 110,000 (c) 80,000
(d) 63,000 (f) 300,000
(e) 85,000

3. The cost of the completed job would be $596,000 as shown in the Work
in Process T-account above. The entry for item (g) would be:
Finished Goods................................ 596,000
Work in Process.......................... 596,000
4. The unit product cost on the job cost sheet would be:
$596,000 ÷ 8,000 units = $74.50 per unit
Problem 3-21 (30 minutes)
1. The predetermined overhead rate was:
Y = $1,275,000 + $3.00 per hour × 85,000 hours
Estimated fixed manufacturing overhead................... $1,275,000
Estimated variable manufacturing overhead
$3.00 per computer hour × 85,000 hours...............     255,000
Estimated total manufacturing overhead cost............ $1,530,000

The predetermined overhead rate is computed as follows:

Estimated total manufacturing overhead........ $1,530,000
÷ Estimated total computer hours................. 85,000 hours
= Predetermined overhead rate.................... $18.00 per hour

2. Actual manufacturing overhead cost....................... $1,350,000

Manufacturing overhead cost applied to Work in
Process during the year: 60,000 actual computer
hours × $18 per computer hour...........................  1,080,000
Underapplied overhead cost................................... $ 270,000

3. Cost of Goods Sold...................................... 270,000

Manufacturing Overhead........................ 270,000

4. The underapplied overhead would be allocated using the following

percentages:
Overhead applied during the year in:
Work in process............................... $    43,200 4%

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Finished goods................................. 280,800 26
Cost of goods sold...........................     756,000  70
Total............................................... $1,080,000 100 %

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Problem 3-21 (continued)

The entry to record the allocation of the underapplied overhead is:

Work In Process (4% × $270,000).......... 10,800
Finished Goods (26% × $270,000).......... 70,200
Cost of Goods Sold (70% × $270,000).... 189,000
Manufacturing Overhead................... 270,000

5. Comparing the two methods of closing underapplied overhead:

Cost of goods sold if the underapplied overhead
is closed directly to cost of goods sold
($2,800,000 + $270,000)................................. $3,070,000
Cost of goods sold if the underapplied overhead
is allocated among the accounts ($2,800,000 +
$189,000)........................................................  2,989,000
Difference in cost of goods sold........................... $    81,000

Thus, net operating income will be $81,000 greater if the underapplied

overhead is allocated among Work In Process, Finished Goods, and Cost
of Goods Sold rather than closed directly to Cost of Goods Sold.

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Problem 3-22 (30 minutes)

1. Cost of Goods Manufactured

Direct materials:
Raw materials inventory, beginning*........... $ 50,000
Add: Purchases of raw materials*...............  260,000
Total raw materials available...................... 310,000
Deduct: Raw materials inventory, ending*...   40,000
Raw materials used in production................ 270,000
Direct labor.................................................... 65,000
Manufacturing overhead applied to work in
process inventory*.......................................  340,000
Total manufacturing costs*............................. 675,000
Add: Beginning work in process inventory........    48,000
723,000
Deduct: Ending work in process inventory*......    33,000
Cost of goods manufactured........................... $690,000

2. Cost of Goods Sold

Finished goods inventory, beginning*.............. $ 30,000
Add: Cost of goods manufactured...................  690,000
Cost of goods available for sale*..................... 720,000
Deduct: Finished goods inventory, ending........   55,000
Unadjusted cost of goods sold*....................... 665,000
Add: Underapplied overhead...........................    10,000
Adjusted cost of goods sold............................ $675,000

3.
Valenko Company
Income Statement
Sales.......................................................... $1,085,000
Cost of goods sold ($665,000 + $10,000).....     675,000
Gross margin.............................................. 410,000
Selling and administrative expenses:
Selling expenses*..................................... $215,000
Administrative expense*...........................  160,000    375,000
Net operating income*................................ $   35,000
* Given

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Problem 3-23 (45 minutes)
1. The cost of raw materials put into production was:
Raw materials inventory, 1/1....................... $ 30,000
Debits (purchases of materials)....................  420,000
Materials available for use............................ 450,000
Raw materials inventory, 12/31....................    60,000
Materials requisitioned for production........... $390,000

2. Of the $390,000 in materials requisitioned for production, $320,000 was

debited to Work in Process as direct materials. Therefore, the difference
of $70,000 ($390,000 – $320,000 = $70,000) would have been debited
to Manufacturing Overhead as indirect materials.

3. Total factory wages accrued during the year

(credits to the Factory Wages Payable account). . $175,000
Less direct labor cost (from Work in Process)........  110,000
Indirect labor cost................................................ $ 65,000

4. The cost of goods manufactured for the year was $810,000—the credits
to Work in Process.

5. The Cost of Goods Sold for the year was:

Finished goods inventory, 1/1........................................... $ 40,000
Add: Cost of goods manufactured (from Work in Process)..  810,000
Cost of goods available for sale........................................ 850,000
Deduct: Finished goods inventory, 12/31..........................  130,000
Cost of goods sold........................................................... $720,000

6. The predetermined overhead rate was:

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Problem 3-23 (continued)
7. Manufacturing overhead was overapplied by $15,000, computed as
follows:
Actual manufacturing overhead cost for the year
(debits)....................................................................... $385,000
Applied manufacturing overhead cost (from Work in
Process—this would be the credits to the
Manufacturing Overhead account).................................  400,000
Overapplied overhead..................................................... $(15,000)

8. The ending balance in Work in Process is $90,000. Direct labor makes

up $18,000 of this balance, and manufacturing overhead makes up
$40,000. The computations are:
Balance, Work in Process, 12/31.................................. $90,000
Less: Direct materials cost (given)............................... (32,000)
Manufacturing overhead cost
($32,000 × 125%).......................................... (40,000)
Direct labor cost (remainder)....................................... $18,000

Problem 3-26 (30 minutes)

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1. Preparation Department:
The estimated total manufacturing overhead cost in the Preparation
Department is computed as follows:
Y = $256,000 + $2.00 per MH × 80,000 MH
Estimated fixed manufacturing overhead................... $256,000
Estimated variable manufacturing overhead:
$2.00 per MH × 80,000 MHs..................................    160,000
Estimated total manufacturing overhead cost............ $416,000

The predetermined overhead rate is computed as follows:

Estimated total manufacturing overhead....... $416,000
÷ Estimated total machine-hours................. 80,000 MHs
= Predetermined overhead rate................... $5.20 per MH

Fabrication Department:
The estimated total manufacturing overhead cost in the Fabrication
Department is computed as follows:
Y = $520,000 + $4.00 per DLH × 50,000 DLH
Estimated fixed manufacturing overhead................... $520,000
Estimated variable manufacturing overhead:
$4.00 per DLH × 50,000 DLHs...............................  200,000
Estimated total manufacturing overhead cost............ $720,000

The predetermined overhead rate is computed as follows:

Estimated total manufacturing overhead....... $720,000
÷ Estimated total machine-hours................. 50,000 DLHs
= Predetermined overhead rate................... $14.40 per DLH

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Problem 3-26 (continued)
2. Preparation Department overhead applied:
350 machine-hours × $5.20 per machine-hour...... $1,820
Fabrication Department overhead applied:
130 direct labor-hours × $14.40 per labor-hour....  1,872
Total overhead cost............................................... $3,692

3. Total cost of Job 127:

Preparation Fabrication Total
Direct materials................ $  940 $1,200 $2,140
Direct labor...................... 710 980 1,690
Manufacturing overhead.. .  1,820  1,872  3,692
Total cost......................... $3,470 $4,052 $7,522

Unit product cost for Job 127:

Total manufacturing cost........................... $7,522
÷ Number of units in the job...................... 25 units
= Unit product cost................................... $300.88 per unit

4.
Preparation Fabrication
Manufacturing overhead cost incurred...... $390,000 $740,000
Manufacturing overhead cost applied:
73,000 machine-hours × $5.20 per
machine-hour.................................... 379,600
54,000 direct labor-hours × $14.40
per direct labor-hour..........................               777,600
Underapplied (or overapplied) overhead... $ 10,400 $(37,600)

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