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PROBLEM 4-33 (30 MINUTES)
1. a. Equivalent units:Percentage
ofCompletion
with RespectTax to
Returns Conversion(physical (labor and Equivalent Units
units) overhead) Labor OverheadReturns in process, February 1...... 300 20%Returns started in February............ 900Total returns to account for............ 1,200
Returns in process, February 28.... 400 75% 300 300 Total returns accounted for............ 1,200 ____ ____ Total equivalent units of activity.... 1,100 1,100
b. Costs per equivalent unit: Labor Overhead Total
Returns in process, February 1................... £ 3,500 £ 4,000 £ 7,500Costs incurred during February.................. 90,000 51,000 141,000Total costs to account for............................. £93,500 £55,000 £148,500Equivalent units............................................. 1,100 1,100Costs per equivalent unit............................. £85.00 £50.00 £135.00
2. Cost of returns in process on February 28:
Labor: equivalent unitscost per equivalent unit300£85.00.................................................... £25,500
Overhead: equivalent unitscost per equivalent unit300£50.00.................................................... 15,000
Total cost of returns in process on February 28.......................................... £40,500
The missing amounts are shown below. A completed production report follows.
Units started during January................................................................................. 55,000Units completed and transferred out during January......................................... 60,000Total equivalent units: conversion........................................................................ 66,000
Work in process, January 1: conversion.............................................................. $ 110,600Costs incurred during January: direct material................................................... 400,000Cost per equivalent unit: conversion.................................................................... 14.10Cost of goods completed and transferred out during January.......................... 1,320,000Cost remaining in ending work-in-process inventory: direct material.............. 158,000
PRODUCTION REPORT: CANANDAIGUA CARPET COMPANYWeighted-Average Method
Physical Units
Percentage of
Completion with
Respect to Conversion
Equivalent UnitsDirect
Material ConversionWork in process, January 1.............. 25,000 25%Units started during January........... 55,000Total units to account for................. 80,000
Units completed and transferred out during January....................... 60,000 100% 60,000 60,000
Work in process, January 31............ 20,000 30% 20,000 6,000 Total units accounted for.................. 80,000 _____ _____ Total equivalent units........................ 80,000 66,000
Total cost of January 31 work in process................................................ $242,600
Check: Cost of goods completed and transferred out... $1,320,000Cost of January 31 work-in-process inventory. . 242,600Total costs accounted for..................................... $1,562,600
PROBLEM 4-35 (45 MINUTES)
1. PRODUCTION REPORT: MIXING DEPARTMENT(Weighted-Average Method)
November 20x5Percentage
ofCompletion
with Equivalent UnitsPhysical Respect to Direct
Units Conversion Material ConversionWork in process, November 1....... 5,000 70%Units started during November.... 17,000Total units to account for.............. 22,000
Units completed and transferredout during November.......... 16,000 100% 16,000 16,000
Work in process, November 30 6,000 30% 6,000 1,800Total units accounted for............... 22,000 ____ _ _ ____Total equivalent units..................... 22,000 17,800
DirectMaterial Conversion Total
Work in process, November 1....... $ 31,600 $ 55,220 $ 86,820Costs incurred during November. 85,000* 210,000† 295,000Total costs to account for.............. $116,600 $265,220 $381,820Equivalent units.............................. 22,000 17,800Costs per equivalent unit.............. $5.30 $14.90 $20.20
Total cost of November 30 work in process...................................................... $58,620
Check: Cost of goods completed and transferred out......... $323,200 Cost of November 30 work-in-process inventory. . . 58,620 Total costs accounted for.......................................... $381,820
2. a. Work-in-Process Inventory: Mixing Department............. 85,000Raw-Material Inventory............................................ 85,000
b. Work-in-Process Inventory: Mixing Department............. 70,000Wages Payable.......................................................... 70,000
c. Work-in-Process Inventory: Mixing Department............. 140,000*Manufacturing Overhead......................................... 140,000
Activity Classification Activity Classification(1) P (11) B(2) P (12) B(3) P (13) U(4) P (14) U(5) P (15) U(6) P (16) U(7) P (17) B(8) B (18) F(9) B (19) F(10) B
bCatalogs distributedunit costcCatalog salesunit costdNumber of retail ordersunit costeSmall: (2,00012) + 79,000 = 103,000 Medium: (45,00012) + 52,000 = 592,000 Large: (178,00012) + 44,000 = 2,180,000fTotal cost for all orders of a given size ÷ units sold
EXERCISE 5-33 (CONTINUED)
2. The analysis of selling costs shows that small orders cost more than large orders. This fact could persuade management to market large orders more aggressively and/or offer discounts for them.
PROBLEM 5-51 (30 MINUTES)
1. Valdosta Vinyl Company (VVC) is currently using a plantwide overhead rate that is applied on the basis of direct-labor dollars. In general, a plantwide manufacturing-overhead rate is acceptable only if a similar relationship between overhead and direct labor exists in all departments or the company manufactures products that receive the same proportional services from each department
In most cases, departmental overhead rates are preferable to plantwide overhead rates because plantwide overhead rates do not provide the following:
A framework for reviewing overhead costs on a departmental basis, identifying departmental cost overruns, or taking corrective action to improve departmental cost control.
Sufficient information about product profitability, thus increasing the difficulties associated with management decision making.
2. Because the company uses a plantwide overhead rate applied on the basis of direct-labor dollars, the elimination of direct labor in the Molding Department through the introduction of robots may appear to reduce the overhead cost of the Molding Department to zero. However, this change will not reduce fixed manufacturing costs such as depreciation and plant supervision. In reality, the use of robots is likely to increase fixed costs because of increased depreciation. Under the current method of allocating overhead costs, these costs merely will be absorbed by the remaining departments.
3. a. In order to improve the allocation of overhead costs in the Cutting and Finishing departments, management should move toward an activity-based costing system. The firm should:
Establish activity-cost pools for each significant activity.
Select a cost driver for each activity that best reflects the relationship of the activity to the overhead costs incurred.
b. In order to accommodate the automation of the Molding Department in its overhead accounting system, the company should:
Establish a separate overhead pool and rate for the Molding Department.
Identify fixed and variable overhead costs and establish fixed and variable overhead rates.
Apply overhead costs to the Molding Department on the basis of robot or machine hours.
PROBLEM 5-54 (50 MINUTES)
1. Activity Cost Pool Type of ActivityI: Machine-related costs Unit-levelII: Setup and inspection Batch-levelIII: Engineering Product-sustaining-levelIV: Plant-related costs Facility-level
Machine-related..............................................................$ 800.00 $ 200.00Setup and inspection.....................................................360.00 72.00Engineering.....................................................................270.00 18.00Plant-related.................................................................... 307.20 15.36
Total overhead cost per unit................................................$1,737.20 $ 305.36 Production volume........................................................... 1,000 5,000 Total overhead assigned......................................................$1,737,200 $1,526,800
2. The new product cost, under an activity-based costing approach, is $11.06 per pound of Jamaican and $4.62 per pound of Columbian coffee, calculated as follows:
3. a. The ABC analysis indicates that several activities other than direct labor drive overhead. The cost computations show that the current system significantly undercosted Jamaican coffee, the low-volume product, and significantly overcosted the high-volume product, Colombian coffee.
b. The implication of the ABC analysis is that the low-volume products are using resources but are not covering their share of the cost of those resources. The Jamaican blend is currently priced at $9.49 [see requirement 1(b)], which is significantly below its activity-based cost of $11.06. The company should set long-run prices above cost. If there is excess capacity and many of the costs are fixed, it may be acceptable to price some products below full activity-based cost temporarily in order to build demand for the product. Otherwise, the high-volume, high-margin products are subsidizing the low-volume, low-margin products.