Solution manual cost and managerial accounting by barfield 3rd systems and methods of product costing

If the cost object is a product, direct labor and direct materials are two costs that are direct to the production of that product.. Last, predetermined overhead rates provide a means to

Systems and Methods of Product CostingQuestions

1 Historical costs are used in cost accounting to provide the

needed information to determine amounts for balance sheet inventory items and cost of goods sold in the income

statement These amounts are objective and verifiable, which are necessary qualities for information needed in financial reporting Replacement costs are useful for decision making since they contain up-to-date, relevant information Such costs, however, may need to be estimated or derived from

sources external to the accounting system For a specific asset, replacement cost may differ substantially from

historical cost Budgeted costs are estimated future costs Budgeted costs are used for purposes of planning, control, anddecision making

2 The relevant range of activity for a company would generally

be the normal range of operations A company could determine that range based on prior year data modified, if necessary, forestimated or known changes in production or other activity measures

Managers need to understand the concept of relevant rangebecause of its use in cost behavior assumptions Costs are assumed to react in a specific way within the relevant range - variable costs will remain constant per unit and fixed costs will remain constant in total If the company operates

outside of its relevant range, such assumptions no longer holdtrue and managers will possibly need to modify their decisionsbecause of the fluctuations that may result from the changes incost behavior

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3 A cost is termed variable because of the way it reacts in

total to changes in levels of activity, not because of the way

it reacts on a per unit basis Total variable cost, within a relevant range of activity, will change or vary in direct proportion to changes in activity This direct, proportional relationship results from the fact that the cost remains

constant for each unit of activity

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4 No, fixed costs will change in an organization over time The

assumption made is that fixed costs, within the relevant range,will not change with changes in the activity measure

However, fixed costs will change because of decisions made by managers (e.g., to acquire a new asset or to hire another factory supervisor) or because of changed economic conditions (such as rising rent costs or an increased supply of rental property)

5 Although both variable and mixed costs change in total with

activity measure changes, the difference is that variable costschange in direct proportion to such activity changes and mixedcosts do not Since a mixed cost has both a fixed and variablecomponent, the cost per unit at different activity levels is not constant as it is with a variable cost

6 It is not necessary for a causal relationship to exist between

the cost predictor and the cost All that is required is thatthere be a strong correlation between movement in the

predictor and the cost Alternatively, a cost driver is an activity that actually causes costs to be incurred

The distinction between cost drivers and predictors is important because it relates to one of the objectives of

managers: to control costs By focusing cost control efforts

on cost drivers, managers can exert control over costs

Exerting control over predictors that are not cost drivers will have no cost control effect

7 No, these are not always the best points of observation The

points must be within the relevant range of activity

Secondly, to be useful, the points must be reflective of the entire data set of observation points If the high and low points do not meet these two conditions, alternative points should be selected

8 An outlier is an observation that is atypical of the other

observations in the data, and thus, it should not be used in data analysis If an outlier is used in the high-low method

to analyze a mixed cost, the consequence will be that the estimated variable and fixed elements of the mixed costs will not be representative of the majority of observations and, thus, the cost formula may not be useful for estimation

purposes

9 A product cost is one that is associated with inventory In a

retailer, product costs are the costs of purchasing inventory and the related freight-in costs less any purchase discounts

In a manufacturing company, product costs would include directmaterials, direct labor, and overhead In a merchandising company, product costs are the costs of purchasing inventory and the related freight-in costs In a service company,

product costs are those costs that are incurred to generate the services provided such as supplies, service labor, and service-related overhead costs

10 In all three types of organizations, a period cost is any cost

that is not a product cost These costs are noninventoriable and are incurred in the nonfactory or non-production areas of

a manufacturing company or in the nonsales or nonservice

areas, respectively, of a retailer or service company In general, these costs are incurred for selling and

administrative activities Many period costs are expensed when incurred, although some may be capitalized as prepaid expenses or other nonfactory assets

11 No Unexpired costs appear on the balance sheet, and expired

costs appear on the income statement Both product and periodcosts can be unexpired or expired Unexpired product costs are shown in a company's inventory account(s) and as other production assets such as manufacturing equipment Expired product costs are included in cost of goods sold or services rendered Unexpired period costs are included in the asset section as prepaid expenses or other nonfactory

(nonproduction) assets Upon expiration, period costs are shown as selling and/or administrative expenses

12 A direct cost is one that can be distinctly traced to the cost

object Thus, if the cost object is not specified, there can be

no identification of direct costs If the cost object is a product, direct labor and direct materials are two costs that are direct to the production of that product

13 Some materials or labor that should, in theory, be accounted

for as direct may be accounted for as indirect because the cost of tracing the materials and labor to the product is not justifiable The benefit realized from the time and effort

expended to trace such costs is limited Additionally, some costs that might theoretically be considered direct costs are intentionally treated as indirect costs so that information is

not distorted For example, the cost of overtime could easily

be tracked to specific products, however, doing so might cause greatly different costs to attach to identical products

assuming some were produced during regular hours and some wereproduced during overtime hours The unintended consequence might be that greatly different profit margins could be realizedfor the similar products

14 Conversion is the process that converts raw materials and

other inputs into salable products (output) A demand for cost accounting is created by the need to track costs through the conversion process, into finished goods, and eventually into cost of goods sold This role is related to the

determination of which costs are expired and which costs are unexpired

15 Manufacturing firms have three inventory accounts: Raw

Materials, Work in Process, and Finished Goods Raw Materialsconsist of inputs that have been purchased and could include inventoriable supplies as well as production components Work

in Process is the inventory account that is used for all

production work that has been started but not completed Finished Goods Inventory contains all completed inventory that

is available for sale to customers

16 Allocation of manufacturing overhead is necessary for both

external reporting and internal purposes Although

manufacturing overhead is a product cost, it is comprised of cost items that are indirectly related to the production of goods and services Overhead must be attached to products through an allocation process because it cannot be directly traced to a firm's products or services Generally accepted accounting principles, regulators and tax authorities require manufacturing overhead to be allocated to products Internal decision making, performance evaluation, planning, and

controlling also require cost allocation

17 The only difference between the two systems is in their

treatment of overhead Under a normal cost system, a level ofactivity is chosen and the budgeted amount of overhead is determined before a period begins Overhead is then applied

to products as production occurs by using a predetermined overhead application rate Under an actual cost system,

actual overhead is applied to production Because actual overhead cannot be determined until the period ends, the

overhead allocation occurs and product cost can be determined only at period-end

The major advantage of using a normal cost system is that

it allows a product's cost to be determined (estimated) at thetime of production Another major advantage is that a normal cost system provides a product cost that is stable across fluctuating levels of production and sales

A normal cost system has several disadvantages For example, if a firm selects a flawed estimate of activity or usesinappropriate cost formulas to determine budgeted overhead, product costs will be distorted Also, a normal cost system requires a more sophisticated accounting system and requires aperiodic reconciliation between applied and actual overhead

18 There are several reasons for using predetermined overhead

rates First, the company does not need to wait to assign overhead costs to products or services until the end of the period when actual costs are known Second, such rates

eliminate overhead cost fluctuations that have nothing to do with volume levels Last, predetermined overhead rates

provide a means to control distortions in product costs caused

by changes in volume between or among periods, and the

resulting product/service cost changes caused by differences infixed cost per period

19 When a normal cost system is used, costs are removed from the

Manufacturing Overhead account by debiting Work in Process Inventory and crediting Manufacturing Overhead The

predetermined overhead rate multiplied by actual activity specifies the amount of costs transferred from the Overhead account to Work in Process

20 In a normal cost system, overhead can be applied as

production occurs, when goods or services are completed and transferred to Finished Goods, or at the end of an accounting period The preferred alternative would be to apply overhead

as production occurs This method would provide accurate, current information on the costs of products in process as well as products competed and sold

In tracking overhead, separate accounts can be maintainedfor variable and fixed overhead, or a single overhead account can be maintained An additional choice is whether to

maintain separate accounts for the actual and applied overheadamounts or to combine them into a single account Further, overhead may be applied based on a plantwide rate or

departmental rates The best information would be obtained when separate variable and fixed rates are used at the

departmental level This approach will provide the best

association between cost incurrence and cost assignment

21 If overhead were materially underapplied for the year, the

amount should be allocated to the accounts that contain

applied overhead: Work in Process Inventory, Finished Goods Inventory, and Cost of Goods Sold This process assigns the underapplied overhead amount to the accounts that were affected

by the under application and causes their costs to increase

22 Two things work together to create under- or overapplied

overhead: actual costs incurred differ from budgeted costs, and actual volume differs from specified volume in determining the predetermined fixed overhead rate For variable overhead, under- or overapplied overhead is caused by the difference between actual variable overhead cost per unit and budgeted variable overhead cost per unit For fixed overhead, under- oroverapplied overhead is caused by the difference between actualfixed overhead cost and the total fixed overhead applied to production using the predetermined overhead rate If there is

a difference either in actual and budgeted fixed overhead costs

or in the actual and specified level of activity, fixed overheadwill be under- or overapplied Under- or overapplied overhead

is the difference between total actual overhead costs and totalapplied overhead costs

Not all factors are equally controllable by management For example, production volume may be largely a function of sales volume Consequently, marketing personnel may have morecontrol over production volume than do production managers Many fixed costs may be uncontrollable because they are a

result of past investment decisions made Or, unexpected occurrences relative to supply or demand may create a

difference in a variable cost per unit

23 The cost of goods manufactured schedule provides an accounting

of activity in work in process In doing so, the schedule provides data on the beginning inventory, current period

manufacturing costs, and the ending inventory The bottom line, "the cost of goods manufactured," is the amount of cost extracted from Work in Process and entered in Finished Goods Inventory Thus, the cost of goods manufactured provides an accounting of direct materials and conversion costs incurred during the period as well as the amount of change in Work in Process Inventory

24 Cost of goods manufactured represents the production cost of

the goods completed and transferred from Work in Process to Finished Goods Inventory during the period It is composed ofthe beginning balance of Work in Process plus total

manufacturing costs for the period (direct materials, direct labor, and overhead) minus the ending balance of Work in

Process

Cost of Goods Sold is the total product cost of the unitsthat were removed from Finished Goods because of sales to customers during the period It consists of the beginning balance of Finished Goods plus the Cost of Goods Manufactured during the period minus the ending balance of Finished Goods

There could be an instance when the amounts are identical For example, if the beginning Finished Goods

balance equals the ending Finished Goods balance, then Cost ofGoods Manufactured and Cost of Goods Sold would be identical This circumstance is most likely to occur in an organization that practices rigorous just-in-time management of inventory

25 Departmental overhead rates are superior to plant-wide

overhead rates in that overhead application bases can be

identified that more accurately reflect the causes of costs in each department In effect, use of departmental rates permits more cost drivers to be identified and used as allocation

bases

Separation of variable and fixed costs allows managers to make decisions that rely on knowledge of cost behavior For example, some decisions require a manager to identify costs that will change if a particular decision alternative (e.g., whether to manufacture and sell additional units) is

implemented Frequently variable costs will respond

differently than fixed costs to managerial actions Use of a total overhead rate does not easily allow managers to

determine the impact of such differences

26 The regression method has the major advantage of utilizing all

data to determine the fixed and variable costs elements

of the mixed costs This contrasts with the high-low method, which uses only two data points

27 Students will have different answers No solution provided

32 a Cardboard, $0.60; cloth materials, $1; plastic,

$0.75; depreciation, $0.90; supervisors' salaries, $2.40;utilities, $0.45; total cost, $6.10

b Cardboard, variable; cloth materials, variable; plastic,

variable; depreciation, fixed; supervisors' salaries, fixed; and utilities, mixed

c If the company produces 2,500 hats this month, the total

cost per unit will decrease The variable costs (cardboard, cloth, plastic) will remain constant per unit The total cost for depreciation and supervisors' salaries will remain fixed and, thus, will result in a lower cost per unit The utility cost will rise in total, but because it is mixed, it is impossible (withoutother information) to estimate its total or per unit cost Without knowing the cost formula for utility costs, it is impossible to determine the total cost of making 2,500 hats

33 Cost of rubber material (variable)

34 a 1 150 returns:

Total cost = $400 + ($3 × 150) = $850Cost per unit = $850 ÷ 150 = $5.67

Cost per unit = $2,200 ÷ 600 = $3.67

b The cost per unit is changing because of the effect of the

fixed cost As production increases, the fixed cost per unit declines

35 a MHs Total Cost = Variable Cost + Fixed Cost

Differences 3,000 $ 24

Variable rate = $24 ÷ 3,000 MHs = $0.008 per MH

High activity variable cost = 34,000 × $.008 = $272

Low activity variable cost = 31,000 × $.008 = $248

Fixed cost at high activity = $610 - $272 = $338

Fixed cost at low activity = $586 - $248 = $338

Variable rate = $(540) ÷ 6,000 MHs = $(0.09) per MHHigh activity variable cost = 9,000 × $(0.09) = $(810) Low activity variable cost = 3,000 × $(0.09) = $(270)

Fixed cost at low activity = $980 – $(270) = $1,250Total maintenance cost = $1,250 - $0.09MH

b The variable cost component is negative which

implies that, as the number of machine hours increases, the amount of maintenance cost declines Such a relationship

is implausible One explanation that would account for the perceived inverse relationship would be that

Johnstonian performs the maintenance chores when there isidle time available As business activity increases, less and less time is available to perform maintenance activities

c For a cost prediction formula to work effectively, it is

not required for there to be a positive relationship between the activity measure and the cost pool Thus, the formula developed in part (a) might function

effectively However, one cannot interpret the parameters

of the model (-$0.09, $1,250) as variable and fixed costs,respectively

37 a 1 Number of sales orders generated, number of miles

traveled, nights away from home, number ofclients contacted

2 Number of pizzas made, number of customers served,

types of pizzas prepared

3 Number of faculty, number of papers and exams written, number of students, number of handouts

4 Number of machine breakdowns, number of hours of

operation for machines, number of machines, number of maintenance hours worked, number of clients

b The distinction between a cost predictor and a cost

driver is whether the activity measure actually causes the cost to be incurred A cost predictor is merely an activity that changes with changes in the cost A cost driver causes costs to be incurred Of the costs

addressed in part (a), the best choices for cost drivers would be 1) number of miles traveled, 2) number of pizzasmade, 3) number of papers and exams written, and 4)

number of hours of operation for machines (preventive maintenance) and number of breakdowns (repairs)

38 a Stainless steel, plastic and fiberglass, knife racks =

$400,000 + $15,000 + $9,200 = $424,200

b $200,000 (equipment operators)

c $8,000 indirect material (oil and grease)

$168,000 indirect labor (mechanics and supervisors)

Overtime premiums (3,000 hours overtime × $4.00) =

$12,000

41 a One month of insurance ($12,000 ÷ 6) $ 2,000

Bonus to corporate president 40,000*Utility cost on headquarters ($10,000 × $0.30) 3,000

d Because product costs are assigned to products made, they

cannot be classified as expired or unexpired because it isnot known whether the associated products made during Maywere sold If sold, the costs would be expired; if

unsold, the costs would be unexpired and be accumulated

in the Finished Goods account

42 a Direct labor is labor that can be specifically identified

with, or physically traced to, a cost object or finished product in an economically feasible manner (e.g., the labor of machine operators in a production environment)

Indirect labor is all factory labor that is not classified

as direct labor

b Certain nonproductive time may be a normal and

unavoidable part of total labor time In such cases, a pro rata share of nonproductive time should be classified

as direct labor time In many cases, nonproductive time

is classified as indirect labor because it cannot be specifically identified with a cost object For example, the amount of downtime usually cannot be specifically identified with a specific cause or particular cost object;

it may result from a parts shortage or a broken machine When there is a shortage of work and employees would therefore be idle, this time can be used for training

usually be specifically identified with a quantity of labor Furthermore, other direct costs, such as payroll taxes, are incurred by the organization because of its use of labor

Manufacturing overhead: The items classified as

manufacturing overhead usually cannot be specifically identified with direct labor quantities

Either direct labor or manufacturing overhead: Some cost

items can be classified as either direct labor or manufacturing overhead, depending on the size of the costobject For example, for very large projects employee time can be easily associated with the projects (e.g., time of specific managers, engineers, draftspersons, janitors, material handlers) Therefore, all costs associated with these employees can be classified as direct labor costs For smaller cost objects, such as a variety of products or subassemblies, costs are more difficult to identify with the cost objects and,

therefore, they are classified as manufacturing overhead

d The quantity of labor hours that should be included as

direct labor or manufacturing overhead reflects a measure

of activity The activity that was performed was either directly related to the product or indirectly related (ornot easily traceable) to the product The dollar amount assigned measures the cost of the activity Wages and salaries are not necessarily directly tied to production activity For example, assume a direct labor employee makes $8 per hour and time-and-a-half for overtime Thisemployee's activity is no different during the overtime

hours - only the wage rate differs Thus, measurement of activity and measurement of cost must be separated.

(CMA adapted)

44 a April applied overhead ($270,000 × 175%) $472,500

May applied overhead ($247,500 × 175%) $433,125 June applied overhead ($255,000 × 175%) $446,250

b Actual Applied Overapplied (underapplied)

April $480,000 $472,500 $(7,500)

June 450,000 446,250 (3,750)Total for the quarter $(5,925)

c The method in part (b) would be more appropriate in this instance because of the materiality of the amount ofoverapplied overhead It is 5.5 percent of the total of the balances in all of the accounts containing overhead,

so to close it directly to cost of goods sold would cause

a distortion of the costs remaining in inventory.

46 a Given the relationships within the account balances,

it appears that overhead is applied based on direct laborcost Thus, using the information in the WIP account, the rate is $20,000 ÷ $10,000 or 200%

b The amount should be prorated because it is very large relative to the balances in Work in Process, Finished Goods, and Cost of Goods Sold.

e A debit balance in the manufacturing overhead account can

be the result of several causes including: (1) the company paid a higher price for the resources comprising actual overhead than budgeted, (2) the company used a greater quantity of overhead resources than attached to inventory for actual output, (3) the company produced at

a lower level of capacity than the planned level of activity upon which the predetermined overhead rate was based, or (4) a combination of the above causes

*Note: The beginning and ending balances of RM are not used because no information is given on purchases for themonth

Cost of goods available for sale 422,000

49 a Champ’s Custom Clocks

Cost of Goods Sold Schedule For the Month Ended August 31, 2003

Beginning finished goods $ 125,000

Cost of goods manufactured 2,273,000*

Cost of goods available $2,398,000**

Ending finished goods (98,000)

Cost of goods sold $2,300,000

** $2,300,000 + $98,000 = $2,398,000

* $2,398,000 - $125,000 = $2,273,000

Cost of Goods Manufactured Schedule For the Month Ended August 31, 2003

Beg work in process $ 90,000

Direct materials:

Beg direct materials $ 30,000

Direct materials purchased 768,500

Direct materials available $798,500

End direct materials (42,000)

Direct materials used 756,500

Direct labor 450,000** Overhead 1,012,500**

Total costs to account for $2,309,000*

End work in process ($90,000 × 40) (36,000)

Cost of goods manufactured $2,273,000

* Total costs to account for = $2,273,000 + $36,000 = $2,309,000

**Total cost to account for = Beg WIP + DM used + DL + OH $2,309,000 = $90,000 + $756,500 + DL + OH