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What are the three major elements of product costs in a manufacturing company?
Distinguish between the following
(a) Direct materials
(b) Indirect materials
(c) Direct labor
(d) Indirect labor and
(e) Manufacturing overhead.
Explain the difference between a product cost and a period cost.
Describe how the income statement of a manufacturing company differs from the income statement of a merchandising company.
Describe the schedule of cost of goods manufactured. How does it tie into the income statement?
Describe how the inventory accounts of a manufacturing company differ from the inventory account of a merchandising company.
Why are product costs sometimes called inventoriable costs? Describe the flow of such costs in a manufacturing company from the point of incurrence until they finally become expenses on the income statement.
Is it possible for cost-such as salaries or depreciation to end up as assets on the balance sheet? Explain.
What is meant by the term cost behavior?
A variable cost is a cost that varies per unit of product, whereas a fixed cost is constant per unit of product. Do you agree? Explain.
How do fixed costs create difficulties in costing units of product?
Why is manufacturing overhead considered an indirect cost of a unit of product?
Define the following terms, differential cost, opportunity cost, and sunk cost.
Only variable costs can be differential costs. Do you agree? Explain.
Mary Adams is employed by Acme Company. Last week she worked 34 hours assembling one of the company’s products and was idle 6 hours due to material short-ages. Acme’s employees are engaged at their workstations for a normal 40-hour week. Ms Adams is paid $15 per hour. Allocate her earnings between direct labor cost and manufacturing overhead cost.
John Olsen operates a stamping machine on the assembly line of Drake Manufacturing Company. Last week Mr. Olsen worked 45 hours. His basic wage rate is $14 per hour, with time and a half for overtime (time worked in excess of 40-hours per week). Allocate MR. Olsen’ wages for the week between direct labor cost and manufacturing overhead cost.
Costs associated with the quality of conformance can be broken down into four broad groups. What are these four groups and how do they differ?
In their efforts to reduce the total cost of quality, should companies generally focus on decreasing prevention costs and appraisal costs?
What is probably the most effective way to reduce a company’s total quality costs?
What are the main uses of quality cost reports?
Why are managers often unaware of the magnitude of quality costs?
The PC Works assembles custom computers from components supplied by various manufacturers. The company is very small and its assembly shop and retail sales store are housed in a single facility in a Redmond, Washington, industrial park. Listed below are some of the costs that are incurred at the company.
Required:
For each not, indicate whether it would most likely be classified as direct labor, direct materials, manufacturing overhead, marketing and selling, or an administrative cost.
1. The cost of a hard drive installed in a computer.
2. The cost of advertising in the Puget Sound Computer User newspaper.
3. The wages of employees who assemble computers from components.
4. Sales commissions paid to the company’s sales people.
5. The wages of the assembly shops supervisor.
6. The wages of the company’s accountant.
7. Depreciation on equipment used to test assembled computers before release to customers.
8. Rent on the facility in the industrial park.
A product cost is also known as an inventoriable cost. Classify the following costs as either product (inventoriable) costs or period (non-inventoriable) costs in a manufacturing company.
1. Depreciation on salespersons’ cars.
2. Rent on equipment used in the factory.
3. Lubricants used for maintenance of machines.
4. Salaries of finished goods warehouse personnel.
5. Soap and paper towels used by factory workers at the end of a shift.
6. Factory supervisor’s salaries.
7. Heat, water, and power consumed in the factory.
8. Materials used for boxing products for shipment overseas. (Units are not normally boxed.)
9. Advertising costs.
10. Workers’ compensation insurance on factory employees.
11. Depreciation on chairs and tables in the factory lunchroom.
12. The wages of the receptionist in the administrative offices.
13. Lease cost of the corporate jet used by the company’s executives.
14. Rent on rooms at a Florida resort for holding of the annual sales conference.
15. Attractively designed box for packaging the company’s product-breakfast cereal.
Last month Cyber Games, a computer game retailer, had total sales of $1,450,000, selling expenses of $210,000, and administrative expenses of $180,000. The company had beginning merchandise inventory of $240,000, purchased additional merchandise inventory for $950,000, and had ending merchandise inventory of $170,000.
Required:
Prepare in income statement for the company for the month.
Lompac Products manufactures a variety of products in its factory. Data for the most recent month’s operations appear below:
Beginning raw materials inventory ...... $ 60, 000
Purchases of raw materials .......... $360,000
Ending raw materials inventory ......... $ 45,000
Direct labor................. $135,000
Manufacturing overhead........... $370,000
Beginning work in process inventory...... $120,000
Ending work in process inventory...... $130,000
Required:
Prepare a schedule of cost of goods manufactured for the company for the month.
Below are a number of costs that are incurred in a variety of organization.
Required:
Classify each cost as being variable or fixed with respect to the number of units of product or services sold by the organization by placing an X in the appropriate column.
Cost Behavoir
Cost Item Variable Fixed
1. X-ray film used in the radiology lab at Virginia Mason Hospital in Seattle.....
2. The costs of advertising a Madonna rock concert in New York City......
3. Rental cost of a McDonald’s restaurant building in Hong Kong..........
4. The electrical costs of running a roller coaster at Magic Mountain.......
5. Property taxes on your local cinema...................
6. Commissions paid to salespersons at Nordstrom..............
7. Property insurance on a Coca-Cola bottling plant...............
8. The costs of synthetic materials used to make Nike running shoes.......
9. The costs of shipping Panasonic televisions to retail stores............
10. The cost of leasing an ultra-scan diagnostic machine at the American
Hospital in Paris..........................
Northwest Hospital is a full-service hospital that provides everything from major surgery and emergency room care to outpatient clinics.
Required:
For each cost incurred at Northwest Hospital, indicate whether it would most likely be a direct cost or an indirect cost of the specified cost object placing an X in the appropriate column.
Direct
CostIndirect
Cost CostCost ObjectEx.Catered food served to patients A particular patientX1.The wages of pediatric nursesThe pediatric department2.Prescription drugsA particular patient3.Heating the hospitalThe pediatric department4.The salary of the head of pediatricsThe pediatric department5.The salary of the head of pediatricsA particular pediatric patient6.Hospital chaplain’s salaryA particular patient7.Lab tests by outside contractorA particular patient8.Lab tests by outside contractor A particular department
Northwest Hospital is a full-service hospital that provides everything from major surgery and emergency room care to outpatient clinics. The hospital’s Radiology Department is considering replacing an old inefficient X-ray machine with a state-of-the-art digital X-ray machine. The new machine would provide higher quality X-rays in less time and at a lower cost per W-ray. It would also require less power and would use a color laser printer to produce easily readable X-ray images. Instead of investing the funds in the new X-ray machine, the Laboratory Department is lobbying the hospital’s management to but a new DNA analyzer.
Required:
For each of the items below, indicate by placing an X in the appropriate column whether it should be considered a differential cost, an opportunity cost, or a sunk cost in the decision to replace the old X-ray machine with a new machine. If none of the categories apply for a particular item, leave all columns blank.

ItemDifferential
ItemOpportunity
CostSunk
CostEx.Cost of X-ray film used in the old machine.....X1.Cost of the old X-ray machine..........2.The salary of the head of the Radiology Department.3.The salary of the head of the Pediatrics Department..4.Cost of the new color laser printer.........5.Rent on the space occupied by Radiology......6.The cost of maintaining the old machine......7.Benefits from a new DNA analyzer..........8.Cost of electricity to run the X-ray machines.....
Several days ago you took your TV set into a shop to have some repair work done. When you later picked up the set, the bill showed a $75 charge for labor. This charge represented two hours of service time-%30 for the first hour and $45 for the second.
When questioned about the difference in hourly rates, the shop manager explained that work on your set was started at 4 o’clock in the afternoon. By the time work was completed two hours later at 6 o’clock, an hour of overtime had been put in by the repair technician. The second hour therefore contained a charge for an “overtime premium,” since the company had to pay the repaid technician time and a half for any work in excess of eight hours per day. The shop manager further explained that the shop was working overtime to “catch up a little” on its backlog of repairs, but it still needed to maintain a “decent” profit margin on the technicians’ time.
Required:
1. Do you with the shop’s computation of the service charge on your job?
2. Assume that the shop pays its technicians $14 per hour for the first eight hours worked in a day and $21 per hour for any additional time worked in a day. Prepare computations to show how the cost of the repair technician’s time for the day (nine hours) should be allocated between direct labor cost and general overhead cost on the shop’s books.
3. Under what circumstances might the shop be justified in charging an overtime premium for repair work on your set?
Listed below are a number of costs that are incurred in connection with a company’s quality control system.
a.Productk.Net cost of scrapb.Product recalls.l.Depreciation of test equipment.c. Rework labor and overhead.m.Returns and allowances arising from poor quality.d.Quality circles.n.Disposal of defective products.e.Downtime caused by defects.o.Technical support to suppliersf.Cost of field servicingp.Systems developmentg.Inspection of goods.q.Warranty replacements.h.Quality engineering.r.Field testing at customer site.i.Warranty repairss.Product designj.Statistical process control.Required:
1. Classify each of the costs above into one of the following categories: prevention cost, appraisal cost, internal failure cost, or external failure cost.
2. Which of the costs in (1) above are incurred in an effort to keep poor quality of conformance from occurring? Which of the costs in (1) above are incurred because poor quality of conformance has occurred?
The Devon Motor Company produces motorcycles. During April, the company purchased 8,000 batteries at a cost of $10 per battery. Devon withdrew 7,600 batteries from the storeroom during the month. Of these 100 were used to replace batteries in motorcycles used by the company’s traveling sales staff. The remaining 7,500 batteries withdrawn from the storeroom were placed in motorcycles being produced by the company. Of the motorcycles in production during April, 90% were completed and transferred from work in process to finished goods. Of the motorcycles completed during the month, 30% were unsold at April 30.
There were no inventories of any type on April 1.
Required:
1. Determine the cost of batteries that would appear in each of the following accounts at April 30:
a. Raw Materials.
b. Work in Process.
c. Finished Goods.
d. Cost of Goods Sold.
e. Selling Expense.
2. Specify whether each of the above accounts would appear on the balance sheet or on the income statement at April 30.
The following cost and inventory data are taken from the accounting records of Mason Company for the year just completed:
Costs incurred:Direct labor cost.......... $70,000
Purchases of raw materials .......$118,000
Indirect labor........... $30,000
Maintenance, factory equipment..... $6,000
Advertising expense.......... $90,000
Insurance, factory equipment..... $8,000
Sales salaries............ $50,000
Rent, factory facilities......... $20,000
Supplies.............. $4,200
Depreciation, office equipment..... $3,000
 Depreciation, factory equipment...... $19,000
Beginning of the year End of the year
Inventories;
Raw materials........$7,000 $15,000
Work in proces........s$10,000 $5,000
Finished goods........$20,000 $35,000
Required:
1. Prepare a schedule of cost of goods manufactured in good form.
2. Prepare the cost of goods sold section of Mason Company
Below are listed various costs that are found in organizations.
1. Hamburger buns in a Wendy’s outlet.
2. Advertising by a dental office.
3. Apples processed and canned by Del Monte.
4. Shipping canned apples from a Del Monte plant to customers.
5. Insurance on a Bausch & Lomb factory producing contact lenses.
6. Insurance on IBM’s corporate head quarters.
7. Salary of a supervisor overseeing production of printers Hewlett-Packard.
8. Commissions paid to Encyclopedia Britannica salespersons.
9. Depreciation of factory lunchroom facilities at a General Electric plant.
10. Steering wheels installed in BMWs.
Required:
Classify each cost as being either variable or fixed with respect to the number of units produced and sold. Also classify each cost as either a selling and administrative cost or a product cost. Prepare your answer sheet as shown below. Place an X in the appropriate columns to show the proper classification of each cost.
Cost Item
Cost Behavior
Variable FixedSelling and
Administrative
CostProduct
Cost
Paul Clark is employed by Aerotech Products and assembles a component part for one of the company’s product lines. He is paid $14 per hour for regular time and time and a half (i.e., $21 per hour) for all work in excess of 40 hours per week.
Required:
1. Assume that during a given week Paul in idle for five hours due to machine breakdowns and that he is idle for four more hours due to material shortages. No overtime is recorded for the week. Allocate Paul’s wages for the week between direct labor cost and manufacturing overhead cost.
2. Assume that during the following week Paul works a total of 48 hours. He has no idle time for the week. Allocate Paul’s wages for the week between direct labor cost and manufacturing overhead cost.
3. Paul’s company provides an attractive package of fringe benefits for its employees. This package includes a retirement program and a health insurance program. Explain two ways that the company could handle the costs of tits direct laborers’ fringe benefits in its cost records.
Listed below are a number of costs typically found in organizations.
1. Property taxes, factory.
2. Boxes used for packaging detergent produced by the company.
3. Salespersons’ commissions.
4. Supervisor’s salary, factory.
5. Depreciation, executive autos.
6. Wages of workers assembling computers.
7. Insurance, finished goods warehouses.
8. Lubricants for machines.
9. Advertising costs.
10. Microchips used in producing calculators.
11. Shipping costs on merchandise sold.
12. Magazine subscriptions, factory lunchroom.
13. Thread in a garment factory.
14. Billing costs.
15. Executive life insurance.
16. Ink used in textbook production.
17. Fringe benefits, assembly-line workers.
18. Yarn used in sweater production.
19. Wages of receptionist, executive offices.
Required:
Prepare an answer sheet with column headings as shown below. For each cost item, indicate whether it would be variable or fixed with respect to the number of units produced and sold; and then whether it would be a selling cost, an administrative cost, or a manufacturing cost. If it is a manufacturing cost, indicate whether it would typically be treated as a direct cost or an indirect cost with respect to units of product. Three sample answers are provided for illustration.
Cost Item
Variable or Fixed
Selling Cost
Administrative CostManufacturing
(Product) Cost
Direct (Indirect)Direct labor..........V XExecutive salaries........FXFactory rent...........F X
Mark Hansen is employed by Eastern Products, Inc., and works on the company’s assembly line. Mark’s basic wage rate is $20 per hour. The company’s union contract states that employees are to be paid time and a half (i.e., $30 per hour) for any work in excess of 40 hours per week.
Required:
1. Suppose that in a given week Mark works 46 hours. Compute Mark’s total wages for the week. How much of this amount would be allocated to direct labor cost? To manufacturing overhead cost?
2. Suppose in another week that Mark works 48 hours but is idle for 3 hours during the week due to machine breakdowns. Compute Mark’s total wages for the week. How much of this amount would be allocated to direct labor cost? To manufacturing overhead cost?
3. Eastern Products, Inc., has an attractive package of fringe benefits that costs the company $6 for each hour of employee time (either regular time or overtime). During a particular week, Mark works 50 hours but is idle for 2 hours due to material shortages. Compute Mark’s total wages and fringe benefits for the week. If the company treats all fringe benefits as part of manufacturing overhead cost, how much of Mark’s wages and friend benefits for the week would be allocated to direct labor cost? To manufacturing overhead cost?
4. Refer to the data in (3) above. If the company treats that part of fringe benefits relating to direct labor as added direct labor cost, how much of Mark’s wages and fringe for the week will be allocated to direct labor cost? To manufacturing overhead cost?
Wollongong Group Ltd, of New South Wales, Australia, acquired its factory building about 10 years ago. For several years the company has rented out a small annex attached to the rear of the building. The company has received a rental income of $30.000 per year on this space. The renter’s lease will expire soon, and rather than renewing the lease, the company has decided to use the space itself to manufacture a new product.
Direct materials cost for the new product will total $80 per unit. To have a place to store finished units of product, the company will rent a small warehouse nearby. The rental cost will be $500 per month. In addition, the company must rent equipment for use in producing the new product; the rental cost will be $4,000 per month. Workers will be hired to manufacture the new product, with direct labor cost amounting to $60 per unit. The space in the annex will continue to be depreciated on a straight-line basis, as in prior. This depreciation is $8,000 per year.
Advertising costs for the new product will total $50,000 per year. A supervisor will be hired to oversee production; her salary will be $1,500 per month. Electricity for operating machines will be $1.20 per unit. Costs of shipping the new product to customers will be $9 per unit. To provide funds to purchase materials, meet payrolls, and so forth, the company will have to liquidate some temporary investments. These investments are presently yielding a return of about $3,000 per year. Required:
Prepare and answer sheet with the following column headings:
Product CostPeriod
(Selling andName
Of the
CostVariable
CostFixed
Cost
Direct
MaterialsDirect
LaborManufacturing
OverheadAdministrative)
CostOpportunity
CostSunk
CostList the different costs associated with the new product decision down the extreme left column (under Name of the Cost). Then place an X under each heading that helps to describe the type of cost involved. There may be X’s under several column headings for a single cost. (Foe example, a cost may be a fixed cost, a period cost, and a sunk cost; you would place an X under each of these column headings opposite the cost).
Various costs associated with the operation of factories are given below:
1. Electricity used in operating machines.
2. Rent on a factory building.
3. Cloth used to drapery production.
4. Production superintendent’s salary.
5. Wages of laborers assembling a product.
6. Depreciation of air purification equipment used in furniture production.
7. Janitorial salaries.
8. Peaches used in canning fruit.
9. Lubricants needed for machines.
10. Sugar used in soft-drink production.
11. Property taxed on the factory.
12. Wages of workers painting a product.
13. Depreciation on cafeteria equipment.
14. Insurance on a building used in producing helicopters.
15. Cost of rotor blades used in producing helicopters.
Required:
Classify each cost as wither variable or fixed with respect to the number of units produced and sold. Also indicate whether each cost would typically be treated as a direct cost or an indirect cost with respect to units of product. Prepare your answer sheet as shown below:
Cost Behavior To Units of Product
Cost Item Variable Fixed Direct Indirect
Example: Factory insurance x x
Various costs associated with the operation of factories are given below:
1. Electricity used in operating machines.
2. Rent on a factory building.
3. Cloth used to drapery production.
4. Production superintendent’s salary.
5. Wages of laborers assembling a product.
6. Depreciation of air purification equipment used in furniture production.
7. Janitorial salaries.
8. Peaches used in canning fruit.
9. Lubricants needed for machines.
10. Sugar used in soft-drink production.
11. Property taxed on the factory.
12. Wages of workers painting a product.
13. Depreciation on cafeteria equipment.
14. Insurance on a building used in producing helicopters.
15. Cost of rotor blades used in producing helicopters.
Required:
Classify each cost as wither variable or fixed with respect to the number of units produced and sold. Also indicate whether each cost would typically be treated as a direct cost or an indirect cost with respect to units of product. Prepare your answer sheet as shown below:
Cost Behavior To Units of Product
Cost Item Variable Fixed Direct Indirect
Example: Factory insurance x x
Various cost and sales data for Meriwell Company for the just completed year appear in the worksheet below:
Finished goods inventory, beginning  $20,000
Finished goods inventory, ending $40,000
Depreciation, factory $27,000
Administrative expenses$110,000
Utilities, factory $8,000
Maintenance, factory  $40,000
Supplies, factory $11,000
Insurance, factory $4,000
Purchases of raw materials $125,000
Raw materials inventory, beginning $9,000
Raw materials inventory, ending $6,000
Direct labor $70,000
Indirect labor $15,000
Work in process inventory, beginning  $17,000
 Work in process inventory, ending $30,000
Sales$500,000Selling expenses $80,000
1. Prepare a schedule of cost of goods manufactured.
2. Prepare an income statement.
3. Assume that the company produced the equivalent of 10,000 units of product the year juts completed. What was the average cost per nit for direct materials? What was the average cost per unit for factory depreciation?
4. Assume that the company expects to produce 15,000 units of product during the coming year. What average cost per unit and what total cost would you expect the company to incur for direct materials at this level of activity for factory depreciation? (In preparing you answer, assume that direct materials are a variable cost and that depreciation is a fixed cost; also assume that deprecation is computed on a straight-line basis).
5. As the manger responsible for production costs, explain to the president any difference in the average costs per unit between (3) and (4) above.
You have just been hired by Ogden Company to fill a new position that was created in response to rapid growth in sales. It is you responsibility to coordinate shipments of finished goods from the factory to distribution warehouses located in various parts of the United States so that goods will be available as orders are received from customers.
The company is unsure how to classify you annual salary in its cost records. The company’s cost analyst says that your salary should be classified as a manufacturing (product) cost; the controller says that it should be classified as a selling expense, and the president says that it doesn’t matter which way your salary cost is classified.
Required:
1. Which viewpoint is correct? Why?’
2. From the point of view of the reported net operating income for the year, is the president correct in his statement that it doesn’t matter which way your salary cost is classified? Explain.
Staci Valek began dabbling in pottery several years ago as a hobby. Her work is quite creative, and it has been so popular with friends and others that she has decided to quit het job is $3,800 per month.
Staci will rent a small building near her home to use as a place for manufacturing the pottery. The rent will be $500 per month. She estimates that the cost of clay and glaze will be $2 for each finished piece of pottery. She will hire workers to produce the pottery at a labor rate of $8 per pot. To sell her pots, Staci feels that she must advertise heavily in the local area. An advertising agency states that it will handle all advertising for a fee of $600 per month. Staci’s brother will sell the pots; he will be paid a commission of $4 for each pot sold. Equipment needed to manufacture the pots will be rented at a cost of #300 per month. Staci has already paid the legal and filing fees associated with incorporating her business in the state. These fees amounted to $500. A small room has been located in a tourist area that Staci will use as a sales office. The rent will be $250 per month. A phone installed in the room for taking after-hours messages. Staci has some money in savings that is earning interest of $1,200 per year. These savings will be withdrawn and used to get the business going. For the time being, Staci does not intend to draw any salary from the new company.
1. Prepare an answer sheet with the following column headings:
Prepare and answer sheet with the following column headings:

Product CostPeriod
(Selling andName
Of the
CostVariable
CostFixed
Cost
Direct
MaterialsDirect
LaborManufacturing
OverheadAdministrative)
CostOpportunity
CostSunk
CostList the different costs associated with the new company down the extreme left column (under Name of Cost). Then place an X under each heading that helps to describe the type of cost involved. There may be X’s under several column headings for a single cost. (That is, a cost may be a fixed cost, a period cost, and a sunk cost; you would place an X under each of these column headings opposite the cost.) Under the Variable Cost column, list only those costs that would be variable with respect to the number of units of pottery that are produced and sold.
2. All of the costs you have listed above, except one, would be differential costs between the alternatives of Staci producing pottery or staying with the aerospace firm. Which cost is not differential? Explain.
Mercury, Inc., produces pagers at its plant in Texas. In recent years, the company’s market share has been eroded by stiff competition from overseas. Price and product quality are the two key areas in which companies compete in this market.
A year ago, the company’s pagers had been ranked low in product quality in a consumer survey. Shocked by this result, Jorge Gomez, Mercury’s president, initiated a crash effort to improve product quality. Gomez set up task force to implement a formal quality improvement program. Included on this task force were representatives from the Engineering, Marketing, Customer Service, Production, and Accounting department. The broad representation was needed because Gomez believed that this was a companywide program and that all employees should share the responsibility for its success. After the first meeting of the task force, Holly Elsoe, manager of the Marketing Department, asked John Tran, production manager, what he thought of the proposed program. Tran replied, “I have reservations. Quality is too abstract to be attaching costs to it and then to be holding your and me responsible for cost improvement. I like to work with goals that I can see and count! I’m nervous about having my annual bonus based on a decrease in quality costs; there are too many variables that we have no control over.” Mercury’s quality improvement program has now been in operation for one year. The company’s most recent quality cost report is shown below:
Mercury, Inc.
Quality Cost Report
(in thousands)
This yearLast YearPrevention costs:
Machine maintenance.......
$ 120
$ 70Training suppliers....... 10 0Quality circles......... 20 0Total prevention costs..... 150 70Appraisal costs:
Incoming inspection......
40
20Final testing.......... 90 80Total appraisal costs...... 130100Internal failure costs:
Rework............ 
130
50Scrap............ 70 40Total Internal failure costs... 200 90External failure costs. 30 90Customer returns........ 80 320Total external failure costs...  110 410Total quality cost....... $590$670Total production cost..... $4,800 $4,200As they were reviewing the report, Elsoe asked Tran what he now thought of the quality improvement program. Tran replied. “I” m relieved that the new quality improvement program hasn’t hurt our bonuses, but the program has increased the workload in the Production Department. It is true that; customer returns are way down, but the pagers that were returned by customer to detail outlets were rarely sent back to us for rework.
Required:
1. Expand the company’s quality cost report by showing the costs in both years as percentages of both total production cost and total quality cost. Carry all computations to one decimal place. BY analyze and the report, determine if Mercury, Inc.’s quality improvement program has been successful. List specific evidence to support your answer
2. Do you expect the improvement program as it progresses to continue to increase the work load in the Production Department?
3. Jorge Gomez believed that the quality improvement program was essential and that Mercury, Inc., could no longer afford to ignore the importance of product quality. Discuss how Mercury, Inc., could measure the cost of not implementing the quality improvement program.
(CMA, adapted)
The Dorilane Company specializes in producing a set of wood patio furniture consisting of a table and four chairs. The set enjoys great popularity, and the company has ample orders to keep production going at its full capacity of 2,000 sets per year. Annual cost data at full capacity follow:
Factory labor, direct $118,000
Advertising $50,000
Factory supervision $40,000
Property taxes, factory building $3,000
Sales commissions $80,000
Insurance, factory $2,500
Depreciation, office equipment $4,000
Lease cost, factory equipment $12,000
Indirect materials, factory $6,000
Depreciation, factory building $10,000
General office supplies (billing) $3,000
General office salaries $60,000
Direct materials used (wood, bolts, etc) $94,000
Utilities, factory $20,000

Required:
1. Prepare an answer sheet with the column headings shown below. Enter each cost item on your answer sheet, placing the dollar amount under the appropriate headings. As examples, this has been done already for the first two items in the list above. Note that each cost item is classified in two ways; first, as variable or fixed with respect to the number of units produced and sold; and second, as a selling and administrative cost or a product cost. If the item is a product cost, it should also be classified as either direct or indirect as shown.)


The Dorilane Company specializes in producing a set of wood

2. Total the dollar amounts in each of the columns in (1) above. Compute the average product cost of one patio set.
3. Assume that production drops to only 1,000 sets annually. Would you expect the average product cost of one set to increase, decrease, or remain unchanged? Explain. No computations are necessary.
4. Refer to the original data. The presidents brother-in-law has considered making himself a patio set and has priced the necessary materials at a building supply store. The brother-in-law has asked the president if he could purchase a patio set from the Dorilane Company at cost, and the president agreed to let him do so.
a. Would you expect any disagreement between the two men over the price the brother-in-law should pay? Explain. What price does the president probably have in mind the brother-in-law?
b. Since the company is operating at full capacity, what cost term used in the chapter might be justification for the president to charge the full, regular price to the brother-in-law and still be selling at cost?
Madison Seniors Care Center is a non-profit organization that provides a variety of health services to the elderly. The center is organized into a number of departments, one of which is the meals-on-wheels program that delivers hot meals to seniors in their homes on a daily basis. Below are listed a number of costs of the center and the meals-on-wheels program.
Example the cost of groceries used in meal preparation.
a. The cost of leasing the meals-on-wheels van.
b. The cost of incidental supplies such as salt, pepper, napkins, and so on.
c. The cost of gasoline consumed by the meals-on-wheels van.
d. The rent on the facility that houses Madison Seniors Care Center, including the meals-in-wheels program.
e. The salary of the part-time manager of the meals-on-wheels program.
f. Depreciation on the kitchen equipment used in the meals-on-wheels program.
g. The hourly wages of the caregiver who drives the van and delivers the meals.
h. The costs of complying with health safety regulations in the kitchen.
i. The costs of mailing letters soliciting donations to the meals-in-wheels program.
Required:
Fore ach cost listed above, indicate whether it is a direct or indirect cost of the meals-on-wheels program, whether, it is a direct or indirect cost of particular seniors served by the program, and whether it is variable or fixed with respect to the number of seniors served. Use the below form for your answer.


Madison Seniors Care Center is a non-profit organization that pr

Swift Company was organized on March 1 of the current year. After five months of start-up losses, management had expected to earn a profit during August. Management was disappointed, however, when the income statement for August also showed a loss. Augusts income statement follows.:

Swift Company was organized on March 1 of the current

After seeing the $12,000 loss for August, Swifts president stated, I was sure wed be profitable within six months, but our six months are up and this loss for August is even worse than Julys. I think its time to start looking for someone to but out the companys assets-f we dont within a few moths there wont be any assets to sell. By the way, I dont see any reason to look for a new controller. Well just limp along with Sam for the time being.
The companys controller resigned a month ago. Sam, a new assistant in the controllers office, prepared the income statement above. Sam has had little experience in manufacturing operations. Additional information about the company follows:
a. Some 60% of the utilities cost and 75% of the insurance apply to factory operations. The remaining amounts apply to selling and administrative activities.
b. Inventory balances at the beginning and end of August were:

Swift Company was organized on March 1 of the current

c. Only 80% of the rent on facilities applies to factory operations the remainder applies to selling and administrative activities. The president has asked you to check over the income statement and make a recommendation as to whether the company should look for a buyer for its assets.

Required:
1. As one step in gathering data for a recommendation to the president, prepare a schedule of cot of goods manufactured for August.
2. As a second step, prepare a new income statement for August.
3. Based on your statements prepared in (1) and (2) above, would you recommend that the company look for a buyer?
M. K. Gallant is president of Kranbrack Corporation, a company whose stock is traded on a national exchange. In a meeting with investment analysts at the beginning of the year, Gallant had predicted that the company’s earnings would grow by 20% this year. Unfortunately, sales have been less than expected for the year, and Gallant concluded within two weeks of the end of the fiscal year that it would be impossible to ultimately report an increase in earnings as large as predicted unless some drastic action was taken. Accordingly, Gallant has ordered that wherever possible, expenditures should be postponed to the new year-including canceling or postponing orders with suppliers, delaying planned maintenance and training, and cutting back on end-of-year advertising and travel. Additionally, Gallant ordered the company’s controller to carefully scrutinize all costs that are currently classified as period costs and reclassify as many as possible as product costs. The company is expected to have substantial inventories of work in process and finished goods at the end of the year.
Required:
1. Why would reclassifying period costs as product costs increase this period’s reported earnings?
2. Do you believe Gallant’s actions are ethical? Why or why not?
Selected account balances for the year ended December 31 are provided below for Superior Company:
Selling and administrative salaries $110,000
Insurance, factory $8,000
Utilities, factory $45,000
Purchases of raw materials $290,000
Indirect labor $60,000
Direct labor ?
Advertising expense $80,000
Cleaning supplies, factory $7,000
Sales commissions $50,000
Rent, factory building $120.000
Maintenance, factory $30,000
Inventory balances at the beginning and end of the year were as follows:

Selected account balances for the year ended December 31 are

The total manufacturing costs for the year were $660,000; the goods available for sale totaled $740,000 and the cost of goods sold totaled $660,000.

Required:
1. Prepare a schedule of cost of goods manufactured and the cost of goods sold section of the companys income statement for the year.
2. Assume that the dollar amounts given above are for the equivalent of 40,000units produced during the year. Compute the average cost per unit for direct materials used and the average cost per unit for rent on the factory building.
3. Assume that in the following year the company expects to produce 50,000 units. What average cost per unit and total cost would you expect to be incurred for direct material for rent on the factory building? (Assume that direct materials are a variable cost and that rent is a fixed cost).
4. As the manager in charge of production costs, explain to the president the reason for any difference in average cost per unit between (2) and (3) above.
Supply the missing data in the following cases. Each case is independent of the others.

Supply the missing data in the following cases. Each case

Visic Corporation, a manufacturing company, produces a single product. The following information has been taken from the companys production, sales, and cost records for the just completed year.


Visic Corporation, a manufacturing company, produces a single

The finished goods inventory is being carried at the average unit production cost for the year. The selling price of the product is $50 per unit.

Visic Corporation, a manufacturing company, produces a single


Required:
1. Prepare a schedule of cost of goods manufactured for the year.
2. Compute the following.
a. The number of units in the finished goods in inventory at the end of the year.
b. The cost of the units in the finished goods in inventory at the end of the year.
3. Prepare an income statement for the year.
I was sure that when our battery hit the market it would be an instant success, said Roger Strong, founder and president of Solar Technology, Inc., but just look at the gusher of red ink for the first quarter. Its obvious that were better scientists that we are businesspeople. The data to which Roger was referring follow:


I was sure that when our battery hit the market

At this rate well be out of business within a year said Cindy Zhang, the companys accountant. But Ive double-checked these figures, so I know theyre right. Solar Technology was organized at the beginning of the current year to produce and market a revolutionary new solar battery. The companys accounting system was set up be Margie Wallace, an experience accountant who recently left the company to do independent consulting work. The statement above was prepared by Zhang, her assistant.
We may not last a year if the insurance company doesnt pay the $226,000 it owes us for the 8,000 batteries lost in the warehouse fire last week, said Roger. The insurance adjuster says out claim, and it will stand up in any court. On April 3, just after the end of the first quarter, the companys finished goods storage area was swept by fire and all 8,000 unsold batteries were destroyed. (These batteries were part of the 40,000 units completed during the first quarter). The companys insurance policy states that the company will be reimbursed for the cost of any finished batteries destroyed or stolen. Zhang has determined this cost as follows:
Total costs for the quarter/ Batteries produced during the quarter = $1,130,000/ 40,000units = $28.25 per unit
8,000 batteries x $ 28.25 per unit = $225,000
The following additional information is available on the companys activities during the quarter ended Marc 31:
a. Inventories at the beginning and end of the quarter were as follows:

I was sure that when our battery hit the market

b. Eighty percent of the rental cost for facilities and 90% of the utilities cost relate to manufacturing operations. The remaining amounts relate to selling and administrative activates.
Required:
1. What conceptual errors, if any, were made in preparing the income statement above?
2. Prepare a schedule of cost of goods manufactured for the first quarter. 3. Prepare a corrected income statement for the first quarter. Your statement should shoe in detail how the cost of goods sold is computed.
4. Do you agree that the insurance company owes Solar Technology, Inc. $226,000? Explain your answer.
Hector P. Wastrel, a careless employee, left some combustible materials near an open flame in Salter Company’s plant. The resulting explosion and fire destroyed the entire plant and administrative offices. Justin Quick, the company’s controller, and Constance True heart, the operations manager, were able to save only a few bits of information as they escaped from the roaring blaze. What a disaster, cried Justin. And the worst part is that we have no records to use in filing an insurance claim.
I know, replied Constance, I was in the plant when the explosion occurred and I managed to grab only this brief summary sheet that contains information on one or two or our costs. It says that our direct labor cost this year has totaled $180,000 and that we have purchased $290,000 in raw materials. But I’m afraid that doesn’t help much; the rest of our records are just ashes. Well, not completely, said Justin. I was working on the year-to-date income statement when the explosion knocked me out of my chair. I instinctively held onto the page I was working on, and from what I can make out, our sales to date this year have totaled $1,200,000 and our gross margin rate has been 40% of sales. Also, I can see that our goods available for sale to customers has totaled $810,000 at cost. Maybe we’re not so bad off after all, exclaimed Constance. My sheet says that prime cost has totaled $410,000 so far this year and that manufacturing overhead is 70% of conversion cost. Now if we just had some information on our beginning inventories. Hey look at this, cried Justin. It’s a copy of last year’s annual report, and it shows what our inventories were when this year started. Let’s see, raw materials were $18,000, work in process was $65,000, and finished goods were $45,000.
Super, yelled Constance, let’s go to work. To file an insurance claim, the company must determine the amount of cost in its inventories as of the date of the fire. You may assume that all materials used in production during the year were direct materials.
Required: Determine the amount of cost in the Raw Materials, Work in Process, and Finished Goods inventory accounts as of the date of the fire.
What is the basic difference in orientation between financial and managerial accounting?
Bristow University is a large private school located in the Midwest. The university is headed by a president who has five vice presidents reporting to him. These vice presidents are responsible for, respectively, auxiliary services, admissions and re cords, academics, financial services (controller), and the physical plant. In addition the university has managers over several areas who report to these vice presidents. These include managers over central purchasing, the university press, and the university bookstore, all of whom report to the vice president for auxiliary services, managers over computer services and over accounting and finance, who report to the vice president for financial services, and managers over grounds and custodial services and over plant and maintenance, who report to the vice president for physical plant. The university has four colleges-business, humanities, fine arts, and engineering and quantitative methods-and a law school. Each of these units has a dean who is responsible to the academic vice president. Each college has several departments. Required:
1. Prepare an organization chart for Bristow University.
2. Which of the positions on your chart would be line positions? Why would they be line positions? Which would be staff positions? Why?
3. Which of the positions on your chart would have need for accounting information? Explain.
Mary Karston was hired by a popular fast-food restaurant as an order-taker and cashier. Shortly after taking the job, she was shocked to overhear an employee bragging to a friend about shortchanging customers. She confronted the employee who then snapped back. Mind your own business. Besides, everyone does it and the customers never miss the money. Mary didn’t know how to respond to this aggressive stance.
Required:
What would be the practical consequences on the fast-food industry and on consumers if cashiers generally shortchanged customer at every opportunity?
Describe the three major activities of a manager.
What are the four steps in the planning and control cycle?
Distinguish between line and staff positions in an organization.
Special Alloys Corporation manufactures a variety of specialized metal products for industrial use. Most of the revenues are generated by large contracts with companies that have government defense contracts. The company also develops and markets parts to the major automobile companies. It employs many metallurgists and skilled technicians because most of its products are made from highly sophisticated alloys.
The company recently signed two large contracts; as a result, the workload of Wayne Washburn, the general manager, has become overwhelming. To relieve some of this overload, Mark Johnson was transferred from the Research Planning Department to the general manager’s office. Johnson, who has been senior metallurgist and supervisor in the Research Planning Department, was given the title assistant to the general manager.
Washburn assigned several responsibilities to Johnson in their first meeting. Johnson will oversee the testing of new alloys in the product planning department and be given the authority to make decisions as to the use of these alloys in product development; he will also be responsible for maintaining the production schedules for one of the new contracts. In addition to these duties, he will be required to meet with the supervisors of the production departments regularly to consult with them about production problems they may be experiencing. Washburn expects to be able to manage the company much more efficiently with Johnson’s help.
Required:
1. Positions within organizations are often described as having (a) line authority or (b) staff authority. Describe what is meant by these two terms.
2. Of the responsibilities assigned to Mark Johnson as assistant to the general manager, which tasks have line authority and which have staff authority?
3. Identify and discuss the conflicts Mark Johnson may experience in the production departments as a result of his new responsibilities.
Consumers and attorney generals in more than 40 states accused a prominent nationwide chain of auto repair shops of misleading customers and selling them unnecessary parts and services, from brake jobs to front-end alignments. Lynn Sharpe Paine reported the situation as follows in Managing for Organizational Integrity, Harvard Business Review; March-April 1994:
In the face of declining revenues, shrinking market share, and an increasingly competitive market. management attempted to spur performance of its auto center.. The automotive service advisers were given product-specific sales quotas-sell so many springs, shock absorbers, alignments, or brake jobs per shift-and paid a commission based on sales.. Failure to meet quotas could lead to a transfer or reduction in work hours. Some employees spoke of the “pressure, pressure, pressure” to bring in sales. This pressure-cooker atmosphere created conditions under which employees felt that the only way to satisfy top management was by selling products and services to customers that they didn’t really need. Suppose all automotive repair businesses routinely followed the practice of attempting to sell customers unnecessary parts and services.
Required:
1. How would this behavior affect customer? How might customers attempt to protect themselves against this behavior?
2. How would this behavior probably affect profits and employment in the automotive service industry?
The situation described below was adapted from a case published by the institute of Management Accountants Committee on Ethics.
WIW is a publicly owned corporation that makes various control devices used in manufacturing mechanical equipment. J.B. is the president of WIW, Tony is the purchasing agent, and Diane is J.B.’s executive assistant. All three have been with WIW for about five years. Charlie is WIW’s controller and has been with the company for two years.
J.B.; Hi, Charlie, come on in , Diane said you had a confidential matter to discuss. What’s on your mind?
Charlie: J.B., I was reviewing our increased purchases from A-1 Warehouse Sales last week and wondered
Why our volume has tripled in the past year. When I discussed this with Tony he seemed a bit evasive and tried to dismiss the issue by stating that A-1 can give us one-day delivery on our orders.
J.B.: Well, Tony is right, Your know we have been trying to implement just-in-time and have been trying to get our inventory down.
Charlie: We still have to look at the overall cost. A-1 is more of a jobber than a warehouse. After investigating orders placed with them, I found that only 10% are delivered from their warehouse and the other90% are drop-shipped from the manufacturers. The average markup by A-1 is 30%, which amounted to about $600.000 on out orders for the past year. If we had ordered directly from the manufacturers when A-1 didn’t have an item in stock, we could have saved about $540,000 ($600,000 x 9-%). In addition, some of the orders were late and not complete.
J.B.: Now look, Charlie, we get quick delivery on most items, and who knows how much we are saving by not having to stock this stuff in advance or worry about it becoming obsolete. Is there anything else on your mind?
Charlie: Well, J.B., as a matter of fact, there is. I ordered a Dun & Bradstreet credit report on A-1 and discovered that Mike Bell is the principal owner. Isn’t he your brother-in-law?
J.B.: Sure he is but don’t worry about Mike. He understands this JIT approach. Besides, he’s looking out for or interest.
Charlie (to himself): this conversation has been enlightening, but it doesn’t really respond to my concerns. Can I legally or ethically ignore this apparent conflict of interests?
Required:
1. Would Charlie be justified in ignoring this situation, particularly since he is not the purchasing agent? In preparing your answer, consider the IMA’s Standards of Ethical Conduct.
2. State the specific steps Charlie should follow to resolve this matter.
A number of terms that relate to organization, the work of management, and the role of managerial accounting are listed below:
Budgets Controller
Decentralization Directing and motivating
Feedback Financial accounting
Line Managerial accounting
Nonmonetary data Performance report
Planning Precision
Staff Chief Financial Officer
Choose the term or terms above that most appropriately complete the following statements:
1. A position on the organization chart that is directly related to achieving the basic objectives of an organization is called a _________________ position.
2. When _________________managers oversee day-to-day activities and keep the organization functioning smoothly.
3. The plans of management are expressed formally in _________________
4. _________________ consists of identifying alternatives, selecting from among the alternatives the one that is best for the organization, and specifying what actions will be taken to implement the chosen alternative.
5. A _________________ position provides service or assistance to other parts of the organization and does not directly achieve the basic objectives of the organization.
6. The delegation of decision-making authority throughout an organization by allowing managers at various operating levels to make key decisions relating to their area of responsibility is called _________________
7. Managerial accounting places less emphasis on _________________ and more emphasis on _________________ than financial accounting.
8. _________________ is concerned with providing information for the use of those who are inside the organization, whereas _________________ is concerned with providing information for the use of those who are outside the organization.
9. The accounting and other reports coming to management that are used in controlling the organization are called _________________
10. The manager in charge of the accounting department is generally known as the _________________
11. A detailed report to management comparing budgeted data with actual data for a specific time period is called a _________________
12. The _________________ is the member of the top management team who is responsible for providing timely and relevant data to support planning and control activities and for preparing financial statements for external users.
Why aren’t actual overhead costs traced to jobs just as direct materials and direct labor costs are traced to jobs?
Why would job-order costing be used instead of process costing?
What is the purpose of the job cost sheet in a job-order costing system?
Why is a predetermined overhead rate, and how is it computed?
Explain how a sales order, a production order, a materials requisition form, and a labor time ticket are involved in producing and costing products?
Explain why some production costs most be assigned to products through an allocation process?
Why do companies uses predetermined overhead rates rather than actual manufacturing overhead costs to apply overhead to jobs?
What factors should be considered in selecting a base to be used in computing the predetermined overhead rate?
If a company fully allocates all of its overhead costs to jobs, does this guarantee that a profit will be earned for the period?
What account is credited when overhead cost is applied to work in process? Would you expect the amount applied for a period to equal the actual overhead costs of the period? Why or why not?
What is underapplied overhead? Over applied overhead? What disposition is made of these amounts at the end of the period?
Provide two reasons why overhead might be under applied in a given year?
What adjustment is made for under applied overhead on the schedule of cost of goods sold? What adjustment is made for over applied overhead?
What is a plant wide overhead rate? Why are multiple overhead rates, rather than a plant wide overhear rate, used in some companies?
What happens to overhead rates based on direct labor when automated equipment replaces direct labor?
Process Costing and Job-Order Costing
Which method of determining product costs, job-order costing or process costing, would be more appropriate in each of the following situations’?
a. An Elmer’s glue factory.
b. A textbook publisher such as McGraw-Hill.
c. An Exxon oil refinery.
d. A facility that makes Minute Maid frozen orange juice.
e. A Scott paper mill.
f. A custom home builder.
g. A shop that customizes vans.
h. A manufacturer of specialty chemicals.
i. An auto repair shop.
j. A Firestone tire manufacturing plant.
k. An advertising agency.
1. A law office.
Cycle Gear Corporation has incurred the following costs on job number W456, an order for 20 special sprockets to be delivered at the end of next month.
Direct materials:
On April 10,
Requisition number 15673 was issued for 20 titanium blanks to be used in the special order. The blanks cost $15.00 each.
On April 11,
Requisition number 15678 was issued for 480 hardened nibs also to be used in the special order. The nibs cost $1.25 each.
Direct labor:
On April 12,
Jamie Unser worked from 11:00AM until 2:45 PM on Job W456. He is paid $9.60 per hour.
On April 18,
Melissa Chan worked from 8:15 AM until 11:30 AM on Job W456. She is paid $12.20 per hour.
Required:
1. On what documents would these costs be recorded?
2. How much cost should have been recorded on each of the documents for Job W456’?
Harris Fabrics computes its predetermined overhead rate annually on the basis of direct labor hours. At the beginning of the year it estimated that its total manufacturing overhead would be S 134,000 and the total direct labor would be 20,000 hours. Its actual total manufacturing overhead for the year was $123,900 and its actual total direct labor was 21,000 hours.
Required:
Compute the company’s predetermined overhead rate for the year.
Lamed Corporation recorded the following transactions for the just completed month.
a. $80,000 in raw materials were purchased on account.
b. $71,000 in raw materials were requisitioned for use in production. Of this amount, $62,000 was for direct materials and the remainder was for indirect materials.
c. Total labor wages of $112,000 were incurred. Of this amount, $101,000 was for direct labor and the remainder was for indirect labor.
d. Additional manufacturing overhead costs of $175,000 were incurred.
Required:
Record the above transactions in journal entries.
Luthan Company uses a predetermined overhead rate of $23.40 per direct labor-hour. This predetermined rate was based on 11,000 estimated direct labor-hours and $257,400 of estimated total manufacturing overhead. The company incurred actual total manufacturing overhead costs of $249,000 and 10,800 total direct labor-hours during the period.
Required:
Determine the amount of manufacturing overhead that would have been applied to units of product during the period.
Primare Corporation has provided the following data concerning last month’s manufacturing operations.

Primare Corporation has provided the following data concerning
Required:
1. Prepare a schedule of cost of goods manufactured for the month.
2. Prepare a schedule of cost of goods sold for themonth.
Jurvin Enterprises recorded the following transactions for the just completed month. The company had no beginning inventories.
a. $94,000 in raw materials were purchased for cash.
b. $89,000 in raw materials were requisitioned for use in production. Of this amount, $78,000 was for direct materials and the remainder was for indirect materials.
c. Total labor wages of $132,000 were incurred and paid. Of this amount, $112,000 was for direct labor and the remainder was for indirect labor.
d. Additional manufacturing overhead costs of $143,000 were incurred and paid.
e. Manufacturing overhead costs of $152,000 were applied to jobs using the company’s predetermined overhead rate.
f. All of the jobs in progress at the end of the month were completed and shipped to customers.
g. Any underapplied or overapplied overhead for the period was closed out to Cost of Goods Sold.
Required:
1. Post the above transactions to T-accounts.
2. Determine the cost of goods sold for the period.
Osborn Manufacturing uses a predetermined overhead rate of $18.20 per direct labor-hour. This predetermined rate was based on 12,000 estimated direct labor-hours and $218,400 of estimated total manufacturing overhead.
The company incurred actual total manufacturing overhead costs of $215,000 and 11,500 total direct labor-hours during the period.
Required:
1. Determine the amount of underapplied or overapplied manufacturing overhead for the period.
2. Assuming that the entire amount of the underapplied or overapplied overhead is closed out to Cost of Goods Sold, what would be the effect of the underapplied or overapplied overhead on the company’s gross margin for the period?
Sigma Corporation applies overhead cost to jobs on the basis of direct labor cost. Job V, which was started and completed during the current period, shows charges of $5,000 for direct materials, $8,000 for direct labor, and $6,000 for overhead on its job cost sheet. Job W, which is still in process at year-end, shows charges of $2,500 for direct materials and $4,000 for direct labor.
Required:
Should any overhead cost be added to Job W at year-end? If so, how much? Explain.
Estimated cost and operating data for three companies for the upcoming year follow:

Estimated cost and operating data for three companies for the
Predetermined overhead rates are computed using the following allocation bases in the three companies:

Estimated cost and operating data for three companies for the
Required:
1. Compute each company’s predetermined overhead rate.
2. Assume that Company X works on three jobs during the upcoming year. Direct labor-hours recorded by job are: Job 418, 12,000 hours; Job 419, 36,000 hours; and Job 420, 30,000 hours. How much overhead will the company apply to Work in Process for the year? If actual overhead costs total $530,000 for the year, will overhead be underapplied or overapplied? By how much?
The following information is taken from the accounts of Latta Company. The entries in the T-accounts are summaries of the transactions that affected those accounts during the year.

The following information is taken from the accounts of
The overhead that had been applied to production during the year is distributed among the ending balances in the accounts as follows:

The following information is taken from the accounts of
For example, of the $40,000 ending balance in Work in Process, $19,500 was overhead that had been applied during the year.
Required:
1. Identify reasons for entries (a) through (d).
2. Assume that the company closes any balance in the Manufacturing Overhead account directly to Cost of Goods Sold. Prepare the necessary journal entry.
3. Assume instead that the company allocates any balance in the Manufacturing Overhead account to the other accounts in proportion to the overhead applied in their ending balances. Prepare the necessary journal entry, with supportingcomputations.
Harwood Company uses a job-order costing system. Overhead costs are applied to jobs on the basis of machine-hours. At the beginning of the year, management estimated that the company would incur $192,000 in manufacturing overhead costs and work 80,000 machine-hours.
Required:
1. Compute the company’s predetermined overhead rate.
2. Assume that during the year the company works only 75,000 machine-hours and incurs the following costs in the Manufacturing Overhead and Work in Process accounts:

Harwood Company uses a job-order costing system. Overhead costs
Copy the data in the T-accounts above onto your answer sheet. Compute the amount of overhead cost that would be applied to Work in Process for the year and make the entry in your T-accounts.
3. Compute the amount of underapplied or overapplied overhead for the year and show the balance in your Manufacturing Overhead T-account, Prepare a journal entry to close out the balance in this account to Cost of Goods Sold.
4. Explain why the manufacturing overhead was underapplied or overapplied for theyear.
A company assigns overhead cost to completed jobs on the basis of 125% of direct labor cost. The job cost sheet for Job 313 shows that $10,000 in direct materials has been used on the job and that $12,000 in direct labor cost has been incurred. A total of 1,000 units were produced in Job 313.
Required:
What is the unit product cost for Job 313?
The Polaris Company uses a job-order costing system. The following data relate to October, the first month of the company’s fiscal year.
a. Raw materials purchased on account, $210,000.
b. Raw materials issued to production, $190,000 ($178,000 direct materials and $12,000 indirect materials).
c. Direct labor cost incurred, $90,000; indirect labor cost incurred, $110,000.
d. Depreciation recorded on factory equipment, $40,000.
e. Other manufacturing overhead costs incurred during October, $70,000 (credit Accounts Payable).
f. The company applies manufacturing overhead cost to production on the basis of $8 per machine-hour. A total of 30,000 machine-hours were recorded for October.
g. Production orders costing $520,000 according to their job cost sheets were completed during October and transferred to Finished Goods.
h. Production orders that had cost $480,000 to complete according to their job cost sheets were shipped to customers during the month. These goods were sold on account at 25% above cost.
Required:
1. Prepare journal entries to record the information given above.
2. Prepare T-accounts for Manufacturing Overhead and Work in Process. Post the relevant information above to each account. Compute the ending balance in each account, assuming that
Work in Process has a beginning balance of $42,000.
Architectural Consultants began operations on January 2. The following activity was recorded in the company’s Work in Process account for the first month of operations:

Architectural Consultants began operations on January 2.
Leeds Architectural Consultants is a service firm, so the names of the accounts it uses are different from the names used in manufacturing companies. Costs of Subcontracted Work is comparable to Direct Materials; Direct Staff Costs is the same as Direct Labor; Studio Overhead is the same as Manufacturing Overhead; and Completed Projects is the same as Finished Goods. Apart from the difference in terms, the accounting methods used by the company are identical to the methods used by manufacturing companies. Leeds Architectural Consultants uses a job-order costing system and applies studio overhead to Work in Process on the basis of direct staff costs. At the end of January, only one job was still in process. This job (Lexington Gardens Project) had been charged with $6,500 in direct staff costs.
Required:
1. Compute the predetermined overhead rate that was in use during January.
2. Complete the following job cost sheet for the partially completed Lexington GardensProject.

Architectural Consultants began operations on January 2.
Dillon Products manufactures various machined parts to customer specifications. The company uses a job-order costing system and applies overhead cost to jobs on the basis of machine-hours. At the beginning of the year, it was estimated that the company would work 240.000 machine-hours and incur $4,800,000 in manufacturing overhead costs.
The company spent the entire month of January working on a large order for 16,000 custom-made machined parts. The company had no work in process at the beginning of January. Cost data relating to January follow:
a. Raw materials purchased on account, $325,000.
b. Raw materials requisitioned for production, $290,000 (80% direct materials and 20% indirect materials).
c. Labor cost incurred in the factory, $180,000 (one-third direct labor and two-thirds indirect labor).
d. Depreciation recorded on factory equipment, $75,000.
e. Other manufacturing overhead costs incurred, $62,000 (credit Accounts Payable).
f. Manufacturing overhead cost was applied to production on the basis of 15,000 machine-hours actually worked during the month.
g. The completed job was moved into the finished goods warehouse on January 31 to await delivery to the customer. (In computing the dollar amount for this entry, remember that the cost of a completed job consists of direct materials, direct labor, and applied overhead.)
Required:
1. Prepare journal entries to record items (a) through (f) above [ignore item (g) for the moment].
2. Prepare T-accounts for Manufacturing Overhead and Work in Process. Post the relevant items from your journal entries to these T-accounts.
3. Prepare a journal entry for item (g) above.
4. Compute the unit product cost that will appear on the job cost sheet.
The following cost data relate to the manufacturing activities of Chang Company during the just completed year:

The following cost data relate to the manufacturing activities
The company uses a predetermined overhead rate to apply overhead cost to production. The rate for the year was $25 per machine-hour. A total of 19,400 machine-hours was recorded for the year.
Required:
1. Compute the amount of underapplied or overapplied overhead cost for the year.
2. Prepare a schedule of cost of goods manufactured for theyear.
Kingsport Containers, Ltd, of the Bahamas experiences wide variation in demand for the 200-liter steel drums it fabricates. The leakproof, rustproof steel drums have a variety of uses from storing liquids and bulk materials to serving as makeshift musical instruments. The drums are made to order and are painted according to the customer’s specifications—often in bright patterns and designs. The company is well known for the artwork that appears on its drums. Unit product costs are computed on a quarterly basis by dividing each quarter’s manufacturing costs (materials, labor, and overhead) by the quarter’s production in units. The company’s estimated costs, by quarter, for the coming year follow:

Kingsport Containers, Ltd, of the Bahamas experiences
Management finds the variation in unit costs confusing and difficult to work with. It has been suggested that the problem lies with manufacturing overhead because it is the largest element of cost. Accordingly, you have been asked to find a more appropriate way of assigning manufacturing overhead cost to units of product. After some analysis, you have determined that the company’s overhead costs are mostly fixed and therefore show little sensitivity to changes in the level of production.
Required:
I. The company uses a job-order costing system. How would you recommend that manufacturing overhead cost be assigned to production? Be specific, and show computations.
2. Re-compute the company’s unit product costs in accordance with your recommendations in (1)above.
Vista Landscaping uses a job-order costing system to track the costs of its landscaping projects. The company provides garden design and installation services for its clients. The table below pro-vides data concerning the three landscaping projects that were in progress during April. There was no work in process at the beginning of April.

Vista Landscaping uses a job-order costing system to track
Actual overhead costs were $30,000 for April. Overhead costs are applied to projects on the basis of designer-hours because most of the overhead is related to the costs of the garden design studio.
The predetermined overhead rate is $90 per designer-hour. The Harris and Chan projects were completed in April; the James project was not completed by the end of the month.
Required:
1. Compute the amount of overhead cost that would have been charged to each project during April.
2. Prepare a journal entry showing the completion of the Harris and Chan projects and the transfer of costs to the Completed Projects (i.e., Finished Goods) account.
3. What is the balance in the Work in Process account at the end of the month?
4. What is the balance in the Overhead account at the end of the month? What is this balancecalled?
White Company has two departments, Cutting and Finishing. The company uses a job-order costing system and computes a predetermined overhead rate in each department. The Cutting Department bases its rate on machine-hours, and the Finishing Department bases its rate on direct labor cost. At the beginning of the year, the company made the following estimates:

White Company has two departments, Cutting and Finishing.
Required:
1. Compute the predetermined overhead rate to be used in each department.
2. Assume that the overhead rates that you computed in (1) above are in effect. The job cost sheet for Job 203, which was started and completed during the year, showed the following:

White Company has two departments, Cutting and Finishing.
Compute the total overhead cost applied to Job 203.
3. Would you expect substantially different amounts of overhead cost to be assigned to some jobs if the company used a plantwide overhead rate based on direct labor cost, rather than using departmental rates? Explain. No computations arenecessary.
Supreme Videos, Inc., produces short musical videos for sale to retail outlets. The company’s balance sheet accounts as of January 1, the beginning of its fiscal year, are given on the following page.

Supreme Videos, Inc., produces short musical videos for sale
Because the videos differ in length and in complexity of production, the company uses a job- order costing system to determine the cost of each video produced. Studio (manufacturing) overhead is charged to videos on the basis of camera-hours of activity. At the beginning of the year, the company estimated that it would work 7,000 camera-hours and incur $280,000 in studio overhead cost. The following transactions were recorded for the year:
a. Film, costumes, and similar raw materials purchased on account, $185,000.
b. Film, costumes, and other raw materials issued to production, $200,000 (85% of this material was considered direct to the videos in production, and the other 15% was considered indirect).
c. Utility costs incurred in the production studio, $72,000.
d. Depreciation recorded on the studio, cameras, and other equipment, $84,000. Three-fourths of this depreciation related to actual production of the videos, and the remainder related to equipment used in marketing and administration.
e. Advertising expense incurred $130,000.
f. Costs for salaries and wages were incurred as follows:

Supreme Videos, Inc., produces short musical videos for sale
g. Prepaid insurance expired during the year, $7,000 (80% related to production of videos, and 20% related to marketing and administrative activities).
h. Miscellaneous marketing and administrative expenses incurred, $8,600.
i. Studio (manufacturing) overhead was applied to videos in production. The company recorded 7,250 camera-hours of activity during the year.
j. Videos that cost $550,000 to produce according to their job cost sheets were transferred to the finished videos warehouse to await sale and shipment.
k. Sales for the year totaled $925,000 and were all on account. The total cost to produce these videos according to their job cost sheets was $600,000.
l. Collections from customers during the year totaled $850,000.
m. Payments to suppliers on account during the year, $500,000; payments to employees for salaries and wages, $285,000.
Required:
1. Prepare a T-account for each account on the company’s balance sheet and enter the beginning balances.
2. Record the transactions directly into the T-accounts. Prepare new T-accounts as needed. Key your entries to the letters (a) through (m) above. Compute the ending balance in each account.
3. Is the Studio (manufacturing) Overhead account underapplied or overapplied for the year? Make an entry in the T-accounts to close any balance in the Studio Overhead account to Cost of Goods Sold.
4. Prepare an income statement for the year. (Do not prepare a schedule of cost of goods manufactured; all of the information needed for the income statement is available in theT-accounts.)
Gold Nest Company of Guandong, China, is a family-owned enterprise that makes birdcages for the South China market. A popular pastime among older Chinese men is to take their pet birds on daily excursions to teahouses and public parks where they meet with other bird owners to talk and play mahjong. A great deal of attention is lavished on these birds, and the birdcages are often elaborately constructed from exotic woods and contain porcelain feeding bowls and silver roosts. Gold Nest Company makes a broad range of birdcages that it sells through an extensive network of Street vendors who receive commissions on their sales. The Chinese currency is the renminbi, which is denoted by Rmb. All of the company’s transactions with customers, employees, and suppliers are conducted in cash; there is no credit.
The company uses a job-order costing system in which overhead is applied to jobs on the basis of direct labor cost. At the beginning of the year, it was estimated that the total direct labor cost for the year would be Rmb200,000 and the total manufacturing overhead cost would be Rmb330,000. At the beginning of the year, the inventory balances were as follows:

Gold Nest Company of Guandong, China, is a family-owned
During the year, the following transactions were completed:
a. Raw materials purchased for cash, Rmb275,000.
b. Raw materials requisitioned for use in production, Rmb280,000 (materials costing Rmb220,000 were charged directly to jobs; the remaining materials were indirect).
c. Costs for employee services were incurred as follows:

Gold Nest Company of Guandong, China, is a family-owned
d. Rent for the year was Rmb18,000 (Rmb13,000 of this amount related to factory operations, and the remainder related to selling and administrative activities).
e. Utility costs incurred in the factory, Rmb57,000.
f. Advertising costs incurred, Rmb140,000.
g. Depreciation recorded on equipment, Rmb100,000. (Rmb8 8,000 of this amount was on equipment used in factory operations; the remaining Rmbl2,000 was on equipment used in selling and administrative activities.)
h. Manufacturing overhead cost was applied to jobs, Rmb?
i. Goods that had cost Rmb675,000 to manufacture according to their job cost sheets were completed.
j. Sales for the year totaled Rmb1,250,000. The total cost to manufacture these goods according to their job cost sheets was Rmb700,000.
Required:
1. Prepare journal entries to record the transactions for the year.
2. Prepare T-accounts for inventories, Manufacturing Overhead, and Cost of Goods Sold. Post relevant data from your journal entries to these T-accounts (don’t forget to enter the beginning balances in your inventory accounts). Compute an ending balance in each account.
3. Is Manufacturing Overhead underapplied or overapplied for the year? Prepare a journal entry to close any balance in the Manufacturing Overhead account to Cost of Goods Sold.
4. Prepare an income statement for the year. (Do not prepare a schedule of cost of goods manufactured; all of the information needed for the income statement is available in the journal entries and T-accounts you haveprepared.)
Almeda Products, Inc., uses a job-order costing system. The company’s inventory balances on April 1, the start of its fiscal year, were as follows:

Almeda Products, Inc., uses a job-order costing system.
During the year, the following transactions were completed:
a. Raw materials were purchased on account, $170,000.
b. Raw materials were issued from the storeroom for use in production, $180,000 (80% direct and 20% indirect).
c. Employee salaries and wages were accrued as follows: direct labor, $200,000; indirect labor, $82,000; and selling and administrative salaries, $90,000.
d. Utility costs were incurred in the factory, $65,000.
e. Advertising costs were incurred, $100,000.
f. Prepaid insurance expired during the year, $20,000 (90% related to factory operations, and 10% related to selling and administrative activities).
g. Depreciation was recorded, $180,000 (85% related to factory assets, and 15% related to selling and administrative assets).
h. Manufacturing overhead was applied to jobs at the rate of 175% of direct labor cost.
i. Goods that cost $700.000 to manufacture according to their job cost sheets were transferred to the finished goods warehouse.
j. Sales for the year totaled $1,000,000 and were all on account. The total cost to manufacture these goods according to their job cost sheets was $720,000.
Required:
1. Prepare journal entries to record the transactions for the year.
2. Prepare T-accounts for Raw Materials, Work in Process, Finished Goods, Manufacturing Overhead, and Cost of Goods Sold. Post the appropriate parts of your journal entries to these T-accounts. Compute the ending balance in each account. (Don’t forget to enter the beginning balances in the inventory accounts.)
3. Is Manufacturing Overhead underapplied or overapplied for the year? Prepare a journal entry to close this balance to Cost of Goods Sold.
4. Prepare an income statement for the year. (Do not prepare a schedule of cost of goods manufactured; all of the information needed for the income statement is available in the journal entries and T-accounts you haveprepared.)
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