Week Three Assignment
Chapter 4
Exercises
Manufacturing journal entries
The following selected transactions and events occurred at Pipeline Manufacturing during March:Mar.
Purchased $10,000 of direct materials and $7,300 of indirect materials on account from Sunbelt Distributors.
Issued $3,100 of direct materials and $700 of indirect materials from the storeroom.
14
Incurred $5,600 of direct labor and $3,400 of indirect labor.
17
Recorded $1,300 of overhead incurred on account.
Mar.
20
Applied $2,800 of overhead to production.
23
Noted that $6,200 of production had been completed.
26
Sold goods on account at a profit of 30% of cost. The goods cost $5,000.
Prepare journal entries to record the preceding transactions and events.
Analysis of job cost sheet
Sumpter Manufacturing began job No. 587 in December 20X6 and recorded material, labor, and overhead charges of $38,800 through year-end. The bottom portion of page 2 of the job's cost sheet is reproduced here:Summary of January charges
Direct materials used
$ 12,600
Direct labor (580 hours)
4,350
Factory overhead applied
6,728
Total
$ 23,678
Job No. 587 was completed on January 30, 20X7.
Determine Sumpter's overhead application rate, assuming the company uses direct labor hours for an application base.
What is the total cost of job No. 587?
Prepare the journal entries recorded in January related to job No. 587.
Cost flows and overhead application
Cleveland Metals uses a job cost system and applies factory overhead to production at a predetermined rate of 180% of direct labor cost. Data pertaining to recent operations follow:
Job No. 636 was the only job in process on January 1 of the current year. The Work in Process account contained a $24,600 balance on this date.
Job Nos. 637, 638, and 639 were started during January.
Total direct material requisitions and direct labor incurred during January amounted to $89,200 and $114,500, respectively.
The only job that remained in process on January 31 was job No. 638, with costs of $15,000 for direct materials and $20,000 for direct labor.
Compute the total cost of the work in process inventory on January 31.
Compute the cost of jobs completed during January and present the proper journal entry to reflect job completion.
Job costing and overhead application
Uniflex applies overhead on the basis of direct labor cost. In December 20X4, the company's cost accountant made the following predictions for 20X5 operations: direct labor cost, $620,000; factory overhead, $961,000.
Uniflex worked on job Nos. 241 and 242 in January. The costs incurred and production status of these two jobs appear in the table that follows.
|
| Job No. 241 | Job No. 242 | |
Direct materials | $26,000 | $47,000 | ||
Direct labor | 18,000 | 24,000 | ||
Production status | In process | In process |
By the end of 20X5, actual direct labor cost amounted to $612,500, and factory overhead incurred totaled $967,500. There was no work in process on January 1, 20X5.
Compute the following:
Uniflex's overhead application rate.
The balance of the Work in Process account on January 31, 20X5.
The amount of over- or underapplied overhead for 20X5. Be sure to indicate whether overhead was overapplied or underapplied.
Job costing and overhead application
Oxford Enterprises uses a job costing system to accumulate manufacturing costs. Overhead is applied to products on the basis of machine hours in the machining department and direct labor cost in the assembly department. The following estimates pertain to 20X4:Machining
Assembly
Machine hours
40,000
5,000
Direct labor cost
$270,000
$800,000
Factory overhead
810,000
960,000
Job No. 328 was the only job in process at the end of 20X4. Its cost sheet revealed the data that follow:
Machining
Assembly
Machine hours
100
10
Direct labor cost
$1,100
$3,500
Direct materials cost
1,900
3,400
Compute Oxford's overhead application rates in the machining department and the assembly department.
Calculate the total amount of overhead applied to job No. 328.
Determine the total cost of job No. 328.
Overview of job costing and overhead application
Evaluate the comments that follow as being true or false. If the comment is false, briefly explain why.A materials requisition forms the basis for the following journal entry: debit Work in Process, credit Raw Materials.
The Work in Process account normally contains the following costs for the jobs in production at year-end: direct materials used, direct labor, and actual factory overhead.
Direct labor cost is a good overhead application base to use if a company is highly automated.
The amount of over- or underapplied overhead at year-end is normally closed to the Work in Process account.
An overhead application rate is derived by the following computation: estimated factory overhead divided by an estimated application base.
Overhead application: Working backward
The Towson Manufacturing Corporation applies overhead on the basis of machine hours. The following divisional information is presented for your review:Division A
Division B
Actual machine hours
22,500
Estimated machine hours
20,000
Overhead application rate
$ 4.50
$ 5.00
Actual overhead
$110,000
Estimated overhead
$90,000
Applied overhead
$86,000
Over- (under-)applied overhead
$ 6,500
Find the unknowns for each of the divisions.
Direct costs and indirect costs
Executive Airlines is studying whether to begin flight service from Chicago to St. Louis. Identify the following costs as a direct cost or an indirect cost of the Chicago/St. Louis flight segment, assuming the route would be serviced by aircraft that would continue to be flown throughout Executive's extensive route system:Passenger beverage service
Airport landing fees
Monthly engine maintenance service
Fuel consumed
Commissions paid to travel agents on tickets sold
Salary of Executive's director of route planning
Cost drivers, service business
Don't Bug Me treats insect-infested homes and trees in Omaha, Nebraska. The company utilizes many liquid pesticides that are purchased in 55-gallon drums and later divided into 10-gallon containers for crew use. The pesticides are accounted for as indirect materials (i.e., supplies) in the firm's job cost system.Why do you think the company treats pesticides as indirect materials (as opposed to direct costs) of servicing a client?
What is a cost driver?
Management insists that crews estimate square footage and tree height, respectively, for homes and trees serviced. Why is this procedure necessary?
Problems
Preparation of job cost sheet and journal entries
Nycom Inc. manufactures items that are used in the electronics industry. The company, which uses a job costing system, has two departments: machining and finishing. The machining department applies overhead to products at the rate of $15 per machine hour. Finishing, in contrast, uses an application rate of 250% of direct labor cost.
On March 19, 20X3, Nycom received an order from Sensormatic for 225 photons, Model No. 116. Production began immediately, and the order (known as job No. 4155) was completed on March 31. Paperwork supporting the order revealed the following:
Document* | Date | Department | Hours | Amount |
MR 1165 | 3/19 | Machining | — | $5,600 |
MR 1169 | 3/21 | Machining | — | 3,500 |
TT 1450-52 | 3/23 | Machining | 45 | 400 |
MUR 46 | 3/23 | Machining | 105 | — |
MR 4330 | 3/27 | Finishing | — | 700 |
TT 1475-76 | 3/31 | Machining | 30 | 300 |
MUR 47 | 3/31 | Machining | 50 | — |
TT 6608-13 | 3/31 | Finishing | 200 | 2,000 |
*MR, materials requisition; MUR, machine usage report; TT, time ticket. |
Instructions
Prepare a job cost sheet for the Sensormatic order as of March 31. Use the following column headings:
Direct Materials
Direct Labor
Machine Usage
Factory Overhead
Date
Requisition
Amount
Ticket
Hours
Amount
Report
Hours
Amount
Prepare journal entries to record (1) the issuance of direct materials, (2) direct labor incurred on the order, and (3) the application of factory overhead. All materials requisitions should be combined in one entry, all time tickets in another, and so forth.
If company policy is to sell goods at a profit of 80% of total job cost, present the journal entries necessary to recognize completion and sale of the photons.
Computations using a job order system
General Corporation employs a job order cost system. On May 1, the following balances were extracted from the general ledger:Work in process
$ 35,200
Finished goods
86,900
Cost of goods sold
128,700
Work in Process consisted of two jobs, No. 101 ($20,400) and No. 103 ($14,800). During May, direct materials requisitioned from the storeroom amounted to $96,500, and direct labor incurred totaled $114,500. These figures are subdivided as follows:
Direct Materials
Direct Labor
Job No.
Amount
Job No.
Amount
101
$ 5,000
101
$ 7,800
115
19,500
103
20,800
116
36,200
115
42,000
Other
35,800
116
18,000
$96,500
Other
25,900
$114,500
Job No. 115 was the only job in process at the end of the month. Job No. 101 and three "other" jobs were sold during May at a profit of 20% of cost. The "other" jobs contained material and labor charges of $21,000 and $17,400, respectively.
General applies overhead daily at the rate of 150% of direct labor cost as labor summaries are posted to job orders. The firm's fiscal year ends on May 31.
Instructions
Compute the total overhead applied to production during May.
Compute the cost of the ending work in process inventory.
Compute the cost of jobs completed during May.
Compute the cost of goods sold for the year ended May 31.
Job order costing, overhead emphasis
Toledo Company uses a job order system to accumulate manufacturing costs. On December 31, 20X1, the work in process inventory (consisting of job No.764) costed as follows:Direct materials
$ 4,800
Direct labor
12,500
Applied overhead
10,000
$27,300
Because of changing plant conditions and labor markets, the cost accounting department calculated a new overhead application rate for use throughout 20X2. Estimated totals for direct labor cost and factory overhead for 20X2 amounted to $300,000 and $270,000, respectively. Actual results follow:
Direct materials used
$259,600
Direct labor
316,000
Indirect materials
23,700
Indirect labor
144,900
Factory depreciation
55,300
Factory taxes
12,700
Factory utilities
55,200
$867,400
All jobs were completed and sold by December 31, 20X2, except for job no. 821, which contained direct material costs of $10,900 and direct labor charges of $22,500. This job was still in production and was anticipated to be completed in early January. The company charges any under- or overapplied overhead to Cost of Goods Sold.
Instructions
Determine the 20X2 over head application rate, using direct labor cost as the application base.
Determine the total cost of the company's work in process inventory as of December 31, 20X2. Determine the amount of under- or overapplied overhead for the year. Be sure to indicate whether overhead was underapplied or overapplied.
Compute the company's cost of goods sold. Toledo had no finished goods inventory on January 1, 20X2.
Job costing in a service business
Diego, Hyatt, and Stevens, a prestigious law firm located in San Antonio, uses a job order system to monitor the cost of servicing clientele. The office manager has prepared the following budget for 20X7:Client billings
$11,520,000
Less: Professional staff costs (85%)
$6,000,000
Administrative staff costs (75%)
2,000,000
Computer time (80%)
500,000
Photocopying (70%)
200,000
Other office costs (20%)
300,000
9,000,000
Net income
$ 2,520,000
The numbers in parentheses indicate the percentage of cost that is directly traceable to client jobs. The remaining, nontraceable portion is charged to clients by using a predetermined overhead application rate. The office manager feels that total direct cost is the most appropriate overhead application base.
In March, the firm completed work on a suit for Picante Foods. The following costs were directly chargeable to Picante:
Professional staff
$25,000
Administrative staff
6,400
Computer time
2,500
Photocopying
3,700
Other office costs
400
Instructions
Determine the firm's total budgeted traceable and nontraceable costs and the overhead application rate.
Calculate the firm's estimated income for the year as a percentage of traceable costs.
Compute the total cost of the Picante job and the amount that Diego, Hyatt, and Stevens would bill the client.
The office manager can acquire new software that would allow the firm to increase the percentage of direct (as opposed to indirect) costs. Briefly explain why Diego, Hyatt, and Stevens would be interested in this software.
Chapter 5
Exercises
High–low method
The following cost data pertain to 20X6 operations of Heritage Products:Quarter 1
Quarter 2
Quarter 3
Quarter 4
Shipping costs
$58,200
$58,620
$60,125
$59,400
Orders shipped
120
140
175
150
The company uses the high–low method to analyze costs.
Determine the variable cost per order shipped.
Determine the fixed shipping costs per quarter.
If present cost behavior patterns continue, determine total shipping costs for 20X7 if activity amounts to 570 orders.
Break-even and other CVP relationships
Delta Gamma Upsilon sorority is in the process of planning its annual homecoming dinner and dance. The treasurer anticipates the following costs for the event, which will be held at the Regency Hotel:Room rental
$300
Dinner cost (per person)
25
Chartered buses
500
Favors and souvenirs (per person)
Band
900
Each person would pay $40 to attend; 200 attendees are expected.
Will the event be profitable for the sorority? Show computations.
How many people must attend for the sorority to break even?
Suppose the sorority encouraged its members to drive to the hotel and did not charter the buses. Furthermore, a planned menu change will reduce the cost per meal by $2. If each member will still be charged $40, compute the contribution margin per person.
Break-even and other CVP relationships
Cedars Hospital has average revenue of $180 per patient day. Variable costs are $45 per patient day; fixed costs total $4,320,000 per year.How many patient days does the hospital need to break even?
What level of revenue is needed to earn a target income of $540,000?
If variable costs drop to $36 per patient day, what increase in fixed costs can be tolerated without changing the break-even point as determined in part (a)?
CVP relationships: Working backward
Determine the missing amounts in each of the independent cases that follow:Case
Units
soldSales
Variable
costsContribution
margin per unitFixed
costsNet
income$70,000
$ ?
$6
$14,000
$10,000
7,000
42,000
8,000
4,000
53,000
21,000
(2,000)
8,000
92,000
40,000
24,000
Direct and absorption inventory costing
Milsap Industries began business on January 1 of the current year, manufacturing and selling a single product. Consider the data that follow:Units
Variable cost per unit
Fixed costs
Production volume
80,000
Sales volume
72,000
Direct materials
$1.30
Direct labor
2.80
Factory overhead
4.40
$540,000
Selling expenses
0.20
180,000
Compute the cost of the company's ending inventory by using direct costing.
Compute the cost of the company's ending inventory by using absorption costing.
Suppose that Milsap's accountant had accidentally excluded straight-line depreciation on machinery from the data presented. Determine the effect of this error (overstate, understate, or no impact) on the company's
1) direct costing ending inventory.
2) absorption costing ending inventory.
Direct and absorption income computations
Crawford Company began operations on January 1 of the current year. The following information has been gathered from the accountingrecords:
Variable costs per unit
Manufacturing: $12.50
Selling & administrative: $1.10
Fixed costs
Manufacturing: $120,000
Selling & administrative: $60,000
Production and sales amounted to 80,000 units and 75,000 units, respectively. The selling price is $17.
Compute net income for the year just ended by using the direct costing method.
Compute net income for the year just ended by using the absorption costing method.
Problems
Cost behavior and analysis
The chief accountant of Stevenson Corporation is studying certain costs (direct labor, plant security, utilities, and maintenance) in an effort to better control operations. Normal production activity ranges from 7,500 to 8,000 units per month. In the past 3 months, the following cost behavior has been observed:Month 1
Month 2
Month 3
Production (units)
7,540
7,950
7,680
Direct labor
$18,850
$19,875
$19,200
Plant security
14,600
14,600
14,600
Utilities
28,044
29,520
28,548
In addition, maintenance costs have displayed the following step behavior:
Activity range (units)
Cost
Up to 7,600
$ 8,000
7,601–7,800
9,500
7,801–8,000
11,000
Stevenson uses the high–low method to analyze cost behavior.
Instructions
Production for next month is expected to total 7,850 units. Calculate the cost of direct labor, plant security, utilities, and maintenance for this level of activity.
Comment on the cost-effectiveness of producing at a 7,850-unit level of activity with respect to maintenance costs. If you believe this is an ineffective production level, describe how effectiveness could be improved.
There is a high probability that Stevenson's production volume will nearly double in forthcoming months because of a new customer. Can the data and methods used in part (a) for predicting the cost of 7,850 units be employed to estimate total costs for, say, 17,500 units? Why?
Break-even and other CVP analysis
Hodge and Best manufactures a single product. The information that follows relates to current operations:Sales (80,000 units @ $15)
$1,200,000
Less: Variable cost
$720,000
Fixed cost
360,000
1,080,000
Net income
$ 120,000
Instructions
The sales outlook for next year is bleak. Calculate the number of units that must be sold to break even if current revenue and cost behavior patterns continue.
If Hodge and Best wishes to earn a target income of $90,000 during the next accounting period, what level of dollar sales must be generated?
Management is studying an increase in the selling price to $18 per unit. If consumers balk and volume drops, calculate the number of units that must be sold to earn the target income of $90,000. Should the change be implemented? Why?
Hodge and Best's projected break-even point and target income are the result of interactions of numerous financial events and transactions. Determine the impact of the following operating changes by filling in the blanks below with "increase," "decrease," or "not affect."
1) An increase in direct labor cost will _______________________ total variable costs, _______________________ the contribution margin, and _______________________ the break-even point.
2) An increase in plant insurance will _______________________ the break-even point and _______________________ the dollar sales level calculated in part (b).
Straightforward CVP analysis
FRB Inc. sells a single product for $40. The following costs and expenses were incurred at store No. 504:
Variable costs per unit | Annual fixed costs | ||||
Invoice cost | $24 | Salaries | $60,000 |
| |
Sales commission | 4 | Advertising | 14,000 |
| |
|
| Other | 16,000 |
|
The company sold 8,200 units during 20X4.
Instructions
Compute the 20X4 break-even point in both dollar and unit sales.
By how much will sales have to increase in 20X5 over 20X4 levels if management wishes to earn a target income of $14,400?
At present, how much does each unit provide toward covering FRB's fixed costs and generating income? Assume that management believes this amount is too low. What alternatives are available to FRB?
What would be the effect on the break-even point if management reduced salary costs by $11,600 and increased the $4 sales commission by 20%?
Break-even and other CVP analysis
Quebec Inc. manufactures and sells a single product. The information that follows relates to the year just ended, when 230,000 units were sold:Sales price per unit
10
Variable cost per unit
Fixed costs
930,000
Instructions
Determine the number of units that Quebec sold in excess of its break-even point.
If current revenue and cost patterns continue, compute the dollar sales needed next year to produce a target income of $492,000.
Assume that a different compensation plan was in effect during the current year. Rather than pay six salespeople an average salary of $36,000 each, management has proposed that the salespeople receive a $10,000 base salary and a 6% commission based on gross sales.
1) Would the company have been better off financially if the new plan had been adopted for the year just ended? By how much?
2) What effect might paying a commission have on gross sales? Briefly explain.
In addition to the compensation plan described in part (c), Quebec is studying the impact of other operating changes as well. State whether you agree or disagree with the following findings of a newly hired staff accountant:
1) A rise in property taxes will increase the break-even point.
2) A decrease in raw material cost will increase the contribution margin and decrease total fixed costs.
Direct and absorption costing
The following information pertains to Turbo Enterprises for the year ended December 31, 20X8:Variable cost per unit:
Direct materials
Direct labor
Factory overhead
Selling & administrative expense
3
Total
22
Annual fixed costs:
Factory overhead
$600,000
Selling &. administrative expense
115,000
Total
$715,000
Other data (units):
Sales
21,000
Production
25,000
Inventory, 12/31/X8
11,000
The unit selling price is $62. Assume that costs have been stable in recent years.
Instructions
Compute the number of units in the beginning inventory on January 1, 20X8.
Calculate the cost of the December 31 inventory assuming use of
1) direct costing.
2) absorption costing.Prepare an income statement for the year ended December 31, 20X8, by using direct costing.
Prepare an income statement for the year ended December 31, 20X8, by using absorption costing.
Direct and absorption costing
The information that follows pertains to Consumer Products for the year ended December 31, 20X6:Inventory, 1/1/X6
24,000 units
Units manufactured
80,000
Units sold
82,000
Inventory, 12/31/X6
? units
Manufacturing costs:
Direct materials
$3 per unit
Direct labor
$5 per unit
Variable factory overhead
$9 per unit
Fixed factory overhead
$280,000
Selling & administrative expenses:
Variable
$2 per unit
Fixed
$136,000
The unit selling price is $26. Assume that costs have been stable in recent years.
Instructions
Compute the number of units in the ending inventory.
Calculate the cost of a unit assuming use of
1) direct costing.
2) absorption costing.Prepare an income statement for the year ended December 31, 20X6, by using direct costing.
Prepare an income statement for the year ended December 31, 20X6, by using absorption costing.