sm_ch04.doc

Chapter 4: Product Costing Systems: General Principles and Job Costing

CHAPTER 4

PRODUCT COSTING SYSTEMS

ANSWERS TO QUESTIONS

4.1 A cost object is anything for which management decides a separate measurement is desirable. In this definition it is important to recognise some key words – a cost object can be anything. There is no exclusive list of cost objects and common cost objects include products, services, contracts, projects and departments. The other important point is that management decides what it wants to know the cost of in order to carry out its managerial functions. Once management has decided the cost objects, management accountants are able to measure the costs associated with the cost object (on a cost/benefit basis) and provide management with the information. As a result of this definition and its analysis, cost objects provide the focus or target for the costing system.

4.2Purpose Current / Future Product CostsShort-term decisions: product mix, pricing FutureLonger-term strategic decisions FutureLong-term pricing Future Plan future product-related costs Future Control of product costs CurrentReimbursement contracts CurrentExternal reporting (inventory calculation) Current

All the information cannot come from one source. The main accounting system may accumulate current and past costs but for much decision-making and planning, estimates of future costs will need to be generated outside of that accounting system.

4.3

Purpose Costs IncludedShort-term decisions - product mix, pricing Production / downstreamLonger-term strategic decisions Production / upstream / downstreamLong-term pricing Production / upstream / downstreamPlan future product-related costs Production, plus other relevant costs

across the value chainControl of product costs Production, plus other relevant costs

across the value chainReimbursement contracts Production costs, plus other costs as

specified in the contractExternal reporting (inventory calculation) Production costs

Conventional costing systems typically focus on production costs. But for many decisions, costs in other parts of the value chain will be need to be included to help managers understand the overall viability of a product or service, and to manage costs effectively.

4.4Purpose FrequencyShort-term decisions: product mix, pricing Ad hocLonger-term strategic decisions Ad hocLong-term pricing For each new product developmentPlan future product-related costs Monthly for current products or adhoc

for each new product developmentControl of product costs Monthly, sometimes more frequentlyReimbursement contracts Whenever invoicing is requiredExternal reporting (inventory calculation) Annually, and possibly monthly

59Solutions Manual t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne and Hilton


A product costing system developed to meet financial reporting requirements will provide routine information on some costs. However, other information will be required on an ad hoc basis. It may be possible to design a product costing approach, to provide at least some of this information.

4.5 This is not entirely satisfactory. There are a range of decisions that product costs may be useful for. Even though the business is a ‘price-taker’, they may well need to consider whether they should be making all of the products in the range, as some may be unprofitable. A wrong decision on one product may cost the firm more than it does to keep a costing system going. A product costing system may well help them control production costs and recognise problems before it is too late. The firm will need some product costs at year-end to value inventory even if it is minimal.

4.6 When direct material, direct labour and manufacturing overhead costs are incurred, they are applied to work in process inventory by debiting the account. When goods are finished, the costs are removed from the work in process account with a credit, and they are transferred to finished goods inventory by debiting that account. Subsequently, when the goods are sold, the finished goods inventory is credited and the costs are added to the cost of goods sold, with a debit.

4.7 For external reporting purposes, only manufacturing costs are included. Factory overhead must be absorbed into inventory. For management decision-making purposes, costs can be collected in any form, and may include costs in any part of the value chain—not just manufacturing costs.

4.8 The three steps followed when applying manufacturing overhead to products are:

(a) identifying the overhead cost driver, which is the factor that causes the overhead costs to be incurred;(b) calculating the overhead rate, which is usually based on the budgeted annual manufacturing overhead

cost, divided by the budgeted annual volume of cost driver; and(c) applying manufacturing overhead costs to products, by multiplying the predetermined overhead rate by

the amount of cost driver consumed by the product.

4.9 Overapplied or underapplied overhead is caused by errors in estimating the predetermined overhead rate. These errors can occur in the numerator (budgeted manufacturing overhead), or in the denominator (budgeted level of the cost driver).

4.10 Overapplied or underapplied overhead can be closed directly into cost of goods sold, or it can be prorated among work in process inventory, finished goods inventory and cost of goods sold. If the amount of underapplied or overapplied overhead is significant, it should be prorated.

4.11 Overapplied or underapplied overhead should be closed at year end because month to month variations are likely to average out.

4.12 In Exhibit 4.10, underapplied overhead is deducted from the actual overheads to estimate the amount of overhead applied to production during the period. As a result of this calculation the manufacturing cost reflects the actual material and labour costs, plus applied overhead. These costs form part of the cost of goods sold. The cost of goods sold is then adjusted by adding in the amount of underapplied overhead, to reflect the part of the actual overhead that has not been recognised in manufacturing cost.

4.13 In a job costing system, costs are assigned to batches or job orders of production. Job costing systems are used by firms that produce relatively small numbers of dissimilar products. Job costing would be used in any situation where products are produced to customers’ specification, such as tailoring or an architect-designed home. Job costing is also appropriate in a panel-beating shop, where the damage to each vehicle is clearly identifiable at the outset. In a process costing system, production costs are averaged over a large number of product units. Process costing systems are used by firms that produce large numbers of nearly identical products, such as paint production, beer brewing or making bricks.

The factor which determines the choice of system is the point at which the cost object (that is, the unit being produced) can be identified. In job costing situations, the job can be identified as being unique from the outset, therefore direct costs can be traced to it easily and economically – think about the panel-beating shop. In a process costing environment, such as producing paint, each litre of paint is identical to every other litre and cannot be distinguished until the completion of the process – and even then, it is difficult. This means that direct costs cannot be traced to the unit, so must be traced to the process and then averaged across all units produced.

4.14 The two main steps in process costing are: estimating the costs of the production process;



calculating an average cost per unit by dividing the cost of the process by the number of units produced

Note that in the next chapter (see Question 5.6) these steps are explained more comprehensively where there are four steps.

4.15 The steps in describing the flow of costs through a single-department process costing system are as follows:

as raw material, direct labour and manufacturing overhead are introduced into production, their costs are debited to the work in process inventory account

as the goods are completed their costs are credited from the work in process inventory account and debited into the finished goods inventory account

as the goods are sold their costs are credited from the finished goods inventory account and debited into the cost of goods sold account

In a two-stage production process, when goods are finished in production department (A), the costs accumulated in the work in process inventory account are transferred to the work in process inventory account for production department B.

4.16 The type of product costing system depends on the type of product produced and the production environment. There are some firms that produce one-off products and use a ‘true’ job costing system, and others that mass-produce one product and use a process costing system. However, many firms need to use a hybrid costing system because of the nature of their products.

4.17 (a) The job costing sheet is used to summarise the costs of direct material, direct labour, and manufacturing overhead that relates to a particular job.

(b) A material requisition form authorises the transfer of raw material from the warehouse to the production department, and is used to record the cost of materials for jobs.

(c) A labour time-sheet is used to record the amount of time spent on each job.

4.18 (a) Total manufacturing cost is the cost of materials and labour used, and the overhead applied for the period.

(b) Manufacturing costs to account for, include the cost of opening inventory for work in process.(c) Cost of goods manufactured is the total manufacturing cost adjusted for opening and closing inventory.

4.19 In process costing, large quantities of identical (or nearly identical) units are produced, therefore it is neither possible, nor necessary, to trace costs to each individual unit. Instead, production costs are traced to a process, or department, and the average unit cost is determined by dividing the total process costs by the total number of units produced. The costs of producing each unit are determined by progressively accumulating the costs for each process.

4.20 Production costs are tracked to each production department for two reasons:

department managers are held responsible for cost control, and so the costs for each department must be identifiable

when there are work in process inventories at the end of an accounting period, separate costs are necessary for each department in order to calculate the value of work in process for that department

4.21 Process costing is appropriate to industries where large quantities of identical units are produced. The system of costing used in these industries is simplified when there are no goods in process at the end of the accounting period, and therefore, no need to value the closing inventory in process. Industries where this is applicable are those where a batch of production is completed entirely and no part of it can be held over for further processing. This is well illustrated in the example for Spritz given in the chapter, because any material left in the mixing tank is discarded. Other industries which are similar are petroleum, beer brewing and paint manufacture. In the real world, firms sometimes close their books off at the completion of the last batch for the accounting period, rather than commence a fresh batch a few hours before the closing date, and then be confronted by the problem of having to value the work in process. Chapter 5 explains how industries deal with this complexity where work in process at the end of the accounting period is unavoidable.

4.22 Australian accounting standard, AASB 1019 (Inventories) has several requirements relating to inventories arising from production:



The cost of inventories produced are to include the costs of:

direct materials direct labour and on-costs sub-contracted work, and a systematic allocation of production overheads

The statement of financial position must disclose separately the accounting policies adopted for measuring inventories, including work in process and finished goods. Both of these requirements involve costs determined under job costing systems and process costing systems, although the valuing of work in process in process costing is not dealt with until Chapter 5.

4.23 The only administration costs which may be included in inventory values are those which relate to production, such as workshop clerks, the production manager, and time-keeping staff. These costs are applied to the unit cost through manufacturing overhead rate, and so are included in the unit cost.

4.24 An advantage of prorating overapplied or underapplied overhead is that it results in the adjustment of all the accounts affected by misestimating the overhead rate. These accounts include the work in process inventory account, the finished goods inventory account, and the cost of goods sold account. The resulting balances in these accounts are more accurate when proration is used than when overapplied or underapplied overhead is closed directly into cost of goods sold. The primary disadvantage of prorating overapplied or underapplied overhead is that it is more complicated and time consuming than the simpler alternative of closing overapplied or underapplied overhead directly into cost of goods sold.

EXERCISES

EXERCISE 4.25 (25 minutes) Job cost sheet: manufacturer

1.

Job Cost Sheet

Job number TB78 Description teddy bearsDate started 4/1 Date completed 4/15

Number of units completed 1,000

Direct Material

Date Requisition Number Quantity Unit Price Cost

¼ 101 400 $0.80 $320

5/4 108 500 0 .30 150

Direct Labour

Date Time Sheet Number Hours Rate Cost

15/4 72 500 $12 $6,000

Manufacturing Overhead



Date Cost Driver Quantity Application Rate Cost

15/4 direct labour hours 500 $2 $1,000

Cost Summary

Cost Item Amount

Total Direct Material $ 470Total Direct Labour 6,000Total Manufacturing Overhead 1,000

Total Cost $7,470

Unit Cost $7.47

Delivery Summary

Date Units Shipped Units Remaining in Inventory

Cost Balance

30/4 700 300 $2,241*

*300 remaining in inventory $7.47 = $2,241

2. Managers might use this information to make pricing decisions, assess product profitability, control product costs, and to estimate inventory values.

EXERCISE 4.26 (30 minutes) Schedule of cost of goods manufactured

1.Lelkogs Cereal Company

Schedule of Cost of Goods ManufacturedFor the Year Ended December 31, 2002

Direct material:Raw materials inventory, January 1 $ 25,000Add: purchases of raw material 272,500Raw material available for use 297,500Deduct: raw materials inventory, December 31 27,500Raw material used $270,000Direct labour 120,000Manufacturing overhead 252,000*Total manufacturing costs 642,000Add: work in process inventory, January 1 39,000Subtotal 681,000Deduct: work in process inventory, December 31 42,900Cost of goods manufactured 638,100

* Applied manufacturing overhead is $252,000 ($120,000 210). Actual manufacturing overhead is also $252,000 so there is no

overapplied or underapplied overhead.

2.Finished goods inventory, January 1 $ 42,000Add: cost of goods manufactured 638,100Cost of goods available for sale 680,100Deduct: Finished goods inventory, December 31 46,200Cost of goods sold 633,900



EXERCISE 4.27 (20 minutes) Manufacturing cost flows

1.Raw Materials Inventory227,000

174,00053,000

Wages Payable324,000

Manufacturing Overhead180,000

Work in Process Inventory18,000174,000324,000180,000

120,000576,000

Finished Goods Inventory30,000120,000

132,00018,000

Sales Revenue195,000

Accounts Receivable195,000

Cost of Goods Sold132,000

2.Fred’s Sports Equipment Pty Ltd

Partial Statement of financial Positionas at December 31

Current assetsCash XXXAccounts receivable XXXInventory

Raw materials $ 53,000Work in process 576,000Finished goods 18,000



Fred’s Sports Equipment Pty LtdPartial Statement of Financial Performance

for the year ended December 31

Sales revenue $195,000Less: Cost of goods sold 132,000Gross margin $63,000

EXERCISE 4.28 (20 minutes) Manufacturing cost flows

1. Raw materials:Beginning inventory $ 71,000Add: Purchases ?Less: Direct materials used 326,000Ending inventory 81,000Therefore, purchases for the year were $336,000

2. Direct labour:Total manufacturing cost $686,000Less: Direct material 326,000Direct labour and manufacturing overhead $360,000Direct labour + manufacturing overhead = $360,000Direct labour + (60%) (direct labour) = $360,000(160%) (direct labour) = $360,000

Direct labour = $360,0001.6

Direct labour = $225,000

3. Cost of goods manufactured:Work in process, beginning inventory $ 80,000Add: Total manufacturing costs 686,000Less: Cost of goods manufactured ? Work in process, ending inventory $ 30,000Therefore, cost of goods manufactured was $736,000

4. Cost of goods sold:Finished goods, beginning inventory $ 90,000Add: Cost of goods manufactured 736,000Less: Cost of goods sold ? Finished goods, ending inventory $110,000Therefore, cost of goods sold was $716,000

EXERCISE 4.29 (15 minutes) Overapplied or underapplied overhead: manufacturer

1. Predetermined overhead rate = $997,500 = $13.30 per hour75,000 hours

2. To calculate actual manufacturing overhead:Depreciation $240,000Property taxes 12,000Indirect labour 82,000Supervisory salaries 200,000Utilities 59,000Insurance 30,000Rental of space 300,000Indirect material:

Beginning inventory, 31/12/00 $48,000



Add: purchases 94,000Indirect material available for use 142,000Deduct: ending inventory, 31/12/01 63,000Indirect material used 79,000Actual manufacturing overhead $1,002,000

Overapplied = actual – applied overhead manufacturing manufacturing

overhead overhead

= $1,002,000 – ($13.30 80,000*) = $62,000* Actual direct labour hours

3. Manufacturing overhead 62,000Cost of goods sold 62,000

4. The overapplied overhead was caused by the misestimated manufacturing overhead rate. The budgeted overhead costs, $997,500, were below the actual costs of $1,002,000. However, the actual hours were 80,000 hours, 5,000 hours above budget. This caused overhead to be overapplied.

EXERCISE 4.30 (5 minutes) Basic journal entries in job costing: manufacturer

Work in process inventory 5,480Raw material inventory 4,600Wages payable 680Manufacturing overhead 200

Finished goods inventory 5,480Work in process inventory 5,480

EXERCISE 4.31(20minutes) Manufacturing overheads: furniture manufacturer

1. In each case, the predetermined manufacturing overhead recovery rate is calculated by dividing the budgeted overhead by the budgeted activity driver.

(a) Machine hours $728 000/20 000 hours $36.40 per machine hour

(b) Direct labour hours $728 000/20 000 hours $18.20 per direct labour hour

(c) Direct labour cost $728 000/(40 000 hours @ $28 per hour) 64.88% of direct labour cost

2. The actual manufacturing overhead is $628 000 and the results of using each of the three methods can be shown below:

Method Overhead applied Over/Under-applied

(a) Machine hours 22 000 hrs @ $36.40 = $800 800 $120 800 over

(b) Direct labour hours 36 000 hrs @ $18.20 = $655 200 $24 800 under

(c) Direct labour cost 64.88% of (36 000 hrs @ $30) = $700 704 $20 704 over

3. The most appropriate method is that based on direct cost, since the difference between actual and applied manufacturing overhead is minimised. It might be useful to monitor each of the methods over a longer period, and more frequently, before any method is decided.



4. Journal entries for each of the methods

No Detail Dr Cr

(a) Work in ProcessManufacturing Overhead Control

Applying manufacturing overhead to work in process

$880 800$800 800

(b) Work in ProcessManufacturing Overhead Control


$655 200$655 200

(c) Work in ProcessManufacturing Overhead Control


$700 704$700 704

EXERCISE 4.32 (15 minutes) Process costing; no work in process: manufacturer

1. The cost in the mixing department = $44,200 / 70,000 = $0.631The cost in packing = $11,400 / 70,000 = $0.163Total cost = $55,600 / 70,000 = $0.794

2. Dr.Work in process - mixing 44,200Cr. Raw materials inventory 25,000

Wages payable 12,000Manufacturing overhead 7,200

Dr.Work in process - packing 44,200Cr. Work in process - mix 44,200

Dr.Work in process - packing 11,400Cr. Raw materials inventory 5,000


Dr.Finished goods 55,600Cr. Work in process - pack 55,600

EXERCISE 4.33 (15 minutes) Process costing; no work in process: brewer

1. The cost per can is calculated as follows:

Mixing Department $100 000/100 000 cans = $1.00Bottling Department $22 000/100 000 cans = $0.22Total $1.22

2. Journal entries

Dr.Work in process - mixing 100,000Cr. Raw materials inventory 75,000




Dr.Work in process - bottling 100,000Cr. Work in process - mixing 100,000

Dr.Work in process - bottling 22,000Cr. Raw materials inventory 12,000


Dr.Finished goods 122,000Cr. Work in process - bottling 122,000

3. Process costing is the correct costing system to use where large quantities of identical units are produced, as the unit cost cannot be determined before the completion of each stage of production. Where production takes place in more than one department, the costs are progressively accumulated as production moves from one department to the next. It is normal to record the costs of each department separately as these are used for control purposes. Northcorp Ltd is following conventional process costing procedures.

EXERCISE 4.34(20 minutes) Proration of underapplied overhead (appendix): manufacturer

1. Overhead has been underapplied by $16,000.

2. Calculation of proration amounts:

Account Amount PercentageCalculation of Percentage

Work in process $ 35,250 25% 35,250 $141,000Finished goods 49,350 35% 49,350 $141,000Cost of goods sold 56,400 40% 56,400 $141,000Total $141,000 100%

AccountUnderapplied Overhead Percentage

Amount added to Account

Work in process $16,000* 25% $4,000Finished goods 16,000 35% 5,600Cost of goods sold 16,000 40% 6,400

* Underapplied overhead = actual overhead – applied overhead$16,000 = $157,000 – $141,000

Journal entry:Work in process inventory 4,000Finished goods inventory 5,600Cost of goods sold 6,400

Manufacturing overhead 16,000

3. If the underapplied overhead had been closed to cost of goods sold, rather than being prorated, cost of goods sold would have been increased by $16,000 instead of $6,400. Thus, profit would have been $9,600 lower under this approach.

PROBLEMS

PROBLEM 4.35 (40 minutes) Schedule of cost of goods manufactured

1.Norton Industries

Schedule of Cost of Goods Manufactured



For the Month Ended May 31 (in thousands)Direct material:

Inventory of raw material, April 30 $ 28Purchases of raw materials 525Total raw material available for use 553Inventory of raw material, May 31 23Raw material used in production $530

Direct labour 260Manufacturing overhead incurred

Indirect factory labour $ 90Utilities ($135 .8) 108Property taxes 60Insurance ($20 .6) 12Depreciation ($20 + $30) 50Actual manufacturing overhead 320Less: Underapplied manufacturing overhead* 7Manufacturing overhead applied to work in process 313Total manufacturing costs 1,103

Add: Inventory of work in process, April 30 150Subtotal 1,253

Less: Inventory of work in process, May 31 220Cost of goods manufactured $1,033

* Actual manufacturing overhead $ 320Applied manufacturing overhead (7,825 tons at $40 per ton) 313Underapplied manufacturing overhead $ 7

2. An alternative treatment for closing underapplied or overapplied manufacturing overhead is to prorate the amount of underapplied or overapplied manufacturing overhead, over the accounts that contain the manufacturing overhead applied to production. These accounts include work in process, finished goods, and the cost of goods sold. This proration should be in proportion to the unadjusted overhead component in each account.

3. Closing overhead at the end of the month may be unhelpful as the under or overapplied overhead may be balanced out by variations in the following month. It is best to close off the total variation at year end.

PROBLEM 4.36 (20 minutes) Basic job costing: journal entries: manufacturer

1. Predetermined overhead rate =budgeted manufacturing overhead

budgeted direct labour hours

=$240,000

$(2,000)(10)= $12 per hour

2. Journal entries:

Raw material inventory 33,000Accounts payable 33,000

Work in process inventory 460Raw material inventory 460

Manufacturing overhead 100Manufacturing supplies inventory 100

Manufacturing overhead 8,000Accumulated depreciation: equipment 8,000



Manufacturing overhead 400Cash 400

Work in process inventory 16,000Wages payable 16,000To record direct labour cost.

Work in process inventory 9,600Manufacturing overhead 9,600

To apply manufacturing overhead to work in process ($9,600 = 800 $12 per hour).

Manufacturing overhead 910Council rates payable 910

Manufacturing overhead 2,500Wages payable 2,500

Finished goods inventory 14,400Work in process inventory 14,400

Accounts receivable 13,500Sales revenue 13,500

Cost of goods sold 10,800*Finished goods inventory 10,800

*10,800 = (9/12)($14,400)

PROBLEM 4.37(25 minutes) Manufacturing cost flows: analysis of ledger accounts

The completed ledger accounts are shown below:

Raw Materials InventoryBal. 1/1 21,000

135,000 120,000Bal. 31/12 36,000

Work in Process InventoryBal. 1/1 17,000Direct material

120,000Direct labour

150,000 718,000Mfg. overhead

450,000Bal. 31/12 19,000

Manufacturing Overhead452,500 450,000

Wages Payable2,000 Bal. 1/1

147,000 150,0005,000 Bal. 31/12

Accounts Payable2,500 Bal. 1/1



136,500 135,0001,000 Bal. 31/12

Finished Goods InventoryBal. 1/1 12,000

718,000 710,000Bal. 31/12 20,000



Accounts ReceivableBal. 1/1 11,000

810,000 806,000Bal. 31/12 15,000

PROBLEM 4.38 (45 minutes) Schedules of cost of goods manufactured and sold; profit and loss statement

1.Buns Bakehouse Ltd


Direct material:Raw materials inventory, 31/12/01 $10,100Add: Purchases of raw material 39,000Raw material available for use 49,100Deduct: Raw materials inventory, 31/12/02 11,000Raw material used $38,100

Direct labour 79,000Manufacturing overhead:

Indirect material $ 4,900Indirect labour 29,000Depreciation on factory building 3,800Depreciation on factory equipment 2,100Electricity for factory 6,000Property taxes 2,400Insurance 3,600Rental of warehouse space 3,100

Total actual manufacturing overhead 54,900Add: Overapplied overhead* 3,100Overhead applied to work in process 58,000Total manufacturing costs 175,100Add: Work in process inventory, 31/12/01 8,100Subtotal 183,200Deduct work in process inventory, 31/12/02 8,300Cost of goods manufactured $174,900

* The schedule of Cost of Goods Manufactured lists the manufacturing costs applied to work in process. Therefore, the overapplied

overhead, $3,100, must be added to the total actual overhead to arrive at the amount of overhead applied to work in process. If there had

been underapplied overhead, the balance would have been deducted from the actual manufacturing overhead. The amount of overapplied

overhead is found by subtracting actual overhead, $54,900 (as calculated above), from overapplied overhead, $58,000 (given).




Schedule of Cost of Goods SoldFor the Year Ended December 31, 2002

Finished goods inventory, 31/12/01 $ 14,000Add: Cost of goods manufactured* 174,900Cost of goods available for sale 188,900Finished goods inventory, 31/12/02 15,400Cost of goods sold 173,500Less: Overapplied overhead† 3,100Cost of goods sold (adjusted for overapplied overhead) $170,400

* The cost of goods manufactured is obtained from the Schedule of Cost of Goods Manufactured.

†The company closes underapplied or overapplied overhead into cost of goods sold. Hence, the balance in overapplied overhead is deducted

from cost of goods sold for the month.


Statement of Financial PerformanceFor the Year Ended December 31, 2002

Sales revenue $205,800Less: Cost of goods sold 170,400Gross margin 35,400Selling and administrative expenses:

Salaries $13,800Electricity for sales and admin offices 2,500Depreciation 1,200Rental of office space 1,700Other expenses 4,000

Total 23,200Profit before taxes 12,200Income tax expense 5,100Net profit 7,100

PROBLEM 4-39 (45 minutes) Schedules of cost of goods manufactured and sold; profit and loss statement

1.Pressed Parts Ltd


Direct material:Raw materials inventory 31/12/02 $ 89,000Add: Purchases of raw material 731,000Raw material available for use 820,000Less: Raw materials inventory, 31/12/03 59,000Raw material used $761,000

Direct labour 474,000

Manufacturing overhead:Indirect material $ 45,000Indirect labour 150,000Depreciation on factory building 125,000Depreciation on factory equipment 60,000Electricity for factory 70,000Council rates 90,000Insurance 40,000



Total actual manufacturing overhead 580,000Less: Underapplied overhead* 2,500Overhead applied to work in process 577,500

Total manufacturing costs 1,812,500Add: Work in process inventory, 31/12/02 –0–Subtotal 1,812,500Less: Work in process inventory, 31/12/03 40,000Cost of goods manufactured 1,772,500

*The Schedule of Costs of Goods Manufactured lists the manufacturing costs applied to work in process. Therefore, the underapplied

overhead, $2,500, must be deducted from total actual overhead to arrive at the amount of overhead applied to work in process. If there had

been overapplied overhead, the balance would have been added to total manufacturing overhead.

The amount of underapplied overhead is found by subtracting the applied manufacturing overhead, $577,500, from the total actual

manufacturing overhead, $580,000.

2.Pressed Parts Ltd

Schedule of Cost of Goods SoldFor the Year Ended December 31, 2003

Finished goods inventory, 31/12/02 $ 35,000Add: Cost of goods manufactured 1,772,500Cost of goods available for sale $1,807,500Finished goods inventory, 31/12/03 40,000Cost of goods sold $1,767,500Add: Underapplied overhead* 2,500Cost of goods sold (adjusted for underapplied overhead) $1,770,000

*The company closes underapplied or overapplied overhead into cost of goods sold. Hence the $2,500 balance in underapplied overhead is

added to cost of goods sold for the month.

3.Pressed Parts Ltd

Statement of Financial PerformanceFor the Year Ended December 31, 2003

Sales revenue $2,105,000Less: cost of goods sold 1,770,000Gross margin 335,000Selling and administrative expenses 269,000Profit before taxes 66,000Income tax expense 25,000Net profit $ 41,000

PROBLEM 4.40 (15 minutes) Interpreting the schedule of cost of goods manufactured

1. $40,000. Since there was no work in process inventory at the beginning of 2003, all of the cost in the year-end work in process inventory was incurred during 2003.

2. The direct material cost would have been larger, probably by (roughly) 20 per cent, because direct material is a variable cost.

3. Depreciation is a fixed cost, so it would not have been any larger if the firm’s volume had increased.

4. Only the $30,000 of equipment depreciation would have been included in manufacturing overhead on the schedule of cost of goods manufactured. The $30,000 of depreciation related to selling and administrative equipment would have been treated as a period cost and expensed during 19x8. However, the cost of goods



manufactured would not have been affected. This difference would have been taken up in underapplied or overapplied overhead.

PROBLEM 4.41 (30 minutes) Cost of goods manufactured; overapplied or underapplied overhead

1. Cost added to work in process inventory during February:

Direct material $26,000Direct labour 20,000Manufacturing overhead* 30,000Total costs added $76,000Add: Work in process inventory 9,000Subtotal 85,000Less: Work in process inventory, February 28:

Direct material $ 2,800Direct labour 1,800Manufacturing overhead* 2,700

Total 7,300Cost of goods manufactured $77,700

* 150% of direct labour cost.

2. Underapplied overhead = actual overhead – applied overhead$2,000 = $32,000 – $30,000

3. Journal entries:

Work in process inventory 26,000Raw materials inventory 26,000

Work in process inventory 20,000Wages payable 20,000

Work in process inventory 30,000Manufacturing overhead 30,000*

* 150% of direct labour cost.

Manufacturing overhead 32,000Various accounts† 32,000

†The credits to various accounts related to actual manufacturing overhead items were $32,000 in total.

Finished goods inventory 77,700Work in process inventory** 77,700

Cost of goods sold 2,000Manufacturing overhead 2,000**

Work in Process Inventory31/1/X2 $9,000

26,000 77,70020,00030,000

28/2/X2 7,300

PROBLEM 4.42 (30 minutes) Cost of goods manufactured; prime and conversion costs

1.



Vancol Crisps LtdSchedule of Cost of Goods Manufactured

For the Month of March

Direct material:Raw materials inventory, March 1 $ 17,000Add: March purchases of raw material 113,000Raw material available for use 130,000Less: Raw materials inventory, March 31 26,000

Raw materials used $104,000Direct labour 160,000*Manufacturing overhead applied (50% of direct labour) 80,000Total manufacturing costs 344,000Add: Work in process inventory, March 1 40,000Subtotal 384,000Less: Work in process inventory,March 31 (90% $40,000) 36,000Cost of goods manufactured $348,000†

* Work upward from the bottom of the statement, using information available. Direct labour + manufacturing overhead = total

manufacturing costs – direct material cost = $344,000 – $104,000 = $240,000. Since manufacturing overhead = 50% of direct labour, then

manufacturing overhead = $80,000 and direct labour = $160,000.

†To calculate cost of goods manufactured:

Cost of goods sold = beginning inventory finished goods + cost of goods manufactured – ending inventory finished goods.

345,000 = 102,000 + cost of goods manufactured – 105,000

cost of goods manufactured = $348,000

2.Vancol Crisps Ltd

Schedule of Prime CostsFor the Month of March

Raw material:Beginning inventory $ 17,000Add: Purchases 113,000Raw materials available 130,000Less: Ending inventory 26,000

Raw materials used 104,000Direct labour 160,000Total prime cost 264,000

3.Vancol Crisps Ltd

Schedule of Conversion CostsFor the Month of March

Direct labour $160,000Manufacturing overhead applied (50% of direct labour) 80,000Total conversion cost $240,000

PROBLEM 4.43 (40 minutes) Flow of manufacturing costs; incomplete data

1. The answers to the questions are as follows:

a. $216,000 f. $60,000

b. $19,000 g. $150,000

c. $70,000 h. $40,000



d. $38,000 i. $15,000

e. $80,000 j. zero

2. The completed ledger accounts, along with supporting calculations, follow.

Raw Materials InventoryBal. 31/10 15,000

70,000 40,000Bal. 30/11 45,000

Work in Process InventoryBal. 31/11 8,000Direct material 40,000

150,000

Direct labour80,000

Overhead 60,000Bal. 30/11 38,000

Manufacturing Overhead 60,000 60,000

Wages Payable1,000 Bal. 31/10

79,500 80,0001,000 Bal. 30/11

Accounts Payable12,000 Bal. 31/10

81,000 70,0001,500 Bal. 30/11

Finished Goods InventoryBal. 31/10 35,000

150,000 180,000Bal. 30/11 5,000



Account ReceivableBal. 31/10 8,000

216,000 205,000Bal. 30/11 19,000



Supporting calculations:

1. Sales revenue = cost of goods sold 120%= $180,000 120%= $216,000

2. Ending balance in accounts receivable = beginning balance + sales revenue – collections= $8,000 + $216,000 – $205,000= $19,000

3. Purchases of raw material = addition to accounts payableAddition to accounts payable = ending balance + payments – beginning balance

= $1,000 + $81,000 – $12,000= $70,000

4.November 30 balance in

work in process inventory=

direct

material +

direct

labour +

manufacturing

overhead

= $20,500 + (500)($20) + (500)($15*)= $38,000

* predetermined overhead rate =budgeted overhead

budgeted direct labour hours†

=$720,000

48,000

= $15 per direct labour hour

†budgeted direct labour hours =budgeted direct labour cost

direct labour rate =

$960,000

$20

5.Addition to work in process

for direct labour=

November credit to

wages payable

November credit to

wages payable= ending balance + payments – beginning balance

= $1,500 + $79,500 – $1,000 = $80,000

6. November applied overhead = direct labour hours predetermined overhead rate= 4,000* $15= $60,000

Direct labour hours =addition to work in process for direct labour

direct labour rate

=$80,000

$20= 4,000 hours



7.Cost of goods completed

during November=

beginning

balance in

work in process +

additions

during

November –

ending

balance in

work in process

= $8,000 + ($40,000 + $80,000 + $60,000) – $38,000= $150,000

8.Raw material used

in November=

November credit to

raw materials inventory = $40,000 (given)

9.October 31 balance in

raw materials inventory=

November 30 balance

in raw materials

inventory +

direct

material

used –

purchases

= $45,000 + $40,000 – $70,000= $15,000

10. Overapplied or = actual overhead – applied overheadunderapplied overhead = $60,000 – $60,000 = 0

PROBLEM 4.44 (20 minutes) Ethical issues; underapplication of manufacturing overhead: manufacturer

1. In accordance with the CPA Australia’s Code of Professional Conduct, the appropriateness of Tom Savin's three alternative courses of action is described as follows:

Follow Brown's directive and do nothing further: This action is inappropriate as Savin has ethical responsibilities to take further action in accordance with the following standards of ethical conduct.

Integrity: Members must be straightforward, honest and sincere in their approach to professional work.Competence and Due Care: Members must perform professional services with due care, competence and diligence.The Image of the Profession: Members must refrain from any conduct or action that may tarnish the image of the accounting profession, or unjustifiably detract from the good name of their professional body.

Ethical behaviour: Members must conduct themselves in a manner consistent with the good reputation of their profession and refrain from any conduct that might bring discredit to their profession.

Attempt to convince Brown to make the proper adjustments, and to advise the external auditors of her actions: This action is appropriate as Savin has taken the ethical conflict to his immediate superior for resolution. Unless Savin suspects that his superior is involved, this alternative is the first step for the resolution of an ethical conflict.

Tell the Audit Committee of the Board of Directors: This action is not appropriate as a first step, because Savin should approach his immediate superior first.

2. Savin should inform Brown that he is planning to discuss the conflict with Brown's superior. He should pursue discussions with successively higher levels of management—including the Audit Committee and the Board of Directors—until the matter is satisfactorily resolved. At the same time, he should seek confidential advice from an objective adviser to clarify the relevant concepts and obtain an understanding of possible courses of action. If the ethical conduct still exists after exhausting all levels of internal review, Savin may have no alternative other than to resign from the business.





PROBLEM 4.45 (30 minutes) Process costing: manufacturer

1, 2 & 3

Mixing Bottling Packaging

Departmental costs $79 300 $24 900 $10 200

Output 5 000 litres 20 000 filled bottles 20 000 packed bottles

Cost per unit $15.86 per litre (or $3.965 per 250 mls)

$1.245 per bottle + $3.965 for mixture = $5.21 per

filled bottle

$0.51 per package + $5.21 per filled bottle =

$5.72 per packaged, filled bottle

4. The method described in the chapter (page 145) shows that the cost per unit ($0.15) is calculated by dividing the total costs ($6 000) by the total output (40 000 microchips). This aggregates the production cost for the entire company, whereas, in many process costing businesses, such as Weedeater Ltd., products undergo a number of separate processes in different departments. In this question, the total cost per unit can be separated into the costs for the mixture, the bottling activity and the packaging.

5. Journal entries

Date Details Dr CrApril 30 Work in Process – Mixing

Raw Materials InventoryDirect LabourManufacturing Overhead Control

$79,300$43,000 16,800 19,500

April 30 Work in Process – Bottling Work in Process – Mixing

Transfer of April production costs from Mixing Department to Bottling Department

79 30079 300

April 30 Work in Process – BottlingRaw Materials InventoryDirect LabourManufacturing Overhead Control

24,90015,000 7,900 2,000

April 30 Work in Process – Packaging Work in Process – Bottling

Transfer of April production costs from Bottling Department to Packaging Department

104 200104 200

April 30 Work in Process – PackingRaw Materials InventoryDirect LabourManufacturing Overhead Control

10,2005,0004,300 900

April 30 Finished Goods InventoryWork in Process – Packaging

Transfer of April production costs from Packaging Department to Finished Goods Inventory

114 400114 400



6. The approach of keeping separate work in process accounts for each department is preferable to aggregating production costs for all processes/departments in one work in process account as it gives each departmental production manager more scope for controlling costs.

PROBLEM 4.46 (30 minutes) Proration of overapplied or underapplied overhead (appendix): manufacturer

1. Predetermined overhead rate = budgeted manufacturing overhead

budgeted machine hours

=$235,000

$47,000= $5 per machine hour

2. Applied manufacturing overhead =

machine

hours

used

⎛

⎝

⎜⎜⎜

⎞

⎠

⎟⎟⎟

predetermined

overhead

rate

⎛

⎝

⎜⎜⎜

⎞

⎠

⎟⎟⎟

= 4,000 hrs $5 per hour= $20,000

3. Underapplied overhead = actual overhead – applied overhead $6,000 = $26,000 – $20,000

4. Cost of goods sold 6,000Manufacturing overhead 6,000

5. (a) Calculation of proration amounts:

Account Explanation Amount* Percentage Calculation of PercentageWork in Process Job P82 only $ 2,500 12.5% 2,500 20,000Finished Goods Job N08 only 12,500 62.5% 12,500 20,000Cost of Goods Sold Job A79 only 5,000 25.0% 5,000 20,000Total $20,000 100.0%

* Machine hours used on job predetermined overhead rate

Account Underapplied Overhead Percentage Amount Added to AccountWork in Process $6,000 12.5% $ 750Finished Goods 6,000 62.5% 3,750Cost of Goods Sold 6,000 25.0% 1,500Total 6,000

(b) Journal entry:Work in process inventory 750Finished goods inventory 3,750Cost of goods sold 1,500

Manufacturing overhead 6,000

CASES

CASE 4.47 (75 minutes) Comprehensive job costing problem: manufacturer

1. Predetermined overhead rate =budgeted manufacturing overhead

budgeted direct labour hours



=$411,600

19,600 = $21 per direct labour hour

2.Job Cost Sheet

Job number T81 Description Trombones

Date started March Date completed March

Number of units completed 76

Direct Material

Date Requisition Number Quantity Unit Price Cost

5/3 112 250 $5.00 $1,250

Direct Labour

Date Time Sheet Number Hours Rate Cost

8/3 to 12/3 308-312 800 $20 $16,000

Manufacturing Overhead

Date Cost Driver Quantity Application Rate Cost

8/3 to 12/3 direct labour hours 800 $21 $16,800

Cost Summary

Cost Item Amount

Total Direct MaterialTotal Direct LabourTotal Manufacturing Overhead

$ 1,25016,00016,800

Total Cost $34,050

Unit Cost $448.03*

Delivery Summary

Date Units Shipped Units Remaining in Inventory

Cost Balance

March 38 38 $17,025†

*rounded

†$17,025 = $34,050 2

3. Journal entries:

(a) Raw material inventory 5,000Accounts payable 5,000



(b) Raw materials inventory 4,000Accounts payable 4,000

(c) Work in process inventory 11,250*Raw materials inventory 11,250

* (250 sq metres $5 per sq metre) + (1,000 kgs $10 per kg)

Manufacturing overhead** 100Manufacturing supplies inventory 100

** Valve lubricant is an indirect material, so it is considered an overhead cost.

(d) Work in process inventory 34,000Manufacturing overhead 13,000Wages payable 47,000

Work in process inventory 35,700*Manufacturing overhead 35,700

* Applied manufacturing overhead = 1,700 direct labour hours $21 per hour

(e) Manufacturing overhead 12,000Accumulated Depreciation: Buildings andEquipment 12,000

(f) Manufacturing overhead 1,200Cash 1,200

(g) Manufacturing overhead 2,100Accounts payable 2,100

(h) Manufacturing overhead 2,400Cash 2,400

(i) Manufacturing overhead 3,100Prepaid insurance 3,100

(j) Selling and administrative expenses 8,000Cash 8,000

(k) Selling and administrative expenses 4,000Accumulated depreciation: OfficeEquipment 4,000

(l) Selling and administrative expenses 1,000Cash 1,000

(m) Finished goods inventory 34,050*Work in process inventory 34,050

* Cost of Job T81:Direct material (250 $5) $ 1,250Direct labour (800 $20) 16,000Manufacturing overhead (800 $21) 16,800Total cost 34,050

(n) Accounts receivable 26,600*Sales revenue 26,600

*(76 2) $700 per trombone

Cost of goods sold 17,025**Finished goods inventory 17,025

**17,025 = $34,050 2



4. Ledger accounts and posting of journal entries:

CashBal 10,000

1,200 (f)2,400 (h)8,000 (j)1,000 (l)

Accounts ReceivableBal 21,000(n) 26,600

Prepaid InsuranceBal 5,000

3,100 (i)

Manufacturing Supplies InventoryBal 500

100 (c)

Accounts Payable13,000 Bal 5,000 (a) 4,000 (b) 2,100 (g)

Wages Payable 8,000 Bal47,000 (d)

Accumulated Depreciation:Buildings and Equipment

102,000 Bal 12,000 (e) 4,000 (k)

Manufacturing Overhead(c) 100 35,700 (d)(d) 13,000(e) 12,000(f) 1,200(g) 2,100(h) 2,400(i) 3,100

Raw Materials InventoryBal 149,000(a) 5,000 11,250 (c)



(b) 4,000

Work In Process InventoryBal 91,000(c) 11,250 34,050 (m)(d) 34,000(d) 35,700

Finished Goods InventoryBal 220,000(m) 34,050 17,025 (n)

Cost of Goods Sold(n) 17,025

Selling and Administrative Expenses(j) 8,000(k) 4,000(l) 1,000

Sales Revenue26,600 (n)

5. (a) Calculation actual overhead:Indirect material (valve lubricant) $ 100Indirect labour 13,000Depreciation: factory building and equipment 12,000Rent: warehouse 1,200Utilities 2,100Council rates and property taxes 2,400Insurance 3,100Total actual overhead $33,900

(b) Overapplied overhead =

actual

manufacturing

overhead –

applied

manufacturing

overhead

= $33,900 – $35,700*

= $1,800 overapplied

* $35,700 = 1,700 direct labour hours $21 per hour

(c) Manufacturing overhead 1,800Cost of goods sold 1,800

6.Bandway Ltd

Schedule of Cost of Goods ManufacturedFor the month of March

Direct material:



Raw materials inventory, March 1 $149,000Add: March purchases of raw material 9,000Raw material available for use 158,000Deduct: Raw materials inventory, March 31 146,750Raw material used $ 11,250

Direct labour 34,000Manufacturing overhead:

Indirect material $ 100Indirect labour 13,000Depreciation on factory building and equipment 12,000Rent: warehouse 1,200Utilities 2,100Council rates and property taxes 2,400Insurance 3,100Total actual manufacturing overhead 33,900Add: overapplied overhead 1,800 * Overhead applied to work in process 35,700

Total manufacturing costs 80,950Add: work in process inventory, March 1 91,000Subtotal 171,950Deduct: work in process inventory, March 31 137,900Cost of goods manufactured $ 34,050†

* The schedule of Cost of Goods Manufactured lists the manufacturing costs applied to work in process. Therefore the overapplied

overhead, $1,800 must be added to the actual overhead to arrive at the amount of overhead applied to work in process during March.

†Cost of JobT81, which was completed during March.

7.Bandway Ltd

Schedule of Cost of Goods SoldFor the month of March

Finished goods inventory, March 1 $220,000Add: Cost of goods manufactured 34,050Cost of goods available for sale 254,050Finished goods inventory, March 31 237,025Cost of goods sold 17,025Less: overapplied overhead* 1,800Cost of goods sold (adjusted for overapplied overhead) $ 15,225

* The company closes underapplied or overapplied overhead into cost of goods sold. Hence the balance in overapplied overhead is deducted from the cost of goods sold for this month.

8.Bandway Ltd

Statement of Financial PerformanceFor the month of March

Sales revenue 26,600Less: Cost of goods sold 15,225Gross margin 11,375Selling and administrative expenses 13,000Profit (loss) $ (1,625)

CASE 4.48 (45 minutes) Interpreting information from a job costing system: manufacturer



1. A job costing system is appropriate in any environment where each product or batch of products is unique and costs can be readily identified with specific products, batches, contracts or projects.

2. The only job remaining in Constructo’s work in process inventory on December 31is DRS114. The dollar value of DRS114 is calculated as follows:

DRS114 balance November30 $250,000December additions:

Raw material $124,000Purchased parts 87,000Direct labour 200,500Manufacturing overhead (19,500 $7.50*) 146,250 557,750

Work in process inventory December 31 $807,750

*Manufacturing overhead rate = $4,500,000

600,000 hours

= $7.50 per hour

3. The dollar value of the playpens remaining in Construco’s finished goods inventory on December 31, is $455,600, calculated as follows:

Playpen UnitsFinished goods inventory November 30 19,400Units completed in December 15,000Units available for sale 34,400Units shipped in December 21,000Finished goods inventory December 31 13,400

Assuming that the units produced first are sold first, all units remaining in finished goods inventory were completed in December.

Unit costs of playpens completed in December:

Work in process inventory November 30 $420,000December additions:

Raw material $ 3,000Purchased parts 10,800Direct labour 43,200Manufacturing overhead (4,400 hours $7.50) 33,000 90,000

Total cost $510,000

Unit cost =total cost

units completed$34 per unit

Value of finished goods inventory on December 31 = Unit cost quantity= $34 13,400= $455,600

CASE 4.49 (50 minutes) Cost flows in a job costing system; schedule of cost of goods manufactured; automation: manufacturer

1. Manufacturers use predetermined overhead rates to allocate to production jobs the production costs that are not directly traceable to specific jobs. As a result, management will have timely, accurate job cost information. Predetermined overhead rates are easy to apply and avoid fluctuations in job costs caused by changes in production volume or overhead costs throughout the year.



2. The manufacturing overhead applied to November 30is calculated as follows:

Machine hours predetermined overhead rate = overhead applied 73,000 $15 = $1,095,000

3. The manufacturing overhead applied in December is calculated as follows:

Machine hours predetermined overhead rate = overhead applied6,000 $15 = $90,000

4. Underapplied manufacturing overhead to December 31is calculated as follows:Actual overhead ($1,100,000 + $96,000) $1,196,000Applied overhead ($1,095,000 + $90,000) (1,185,000 ) Underapplied overhead $ 11,000

5. The balance in Valport’s finished goods inventory account on December 31is comprised only of job number N11-013 and is calculated as follows:

November 30 balance for Job No. N11-013 $55,000December direct material 4,000December direct labour 12,000December overhead (1,000 $15) 15,000

Total finished goods inventory $86,000

6. Valport’s Schedule of Cost of Goods Manufactured for the year is constructed as follows:

Valport LtdSchedule of Cost of Goods Manufactured

For the Year Ended December 31

Raw materials inventory January 1 $ 105,000Raw material purchases ($965,000 + $98,000) 1,063,000Raw material available for use 1,168,000Less: Indirect material used ($125,000 + $9,000) $134,000Raw materials inventory December 31 85,000 219,000

Raw material used 949,000Direct labour ($845,000 + $80,000) 925,000Manufacturing overhead:

Indirect material ($125,000 + $9,000) $134,000Indirect labour ($345,000 + $30,000) 375,000Utilities ($245,000 + $22,000) 267,000Depreciation ($385,000 + $35,000) 420,000Total actual manufacturing overhead 1,196,000Deduct: underapplied overhead 11,000

Overhead applied to work in process 1,185,000Total manufacturing costs 3,059,000Add: Work in process inventory, January 1 60,000Subtotal 3,119,000Less: work in process inventory December 31* 150,000

Cost of goods manufactured $2,968,800

*Supporting calculations for work in process at December 31:



D12-002 D12-003 TotalDirect material $37,900 $26,000 $ 63,900Direct labour 20,000 16,800 36,800Applied overhead:2,500 hrs $15 37,500 37,500 800 hrs $15 ______ 12,000 12,000Total $95,400 $54,800 $150,200


sm_ch04.doc

Documents

product costing approach

future costs

decisions product mix

relevant costs

past costs

job costing chapter

common cost objects

exclusive list of cost