Solution manual cost accounting 14e by carter ch04

The five parts are: a Direct materials section b Direct labor section c Factory overhead d Work in process inventories e Finished goods inventories Q4-2.. The accounting use of historica

CHAPTER 4

DISCUSSION QUESTIONS

4-1

Q4-1 The five parts are:

(a) Direct materials section

(b) Direct labor section

(c) Factory overhead

(d) Work in process inventories

(e) Finished goods inventories

Q4-2 The balance sheet is a statement of financial

position; the income statement is a statement

of activity The income statement is

comple-mentary to the balance sheet, accounting in

particular for the change in the proprietary

equity as a result of operations during the year.

In that respect, the income statement is

essen-tially nothing more than a major section of the

retained earnings account Therefore, the

rev-enue and expense accounts in the income

statement have been termed “explanatory”

accounts, explaining the ebb and flow of

rev-enues and expenses that lead to the new

income (or loss) and to the new retained

earn-ings balance in the balance sheet.

Q4-3 The ordinary balance sheet and income

statement are intended to provide

informa-tion as to financial posiinforma-tion and results of

operation of a business, in accordance with

several assumptons that are made in

prepar-ing the statements From the standpoint of

the criticisms made, the most important of

these assumptions are that cost less

appro-priate amortization of cost measures

unex-pired cost, and that a business may be

assumed to be going to continue operations

indefinitely into the future Accounting

state-ments are usually prepared on the theory

that a sale or some other definite event is

essential before revenue is recognized.

Basically, the asset side of a balance sheet

contains a presentation of the amounts of

cost incurred, which can be presumed to

benefit future periods An income statement

presents the amount of revenue recognized

as having been realized during the period

less the portion of all costs incurred that

does not appear to be fairly deferrable to

future periods.

The income statement is primarily a meas-ure of what has been earned, and not a measure of “earning power.” For plant assets, the balance sheet is primarily a measure of accountability for expenditures, showing acquisition costs less costs allocated to past operations This measure of accountability may be quite different from “true value.”

To increase its usefulness as one element

in judging earning power, the income state-ment is prepared with a distinction between operating and nonoperating items For the same reason, certain items may be eliminated from the income statement and shown in the statement of retained earnings However, the effect of nonrecurring and nonoperating trans-actions is not entirely eliminated.

Information revealed by a series of income statements is more significant in judging earning power than information revealed by one income statement The income of a business may follow or even exaggerate the ups and downs of the busi-ness cycle and, therefore, the income of any one year will not represent earning power Changes in law or local zoning ordinances may result in a marked change in the earning power of a business Likewise, changes in public taste, development of new products, appearance of new competition, acquisition of subsidiaries, changes in management and the like, all may change earning power and yet not be clearly reflected, if reflected at all,

in one income statement.

The accounting use of historical, rather than current, dollars in measuring deprecia-tion and cost of goods sold may result in dis-torting any view of earning power obtained from a single income statement.

In regard to plant assets, it can be said that their value to a going concern is usually dependent upon the earning power of the business Such a value is not necessarily the same as liquidation value, cost, cost less amortization, replacement value, or any other

kind of value The phrase “true value” has no

definite connotation.

Q4-4 Actual describes the way costs are

meas-ured, i.e., at actual historical amounts;

absorption describes which elements of cost

are allocated to inventory accounts, i.e., all

elements of manufacturing cost are fully

allo-cated to inventories; process describes how

cost information is accumulated, i.e., costs

are accumulated for each process or

depart-ment in the factory.

Q4-5 Prime costing systems allocate only the prime

costs, direct material and direct labor, to

inventory accounts Direct costing systems,

also called variable costing systems, allocate

the variable manufacturing costs, direct

mate-rial, direct labor, and variable factory

over-head to the inventory accounts Absorption

costing systems allocate to inventories part or

all of fixed factory overhead, in addition to all

variable manufacturing costs.

Q4-6 Actual costing measures product costs at

actual historical amounts, while standard

costing measures product costs by using

pre-determined amounts of resources to be

con-sumed and predetermined prices of those

resources.

Q4-7 Process costing accumulates costs for each

process or department in the factory and

maintains detailed records and calculations of

the costs of work in process Job order

cost-ing accumulates costs for each job, lot, batch,

or contract and maintains detailed records

and calculations of the costs of work in

process Backflush costing accumulates costs

by working backwards through the available

information after production is completed (i.e.,

at the end of the accounting period) and

maintains no detailed records of the costs of

work in process.

Q4-8 Actual costing is more common than standard

costing in defense-related industries, while

standard costing is somewhat more common

elsewhere.

Q4-9 Super-full absorption or super absorption

refers to the income tax requirement that

some purchasing and storage costs be

allo-cated to inventory accounts.

Q4-10 Job order costing would be common in repair

shops, building construction, and printing; and

in service businesses such as medical, legal, architectural, construction engineering, accounting, and consulting firms, as men-tioned in the text Other examples include shipbuilding, bridge building, tool and die manufacturing, art and antique restoration, and contract research.

Q4-11 As mentioned in the text, process costing

would be common in the milling, brewing, chemical, and textile industries; in simple assembly operations; and in service busi-nesses serving large numbers of customers simultaneously, such as airlines Other exam-ples include petroleum refining, basic food processing, and manufacture of low-cost con-sumer products such as toys, disposable pens, razors, and lighters.

Q4-12 Aspects common to job order and process

costing are:

(a) They can be used by service organiza-tions.

(b) They require considerable detail to calcu-late the cost of work in process.

(c) The work in process account in the gen-eral ledger is supported by subsidiary records.

Q4-13 A blended costing method uses job order

cost-ing to accumulate some element(s) of cost and process costing to accumulate others.

Q4-14 Flexible manufacturing systems consist of an

integrated collection of automated production processes, automated materials movement, and computerized system controls to utilize facilities in efficiently manufacturing a highly flexible variety of products.

Q4-15 The advantages of a flexible manufacturing

system over the other systems include short (near zero) setup times, the absence of a learning curve, lower lead times to shipment, lower direct labor cost per unit, lower direct labor cost in total, and lower work in process inventories.

Q4-16 The initial cost of creating a flexible

manufac-turing system is much higher than that of other manufacturing systems.

Q4-17 Manufacturing settings suited for backflush

costing are distinguished by very fast pro-cessing speeds, which remove both the incentive and the opportunity to track the detailed costs of work in process.

E4-1 Calculation of cost of goods sold (in thousands):

Total manufacturing cost $110

Add work in process inventory, beginning 80

$190 Less work in process inventory, ending 90

Cost of goods manufactured $100

Add finished goods inventory, beginning 150

Cost of goods available for sale $250

Less finished goods inventory, ending 120

Cost of goods sold $130

E4-2 Calculation of cost of goods sold (in thousands): Direct materials used $ 90

Direct labor 60

Factory overhead 80

Total manufacturing cost $230

Add work in process inventory, beginning 250

$480 Less work in process inventory, ending 210

Cost of goods manufactured $270

Add finished goods inventory, beginning 340

Cost of goods available for sale $610

Less finished goods inventory, ending 300

Cost of goods sold $310

(1) Direct materials:

Direct materials inventory, beginning $ 37,500 Purchases 160,000 Direct materials available for use $197,500 Less direct materials inventory, ending 43,500 Direct materials consumed $154,000 Direct labor 120,000 Factory overhead 108,000 Total manufacturing cost $382,000 Add work in process inventory, beginning 61,500

$443,500 Less work in process inventory, ending 57,500 Cost of goods manufactured $386,000

(2) Cost of goods manufactured (from (1)) $386,000

Add finished goods inventory, beginning 27,000 Cost of goods available for sale $413,000 Less finished goods inventory, ending 26.000 Cost of goods sold $387,000

E4-4

(1) Factory overhead incurred in May:

Indirect labor $22,000 Heat, light, and power 11,220 Factory rent 18,500 Factory insurance 2,000 Supplies used* 16,920 Supervisor’s salary 5,000 Overtime premium** 2,750 Total overhead $78,390

*($5,600 + $16,500 – $5,180 = $16,920

** (.5 × $22 per hr.) × 250 hrs = $2,750

E4-4 (Concluded)

(2) Cost of goods manufactured:

Stores, April 30 $ 10,250 Purchases 105,000

$115,250 Less: Stores, May 31 12,700 Direct materials consumed $102,550 Direct labor used (4,250 × $22) 93,500 Factory overhead 78,390 Total manufacturing cost $274,440 Add work in process, beginning inventory 60,420

$334,860 Less work in process, ending inventory 52,800 Cost of goods manufactured $282,060 (3) Ending balance of finished goods:

Therefore, the finished goods ending balances is $47,662.

E4-5 (a) Materials 40,000

Accounts Payable 40,000 (b) Work in Process 33,000

Factory Overhead Control 2,000 Materials 35,000 (c) Payroll 40,000

Accrued Payroll 40,000 (d) Accrued Payroll 40,000

Cash 40,000 (e) Work in Process 32,000

Factory Overhead control 8,000 Payroll 40,000 (f) Factory Overhead Control 4,000

Cash 4,000

E4-5 (Concluded)

(g) Factory Overhead Control 18,000

Accounts Payable 18,000 (h) Factory Overhead Control 4,130

Accumulated Depreciation 2,100 Prepaid Expenses 780 Accrued Property Taxes 1,250 (i) Work in Process 36,130

Factory Overhead Control 36,130 (j) Finished Goods 92,000

Work in Process 92,000 (k) Accounts Receivable 80,000

Sales 80,000 Cash 40,000

Accounts Receivable 40,000 Cost of Goods Sold 60,000

Finished Goods 60,000

E4-6 (a) Materials 13,500

Accounts Payable 13,500 (b) Work in Process 17,500

Materials 17,500 (c) Factory Overhead Control 1,800

Materials 1,800 (d) Payroll 27,000

Accrued Payroll 27,000 Work in Process 17,000

Factory Overhead Control 2,000 Marketing Expenses Control 5,000 Administrative Expenses Control 3,000 Payroll 27,000 (e) Factory Overhead Control 2,508

Cash 2,508 (f) Factory Overhead Control 8,500

Accounts Payable 8,500 (g) Work in Process 14,808

Factory Overhead Control 14,808 (h) Finished Goods 60,100

Work in Process 60,100

E4-6 (Concluded)

(i) Accounts Receivable 75,000

Sales 75,000 Cost of Goods Sold* 60,000

Finished Goods 60,000

*$15,000 + $60,100 – $15,100 = $60,000

E4-7

WALLACE INDUSTRIES Cost of Goods Manufactured Statement

For May (in thousands of dollars) Direct materials:

Direct materials, April 30, 20A $ 28

Purchases $510

Freight in 15 525 Direct materials available for use $553

Less direct materials, May 31, 20A 23

Direct materials consumed $ 530

Direct labor 260

Factory overhead: Indirect factory labor $ 90

Utilities ($135 × 80%) 108

Property tax 60

Insurance ($20 × 60%) 12

Depreciation ($20 + $30) 50

Total factory overhead 320

Total manufacturing cost $1,110 Add work in process, April 30, 20A 150

$1,260 Less work in process, May 31, 20A 210

CINNABAR COMPANY Statement of Cost of Goods Sold For Year Ended December 31 Raw materials:

Purchases $400,000 Less discounts on raw

materials purchased 4,200 $395,800 Less raw materials on hand,

December 31, 20A 24,000

Direct labor 180,000 Factory overhead:

Factory maintenance $ 38,400 Factory supplies used 22,400 Power and heat—factory 19,400 Insurance expense—factory

building and equipment 4,800 Depreciation—factory building

and equipment 17,500 Factory superintendence 100,000 Indirect factory labor 20,000

Total manufacturing costs $774,300

$858,300 Less work in process, December 31,

20A 30,000 Cost of goods manufactured $828,300

Cost of goods available for sale $865,800 Less finished goods, December 31,

20A 70,000 Cost of goods sold $795,800

CGA-Canada (adapted) Reprint with permission.

P4-1

Cost of Goods Sold Statement For Month Ended July 31 (in thousands)

Direct materials consumed $16

Direct labor 24

Factory overhead 20

Total manufacturing cost (a) $60

Add work in process inventory, July 1 15

$75 Less work in process inventory, July 31 25

Cost of goods manufactured $50

Add finished goods inventory, July 1 (b) 20

Cost of goods available for sale $70

Less finished goods inventory, July 31 (c) 10

Cost of goods sold $60

Calculations: (a) Cost of goods manufactured $50

Add work in process, ending 25

$75 Less work in process, beginning 15

Equals total manufacturing cost $60

(b) Cost of goods available for sale $70

Less cost of goods manufactured 50

Equals finished goods, beginning $20

(c) Cost of goods available for sale $70

Less cost of goods sold 60

Equals finished goods, ending $10

P4-1 (Concluded)

(2) (a) Materials 25,000

Accounts Payable 25,000 (b) Work in Process 16,000

Factory Overhead Control 2,000 Materials 18,000 (c) Payroll ($24,000 + $5,000) 29,000

Accrued Payroll 29,000 (d) Work in Process 24,000

Factory Overhead Control 5,000 Payroll 29,000 (e) Finished Goods 50,000

Work in Process 50,000 (f) Accounts Receivable 105,000

Sales ($60,000 + (75% of $60,000)) 105,000 Cost of Goods Sold 60,000

Finished Goods 60,000

Cost of Goods Sold Statement For Month Ended June 30 (in thousands) Direct materials:

Materials inventory, June 1 $15

Purchases 33

Materials available for use $48

Less: Indirect materials used $ 1

Materials inventory, June 30 19 20 Direct materials consumed $28

Direct labor (Note (a)) 42

Factory overhead: Indirect materials $ 1

Indirect labor (a) 7

Depreciation 17

Insurance 2

General factory overhead 13 40 Total manufacturing cost (b) $110

Add work in process inventory, June 1 40

$150 Less work in process inventory, June 30 30 Cost of goods manufactured $120

Add finished goods inventory, June 1 (c) 70

Cost of goods available for sale $190

Less finished goods inventory, June 30 (d) 50

Cost of goods sold 140

Calculations: (a) indirect labor + direct labor = $49 indirect labor + (indirect labor × 6) = $49 indirect labor × 7 = $49 indirect labor = $7 direct labor = 6 × $7 = $42 (b) Cost of goods manufactured $120

Add work in process, ending 30

$150 Less work in process, beginning 40

Equals total manufacturing cost $110