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Chapter 3

Systems Design: Job-Order Costing

Solutions to Questions

3-1 By definition, manufacturing overhead forms, direct labor time tickets, and by applying
consists of costs that cannot be practically traced overhead.
to jobs. Therefore, if these costs are to be as-
signed to jobs, they must be allocated rather than 3-6 Some production costs such as a factory
traced. manager’s salary cannot be traced to a particular
product or job, but rather are incurred as a result
3-2 Job-order costing is used in situations of overall production activities. In addition, some
where many different products or services are production costs such as indirect materials cannot
produced each period. Process costing is used in be easily traced to jobs. If these costs are to be
situations where a single, homogeneous product, assigned to products, they must be allocated to
such as cement, bricks, or gasoline, is produced the products.
for long periods.
3-7 If actual manufacturing overhead cost is
3-3 The job cost sheet is used to record all applied to jobs, the company must wait until the
costs that are assigned to a particular job. These end of the accounting period to apply overhead
costs include direct materials costs traced to the and to cost jobs. If the company computes actual
job, direct labor costs traced to the job, and overhead rates more frequently to get around this
manufacturing overhead costs applied to the job. problem, the rates may fluctuate widely due to
When a job is completed, the job cost sheet is seasonal factors or variations in output. For this
used to compute the unit product cost. reason, most companies use predetermined over-
head rates to apply manufacturing overhead costs
3-4 A predetermined overhead rate is used to to jobs.
apply overhead cost to jobs. It is computed be-
fore a period begins by dividing the period’s esti- 3-8 The measure of activity used as the allo-
mated total manufacturing overhead by the peri- cation base should drive the overhead cost; that
od’s estimated total amount of the allocation is, the allocation base should cause the overhead
base. Thereafter, overhead cost is applied to jobs cost. If the allocation base does not really cause
by multiplying the predetermined overhead rate the overhead, then costs will be incorrectly at-
by the actual amount of the allocation base that is tributed to products and jobs and product costs
recorded for each job. will be distorted.

3-5 A sales order is issued after an agree- 3-9 Assigning manufacturing overhead costs
ment has been reached with a customer on quan- to jobs does not ensure a profit. The units pro-
tities, prices, and shipment dates for goods. The duced may not be sold and if they are sold, they
sales order forms the basis for the production may not be sold at prices sufficient to cover all
order. The production order specifies what is to costs. It is a myth that assigning costs to prod-
be produced and forms the basis for the job cost ucts or jobs ensures that those costs will be re-
sheet. The job cost sheet, in turn, is used to covered. Costs are recovered only by selling to
summarize the various production costs incurred customers—not by allocating costs.
to complete the job. These costs are entered on
the job cost sheet from materials requisition 3-10 The Manufacturing Overhead account is
credited when overhead cost is applied to Work in

© The McGraw-Hill Companies, Inc., 2010. All rights reserved.
Solutions Manual, Chapter 3 77

Process. Generally, the amount of overhead ap- 3-13 Underapplied overhead implies that not
plied will not be the same as the amount of actual enough overhead was assigned to jobs during the
cost incurred because the predetermined over- period and therefore cost of goods sold was un-
head rate is based on estimates. derstated. Therefore, underapplied overhead is
added to cost of goods sold. On the other hand,
3-11 Underapplied overhead occurs when the overapplied overhead is deducted from cost of
actual overhead cost exceeds the amount of goods sold.
overhead cost applied to Work in Process invento-
ry during the period. Overapplied overhead occurs 3-14 A plantwide overhead rate is a single
when the actual overhead cost is less than the overhead rate used throughout a plant. In a mul-
amount of overhead cost applied to Work in Pro- tiple overhead rate system, each production de-
cess inventory during the period. Underapplied or partment may have its own predetermine over-
overapplied overhead is disposed of by either head rate and its own allocation base. Some
closing out the amount to Cost of Goods Sold or companies use multiple overhead rates rather
by allocating the amount among Cost of Goods than plantwide rates to more appropriately allo-
Sold and ending inventories in proportion to the cate overhead costs among products. Multiple
applied overhead in each account. The adjust- overhead rates should be used, for example, in
ment for underapplied overhead increases Cost of situations where one department is machine in-
Goods Sold (and inventories) whereas the ad- tensive and another department is labor inten-
justment for overapplied overhead decreases Cost sive.
of Goods Sold (and inventories).
3-15 When automated equipment replaces
3-12 Manufacturing overhead may be un- direct labor, overhead increases and direct labor
derapplied for several reasons. Control over over- decreases. This results in an increase in the pre-
head spending may be poor. Or, some of the determined overhead rate—particularly if it is
overhead may be fixed and the actual amount of based on direct labor.
the allocation base may be less than estimated at
the beginning of the period. In this situation, the
amount of overhead applied to inventory will be
less than the actual overhead cost incurred.

© The McGraw-Hill Companies, Inc., 2010. All rights reserved.
78 Managerial Accounting, 13th Edition

Exercise 3-1 (10 minutes)

a. Process costing g. Job-order costing
b. Job-order costing h. Process costing*
c. Process costing i. Job-order costing
d. Process costing j. Process costing*
e. Process costing k. Job-order costing
f. Job-order costing l. Job-order costing

* Some of the listed companies might use either a process costing or a
job-order costing system, depending on the nature of their operations
and how homogeneous the final product is. For example, a chemical
manufacturer would typically operate with a process costing system, but
a job-order costing system might be used if products are manufactured
in relatively small batches. The same thing might be true of the tire
manufacturing plant in item j.

© The McGraw-Hill Companies, Inc., 2010. All rights reserved.
Solutions Manual, Chapter 3 79

the time ticket for Melissa Chan. The direct materials and direct labor costs listed in the exercise would have been recorded on four different documents: the materials requisi- tion form for Job W456. 36...75 $9. 2.. and the job cost sheet for Job W456.65 $975.. 39.... Inc.. 80 Managerial Accounting.. 2010..00 W456 Time ticket for Melissa Chan Time Started Ended Completed Rate Amount Job Number 8:15 AM 11:30 AM 3....60 $36...Exercise 3-2 (15 minutes) 1..20 $39..65 W456 Job Cost Sheet for Job W456 Direct materials .....00 $300 Nibs 480 $1.00 Direct labor: Jamie Unser ..25 $12....65 © The McGraw-Hill Companies.... $900. The costs for Job W456 would have been recorded as follows: Materials requisition form: Quantity Unit Cost Total Cost Blanks 20 $15... 13th Edition .... All rights reserved..00 Melissa Chan . the time ticket for Jamie Unser.25 600 $900 Time ticket for Jamie Unser Time Started Ended Completed Rate Amount Job Number 11:00 AM 2:45 PM 3.

..... 20... 2010. All rights reserved. Solutions Manual.... Inc.....Exercise 3-3 (10 minutes) The predetermined overhead rate is computed as follows: Estimated total manufacturing overhead . Chapter 3 81 ..... $6.....000 ÷ Estimated total direct labor hours (DLHs) .. $134...........000 DLHs = Predetermined overhead rate .70 per DLH © The McGraw-Hill Companies.....

..... 13th Edition ..000 Manufacturing Overhead... 112. Inc.. 101......... Manufacturing Overhead....000 d.........000 c...... 82 Managerial Accounting.. 71... 62.........000 Wages Payable . 175. 80....... Work in Process .. 2010.....000 Accounts Payable ... 11.000 © The McGraw-Hill Companies........ All rights reserved.... 80....... Work in Process ..... 175......000 Raw Materials ....000 Various Accounts .000 Manufacturing Overhead.......000 b.......... 9. Raw Materials .Exercise 3-4 (15 minutes) a.........

800 × Predetermined overhead rate ......... 10.............. All rights reserved.720 © The McGraw-Hill Companies........... $23. $252.. Inc........... Solutions Manual. Chapter 3 83 ... 2010.......40 = Manufacturing overhead applied...........Exercise 3-5 (10 minutes) Actual direct labor-hours ..

.... 24.......... beginning .. 65. 190................................... 42.. 30...... 2010.......... ending........... All rights reserved...000 $ 19....................... ending ... 5.... $152............000 220.............000 Total raw materials available ............. 84 Managerial Accounting...000 Deduct: Finished goods inventory...........000 Unadjusted cost of goods sold .. 13th Edition .................................................... 148........................... Cost of Goods Manufactured Direct materials: Raw materials inventory............. beginning... 42................. 18.............000 Direct labor ...............000 Add: Cost of goods manufactured ...............000 Cost of goods manufactured ....000 Goods available for sale ....000 Manufacturing overhead applied to work in pro- cess inventory ....000 Add: Purchases of raw materials ......000 Deduct: Ending work in process inventory .... 56....000 © The McGraw-Hill Companies... $12.... $ 35...........................Exercise 3-6 (20 minutes) 1.... 155..............000 2....000 Add: Underapplied overhead .... 4.......... 164........... 58...000 Raw materials used in production ... Inc.... $155....000 Add: Beginning work in process inventory........000 Deduct: Raw materials inventory...............000 Total manufacturing costs.. Cost of Goods Sold Finished goods inventory..........................000 Adjusted cost of goods sold ....000 Less indirect materials included in manufac- turing overhead ........ 87..

000 (b) 89. 2010.Exercise 3-7 (20 minutes) Parts 1 and 2.. 0 Manufacturing Overhead Cost of Goods Sold (b) 11.000 Bal.000 (a) 94.000 Bal.000 (g) 22. Chapter 3 85 .000 (f) 342.000 Work in Process Finished Goods (b) 78. Cash Raw Materials (a) 94.000 (f) 342.000 (d) 143.000 (e) 152. 0 (e) 152.000 (c) 132.000 Bal.000 Bal. Inc. 364.000 (d) 143. 0 © The McGraw-Hill Companies. Solutions Manual.000 (c) 20. All rights reserved.000 (g) 22.000 Bal.000 (c) 112.000 (f) 342. 5.000 (f) 342.

.. $5... Inc... 86 Managerial Accounting... $209.......700) Manufacturing overhead underapplied ......Exercise 3-8 (10 minutes) 1....... 11...500 × Predetermined overhead rate .. 215. © The McGraw-Hill Companies......700 and the gross margin would decrease by $5.000 $ (5. the cost of goods sold would increase by $5... All rights reserved... 2010..... Because manufacturing overhead is underapplied......20 = Manufacturing overhead applied ..300 Less: Manufacturing overhead incurred .......700 2. Actual direct labor-hours .700.... $18... 13th Edition ......

.75 = Manufacturing overhead applied to Job W at year-end ...... Inc......000 of direct labor cost.. Solutions Manual... $3......000 × Predetermined overhead rate.... overhead should be applied to value the Work in Process inventory at year-end......000 of overhead was applied to Job V on the basis of $8.......Exercise 3-9 (10 minutes) Yes. Because $6.000 © The McGraw-Hill Companies......... 2010.... All rights reserved...... the company’s predetermined overhead rate must be 75% of direct labor cost...................... Job W direct labor cost .. Chapter 3 87 .... × 0...... $4..................

. 2010..000 Overhead cost applied to Work in Process: $6.... $530.........70 per hour × 78.. Predetermined overhead rates: Company X: Predetermined = Estimated total manufacturing overhead cost overhead rate Estimated total amount of the allocation base $536.000 hours © The McGraw-Hill Companies....000 hours + 30.70 per DLH 80...400 *12.000 hours + 36.......000 = = 160% of direct $300.... 13th Edition .. All rights reserved......000* actual hours ..000 DLHs Company Y: Predetermined = Estimated total manufacturing overhead cost overhead rate Estimated total amount of the allocation base $315..... 88 Managerial Accounting.........000 MHs Company Z: Predetermined = Estimated total manufacturing overhead cost overhead rate Estimated total amount of the allocation base $480..000 = = $6......... 522......000 hours = 78.. Inc..50 per MH 70..600 Underapplied overhead cost ..000 = = $4.000 direct materials cost materials cost 2.. Actual overhead costs incurred.........Exercise 3-10 (15 minutes) 1. $ 7.......

...000 100 % Using these percentages.....500 15 Cost of Goods Sold .......... 70......... $390.. 56.....500 Finished Goods (15% × $70.Exercise 3-11 (15 minutes) 1... Item (b): Overhead cost applied to work in process for the year....000 80 Total cost .............. 10... The underapplied overhead will be allocated to the other accounts on the basis of the amount of overhead applied during the year in the end- ing balance of each account: Work in Process ......000) ..... All rights reserved.....000 Manufacturing Overhead.... Inc..000) ... 312.........500 5% Finished Goods .... Chapter 3 89 ...........000 Manufacturing Overhead ....... Item (d): Cost of goods sold for the year. 70.... 58.... $ 19............... Item (c): Cost of goods manufactured for the year. the journal entry would be as follows: Work in Process (5% × $70.. Solutions Manual............ 2.......000) .... Item (a): Actual manufacturing overhead costs for the year.500 Cost of Goods Sold (80% × $70. 2010................... Cost of Goods Sold ....... 3. 70......000 © The McGraw-Hill Companies............000 3.....

. 90 Managerial Accounting.......000 machine-hours × $2.... The amount of overhead cost applied to Work in Process for the year would be: 75. 4. 13th Edition ...000 Balance 4.40 per MH 80.000 (Indirect labor) 60.. All rights reserved.000... Overhead is underapplied by $4...000 (Utilities) 32.. 4..000 (Overhead) (a) 180.. 2010... as shown in the Manu- facturing Overhead account above.....000 (Insurance) 7.000 MHs 2...000 (Indirect materials) 8....000 = = $2.........000 © The McGraw-Hill Companies.. Inc. The predetermined overhead rate is computed as follows: Predetermined = Estimated total manufacturing overhead cost overhead rate Estimated total amount of the allocation base $192......000 for the year..000 (Direct labor) 90....000 Work in Process (Direct materials) 710.000 3...... The entry to close out this balance to Cost of Goods Sold would be: Cost of Goods Sold .Exercise 3-12 (30 minutes) 1.40 per machine-hour = $180.... This amount is shown in entry (a) below: Manufacturing Overhead (Maintenance) 21..000 (Depreciation) 56.000 (a) 180..000 Manufacturing Overhead ....

The manufacturing overhead did not decline by the full $12. Chapter 3 91 .000. © The McGraw-Hill Companies.. Howev- er.000 from the initial estimated manufacturing overhead cost of $192. When the actual machine-hours turn out to be 75. the actual manufacturing overhead did not drop by this much. Inc.000—a drop of $8.40 per machine-hour. These issues will be covered in more detail in later chapters. This is a drop of $12. Solutions Manual. or $180.000. The actual manufacturing overhead was $184.000. it is assumed that overhead cost is proportional to ma- chine-hours.000 machine-hours × $2. When overhead is applied using a predetermined rate based on ma- chine-hours. 2010. All rights reserved. the costing system assumes that the overhead will be 75.000 because of the existence of fixed costs and/or because over- head spending was not under control.000 from the estimate.Exercise 3-12 (continued) 4.

....Exercise 3-13 (10 minutes) Direct material .000 Direct labor . Inc....000 ÷ 1.............. $37 © The McGraw-Hill Companies... 92 Managerial Accounting...................000 × 125%..000 Unit product cost: $37........... $10........ 2010.. 15....000 Manufacturing overhead: $12........... All rights reserved.. $37. 12.000 Total manufacturing cost......... 13th Edition .000 units ..........

........000 Accounts Payable ..000 $480... 210............... a...... Solutions Manual......................000 Work in Process ... Work in Process ... Cost of Goods Sold ..000 Manufacturing Overhead ...... Work in Process . 600. 70.................................................... All rights reserved............................... Manufacturing Overhead ..... 190......000 Finished Goods ..000 Accounts Payable .. 40....000 f...................... Manufacturing Overhead ... 110...................... g......000.000 Accumulated Depreciation ....... 520....000 Raw Materials Inventory ..... 70....... Inc........ 600.......000........................................... 240.....000 30........000 Salaries and Wages Payable....... Work in Process ........ 240.............. Raw Materials Inventory........ 480........... 480...000 d................................000 b....................000 h..................000 Manufacturing Overhead . 2010........000 MH × $8 per MH = $240... © The McGraw-Hill Companies.... 40.... 90..................... 12.....000 e........ Finished Goods ..000 Sales .............000 c...... 520................25 = $600........................ 210............ 200....000 × 1..... Chapter 3 93 ...........000 Accounts Receivable ...........................................Exercise 3-14 (30 minutes) 1......................................000 Manufacturing Overhead ... 178...

All rights reserved.000 (g) 520.Exercise 3-14 (continued) 2. Manufacturing Overhead Work in Process (b) 12.000 Bal.000 (b) 178.000 (c) 90.000 8.000 (Overapplied overhead) © The McGraw-Hill Companies. 13th Edition . 94 Managerial Accounting. 42. 30.000 (e) 70.000 (f) 240..000 (c) 110.000 (d) 40.000 (f) 240. Inc.000 Bal. 2010.

.000 = = 160% rate Direct staff costs incurred $75.Exercise 3-15 (30 minutes) 1..............000 2.... Solutions Manual................ All rights reserved........400 16......000 © The McGraw-Hill Companies. the predetermined overhead rate was 160%: Studio overhead applied $120...... 10.. $18.900 Costs of subcontracted work ... Inc... Chapter 3 95 ..... $35..500 × 160%).... Because $120. $35..400 Total cost to January 31 . $ 6.500 Studio overhead . we can now complete the job cost sheet for the Lexington Gardens Project: Costs of subcontracted work ...... 2010...... Recognizing that the predetermined overhead rate is 160% of direct staff costs.....100 Direct staff costs ..........100 With this information.....000 Less: Direct staff costs ..000 balance in the Work in Process account at that point must apply to it... therefore. 10..000 of direct staff costs.... $18. the following computation can be made: Total cost in the Lexington Gardens Project ...... The Lexington Gardens Project is the only job remaining in Work in Pro- cess at the end of the month................500 Studio overhead cost ($6.............. the entire $35. 6.000 of studio overhead was applied to Work in Process on the basis of $75....

.....000 Wages and Salaries Payable ........000 Accounts Payable ......000 Manufacturing Overhead ...................000 (b) 232.000 Accumulated Depreciation .. Work in Process ................... 75. Manufacturing Overhead ...................... 2010................. 592.....800.....000 MHs 15.... 232........... 290........................ The cost of the completed job is $592.000 Manufacturing Overhead ...... 13th Edition .000 (d) 75.............000 as shown in the Work in Pro- cess T-account above.......................000 f....000 b..................... 325. Manufacturing Overhead Work in Process (b) 58.....000 units = $37 per unit © The McGraw-Hill Companies...000 Manufacturing Overhead ........... 300...000 ÷ 16.................000 Work in Process .........000 (f) 300.. Work in Process ..... 75.Exercise 3-16 (30 minutes) 1...........000 4................ 58.000 2.. 120....000 (e) 62.............000 e.000 = = $20 per MH 240.. 300........000 Raw Materials ..... 96 Managerial Accounting.......000 c............000 MH × $20 per MH = $300............ The journal entry is: Finished Goods ... Inc.. 62.........000 3.... All rights reserved........ 62. Raw Materials ...000 (c) 120.. Manufacturing Overhead ........000 d........ The unit product cost on the job cost sheet would be: $592.....000 Predetermined = Estimated total manufacturing overhead cost overhead rate Estimated total amount of the allocation base $4..... Work in Process .. 60... 592..........000 (c) 60............ 325......000 (f) 300.000 Accounts Payable ........ a.................. 180..............

............. 400.000 Add: Work in process.. 420............. Inc.... 70.... $ 20. 485... 60.. 485..000 2...000 Cost of goods manufactured ..........000 © The McGraw-Hill Companies.000 Deduct raw materials inventory. 2010.............................000 Raw materials used in production .....................000 Overapplied overhead cost ..000 Manufacturing overhead cost applied to work in process .....Exercise 3-17 (15 minutes) 1.....000 Manufacturing overhead cost applied: 19.......400 MH × $25 per MH. 15.......000 960..... All rights reserved. Chang Company Schedule of Cost of Goods Manufactured Direct materials: Raw materials inventory............ $473.......... $ 12.....000 Less indirect materials...........000 Total manufacturing costs . ending ..000 Raw materials available for use .. 390.....000 Direct labor .000 $375.... Chapter 3 97 .. 40................................ Solutions Manual.... ending ....... 920.....000 Deduct: Work in process.....000 Add purchases of raw materials .. $890.............. 30................ Actual manufacturing overhead costs ........... beginning ......... beginning ...................

The computations are: Predetermined = Estimated total manufacturing overhead cost overhead rate Estimated total amount of the allocation base $960.000 = = 160% of direct $600.000 direct labor cost labor cost Predetermined = Estimated total manufacturing overhead cost overhead rate Estimated total amount of the allocation base $960. 98 Managerial Accounting. the costing problem does indeed lie with manufacturing overhead cost.. Some students will use units of product in computing the predetermined over- head rate.80 per unit 200. 13th Edition .000 = = 300% of direct $320. As suggested. Because manufacturing overhead is mostly fixed.Exercise 3-18 (30 minutes) 1. which should be based on expected activity for the entire year. the cost per unit increases as the level of production decreases. as follows: Predetermined = Estimated total manufacturing overhead cost overhead rate Estimated total amount of the allocation base $960.000 = = $4. Inc.000 direct materials cost materials cost © The McGraw-Hill Companies. All rights reserved. 2010.000 units The predetermined overhead rate could also be set on the basis of ei- ther direct labor cost or direct materials cost. This appar- ent problem can be “solved” by using a predetermined overhead rate.

...000 $564........000 64....000 Manufacturing overhead: Applied at $4. $240.. or 160% of direct materials cost .. the unit product costs would be: Quarter First Second Third Fourth Direct materials . Chapter 3 99 ...000 Unit product cost .000 96...000 $ 60. $752.40 $9.....Exercise 3-18 (continued) 2.......000 Direct labor ..000 288....000 96..000 Number of units produced ..... 80... 300% of direct labor cost....40 $9.000 Total cost ............000 $376.40 $9... Solutions Manual..000 32.000 $188..000 60... $9........... 384.... Inc. All rights reserved. 2010...80 per unit......000 20..000 192..000 $180.....40 © The McGraw-Hill Companies. Using a predetermined overhead rate.... 128...000 $120.000 40...

.800 9.. Inc...... 45....... 45.... 8........700 = $45..900 Applied overhead costs Underapplied overhead 2......000 $8................400 Direct labor ..................800 $9......... 100 Managerial Accounting........ Harris Chan James Designer-hours ..... 7. $10. All rights reserved.600 8.......000 27....500 $ 3.................700 4..........100 Total cost in work in process ............................100 As indicated above..... The balance in the Work in Process account consists entirely of the costs associated with the James project: Direct materials .600 3.. $24..............000 Total cost ...700 Completed Projects ..100 2......... 10.. $ 4...............200 Overhead applied . × $90 × $90 × $90 Manufacturing overhead applied.600* Work in Process ................. $16....600* * $24.........900 + $20.. the debit balance in the Overhead account is called underapplied overhead............... 13th Edition ..... © The McGraw-Hill Companies....700 Direct labor ..... $ 1...... 9..900 $20........ Harris Chan Direct materials ................... 120 100 90 Predetermined overhead rate ..................000 Overhead applied ........................... 2010........Exercise 3-19 (30 minutes) 1.... The balance in the Overhead account can be determined as follows: Overhead Actual overhead costs 30.....

. Overhead Applied Cutting Department: 80 MHs × $7. for example....000 MHs Finishing Department: Predetermined = Estimated total manufacturing overhead cost overhead rate Estimated total amount of the allocation base $486......000 = = $7..... 270 Total overhead cost applied .... if some jobs require a large amount of machine time and little labor cost.. $600 Finishing Department: $150 × 180%.50 per MH .. $870 3.. It appears.000 direct labor cost labor cost 2..50 per MH 48... but required only a small amount of labor cost..... Inc........ Cutting Department: Predetermined = Estimated total manufacturing overhead cost overhead rate Estimated total amount of the allocation base $360..... © The McGraw-Hill Companies. All rights reserved..Exercise 3-20 (15 minutes) 1. 2010.... Chapter 3 101 .. Solutions Manual.. that this would be true of Job 203 which required considerable machine time to complete.....000 = = 180% of direct $270... Yes... they would be charged substantially less overhead cost if a plant- wide rate based on direct labor cost were used..

000 (j) 550.000 (d) 84.000 Bal.000 Bal.000 (d) 63.000 (b) 170.000 Bal.000 (j) 550. 63.000 (d) 21.000 Bal. 15.000 (a) 185. and 2.. 9.000 (l) 850.Problem 3-21 (60 minutes) 1.000 (g) 5.000 (i) 290. 13th Edition . 9.000 * (i) 290. 2. 102 Managerial Accounting.000 Bal.400 * $280. 30.000 (g) 7.000 (h) 8. 177. 128. 210.000 (f) 82.000 ÷ 7.000 Studio Overhead Depreciation Expense (b) 30.000 Bal.600 © The McGraw-Hill Companies. Inc. 45.000 (m) 785. 31.000 Bal.000 (f) 110.400 Bal. 81.000 Advertising Expense Miscellaneous Expense (e) 130.000 Bal.000 Bal.000 Studio and Equipment Accumulated Depreciation Bal. 730.000 hours = $40 per hour.000 Raw Materials Prepaid Insurance Bal.000 (l) 850. Cash Accounts Receivable Bal.000 Bal.250 hours × $40 per hour = $290.000 (b) 200.000 (k) 600.000 (k) 925.000 Videos in Process Finished Goods Bal. 7.000 Bal. 2010. 37.400 (g) 1. All rights reserved.600 Insurance Expense (n) 9.000 (c) 72. 294. 102.

.Problem 3-21 (continued) Administrative Salaries Expense Sales (f) 95.. Income Statement For the Year Ended December 31 Sales of videos ..000 (h) 8.............................000 Bal.... $ 78.......... 130....... Chapter 3 103 . 95.......400 © The McGraw-Hill Companies......000 (a) 185. Supreme Videos. All rights reserved... 420....000 Cost of goods sold ($600............ 590............000 (k) 925.............. Solutions Manual................... 590. 270. 55....000 3... 334. 2..000 Bal...000 Administrative salaries..... 1....000 Bal. Entry (n) above records the closing of this overapplied overhead balance to Cost of Goods Sold...000 (e) 130........ Overhead is overapplied for the year by $9....000 Net operating income .... 4.....000 (f) 287...600 (c) 72....400 Miscellaneous expense .............. Inc.000 Cost of Goods Sold Accounts Payable (k) 600....000 (n) 9....600 Gross margin.....600 Bal........400 Selling and administrative expenses: Depreciation expense .000 – $9.. $925.....000 Insurance expense ..............000 Bal......... 8................. Inc......000 Advertising expense ....... $ 21.400)...............400 (m) 500..600 Salaries & Wages Payable (m) 285.......600 256.400.......... 160... 2010...000 Capital Stock Retained Earnings Bal......

............................ 88.......... 18........000 Sales Commissions Expense . 100.......000 d..............................000 © The McGraw-Hill Companies...........................000 Cash .......................000 Manufacturing Overhead ....000 Cash ..................................000 Cash ...... 63.... 5.......000 actual direct labor cost × 165% = Rmb297............. All rights reserved.................000 Rent Expense ................................................................. Work in Process .... 57..000 Depreciation Expense .......000 Cash . 220.. 280.........000 Cash .................................000 c........... 104 Managerial Accounting................................. Advertising Expense ................ 297................................................... 13....................000 g.............. 180.......Problem 3-22 (60 minutes) 1...000 direct labor cost direct labor cost Rmb180................ 90..000 b......... 60.. 297.................000 Salaries Expense .......000 e...000 Raw Materials .............000 Accumulated Depreciation ..000 165% of = = Rmb200............... a................................. Manufacturing Overhead . 72.. Work in Process .. Inc...... Manufacturing Overhead ......000 Manufacturing Overhead ..... 140.......... Work in Process ....000 f..........000 h....................... Manufacturing Overhead . 275.........000 Predetermined = Estimated total manufacturing overhead cost overhead rate Estimated total amount of the allocation base Rmb330...................... 405.............. Raw Materials .. 13th Edition . 57................. 12.... 140.... 275....000 Manufacturing Overhead .... 2010............

.000 (h) 297..... 10. 1.......... Raw Materials Work in Process Bal.... The entry to close this balance to Cost of Goods Sold would be: Manufacturing Overhead ..... 25...... 7.......000 Bal...000 (i) 675.000 (c) 180...000 Finished Goods ......250..............000 Work in Process .......000 3. 2010..... 15......................000 Cost of Goods Sold ..............000 (h) 297...... Finished Goods ................000 Bal..........000 (b) 60. Manufacturing overhead is overapplied by Rmb7. Chapter 3 105 .....000 Bal..000 Cost of Goods Sold ...000 for the year.000 Finished Goods Manufacturing Overhead Bal......000 (a) 275.....................000 Cost of Goods Sold (j) 700.250...............000 j.. 7. Inc....000 (b) 220................. 20..000 (i) 675.....000 (e) 57.. Cash..... 675... 700... 32......... Solutions Manual............... 675....000 (c) 72................000 © The McGraw-Hill Companies.....000 Sales ..............000 (d) 13..... 7..........Problem 3-22 (continued) i........000 (j) 700.000 (b) 280..... All rights reserved...000 Bal.000 Bal.. 40. 1..........000 2.... 700.....000 (g) 88..

....................000) .............. Rmb1............. 557................ 90......000 .000 © The McGraw-Hill Companies.............. 13th Edition ..........000 Net operating income .......... 5.......250....000 310..............000 Gross margin.......000 Rent expense........000 Advertising expense .....................Problem 3-22 (continued) 4....000 Administrative salaries ....Rmb7....................... Inc. 106 Managerial Accounting................ Rmb 247...... All rights reserved.........000 Selling and administrative expenses: Sales commissions ............. Gold Nest Company Income Statement Sales ...000 Cost of goods sold (Rmb700.......... 140........000 Depreciation expense ...... Rmb63........................ 2010. 693............... 12.........

.000 Raw Materials ......000 f.............. All rights reserved...000 Accounts Payable .....................000 c.......... 350.................... Chapter 3 107 .......... Solutions Manual......................... Work in Process ........... 90............. Finished Goods ... 1............... Manufacturing Overhead ..............000 Salaries and Wages Payable .......000 j.............. Raw Materials ............000 $200.......... 350.......... 65...........000 e.................. a.............. 1. 100.......000 Insurance Expense .............000 Manufacturing Overhead ........................... Work in Process .000 Salaries Expense ......................000 Accumulated Depreciation ..000 b.. Accounts Receivable ............. 372......... 100..........................000 overhead applied i...............000 Work in Process . 18........... 153......... 144........... 20... 27.......... 65... 2010............... 200...000 Cost of Goods Sold ......... 720..............000 Sales ....000.......000 d........ Work in Process .. 2............000 Accounts Payable ........................000 Manufacturing Overhead ........... 720.......... 700................. 180...... 700............ Manufacturing Overhead ............. Inc................000 Manufacturing Overhead ............000 h.....Problem 3-23 (60 minutes) 1... 36...000 Prepaid Insurance .000 actual direct labor cost × 175% = $350.......... 82...................000 g........... Manufacturing Overhead ..000 © The McGraw-Hill Companies............ Advertising Expense .......000 Accounts Payable .............000 Finished Goods ... 170....000 Depreciation Expense ...... 180............................. 170............................000...............

..000 4....... Overhead is underapplied by $4..... 4......000..000 (a) 170.....000 Depreciation expense .............000 (h) 350.... Almeda Products.......000 for the year...000 Insurance expense ... 14...... The entry to close this balance to Cost of Goods Sold would be: Cost of Goods Sold ... 27......000 Cost of goods sold ($720.... 28........ 724........000 (i) 700.....000) ..... 13th Edition ..........000 Gross margin........... $1....000 (d) 65..000 (c) 200.... Raw Materials Finished Goods Bal.....................Problem 3-23 (continued) 2..... 32....000 Bal...000 219.......000 Work in Process Manufacturing Overhead Bal..... 2..... 22.....000 Cost of Goods Sold (j) 720..........000 3.......000 (c) 82......000 (h) 350........000 Net operating income ...... 48...........000 (j) 720.000 Bal....... 276....000 Bal.000 + $4.000 (b) 36...... 108 Managerial Accounting. All rights reserved. $ 57...000 Bal... 2010.............................. 4..........000 © The McGraw-Hill Companies..000 (i) 700.000 Manufacturing Overhead .......000 (g) 153...000 Advertising expense ............000 Selling and administrative expenses: Salary expense ..............000 (f) 18........ 100.................. $ 90........000 (b) 180................. Inc... 4..000 (b) 144......000 Bal... 20..... Inc........ Income Statement For the Year Ended March 31 Sales ..

17.000 (g) 3.300 (j) 140. 2010.000 (l) 245.000 Bal. Inc.000 (k) (f) 45. Chapter 3 109 .500 © The McGraw-Hill Companies. and 2.000 (f) 10. 9. 89. 210. 4. Cash Accounts Receivable Bal.000 Raw Materials Prepaid Insurance Bal.000 (c) 19.000 (h) 9.000 (l) 245.700 * (i) 60. Solutions Manual.000 (d) 9.000 (b) 38. 7. 53.000 Bal.000 (g) 2.000 (i) 60.000 Manufacturing Overhead Depreciation Expense (b) 5.000 (a) 40.000 Bal.000 Bal. 23.000 (m) 234.500 MH × $8 per MH = $60.000 Bal.000 Bal.100 (d) 27.000 Bal.200 (n) 4. 11. 18.000 (k) 250.000 Bal. 4.200 (g) 600 *7.000 Advertising Expense Miscellaneous Expense (e) 48.000 130.000 (b) 32.000 Bal. 42.Problem 3-24 (60 minutes) 1. 32. 18.000 (j) 140. All rights reserved.000 Work in Process Finished Goods Bal. 20.000 (d) 36.400 Insurance Expense Bal.000 Bal.300 Plant and Equipment Accumulated Depreciation Bal..000 Bal. 1.

.. Entry (n) above records the closing of this underapplied overhead balance to Cost of Goods Sold.... 1....100 Net operating income .............000 Capital Stock Retained Earnings Bal.............. 134.. $ 18.100 (e) 48..000 (k) 250.800 Selling and administrative expenses: Depreciation expense ........700 © The McGraw-Hill Companies...... 9.000 3..000 Bal... 2010..................... 4.........200 Gross margin...................... $ 9.200 (a) 40.000 Bal...... 160..... Overhead is underapplied by $4.. 13th Edition ....Problem 3-24 (continued) Administrative Salaries Expense Sales (f) 30.............000 Bal.... Hudson Company Income Statement For the Year Ended December 31 Sales . $250.000 + $4. 49..........200 (c) 19.000 (h) 9............ 48... Inc....000 (f) 85...........000 (m) 150.500 97.........200) ...... 4.................. 110 Managerial Accounting....000 Cost of Goods Sold Accounts Payable (k) 130............ 134......200.............. 600 Miscellaneous expense .000 Bal....................000 Insurance expense .......... 30.......000 Cost of goods sold ($130... 115....600 Salaries & Wages Payable (m) 84. 38... All rights reserved........000 Advertising expense ...500 Bal................000 Administrative salaries expense ............000 (n) 4......

$ 80 $ 40 $ 120 Direct attorney cost .... 2010.... 300........... Research & Documents predetermined overhead rate: Predetermined = Estimated total manufacturing overhead cost overhead rate Estimated total amount of the allocation base $840..360 4.......020 $9..Problem 3-25 (45 minutes) 1....050 Overhead cost applied ... Solutions Manual.........700 × 40% .. Inc......... $ (40...000 $315............190 Total cost ....000 hours × $35 per hour .............700 6.. Research & Documents Litigation Departmental overhead cost incurred . 350 5......190 3..280 Total overhead cost ..........000 direct attorney cost attorney cost 2...280 3....... $3......000 hours Litigation predetermined overhead rate: Predetermined = Estimated total manufacturing overhead cost overhead rate Estimated total amount of the allocation base $360...000 × 40% ...000 © The McGraw-Hill Companies..000 Underapplied (or overapplied) overhead .. Total cost of Case 418-3: Departments Research & Documents Litigation Total Legal forms and supplies . 910..000 $750.000 Departmental overhead cost applied: 26.. $1...000 = = $35 per hour 24.......... 2. All rights reserved..000 = = 40% of direct $900..................... $870.......... Research & Documents overhead applied: 26 hours × $35 per hour ............ Chapter 3 111 ...........000) $ 15...340 $8........ 910 2. $ 910 Litigation overhead applied: $5.

3. and overhead at May 31 . a. 30........000 (c) 19.... labor......... 12.........000 + RUR7..900 Finished Goods Manufacturing Overhead Bal.... 16. labor. This entry is posted to the T-accounts as entry (b) above. © The McGraw-Hill Companies.000 *RUR4.. 13.....Problem 3-26 (60 minutes) 1.300 (a) 13...... Inc..500 + RUR8........000 (a) 3. RUR28..400 Salaries & Wages Payable Accounts Payable (b) 27.000 Bal... 41..200...........300 (b) 7.......000 (d) 28......800 *RUR6..000* (e) 38....... All rights reserved..000 + RUR7......000 Salaries and Wages Payable...400 * Job 208 materials.000.600 (d) 28...... 13th Edition ...000 (e) 38.. b.. 2010.500 = RUR20...... and overhead at May 31 .... This entry is posted to the T-accounts as entry (a) above...000 (c) 19.700 Job 209 materials....600 Raw Materials .200 * Manufacturing Overhead ....... 20.300 Total Work in Process inventory at May 31 .000 (a) 16......... Work in Process ..200 = RUR13.. Work in Process ....000 * Manufacturing Overhead............ 50.......800 Bal.200 (b) 20...... 63.. 27........... Raw Materials Work in Process Bal.. 112 Managerial Accounting... 7.000 2. RUR41...

........200 = = 140% of direct May direct labor cost RUR8........000 × 140% ...... in the case of Job 208: May overhead cost RUR11... Chapter 3 113 ...........000 labor cost The overhead cost applied to each job during June was: Job 208: RUR4..600 Job 209: RUR7......... Solutions Manual..... RUR 5.500 × 140% ....900 Total applied overhead .000 Manufacturing Overhead..400 Accounts Payable .... 28......... 11...... Manufacturing Overhead . RUR28.... 3....... 10...500 Job 210: RUR8.... 28..000 © The McGraw-Hill Companies....... For example........ 19. The company uses a predetermined overhead rate of 140% of direct la- bor cost.......500 × 140% ..000 The entry to record the application of overhead cost to jobs would be [recorded as entry (d) in the T-accounts above]: Work in Process.. 2010......... 19... This figure can be determined by relating the May applied overhead cost on the job cost sheets to the May direct labor cost shown on these sheets..............400 This entry is posted to the T-accounts as entry (c) above.. All rights reserved..Problem 3-26 (continued) c. Inc........

.. RUR36.......300 The entry to record the transfer of the completed job is [recorded as en- try (e) in the T-accounts above]: Finished Goods .....300 5.......000 Manufacturing overhead applied (RUR12......................200 RUR18..000 × 140%) .......300 RUR27................... The breakdown of this amount between Jobs 209 and 210 is: Job 209 Job 210 Total Direct materials .Problem 3-26 (continued) 4........... 12... 13th Edition .........500 8..600 Total cost........... All rights reserved.900 © The McGraw-Hill Companies...... 38.....100 RUR7......... 38.... As shown in the above T-accounts...........600 RUR63....500 19.000 Manufacturing overhead applied ......000 + RUR4......................... The total cost of job 208 was: Direct materials .....900.......000)........... 10.. 16......... the balance at June 30 was RUR63................300 Direct labor .................. 14......900 26...... RUR38.......800 Total cost........................ 114 Managerial Accounting.300 Work in Process ... Inc.... 2010...500 Direct labor (RUR8.. RUR11..............700 11....... RUR 9............

.....000 Insurance ......000 × 160%.................................... $170...........000 direct materials cost b... $ 20.....000 = =160% $500.............. ending .. 510... Before the underapplied or overapplied overhead can be computed.. 760.......................000 Depreciation of equipment. $450............................. 48..........................................Problem 3-27 (60 minutes) 1...000 Add.................... 80................ 7.....000 Rent.......... a... 95..............000 Underapplied overhead ......000 Property taxes ......................... we must determine the amount of direct materials used in production for the year............. Inc........................... Predetermined = Estimated total manufacturing overhead cost overhead rate Estimated total amount of the allocation base $800........... 260.....000 Raw materials used in production ........000 © The McGraw-Hill Companies...... $ 40.............. Purchases of raw materials ..................... 530.... 720.......000 Applied manufacturing overhead costs: $450.... All rights reserved............. Raw materials inventory.............. 2010...................000 Deduct: Raw materials inventory.............. Solutions Manual.000 Actual manufacturing overhead costs: Indirect labor ..000 Raw materials available.. building .....................000 Total actual costs ....................000 Maintenance .. beginning ................................... 180....................... Chapter 3 115 ......

..... $1.....000 Deduct raw materials inventory........ $1....................600.. and Cost of Goods Sold based on the overhead applied during the year in the ending balance in each of these accounts.. $ 450. Inc......... Direct materials ....... 4.......000 Total raw materials available ................410.......... 2010......................260.....340............................................ ending . 116 Managerial Accounting......000 Add: Work in process...... 70....800 $24.600 Total manufacturing cost .......... 80.. 400....... 2....500 × 160%) .....000 Add purchases of raw materials ..............................000 Deduct: Finished goods inventory...000 Direct labor...500 Direct labor .... 13th Edition .. 1.......... 150........... 1.......... 510..000 3............ 13..... 90............000 Cost of goods sold ..........................000 Manufacturing overhead applied to work in process ........ beginning ....... Gitano Products Schedule of Cost of Goods Manufactured Direct materials: Raw materials inventory..................000 Goods available for sale .............. $ 8..............000 Add: Cost of goods manufactured ..........000 Cost of goods manufactured ...... $24.............700 Overhead applied ($8. $ 260.... 720... Finished Goods....................................................Problem 3-27 (continued) 2........ $ 20............. All rights reserved............. 1.....340......000 Raw materials used in production.......000 The underapplied overhead can either be closed out to Cost of Goods Sold or allocated between Work in Process..........................000 Deduct: Work in process......000 price to the customer © The McGraw-Hill Companies... beginning ..........800 × 125% = $31... ending ..........................200..........000 1..... 530. beginning ..000 Total manufacturing costs ... ending .......... Cost of goods sold: Finished goods inventory.

..... 7.............. All rights reserved................... $70..400 62....400 The amount of direct labor cost in Work in Process is: Total ending work in process ..400 Work in process inventory .............000 direct materials cost × 160% = $38........... 38.. 2010...... Inc..... $ 7....................... Solutions Manual.000 © The McGraw-Hill Companies........000 Direct labor ............... Chapter 3 117 ..........Problem 3-27 (continued) 5...600 Manufacturing overhead .............. The amount of overhead cost in Work in Process was: $24..... $70... 38....600 The completed schedule of costs in Work in Process was: Direct materials .............400 Direct labor cost ...... $24...000 Deduct: Direct materials .. $24....000 Manufacturing overhead ............

... Molding Department overhead applied: 110 machine-hours × $8...000 MHs Painting Department predetermined overhead rate: Predetermined = Estimated total manufacturing overhead cost overhead rate Estimated total amount of the allocation base $735.. 13th Edition ..............190 Total overhead cost ...908 = $78. 290 680 970 Manufacturing overhead applied ............... Dept....... $3..... 1....Problem 3-28 (45 minutes) 1.....60 per machine-hour $ 946 Painting Department overhead applied: $680 direct labor cost × 175%.... $2.......136 3. $ 470 $ 332 $ 802 Direct labor ................................202 $3...706 $2..... All rights reserved............136 Total cost ... Total Direct materials . Total cost of Job 205: Molding Painting Dept....... 118 Managerial Accounting.......... $1...16 per unit 50 units © The McGraw-Hill Companies.......190 2......000 = = 175% of direct $420. Inc.....000 direct labor cost labor cost 2.. Molding Department predetermined overhead rate: Predetermined = Estimated total manufacturing overhead cost overhead rate Estimated total amount of the allocation base $602.... 2010...908 Unit product cost for Job 205: Total cost.000 = = $8. 946 1....60 per machine-hour 70........

. Manufacturing overhead incurred ...000 $750.......Problem 3-28 (continued) 4... Solutions Manual. 559... 763...000 ($ 13. Dept..000 direct labor cost × 175% .000 $436. $570....000 Manufacturing overhead applied: 65.. Inc...... All rights reserved....000 Underapplied (or overapplied) overhead .. Molding Painting Dept. Chapter 3 119 ... 2010...000) © The McGraw-Hill Companies. $ 11.60 per MH .000 MHs × $8..

. The bulk of the labor cost on the Koopers job is in the Assembly De- partment. use of departmental overhead rates results in a relatively small amount of overhead cost being charged to the job..860 Total applied overhead .......... which incurs very little overhead cost. Fabricating Department: $2. 1. $4..000 Assembly Department: $6.000 direct labor cost labor cost b....... $200...900 Machining Department: $500 × 400%..000 $300......... 2010. 120 Managerial Accounting.....000 $100... All rights reserved.. $350..................200 × 30%.. Therefore............000 Predetermined overhead rate (a) ÷ (b) ........ Use of a plantwide overhead rate in effect redistributes overhead costs proportionately between the three departments (at 140% of direct labor cost) and results in a large amount of overhead cost being charged to the Koopers job. Department Department Department Estimated manufacturing overhead cost (a) ............Problem 3-29 (60 minutes) 1................ a...........760 3.... This may explain why the company © The McGraw-Hill Companies. 2...300 Fabricating Machining Assembly 2.. $8.. as shown in Part 1............000 = = 140% of direct $600........000 $400......000 Estimated direct labor cost (b) .. a. 13th Edition ..800 × 175% . as shown above....500 × 140% = $13..... Inc. The department has an overhead rate of only 30% of direct labor cost as compared to much higher rates in the other two departments..000 $ 90.... $9. Predetermined = Estimated total manufacturing overhead cost overhead rate Estimated total amount of the allocation base $840... 175% 400% 30% b...

........ and the company will tend to charge too little overhead cost to the jobs if a plantwide over- head rate is being used....... 9......................... 9................ 5...760 Total manufacturing cost ....600 Direct labor ........................... Actual overhead cost . $34...... 2010. $ 52......000 Applied overhead cost ($580. $ 4....... All rights reserved............... × 1................................ Teledex Com- pany would have been the low bidder on the Koopers job because the competitor underbid Teledex by only $2....................... 812.....5 Total bid price .........5 Total bid price ....000 × 140%).860 Bidding rate ........ Too much overhead cost was assigned to the job for the kind of work being done on the job in the plant... 8.........300 Total manufacturing cost ......290 Note that if departmental overhead rates had been used....000 © The McGraw-Hill Companies... Solutions Manual..... 4........ Chapter 3 121 .................. $864..... $22......... $27....000.................... × 1................. On jobs that require a large amount of labor in the Fabricating or Ma- chining Departments the opposite will be true..500 Manufacturing overhead applied (above) ....... the bid would have been: Direct materials ....................000 Underapplied overhead cost...... $41......400 Bidding rate ....Problem 3-29 (continued) bid too high and lost the job................ a........ 13.. Inc.........................................500 Manufacturing overhead applied (above) ......................................600 Direct labor .......... $ 4.100 If departmental overhead rates had been used....................... The company’s bid was: Direct materials ........................ The reason is that the plantwide overhead rate (140%) is much lower than the rates would be if these departments were considered separately......................

Inc.000 × 400% .. 122 Managerial Accounting.100 Underapplied (over- applied) overhead cost . $360..600 878........000 Applied overhead cost: ...Problem 3-29 (continued) b... 78.400 ($ 14. ($ 7.....000 $864.. 2010.......... 13th Edition .000 × 175% ....500 $108. 432.. $210..500) ($ 12.......000) $ 5. Department Fabricating Machining Assembly Total Plant Actual overhead cost .......000 $262.....000 $420.........100) © The McGraw-Hill Companies....000 $84. All rights reserved. 367.......000 × 30% .

..000 Raw materials inventory.........000 6.................... 12/31 ....000 Debits (purchases of materials) ...... The cost of raw materials put into production was: Raw materials inventory....Problem 3-30 (45 minutes) 1................. 510....... $ 15. All rights reserved.000 Finished goods inventory.... The Cost of Goods Sold for the year was: Finished goods inventory........... the difference of $20........ $450......000 Materials available for use ............................ 135........................ $110.000—the credits to the Work in Process account.000 direct labor cost labor cost © The McGraw-Hill Companies............000 Goods available for sale .000 Less direct labor cost (from Work in Process) ........ Total factory wages accrued during the year (credits to the Factory Wages Payable account) ................ 25........000 Indirect labor cost ............ Of the $110. 3. Chapter 3 123 ... The predetermined overhead rate was: Predetermined = Estimated total manufacturing overhead cost overhead rate Estimated total amount of the allocation base $240........ 1/1....000 Materials requisitioned for production .. 12/31 .... $180......000 4............ 60... Solutions Manual........ 470.............. 150.............000 in materials requisitioned for production.......... Therefore.000 = = 160% of direct $150. 2010..........000 was debited to Work in Process as direct materials..000 Cost of goods sold .. The cost of goods manufactured was $470. Inc.... 5........................ $90............. 1/1 ........ $ 30.. $ 40..000 was debited to Manufacturing Overhead as indirect materi- als......000 Add: Cost of goods manufactured (from Work in Process) ..................... 120............000 2...

................ Inc..............000 Overapplied overhead .....Problem 3-30 (continued) 7... 2010................... computed as fol- lows: Actual manufacturing overhead cost for the year (debits) .200 © The McGraw-Hill Companies. 13th Edition ........000) 8.... $230...000 Less: Direct labor cost (given) ... 12/31 ...000 × 160%) ..... and manufacturing overhead makes up $12....000..... (12....... Direct materials make up $9........... $(10........................... $30..800.800) Direct materials cost (remainder) ............. Work in Process. 124 Managerial Accounting.... The computations are: Balance........... (8..... Manufacturing overhead was overapplied by $10.......000) Manufacturing overhead cost ($8...... The ending balance in Work in Process is $30........................ 240...000. All rights reserved......000 Applied manufacturing overhead cost (from Work in Pro- cess—this would have been the credits to the Manufacturing Overhead account) .... $ 9.200 of this balance..

............. 200... Work in Process ........ Work in Process ................000 d.......... Manufacturing Overhead ............ 95..........000 Accumulated Depreciation ............ a... 90.............. Chapter 3 125 ................. 230.................000 Rent Expense .. 430.......000 Accounts Payable .....000 © The McGraw-Hill Companies............ 120.............. All rights reserved.......000 g.....000 Accounts Payable ............000 Accounts Payable .......Problem 3-31 (120 minutes) 1..000 h............000 Salaries and Wages Payable .000 Accounts Payable ....... 54............................000 Accounts Payable ..... 7.......................000 b.......... Solutions Manual................ Inc. Manufacturing Overhead ...... 76......... 54.. 110......... 63. Raw Materials .......000 Raw Materials.000 c......000 Depreciation Expense..... 185...........000 Utilities Expense .............. Work in Process . 18..............000 i.......... 102.....000 Predetermined = Estimated total manufacturing overhead cost overhead rate Estimated total amount of the allocation base Nkr360.... 200.............. 70... 19.....000 f....... 390.... 136............... 185............................ 136..........000 Manufacturing Overhead ....................... 2010. Manufacturing Overhead .............. 390... Manufacturing Overhead ...............000 Salaries Expense........000 = = Nkr400 per DLH 900 DLHs 975 actual DLH × Nkr400 per DLH = Nkr390............................. Advertising Expense ..000 Manufacturing Overhead ...........000 e...............

. 1..... Accounts Receivable ..200..... Inc..000 k... 2010... 800.......000 © The McGraw-Hill Companies..000 Work in Process .........000 Finished Goods ....................... 13th Edition ...................000 Cost of Goods Sold ............ 770.................Problem 3-31 (continued) j......... 770................000 Sales ............. 126 Managerial Accounting..... Finished Goods ...200.... 1......................... All rights reserved..... 800..................

000 Accounts Payable Salaries Expense (a) 200.200.000 (c) 63.000 (i) 390. 21. 30..000 Accumulated Depreciation Utilities Expense (g) 95.000 185.000 (h) 102.000 (a) 200. Accounts Receivable Sales (k) 1.000 (e) 54.000 (d) 90.000 Salaries & Wages Payable Rent Expense (d) 430.000 (j) 770. Solutions Manual. All rights reserved.000 (c) 7. 60. 30.000 (i) 390.000 (j) 770.000 Bal. 2010.200.000 (g) 19.000 Raw Materials Cost of Goods Sold Bal.000 (d) 110.000 (f) 136.000 Bal.000 (g) 76. 5. 45.000 Bal.000 (b) Bal.000 (h) 120.000 (k) 800. Chapter 3 127 .000 (k) 800. Inc.000 (c) 70.000 © The McGraw-Hill Companies.000 (b) 185. 56.Problem 3-31 (continued) 2.000 (e) 54.000 Depreciation Expense (f) 136.000 Finished Goods Advertising Expense Bal.000 (k) 1.000 (h) 18.000 Work in Process Manufacturing Overhead Bal.000 (d) 230.

. Froya Fabrikker A/S Schedule of Cost of Goods Manufactured Direct materials: Raw materials inventory............. 200......................000 Deduct: Work in process.000 Unadjusted cost of goods sold ......000 Raw materials inventory......... Nkr 60......Problem 3-31 (continued) 3....000 Direct labor ....000 Deduct finished goods inventory........... 800....... 13th Edition ....000 4.... ending .......... 830........000 Materials available for use .............. All rights reserved.. Nkr770..... 5. 2010......................................... 30........ 5.... Nkr185........ Inc...000 Purchases of raw materials ................ Manufacturing Overhead . ending .. Nkr795........000 Deduct: Overapplied overhead...... 45.000 Materials used in production ....000 Manufacturing overhead applied to work in process . 230...000 Cost of goods manufactured .................. 21... 56... beginning ..000 Adjusted cost of goods sold .... 230. beginning ... 128 Managerial Accounting.... 390................. 5.....000 Cost of Goods Sold ........ beginning ...........................000 826.. 770..000 © The McGraw-Hill Companies.......000 Add: Work in process............. ending .............000 Goods available for sale ...........000 Add: Cost of goods manufactured .......000 Schedule of cost of goods sold: Finished goods inventory...... Nkr 30. 805..................000 Total manufacturing costs ..............................

.........200...200 Manufacturing overhead applied (39 hours × Nkr400 per hour) ............... 15.............................................800) ............... 405........................120 per unit © The McGraw-Hill Companies.............Problem 3-31 (continued) 5........... Direct materials ................... Nkr136.......................000 Cost of goods sold .....000 Salaries expense . Nkr52............................... 2010.........480 Nkr52..................................... Nkr1..000 290. Nkr 8.................................................... 18.................................. 795..800 Add markup (60% × Nkr32.000 Net operating income ... 19....... 9...............................000 Selling and administrative expenses: Advertising expense ..480 ÷ 4 units = Nkr13.. 7.. Froya Fabrikker A/S Income Statement Sales ...600 Total manufacturing cost ........680 Total billed price of Job 412 .................. All rights reserved........... Nkr 115............000 Gross margin .......... Solutions Manual..... Chapter 3 129 ...000 6...............................000 Depreciation expense ...................000 Utilities expense .............. Inc..000 Rent expense ...................... 110...............000 Direct labor .... 19.............. 32.........................

2. Inc.” In our opinion. In December. This step may bring her into direct con- flict with the general manager of the division. some of the facts are indisputable. Shaving 5% off the estimated direct labor-hours in the predetermined overhead rate will result in an artificially high overhead rate. analyses or recommendations. © The McGraw-Hill Companies. Therefore. of course. This means. The cumulative effect of overapplying the over- head throughout the year is all recognized in December when the bal- ance in the Manufacturing Overhead account is closed out to Cost of Goods Sold. The artifi- cially high predetermined overhead rate is likely to result in overapplied overhead for the year. Where should Terri Ronsin’s loyalties lie? Is she working for the general manager of the division or for the corporate controller? Is there anything wrong with the “Christ- mas bonus”? How far should Terri go in bucking her boss on a new job? While individuals can certainly disagree about what Terri should do. This question may generate lively debate. this effect would be dissipated over the course of the year. First.. her responsibilities under the IMA’s Statement of Ethical Professional Practice seem to be clear. the practice results in distortions in the pattern of net operating income over the year. Terri should dis- cuss this situation with her immediate supervisor in the controller’s of- fice at corporate headquarters.Case 3-33 (45 minutes) 1. While Terri is in an extremely difficult position. inventories are still overstated at year-end. All rights reserved. This has the effect of inflating the Cost of Goods Sold in all months prior to December and overstating the costs of inventories. If the balance were closed out every month or every quar- ter. 2010. In addition. the huge adjustment for overapplied overhead provides a big boost to net operating income. understating direct labor-hours artificially inflates the overhead rate. because all of the adjustment is taken to Cost of Goods Sold. that the net operating income for the entire year is also over- stated. so it would be a very diffi- cult decision for her to make. 13th Edition . 130 Managerial Accounting. The Credibility Standard states that management accountants have a responsibility to “disclose all relevant information that could reasonably be expected to influence an intended user’s understanding of the re- ports.

Solutions Manual. we would be very uncomfortable supporting a manager who will resort to deliberate dis- tortions to achieve “results.Case 3-33 (continued) In the actual situation that this case is based on. 2010. All rights reserved. the corporate control- ler’s staff were aware of the general manager’s accounting tricks. Personally. what else might he be doing that is questionable or even perhaps ille- gal? © The McGraw-Hill Companies. Chapter 3 131 .” If the manager will pull tricks in this area. Inc.. but top management of the company supported the general manager be- cause “he comes through with the results” and could be relied on to hit the annual profit targets for his division.

000 Estimated total manufacturing overhead . This double-whammy effect in- creases the predetermined overhead rate.. This is because the company uses a plantwide overhead rate. The revised predetermined overhead rate is determined as follows: Original estimated total manufacturing overhead.800.. There may be pressure to increase the prices of these products even though there has in fact been no increase in their real costs.. 6..800. this would not happen... The predetermined overhead rate is now considerably higher than it was.. If there were a different overhead rate for each department......... 57....402. $3. Inc.. 13th Edition .......Case 3-34 (75 minutes) 1... 50.000 DLHs = $66...000 Predetetermined = Estimated total manufacturing overhead overhead rate Estimated total amount of the allocation base $3. Such products will now appear to be less profitable and the managers of these products will appear to be doing a poorer job. © The McGraw-Hill Companies.000 Less: Estimated reduction in direct labor-hours .. All rights reserved..000 = 57.000 Plus: Cost of new technician/programmer ...... 2. Acquisition of the automated milling machine will increase the apparent costs of all jobs—not just those that use the new facility...000 Estimated total direct labor-hours....... 2010........... 63.. 3.000 Plus: Lease cost of the new machine . $3..... 132 Managerial Accounting...000 Original estimated total direct labor-hours ............67 per DLH The revised predetermined overhead rate is higher than the original rate because the automated milling machine will increase the overhead for the year (the numerator in the rate) and will decrease the direct labor- hours (the denominator in the rate).... This will penalize products that continue to use the same amount of direct labor-hours..... 348..

.000 398... The entire 6......000 Less: labor cost savings (2...000 Net increase in annual costs .000 hours × $41 per hour) .. the overhead increased because of the additional costs of the new equipment.Case 3-34 (continued) 4...... Cost consequences of leasing the automated equipment: Increase in manufacturing overhead cost: Lease cost of the new machine .000-hour reduction in direct labor-hours had hap- pened..... 82.. © The McGraw-Hill Companies.000-hour reduction may ultimately be realized as workers retire or quit.. the calculations of the cost savings were in error..... First. There are two morals to this tale..... While it may have been a good idea to acquire the new equipment be- cause of its greater capabilities...000 a year if the la- bor reduction is only 2.000 and the machine would still be an unattractive proposal...000 Even if the entire 6..... 2010.. $348. A differential cost analysis would reveal that the automated equipment would increase total cost by about $316.. The original calculations implicitly assumed that overhead would decrease because of the reduction in direct labor-hours.. All rights reserved... Inc..... The net increase in annual costs would have been $152.... Second. this is by no means automatic. a reduction in direct labor requirements does not necessarily lead to a re- duction in direct labor hours paid.. $316... It is often very difficult to actually re- duce the direct labor force and may be virtually impossible except through natural attrition in some countries. In reali- ty........ that would have added only $164..........000 hours × $41 per hour) in cost savings... Solutions Manual.000 Cost of new technician/programmer .... 50.......000 hours.....000 (4.. However....... predetermined overhead rates should not be misinterpreted as variable costs..... Chapter 3 133 ... They are not..

Research and Application 3-35
1. Toll Brothers succeeds first and foremost because of its product leader-
ship customer value proposition. The annual report mentions in numer-
ous places that Toll Brothers focuses on Luxury Homes and Communi-
ties and high quality construction. Page 8 of the 10-K says ‘We believe
our marketing strategy, which emphasizes our more expensive “Estate”
and “Executive” lines of homes, has enhanced our reputation as a build-
er-developer of high-quality upscale housing.” Page 2 of the 10-K says
“We are the only publicly traded national home builder to have won all
three of the industry’s highest honors: America’s Best Builder (1996),
the National Housing Quality Award (1995), and Builder of the Year
(1988).” Toll Brothers seeks to realize manufacturing efficiencies for the
benefit of its shareholders, but its customers choose Toll Brothers for its
leadership position in the luxury home market.

2. Toll Brothers faces numerous business risks as described in pages 10-11
of the 10-K. Students may mention other risks beyond those specifically
mentioned in the 10-K. Here are four risks faced by Toll Brothers with
suggested control activities:
 Risk: Downturns in the real estate market could adversely impact Toll
Brothers’ sales. Control activities: Diversify geographic markets
served so that a downturn in one region of the country will not crip-
ple the company.
 Risk: Large sums of money may be spent buying land that, geologi-
cally speaking, cannot support home construction. For example, soil
conditions may be too unstable to support the weight of a home.
Control activities: Pay engineers to certify that targeted properties
can support home construction.
 Risk: Raw material costs may increase thereby depressing profit
margins. Control activities: Vertically integrate by operating manufac-
turing facilities (see page 12 of the 10-K for a discussion of Toll
Brothers’ manufacturing facilities). Buying raw materials at wholesale
prices cuts out a middleman in the value chain. In addition, Toll
Brothers can purchase raw materials in large volumes to realize pur-
chase price discounts.

© The McGraw-Hill Companies, Inc., 2010. All rights reserved.
134 Managerial Accounting, 13th Edition

Research and Application 3-35 (continued)

 Risk: Subcontractors may perform substandard work resulting in war-
ranty claims and dissatisfied customers. Control activities: Employ a
project manager within each community who serves in a quality as-
surance capacity.

3. Toll Brothers would use job-order costing because its homes are unique
rather than homogeneous. Each home being built would be a considered
a job. Toll Brothers’ standard floor plans differ from one another particu-
larly across its main product lines such as Move-Up, Empty Nester, Ac-
tive Adult, Urban In-Fill, High-Density Suburban, and Second Homes
(see pages 5 and 9 of the annual report). In 2004, Toll Brothers intro-
duced 87 new home models (see page 4 of the 10-K).
Beyond the fact that Toll Brothers offers a wide variety of floor plans,
homes are further distinguished from one another by customer up-
grades that add an average of $103,000 to the price of a home (see
page 1 of the annual report). Upgrades include items such as additional
garages, guest suites, extra fireplaces, and finished lofts (see page 4 of
10-K).

4. Examples of direct materials used in Toll Brothers’ manufacturing facili-
ties include lumber and plywood for wall panels, roofs, and floor trusses,
as well as other items such as windows and doors (see page 12 of the
10-K). Examples of direct materials used at the home sites include shin-
gles, exterior finishes such as stone, stucco, siding, or brick, kitchen
cabinets, cement for the foundation, bathroom fixtures, etc.
The standard bill of materials (e.g., prior to considering a specific cus-
tomer’s upgrade requests) for each home would differ. For example, dif-
ferences in the square footage of homes would drive numerous differ-
ences in their bills of materials. Bigger homes would require more lum-
ber, sheet rock, electrical wiring, etc. Bills of materials are also likely to
differ across geographic regions of the country. For example, homes in
Florida typically do not have basements whereas homes in New England
are likely to have basements. Front porches may be more prevalent in
South Carolina than in Ohio. Different grades of windows and insulation
may be used in homes in the North than in the South.

© The McGraw-Hill Companies, Inc., 2010. All rights reserved.
Solutions Manual, Chapter 3 135

Research and Application 3-35 (continued)
5. Toll Brothers incurs two types of direct labor costs. The company em-
ploys its own direct laborers in its manufacturing facilities in Morrisville,
Pa. and Emporia, Va. The costs of these workers can be traced to spe-
cific items such as roof trusses that can in turn be traced to particular
houses. Work at the home sites is performed by subcontractors. The la-
bor cost embedded in a subcontractor’s fixed price contract is directly
traceable to the home being built. However, the direct laborers are not
employed by Toll Brothers. Toll Brothers would not use employee time
tickets at its home sites because the subcontractors are not employees
of Toll Brothers, Inc. and they are paid a fixed price that is unaffected
by the amount of hours worked.

6. There are numerous examples of overhead costs mentioned in the an-
nual report and 10-K. Some examples are: land acquisition costs, land
development costs (e.g., grading and clearing), road construction costs,
underground utility installation costs, swimming pools, golf courses,
tennis courts, marinas, community entrances, model home costs (includ-
ing construction, furnishing and staffing), and project manager salaries.
These costs are incurred to create housing communities but they cannot
be easily and conveniently traced to specific homes.

7. It appears that Toll Brothers does not use cost-plus pricing to establish
selling prices for its base models. Page 8 of the 10-K says “In determin-
ing the prices for our homes, we utilize, in addition to management’s ex-
tensive experience, an internally developed value analysis program that
compares our homes with homes offered by other builders in each local
marketing area.” In other words, the value to the customer and compet-
itive conditions determine prices—not the cost of building a particular
home.
Page 5 of the annual report says “When there is strong demand, we
benefit from exceptional pricing power because we have greater ability
to raise prices than those builders who target buyers on tight budgets:
it’s easier to hit doubles, triples and home runs selling to luxury buyers.”
This quote implies that pricing is driven by the customers’ willingness
and ability to pay and not by the cost of building a particular house.

© The McGraw-Hill Companies, Inc., 2010. All rights reserved.
136 Managerial Accounting, 13th Edition

First.” In other words. each home is assigned an equal share of overhead costs. Page 16 also says. © The McGraw-Hill Companies. page 16 of the 10-K says “Land. Overhead costs (as well as direct costs) flow through the construction in progress account and hit cost of home sales when a customer has a closing and takes possession of the home. Then. the overhead costs common to all com- munities contained with the master planned community are assigned to communities based on relative sales value. land deposits and costs of future devel- opment ($237 million).Research and Application 3-35 (continued) 8. Inventoriable costs include land and land development costs ($1. and other ($12 million).. it appears that Toll Broth- ers assigns overhead to cost objects in two ways. the allocation of overhead appears to take place in two stages. com- mon area development and related costs of master planned communi- ties (including the cost of golf courses. higher priced communities within a master planned community are assigned a greater portion of master planned community overhead costs. 2010.178 billion).878 billion. Based on information contained in the 10-K. All rights reserved. Chapter 3 137 . net of their estimated residual value) are allocated to individual communities within a master planned community on a relative sales value basis. sample homes and sales offices ($208 million). First.242 billion). In master planned communities. The company needs to assign overhead costs to homes so that it can derive a cost of sales number for the income statement and an invento- ry number for the balance sheet. construction in progress ($2.” In other words. Inc. Construction in progress is similar to work in process for a manufacturing company. “The estimated land. all overhead costs re- lated to a particular community within the master planned community are assigned equally to each home site. Page 29 of the annual report shows the components of the company’s ending inventory balance of $3. land development and related costs (both incurred and estimated to be incurred in the future) are amortized to the cost of homes closed based upon the total number of homes to be constructed in each community. Solutions Manual.

...Appendix 3A The Predetermined Overhead Rate and Capacity Exercise 3A-1 (30 minutes) 1. × 2.500 Professional staff hours available (b) .. $67. Brinksi’s account.................. Brinksi’s account ... × 2............... $310.............. $ 0 $ 0 3.......00 Actual professional staff hours charged to cli- ents’ accounts (by assumption) .......... The overhead applied to Mrs. 6...75 $172... the computations would be: Estimated overhead cost (a) ................................. $168.......5 × 2...................500 $310. 2010.....50 $69..500 $310............500 Overhead applied . All rights reserved...... 4.........000 Predetermined overhead rate (a) ÷ (b) .... Brinksi’s account would be computed as follows: 2008 2009 Estimated overhead cost (a) ................. $67..600 × 4. Brinksi’s account ..500 $310.................... $51..00 Professional staff hours charged to Ms........ 138 Managerial Accounting.... $129.................. $310. If the actual overhead cost and the actual professional hours charged turn out to be exactly as estimated there would be no underapplied or overapplied overhead. $310.. 2008 2009 Predetermined overhead rate (see above) ..500 310..... 13th Edition ...........500 Underapplied or overapplied overhead ... × 4.5 Overhead applied to Ms.000 6............ Brinksi’s account .......... 310................38 $129..5 × 2........75 $51..500 Estimated professional staff hours (b) ...600 4.........50 $69......38 © The McGraw-Hill Companies............. Inc...500 Predetermined overhead rate (a) ÷ (b)..50 2....500 Actual overhead cost incurred (by assumption) .........5 Overhead applied to Ms............ If the predetermined overhead rate is based on the professional staff hours available...75 Professional staff hours charged to Ms.

.....75 $51. × 4... $ 72........ $51..050 $232.. Solutions Manual...........500 Underapplied overhead ..625 The underapplied overhead is best interpreted in this situation as the cost of idle capacity.450 $ 77.... 310..500 Overhead applied (a) × (b) ......600 × 4....... Inc. $238.Exercise 3A-1 (continued) 4......... All rights reserved..... If the actual overhead cost and the actual professional staff hours charged to clients’ accounts turn out to be exactly as estimated......... 2008 2009 Predetermined overhead rate (see above) (a) ...................75 Actual professional staff hours charged to clients’ accounts (by assumption) (b) . Proponents of this method of computing predeter- mined overhead rates suggest that the underapplied overhead be treat- ed as a period expense that would be disclosed separately on the in- come statement as Cost of Unused Capacity..... © The McGraw-Hill Companies... 2010. over- head would be underapplied as shown below. Appendix 3A 139 ....500 310.875 Actual overhead cost incurred (by assumption) ..

............ $6......... $100 $100 Verde Baja job’s studio hours ..............000 160.......000 800 Predetermined overhead rate (a) ÷ (b)......................... $4.. 2010..000 Overhead is underapplied for both years as computed below: 2008 2009 Predetermined overhead rate (see above) (a) ........ $ 40................ Inc... All rights reserved..........000 $ 50...... $ 85............000 $160.....000 160..... If the predetermined overhead rate is based on the hours of studio ser- vice at capacity.....000 Hours of studio service at capacity (b) ...............000 Estimated hours of studio service (b).............. 140 Managerial Accounting. 1.000 © The McGraw-Hill Companies...................000 $160...... 750 500 Overhead applied (a) × (b) .. $120..........000 Underapplied overhead ...... × 40 × 40 Overhead applied to the Verde Baja job ...000 Overhead is underapplied for both years under this method as well: 2008 2009 Predetermined overhead rate (see above) (a) ..............400 $8......... $160 $200 Verde Baja job’s studio hours ..........Problem 3A-2 (60 minutes) 1. 750 500 Overhead applied (a) × (b) . $160.................000 $100.600 1..........000 $110..000 Actual studio cost incurred ..000 Underapplied overhead ........000 $ 60..... The overhead applied to the Verde Baja job is computed as follows: 2008 2009 Estimated studio overhead cost (a) .......... $160 $200 Actual hours of studio service provided (b) ..... 160....000 $4. × 40 × 40 Overhead applied to the Verde Baja job .... the computations would be: 2008 2009 Estimated studio overhead cost at capacity (a) $160...600 Predetermined overhead rate (a) ÷ (b)............ 160.. $ 75.........000 Actual studio cost incurred ........... 13th Edition .. 1.....000 2..... $100 $100 Actual hours of studio service provided (b) .....

When the predetermined overhead rate is based on capacity. the un- derapplied overhead is interpreted as the cost of idle capacity. This would al- most surely accelerate the company’s decline. Indeed. The company must do some- thing to counter this threat or it will ultimately face failure. 4.000 and lower than the costs reported under the conven- tional method. Platinum Track’s managers may be misled into thinking that the problem is rising costs and they may be tempted to raise prices to recover their apparently increasing costs.000 is reported. management is much more likely to draw the appropriate conclusion that the real problem is the loss of business (and therefore more idle capacity) rather than an increase in costs. if it is properly labeled as the cost of idle capacity. at least this method is less likely to send managers misleading signals. excellent service. Solutions Manual. Under the alternative approach. the overhead cost of the Verde Baja job is stable at $4. While basing the predetermined rate on capacity rather than on esti- mated activity will not solve the company’s basic problems. All rights reserved.. It is true that the underapplied overhead under the alternative approach is much larger than under the conventional approach and is growing. Under the conventional method. This results in costs that seem to increase as the volume declines. That happens because the company is losing business to competitors and therefore the company’s fixed overhead costs are being spread over a smaller base. proponents of this method suggest that the underapplied overhead should be treated as a period expense that would be disclosed separate- ly on the income statement as Cost of Unused Capacity. managers may be mis- led into thinking that they are actually losing money on the Verde Baja job and they might refuse such jobs in the future—another sure road to disaster. Platinum Track’s fundamental problem is the competition that is drawing customers away. The competition is able to offer the latest equipment. Appendix 3A 141 .Problem 3A-2 (continued) 3. This is much less likely to happen if the lower cost of $4. Under the conventional approach in which the predetermined overhead rate is based on the estimated studio hours. However. 2010. Under this method. the apparent cost of the Verde Baja job has increased between 2008 and 2009. © The McGraw-Hill Companies. Inc. and attractive prices.

.. 800...000 Gross margin ....000 units × $60 per unit)... 13th Edition ....700..... $9..............000 units – 160........000... 142 Managerial Accounting. $ 300............000 Net operating income ... 2......... Inc...........000 5....000 units × $15 per unit) ................000 units × $25 per unit) .000..000 6...000 units) × $20 per unit] ...... 3.. $2. All rights reserved........... Income Statement: Traditional Approach Sales (150......000..... 2.....000 units × $15 per unit) .......... 3.000..................250.000 units × $60 per unit) ......... Traditional approach: Actual total manufacturing overhead cost incurred (assumed to equal the original estimate) ..... Income Statement: New Approach Sales (150........ Inc... $2. 3..000 New approach: Vault Hard Drives...000....700.000 Cost of goods sold: Variable manufacturing (150.............. Inc.........000 Cost of unused capacity [(200. $4......000 Overhead underapplied or overapplied .. $ 250......250...000 Manufacturing overhead applied (150...000 Selling and administrative expenses ......000.... $9.........250.. $ 0 Vault Hard Drives.................................Case 3A-3 (120 minutes) 1...........000 Manufacturing overhead applied (160...750........750........... 4..........000 Cost of goods sold: Variable manufacturing (150..................000.........000 Net operating income ......000 © The McGraw-Hill Companies..............000 Manufacturing overhead applied (150. 2010..................000 Selling and administrative expenses ...... 3...000 Gross margin ........000 units × $25 per unit) ...........000 units × $20 per unit) ......................

. $2.......000 units × $15 per unit) ........ 3.. $4...000 units + 8.014 units rather than 168.....000 Less: Manufacturing overhead overapplied ...800. Income Statement: Traditional Approach Sales (150...000 Vault Hard Drives.................. 4......000) (a) .... In fact..000 Cost of goods sold: Variable manufacturing (150..... Appendix 3A 143 ..... 3............ 2010.000 – $300...000 Manufacturing overhead applied (150........ © The McGraw-Hill Companies..000 Net operating income .. 200........750.......000 units × $60 per unit)......000.......... Solutions Manual.....000 5................... the reported net operating income can be increased by increasing the production level which then results in overapplied overhead which is deducted from Cost of Goods Sold... Traditional approach: Under the traditional approach...........000 units × $25 per unit) ............000...... Inc.. $ 500..000 units) × $25 per unit] ...... $9... $25 per unit Additional output required to attain target net operat- ing income (a) ÷ (b) ............. 8....... All rights reserved..000 Manufacturing overhead applied [(160..Case 3A-3 (continued) 2..000 units.... $200.................. $ 200.200... 2.........700... Inc.......000 Gross margin ....000 Overhead applied per unit of output (b) .. more units would have to be produced to attain the target net profit of $500...............000................000 Selling and administrative expenses ..250. Additional net operating income required to attain tar- get net operating income ($500.200...000 units Actual total manufacturing overhead cost incurred .000 Note: If the overapplied manufacturing overhead were prorated be- tween ending inventories and Cost of Goods Sold........ it can be shown that the total production level would have to be 169.........000 Overhead overapplied ...................

...... All rights reserved............ 144 Managerial Accounting.......000 units × $60 per unit) .. 12.250...000 Manufacturing overhead applied (150............500 units) × $20 per unit] .... the reported net operating income can be in- creased by increasing the production level......000 units × $20 per unit) ...........250......000 units × $15 per unit) .... 3.......000 Selling and administrative expenses .....000.............. $9......... $250............... $ 500................000) (a) ...000 units – 172....... 13th Edition .........000 units Actual number of units to be produced .000....... 2..750...... 172.......000 Net operating income ...........000 5............. 160.........000 © The McGraw-Hill Companies...............500 units Vault Hard Drives... Income Statement: New Approach Sales (150.. $20 per unit Additional output required to attain target net operating income (a) ÷ (b) .. 3.. This results in less of a deduc- tion on the income statement for the Cost of Unused Capacity...........500 units Estimated number of units produced .........000 Cost of goods sold: Variable manufacturing (150....000 Gross margin ....Case 3A-3 (continued) New approach: Under the new approach.................................. Inc...............000 Overhead applied per unit of output (b) .........000 Cost of unused capacity [(200........000 – $250..... Inc.... 2010... $2............ 550........700.. Additional net operating income required to attain target net operating income ($500......................

Building up inventories all at once is very likely to be much more expensive than increasing the rate of production uniformly throughout the year. it can be ar- gued that the hat trick is not unethical. 4. the “hat trick” is a bit harder to perform under the new method. because the predetermined overhead rate is lower under the new method. Net operating income is more volatile under the new method than under the old method. we as- sumed that there would not be an increase in overhead costs due to the additional production. swings in sales in either di- rection will have a more dramatic impact on reported profits under the new method. In this case. Solutions Manual. As a consequence. All rights reserved. there does not seem to be any reason to use the hat trick. It is certainly unethical if the purpose is to fool users of financial reports such as owners and creditors or if the purpose is to meet targets so that bonuses will be paid to top managers. The drop in sales has had a more dramatic effect on net operating income under the new method as not- ed above in part (3). One can argue that whether the “hat trick” is unethical depends on the level of sophistication of the owners of the company and others who read the financial statements. However. but that is likely not to be true.000 units. Under the new method. Under the old method. If they understand the effects of excess production on net operating income and are not misled. In our opinion. The reason for this is that the reported profit per unit sold is higher under the new method by $5.. this is a consequence of the difference in predetermined overhead rates. As the computations in part (2) above show. the hat trick is unethical unless there is a good reason for increasing production other than to artificially boost the current peri- od’s net operating income. Appendix 3A 145 .500 units. Inc. 5. if that were the case. the production would have to be increased by 12.Case 3A-3 (continued) 3. 2010. In addition. the difference in the prede- termined overhead rates. producing excess inventories has less of an effect per unit on net operating income than under the tradi- tional method and hence more excess production is required. Again. © The McGraw-Hill Companies. the target net operating income can be attained by producing an additional 8. Why would the owners want to tie up working capital in inventories just to artificial- ly attain a target net operating income for the period? And increasing the rate of production toward the end of the year is likely to increase overhead costs due to overtime and other costs.