Homework Answers Hcost accounting handout

8/13/2019 Homework Answers Hcost accounting handout

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CHAPTER 1

THE ACCOUNTANT’S ROLE IN THE ORGANIZATION

1-1 Management accounting measures, analyzes and reports financial and nonfinancial informationthat helps managers make decisions to fulfill the goals of an organization. It focuses on internalreporting and is not restricted by generally accepted accounting principles (GAAP). Financial accounting focuses on reporting to external parties such as inestors, goernment

agencies, and banks. It measures and records business transactions and proides financialstatements that are based on generally accepted accounting principles (GAAP).!ther differences include (") management accounting emphasizes the future (not the past), and(#) management accounting influences the behaior of managers and other employees (ratherthan primarily reporting economic eents).

1-2 $inancial accounting is constrained by generally accepted accounting principles. %anagementaccounting is not restricted to these principles. &he result is that

• management accounting allo's managers to charge interest on o'ners capital to help udge a

diisions performance, een though such a charge is not allo'ed under GAAP,

• management accounting can include assets or liabilities (such as *brand names+ deeloped

internally) not recognized under GAAP, and

• management accounting can use asset or liability measurement rules (such as present alues or

resale prices) not permitted under GAAP.

1-4 &he business functions in the alue chain are

• Research and devel!"en# generating and experimenting 'ith ideas related to ne'

products, serices, or processes.

• $es%&n ' !rd(c#s) serv%ces) and !rcesses the detailed planning and engineering of

products, serices, or processes.

• Prd(c#%n ac-uiring, coordinating, and assembling resources to produce a product or

delier a serice.

• *ar+e#%n& promoting and selling products or serices to customers or prospectie

customers.

• $%s#r%,(#%n deliering products or serices to customers.

• C(s#"er serv%ce proiding aftersale support to customers.

1- Supply chain describes the flo' of goods, serices, and information from the initial sources ofmaterials and serices to the deliery of products to consumers, regardless of 'hether thoseactiities occur in the same organization or in other organizations./ost management is most effectie 'hen it integrates and coordinates actiities across allcompanies in the supply chain as 'ell as across each business function in an indiidualcompanys alue chain. Attempts are made to restructure all cost areas to be more costeffectie.

1-. &he fiestep decisionmaking process is (") identify the problem and uncertainties (#) obtaininformation (0) make predictions about the future (1) make decisions by choosing amongalternaties and (2) implement the decision, ealuate performance and learn.

1-11 Agree. A successful management accountant re-uires general business skills (such asunderstanding the strategy of an organization) and people skills (such as motiating other teammembers) as 'ell as technical skills (such as computer kno'ledge, calculating costs of products,and supporting planning and control decisions).



1-12 &he ne' controller could reply in one or more of the follo'ing 'ays3(a) 4emonstrate to the plant manager ho' he or she could make better decisions if the plant

controller 'as ie'ed as a resource rather than a dead'eight. In a related 'ay, the plantcontroller could sho' ho' the plant managers time and resources could be saed by ie'ing thene' plant controller as a team member.

(b) 4emonstrate to the plant manager a good kno'ledge of the technical aspects of the plant. &hisapproach may inole doing background reading. It certainly 'ill inole spending much time onthe plant floor speaking to plant personnel.

(c) 5ho' the plant manager examples of the ne' plant controllers past successes in 'orking 'ithline managers in other plants. 6xamples could include

• assistance in preparing the budget,

• assistance in analyzing problem situations and ealuating financial and nonfinancial

aspects of different alternaties, and

• assistance in submitting capital budget re-uests.

(d) 5eek assistance from the corporate controller to highlight to the plant manager the importance ofmany tasks undertaken by the ne' plant controller. &his approach is a last resort but may benecessary in some cases.

1-1/ 0al(e cha%n and class%'%ca#%n ' cs#s) c"!(#er c"!an

Cs# I#e" 0al(e Cha%n 3(s%ness (nc#%n

a. b.c.d.e.f.

g.

h.

Production4istribution4esign of products, serices or processes7esearch and 4eelopment/ustomer 5erice or %arketing4esign of products, serices or processes(or 7esearch and 4eelopment)%arketing

Production

1-25 Plann%n& and cn#rl dec%s%ns

Ac#%n $ec%s%n

a. b.c.d.e.

Planning/ontrol/ontrolPlanningPlanning

1-26 Pr'ess%nal e#h%cs and end-'-ear ac#%ns

". &he possible motiations for the snack foods diision 'anting to take endofyear actionsinclude3

(a) %anagement incenties. Gourmet $oods may hae a diision bonus scheme based on oneyearreported diision earnings. 6fforts to frontend reenue into the current year or transfer costs intothe next year can increase this bonus.

(b) Promotion opportunities and ob security. &op management of Gourmet $oods likely 'ill ie'those diision managers that delier high reported earnings gro'th rates as being the best



prospects for promotion. 4iision managers 'ho delier *un'elcome surprises+ may be ie'edas less capable.

(c) 7etain diision autonomy. If top management of Gourmet $oods adopts a *management byexception+ approach, diisions that report sharp reductions in their earnings gro'th rates mayattract a sizable increase in top management superision.

#. &he *5tandards of 6thical /onduct . . . + re-uire management accountants to

• Perform professional duties in accordance 'ith releant la's, regulations, and technicalstandards.

• 7efrain from engaging in any conduct that 'ould preudice carrying out duties ethically.

• /ommunicate information fairly and obectiely.

5eeral of the *endofyear actions+ clearly are in conflict 'ith these re-uirements and should be ie'edas unacceptable by &aylor.

(b) &he fiscal yearend should be closed on midnight of 4ecember 0". *6xtending+ the close falselyreports next years sales as this years sales.

(c) Altering shipping dates is falsification of the accounting reports.(f) Adertisements run in 4ecember should be charged to the current year. &he adertising agency is

facilitating falsification of the accounting records.

&he other *endofyear actions+ occur in many organizations and fall into the *gray+ to *acceptable+ area.8o'eer, much depends on the circumstances surrounding each one, such as the follo'ing3

(a) If the independent contractor does not do maintenance 'ork in 4ecember, there is no transactionregarding maintenance to record. &he responsibility for ensuring that packaging e-uipment is'ell maintained is that of the plant manager. &he diision controller probably can do little morethan obsere the absence of a 4ecember maintenance charge.

(d) In many organizations, sales are heaily concentrated in the final 'eeks of the fiscal yearend. Ifthe double bonus is approed by the diision marketing manager, the diision controller can dolittle more than obsere the extra bonus paid in 4ecember.

(e) If &9 spots are reduced in 4ecember, the adertising cost in 4ecember 'ill be reduced. &here isno record falsification here.

(g) %uch depends on the means of *persuading+ carriers to accept the merchandise. $or example, if anunderthetable payment is inoled, or if carriers are pressured to accept merchandise, it isclearly unethical. If, ho'eer, the carrier receies no extra consideration and 'illingly agrees toaccept the assignment because it sees potential sales opportunities in 4ecember, the transactionappears ethical.

6ach of the (a), (d), (e), and (g) *endofyear actions+ may 'ell disadantage Gourmet $oods in the longrun. $or example, lack of routine maintenance may lead to subse-uent e-uipment failure. &hediisional controller is 'ell adised to raise such issues in meetings 'ith the diision president.8o'eer, if Gourmet $oods has a rigid set of line:staff distinctions, the diision president is theone 'ho bears primary responsibility for ustifying diision actions to senior corporate officers.

0. If &aylor beliees that 7yan 'ants her to engage in unethical behaior, she should first directlyraise her concerns 'ith 7yan. If 7yan is un'illing to change his re-uest, &aylor should discussher concerns 'ith the /orporate /ontroller of Gourmet $oods. 5he could also initiate aconfidential discussion 'ith an I%A 6thics /ounselor, other impartial adiser, or her o'nattorney. &aylor also may 'ell ask for a transfer from the snack foods diision if she perceies7yan is un'illing to listen to pressure brought by the /orporate /ontroller, /$!, or eenPresident of Gourmet $oods. In the extreme, she may 'ant to resign if the corporate culture ofGourmet $oods is to re'ard diision managers 'ho take *endofyear actions+ that &aylor ie's



as unethical and possibly illegal. It 'as precisely actions along the lines of (b), (c), and (f) thatcaused ;etty 9inson, an accountant at <orld/om to be indicted for falsifying <orld/oms books and misleading inestors.

CHAPTER 2

AN INTRO$UCTION TO COST TER*S AN$ PURPOSES

2-1 A cost object is anything for 'hich a separate measurement of costs is desired. 6xamples include

a product, a serice, a proect, a customer, a brand category, an actiity, and a department.

2-7 %anagers beliee that direct costs that are traced to a particular cost obect are more accuratelyassigned to that cost obect than are indirect allocated costs. <hen costs are allocated, managersare less certain 'hether the cost allocation base accurately measures the resources demanded by acost obect. %anagers prefer to use more accurate costs in their decisions.

2-/ A cost driver is a ariable, such as the leel of actiity or olume, that causally affects total costsoer a gien time span. A change in the cost drier results in a change in the leel of total costs.$or example, the number of ehicles assembled is a drier of the costs of steering 'heels on amotorehicle assembly line.

215 %anufacturing companies typically hae one or more of the follo'ing three types of inentory3". Direct materials inventory. 4irect materials in stock and a'aiting use in the manufacturing process.

#. Work-in-process inventory. Goods partially 'orked on but not yet completed. Also called work

in progress

0. Finished goods inventory. Goods completed but not yet sold.

2-1 A product cost is the sum of the costs assigned to a product for a specific purpose. Purposes forcomputing a product cost include

• pricing and product mix decisions,

• contracting 'ith goernment agencies, and

• preparing financial statements for external reporting under generally accepted accounting

principles.

2-25 Class%'%ca#%n ' cs#s) "an('ac#(r%n& sec#r

/ost obect3 &ype of car assembled (/orolla or Geo Prism)/ost ariability3 <ith respect to changes in the number of cars assembled

&here may be some debate oer classifications of indiidual items, especially 'ith regard to costariability.

Cs# I#e" $ r I 0 r

A 4 9; I $

/ 4 $4 4 $6 4 9$ I 9G 4 98 I $



2-26 l8 ' Inven#r%a,le Cs#s

(All numbers belo' are in millions).

".4irect materials inentory =:":#>>= ? @>4irect materials purchased 0>4irect materials aailable for production 12>4irect materials used 0B24irect materials inentory =:0":#>>= ? B2

#.&otal manufacturing oerhead costs ? 1=>5ubtract3 9ariable manufacturing oerhead costs (#2>)$ixed manufacturing oerhead costs for August ? #0>

0.&otal manufacturing costs ? ",>>5ubtract3 4irect materials used (from re-uirement ") (0B2)&otal manufacturing oerhead costs (1=>)4irect manufacturing labor costs for August ? B12

1.<orkinprocess inentory =:":#>>= ? #>>&otal manufacturing costs ",>><orkinprocess aailable for production ",=>>5ubtract3 /ost of goods manufactured (moed into $G) (",2>)<orkinprocess inentory =:0":#>>= ? "2>

2.$inished goods inentory =:":#>>= ? "#2/ost of goods manufactured (moed from <IP) ",2>$inished goods aailable for sale in August ? ",BB2

.$inished goods aailable for sale in August (from re-uirement 2) ? ",BB25ubtract3 /ost of goods sold (",B>>)$inished goods inentory =:0":#>>= ? B2

2-71 Cs# ' &ds "an('ac#(red

". Cansec C"!an

Sched(le ' Cs# ' Gds *an('ac#(red

9ear Ended $ece",er 71) 2556

:%n #h(sands;

4irect materials3

;eginning inentory, Canuary ", #>>@ ? ##,>>>Purchases of direct materials B2,>>>



/ost of direct materials aailable for use @B,>>>6nding inentory, 4ecember 0", #>>@ #,>>>

4irect materials used ? B",>>>4irect manufacturing labor #2,>>>Indirect manufacturing costs3

Indirect manufacturing labor "2,>>>

Plant insurance @,>>>4epreciationplant building D e-uipment "",>>>7epairs and maintenanceplant 1,>>>

&otal indirect manufacturing costs 0@,>>>%anufacturing costs incurred during #>>@ "02,>>>Add beginning 'orkinprocess inentory, Canuary ", #>>@ #",>>>&otal manufacturing costs to account for "2,>>>4educt ending 'orkinprocess inentory, 4ecember 0", #>>@ #>,>>>/ost of goods manufactured (to Income 5tatement) ?"0,>>>

#. Cansec C"!an

Inc"e S#a#e"en#9ear Ended $ece",er 71) 2556

:%n #h(sands;

7eenues ?0>>,>>>/ost of goods sold3

;eginning finished goods, Canuary ", #>>@ ? "=,>>>/ost of goods manufactured "0,>>>/ost of goods aailable for sale "21,>>>6nding finished goods, 4ecember 0", #>>@ #0,>>>

/ost of goods sold "0",>>>Gross margin "@,>>>

!perating costs3%arketing, distribution, and customerserice costs @0,>>>General and administratie costs #@,>>>

&otal operating costs "##,>>>!perating income ? 1B,>>>

2-7/ La,r cs#) ver#%"e and %dle #%"e

".(a) &otal cost of hours 'orked at regular rates1# hours E "# per hour

? 2>1.>>1# hours E "# per hour

2>1.>>

10 hours E "# per hour 2".>>

1> hours E "# per hour 1=>.>>

#,>>1.>>%inus idle time (2.# hours E ?"# per hour)

#.1>4irect manufacturing labor costs

?",@1".>



(b) Idle time F 2.# hours E "# per hour F(c) !ertime and holiday premium.

?#.1>

<eek "3 !ertime (1#1>) hours E Premium, ? per hour ? "#.>>

<eek #3 !ertime (1#1>) hours EPremium, ? per hour "#.>>

<eek 03 !ertime (101>) hours E Premium, ? per hour "=.>>

<eek 13 8oliday = hours E Premium, ?"# per hour @.>>

&otal oertime and holiday premium?"0=.>>

(d) &otal earnings in %ay4irect manufacturing labor costs

?",@1".>Idle time

#.1>

!ertime and holiday premium "0=.>>&otal earnings

?#,"1#.>>

#. Idle time caused by e-uipment breakdo'ns and scheduling mixups is an indirect cost of the ob because it is not related to a specific ob.!ertime premium caused by the heay oerall olume of 'ork is also an indirect cost because itis not related to a particular ob that happened to be 'orked on during the oertime hours. If,ho'eer, the oertime is the result of a demanding *rush ob,+ the oertime premium is a directcost of that ob.

CHAPTER 7

COST-0OLU*E-PROIT ANAL9SIS

!&A&I! H564 I /8AP&67 0 5!H&I!5

5P3 5elling price9/H3 9ariable cost per unit/%H3 /ontribution margin per unit

$/3 $ixed costs&!I3 &arget operating income

7-2 &he assumptions underlying the /9P analysis outlined in /hapter 0 are". /hanges in the leel of reenues and costs arise only because of changes in the number of

product (or serice) units sold.#. &otal costs can be separated into a fixed component that does not ary 'ith the units sold and a

component that is ariable 'ith respect to the units sold.



0. <hen represented graphically, the behaior of total reenues and total costs are linear(represented as a straight line) in relation to units sold 'ithin a releant range and time period.

1. &he selling price, ariable cost per unit, and fixed costs are kno'n and constant.

7- &hree methods to express /9P relationships are the e-uation method, the contribution marginmethod, and the graph method. &he first t'o methods are most useful for analyzing operatingincome at a fe' specific leels of sales. &he graph method is useful for isualizing the effect of

sales on operating income oer a 'ide range of -uantities sold.

7-/ ;reakeen analysis denotes the study of the breakeen point, 'hich is often only an incidental part of the relationship bet'een cost, olume, and profit. /ostolumeprofit relationship is amore comprehensie term than breakeen analysis.

7-17 /9P analysis is al'ays conducted for a specified time horizon. !ne extreme is a ery shorttimehorizon. $or example, some acation cruises offer deep price discounts for people 'ho offer totake any cruise on a days notice. !ne day prior to a cruise, most costs are fixed. &he otherextreme is seeral years. 8ere, a much higher percentage of total costs typically is ariable./9P itself is not made any less releant 'hen the time horizon lengthens. <hat happens is thatmany items classified as fixed in the short run may become ariable costs 'ith a longer time

horizon.

7-1< C0P c"!(#a#%ns

"a. 5ales (?0> per unit E #>>,>>> units) ?,>>>,>>>9ariable costs (?#2 per unit E #>>,>>> units) 2,>>>,>>>/ontribution margin ?",>>>,>>>

"b. /ontribution margin (from aboe) ?",>>>,>>>$ixed costs =>>,>>>!perating income ? #>>,>>>

#a. 5ales (from aboe) ?,>>>,>>>9ariable costs (?" per unit E #>>,>>> units) 0,#>>,>>>/ontribution margin ?#,=>>,>>>

#b. /ontribution margin ?#,=>>,>>>$ixed costs #,1>>,>>>!perating income ? 1>>,>>>

0. !perating income is expected to increase by ?#>>,>>> if %s. 5choenens proposal is accepted.&he management 'ould consider other factors before making the final decision. It is likely that product -uality 'ould improe as a result of using state of the art e-uipment. 4ue to increasedautomation, probably many 'orkers 'ill hae to be laid off. Patels management 'ill hae toconsider the impact of such an action on employee morale. In addition, the proposal increases thecompanys fixed costs dramatically. &his 'ill increase the companys operating leerage andrisk.

7-75 Cn#r%,(#%n "ar&%n) dec%s%n "a+%n&

". 7eenues ?2>>,>>>4educt ariable costs3



/ost of goods sold ?#>>,>>>5ales commissions 2>,>>>!ther operating costs 1>,>>> #@>,>>>

/ontribution margin ?#">,>>>

#. /ontribution margin percentage F?2>>,>>>

?#">,>>> F 1#J

0. Incremental reenue (#>J E ?2>>,>>>) F ?">>,>>>Incremental contribution margin

(1#J E ?">>,>>>) ?1#,>>>Incremental fixed costs (adertising) ">,>>>Incremental operating income ?0#,>>>

If %r. 5chmidt spends ?">,>>> more on adertising, the operating income 'ill increase by?0#,>>>, conerting an operating loss of ?">,>>> to an operating income of ?##,>>>.

Proof (!ptional)37eenues ("#>J E ?2>>,>>>) ?>>,>>>/ost of goods sold (1>J of sales) #1>,>>>Gross margin 0>,>>>

!perating costs35alaries and 'ages ?"2>,>>>5ales commissions (">J of sales) >,>>>4epreciation of e-uipment and fixtures "#,>>>5tore rent 1=,>>>Adertising ">,>>>!ther operating costs3

9ariable (?2>>,>>>?1>,>>> E ?>>,>>>) 1=,>>>

$ixed ">,>>> 00=,>>>!perating income ? ##,>>>

7-77 C0P anals%s) serv%ce '%r".

". 7eenue per package ?1,>>>9ariable cost per package 0,>>/ontribution margin per package ? 1>>

;reakeen (units) F $ixed costs K /ontribution margin per package

F package per?1>>

?1=>,>>> F ",#>> tour packages

#. /ontribution margin ratio F price5elling

package permarginon/ontributi F

?1,>>>

1>>? F ">J

7eenue to achiee target income F ($ixed costs L target !I) K /ontribution margin ratio



F>.">

?">>,>>>?1=>,>>>+ F ?2,=>>,>>>, or

?1=>,>>> ?">>,>>> Gumber of tour packages to earn ?">>,>>> operating income3 ",12> tour pack

?1>>

+= =

7eenues to earn ?">>,>>> !I F ",12> tour packages E ?1,>>> F ?2,=>>,>>>.

0. $ixed costs F ?1=>,>>> L ?#1,>>> F ?2>1,>>>

;reakeen (units) Funit permarginon/ontributi

costs$ixed

/ontribution margin per unit F(units);reakeen

costs$ixed

F packagestour",#>>

?2>1,>>> F ?1#> per tour package

4esired ariable cost per tour package F ?1,>>> M ?1#> F ?0,2=>

;ecause the current ariable cost per unit is ?0,>>, the unit ariable cost 'ill need to be reduced by ?#>to achiee the breakeen point calculated in re-uirement ".

Alternate %ethod3 If fixed cost increases by ?#1,>>>, then total ariable costs must be reduced by?#1,>>> to keep the breakeen point of ",#>> tour packages.

&herefore, the ariable cost per unit reduction F ?#1,>>> K ",#>> F ?#> per tour package

7-4. E#h%cs) C0P anals%s

". /ontribution margin percentage F

7eenues osts

7eenues

−9ariable c

F?2, , ?0, ,>>> >>> >>> >>>−

?2,>>>,>>>

F?2,>>>,>>>

?#,>>>,>>> F 1>J

;reakeen reenues F percentagemarginon/ontributi

costs$ixed

F>.1>

?#,"A>,>>>F ?2,1>>,>>>

#. If ariable costs are 2#J of reenues, contribution margin percentage e-uals 1=J (">>J − 2#J)

;reakeen reenues F percentagemarginon/ontributi

costs$ixed

F>.1=

?#,"A>,>>> F ?1,2>>,>>>

0. 7eenues ?2,>>>,>>>

9ariable costs (>.2# × ?2,>>>,>>>) #,>>,>>>



$ixed costs #,">,>>>!perating income ? #1>,>>>

1. Incorrect reporting of enironmental costs 'ith the goal of continuing operations is unethical. Inassessing the situation, the specific *5tandards of 6thical /onduct for %anagement Accountants+(described in 6xhibit "B) that the management accountant should consider are listed belo'.

Competence/lear reports using releant and reliable information should be prepared. Preparing reports on the basis ofincorrect enironmental costs to make the companys performance look better than it is iolatescompetence standards. It is unethical for ;ush not to report enironmental costs to make the plants performance look good.

Integrity

&he management accountant has a responsibility to aoid actual or apparent conflicts of interest andadise all appropriate parties of any potential conflict. ;ush may be tempted to report lo'erenironmental costs to please emond and <oodall and sae the obs of his colleagues. &hisaction, ho'eer, iolates the responsibility for integrity. &he 5tandards of 6thical /onductre-uire the management accountant to communicate faorable as 'ell as unfaorable

information.

Credibility

&he management accountants 5tandards of 6thical /onduct re-uire that information should be fairly andobectiely communicated and that all releant information should be disclosed. $rom amanagement accountants standpoint, underreporting enironmental costs to make performancelook good 'ould iolate the standard of obectiity.

;ush should indicate to emond that estimates of enironmental costs and liabilities should beincluded in the analysis. If emond still insists on modifying the numbers and reporting lo'erenironmental costs, ;ush should raise the matter 'ith one of emonds superiors. If after takingall these steps, there is continued pressure to understate enironmental costs, ;ush should

consider resigning from the company and not engage in unethical behaior.

CHAPTER 15

$ETER*INING HO= COSTS 3EHA0E

15-7 A linear cost function is a cost function 'here, 'ithin the releant range, the graph of total costsersus the leel of a single actiity related to that cost is a straight line. An example of a linearcost function is a cost function for use of a telephone line 'here the terms are a fixed charge of?">,>>> per year plus a ?# per minute charge for phone use. A nonlinear cost function is a costfunction 'here, 'ithin the releant range, the graph of total costs ersus the leel of a singleactiity related to that cost is not a straight line. 6xamples include economies of scale inadertising 'here an agency can double the number of adertisements for less than t'ice thecosts, stepcost functions, and learningcurebased costs.

15- $our approaches to estimating a cost function are". Industrial engineering method.#. /onference method.0. Account analysis method.1. Nuantitatie analysis of current or past cost relationships.





4irect materials4irect manufacturing labor Po'er 5uperision labor %aterialshandling labor %aintenance labor

4epreciation7ent, property taxes, admin

?0>>,>>>##2,>>>0B,2>>2,#2>>,>>>B2,>>>

@2,>>> ">>,>>>

">>J">>">>

#>2>1>

>>

?0>>,>>>##2,>>>

0B,2>>"",#2>0>,>>>0>,>>>

> >

? >>>

12,>>>0>,>>>12,>>>

@2,>>> ">>,>>>

?1.>>0.>>>.2>>."2>.1>>.1>

> >

&otal ?@1=,B2> ?00,B2> ?0"2,>>> ?= .12

&otal manufacturing cost for #>>@ F ?@1=,B2>

9ariable costs in #>">3

Acc(n#

Un%# 0ar%a,le

Cs# !er Un%# 'r

2556

:/;

>

Increase

:<;

Increase %n

0ar%a,le Cs#

!er Un%#

:.; ? :/; × :<;

0ar%a,le Cs#

!er Un%#

'r 2515

:6; ? :/; :.;

T#al 0ar%

'r 2

:15; ? :6;

4irect materials4irect manufacturing labor Po'er 5uperision labor %aterialshandling labor %aintenance labor 4epreciation7ent, property taxes, admin.

?1.>>0.>>>.2>>."2>.1>>.1>>

>

2J">

>>>>>>

?>.#>>.0>>>>>>

>

?1.#>0.0>>.2>>."2>.1>>.1>>

>

?00,>#1,>

1>,>"#,>0#,>0#,>

&otal ?= .12 ?> .2> ?= .@2 ?B",>

$ixed and total costs in #>">3

Acc(n#

%@ed

Cs#s

'r 2556

:11;

Percen#a&e

Increase

:12;

$llar

Increase %n

%@ed Cs#s

:17; ?

:11; :12;

%@ed Cs#s

'r 2515

:14; ?

:11; :17;

0ar%a,le

Cs#s 'r

2515

:1;

T#al

Cs#s

:1/; ?

:14; :1;



4irect materials4irect manufacturing labor Po'er 5uperision labor %aterialshandling labor %aintenance labor

4epreciation7ent, property taxes, admin.

? >>>

12,>>>0>,>>>12,>>>

@2,>>> ">>,>>>

>J>>>>>

2B

? >>>>>>

1,B2> B,>>>

? >>>

12,>>>0>,>>>12,>>>

@@,B2> ">B,>>>

?00,>>>#1,>>>

1>,>>>"#,>>>0#,>>>0#,>>>

> >

? 00,>>>#1,>>>1>,>>>2B,>>>#,>>>BB,>>>

@@,B2> ">B,>>>

&otal ?0"2,>>> ?"",B2> ?0#,B2> ?B",>>> ?",>1#,B2>

&otal manufacturing costs for #>"> F ?",>1#,B2>

#. &otal cost per unit, #>>@ FB2,>>>

?@1=,B2>F ?"#.2

&otal cost per unit, #>"> F=>,>>>

?",>1#,B2>F ?"0.>0

0. /ost classification into ariable and fixed costs is based on -ualitatie, rather than -uantitatie,

analysis. 8o' good the classifications are depends on the kno'ledge of indiidual managers 'hoclassify the costs. Go'er may 'ant to undertake -uantitatie analysis of costs, using regressionanalysis on timeseries or crosssectional data to better estimate the fixed and ariablecomponents of costs. ;etter kno'ledge of fixed and ariable costs 'ill help Go'er to better pricehis products, to kno' 'hen he is getting a positie contribution margin, and to better managecosts.

15-27 Es#%"a#%n& a cs# '(nc#%n) h%&h-l8 "e#hd

". &he key point to note is that the problem proides highlo' alues of (annual round trips made by a helicopter) and ! ÷ (the operating cost per round trip). <e first need to calculate theannual operating cost ! (as in column (0) belo'), and then use those alues to estimate the

function using the highlo' method.

Cs# $r%verD

Ann(al R(nd-

Tr%!s : X ;

O!era#%n&

Cs# !er

R(nd-Tr%!

Ann(al

O!era#%n&

Cs# :Y ;

:1; :2; :7; ? :1; × :2;

8ighest obseration of cost drier #,>>> ?0>> ?>>,>>>o'est obseration of cost drier ",>>> ?02> ?02>,>>>4ifference ",>>> ?#2>,>>> 5lope coefficient F ?#2>,>>> ÷ ",>>> F ?#2> per roundtrip/onstant F ?>>,>>> M (?#2> × #,>>>) F ?">>,>>>

&he estimated relationship is ! F ?">>,>>> L ?#2> O 'here ! is the annual operating cost of a helicopterand represents the number of round trips it makes annually.

#. &he constant a (estimated as ?">>,>>>) represents the fixed costs of operating a helicopter,irrespectie of the number of round trips it makes. &his 'ould include items such as insurance,registration, depreciation on the aircraft, and any fixed component of pilot and cre' salaries. &hecoefficient b (estimated as ?#2> per roundtrip) represents the ariable cost of each round trip costs that are incurred only 'hen a helicopter actually flies a round trip. &he coefficient b may





#. %anufacturing oerhead allocated F Actual machinehours E ;udgeted manufacturing oerhead r

F "@2,>>> E ?#> F ?0,@>>,>>>

0. 5ince manufacturing oerhead allocated is greater than the actual manufacturing oerhead costs,<aheed oerallocated manufacturing oerhead3

%anufacturing oerhead allocated ?0,@>>,>>>Actual manufacturing oerhead costs 0,=>,>>>!erallocated manufacturing oerhead ? 1>,>>>

4-22 Serv%ce %nd(s#r) #%"e !er%d (sed # c"!(#e %nd%rec# cs# ra#es

". an*arch A!r%l(ne (lSe!# Oc#$ec T#al

4irect labor costs ?1>>,>>> ?#=>,>>> ?#2>,>>> ?#B>,>>> ?",#>>,>>>9ariable oerhead costs asa percentage of directlabor costs @> J > J > J > J9ariable oerhead costs (Percentage × direct labor costs) ?0>,>>> ?"=,>>> ?"2>,>>> ?"#,>>> ? =1>,>>>

$ixed oerhead costs 0>>,>>> 0>>,>>> 0>>,>>> 0>>,>>> ",#>>,>>>&otal oerhead costs ?>,>>> ?1=,>>> ?12>,>>> ?1#,>>> ?#,>1>,>>>&otal oerhead costs as a percentage of direct labor costs "2J "BJ "=>J "B"J "B>J

3(d&e#ed Overhead Ra#e Used

, 772

an*arch

Ra#e

(lSe!#

Ra#e

Avera&e

9earl Ra#e

4irect materials ?">,>>> ?">,>>> ?">,>>>4irect labor costs ,>>> ,>>> ,>>>!erhead allocated (ariable L fixed)

("2JO "=>JO "B>J of ?,>>>) @,@>> ">,=>> ">,#>>$ull cost of Cob 00# ?#2,@>> ?#,=>> ?#,#>>

(a) &he full cost of Cob 00#, using the budgeted oerhead rate of "2J for CanuaryM%arch, is?#2,@>>.

(b) &he full cost of Cob 00#, using the budgeted oerhead rate of "=>J for CulyM5eptember, is?#,=>>.



(c) &he full cost of Cob 00#, using the annual budgeted oerhead rate of "B>J, is ?#,#>>.

#.

;udgeted fixed oerhead rate based on annual fixed oerhead costs and annualdirect labor costs F ?",#>>,>>> ÷ ?",#>>,>>> F ">>J

3(d&e#ed 0ar%a,le Overhead Ra#e Used, 772 an(ar*arch

ra#e

(lSe!#

ra#e

4irect materials ?">,>>> ?">,>>>4irect labor costs ,>>> ,>>>9ariable oerhead allocated

(@>JO >JO of ?,>>>) 2,1>> 0,>>

$ixed oerhead allocated(">>J of ?,>>>)

,>>> ,>>>

$ull cost of Cob 00# ?#B,1>> ?#2,>>





0. %achining 4epartment oerhead, ?2> × "0> hours ?,2>>

$inishing 4epartment oerhead, #>>J of ?",#2> #,2>>&otal manufacturing oerhead allocated ?@,>>>

1. &otal costs of Cob 10"34irect costs3

4irect materialsMM%achining 4epartment ?"1,>>> MM$inishing 4epartment 0,>>>

4irect manufacturing labor %achining 4epartment >> $inishing 4epartment ",#2> ?"=,=2>

Indirect costs3

%achining 4epartment oerhead, ?2> × "0> ?,2>>

$inishing 4epartment oerhead, #>>J of ?",#2> #,2>> @,>>>&otal costs ?#B,=2>

&he perunit product cost of Cob 10" is ?#B,=2> K #>> units F ?"0@.#2 per unit&he point of this part is (a) to get the definitions straight and (b) to underscore that oerhead is allocated

by multiplying the actual amount of the allocation base by the budgeted rate.2.

*ach%n%n& %n%sh%n&

%anufacturing oerhead incurred (actual) ?"",#>>,>>> ?B,@>>,>>>%anufacturing oerhead allocated

##>,>>> hours × ?2> "",>>>,>>>

#>>J of ?1,">>,>>> =,#>>,>>>Hnderallocated manufacturing oerhead ? #>>,>>>!erallocated manufacturing oerhead ? 0>>,>>>

&otal oerallocated oerhead F ?0>>,>>> M ?#>>,>>> F ?">>,>>>

. A homogeneous cost pool is one 'here all costs hae the same or a similar causeandeffect or benefitsreceied relationship 'ith the costallocation base. 5olomon likely assumes that all itsmanufacturing oerhead cost items are not homogeneous. 5pecifically, those in the %achining4epartment hae a causeandeffect relationship 'ith machinehours, 'hile those in the $inishing

4epartment hae a causeandeffect relationship 'ith direct manufacturing labor costs. 5olomon beliees that the benefits of using t'o cost pools (more accurate product costs and better abilityto manage costs) exceeds the costs of implementing a more complex system.



4-41 , cs#%n&-serv%ce %nd(s#r.

". &ours in Process (&IP) Cune 0>, #>>@

#. /ost of /ompleted &ours (//&) in Cune #>>@

3and

*a#er%als

:1;

La,r

:2;

Overhead

:7; ? 15> F :2;

T#al

:4;

#runge $%press ? 1>> ? B>> ?",>2> ?#,"2> Di&&erent Strokes 1B2 B>> ",>2> #,##2 Maybe 'omorrow #B2 1>> >> ",#B2&otal ?","2> ?",=>> ?#,B>> ?2,2>

0. !erhead allocated F ".2> F ",1>>a

F ?#,">>Hnderallocated oerhead F Actual oerhead M Allocated oerhead F ?#,2>> M #,">> F ?1>> underallocated

a &otal labor in Cune F ?">>L?0>>L?1>>L?#>>L?1>> F ?",1>>

1a. Hnderallocated oerhead is 'ritten off to //&

/IP inentory remains unchanged.

Acc(n#

(ne 75) 2556

3alance

:3e're Prra#%n; :1;

Prra#%n ' 455

Underallca#ed

Overhead:2;

(ne 75) 2556

3alance

:A'#er

Prra#%n; :7; ? :1; L :2;

/IP ?#,">> ? > ?#,">>//& 2,2> 1>> ,>2>

?B,B2> ?1>> ?=,"2>

1b. Hnderallocated oerhead prorated based on ending balances

Acc(n#

(ne 75) 2556

3alance

:3e're

Prra#%n;

:1;

3alance as a

Percen# ' T#al

:2; ? :1; B <)<5

Prra#%n ' 455

Underallca#ed

Overhead

:7; ? :2;×455

(ne 75) 255

3alance

:A'#er

Prra#%n;

:4; ? :1; L :

&IP ?#,">> >.#B" >.#B"×

?1>> F?">= ?#,#//& 2,2> >.B#@ >.B#@×?1>> F #@# 2,@ ?B,B2> ".>>> ?1>> ?=,

1c. Hnderallocated oerhead prorated based on Cune oerhead in ending balances

3and

*a#er%als

:1;

La,r

:2;

Overhead

:7; ? 15> F :2;

T#al

:4;

(s I )ay Dieing ?#2> ?1>> ?>> ?",#2> (sk Me )ater 02> #>> 0>> =2>&otal ?>> ?>> ?@>> ?#,">>



Acc(n#

(ne 75) 2556

3alance

:3e're

Prra#%n;

:1;

Overhead

allca#ed %n (ne

Incl(ded %n (ne

75) 2556 3alance

:2;

Overhead

allca#ed %n (ne

Incl(ded %n (ne

75) 2556 as a

Percen# ' T#al

:7; ? :2; B 2)155

Prra#%n ' 455

Underallca#ed

Overhead

:4; ? :7;×455

(ne 75)

3alan

:A'#e

Prra#%

:; ? :1;

&IP ?#,">> ? @>>a >.10 >.10×?1>> F?"B# ?

//& 2,2> ",#>> b

>.2B >.2B×?1>> F ##= ?B,B2> ?#,">> ".>> ?1>> ?

aCune labor for As I ay 4ieing and Ask %e ater E "2>JF (?1>> L ?#>>) E "2>J F ?>> E "2>J F ?@>>

bCune labor for Grunge 6xpress, 4ifferent 5trokes and %aybe &omorro' E "2>JF (?">> L ?0>> L ?1>>) E "2>J F ?=>> E ?"2> F ?",#>>

2. I 'ould choose the method in 1c because this method results in account balances based on actualoerhead allocation rates. &he account balances before proration in &IP and //& are significantand underallocated oerhead is material. $urthermore, the ratio of ending balances in &IP and

//& is different from the ratio of oerhead allocated to each of these accounts in Cune.

CHAPTER

ACTI0IT9-3ASE$ COSTING AN$ ACTI0IT9-3ASE$ *ANAGE*ENT

-2 !ercosting may result in competitors entering a market and taking market share for productsthat a company erroneously beliees are lo'margin or een unprofitable.Hndercosting may result in companies selling products on 'hich they are in fact losing money,'hen they erroneously beliee them to be profitable.

-4 An actiitybased approach refines a costing system by focusing on indiidual actiities as thefundamental cost obects. It uses the cost of these actiities as the basis for assigning costs toother cost obects such as products or serices.

-< An A;/ approach focuses on actiities as the fundamental cost obects. &he costs of theseactiities are built up to compute the costs of products, and serices, and so on. 5imple costingsystems hae one or a fe' indirect cost pools, irrespectie of the heterogeneity in the facility'hile A;/ systems hae multiple indirect cost pools. An A;/ approach attempts to use costdriers as the allocation base for indirect costs, 'hereas a simple costing system generally doesnot. &he A;/ approach classifies as many indirect costs as direct costs as possible. A simplecosting system has more indirect costs.

-11 &he main costs and limitations of A;/ are the measurements necessary to implement thesystems. 6en basic A;/ systems re-uire many calculations to determine costs of products andserices. Actiitycost rates often need to be updated regularly. 9ery detailed A;/ systems arecostly to operate and difficult to understand. 5ometimes the allocations necessary to calculateactiity costs often result in actiitycost pools and -uantities of costallocation bases beingmeasured 'ith error. <hen measurement errors are large, actiitycost information can bemisleading.



-1 &he controller faces a difficult challenge. &he benefits of a better accounting system sho' up inimproed decisions by managers. It is important that the controller hae the support of thesemanagers 'hen seeking increased inestments in accounting systems. 5tatements by thesemanagers sho'ing ho' their decisions 'ill be improed by a better accounting system are thecontrollers best arguments 'hen seeking increased funding. $or example, the ne' system 'illresult in more accurate product costs 'hich 'ill influence pricing and product mix decisions. &hene' system can also be used to reduce product costs 'hich 'ill lo'er selling prices. As a result,

the customer 'ill benefit from the ne' system.

-16 Plan#8%de) de!ar#"en# and A3C %nd%rec# cs# ra#es

".Actual plant'ide ariable %!8rate based on machine hours,?0>=,>> ÷ 1,>>> ?BB."2 per machine hour

Un%#ed

*#rs

Hlden

*#rs

Leland

0eh%cle T#al

9ariable manufacturing oerhead, allocated based onmachine hours

(?BB."2 × "#>O ?BB."2 × #,=>>O ?BB."2 × ",>=>) ?@,#2= ?#",>#> ?=0,0## ?0>=,>>

#.

$e!ar#"en#

0ar%a,le

*OH %n 255<

T#al

$r%ver Un%#s Ra#e

4esign ?0@,>>> 0@> ?">> per /A4design hour

Production #@,>> 0B> ? => per engineering hour6ngineering #1>,>>> 1,>>> ? > per machine hour

Un%#ed

*#rs

Hlden

*#rs

Leland

0eh%cle T#al

4esignrelated oerhead, allocated on /A4designhours(""> × ?">>O #>> × ?">>O => × ?">>)

?"",>>>

?#>,>>>

?=,>>> ? 0@,>>>

Productionrelated oerhead, allocated on engineeringhours(B> × ?=>O > × ?=>O #1> × ?=>) 2,>> 1,=>> "@,#>> #@,>>6ngineeringrelated oerhead, allocated on machinehours("#> × ?>O #,=>> × ?>O ",>=> × ?>)

B,#>>

"=,>>>

1,=>> #1>,>>>

&otal

?#0,=>>

?"@#,=>>

?@#,>>> ?0>=,>>

0. Un%#ed

*#rs

Hlden

*#rs

Leland

0eh%cle

a. 4epartment rates (7e-uirement #) b. Plant'ide rate (7e-uirement ")

?#0,=>>

? @,#2=

?"@#,=>>

?#",>#>

?@#,>>>

?=0,0##7atio of (a) K (b) #.2B >.=@ ".">



&he ariable manufacturing oerhead allocated to Hnited %otors increases by "2BJ under the departmentrates, the oerhead allocated to 8olden decreases by about ""J and the oerhead allocated toeland increases by about ">J.&he three contracts differ sizably in the 'ay they use the resources of the three departments.

&he percentage of total drier units in each department used by the companies is3

$e!ar#"en#Cs#

$r%verUn%#ed*#rs

Hlden*#rs

Leland0eh%cle

4esign6ngineeringProduction

/A4design hours6ngineering hours%achine hours

#=J"@0

2"J"B>

#"J2#B

&he Hnited %otors contract uses only 0J of total machines hours in #>>1, yet uses #=J of /A4designhours and "@J of engineering hours. &he result is that the plant'ide rate, based onmachine hours, 'ill greatly underestimate the cost of resources used on the Hnited %otorscontract. &his explains the "2BJ increase in indirect costs assigned to the Hnited %otors contract'hen department rates are used.In contrast, the 8olden %otors contract uses less of design (2"J) and engineering ("J) than ofmachinehours (B>J). 8ence, the use of department rates 'ill report lo'er indirect costs for

8olden %otors than does a plant'ide rate.8olden %otors 'as probably complaining under the use of the simple system because its contract'as being oercosted relatie to its consumption of %!8 resources. Hnited, on the other hand'as haing its contract undercosted and underpriced by the simple system. Assuming that AP isan efficient and competitie supplier, if the ne' departmentbased rates are used to pricecontracts, Hnited 'ill be unhappy. AP should explain to Hnited ho' the calculation 'as done,and point out Hniteds high use of design and engineering resources relatie to productionmachine hours. 4iscuss 'ays of reducing the consumption of those resources, if possible, andsho' 'illingness to partner 'ith them to do so. If the price rise is going to be steep, perhapsoffer to phase in the ne' prices.

1. !ther than for pricing, AP can also use the information from the departmentbased system to

examine and streamline its o'n operations so that there is maximum alueadded from allindirect resources. It might set targets oer time to reduce both the consumption of each indirectresource and the unit costs of the resources. &he departmentbased system gies AP moreopportunities for targeted cost management.

2. It 'ould not be 'orth'hile to further refine the cost system into an A;/ system if there 'asntmuch ariation among contracts in the consumption of actiities 'ithin a department. If, forexample, most actiities 'ithin the design department 'ere, in fact, drien by /A4design hours,then the more refined system 'ould be more costly and no more accurate than the department based cost system. 6en if there 'as sufficient ariation, considering the relatie sizes of the 0department cost pools, it may only be costeffectie to further analyze the engineering cost pool,'hich consumes B=J (?#1>,>>> ÷ ?0>=,>>) of the manufacturing oerhead.

-7< Un(sed ca!ac%#) ac#%v%#-,ased cs#%n&) ac#%v%#-,ased "ana&e"en#.

".3as+e#,alls 0lle,alls T#al

umber of batches 0>> 1>> B>>%achinehours "",>>> "#,2>> #0,2>>

5etup cost per batch F ?"10,2>> K B>> batches F ?#>2 per batch.





".Cob !rder 1"> , Order 411

4irect manufacturing cost4irect materials4irect manufacturing labor

?0> × #2O ?0> × 0B2

Indirect manufacturing cost?""2 × #2O ?""2 × 0B2

&otal manufacturing cost umber of units%anufacturing cost per unit

?@,B>>

B2> ?">,12>

#,=B2?"0,0#2

K ">? ",00# .2>

?2@,@>>

"",#2> ? B","2>

10,"#2?""1,#B2K #>>? 2B" .0B2

#. , Order 415 , Order 411

4irect manufacturing cost4irect materials4irect manufacturing labor

?0> × #2O ?0> × 0B2

Indirect manufacturing cost%aterials handling

?>.1> × 2>>O ?>.1> × #,>>>

athe 'ork

?>.#> × #>,>>>O ?>.#> × >,>>>

%illing

?#>.>> × "2>O ?#>.>> × ",>2>

Grinding

?>.=> × 2>>O ?>.=> × #,>>>

&esting

?"2.>> × ">O ?"2.>> × #>>

&otal manufacturing cost umber of units%anufacturing cost per unit

?@,B>>

B2> ?">,12>

#>>

1,>>>

0,>>>

1>>

"2> B,B2>?"=,#>>

K ">? ",=#>

?2@,@>>

"",#2> ? B","2>

=>>

"#,>>>

#",>>>

",>>

0,>>> 0=,1>>?">@,22>

K #>>? 21B .B2

0. , Order 415 , Order 411

umber of units in ob "> #>>/osts per unit 'ith prior costing system ?",00#.2> ?2B".0B2/osts per unit 'ith actiitybased costing ",=#>.>> 21B.B2>

Cob order 1"> has an increase in reported unit cost of 0.J (?",=#> M ?",00#.2>) K ?",00#.2>Q,'hile ob order 1"" has a decrease in reported unit cost of 1."J (?21B.B2 M ?2B".0B2) K

?2B".0B2Q.A common finding 'hen actiitybased costing is implemented is that lo'olume products haeincreases in their reported costs 'hile higholume products hae decreases in their reported cost.&his result is also found in re-uirements " and # of this problem. /osts such as materialshandling costs ary 'ith the number of parts handled (a function of batches and complexity of products) rather than 'ith direct manufacturing laborhours, an outputunit leel cost drier,'hich 'as the only cost drier in the preious obcosting system.

&he product cost figures computed in re-uirements " and # differ because



a. the ob orders differ in the 'ay they use each of fie actiity areas, and b. the actiity areas differ in their indirect cost allocation bases (specifically, each area does not use

the direct manufacturing laborhours indirect cost allocation base).

&he follo'ing table documents ho' the t'o ob orders differ in the 'ay they use each of the fie actiityareas included in indirect manufacturing costs3

Usa&e 3ased n Anals%s ' Ac#%v%# Area Cs# $r%vers

Usa&e Ass("ed 8%#h $%rec# *an('La,r-H(rs as A!!l%ca#%n 3ase

Ac#%v%# Area

, Order

415

, Order

411

, Order 415 , Order

411

%aterials handling #>.>J =>.>J .#2J @0.B2Jathe 'ork #2.> B2.> .#2 @0.B2%illing "#.2 =B.2 .#2 @0.B2Grinding #>.> =>.> .#2 @0.B2&esting 1.= @2.# .#2 @0.B2

&he differences in product cost figures might be important to &racy /orporation for product pricing and product emphasis decisions. &he actiitybased accounting approach indicates that ob order 1"> is being undercosted 'hile ob order 1"" is being oercosted. &racy /orporation

may erroneously push ob order 1"> and deemphasize ob order 1"". %oreoer, by its actions,&racy /orporation may encourage a competitor to enter the market for ob order 1"" and takemarket share a'ay from it.

1. Information from the A;/ system can also help &racy manage its business better in seeral 'ays. a. *roduct design. Product designers at &racy /orporation likely 'ill find the numbers in the

actiitybased costing approach more belieable and credible than those in the simple system. Ina machinepaced manufacturing enironment, it is unlikely that direct laborhours 'ould be themaor cost drier. Actiitybased costing proides more credible signals to product designersabout the 'ays the costs of a product can be reducedMMfor example, use fe'er parts, re-uire fe'erturns on the lathe, and reduce the number of machinehours in the milling area.

b. Cost management . &racy can reduce the cost of obs both by making process improements that

reduce the actiities that need to be done to complete obs and by reducing the costs of doing theactiities.c. Cost planning+ A;/ proides a more refined model to forecast costs and to explain 'hy actual

costs differ from budgeted costs.

CHAPTER 1<

PROCESS COSTING

1<-2 Process costing systems separate costs into cost categories according to the timing of 'hen costsare introduced into the process. !ften, only t'o cost classifications, direct materials andconersion costs, are necessary. 4irect materials are fre-uently added at one point in time, oftenthe start or the end of the process, and all conersion costs are added at about the same time, butin a pattern different from direct materials costs.



1<- &he fie key steps in process costing follo'35tep "3 5ummarize the flo' of physical units of output.5tep #3 /ompute output in terms of e-uialent units.5tep 03 5ummarize total costs to account for.5tep 13 /ompute cost per e-uialent unit.5tep 23 Assign total costs to units completed and to units in ending 'ork in process.

1<-/ &hree inentory methods associated 'ith process costing are3• <eighted aerage.

• $irstin, firstout.

• 5tandard costing.

1<-1 %aterials are only one cost item. !ther items (often included in a conersion costs pool) includelabor, energy, and maintenance. If the costs of these items ary oer time, this ariability cancause a difference in cost of goods sold and inentory amounts 'hen the 'eightedaerage or$I$! methods are used.A second factor is the amount of inentory on hand at the beginning or end of an accounting period. &he smaller the amount of production held in beginning or ending inentory relatie tothe total number of units transferred out, the smaller the effect on operating income, cost of goodssold, or inentory amounts from the use of 'eightedaerage or $I$! methods.

1<-1/ E(%valen# (n%#s) Jer ,e&%nn%n& %nven#r

". 4irect materials cost per unit (?B2>,>>> K ">,>>>) ? B2.>>/onersion cost per unit (?B@=,>>> K ">,>>>) B@ .=>Assembly 4epartment cost per unit ?" 21 .=>

#a. 5olution 6xhibit "B"A calculates the e-uialent units of direct materials and conersion costs inthe Assembly 4epartment of ihon, Inc. in $ebruary #>>@.

5olution 6xhibit "B"; computes e-uialent unit costs.

#b. 4irect materials cost per unit ? B2/onersion cost per unit = 1Assembly 4epartment cost per unit ?"2 @

0. &he difference in the Assembly 4epartment cost per unit calculated in re-uirements " and # arises because the costs incurred in Canuary and $ebruary are the same but fe'er e-uialent units of'ork are done in $ebruary relatie to Canuary. In Canuary, all ">,>>> units introduced are fullycompleted resulting in ">,>>> e-uialent units of 'ork done 'ith respect to direct materials andconersion costs. In $ebruary, of the ">,>>> units introduced, ">,>>> e-uialent units of 'ork isdone 'ith respect to direct materials but only @,2>> e-uialent units of 'ork is done 'ith respectto conersion costs. &he Assembly 4epartment cost per unit is, therefore, higher.





<e also kno' that the ending inentory is costed at ?"#,"@#,>B> and contains ",="B,>>>e-uialent units of materials and ",>@>,#>> e-uialent units of conersion costs. &his proides a second e-uation3

",="B,>>> x L ",>@>,#>> y F "#,"@#,>B>.

5oling these e-uations reeals that the direct materials cost per unit, x, is ?1.=2, 'hile the

conersion cost per unit, y, is ?0.">.

1. $inally, the opening <IP contained @2,>>> e-uialent units of materials and (@2,>>>101,#2>) F20>,B2> e-uialent units of conersion costs. Applying the standard costs computed in step (0),the cost of the opening inentory must hae been3

@2,>>> E ?1.=2 L 20>,B2> E ?0."> F ?,0#2,2B2.

1<-75 <eightedaerage method.

". 5ince direct materials are added at the beginning of the assembly process, the units in thisdepartment must be ">>J complete 'ith respect to direct materials. 5olution 6xhibit "B0>A

sho's e-uialent units of 'ork done to date3

4irect materials #2,>>> e-uialent units/onersion costs #1,#2> e-uialent units

#. D 0. 5olution 6xhibit "B0>; summarizes the total Assembly 4epartment costs for !ctober #>>@,calculates cost per e-uialent unit of 'ork done to date, and assigns these costs to unitscompleted (and transferred out) and to units in ending 'ork in process using the 'eightedaerage method.

5!H&I! 6R8I;I& "B0>A5teps " and #3 5ummarize !utput in Physical Hnits and /ompute !utput in 6-uialent HnitsO <eighted

Aerage %ethod of Process /osting, Assembly 4epartment of arsen /ompany, for !ctober#>>@.

:S#e! 1; :S#e! 2;

E(%valen# Un%#s

Phs%cal $%rec# Cnvers%n

l8 ' Prd(c#%n Un%#s *a#er%als Cs#s

<ork in process, beginning (gien) 2,>>>5tarted during current period (gien) #>, > >>&o account for #2, > >>/ompleted and transferred out during current period ##,2>> ##,2>> ##,2>><ork in process, endingS (gien) #,2>>

#,2>> × ">>JO #,2>> × B>J #,2>> ",B2>

Accounted for #2, > >><ork done to date #2, > >> #1,#2>S4egree of completion in this department3 direct materials, ">>JO conersion costs, B>J.



5!H&I! 6R8I;I& "B0>;5teps 0, 1, and 23 5ummarize &otal /osts to Account $or, /ompute /ost per 6-uialent Hnit, and Assign

&otal /osts to Hnits /ompleted and to Hnits in 6nding <ork in ProcessO<eightedAerage %ethod of Process /osting, Assembly 4epartment of arsen /ompany, for !ctober

#>>@.

T#al

Prd(c#%nCs#s

$%rec#*a#er%als

Cnvers%n Cs#s

:S#e! 7) <ork in process, beginning (gien) ?",2#,B2> ?",#2>,>>> ? 1>#,B2>/osts added in current period (gien) ,=0B,2 >> 1,2 >>,>>> #,00B ,2 >>

&otal costs to account for ? =,1@>,#2> ? 2,B2 >,>>> ? #,B1>,#2 >

(S#e! 4) /osts incurred to date ?2,B2>,>>> ?#,B1>,#2>4iide by e-uialent units of 'ork done to date(5olution 6xhibit "B0>A) ÷ #2, > >> ÷ #1,#2>

/ost per e-uialent unit of 'ork done to date ? # 0> ? ""0

(S#e! ) Assignment of costs3

/ompleted and transferred out (##,2>> units) ?B,B"B,2>> (##,2>>S × ?#0>) L (##,2>>S

× ?""0)

<ork in process, ending (#,2>> units) BB#,B2> ( #,2>> T× ?#0>) L ( ",B2>T ×

?""0)&otal costs accounted for ? =,1@>,#2 > ? ,"2 >,>>> L ? #,"@,> >>

S6-uialent units completed and transferred out from 5olution 6xhibit "B0>A, 5tep #.T6-uialent units in 'ork in process, ending from 5olution 6xhibit "B0>A, 5tep #.

1<-7 =e%&h#ed-avera&e "e#hd

5olution 6xhibit "B02A sho's e-uialent units of 'ork done to date of3

4irect materials #2 e-uialent units/onersion costs 2#2 e-uialent units

ote that direct materials are added 'hen the Assembly 4epartment process is ">J complete.;oth the beginning and ending 'ork in process are more than ">J complete and hence are ">>Jcomplete 'ith respect to direct materials.

5olution 6xhibit "B02; summarizes the total Assembly 4epartment costs for April #>>@, calculates cost per e-uialent unit of 'ork done to date for direct materials and conersion costs, and assignsthese costs to units completed (and transferred out), and to units in ending 'ork in process usingthe 'eightedaerage method.



5!H&I! 6R8I;I& "B02A5teps " and #3 5ummarize !utput in Physical Hnits and /ompute !utput in 6-uialent HnitsO<eightedAerage %ethod of Process /osting, Assembly 4epartment of Porter 8andcraft for April #>>@.

:S#e! 1; :S#e! 2;

6-uialent Hnits

Phs%cal $%rec# Cnvers%nl8 ' Prd(c#%n Un%#s *a#er%als Cs#s

<ork in process, beginning (gien) B25tarted during current period (gien) 22>&o account for #2/ompleted and transferred out during current period 2>> 2>> 2>><ork in process, endingS (gien) "#2

"#2 × ">>JO "#2 × #>J "#2 #2

Accounted for #2<ork done to date #2 2#2

S

4egree of completion in this department3 direct materials, ">>JO conersion costs, #>J.

5!H&I! 6R8I;I& "B02;5teps 0, 1, and 23 5ummarize &otal /osts to Account $or, /ompute /ost per 6-uialent Hnit, and Assign

&otal /osts to Hnits /ompleted and to Hnits in 6nding <ork in ProcessO<eightedAerage %ethod of Process /osting, Assembly 4epartment of Porter, April #>>@.

T#al

Prd(c#%n

Cs#s

$%rec#

*a#er%als

Cnvers%n

Cs#s

:S#e! 7) <ork in process, beginning (gien) ? ",@"> ? ",BB2 ? "02

/osts added in current period (gien) #=,1@> "B, >> ">,=@>

&otal costs to account for ? 0>,1>> ? "@,0B2 ? "",>#2

(S#e! 4) /osts incurred to date ?"@,0B2 ?"",>#2

4iide by e-uialent units of 'ork done to date (5olution 6xhibit "B02A) ÷ #2 ÷ 2#2

/ost per e-uialent unit of 'ork done to date ? 0" ? #"

(S#e! ) Assignment of costs3/ompleted and transferred out (2>> units) ?#,>>> (2>>S × ?0") L (2>>S × ?#")

<ork in process, ending ("#2 units) 1,1>> ( "#2T × ?0") L ( #2T × ?#")

&otal costs accounted for ? 0>,1>> ? "@,0B2 L ? "",>#2

S6-uialent units completed and transferred out from 5olution 6xhibit "B02A, 5tep #.T6-uialent units in ending 'ork in process from 5olution 6xhibit "B02A, 5tep #.



CHAPTER 1.

SPOILAGE) RE=ORK) AN$ SCRAP

1.-2 5poilageunits of production that do not meet the standards re-uired by customers for goodunits and that are discarded or sold at reduced prices.7e'orkunits of production that do not meet the specifications re-uired by customers but 'hichare subse-uently repaired and sold as good finished units.5crapresidual material that results from manufacturing a product. It has lo' total sales aluecompared to the total sales alue of the product.

1.-15 o. If abnormal spoilage is detected at a different point in the production cycle than normalspoilage, then unit costs 'ould differ. If, ho'eer normal and abnormal spoilage are detected atthe same point in the production cycle, their unit costs 'ould be the same.

1.-11 o. 5poilage may be considered a normal characteristic of a gien production cycle. &he costs ofnormal spoilage caused by a random malfunction of a machine 'ould be charged as a part of themanufacturing oerhead allocated to all obs. ormal spoilage attributable to a specific ob ischarged to that ob.

1.-12 o. Hnless there are special reasons for charging normal re'ork to obs that contained the badunits, the costs of extra materials, labor, and so on are usually charged to manufacturing oerheadand allocated to all obs.

1.-14 A company is ustified in inentorying scrap 'hen its estimated net realizable alue is significantand the time bet'een storing it and selling or reusing it is -uite long.

1.-24 =e%&h#ed-avera&e "e#hd) s!%la&e

". 5olution 6xhibit "=#1, Panel A, calculates the e-uialent units of 'ork done to date for eachcost category in 5eptember #>>=.

#. 5olution 6xhibit "=#1, Panel ;, summarizes total costs to account for, calculates the costs pere-uialent unit for each cost category, and assigns total costs to units completed (includingnormal spoilage), to abnormal spoilage, and to units in ending 'ork in process using the'eightedaerage method.





5!H&I! 6R8I;I& "=#1

PANEL 3D S#e!s 7) 4) and S(""ar%Je T#al Cs#s # Acc(n# r) C"!(#e Cs# !er

E(%valen# Un%#) and Ass%&n T#al Cs#s # Un%#s C"!le#ed) # S!%led Un%#s) and # Un%#s

%n End%n& =r+ %n Prcess

T#al

Prd(c#%n

Cs#s

$%rec#

*a#er%als

Cnvers%

Cs#s

:S#e! 7; <ork in process, beginning (gien)

/osts added in current period (gien)&otal costs to account for

:S#e! 4; /osts incurred to date4iided by e-uialent units of 'ork done to date/ost per e-uialent unit

:S#e! ; Assignment of costsGood units completed and transferred out (#,">>

units)

?""",0>>

B@B,1 >>? @>=,B >>

? @,>>>

2B ,>>>? 0 ,>>>

?0,>>>

÷ 0,"2 >

?#"> .1B

? "

#0? #1

?#1

÷

?=2

/osts before adding normal spoilage ormal spoilage (0"2 units)

(A) &otal cost of good units completed andtransferred out(;) Abnormal spoilage (#=2 units)(/) <orkinprocess, ending (12> units)

?#","2 @0,"B0

B"1,0#@ =1,0>> "">,>B"

(#,">>V×?#">.1B) L

(#,">>V×?=2.0"#2)

(0"2V × ?#">.1B) L (0"2V × ?=2.0"#2)

(#=2V × ?#">.1B) L (#=2V ×

?=2.0"#2)

( 12 >V × ?#">.1B) L (" = >V ×

?=2.0"#2)(A)L(;)L(/) &otal costs accounted for ? @>=,B >> ? 0 ,>>> ? #1V 6-uialent units of direct materials and conersion costs calculated in 5tep # in Panel A.

1.-2< S!%la&e and , cs#%n&

". /ash #>>oss from Abnormal 5poilage ",>>>

<orkinProcess /ontrol ",#>>

oss F (?.>> × #>>) M ?#>> F ?",>>>

7emaining cases cost F ?.>> per case. &he cost of these cases is unaffected by the loss fromabnormal spoilage.



#. a. /ash 1>><orkinProcess /ontrol 1>>

&he cost of the remaining good cases F (?.>> × #,2>>) M ?1>>Q F ?"1,>>

&he unit cost of a good case no' becomes ?"1,>> ÷ #,0>> F ?.01B=

b./ash 1>>%anufacturing 4epartment !erhead /ontrol =>>

<orkinProcess /ontrol ",#>>

&he unit cost of a good case remains at ?.>>.

c. &he unit costs in #a and #b are different because in #a the normal spoilage cost is charged as acost of the ob 'hich has exacting ob specifications. In #b ho'eer, normal spoilage is due tothe production process, not the particular attributes of this specific ob. &hese costs are, therefore,charged as part of manufacturing oerhead and the manufacturing oerhead cost of ?" per casealready includes a proision for normal spoilage.

0. a. <orkinProcess /ontrol #>>%aterials /ontrol, <ages Payable /ontrol,

%anufacturing !erhead Allocated #>>

&he cost of the good cases F (?.>> × #,2>>) L ?#>>Q F ?"2,#>>

&he unit cost of a good case is ?"2,#>> ÷ #,2>> F ?.>=

b.%anufacturing 4epartment !erhead /ontrol #>>%aterials /ontrol, <ages Payable /ontrol,

%anufacturing !erhead Allocated #>>&he unit cost of a good case F ?.>> per case

c. &he unit costs in 0a and 0b are different because in 0a the normal re'ork cost is charged as a costof the ob 'hich has exacting ob specifications. In 0b ho'eer, normal re'ork is due to the production process, not the particular attributes of this specific ob. &hese costs are, therefore,

charged as part of manufacturing oerhead and the manufacturing oerhead cost of ?" per casealready includes a proision for this normal re'ork.

1.-72 =e%&h#ed-avera&e "e#hd) Pac+a&%n& $e!ar#"en# :cn#%n(a#%n ' 1.-75;

$or the Packaging 4epartment, 5olution 6xhibit "=0# summarizes total costs to account for, calculatesthe e-uialent units of 'ork done to date for each cost category, and assigns costs to unitscompleted (including normal spoilage), to abnormal spoilage, and to units in ending 'ork in process using the 'eightedaerage method.



5!H&I! 6R8I;I& "=0#<eightedAerage %ethod of Process /osting 'ith 5poilageO

Packaging 4epartment of the ;oston /ompany for %ay.

PA6 A3 5teps " and #5ummarize !utput in Physical Hnits and /ompute !utput in 6-uialentHnits

:S#e! 1; :S#e! 2;

E(%valen# Un%#s

l8 ' Prd(c#%n Phs%calUn%#s Trans'erred-%n Cs#s $%rec#*a#er%als Cnvers%nCs#s

<ork in process, beginning (gien)5tarted during current period (gien)&o account for Good units completed and transferred out

during current period3 ormal spoilageS

B2> × ">>JO B2> × ">>JO B2> × ">>J

Abnormal spoilageT

#2> × ">>JO #2> ×">>J, #2> × ">>J

<ork in process, endingU (gien)

">,>>> ×">>JO ">,>>>×>JO ">,>>>×#2JAccounted for <ork done to date

B,2>>"=,2 >>#,> >>

"2,>>>B2>

#2>

">,>>>

#,> >>

"2,>>>

B2>

#2>

">,>>> #,> >>

"2,>>>

B2>

#2>

> WWWWWW",> >>

"2,>>>

B2>

#2>

#,2>> WWWWW "=,2 >>

Sormal spoilage is 2J of good units transferred out3 2J "2,>>> F B2> units. 4egree of completionof normal spoilage in this department3 transferredin costs, ">>JO direct materials, ">>JOconersion costs, ">>J.

T&otal spoilage FB,2>> L "=,2>> M "2,>>> M ">,>>> F ",>>> units. Abnormal spoilage F ",>>> M B2> F #2>units. 4egree of completion of abnormal spoilage in this department3 transferredin costs, ">>JOdirect materials, ">>JO conersion costs, ">>J.

U4egree of completion in this department3 transferredin costs, ">>JO direct materials, >JO conersion

costs, #2J.



5!H&I! 6R8I;I& "=0#

PANEL 3D S#e!s 7) 4) and S(""ar%Je T#al Cs#s # Acc(n# r) C"!(#e Cs# !er

E(%valen# Un%#) and Ass%&n T#al Cs#s # Un%#s C"!le#ed) # S!%led Un%#s) and # Un%#s

%n End%n& =r+ %n Prcess

T#al

Prd(c#%

n

Cs#s

Trans'erred-

%n cs#s

$%rec#

*a#er%als

Cnvers

Cs#s

:S#e! 7; <ork in process, beginning (gien)/osts added in current period (gien)

&otal costs to account for

:S#e! 4; /osts incurred to date4iided by e-uialent units of 'ork done to

date/ost per e-uialent unit

:S#e! ; Assignment of costsGood units completed and transferred out

("2,>>> units)

?##,#2> 21,B2? B,@#2

?","#2 1>,B> > S?2,=#2

2,=#2

÷#,> >>

?# ."=2

? > ",> >?",> >

",>>

÷ ",> >>

? > .">

? ,"# "#,0B?"=,2 >

"=,2>

÷"=,2 >

?

/osts before adding normal spoilage ormal spoilage (B2> units)(A) &otal cost of good units completed andtransferred out(;) Abnormal spoilage (#2> units)(/) <ork in process, ending (">,>>> units) (A)L(;)L(/)&otal costs accounted for

?1@,#=1 #,11

2",B1= =#"

#1,02? B,@#2

"2,>>>V × (?#."=2 L ?>."> L ?")

B2>V× (?#."=2 L ?>."> L ?")

#2>V × (?#."=2 L ?>."> L ?"

( "> ,>>>V × ?#."=2) L(>V × ?>.">) L( #,2 >

?") ?2,=#2 L ?",> > L ?"=,2

S&otal costs of good units completed and transferred out in Panel ; (5tep 2) of 5olution 6xhibit "=0>.V6-uialent units of direct materials and conersion costs calculated in 5tep # in Panel A aboe.

CHAPTER /

*ASTER 3U$GET AN$ RESPONSI3ILIT9 ACCOUNTING

/-1 &he budgeting cycle includes the follo'ing elements3



a. Planning the performance of the company as a 'hole as 'ell as planning the performance of itssubunits. %anagement agrees on 'hat is expected.

b. Proiding a frame of reference, a set of specific expectations against 'hich actual results can becompared.

c. Inestigating ariations from plans. If necessary, correctie action follo's inestigation.d. Planning again, in light of feedback and changed conditions.

/-4 <e agree that budgeted performance is a better criterion than past performance for udgingmanagers, because inefficiencies included in past results can be detected and eliminated in budgeting. Also, future conditions may be expected to differ from the past, and these can also befactored into budgets.

/- Production and marketing traditionally hae operated as relatiely independent businessfunctions. ;udgets can assist in reducing conflicts bet'een these t'o functions in t'o 'ays./onsider a beerage company such as /oca/ola or Pepsi/ola3

• /ommunication. %arketing could share information about seasonal demand

'ith production.•

/oordination. Production could ensure that output is sufficient to meet, forexample, high seasonal demand in the summer.

/. &he steps in preparing an operating budget are as follo's3

". Prepare the reenues budget#. Prepare the production budget (in units)0. Prepare the direct material usage budget and direct material purchases budget1. Prepare the direct manufacturing labor budget2. Prepare the manufacturing oerhead budget. Prepare the ending inentories budgetB. Prepare the cost of goods sold budget=. Prepare the nonmanufacturing costs budget

@. Prepare the budgeted income statement

/-17 &he choice of the type of responsibility center determines 'hat the manager is accountable forand thereby affects the managers behaior. $or example, if a reenue center is chosen, themanager 'ill focus on reenues, not on costs or inestments. &he choice of a responsibility centertype guides the ariables to be included in the budgeting exercise.

/-22 Reven(es) !rd(c#%n) and !(rchases ,(d&e#

". @>>,>>> motorcycles × 1>>,>>> yen F 0>,>>>,>>>,>>> yen

#. ;udgeted sales (motorcycles) @>>,>>>

Add target ending finished goods inentory =>,>>>&otal re-uirements @=>,>>>4educt beginning finished goods inentory ">>,>>>Hnits to be produced ==>,>>>

0. 4irect materials to be used in production,==>,>>> E # ('heels) ",B>,>>>

Add target ending direct materials inentory >,>>>&otal re-uirements ",=#>,>>>





Plastic3 #2> lbs. E ?0.=> per lb. ? @2>%etal3 > lbs. E ?0 per lb. ? "=>

&o be purchased this period .Plastic3 (0,B@> M #2>) lbs. ×?1 per lb. "1,">%etal3 (212 M >) lbs. ×?0 per lb. WW WWWW ",122

4irect materials to be used this period ?"2,""> ? ",02 ?",B12



$%rec# *a#er%al P(rchases 3(d&e#

r #he *n#h ' A!r%l

*a#er%al

Plas#%c *e#al T#al

Phs%cal Un%#s 3(d&e# &o be used in production (re-uirement 0) 0,B@> lbs. 212 lbs.Add target ending inentory 0=> lbs. 22 lbs.

&otal re-uirements 1,"B> lbs. >> lbs.4educt beginning inentory #2> lbs. > lbs.Purchases to be made 0,@#> lbs. 21> lbs.

Cs# 3(d&e#

Plastic3 0,@#> lbs.× ?1 ?"2,=>%etal3 21> lbs. × ?0 WWWWWW ? ",#>

Purchases ?"2,=> ? ",#> ? "B,0>>

1.

$%rec# *an('ac#(r%n& La,r Cs#s 3(d&e#

r #he *n#h ' A!r%l

O(#!(# Un%#s

Prd(ced $*LH T#al H(rl =a&e

:re(%re"en# 2; !er Un%# H(rs Ra#e T#al

/atallac 2#> 0 ",2> ?"> ?"2,>>4ogerrific #=2 2 ",1#2 "> "1,#2>&otal ?#@,=2>

2. *ach%ne Se#(! Overhead

Ca#-allac $&-err%'%c T#al

Hnits to be produced 2#> #=2 Hnits per batch K #> K"2

umber of batches # "@ 5etup time per batch ×".2 hrs. × ".B2 hrs. &otal setup time 0@ hrs. 00.#2 hrs. B#.#2 hrs.

;udgeted machine setup costs F ?">> per setup hour × B#.#2 hours F ?B,##2

Prcess%n& Overhead

;udgeted machinehours (%8) F ("> %8 per unit E 2#> units) L ("= %8 per unit E #=2 units) F 2,#>> %8 L 2,"0> %8 F ">,00> %8

;udgeted processing costs F ?2 per %8 E ">,00> %8 F ?2",2>

Ins!ec#%n Overhead

;udgeted inspectionhours F (>.2 × # batches) L (>. × "@ batches) F "0 L "".1 F #1.1 inspection hrs.

;udgeted inspection costs F ?" per inspection hr. × #1.1 inspection hours F ?0@>.1>



*an('ac#(r%n& Overhead 3(d&e#

r #he *n#h ' A!r%l

%achine setup costs ? B,##2Processing costs 2",2>Inspection costs 0@>

&otal costs ?2@,#2

. Un%# Cs#s ' End%n& %n%shed Gds Inven#r

A!r%l 75) 25@@

Prd(c#

Ca#-allac $&-err%'%c

Cs# !er In!(# !er In!(# !er Un%# '

In!(#

Un%# '

O(#!(# T#al Un%# ' O(#!(# T#al

Plastic ? 1 1 lbs. ? ".>> lbs. ? #1.>>%etal 0 >.2 lbs. ".2> " lb. 0.>>

4irect manufacturing labor "> 0 hrs. 0>.>> 2 hrs. 2>.>>%achine setup ">> >.>B2 hrs. " B.2> >.""B hr " "".BProcessing 2 "> %8 2>.>> "= %8 @>.>>Inspection " >.>#2 hr # >.1> >.>1 hr.# >.1&otal ?">2.1> ?"[email protected]"

" 0@ setuphours K 2#> units F >.>B2 hours per unitO 00.#2 setuphours K #=2 units F >.""B hours per unit# "0 inspection hours K 2#> units F >.>#2 hours per unitO "".1 inspection hours K #=2 units F >.>1 hours

per unitEnd%n& Inven#r%es 3(d&e#

A!r%l 75) 25@@

M(an#%# Cs# !er (n%# T#al4irect %aterials Plastic 0=> ?1 ?",2#> %etals 22 0 "2 ?",=2

$inished goods /atallac 02 ?">2.1> ?0,=@ 4ogerrific "2 "[email protected]" #,@> ,0B@&otal ending inentory ?=,>1

B.Cs# ' Gds Sld 3(d&e#

r #he *n#h ' A!r%l) 25@@;eginning finished goods inentory, April, " (?",2>> L ?2,2=>) ? B,>=>4irect materials used (re-uirement 0) ?",B124irect manufacturing labor (re-uirement 1) #@,=2>%anufacturing oerhead (re-uirement 2) 2@,#2/ost of goods manufactured ">2,=>/ost of goods aailable for sale ""#,@1>4educt3 6nding finished goods inentory, April 0> (re-mt. ) ,0B@



/ost of goods sold ?">,2"

=.Nn"an('ac#(r%n& Cs#s 3(d&e#

r #he *n#h ' A!r%l) 25@@5alaries (?0,>>> K # × ".>2) ?"=,@>>!ther fixed costs (?0,>>> K #) "=,>>>5ales commissions (?"22,>>> × "J) ",22>&otal nonmanufacturing costs ?0=,12>

@.3(d&e#ed Inc"e S#a#e"en#

r #he *n#h ' A!r%l) 25@@

7eenues ?"22,>>>/ost of goods sold ">,2"Gross margin 1=,10@

!perating (nonmanufacturing) costs 0=,12>!perating income ? @,@=@

/-76 3(d&e#%n& and e#h%cs

". &he standards proposed by <ert are not challenging. In fact, he set the target at the leel hisdepartment currently achiees.

4% #.@2 lbs.×">> units F #@2 lbs.4 "@.# min.×">> units F ",@#> min K > F 0# hrs.%& @.@ min.×">> units F @@> min. K > F ".2 hrs.

#. <ert probably chose these standards so that his department 'ould be able to make the goal andreceie any resulting re'ard. <ith a little effort, his department can likely beat these goals.

0. As discussed in the chapter, benchmarking might be used to highlight the easy targets set by <ert.Perhaps the organization has multiple plant locations that could be used as comparisons.Alternatiely, management could use industry aerages. Also, management should 'ork 'ith<ert to better understand his department and encourage him to set more realistic targets. $inally,the re'ard structure should be designed to encourage increasing productiity, not beating the budget.

CHAPTER <

LEI3LE 3U$GETS) $IRECT-COST 0ARIANCES)

AN$ *ANAGE*ENT CONTROL

<2 &'o sources of information about budgeted amounts are (a) past amounts and (b) detailedengineering studies.





#.Ac#(al Cs#s

Inc(rred

:Ac#(al In!(# M#

F Ac#(al Pr%ce;

Ac#(al In!(# M#

F 3(d&e#ed Pr%ce

le@%,le 3(d&e#

:3(d&e#ed In!(#

M# All8ed 'r

Ac#(al O(#!(#

F 3(d&e#ed Pr%ce;

?"0,"#>a ?"1,#1> b ?"0,2#=c

?","#> $ ?B"# HPrice ariance 6fficiency ariance

?1>= $

$lexiblebudget ariancea ",>>> E ?>.=# F ?"0,"#> b",>>> E ?>.=@ F ?"1,#1>c >,=>> E >.#2 E ?>.=@ F ?"0,2#=

0. &he faorable flexiblebudget ariance of ?1>= has t'o offsetting components3

(a) faorable price ariance of ?","#>MMreflects the ?>.=# actual purchase cost being lo'er than the?>.=@ budgeted purchase cost per pound.

(b) unfaorable efficiency ariance of ?B"#MMreflects the actual materials yield of 0.=> scones per pound of pumpkin (>,=>> K ",>>> F 0.=>) being less than the budgeted yield of 1.>> (>,>>> K"2,>>> F 1.>>). &he company used more pumpkins (materials) to make the scones than 'as budgeted.

!ne explanation may be that Peterson purchased lo'er -uality pumpkins at a lo'er cost per pound.

<-22 *a#er%als and "an('ac#(r%n& la,r var%ances

Ac#(al Cs#sInc(rred

:Ac#(al In!(# M#

F Ac#(al Pr%ce;

Ac#(al In!(# M#

F 3(d&e#ed Pr%ce

le@%,le 3(d&e#

:3(d&e#ed In!(#M# All8ed 'r

Ac#(al O(#!(#

F 3(d&e#ed Pr%ce;

4irect%aterials

?#>>,>>> ?#"1,>>> ?##2,>>>

?"1,>>> $ ?"",>>> $Price ariance 6fficiency ariance

?#2,>>> $$lexiblebudget ariance

4irect ?@>,>>> ?=,>>> ?=>,>>>%fg. abor

?1,>>> H ?,>>> HPrice ariance 6fficiency ariance

?">,>>> H$lexiblebudget ariance



<-74 *a#er%al cs# var%ances) (se ' var%ances 'r !er'r"ance eval(a#%n

". %aterials 9ariances

Ac#(al Cs#sInc(rred

:Ac#(al In!(# M#

E Ac#(al Pr%ce;

Ac#(al In!(# M#

E 3(d&e#ed Pr%ce

le@%,le 3(d&e#:3(d&e#ed In!(# M# All8e

'r Ac#(al O(#!(#

E 3(d&e#ed Pr%ce;

4irect%aterials

(,>>> E ?"=a)?">=,>>>

Purchases Hsage(,>>> E ?#>) (2,>>> E ?#>)

?"#>,>>> ?">>,>>>(2>> E = E ?#>)(1,>>> E ?#>)

?=>,>>>

?"#,>>> $ ?#>,>>> HPrice ariance 6fficiency ariance

a

?">=,>>> K ,>>> F ?"=

#. &he faorable price ariance is due to the ?# difference (?#> ?"=) bet'een the standard price based on the preious suppliers and the actual price paid through the online marketplace. &heunfaorable efficiency ariance could be due to seeral factors including inexperienced 'orkersand machine malfunctions. ;ut the likely cause here is that the lo'erpriced titanium 'as lo'er-uality or less refined, 'hich led to more 'aste. &he labor efficiency ariance could be affected ifthe lo'er -uality titanium caused the 'orkers to use more time.

0. 5'itching suppliers 'as not a good idea. &he ?"#,>>> saings in the cost of titanium 'asout'eighed by the ?#>,>>> extra material usage. In addition, the ?#>,>>>H efficiency ariancedoes not recognize the total impact of the lo'er -uality titanium because, of the ,>>> pounds

purchased, only 2,>>> pounds 'ere used. If the -uantity of materials used in production isrelatiely the same, ;etter ;ikes could expect the remaining ",>>> lbs to produce ">> more units.At standard, ">> more units should take ">> E = F =>> lbs. &here could be an additionalunfaorable efficiency ariance of

(">>> × ?#>) (">> E = E ?#>)

?#>,>>> ?",>>>

?1,>>>H

1. &he purchasing managers performance ealuation should not be based solely on the priceariance. &he shortrun reduction in purchase costs 'as more than offset by higher usage rates.

8is ealuation should be based on the total costs of the company as a 'hole. In addition, the production managers performance ealuation should not be based solely on the efficiencyariances. In this case, the production manager 'as not responsible for the purchase of the lo'er-uality titanium, 'hich led to the unfaorable efficiency scores. In general, it is important for5tanley to understand that not all faorable material price ariances are *good ne's,+ because ofthe negatie effects that can arise in the production process from the purchase of inferior inputs.&hey can lead to unfaorable efficiency ariances for both materials and labor. 5tanley shouldalso that understand efficiency ariances may arise for many different reasons and she needs tokno' these reasons before ealuating performance.



2. 9ariances should be used to help ;etter ;ikes understand 'hat led to the current set of financialresults, as 'ell as ho' to perform better in the future. &hey are a 'ay to facilitate the continuousimproement efforts of the company. 7ather than focusing solely on the price of titanium, 5cottcan balance price and -uality in future purchase decisions.

. $uture problems can arise in the supply chain. 5cott may need to go back to the preioussuppliers. ;ut ;etter ;ikes relationship 'ith them may hae been damaged and they may no' be selling all their aailable titanium to other manufacturers. o'er -uality bicycles could alsoaffect ;etter ;ikes reputation 'ith the distributors, the bike shops and customers, leading tohigher 'arranty claims and customer dissatisfaction, and decreased sales in the future.

<-7/ $%rec# "a#er%als and "an('ac#(r%n& la,r var%ances) slv%n& (n+n8ns

All gien items are designated by an asterisk.

Ac#(al Cs#sInc(rred

:Ac#(al In!(# M#

E Ac#(al Pr%ce;

(",@>> E ?#")?0@,@>>

Ac#(al In!(# M#

E 3(d&e#ed Pr%ce

le@%,le 3(d&e#

:3(d&e#ed In!(#M# All8ed 'r

Ac#(al O(#!(#

E 3(d&e#ed Pr%ce;

4irect%anufacturingabor

(",@>> E ?#>S)?0=,>>>

(1,>>>S E >.2S E ?#>S)?1>,>>>

?",@>> HS ?#,>>> $S Price ariance 6fficiency ariance

Purchases Hsage

4irect ("0,>>> E ?2.#2) ("0,>>> E ?2S) ("#,2>> E ?2S) (1,>>>S E 0S E ?2S)%aterials ?=,#2>S ?2,>>> ?#,2>> ?>,>>>

?0,#2> HS ?#,2>> HS Price ariance 6fficiency ariance

". 1,>>> units E >.2 hours:unit F #,>>> hours

#. $lexible budget M 6fficiency ariance F ?1>,>>> M ?#,>>> F ?0=,>>>Actual dir. manuf. labor hours F ?0=,>>> K ;udgeted price of ?#>:hour F ",@>> hours

0. ?0=,>>> L Price ariance, ?",@>> F ?0@,@>>, the actual direct manuf. labor cost

Actual rate F Actual cost K Actual hours F ?0@,>>> K ",@>> hours F ?#":hour (rounded)

1. 5tandard -ty. of direct materials F 1,>>> units E 0 pounds:unit F "#,>>> pounds

2. $lexible budget L 4ir. matls. effcy. ar. F ?>,>>> L ?#,2>> F ?#,2>>Actual -uantity of dir. matls. used F ?#,2>> K ;udgeted price per lb

F ?#,2>> K ?2:lb F "#,2>> lbs



. Actual cost of direct materials, ?=,#2> M Price ariance, ?0,#2> F ?2,>>>Actual -ty. of direct materials purchased F ?2,>>> K ;udgeted price, ?2:lb F "0,>>> lbs.

B. Actual direct materials price F ?=,#2> K "0,>>> lbs F ?2.#2 per lb.

<-47 Pr%ce and e''%c%enc var%ances) !r,le"s %n s#andard-se##%n&) ,ench"ar+%n&

". ;udgeted direct materials input per shirt F >> rolls K ,>>> shirtsF >."> roll of cloth;udgeted direct manufacturing. laborhours per shirt (",2>> hours K ,>>> shirts) F >.#2 hours;udgeted direct materials cost (?0>,>>> K >>) F ?2> per roll;udgeted direct manufacturing labor cost per hour (?#B,>>> K ",2>>) F ?"= per hour Actual output achieed F ,B0# shirts

le@%,le 3(d&e#

Ac#(al Cs#s :3(d&e#ed In!(#

Inc(rred M# All8ed 'r

:Ac#(al In!(# M# Ac#(al In!(# M# Ac#(al O(#!(#

F Ac#(al Pr%ce; F 3(d&e#ed Pr%ce F 3(d&e#ed Pr%ce;

4irect ("# E ?2>) (,B0# E >."> E ?2>)

%aterials ?0>,#@1 ?0>,>> ?00,>

?0> $ ?0,>> $ Price ariance 6fficiency ariance

4irect%anufacturing (",20> E ?"=) (,B0# E >.#2 E ?"=)abor ?#B,@0 ?#B,21> ?0>,#@1

?"20 H ?#,B21 $ Price ariance 6fficiency ariance

#. Actions employees may hae taken include3(a) Adding steps that are not necessary in 'orking on a shirt.(b) &aking more time on each step than is necessary.(c) /reating problem situations so that the budgeted amount of aerage do'ntime 'ill

be oerstated.(d) /reating defects in shirts so that the budgeted amount of aerage re'ork 'ill be

oerstated.

6mployees may take these actions for seeral possible reasons.(a) &hey may be paid on a piecerate basis 'ith incenties for production leels aboe budget.(b) &hey may 'ant to create a relaxed 'ork atmosphere, and a less demanding standard can reduce

stress.

(c) &hey hae a *them s. us+ mentality rather than a partnership perspectie.(d) &hey may 'ant to gain all the benefits that ensue from superior performance (ob security, 'age rate

increases) 'ithout putting in the extra effort re-uired.

&his behaior is unethical if it is deliberately designed to undermine the credibility of the standards usedat e' $ashions.



0. If Corgenson does nothing about standard costs, his behaior 'ill iolate the *5tandards of6thical /onduct for Practitioners of %anagement Accounting.+ In particular, he 'ould iolatethe

(a) standards of competence, by not performing professional duties in accordance 'ith releantstandardsO

(b) standards of integrity, by passiely suberting the attainment of the organizations obectie to

control costsO and(c) standards of credibility, by not communicating information fairly and not disclosing all releant cost

information.

1. Corgenson should discuss the situation 'ith $enton and point out that the standards are lax andthat this practice is unethical. If $enton does not agree to change, Corgenson should escalatethe issue up the hierarchy in order to effect change. If organizational change is notforthcoming, Corgenson should be prepared to resign rather than compromise his professionalethics.

2. %ain pros of using ;enchmarking /learing 8ouse information to compute ariances are3(a) 8ighlights to e' $ashions in a direct 'ay ho' it may or may not be costcompetitie.

(b) Proides a *reality check+ to many internal positions about efficiency or effectieness.

%ain cons are3(a) e' $ashions may not be comparable to companies in the database.(b) /ost data about other companies may not be reliable.(c) /ost of ;enchmarking /learing 8ouse reports.

CHAPTER .

LEI3LE 3U$GETS) O0ERHEA$ COST 0ARIANCES) AN$

*ANAGE*ENT CONTROL

.-4 5teps in deeloping a budgeted ariableoerhead cost rate are3". /hoose the period to be used for the budget,#. 5elect the costallocation bases to use in allocating ariable oerhead costs to the output

produced,

3. Identify the ariable oerhead costs associated 'ith each costallocation base, and

4. /ompute the rate per unit of each costallocation base used to allocate ariable oerhead costs to

output produced.

.-< A direct materials efficiency ariance indicates 'hether more or less direct materials 'ere usedthan 'as budgeted for the actual output achieed. A ariable manufacturing oerhead efficiency

ariance indicates 'hether more or less of the chosen allocation base 'as used than 'as budgetedfor the actual output achieed.

.-. 5teps in deeloping a budgeted fixedoerhead rate are". /hoose the period to use for the budget,#. 5elect the costallocation base to use in allocating fixed oerhead costs to output produced,0. Identify the fixedoerhead costs associated 'ith each costallocation base, and1. /ompute the rate per unit of each costallocation base used to allocate fixed oerhead costs to

output produced.



.-12 A strong case can be made for 'riting off an unfaorable productionolume ariance to cost ofgoods sold. &he alternatie is prorating it among inentories and cost of goods sold, but this'ould *penalize+ the units produced (and in inentory) for the cost of unused capacity, i.e., forthe units not produced. ;ut, if 'e take the ie' that the denominator leel is a *soft+ number i.e., it is only an estimate, and it is neer expected to be reached exactly, then it makes more sense

to prorate the production olume ariance'hether faorable or notamong the inentorystock and cost of goods sold. Prorating a faorable ariance is also more conseratie3 it results ina lo'er operating income than if the faorable ariance had all been 'ritten off to cost of goodssold. $inally, prorating also dampens the efficacy of any steps taken by company management tomanage operating income through manipulation of the production olume ariance. In sum, a productionolume ariance need not al'ays be 'ritten off to cost of goods sold.

.-17 &he four ariances are3

• 9ariable manufacturing oerhead costs

− spending ariance

− efficiency ariance

• $ixed manufacturing oerhead costs

− spending ariance

− productionolume ariance

.-22 S#ra%&h#'r8ard 4-var%ance verhead anals%s

". &he budget for fixed manufacturing oerhead is 1,>>> units E machinehours E ?"2 machinehours:unit F ?0>,>>>.

An oerie' of the 1ariance analysis is3

4-0ar%ance

Anals%s

S!end%n&

0ar%ance

E''%c%enc

0ar%ance

Prd(c#%n-

0l("e 0ar%ance9ariable%anufacturing!erhead

?"B,=>> H ?",>>> H eer a 9ariance

$ixed%anufacturing!erhead

?"0,>>> H eer a 9ariance ?0,>>> $

5olution 6xhibit =## has details of these ariances.

A detailed comparison of actual and flexible budgeted amounts is3

Ac#(al le@%,le 3(d&e#

!utput units (auto parts) 1,1>> 1,1>>Allocation base (machinehours) #=,1>> #,1>>a

Allocation base per output unit .12 b .>>

9ariable %!8 ?#12,>>> ?#"",#>>c

9ariable %!8 per hour ?=.0d ?=.>>$ixed %!8 ?0B0,>>> ?0>,>>>e

$ixed %!8 per hour ?"0."0f M



a1,1>> units E .>> machinehours:unit F #,1>> machinehours b#=,1>> K 1,1>> F .12 machinehours per unitc 1,1>> units E .>> machinehours per unit E ?=.>> per machinehour F ?#"",#>>d ?#12,>>> K #=,1>> F ?=.0e 1,>>> units E .>> machinehours per unit E ?"2 per machinehour F ?0>,>>>f ?0B0,>>> K #=,1>> F ?"0."0

#. 9ariable %anufacturing !erhead /ontrol #12,>>>Accounts Payable /ontrol and other accounts #12,>>>

<orkinProcess /ontrol #"",#>>9ariable %anufacturing !erhead Allocated #"",#>>

9ariable %anufacturing !erhead Allocated #"",#>>9ariable %anufacturing !erhead 5pending 9ariance "B,=>>9ariable %anufacturing !erhead 6fficiency 9ariance ",>>>

9ariable %anufacturing !erhead /ontrol #12,>>>

$ixed %anufacturing !erhead /ontrol 0B0,>>><ages Payable /ontrol, Accumulated 4epreciation

/ontrol, etc. 0B0,>>>

<orkinProcess /ontrol 0@,>>>$ixed %anufacturing !erhead Allocated 0@,>>>

$ixed %anufacturing !erhead Allocated 0@,>>>$ixed %anufacturing !erhead 5pending 9ariance "0,>>>

$ixed %anufacturing !erhead Production9olume 9ariance 0,>>>$ixed %anufacturing !erhead /ontrol 0B0,>>>

0. Indiidual fixed manufacturing oerhead items are not usually affected ery much by daytodaycontrol. Instead, they are controlled periodically through planning decisions and budgeting procedures that may sometimes hae horizons coering six months or a year (for example,management salaries) and sometimes coering many years (for example, longterm leases anddepreciation on plant and e-uipment).

1. &he fixed oerhead spending ariance is caused by the actual realization of fixed costs differingfrom the budgeted amounts. 5ome fixed costs are kno'n because they are contractuallyspecified, such as rent or insurance, although if the rental or insurance contract expires during theyear, the fixed amount can change. !ther fixed costs are estimated, such as the cost ofmanagerial salaries 'hich may depend on bonuses and other payments not kno'n at the

beginning of the period. In this example, the spending ariance is unfaorable, so actual $!8 isgreater than the budgeted amount of $!8. &he fixed oerhead production olume ariance iscaused by production being oer or under expected capacity. You may be under capacity 'hendemand drops from expected leels, or if there are problems 'ith production. !er capacity isusually drien by faorable demand shocks or a desire to increase inentories. &he fact that thereis a faorable olume ariance indicates that production exceeded the expected leel of output(1,1>> units actual relatie to a denominator leel of 1,>>> output units).



SOLUTION EHI3IT .-22

Ac#(al Cs#s

Inc(rred:1;

Ac#(al In!(#

F 3(d&e#ed Ra#e:2;

le@%,le 3(d&e#D

3(d&e#ed In!(#

All8ed 'r

Ac#(al O(#!(#

F 3(d&e#ed Ra#e:7;

Allca#edD

3(d&e#ed In!(#

All8ed 'r

Ac#(al O(#!(#

E 3(d&e#ed Ra#e:4;

9ariable%!8 ?#12,>>>

(#=,1>> E ?=)?##B,#>>

(1,1>> E E ?=)?#"",#>>

(1,1>> E E ?=)?#"",#>>

Ac#(al Cs#s

Inc(rred

:1;

5ame ;udgetedump 5um:as %n S#a#%c 3(d&e#;

Re&ardless '

O(#!(# Level

:2;

le@%,le 3(d&e#D

5ame ;udgetedump 5um:as %n S#a#%c 3(d&e#;

Re&ardless '

O(#!(# Level

:7;

Allca#edD

3(d&e#ed In!(#

All8ed 'r

Ac#(al O(#!(#

F 3(d&e#ed Ra#e

:4;

$ixed

%!8 ?0B0,>>>

(1,>>> E E ?"2)

?0>,>>>

(1,>>> E E ?"2)

?0>,>>>

(1,1>> E E ?"2)

?0@,>>>

.-26 C"!rehens%ve var%ance anals%s

". ;udgeted number of machinehours planned can be calculated by multiplying the numberof units planned (budgeted) by the number of machinehours allocated per unit3

=== units × # machinehours per unit F ",BB machinehours.

$17,800 U

Spending variance

$16,000 U

Efficiency varianceNever a variance

$13,000 U

Never a variance

$36,000 F

Productionolumeariance

$33,800 U

Flexible-budge variance

$33,800 U

Underall!caed variable !ver"ead

$13,000 U

-

$36,000 F

Productionolume ariance$&3,000 F

'verall!caed fixed !ver"ead



#. ;udgeted fixed %!8 costs per machinehour can be computed by diiding the flexible budgetamount for fixed %!8 ('hich is the same as the static budget) by the number of machinehours planned (calculated in (a.))3

?01=,>@ K ",BB machinehours F ?"@.>> per machinehour

0. ;udgeted ariable %!8 costs per machinehour are calculated as budgeted ariable %!8costs diided by the budgeted number of machinehours planned3

?B",>1> K ",BB machinehours F ?1>.>> per machinehour.

". ;udgeted number of machinehours allo'ed for actual output achieed can be calculated bydiiding the flexiblebudget amount for ariable %!8 by budgeted ariable %!8 costs per machinehour3

?B,=>> K ?1>.>> per machinehourF ",@#> machinehours allo'ed

#. &he actual number of output units is the budgeted number of machinehours allo'ed for actual

output achieed diided by the planned allocation rate of machine hours per unit3

",@#> machinehours K # machinehours per unit F @> units.

0. &he actual number of machinehours used per output unit is the actual number of machine hoursused (gien) diided by the actual number of units manufactured3

",=#1 machinehours K @> units F ".@ machinehours used per output unit.

.-7/ Ac#%v%#-,ased cs#%n&) ,a#ch-level var%ance anals%s

". 5tatic budget number of crates F ;udgeted pairs shipped : ;udgeted pairs per crate

F #1>,>>>:"# F #>,>>> crates

#. $lexible budget number of crates F Actual pairs shipped : ;udgeted pairs per crate F "=>,>>>:"# F "2,>>> crates

0. Actual number of crates shipped F Actual pairs shipped : Actual pairs per box F "=>,>>>:">

F "=,>>> crates

1. 5tatic budget number of hours F 5tatic budget number of crates E budgeted hours per box

F #>,>>> E ".# F #1,>>> hours

$ixed oerhead rate F 5tatic budget fixed oerhead : static budget number of hours F >,>>>:#1,>>> F ?#.2> per hour



2. 9ariable !erhead 9ariance Analysis for 7icas $leet $eet Inc. for #>>=

Ac#(al Ac#(al h(rs 3(d&e#ed h(rs all8ed 'r

0ar%a,le Overhead @ 3(d&e#ed ra#e Ac#(al (#!(# @ 3(d&e#ed ra#e

("=,>>> E "." E ?#") ("=,>>> E "." E ?#>) ("2,>>> E ".# E ?#>)?1"2,=>> ?0@,>>> ?0>,>>>

?"@,=>> H ?0,>>> HS!end%n& var%ance E''%c%enc var%ance

. $ixed !erhead 9ariance Analysis for 7icas $leet $eet Inc. for #>>=

Ac#(al S#a#%c 3(d&e# 3(d&e#ed h(rs all8ed 'r

%@ed Overhead %@ed Overhead Ac#(al (#!(# F 3(d&e#ed Ra#e

("2,>>> E ".# E?#.2) ?22,>>> ?>,>>> ?12,>>>

?2,>>> $ ?"2,>>> H S!end%n& var%ance Prd(c#%n vl("e var%ance

.-47 Overhead var%ances) e#h%cs

". a.&otal budgeted oerhead ?0",#2>,>>>

;udgeted ariable oerhead

(?"> budgeted rate per machinehour E #,2>>,>>>

budgeted machinehours) #2,>>>,>>>

;udgeted fixed oerhead ? ,#2>,>>>

;udgeted fixed !8 rate

?,#2>,>>> budgeted amountF ?#.2> per machinehour

#,2>>,>>> budgeted machinehours=

, %@ed verhead s!end%n& var%ance ? Ac#(al cs#s %nc(rred 3(d&e#ed a"(n# 3eca(se

'%@ed verhead s!end%n& var%ance %s (n'avra,le) #he a"(n# ' ac#(al cs#s %s h%&her #han

#he ,(d&e#ed a"(n#

Actual cost F ?,#2>,>>> L ?",2>>,>>>

F ?B,B2>,>>>

c. Productionolume ariance F

;udgeted fixed oerhead M

F ?,#2>,>>> M (?#.2> per machinehour E # machinehours per unitS E ",#12,>>>units)

F ?,#2>,>>> M ?,##2,>>>F ?#2,>>> H



S ;udgeted ariable oerhead per unit F ?#> ;udgeted ariable oerhead rate F ?"> per machinehour &herefore, budgeted machine hours allo'ed per unit F ?#>:?"> F # machinehours

#. 9ariable oerhead spending ariance3

Actual ariableoerhead cost

per unit of costallocation base

M

;udgeted ariableoerhead cost per unit of

costallocation base

E

Actual -uantityof ariable oerheadcostallocation base

used for actual output

?#2,#>>,>>> budget amount?"> per machinehour #,1>>,>>> machinehours

#,1>>,>>> actual machinehours

= − ×

F (?">.2> M ?">) E #,1>>,>>>F ?",#>>,>>> H

9ariable oerhead efficiency ariance3

Actual units of ;udgeted units of ;udgeted ariable oerhead ariable oerhead ariable

costallocation M costallocation base E oerhead

base used for allo'ed for rate actual output actual output

F (#,1>>,>>> M (# E ",#12,>>>)) E ?">F (#,1>>,>>> M #,1@>,>>>) E ?">F ?@>>,>>> $

0. ;y manipulating, 7emich has created a sizable unfaorable fixed oerhead spending ariance or,at least, has increased its magnitude. Cack 7emichs action is clearly unethical. 9ariances dra'attention to the areas that need management attention. If the top management relies on 7emich,due to his expertise, to interpret and explain the reasons for the unfaorable ariance, it is likely

that his report 'ill be biased and misleading to the top management. &he top management mayerroneously conclude that %onroe is not able to manage his fixed oerhead costs effectiely.Another probable aderse outcome of 7emichs actions 'ill be that %onroe 'ill hae een lessconfidence in the usefulness of accounting reports. &his, of course, defeats the purpose ofpreparing the reports In summary 7emichs unethical actions 'ill 'aste top managements time

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