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Chapter 06 - Fundamentals of Product and Service Costing
Chapter 06 - Fundamentals of Product and Service Costing
Chapter 6 Fundamentals of Product and Service CostingSolutions
to Review Questions
Cost allocation is the assignment of costs in cost pools to cost
objects. The cost objects may be products, services, customers,
processes, or anything for which we want to know the cost. Product
costing uses cost allocation to calculate product costs. Product
costing is an application of cost allocation where products are the
cost objects.
Cost management systems should satisfy the following criteria:
Cost systems should have a decision focus. Different cost
information is used for different purposes. Cost information for
managerial purposes must meet the cost-benefit test.
Cost flow diagrams serve two purposes. First, they help describe
how a cost management system works, just like a flow chart helps
you understand how a process works. Second, cost flow diagrams help
managers identify and understand quickly the effect of changes in
the system design on reported costs.
A job costing accounting system traces costs to individual units
or to specific jobs (typically custom products). A process costing
accounting system is used when identical units are produced through
a series of uniform production steps. Operation costing is used
when goods have some common characteristics (process costing) and
some individual characteristics (job costing).
The predetermined overhead rate is the value at which overhead
is applied to one unit of the cost allocation base. It is used in
product costing to apply the overhead to the units produced.
It would be ideal, but unlikely, that an allocation base would
reflect direct causality between the activity and the overhead
cost.
Continuous flow processing is used when a single product is mass
produced in a continuing process. Examples would include products
such as paint, gasoline, paper, or any others that are mass
produced in a continuing process.
The basic cost flow model appears as follows:Beginning balance +
Transfers in Transfers out = Ending balanceBeginning balance is the
balance of inventory at the beginning of the period. Transfers in
represent inventory purchased or transferred in from another
department (for example, raw materials would be goods transferred
in to work in process) for the period. Transfers out are goods
transferred from one department to another (for example, work in
process would be transferred out to finished goods). Ending balance
represents the amount of inventory in a department at the end of
the accounting period.Solutions to Critical Analysis and Discussion
Questions
Although there may be no one correct way to allocate cost, cost
allocation can provide managers with information about the costs of
the resources they use. Ignoring costs that cannot be directly
assigned leads to the possibility that managers forget that it is a
real resource that is being used.
There are three important points to consider:1.The cost system
should meet the needs of the users (the decision makers).2.The cost
system must provide the appropriate data for its intended purpose.
Different cost information is used for different purposes.3.Cost
information for managerial purposes must meet the cost-benefit
test. The costs of implementing the system should be less than the
benefits derived from the system (i.e. better decisions).
The basic cost flow model is as follows:Beginning balance +
Transfers in Transfers out = Ending balance
This model is used for finding one unknown or for comparing
perpetual inventory system output to a physical inventory count. An
example of finding one unknown is if the beginning balance is known
(from the previous period ending balance), transfers in are known,
and ending inventory is counted physicallyand we are asked to find
the cost of goods sold for the period (transfers out).
It is sometimes difficult (and frustrating) for managers when
the cost accountant says that the cost depends on the decision
being made. Many people feel that there is one cost that is
correct. However, as we saw in Chapter 2, costs behave in different
ways and this behavior is affected by the decision being made.
Reasons to agree with approach: If the products are not
contributing to company profits, then the products should be
eliminated. This will increase overall company profits.Reasons not
to agree with approach: The reported product costs and the
associated product profits depend on the allocation of indirect
costs. Under a different allocation process, the results could be
very different. In addition, many of the indirect costs are
unavoidable. If the products are eliminated, the costs will be
allocated to the remaining products.
The way the products are defined will depend, at least in part,
on the decision the dean is interested in making. They may be
defined as degree programs vs. non-degree programs. They may be the
different degree programs. They might be the credit hour (although
it is unlikely you would be able to get much information at this
level).You might ask about the time frame of the analysis (to
determine fixed and variable costs), the source of the data, and
how to treat costs that the school does not directly pay for but
where the school consumes the resources (e.g., university
buildings).This is a very difficult analysis in a university
setting because of the high proportion of common costs and the
difficulty in defining products.
Answers will vary. Common answers include the number of
students, the number of credit hours, number of classes, number of
class sessions, and so on.
The two most important criteria in determining an allocation
base are (1) causality and (2) measurability. We would like an
allocation base that causes costs. This is rarely possible, but it
is a good criterion to use. Second, we need to be able to measure
the allocation base at reasonable cost.
Although it would be ideal for the cost allocation base to have
cause-and-effect relation with overhead costs, it is unlikely to
happen for several reasons. One reason is that some of the overhead
is fixed and therefore does not depend on volume (at least within
certain volume ranges). This does not make the choice of the
allocation base unimportant. First, it is helpful to have an
intuitive link between the allocation base (machine hours, for
example) and overhead resource (machine depreciation). It serves as
a reminder of the service being provided. Second, it is often the
case that the cost is not solely fixed and there might be some
variable component. Finally, cost might be fixed over a certain
range, but not over the entire relevant range.
The allocation base determines the costs assigned to the cost
objects. If these costs are used to make decisions and if they are
based on inappropriate or improper allocation bases, they could
lead the manager to make bad decisions.
There are many reasons why two companies may have different cost
systems. First, firms may be pursuing different strategies (cost
containment versus product differentiation) and want different
information from the cost system. A second reason is that some
firms may be subject to regulations (for example, utilities) and
the regulations dictate the information needed from the cost
system.
A firm can have a two-stage system and use the same allocation
base to allocate costs in the second stage. There will be different
costs reported if the allocation base (direct labor, say) is used
differently by the products in the second stage cost pools.
Solutions to Exercises(20 min.)Basic Cost Flow Model: Office
Mart.a.$300,000 (see item 5)b.$1,240,000 = $1,200,000 + $40,000
(see items 2 & 3)c.$200,000 (see item 5)d.$1,340,000. BB + TI
TO = EB$300,000 + $1,240,000 X = $200,000X = $300,000 + $1,240,000
$200,000X = $1,340,000
(20 min.) Basic Cost Flow Model: Generic Electric.a.$100.5
million = $24.0 million + $40.5 million + (.8 x $45.0
million)b.$72.36 million = .72 x $100.5 millionc.BB + TI TO = EB0 +
$100.5 million $72.36 million = EBEB = $28.14 million(20 min.)
Basic Cost Flow Model.Based on the basic formula:
BB+TITO=EB
a.$51,000+X$57,000=$48,000
X=$54,000
b.$28,400+$88,000X=$24,800
X=$88,000 + $28,400 $24,800
X=$91,600
c.$67,000+X$170,000=$56,000
X=$56,000 + $170,000 $67,000
X=$159,000
(20 min.) Basic Cost Flow Model.Based on the basic formula:
BB+TITO=EB
A.X+$260,000$270,000=$250,000
X=$250,000 + $270,000 $260,000
X=$260,000
B.$7,100+$22,000X=$6,200
X=$7,100 $6,200 + $22,000
X=$22,900
C.$156,000+X$280,000=$128,000
X=$128,000 + $280,000 $156,000
X=$252,000
(20 min.) Basic Cost Flow Model.Based on the basic formula:
BB+TITO=EB
A.X+$18,000$27,000=$21,000
X=$21,000 + $27,000 $18,000
X=$30,000
B.$30,000+$110,000X=$31,000
X=$30,000 + $110,000 $31,000
X=$109,000
C.$260,000+X$920,000=$120,000
X=$120,000 + $920,000 $260,000
X=$780,000
(10 min.)Basic Product Costing: Enviro Corporation.
Materials$714,000
Labor61,200
Manufacturing overhead244,800
Total cost$1,020,000
Gallons produced 850,000
= Cost per gallon$1.20
(10 min.)Basic Product Costing: Poguess Pops.
Materials$650,000
Labor110,000
Manufacturing overhead2,940,000
Total cost$3,700,000
Liters produced 10,000,000
= Cost per liter$0.37
(10 min.)Basic Product Costing: Big City Bank.
Labor$ 35,000
Manufacturing overhead77,000
Total$ 112,000
Checks processed 2,800,000
= Cost per check$0.04
(20 min.) Basic Product Costing: Kim and Smith Refiners.
Totala.
Soldb.Work-in-Process, March 31
Production:
Gallons450,000400,00050,000
Percentage complete100%80%
Equivalent gallons440,000a400,00040,000
Costs:
Materials$188,000
Labor48,400
Manufacturing overhead98,000
Total cost incurred$334,400
Cost per equivalent gallon$0.76b
Cost assigned to product$334,400$304,000c$30,400d
a 440,000 equivalent units = 400,000 gallons completed + 80% x
50,000 gallons in process.b $0.76 = $334,400 440,000 equivalent
units.c $304,000 = 400,000 equivalent units x $0.76.d $30,400 =
40,000 equivalent units x $0.76.
(20 min.) Basic Product CostingEthical Issues: Old Tyme Soda.a.
and b.
Totala.
Soldb.Work-in-Process, November 30
Production:
Barrels10,0008,8001,200
Percentage complete100%30%
Equivalent barrels9,160a8,800360
Costs:
Materials$18,072
Manufacturing overhead20,400
Total cost incurred$38,472
Cost per equivalent barrel$4.20b
Cost assigned to product$38,472$36,960c$1,512d
a 9,160 equivalent units = 8,800 barrels sold + 30% x 1,200
barrels in process.b $4.20 = $38,472 9,160 equivalent units.c
$36,960 = 8,800 equivalent units x $4.20.d $1,512 = 360 equivalent
units x $4.20.
c. (1) He would raise the estimated degree of completion. The
change in the estimate will cause more cost to be assigned to
work-in-process inventory and less to finished goods. As the
finished goods are sold, cost of goods will be lower and income
higher.(2) Unless the production supervisors estimates are
incorrect, the controller should not change the estimates. He or
she has an ethical (and legal) obligation to ensure that the
estimates reflect fairly the results of operations.
(15 min.) Process Costing: Van Goe.
TotalTransferred to Finished GoodsWork-in-Process, January
31
Production:
Gallons300,000240,00060,000
Percentage complete100%80%
Equivalent gallons288,000a240,00048,000
Costs:
Materials$411,000
Conversion costs525,000
Total cost incurred$936,000
Cost per equivalent gallon$3.25b
Cost assigned to product$936,000$780,000c$156,000d
a 288,000 equivalent units = 240,000 gallons completed + 80% x
60,000 gallons in process.a $3.25 = $936,000 288,000 equivalent
units.b $780,000 = 240,000 equivalent units x $3.25.c $156,000 =
48,000 equivalent units x $3.25.
(15 min.) Process Costing: Opech, Inc.
Total
ShippedWork-in-Process, May 31
Production:
Barrels (millions)30027030
Percentage complete100%70%
Equivalent barrels (millions)29127021
Costs:
Materials (millions)$5,000
Conversion costs (millions)6,640
Total cost incurred (millions)$11,640
Cost per equivalent barrel$40a
Cost assigned to product$11,640$10,800b$840c
a 291 equivalent units = 270 barrels shipped + 70% x 30 barrels
in process.a $40 = $11,640 291 equivalent units.b $10,800 = 270
equivalent units x $40.c $840 = 21 equivalent units x $40.
(15 min.) Process Costing: Oholics, Ltd.
Total
CompletedWork-in-Process, April 30
Production:
Pounds20,00019,0001,000
Percentage complete100%60%
Equivalent pounds19,600a19,000600
Costs:
Materials$29,700
Conversion costs36,940
Total cost incurred$66,640
Cost per equivalent pound$3.40b
Cost assigned to product$66,640$64,600c$2,040d
a 19,600 equivalent units = 19,000 pounds completed + 60% x
1,000 pounds in process.b $3.40 = $66,640 19,600 equivalent units.c
$64,600 = 19,000 equivalent units x $3.40.d $2,040 = 600 equivalent
units x $3.40.
(15 Minutes) Predetermined Overhead Rates: Tiger
Furnishings.Predetermined overhead rate = $34.82 per direct labor
hour.
BasicDominatorTotal
Units produced1,0002501,250
Machine-hours4,0002,0006,000
Direct labor-hours3,0002,0005,000
Direct materials$10,000 $3,750 $13,750
Direct labor64,50035,500100,000
Manufacturing overhead174,100
Total Costs$287,850
Burden Rate:
Total overhead$174,100
Direct labor-hours 5,000= $34.82
(15 Minutes) Predetermined Overhead Rates: Tiger
Furnishings.
Predetermined overhead rate = 174.1% of direct labor cost.
BasicDominatorTotal
Units produced1,0002501,250
Machine-hours4,0002,0006,000
Direct labor-hours3,0002,0005,000
Direct materials$10,000 $3,750 $13,750
Direct labor64,50035,500100,000
Manufacturing overhead174,100
Total Costs$287,850
Burden Rate:
Total overhead$174,100
Direct labor cost $100,000=174.1%
(15 Minutes) Predetermined Overhead Rates: Tiger
Furnishings.Predetermined overhead rate = $29.0167 per machine-hour
(rounded).
BasicDominatorTotal
Units produced1,0002501,250
Machine-hours4,0002,0006,000
Direct labor-hours3,0002,0005,000
Direct materials$10,000 $3,750 $13,750
Direct labor64,50035,500100,000
Manufacturing Overhead174,100
Total Costs$287,850
Burden Rate:
Total overhead$174,100
Machine-hours 6,000=$29.0167
(20 Minutes) Predetermined Overhead Rates Tiger Furnishings.
(30 Minutes) Operations Costing: Howrley-David, Inc.The unit
costs are:Fatboy:$4,000
Screamer:$5,000
FatboyScreamerTotal
Number of units2,0004,0006,000
Materials cost per unit $2,000 $3,000
Costs$ 4,000,000$12,000,000$16,000,000
Conversion costs:
Direct Labor$ 6,000,000
Indirect materials 1,800,000
Other overhead 4,200,000
Total operation cost$12,000,000
Conversion cost per unit in plant($12,000,000 6,000 units) =
$2,000 per unit.
Operation cost (@ $2,000 per
unit)$4,000,000a$8,000,000b$12,000,000
Material cost4,000,00012,000,000
Total cost$8,000,000$20,000,000
Number of units 2,000 4,000
Unit cost$4,000$5,000
a $4,000,000 = 2,000 units x $2,000 per unit.b $8,000,000 =
4,000 units x $2,000 per unit.
(30 Minutes) Operations Costing: S. Lee Enterprises.The unit
costs are:SL1:$2,200
SL2:$2,700
SL1SL2Total
Number of units1,3001,8003,100
Materials cost per unit $900 $1,400
Costs$ 1,170,000$2,520,000$3,690,000
Conversion costs:
Direct Labor$ 1,200,000
Indirect materials 480,000
Other overhead 2,350,000
Total operation cost$4,030,000
Conversion cost per unit in plant($4,030,000 3,100 units) =
$1,300 per unit.
Operation cost (@ $1,300 per
unit)$1,690,000a$2,340,000b$4,030,000
Material cost1,170,0002,520,000
Total cost$2,860,000$4,860,000
Number of units 1,300 1,800
Unit cost$2,200$2,700
a $1,690,000 = 1,300 units x $1,300 per unit.b $2,340,000 =
1,800 units x $1,300 per unit.
(30 Minutes) Operations Costing: Organic Grounds.The unit costs
are:Star:$10.60
Bucks:$12.60
StarBucksTotal
Number of pounds5,00020,00025,000
Materials cost per pound $4.00 $6.00
Costs$20,000$120,000$ 140,000
Conversion costs:
Direct Labor$ 50,000
Indirect materials 15,000
Other overhead 100,000
Total operation cost$165,000
Cost per pound in plant($165,000 25,000 pounds) = $6.60 per
pound.
Conversion cost (@ $6.60 per pound)$33,000a$132,000b$165,000
Material cost20,000120,000
Total cost$53,000$252,000
Number of pounds 5,000 20,000
Cost per pound$10.60$12.60
a $33,000 = 5,000 units x $6.60 per pound.b $132,000 = 20,000
units x $6.60 per pound.
Solutions to Problems(30 Minutes) Product Costing: Tiger
Furnishings.The unit costs are: Basic: $186.80 and Dominator:
$404.22
BasicDominatorTotal
Direct materials$10,000 $3,750 $13,750
Direct labor64,50035,500100,000
Manufacturing overhead (@174.1% of Direct labor cost)a 112,295
61,805 174,100b
Total costs$186,795 $101,055 $287,850b
Units produced 1,000 250
Unit cost$186.80 $404.22
a 174.1% = $174,100 $100,000.b Adjusted for rounding error.
(30 Minutes) Product Costing: Tiger Furnishings.The unit costs
are: Basic: $190.57 and Dominator: $389.13
BasicDominatorTotal
Direct materials$ 10,000 $3,750 $13,750
Direct labor64,50035,500100,000
Manufacturing overhead (@29.0167 per machine-hour) a116,067b
58,033c 174,100
Total costs$ 190,567 $97,283 $287,850
Units produced 1,000 250
Unit cost$ 190.57 $389.13
a $29.0167 per machine-hour = $174,100 6,000 machine-hours.b
$116,067 = 4,000 machine-hours x $29.0167 per machine-hour.c
$58,033 = 2,000 machine-hours x $29.0167 per machine-hour.
(30 Minutes) Product CostingEthical Issues: Tiger
Furnishings.a.The unit costs are different because the two products
use the machine hours and direct labor costs in different
proportions. The Basic model is more machine intensive (it uses
relatively more machine hours than labor compared to the Dominator
model). This means that when the company moves to machine hours to
allocate costs, the Basic model will be assigned more overhead
costs resulting in higher reported product costs.b. Without knowing
more about the production process at Tiger Furnishings, it is not
possible to say which of these is better. Because you get different
results, it may pay to use a two stage system to split overhead
between that which is driven more by machine hours and that driven
more by direct labor.c.The allocation base should be chosen on the
basis of how overhead is related to cost. Income is the result of
this decision and not the basis for the decision.(30 Minutes)
Two-Stage Allocation and Product Costing: Mets Products.a.The
overhead rates are $13.50 per machine hour and 45% of
direct-materials cost.
AccountMachine-Hour RelatedMaterials Related
Utilities .$ 6,000
Supplies $4,200
Machine depreciation and maintenance 13,200
Purchasing and storing materials 4,800
Miscellaneous 5,100
Total overhead $ 24,300$ 9,000
Total machine hours 1,800 hours
Total materials cost $20,000
Overhead rate $13.50 / hour45%
b.The cost per unit of output is $3.49 for baseball caps and
$4.96 for T-shirts.
Baseball CapsT-shirtsTotal
Machine hours used1,0008001,800
Direct materials costs .$12,000$8,000$20,000
Direct labor costs 4,000 2,4006,400
Manufacturing overhead costs .
Machine-hour related overheada13,50010,80024,300
Materials-related overheadb 5,400 3,600 9,000
Total cost$34,900$24,800$59,700
Units produced .. 10,000 5,00015,000
Cost per unit$3.49$4.96
a $13,500 = 1,000 machine hours x $13.50 per machine hour;
$10,800 = 800 machine hours x $13.50 per machine hour.b$5,400 =
$12,000 materials cost x 45%;$3,600 = $8,000 materials cost x
45%.
(30 Minutes) Two-Stage Allocation and Product Costing: Owl-Eye
Radiologists.a.The overhead rates are $46 per equipment hour and
$50 per direct labor hour.
AccountEquipment-Hour RelatedDirect-Labor Hour Related
Utilities .$ 4,800
Supplies $12,600
Indirect labor and supervision 20,400
Equipment depreciation and maintenance 8,400
Miscellaneous 3,360
Total overhead $ 16,560$ 33,000
Total equipment hours 360 hours
Total labor hours 660 hours
Overhead rate $46 per hour$50 per hour
b.The costs per patient are $114.75 per hospital patient hour
and $29.44 per other patient.
Hospital PatientsOther PatientsTotal
Equipment hours used240120360
Direct labor-hours480180660
Direct labor costs $38,400 $10,800$49,200
Overhead costs .
Equipment-hour related overheada11,0405,52016,560
Direct labor-hours related overheadb 24,000 9,000 33,000
Total cost$73,440$25,320$98,760
Patients .. 640 8601,500
Cost per patient$114.75$29.44
a $11,040 = 240 equipment hours x $46 per equipment hour; $5,520
= 120 equipment hours x $46 per equipment hour.b$24,000 = 480
direct labor-hours x $50 per direct labor-hour;$9,000 = 180 direct
labor-hours x $50 per direct labor-hour.(30 Minutes) Operations
Costing: Vermont Instruments.The unit costs are:Fin-X:$28
Sci-X:$33
Fin-XSci-XTotal
Number of units10,00040,00050,000
Parts cost per unit$25$30
Costs$250,000$1,200,000$ 1,450,000
Operation costs:
Direct Labor62,000
Indirect materials 17,500
Overhead 70,500
Total operation cost$ 150,000
Cost per unit in plant($150,000 50,000 units) = $3 per unit.
Operation cost (@ $3 per unit)$ 30,000a$ 120,000b$150,000
Material cost250,0001,200,000
Total cost$ 280,000$1,320,000
Number of units 10,000 40,000
Unit cost$28$33
a $30,000 = 10,000 units x $3 per unit.b $120,000 = 40,000 units
x $3 per unit. (45 Minutes) Account Analysis, Two-Stage Allocation,
and Product Costing: Tiger Furnishings.a. Cost Flow Diagram
6-47. (continued)b. Basic$188
Dominator$400
BasicDominatorTotal
Units Produced1,0002501,250
Machine hours4,0002,0006,000
Direct labor hours3,0002,0005,000
Direct materials$10,000 $3,750 $ 13,750
Direct labor64,50035,500100,000
Manufacturing OverheadMachine-hourrelatedDirect labor cost
related
Utilities$1,800$0$1,800
Supplies05,0005,000
Training010,000 10,000
Supervision025,800 25,800
Machine depreciation32,000 032,000
Plant depreciation14,200 014,200
Miscellaneous 085,30085,300
Total$48,000$126,100174,100
Total Costs$287,850
Burden Rates
Machine hour rate($48,000 6,000 hours) = $8.00
Direct labor cost rate($126,100 $100,000) = 126.1%
6-47. (continued)
Product Costing
Direct material$ 10,000 $ 3,750 $ 13,750
Direct labor 64,500 35,500 100,000
Overhead
Machine-related (@$8 per machine-hour)32,000a 16,000b 48,000
Labor-related (@126.1% direct labor cost) 81,335c 44,765d
126,100
Total overhead$113,335 $60,765 $174,100
Total cost$187,835 $100,015 $287,850
Units produced 1,000 2501,250
= Unit cost (rounded)= $188 = $400
a $32,000 = 4,000 machine-hours x $8 per machine-hour.b $16,000
= 2,000 machine-hours x $8 per machine-hour.c $81,335 = $64,500 x
126.1% direct labor cost.d $44,765 = $35,500 x 126.1% direct labor
cost
Solutions to Integrative Case6-48. (45 Minutes) Product Costing,
Cost Estimation, and Decision Making: Dolan Products.a. To
determine product costs and margins, first calculate the Year 1
overhead rate:
Overhead rate=Total overheadTotal direct labor hours
=$750,000(5,000 x 2.0 + 10,000 x 1.0 + 20,000 x 0.5)
=$750,00030,000 hours
=$25 per direct labor hour
The product costs are:
RedYellowGreen
Direct materials $70.00$50.00$30.00
Direct labor (@$20)40.0020.0010.00
Manufacturing overhead (@$25) 50.00 25.00 12.50
Product cost$160.00$95.00$52.50
The product margins are:
RedYellowGreen
Price $150.00$100.00$75.00
Product cost160.0095.0052.50
Product margin$(10.00)$5.00$22.50
6-48. (continued)
b. To determine product costs and margins, first calculate the
Year 2 overhead rate:
Overhead rate=Total overheadTotal direct labor hours
=$650,000(10,000 x 1.0 + 20,000 x 0.5)
=$650,00020,000 hours
=$32.50 per direct labor hour
The product costs are:
YellowGreen
Direct materials $50.00$30.00
Direct labor (@$20)20.0010.00
Manufacturing overhead (@$32.50) 32.50 16.25
Product cost$102.50$56.25
The product margins are:
YellowGreen
Price $100.00$75.00
Product cost102.5056.25
Product margin$(2.50)$18.75
6-48. (continued)
c. Dolan should not drop Yellow.The problem is that some of the
manufacturing overhead is fixed and when a product is dropped, that
cost is not avoided, but added to the overhead allocated to the
remaining products. We know that not all the overhead is fixed,
however, because overhead declined from $750,000 to $650,000 when
Dolan dropped Red.
We can use the high-low method from Chapter 5 to estimate the
fixed overhead component and the variable overhead rate. We only
have two observations, so these serve as the high and low
observations.
Variable cost =Cost at highest activity cost at lowest
activity
Highest activity lowest activity
=$750,000 $650,000
30,000 20,000
= $10.00 per direct labor hour
Fixed costs=Total costs variable costs
=$750,000 ($10.00 x 30,000)
=$450,000
or
Fixed costs=$650,000 ($10.00 x 20,000)
=$450,000
Considering only financial considerations, the variable cost of
Yellow is $50 for materials, $20 for direct labor, and $10 for
variable overhead (because Yellow requires one hour of direct
labor). Therefore, the total variable cost of Yellow is $80 (= $50
+ $20 +$10) and the unit contribution margin is $20 (=$100 $80). If
Dolan drops Yellow, the firm will lose $200,000 (= 10,000 units x
$20 unit contribution margin) and profit.
6-49. (45 Minutes) Product Costing and Decision Making:
Brunswick Parts.
This problem is designed to get students to understand the
effect that cost systems can have on decisions by showing what
happens when product cost information is used to schedule
production when plants have very different ages (hence, very
different depreciation expense).
a.
The reported product costs include direct materials, direct
labor, and manufacturing overhead.
First, compute the plant-wide overhead rates used to allocate
manufacturing overhead. (Note that the corporate administration
overhead is irrelevant in the product-costing question. It is used
for performance evaluation only.)
MonctonFredericton
Estimated plant overhead$1,000,000$600,000
Estimate production 100,000 labor hours 150,000 labor hours
= Overhead rate= $10 / labor hour=$4 / labor hour
The reported product costs of P28 in each plant can then be
determined as follows:
MonctonFredericton
Direct material$25$25
Direct labor3 hrs. @ $9 = 274 hrs @ $10 = 40
Manufacturing overhead3 hrs @ $10 = 304 hrs @ $4 = 16
Total $82$81
b.
Based on the reported product costs, it appears that Fredericton
is the plant where P28 should be produced. However, the Moncton
plant is more efficient (it requires only 3 hours of direct labor
compared to 4 hours at Fredericton). The distortion is caused by
the fact that the Fredericton plant is almost fully depreciated
whereas the Moncton plant is new and probably much more
automated.
6-2 2014 by McGraw-Hill Education. This is proprietary material
solely for authorized instructor use. Not authorized for sale or
distribution in any manner. This document may not be copied,
scanned, duplicated, forwarded, distributed, or posted on a
website, in whole or part.
6-1 2014 by McGraw-Hill Education. This is proprietary material
solely for authorized instructor use. Not authorized for sale or
distribution in any manner. This document may not be copied,
scanned, duplicated, forwarded, distributed, or posted on a
website, in whole or part.OverheadMachine-Related OverheadDirect
Labor Cost Related OverheadDominatorBasicMachine HoursDirect Labor
CostFirst StageSecond Stage