Solution manual introduction to management accounting 14e by horngren ch14

Step 1 Equivalent Units Physical Direct Conversion Application of costs Step 5: To units completed and transferred to To units not completed and still in process, Feb... Step 2 Step

CHAPTER 14 COVERAGE OF LEARNING OBJECTIVES

LEARNING OBJECTIVE

FUNDA- MENTAL ASSIGN- MENT MATERIAL

CRITICAL THINKING EXERCISES AND

EXERCISES PROBLEMS

CASES, NIKE 10K, EXCEL, COLLAB & INTERNET EXERCISES LO1: Distinguish between

job-order costing and

process costing

LO2: Prepare summary

journal entries for the

typical transactions of a

job-costing system

LO3: Use an

activity-based-costing system in a

job-order environment

LO4: Show how service

organizations use job

costing

LO5: Explain the basic ideas

underlying process costing

and how they differ from

job costing

LO6: Compute output in

terms of equivalent units

A2,B2 31,32,33,36 44,45,46,47

LO7: Compute costs and

prepare journal entries for

the principal transactions in

inventories affects the

computation of unit costs

under the weighted-average

method

LO9: Use backflush costing

with a JIT production

system

JOB-COSTING AND PROCESS-COSTING SYSTEMS 14-A1 (15-20 min.) Answers are in thousands

(80 + 55 + 40 = 175)

Factory department overhead

(180% x 125)

14-A2 (10-15 min.)

(Step 1) Equivalent Units Physical Direct Conversion

Application of costs (Step 5):

To units completed and transferred to

To units not completed and still in

process, Feb 28, 2,000 units:

14-A3 (25-30 min.)

(Step 2) (Step 1) _ Equivalent Units _ Physical Direct Conversion Flow of Production Units Materials Costs Work in process, beg inv 10,000 (25%)*

Completed and transferred out

during current period 70,000 70,000 70,000 Work in process, end inv 20,000 (50%)*20,000 10,000 Units accounted for 90,000

Direct Conversion

Work in process, beg inv $ 175,500 $138,000 $ 37,500

(Step 4) Divisor, equivalent units for

Cost per equivalent unit $ 19.40 $ 11.00 $ 8.40

(Step 5) Application of Costs

Completed and transferred

Total work in process $ 304,000

*Degree of completion for conversion costs

To recognize actual conversion costs that were

$3,000 greater than the amount applied to the

products

14-B1 (20-25 min.) Entries are in British pounds (£)

Various accounts, such as cash or

14-B2 (10-15 min.)

Equivalent Units (Step 1)

Physical Direct Conversion

Work in process, ending inv 300,000 300,000 150,000* Units accounted for 900,000

Total costs to account

To units completed and

transferred to Finishing,

To units not completed and still

in process, end, 300,000 units:

14-B3 (25-35 min.)

(Step 2)

Physical Direct Conversion

Work in process, beg inv 550 (40%)*

Completed and transferred

out during current period,

Work in process, end inv 400 (20%)* 400 80

Units accounted for 7,700

Details _

Direct Conversion

Work in process, beg inv $ 5,104 $ 3,190 $ 1,914

Costs added currently 101,064 65,340 35,724

(Step 3) Total costs to account for $106,168 $68,530 $37,638

(Step 4) Divisor, equivalent units

For work done to date ÷ 7,700 ÷ 7,380

Cost per equivalent unit $14.00 $8.90 $5.10

(Step 5) Application of Costs

Total work in process $ 3,968

Total costs accounted for $106,168

*Degree of completion for conversion costs

To recognize actual conversion costs that were

$300 less than the amount applied to the products

14-1 Three purposes of product costing are to satisfy differing demands for (a) inventory valuation and income determination in accordance with generally accepted accounting principles, (b)

income tax reporting, and (c) guiding strategic and operational decision-making

14-2 The distinction between the job cost and the process cost

methods centers largely around how product costing is

accomplished Unlike process costing, which deals with broad averages and great masses of like units, the essential feature of the job-cost method is the attempt to apply costs to specific jobs that may consist of either a single physical unit (a custom sofa) or a few like units (a dozen tables) in a distinct batch or job lot

14-3 The basic record for the accumulation of job costs is the cost sheet or job-cost record Exhibit 14-1 shows a Job-Cost Sheet, and it also shows the related source documents A file of current job-cost sheets becomes the supporting details for the Work-in- Process Inventory account

job-14-4 Source documents include materials requisitions and labor time tickets (time cards)

14-5 Examples of service industries that use the job-costing

approach include repairing, consulting, legal, accounting, painting, dentistry, and income tax preparation

14-6 No, the amount of value-chain activity not captured in either job-cost or process-cost systems is independent of the type of

operating system used

14-7 Examples of process costing include flour, glass, paint, and beer

14-8 Examples of process costing include handling of mail, income tax returns, automobile registrations, and drivers license

examinations

14-9 Five key steps in process cost accounting are

the total debits in Work in Process (that is, the costs applied to

Work in Process)

Step 4: Calculate unit costs

Step 5: Apply costs to units completed and to units in

ending work in process

14-10 The first two steps concentrate on what is occurring in

physical or engineering terms The financial impact of the

production process is measured in the final three steps

14-11 (1 x 10,000) + (.5 x 5,000) = 12,500 full-time-equivalent

students

14-12 Beginning inventories + Units started = Units transferred out + Ending inventories

14-13 Transferred-in costs are accounted for operationally the same

as direct materials added at the beginning of a production process They differ from direct material costs because they are a

combination of direct material and conversion costs from a previous department; thus, calling them a direct-material cost is

inappropriate

14-14 When actual conversion costs exceed the amount applied, the excess in the conversion cost account is charged directly to cost of goods sold; the treatment is similar to accounting for underapplied overhead

14-15 In addition to inventory valuation and income determination, managers want accurate job costs as guides to pricing and to

allocating effort among particular products, services, or customers They are also necessary in contracts that reimburse the cost of a product or service

14-16 The most important point is that product costing is an

averaging process The unit cost used for inventory purposes is the result of taking some accumulated cost and dividing it by some

measure of production The basic distinction between job order costing and process costing is the breadth of the denominator: in job order costing, it is small (for example, one painting, 100

advertising circulars, or one special packaging machine); but in process costing, it is large (for example, thousands of pounds,

gallons, or board feet)

14-17 No Some service firms trace only direct-labor costs to

individual jobs However, with advances in computer technology and needs for better job-cost information because of competition, more service firms are tracing additional costs to jobs The more costs that are traced to jobs instead of being allocated, the more accurate are the job costs

14-18 The central product costing problem in process costing is how each department should compute the cost of goods transferred out and the cost of goods remaining in the department

14-19 No, but they are especially appropriate for companies with just-in-time systems Any company with small inventories might find backflush costing appealing

14-20 (5 min.)

a and d are service-sector companies

b is merchandising

c is manufacturing

14-21 (10-15 min.) You may wish to use T-accounts Amounts are

in millions of dollars You can also use the expression: ending

balance (of any account) equals the beginning balance plus additions less subtractions or EB = BB + A - S In this case “Purchased” is

“additions” and “Used” is “subtractions.”

1 8 + 5 - 7 = 6 (BB + A - S = EB)

2 8 + 9 - 6 = 11 (BB + A - EB = S)

3 5 + Purchases - 7 = 8 Purchases = 10

4 Beginning inventory + 8 - 3 = 7 Beginning inventory = 2

14-22 (10-15 min.) Amounts are in thousands of dollars

Sale of Job A13

Cost of Job A13 sold

Var medical supplies Jan 5 $ 925

Direct Labor:

Research associates Jan 5-12 120 hrs $32 $3,840

Research assistants Jan 7-12 180 hrs $19 3,420 7,260

14-25 (15 min.) Answers are in thousands of dollars

1 a b c a b c

Construction Finished Cost of Construction Finished Cost of

in Process Houses, Houses in Process Houses, Houses

Job No Sept 30 Sept 30 Sold Sept Oct 31 Oct 31 Sold Oct

To record sale of Job 53

To record cost of Job 53 sold

14-26 (30 min.)

The answers (in millions) are $15, $5, and $240

Step-by-step entries are keyed alphabetically The sequence depends on where the student prefers to start You may wish to

raise the question of whether the underapplied overhead should be prorated among the affected accounts at the end of the year

Direct Materials Work in Process

Bal 15 (a) 210 Bal 5 (e) Completed 420 (b) 225 (a) Dir Materials 210

14-27 (30 min.)

The answers (in millions) are $25, $22, and $32

Step-by-step entries are keyed alphabetically The sequence depends on where the student prefers to start You may wish to raise the question of whether the underapplied overhead should be prorated among the affected accounts at the end of the year Note the heavy ending Finished Goods

Bal.* 25 (a) 235 Bal.* 22 (e) Completed 493 (b) 275 (a) Dir Materials 235

14-29 (5 min.)

Coca-Cola and Nally and Gibson are manufacturing companies U

S Post Office and Mckensey and Co are service companies

14-30 (5 min.)

(1) The debit to the work in process account when

transferring a subcomponent from Process A to the assembly

process is a transferred-in cost

(2) The direct materials used in process A and assembly are variable-cost resources

(3) Direct labor costs in process A and assembly are directly traced fixed- cost resources

(4) An example of an indirect resource cost is the indirect material and indirect labor used for process A and the assembly process

14-31 (5 min.)

The direct material is the limestone rock that is delivered to the plant Because crushing and screening the rock can begin

immediately, we assume that direct material is always 100%

completed Thus, the equivalent units of direct material is the entire

400 tons The 320 tons of rock that have been stocked are 100% complete with respect to both direct labor and overhead

The 80 tons of rock that are in process at the end of March are 40% complete This is 32 equivalent tons (80 tons x 40) Thus, the total work done during March is 400 tons of direct material and 352 (that

is, 320 + 32) equivalent tons of direct labor and overhead

14-32 (10-15 min.)

Total costs to account

Application of costs (Step 5):

To units completed and transferred,

14-33 (15-20 min.)

Equivalent Units (Step 1)

Costs Materials Costs

Application of costs (Step 5):

To units completed and

14-34 (10-15 min.)

Materials added to production in February

Direct labor in February

Factory overhead applied in February

Cost of goods completed and transferred in

February from Assembly to Testing

The Key T-account would show:

14-35 (10-15 min.)

Materials added to production

Direct labor

Factory overhead applied

Cost of goods completed and transferred

from Assembly to Finishing

The key T-account would show:

costs to account for 2,295,000

14-36 (10-15 min.)

(Step 2)

Physical Direct Conversion

*Degree of completion: materials, 80%; conversion costs, 40%

**Degree of completion: materials, 20%; conversion costs, 10%

a

.20 x 10,000 and 10 x 10,000

3 Work in process, Department B 102,200

Work in process, Department A 102,200

14-38 (5-10 min.)

14-39 (10-15 min.)

Dell would most likely use a job-cost system with each order considered a job Because each order is assembled from a set of common parts, there is a single cost for each part Most of the parts are purchased, so the cost is the purchase price If some parts are made, the production cost would be used as the cost of the part

Each order would call for several materials, and each would be added to the order's job-cost sheet Labor would be incurred in assembly, so the direct-labor cost could be allocated to each order based on the number of hours used for assembly If assembly is

highly automated, it is possible that no labor is considered "direct", and labor becomes one more overhead item

Overhead costs would be allocated based on one or more cost drivers Possible drivers include direct-labor hours or cost (if direct labor is measured separately), hours in assembly, or number of

component parts For a highly automated process, that latter would

be a likely cost driver

Testing and quality control costs might be part of overhead Alternately, costs of testing final computers could be charged

directly to the order (job) If different types of computers require different amounts of testing, this is a logical allocation method

14-40 (15-25 min.)

1 Ending inventory = Beginning inventory + Purchases - Usage

90 = 70 + Purchases - 468 Purchases = 488

2 Total manufacturing costs = Direct + Direct + Factory

charged to production materials labor overhead

864 = 468 + DL + 8 DL

864 - 468 = 1.8 DL 1.8 DL = 396

DL = 220

3 Cost of goods = Cost of goods available - Beginning finished

= 1,004 - 100

= 904

4 Cost of goods = Cost of goods available - Ending finished

= 1,004 - 120

= 884

14-41 (25-35 min.)

The $33,000 amount is given

Direct Materials Inventory Work-in-Process Inventory

We point out that direct-labor time on a job is usually

compiled for all classes of engineers and then applied at their different compensation rates Overhead is usually not applied

on the piecemeal basis demonstrated here Instead, it is

applied in one step after all the labor costs of the job have been accumulated

14-43 (30-40 min.) See details below

using the weighted average process cost method We must look at the equivalent units of conversion work done in May only:

Budget for 284 tons:

$16,000 + ($80 x 284) = $38,720

Budget - Actual = $38,720 - $40,670 = $1,950 unfavorable During May, conversion costs were $1,950 (or 5%) above budget

(Step 2)

*Degree of completion for conversion costs