Solution Manual For Managerial Accounting, 17th Edition

Chapter 2 Job-Order Costing: Calculating Unit Product Costs Questions 2-1 Job-order costing is used in situations where many different products, each with individual and unique features, are produced each period. 2-2 In absorption costing, all manufacturing costs, both fixed and variable, are assigned to units of product—units are said to fully absorb manufacturing costs. Conversely, all nonmanufacturing costs are treated as period costs and they are not assigned to units of product. 2-3 Normal costing systems apply overhead costs to jobs by multiplying a predetermined overhead rate by the actual amount of the allocation incurred by the job. 2-4 Unit product cost is computed by taking the total manufacturing costs assigned to a job and dividing it by the number of units contained in the job. 2-5 The first step is to estimate the total amount of the allocation base (the denominator) that will be required for next period’s estimated level of production. The second step is to estimate the total fixed manufacturing overhead cost for the coming period and the variable manufacturing overhead cost per unit of the allocation base. The third step is to use the cost formula Y = a + bX to estimate the total manufacturing overhead cost (the numerator) for the coming period. The fourth step is to compute the predetermined overhead rate. 2-6 The job cost sheet is used to record all costs that are assigned to a particular job. These costs include direct materials costs traced to the job, direct labor costs traced to the job, and manufacturing overhead costs applied to the job. When a job is completed, the job cost sheet is used to compute the unit product cost. 2-7 Some production costs such as a factory manager’s salary cannot be traced to a particular product or job, but rather are incurred as a result of overall production activities. In addition, some production costs such as indirect materials cannot be easily traced to jobs. If these costs are to be assigned to products, they must be allocated to the products. 2-8 If actual manufacturing overhead cost is applied to jobs, the company must wait until the end of the accounting period to apply overhead and to cost jobs. If the company computes actual overhead rates more frequently to get around this problem, the rates may fluctuate widely due to seasonal factors or variations in output. For this reason, most companies use predetermined overhead rates to apply manufacturing overhead costs to jobs. 2-9 The measure of activity used as the allocation base should drive the overhead cost; that is, the allocation base should cause the overhead cost. If the allocation base does not really cause the overhead, then costs will be incorrectly attributed to products and jobs and product costs will be distorted. 2-10 Assigning manufacturing overhead costs to jobs does not ensure a profit. The units produced may not be sold and if they are sold, they may not be sold at prices sufficient to cover all costs. It is a myth that assigning costs to products or jobs ensures that those costs will be recovered. Costs are recovered only by selling to customers—not by allocating costs. © The McGraw-Hill Companies, Inc., 2021. All rights reserved. Solutions Manual, Chapter 2 1 2-11 No, you would not expect the total applied overhead for a period to equal the actual overhead for that period. This is because the applied overhead relies on a predetermined overhead rate that is based on estimates in the numerator and denominator. 2-12 When a company applied less overhead to production than it actually incurs, it creates what is known as underapplied overhead. When it applies more overhead to production than it actually incurs, it results in overapplied overhead. 2-13 A plantwide overhead rate is a single overhead rate used throughout a plant. In a multiple overhead rate system, each production department may have its own predetermined overhead rate and its own allocation base. Some companies use multiple overhead rates rather than plantwide rates to more appropriately allocate overhead costs among products. Multiple overhead rates should be used, for example, in situations where one department is machine intensive and another department is labor intensive. © The McGraw-Hill Companies, Inc., 2021. All rights reserved. 2 Managerial Accounting, 17th edition Chapter 2: Applying Excel The completed worksheet is shown below. © The McGraw-Hill Companies, Inc., 2018. All rights reserved. Solutions Manual, Chapter 2 3 Chapter 2: Applying Excel (continued) The completed worksheet, with formulas displayed, is shown below. © The McGraw-Hill Companies, Inc., 2018. All rights reserved. 4 Managerial Accounting, 16th edition Chapter 2: Applying Excel (continued) [Note: To display formulas in Excel 2013, select File > Options > Advanced > Display options for this worksheet > Show formulas in cells instead of their calculated amounts. To display the formulas in other versions of Excel, consult Excel Help.] © The McGraw-Hill Companies, Inc., 2018. All rights reserved. Solutions Manual, Chapter 2 5 Chapter 2: Applying Excel (continued) 1. When the total fixed manufacturing overhead cost for the Milling Department is changed to $300,000, the worksheet changes as shown below: © The McGraw-Hill Companies, Inc., 2018. All rights reserved. 6 Managerial Accounting, 16th edition Chapter 2: Applying Excel (continued) The selling price of Job 407 has dropped from $4,348.75 to $4,112.50 because the fixed manufacturing overhead in the Milling Department decreased from $390,000 to $300,000. This reduced the predetermined overhead rate in the Milling Department from $8.50 per machine-hour to $7.00 per machine-hour and hence the amount of overhead applied to Job 407 in the Milling Department. © The McGraw-Hill Companies, Inc., 2018. All rights reserved. Solutions Manual, Chapter 2 7 Chapter 2: Applying Excel (continued) 2. For the new Job 408, the worksheet should look like the following: © The McGraw-Hill Companies, Inc., 2018. All rights reserved. 8 Managerial Accounting, 16th edition Chapter 2: Applying Excel (continued) 3. When the total number of machine-hours in the Assembly Department increases from 3,000 machine-hours to 6,000 machine-hours, the worksheet looks like the following: © The McGraw-Hill Companies, Inc., 2018. All rights reserved. Solutions Manual, Chapter 2 9 Chapter 2: Applying Excel (continued) The selling price for Job 408 is not affected by this change. The reason for this is that the total number of machine-hours in the Assembly Department has no effect on any cost. There would have been a change in costs and in the selling price if the total machine-hours in the Milling Department would have changed. This is because the predetermined overhead rate in that department is based on machine-hours and any change in the total machine-hours would affect the magnitude of the predetermined overhead rate in that department. © The McGraw-Hill Companies, Inc., 2018. All rights reserved. 10 Managerial Accounting, 16th edition Chapter 2: Applying Excel (continued) 4. When the total number of direct labor-hours in the Assembly Department decreases from 80,000 direct labor-hours to 50,000 direct laborhours, the worksheet looks like the following: © The McGraw-Hill Companies, Inc., 2018. All rights reserved. Solutions Manual, Chapter 2 11 Chapter 2: Applying Excel (continued) The selling price of Job 408 has increased from $2,905.00 to $2,944.38. This occurs because the decrease in the total number of direct laborhours in the Assembly Department increases the predetermined overhead rate in that department from $10.00 per direct labor-hour to $13.75 per direct labor-hour. In effect, the same total fixed manufacturing overhead cost is spread across fewer total direct labor-hours. © The McGraw-Hill Companies, Inc., 2018. All rights reserved. 12 Managerial Accounting, 16th edition The Foundational 15 1. Molding: Using the equation Y = a + bX, the estimated total manufacturing overhead cost is computed as follows: Y = $10,000 + ($1.40 per MH)(2,500 MHs) Estimated fixed manufacturing overhead ……………… Estimated variable manufacturing overhead: $1.40 per MH × 2,500 MHs …………………………….. Estimated total manufacturing overhead cost ………… $10,000 3,500 $13,500 The predetermined overhead rate in Molding is computed as follows: Estimated total manufacturing overhead (a) … Estimated total machine-hours (MHs) (b)…….. Predetermined overhead rate (a) ÷ (b)……….. $13,500 2,500 MHs $5.40 per MH Fabrication: Using the equation Y = a + bX, the estimated total manufacturing overhead cost is computed as follows: Y = $15,000 + ($2.20 per MH)(1,500 MHs) Estimated fixed manufacturing overhead ……………… Estimated variable manufacturing overhead: $2.20 per MH × 1,500 MHs …………………………….. Estimated total manufacturing overhead cost ………… $15,000 3,300 $18,300 The predetermined overhead rate in Fabrication is computed as follows: Estimated total manufacturing overhead (a) … Estimated total machine-hours (MHs) (b)…….. Predetermined overhead rate (a) ÷ (b)……….. $18,300 1,500 MHs $12.20 per MH 2. The applied overhead from Molding is computed as follows: Machine-hours worked on job (a) …………….. Molding overhead rate (b) ………………………. Manufacturing overhead applied (a) × (b) …. Job P 1,700 $5.40 $9,180 Job Q 800 $5.40 $4,320 © The McGraw-Hill Companies, Inc., 2018. All rights reserved. Solutions Manual, Chapter 2 13 The Foundational 15 3. The applied overhead from Fabrication is computed as follows: Machine-hours worked on job (a) …………….. Fabrication overhead rate (b) ………………….. Manufacturing overhead applied (a) × (b) …. Job P 600 $12.20 $7,320 Job Q 900 $12.20 $10,980 4. The total manufacturing cost assigned to Job P is computed as follows: Direct materials …………………………………………………. Direct labor ………………………………………………………. Manufacturing overhead applied ($9,180 + $7,320) ….. Total manufacturing cost …………………………………….. Job P $13,000 21,000 16,500 $50,500 5. The unit product cost for Job P is computed as follows: Total manufacturing cost (a) ………………….. Number of units in the job (b) ………………… Unit product cost (a) ÷ (b)…………………….. $50,500 20 $2,525 6 . The total manufacturing cost assigned to Job Q is computed as follows: Direct materials …………………………………………………. Direct labor ………………………………………………………. Manufacturing overhead applied ($4,320 + $10,980) … Total manufacturing cost…………………………………….. Job Q $ 8,000 7,500 15,300 $30,800 7. The unit product cost for Job Q is computed as follows: Total manufacturing cost (a) ………………….. Number of units in the job (b) ………………… Unit product cost (rounded) (a) ÷ (b) ………. $30,800 30 $1,027 © The McGraw-Hill Companies, Inc., 2018. All rights reserved. 14 Managerial Accounting, 16th edition The Foundational 15 8. The selling prices are calculated as follows: Total manufacturing cost………………………… Markup (based on 80%) ………………………… Total price for the job (a) ……………………….. Number of units in the job (b) …………………. Selling price per unit (a) ÷ (b) ………………… Job P $50,500 40,400 $90,900 20 $4,545 Job Q $30,800 24,640 $55,440 30 $1,848 9. The cost of goods sold is the sum of the manufacturing costs assigned to Jobs P and Q: Total manufacturing cost assigned to Job P ….. $50,500 Total manufacturing cost assigned to Job Q …. 30,800 Cost of goods sold ………………………………….. $81,300 10. The plantwide overhead rate of $7.95 per machine-hour is calculated by combining the estimated manufacturing overhead costs computed in requirement 1 for Molding and Fabrication ($13,500 + $18,300 = $31,800) and then dividing by the estimated total machine-hours: Estimated total manufacturing overhead (a) . Estimated total machine-hours (MHs) (b)…….. Predetermined overhead rate (a) ÷ (b)……… $31,800 4,000 MHs $7.95 per MH 11. The manufacturing overhead applied to Jobs P and Q is computed as follows: Actual machine-hours worked (a) …………….. Predetermined overhead rate per MH (b) …… Manufacturing overhead applied (a) × (b) …. Job P 2,300 $7.95 $18,285 Job Q 1,700 $7.95 $13,515 © The McGraw-Hill Companies, Inc., 2018. All rights reserved. Solutions Manual, Chapter 2 15 The Foundational 15 12. Job P’s unit product cost is computed as follows: Direct materials …………………………………… Direct labor ………………………………………… Manufacturing overhead applied ……………… Total manufacturing cost (a) ………………….. Number of units in the job (b) ………………… Unit product cost (rounded) (a) ÷ (b) ………. $13,000 21,000 18,285 $52,285 20 $2,614 13. Job Q’s unit product cost is computed as follows: Direct materials …………………………………… Direct labor ………………………………………… Manufacturing overhead applied ……………… Total manufacturing cost (a) ………………….. Number of units in the job (b) ………………… Unit product cost (rounded) (a) ÷ (b) ………. $8,000 7,500 13,515 $29,015 30 $967 14. The selling prices are calculated as follows: Total manufacturing cost………………………… Markup (based on 80%) ………………………… Total price for the job (a) ……………………….. Number of units in the job (b) …………………. Selling price per unit (rounded) (a) ÷ (b) …… Job P $52,285 41,828 $94,113 20 $4,706 Job Q $29,015 23,212 $52,227 30 $1,741 15. The cost of goods sold is the sum of the manufacturing costs assigned to Jobs P and Q: Total manufacturing cost assigned to Job P ….. $52,285 Total manufacturing cost assigned to Job Q …. 29,015 Cost of goods sold ………………………………….. $81,300 © The McGraw-Hill Companies, Inc., 2018. All rights reserved. 16 Managerial Accounting, 16th edition Exercise 2-1 (10 minutes) The estimated total manufacturing overhead cost is computed as follows: Y = $94,000 + ($2.00 per DLH)(20,000 DLHs) Estimated fixed manufacturing overhead ……………… Estimated variable manufacturing overhead: $2.00 per DLH × 20,000 DLHs …………………………………. Estimated total manufacturing overhead cost ………… $ 94,000 40,000 $134,000 The plantwide predetermined overhead rate is computed as follows: Estimated total manufacturing overhead (a) …… Estimated total direct labor hours (b) ……………. Predetermined overhead rate (a) ÷ (b) …………. $134,000 20,000 DLHs $6.70 per DLH © The McGraw-Hill Companies, Inc., 2018. All rights reserved. Solutions Manual, Chapter 2 17 Exercise 2-2 (10 minutes) Actual direct labor-hours (a) …………………… Predetermined overhead rate (b) …………….. Manufacturing overhead applied (a) × (b) …. 10,800 $23.40 $252,720 © The McGraw-Hill Companies, Inc., 2018. All rights reserved. 18 Managerial Accounting, 16th edition Exercise 2-3 (10 minutes) 1. Total direct labor-hours required for Job A-500: Direct labor cost (a) ………………………………. Direct labor wage rate per hour (b) …………… Total direct labor hours (a) ÷ (b) ……………… $153 $17 9 Total manufacturing cost assigned to Job A-500: Direct materials ………………………………………………. Direct labor ……………………………………………………. Manufacturing overhead applied ($14 per DLH × 9 DLHs)…………………………………………………………. Total manufacturing cost …………………………………… $231 153 126 $510 2. Unit product cost for Job A-500: Total manufacturing cost (a) ……………………. Number of units in the job (b)………………….. Unit product cost (a) ÷ (b) ……………………… $510 40 $12.75 © The McGraw-Hill Companies, Inc., 2018. All rights reserved. Solutions Manual, Chapter 2 19 Exercise 2-4 (10 minutes) 1 and 2. The total direct labor-hours required for Job N-60: Direct labor cost (a) ………………………………. Direct labor wage rate per hour (b) …………… Total direct labor hours (a) ÷ (b) ……………… Assembly $180 $20 9 Testing & Packaging $40 $20 2 The total manufacturing cost and unit product cost for Job N-60 is computed as follows: Direct materials ($340 + $25) ………………………….. Direct labor ($180 + $40) ……………………………….. Assembly Department ($16 per DLH × 9 DLHs) ……. Testing & Packaging Department ($12 per DLH × 2 DLHs) ……………………………………………………….. Total manufacturing cost …………………………………. Total manufacturing cost (a) ……………………………. Number of units in the job (b) ………………………….. Unit product cost (a) ÷ (b) ………………………………. $144 24 $365 220 168 $753 $753 10 $75.30 © The McGraw-Hill Companies, Inc., 2018. All rights reserved. 20 Managerial Accounting, 16th edition Exercise 2-5 (10 minutes) 1 and 2. The total direct labor-hours required in Finishing for Job 700: Direct labor cost (a) ………………………………. Direct labor wage rate per hour (b) …………… Total direct labor hours (a) ÷ (b) ……………… Finishing $128 $16 8 The total manufacturing cost and unit product cost for Job 700 is computed as follows: Direct materials ($410 + $60) ………………………….. Direct labor ($128 + $48) ……………………………….. Finishing Department ($18 per DLH × 8 DLHs) …….. Fabrication Department (110% × $60) ………………. Total manufacturing cost …………………………………. Total manufacturing cost (a) ……………………………. Number of units in the job (b) ………………………….. Unit product cost (rounded) (a) ÷ (b) ………………… $144 66 $470 176 210 $856 $856 15 $57.07 © The McGraw-Hill Companies, Inc., 2018. All rights reserved. Solutions Manual, Chapter 2 21 Exercise 2-6 (10 minutes) 1. The estimated total overhead cost is computed as follows: Y = $680,000 + ($0.50 per DLH)(80,000 DLHs) Estimated fixed overhead cost ………………………….. Estimated variable overhead cost: $0.50 per DLH × 80,000 DLHs ………………………………………………. Estimated total overhead cost ………………………….. $680,000 40,000 $720,000 The predetermined overhead rate is computed as follows: Estimated total overhead (a) …………………. Estimated total direct labor-hours (b) ……… Predetermined overhead rate (a) ÷ (b)……. $720,000 80,000 DLHs $9.00 per DLH 2. Total manufacturing cost assigned to Xavier: Direct materials ………………………………………………. Direct labor ……………………………………………………. Overhead applied ($9.00 per DLH × 280 DLHs) ……… Total manufacturing cost …………………………………… $38,000 21,000 2,520 $61,520 © The McGraw-Hill Companies, Inc., 2018. All rights reserved. 22 Managerial Accounting, 16th edition Exercise 2-7 (20 minutes) 1. Step 1: The total direct labor-hours required for Job Omega: Direct labor cost (a) ………………………………. Direct labor wage rate per hour (b) …………… Total direct labor hours worked (a) ÷ (b) …… $345,000 $15 23,000 Step 2: Derive the plantwide predetermined overhead rate: Manufacturing overhead applied to Job Omega (a) ………………………………………… Direct labor hours worked on Job Omega (b) . Plantwide predetermined overhead rate (a) ÷ (b) ……………………………………………….. $184,000 23,000 $8.00 per DLH 2. The job cost sheet for Job Alpha is derived as follows: (note that direct materials is the plug figure) Direct materials (plug figure) …………………………… $ 280,000 Direct labor (54,500 DLHs × $15 per DLH) ………… 817,500 Manufacturing overhead applied ($8 per DLH × 54,500 DLHs) ……………………………………………. 436,000 Total job cost (given) …………………………………….. $1,533,500 © The McGraw-Hill Companies, Inc., 2018. All rights reserved. Solutions Manual, Chapter 2 23 Exercise 2-8 (10 minutes) Direct material………………………….. Direct labor ……………………………… Manufacturing overhead applied: $12,000 × 125% ……………………. Total manufacturing cost ……………. $10,000 12,000 Total manufacturing cost (a) ……….. Number of units in job (b) …………… Unit product cost (a) ÷ (b) ………….. $37,000 1,000 $37 15,000 $37,000 © The McGraw-Hill Companies, Inc., 2018. All rights reserved. 24 Managerial Accounting, 16th edition Exercise 2-9 (30 minutes) 1. The estimated total overhead cost is computed as follows: Y = $1,980,000 + ($2.00 per MH)(165,000 MHs) Estimated fixed overhead ………………………………… $1,980,000 Estimated variable overhead: $2.00 per MH × 165,000 MHs ……………………………………………… 330,000 Estimated total overhead cost ………………………….. $2,310,000 The plantwide predetermined overhead rate is computed as follows: Estimated total overhead (a) …………………. Estimated total machine-hours (b) …………. Predetermined overhead rate (a) ÷ (b)……. $2,310,000 165,000 MHs $14.00 per MH 2. Total manufacturing cost assigned to Job P90: Direct materials ………………………………………………. Direct labor ……………………………………………………. Overhead applied ($14 per MH × 72 MHs) ……………. Total manufacturing cost …………………………………… $1,150 830 1,008 $2,988 3a. Given that the company is operating at 50% of its manufacturing capacity, an argument can be made that the company should pursue any business opportunities that generate a positive a contribution margin. Based on the information provided, it appears that Job P90 does generate a positive contribution margin as shown below: Sales……………………………………………………… Direct materials ……………………………………….. Direct labor …………………………………………….. Variable overhead applied ($2.00 per MH × 72 MHs) …………………………………………………… Contribution margin ………………………………….. $1,150 830 $2,500 144 2,124 $ 376 © The McGraw-Hill Companies, Inc., 2018. All rights reserved. Solutions Manual, Chapter 2 25 Exercise 2-9 (continued) 3b. The CFO’s argument is based on the assertion that Job P90 does not generate enough revenue to cover the cost of the manufacturing resources that it consumes. However, given that the company is operating at 50% of its manufacturing capacity, the overhead costs applied to Job P90 in requirement 2 do not represent the cost of the overhead resources consumed making Job P90. In other words, the overhead applied in requirement 2 includes a charge for used and unused capacity. This reality provides instructors an opportunity to introduce students to the main idea underlying Appendix 2B. If we estimate a capacity-based overhead rate for the company and apply overhead costs to Job P90 using this rate, it reveals that the revenue generated by the job ($2,500) is still insufficient to cover its manufacturing costs of $2,556, as computed below: The estimated total overhead cost (at capacity) is computed as follows (keep in mind that 165,000 MHs ÷ 50% = 330,000 MHs): Y = $1,980,000 + ($2.00 per MH)(330,000 MHs) Estimated fixed overhead ………………………………… $1,980,000 Estimated variable overhead: $2.00 per MH × 330,000 MHs ……………………………………………… 660,000 Estimated total overhead cost ………………………….. $2,640,000 The predetermined capacity-based overhead rate is computed as follows: Estimated total overhead (a) …………………. Estimated total machine-hours (b) …………. Predetermined overhead rate (a) ÷ (b)……. $2,640,000 330,000 MHs $8.00 per MH The total manufacturing cost assigned to Job P90 (using a capacity-based overhead rate): Direct materials ………………………………………………. Direct labor ……………………………………………………. Overhead applied ($8 per MH × 72 MHs) ……………… Total manufacturing cost …………………………………… $1,150 830 576 $2,556 © The McGraw-Hill Companies, Inc., 2018. All rights reserved. 26 Managerial Accounting, 16th edition Exercise 2-10 (10 minutes) 1. Yes, overhead should be applied to Job W at year-end. Because $6,000 of overhead was applied to Job V on the basis of $8,000 of direct labor cost, the company’s predetermined overhead rate must be 75% of direct labor cost. Job W direct labor cost (a) …………………………………….. Predetermined overhead rate (b) ……………………………. Manufacturing overhead applied to Job W (a) × (b) ……. $4,000 0.75 $3,000 2. The direct materials ($2,500), direct labor ($4,000), and applied overhead ($3,000) for Job W will be included in Work in Process on Sigma Corporation’s balance sheet. © The McGraw-Hill Companies, Inc., 2018. All rights reserved. Solutions Manual, Chapter 2 27 Exercise 2-11 (30 minutes) Note to the instructor: This exercise can be used as a launching pad for a discussion of Appendix 2B. 1. The estimated total fixed manufacturing overhead can be computed using the data from any of quarters 1-3. For illustrative purposes, we’ll use the first quarter as follows: Total overhead cost (First quarter) ……………………… $300,000 Variable cost element ($2.00 per unit × 80,000 units) 160,000 Fixed cost element ………………………………………….. $140,000 2. The fixed and variable cost estimates from requirement 1 can be used to estimate the total manufacturing overhead cost for the fourth quarter as follows: Y = $140,000 + ($2.00 per unit)(60,000 units) Estimated fixed manufacturing overhead ……………… Estimated variable manufacturing overhead $2.00 per unit × 60,000 units………………………….. Estimated total manufacturing overhead cost ………… $140,000 120,000 $260,000 The estimated unit product cost for the fourth quarter is computed as follows: Direct materials ……………………………………………. Direct labor ……………………………………………….. Manufacturing overhead …………………………………. Total manufacturing costs (a) ………………………… Number of units to be produced (b) ………………… Unit product cost (rounded) (a) ÷ (b) ……………… $180,000 96,000 260,000 $536,000 60,000 $8.93 © The McGraw-Hill Companies, Inc., 2018. All rights reserved. 28 Managerial Accounting, 16th edition Exercise 2-11 (continued) 3. The fixed portion of the manufacturing overhead cost is causing the unit product costs to fluctuate. The unit product cost increases as the level of production decreases because the fixed overhead is spread over fewer units. 4. The unit product cost can be stabilized by using a predetermined overhead rate that is based on expected activity for the entire year. The cost formula created in requirement 1 can be adapted to compute the annual predetermined overhead rate. The annual fixed manufacturing overhead is $560,000 ($140,000 per quarter × 4 quarters). The variable manufacturing overhead per unit is $2.00. The cost formula is as follows: Y = $560,000 + ($2.00 per unit × 200,000 units) Estimated fixed manufacturing overhead ……………… Estimated variable manufacturing overhead $2.00 per unit × 200,000 units ………………………… Estimated total manufacturing overhead cost ………… $560,000 400,000 $960,000 The annual predetermined overhead rate is computed as follows: Estimated total manufacturing overhead (a) Estimated total units produced (b) ………….. Predetermined overhead rate (a) ÷ (b) ……. $960,000 200,000 $4.80 per unit Using a predetermined overhead rate of $4.80 per unit, the unit product costs would stabilize as shown below: Direct materials…………….. Direct labor………………….. Manufacturing overhead: at $4.80 per unit ………… Total cost (a) ……………….. Number of units produced (b) …………………………… Unit product cost (a) ÷ (b) First Quarter Second Third Fourth $240,000 $120,000 $ 60,000 $180,000 128,000 64,000 32,000 96,000 384,000 192,000 96,000 288,000 $752,000 $376,000 $188,000 $564,000 80,000 $9.40 40,000 $9.40 20,000 $9.40 60,000 $9.40 © The McGraw-Hill Companies, Inc., 2018. All rights reserved. Solutions Manual, Chapter 2 29 Exercise 2-12 (20 minutes) 1. The estimated total manufacturing overhead cost is computed as follows: Y = $650,000 + ($3.00 per MH)(100,000 MHs) Estimated fixed manufacturing overhead …………….. Estimated variable manufacturing overhead: $3.00 per MH × 100,000 MHs ………………………………… Estimated total manufacturing overhead cost ………. $650,000 300,000 $950,000 The plantwide predetermined overhead rate is computed as follows: Estimated total manufacturing overhead (a) Estimated total machine-hours (b) …………. Predetermined overhead rate (a) ÷ (b)……. $950,000 100,000 MHs $9.50 per MH 2. Total manufacturing cost assigned to Job 400: Direct materials ………………………………………………. Direct labor ……………………………………………………. Manufacturing overhead applied ($9.50 per MH × 40 MHs) ………………………………………………………….. Total manufacturing cost …………………………………… $ 450 210 380 $1,040 3. The unit product cost of Job 400 is computed as follows: Total manufacturing cost (a) …………………. Number of units in the job (b)……………….. Unit product cost (a) ÷ (b) …………………… $1,040 52 $20 4. The selling price per unit is computed as follows: Total manufacturing cost ……………………… Markup (120% of manufacturing cost) ……. Selling price for Job 400 (a) ………………….. Number of units in Job 400 (b) ……………… Selling price per unit (a) ÷ (b) ………………. $1,040 1,248 $2,288 52 $44 © The McGraw-Hill Companies, Inc., 2018. All rights reserved. 30 Managerial Accounting, 16th edition Exercise 2-12 (continued) 5. Possible critiques of Moody’s pricing tactics include (1) relying on a plantwide overhead rate to allocate overhead costs to jobs may distort the cost base used for cost-plus pricing, (2) relying on an absorption approach may allocate unused capacity costs to jobs thereby distorting the cost base for cost-plus pricing, and (3) relying on absorption cost-plus pricing ignores the customers’ willingness to pay based on their perceived value of the product or service. © The McGraw-Hill Companies, Inc., 2018. All rights reserved. Solutions Manual, Chapter 2 31 Exercise 2-13 (20 minutes) 1. Cutting Department: The estimated total manufacturing overhead cost in the Cutting Department is computed as follows: Y = $264,000 + ($2.00 per MH)(48,000 MHs) Estimated fixed manufacturing overhead ……………… Estimated variable manufacturing overhead $2.00 per MH × 48,000 MHs …………………………… Estimated total manufacturing overhead cost ………… $264,000 96,000 $360,000 The predetermined overhead rate is computed as follows: Estimated total manufacturing overhead (a) . Estimated total machine-hours (b) …………… Predetermined overhead rate (a) ÷ (b)……… $360,000 48,000 MHs $7.50 per MH Finishing Department: The estimated total manufacturing overhead cost in the Finishing Department is computed as follows: Y = $366,000 + ($4.00 per DLH)(30,000 DLHs) Estimated fixed manufacturing overhead ……………… Estimated variable manufacturing overhead $4.00 per DLH × 30,000 DLHs ………………………… Estimated total manufacturing overhead cost ………… $366,000 120,000 $486,000 The predetermined overhead rate is computed as follows: Estimated total manufacturing overhead (a) .. Estimated total direct labor-hours (b) ………… Predetermined overhead rate (a) ÷ (b)………. $486,000 30,000 DLHs $16.20 per DLH © The McGraw-Hill Companies, Inc., 2018. All rights reserved. 32 Managerial Accounting, 16th edition Exercise 2-13 (continued) 2. Total manufacturing cost assigned to Job 203: Direct materials ($500 + $310) ……………………. Direct labor ($108 + $360) …………………………. Cutting Department (80 MHs × $7.50 per MH) .. Finishing Department (20 DLH × $16.20 per DLH) …………………………………………………… Total manufacturing cost ……………………………. $600 324 $ 810 468 924 $2,202 3. Yes; if some jobs require a large amount of machine time and a small amount of labor time, they would be charged substantially less overhead cost if a plantwide overhead rate based on direct labor hours were used. It appears, for example, that this would be true of Job 203 which required considerable machine time to complete, but required a relatively small amount of labor hours. © The McGraw-Hill Companies, Inc., 2018. All rights reserved. Solutions Manual, Chapter 2 33 Exercise 2-14 (10 minutes) 1. The estimated total overhead cost is computed as follows: Y = $4,800,000 + ($0.05 per DL$)($8,000,000) Estimated fixed overhead ………………………………… $4,800,000 Estimated variable overhead: $0.05 per DL$ × $8,000,000 DL$ ………………………………………….. 400,000 Estimated total overhead cost ………………………….. $5,200,000 The predetermined overhead rate is computed as follows: Estimated total overhead (a) …………………. Estimated total direct labor-dollars (b) …….. Predetermined overhead rate (a) ÷ (b)……. $5,200,000 8,000,000 DL$ $0.65 per DL$ 2. Total cost assigned to You Can Say That Again: Direct materials ………………………………………………. Direct labor ……………………………………………………. Overhead applied ($0.65 per DL$ × $2,400,000) ……. Total job cost …………………………………………………. $1,259,000 2,400,000 1,560,000 $5,219,000 © The McGraw-Hill Companies, Inc., 2018. All rights reserved. 34 Managerial Accounting, 16th edition Exercise 2-15 (45 minutes) 1a. Molding Department: Using the equation Y = a + bX, the estimated total manufacturing overhead cost would be depicted as follows: Y = $700,000 + ($3.00 per MH)(20,000 MHs) Estimated fixed manufacturing overhead ………………. Estimated variable manufacturing overhead: $3.00 per MH × 20,000 MHs ……………………………………. Estimated total manufacturing overhead cost ………… $700,000 60,000 $760,000 The predetermined overhead rate is computed as follows: Estimated total manufacturing overhead (a) . Estimated total machine-hours (b) …………… Predetermined overhead rate (a) ÷ (b) …….. $760,000 20,000 MHs $38.00 per MH Fabrication Department: Using the equation Y = a + bX, the estimated total manufacturing overhead cost would be depicted as follows: Y = $210,000 + ($1.00 per MH)(30,000 MHs) Estimated fixed manufacturing overhead ………………. Estimated variable manufacturing overhead: $1.00 per MH × 30,000 MHs ……………………………………. Estimated total manufacturing overhead cost ………… $210,000 30,000 $240,000 The predetermined overhead rate is computed as follows: Estimated total manufacturing overhead (a) . Estimated total direct labor-hours (b) ……….. Predetermined overhead rate (a) ÷ (b) …….. $240,000 30,000 MHs $8.00 per MH © The McGraw-Hill Companies, Inc., 2018. All rights reserved. Solutions Manual, Chapter 2 35 Exercise 2-15 (continued) 1b. Total manufacturing costs assigned to Jobs D-70 and C-200: D-70 Direct materials ………………………………………… $ 700,000 Direct labor ……………………………………………… 360,000 Molding Department (14,000 MHs × $38 per MH; 6,000 MHs × $38 per MH)………………….. 532,000 Fabrication Department (6,000 MH × $8 per MH; 24,000 MH × $8 per MH) …………………… 48,000 Total manufacturing cost ……………………………. $1,640,000 1c. Bid prices for Jobs D-70 and C-200: Total manufacturing cost (a) ………………….. Markup percentage (b) …………………………. Bid price (a) × (b) ……………………………….. D-70 $1,640,000 150% $2,460,000 C-200 $ 550,000 400,000 228,000 192,000 $1,370,000 C-200 $1,370,000 150% $2,055,000 1d. Because the company has no beginning or ending inventories and only Jobs D-70 and C-200 were started, completed, and sold during the year, the cost of goods sold is equal to the sum of the manufacturing costs assigned to both jobs of $3,010,000 (= $1,640,000 + $1,370,000). 2a. The plantwide overhead rate of $20.00 per machine-hour is calculated by combining the estimated manufacturing overhead costs computed in requirement 1a for Molding and Fabrication ($760,000 + $240,000 = $1,000,000) and then dividing by the estimated total machine-hours (20,000 + 30,000 = 50,000): Estimated total manufacturing overhead (a) … $1,000,000 Estimated total machine-hours (MHs) (b)…….. 50,000 MHs Predetermined overhead rate (a) ÷ (b)……….. $20.00 per MH © The McGraw-Hill Companies, Inc., 2021. All rights reserved. 36 Managerial Accounting, 17th edition Exercise 2-15 (continued) 2b. Total manufacturing cost assigned to Jobs D-70 and C-200: Direct materials ………………………………….. Direct labor ……………………………………….. Manufacturing overhead applied ($20.00 per MH × 20,000 MHs; $20.00 per MH × 30,000 MHs) ……………………………………. Total manufacturing cost ………………………. 2c. Bid prices for Jobs D-70 and C-200: Total manufacturing cost (a) …………………. Markup percentage (b) ………………………… Bid price (a) × (b) ………………………………. 2d. D-70 C-200 $ 700,000 $ 550,000 360,000 400,000 400,000 600,000 $1,460,000 $1,550,000 D-70 C-200 $1,460,000 $1,550,000 150% 150% $2,190,000 $2,325,000 Because the company has no beginning or ending inventories and only Jobs D-70 and C-200 were started, completed, and sold during the year, the cost of goods sold is equal to the sum of the manufacturing costs assigned to both jobs of $3,010,000 (= $1,460,000 + $1,550,000). © The McGraw-Hill Companies, Inc., 2021. All rights reserved. Solutions Manual, Chapter 2 37 Exercise 2-15 (continued) 3. The plantwide and departmental approaches for applying manufacturing overhead costs to products produce identical cost of goods sold figures. However, these two approaches lead to different bid prices for Jobs D70 and C-200. The bid price for Job D-70 using the departmental approach is $270,000 (= $2,460,000 ‒ $2,190,000) higher than the bid price using the plantwide approach. This is because the departmental cost pools reflect the fact that Job D-70 is an intensive user of Molding machine-hours. The overhead rate in Molding ($38) is much higher than the overhead rate in Fabrication ($8). Conversely, Job C-200 is an intensive user of the less-expensive Fabrication machine-hours, so its departmental bid price is $270,000 lower than the plantwide bid price. Whether a job-order costing system relies on plantwide overhead cost allocation or departmental overhead cost allocation does not usually have an important impact on the accuracy of the cost of goods sold reported for the company as a whole. However, it can have a huge impact on internal decisions with respect to individual jobs, such as establishing bid prices for those jobs. Job-order costing systems that rely on plantwide overhead cost allocation are commonly used to value ending inventories and cost of goods sold for external reporting purposes, but they can create costing inaccuracies for individual jobs that adversely influence internal decision making. © The McGraw-Hill Companies, Inc., 2021. All rights reserved. 38 Managerial Accounting, 17th Edition Problem 2-16 (30 minutes) 1a. The estimated total overhead cost is computed as follows: Y = $784,000 + ($2.00 per DLH)(140,000 DLHs) Estimated fixed manufacturing overhead …………….. $ 784,000 Estimated variable manufacturing overhead: $2.00 per DLH × 140,000 DLH ……………………………….. 280,000 Estimated total manufacturing overhead cost ………. $1,064,000 The predetermined overhead rate is computed as follows: Estimated total manufacturing overhead (a) Estimated total direct labor-hours (b) ……… Predetermined overhead rate (a) ÷ (b)……. $1,064,000 140,000 DLH $7.60 per DLH 1b. Total manufacturing cost assigned to Job 550: Direct materials ………………………………………………. Direct labor ……………………………………………………. Manufacturing overhead applied ($7.60 per DLH × 15 DLH) ……………………………………………………… Total manufacturing cost of Job 550 ……………………. 1c. The selling price for Job 550 is computed as follows: Total manufacturing cost …………………………………… Markup (200%) ………………………………………………. Selling price …………………………………………………… $175 225 114 $514 Job 550 $ 514 1,028 $1,542 © The McGraw-Hill Companies, Inc., 2021. All rights reserved. Solutions Manual, Chapter 2 39 Problem 2-16 (continued) 2a. The estimated total overhead cost is computed as follows: Y = $784,000 + ($4.00 per MH)(70,000 MHs) Estimated fixed manufacturing overhead …………….. $ 784,000 Estimated variable manufacturing overhead: $4.00 per MH × 70,000 MHs ………………………………….. 280,000 Estimated total manufacturing overhead cost ………. $1,064,000 The predetermined overhead rate is computed as follows: Estimated total manufacturing overhead (a) . Estimated total machine-hours (b)……………. Predetermined overhead rate (a) ÷ (b) ……… $1,064,000 70,000 MHs $15.20 per MH 2b. Total manufacturing cost assigned to Job 550: Direct materials ………………………………………………. Direct labor ……………………………………………………. Manufacturing overhead applied ($15.20 per MH × 5 MH) …………………………………………………………… Total manufacturing cost of Job 550 ……………………. 2c. The selling price for Job 550 is computed as follows: Total manufacturing cost …………………………………… Markup (200%) ………………………………………………. Selling price …………………………………………………… $175 225 76 $476 Job 550 $ 476 952 $1,428 3. The price for Job 550 using direct labor-hours as the allocation base ($1,542) is $114 higher than the price derived using machine-hours as the allocation base ($1,428). If machine-hours is the better choice for an allocation base, then if Landen continues to use direct labor-hours as its overhead allocation base, it will overprice jobs that are intensive users of direct labor-hours and non-intensive users of machine-hours. In a bidding situation, Landen will tend to lose bids on jobs such as Job 550 if its competitors have more accurate cost accounting systems. © The McGraw-Hill Companies, Inc., 2021. All rights reserved. 40 Managerial Accounting, 17th Edition Problem 2-17 (20 minutes) 1. The predetermined plantwide overhead rate is computed as follows: Estimated manufacturing overhead (a) ……. Estimated total direct labor-hours (b) ……… Predetermined overhead rate (a) ÷ (b)……. $1,400,000 80,000 DLHs $17.50 per DLH The overhead applied to Job Bravo is computed as follows: Direct labor-hours worked on Bravo (a) …… Predetermined overhead rate (b) …………… Overhead applied to Bravo (a) × (b) ………. 14 $17.50 per DLH $245 2. The predetermined overhead rate in Assembly is computed as follows: Estimated manufacturing overhead (a) ……. Estimated total direct labor-hours (b) ……… Predetermined overhead rate (a) ÷ (b)……. $600,000 50,000 DLHs $12.00 per DLH The predetermined overhead rate in Fabrication is computed as follows: Estimated manufacturing overhead (a) ……. Estimated total machine-hours (b) …………. Predetermined overhead rate (a) ÷ (b)……. $800,000 100,000 MHs $8.00 per MH The overhead applied to Job Bravo is computed as follows: Quantity of allocation base used (a) Predetermined overhead rate (b) …. Overhead applied to Bravo (a) × (b) Assembly Fabrication 11 6 $12.00 $8.00 $132 $48 Total $180 © The McGraw-Hill Companies, Inc., 2021. All rights reserved. Solutions Manual, Chapter 2 41 Problem 2-18 (15 minutes) 1. The estimated total overhead cost is computed as follows: Y = $350,000 + ($1.00 per DLH)(20,000 DLHs) Estimated fixed overhead ………………………………… Estimated variable overhead: $1.00 per DLH × 20,000 DLHs ………………………………………………. Estimated total overhead cost ………………………….. $350,000 20,000 $370,000 The predetermined overhead rate is computed as follows: Estimated total overhead (a) …………………… Estimated total direct labor-hours (b) ……….. Predetermined overhead rate (a) ÷ (b) ……… $370,000 20,000 DLHs $18.50 per DLH 2. Total manufacturing cost assigned to Mr. Wilkes: Direct materials ………………………………………………. Direct labor ……………………………………………………. Overhead applied ($18.50 per DLH × 6 DLH) ………… Total cost assigned to Mr. Wilkes ………………………… 3. The price charged to Mr. Wilkes is computed as follows: Total manufacturing cost …………………………………… Markup (40%) ………………………………………………… Selling price …………………………………………………… $590 109 111 $810 Job Wilkes $ 810 324 $1,134 © The McGraw-Hill Companies, Inc., 2021. All rights reserved. 42 Managerial Accounting, 17th Edition Problem 2-19 (20 minutes) 1. Molding Department: The estimated total manufacturing overhead cost in the Molding Department is computed as follows: Y = $497,000 + $1.50 per MH × 70,000 MHs Estimated fixed manufacturing overhead ……………… Estimated variable manufacturing overhead: $1.50 per MH × 70,000 MHs …………………………… Estimated total manufacturing overhead cost ………… $497,000 105,000 $602,000 The predetermined overhead rate is computed as follows: Estimated total manufacturing overhead (a) . Estimated total machine-hours (b) …………… Predetermined overhead rate (a) ÷ (b) …….. $602,000 70,000 MHs $8.60 per MH Painting Department: The estimated total manufacturing overhead cost in the Painting Department is computed as follows: Y = $615,000 + $2.00 per DLH × 60,000 DLHs Estimated fixed manufacturing overhead ……………… Estimated variable manufacturing overhead: $2.00 per DLH × 60,000 DLHs ………………………… Estimated total manufacturing overhead cost ………… $615,000 120,000 $735,000 The predetermined overhead rate is computed as follows: Estimated total manufacturing overhead (a) . Estimated total DLHs (b) ……………………….. Predetermined overhead rate (a) ÷ (b) …….. $735,000 60,000 DLHs $12.25 per DLH © The McGraw-Hill Companies, Inc., 2021. All rights reserved. Solutions Manual, Chapter 2 43 Problem 2-19 (continued) 2. Molding Department overhead applied: 110 machine-hours × $8.60 per machine-hour Painting Department overhead applied: 84 direct labor-hours × $12.25 per DLH ………. Total overhead cost……………………………………… $ 946 1,029 $1,975 3. Total cost of Job 205: Direct materials …………………….. Direct labor ………………………….. Manufacturing overhead applied.. Total manufacturing cost ………… Molding Dept. $ 770 525 946 $2,241 Unit product cost for Job 205: Total manufacturing cost (a) …………………. Number of units in the job (b)……………….. Unit product cost (a) ÷ (b) …………………… Painting Dept. $1,332 1,470 1,029 $3,831 Total $2,102 1,995 1,975 $6,072 $6,072 50 units $121.44 per unit © The McGraw-Hill Companies, Inc., 2021. All rights reserved. 44 Managerial Accounting, 17th Edition Problem 2-20 (45 minutes) 1a. The overhead rate in ICU is computed as follows: Y = $3,200,000 + ($236 per patient-day)(2,000 patient-days) Estimated fixed overhead……………………………… Estimated variable overhead: $236 per patient-day × 2,000 patient-days…….. Estimated total overhead cost ……………………….. $3,200,000 472,000 $3,672,000 The predetermined overhead rate is computed as follows: Estimated total overhead (a) …………… Estimated total patient-days (b) ……….. Predetermined overhead rate (a) ÷ (b) $3,672,000 2,000 patient-days $1,836 per patient-day The overhead rate in Other is computed as follows: Y = $14,000,000 + ($96 per patient-day)(18,000 patient-days) Estimated fixed overhead ……………………………… Estimated variable overhead: $96 per patient-day × 18,000 patient-days …….. Estimated total overhead cost ………………………… $14,000,000 1,728,000 $15,728,000 The predetermined overhead rate is computed as follows: Estimated total overhead (a) …………… Estimated total patient-days (b) ……….. Predetermined overhead rate (rounded) (a) ÷ (b) …………………….. $15,728,000 18,000 patient-days $873.78 per patient-day © The McGraw-Hill Companies, Inc., 2021. All rights reserved. Solutions Manual, Chapter 2 45 Problem 2-20 (continued) 1b. The total cost assigned to Patient A: Direct materials ………………………………………… $ 4,500 Direct labor ……………………………………………… 25,000 ICU ($1,836 per patient-day × 0 patient-days)… $ 0 Other ($873.78 per patient day × 14 patientdays) (rounded to nearest dollar) ………………. 12,233 12,233 Total cost assigned to Patient A …………………… $41,733 The total cost assigned to Patient B: Direct materials ………………………………………… $ 6,200 Direct labor ……………………………………………… 36,000 ICU ($1,836 per patient-day × 7 patient-days)… $12,852 Other ($873.78 per patient day × 14 patientdays) (rounded to nearest dollar) ………………. 12,233 25,085 Total cost assigned to Patient B …………………… $67,285 2a. The plantwide overhead rate of $970.00 per patient-day is calculated by combining the estimated manufacturing overhead costs computed in requirement 1a for ICU and Other ($3,672,000 + $15,728,000 = $19,400,000) and then dividing by the estimated total patient-days (2,000 + 18,000 = 20,000): Estimated total overhead (a) …………… Estimated total patient-days (b) ………. Predetermined overhead rate (a) ÷ (b) $19,400,000 20,000 patient-days $970 per patient-day 2b. The total cost assign to Patients A and B is computed as follows: Direct materials ……………………………….. Direct labor …………………………………….. Overhead applied ($970 per patient-day × 14 patient days; ($970 per patientday × 21 patient days) …………………… Total cost ………………………………………. Patient A Patient B $ 4,500 25,000 $ 6,200 36,000 13,580 $43,080 20,370 $62,570 © The McGraw-Hill Companies, Inc., 2021. All rights reserved. 46 Managerial Accounting, 17th Edition Problem 2-20 (continued) 3. Relying on just one predetermined overhead rate overlooks the fact that some departments are more intensive users of overhead resources than others. As the name implies, patients in the ICU require more intensive (and expensive) care than other patients in other departments. Broadly speaking, relying on only one overhead rate, will most likely overcost patients with less severe illnesses and undercost patients with more severe illnesses. © The McGraw-Hill Companies, Inc., 2021. All rights reserved. Solutions Manual, Chapter 2 47 Problem 2-21 (30 minutes) 1. The plantwide predetermined overhead rate is computed as follows: Estimated manufacturing overhead (a) ……. Estimated total direct labor-hours (b) ……… Predetermined overhead rate (a) ÷ (b)……. $600,000 60,000 DLHs $10 per DLH The overhead applied to Job A is computed as follows: Direct labor-hours worked on Job A (a) …… Predetermined overhead rate (b) …………… Overhead applied to Job A (a) × (b) ……….. 15 $10 per DLH $150 The overhead applied to Job B is computed as follows: Direct labor-hours worked on Job B (a) …… Predetermined overhead rate (b) …………… Overhead applied to Job B (a) × (b) ……….. 9 $10 per DLH $90 2. The predetermined overhead rate in Machining is computed as follows: Estimated manufacturing overhead (a) ……. Estimated total machine-hours (b) …………. Predetermined overhead rate (a) ÷ (b)……. $500,000 50,000 MHs $10 per MH The predetermined overhead rate in Assembly is computed as follows: Estimated manufacturing overhead (a) ……. Estimated total direct labor-hours (b) ……… Predetermined overhead rate (a) ÷ (b)……. $100,000 50,000 DLHs $2 per DLH The overhead applied to Job A is computed as follows: Quantity of allocation base used (a) . Predetermined overhead rate (b) ….. Overhead applied to Job A (a) × (b) . Machining 11 $10 $110 Assembly 10 $2 $20 Total $130 © The McGraw-Hill Companies, Inc., 2021. All rights reserved. 48 Managerial Accounting, 17th Edition Problem 2-21 (continued) The overhead applied to Job B is computed as follows: Quantity of allocation base used (a) . Predetermined overhead rate (b) ….. Overhead applied to Job B (a) × (b) . Machining 12 $10 $120 Assembly 5 $2 $10 Total $130 3. The plantwide approach will overcost jobs that are intensive users of Assembly and minimal users of Machining. Conversely, it will undercost products that are intensive users of Machining and minimal users of Assembly. These cost distortions will adversely impact the company’s pricing process. Jobs that get overcosted will have selling prices that are greater than the prices that would be established using departmental overhead allocation. Jobs that get undercosted will have selling prices that are less than the prices that would be established using departmental overhead allocation. © The McGraw-Hill Companies, Inc., 2021. All rights reserved. Solutions Manual, Chapter 2 49 Case 2-22 (60 minutes) 1. a. Predetermined = Estimated total manufacturing overhead cost overhead rate Estimated total amount of the allocation base = $840,000 = 140% of direct labor cost $600,000 direct labor cost b. The manufacturing overhead cost applied to the Koopers job is computed as follows: $9,500 × 140% = $13,300 2. a. Estimated manufacturing overhead cost (a) ……… Estimated direct labor cost (b)…………………… Predetermined overhead rate (a) ÷ (b) …………… Fabricating Machining Assembly Department Department Department $350,000 $400,000 $ 90,000 $200,000 $100,000 $300,000 175% 400% 30% b. Fabricating Department: $2,800 × 175%……………………….. Machining Department: $500 × 400% …………………………. Assembly Department: $6,200 × 30% ………………………… Total applied overhead ………………… $4,900 2,000 1,860 $8,760 3. The bulk of the labor cost on the Koopers job is in the Assembly Department, which incurs very little overhead cost. The department has an overhead rate of only 30% of direct labor cost as compared to much higher rates in the other two departments. Therefore, as shown above, use of departmental overhead rates results in a relatively small amount of overhead cost being charged to the job. Use of a plantwide overhead rate in effect redistributes overhead costs proportionately between the three departments (at 140% of direct labor © The McGraw-Hill Companies, Inc., 2021. All rights reserved. 50 Managerial Accounting, 17th Edition Case 2-22 (continued) cost) and results in a large amount of overhead cost being charged to the Koopers job, as shown in Part 1. This may explain why the company bid too high and lost the job. Too much overhead cost was assigned to the job for the kind of work being done on the job in the plant. On jobs that require a large amount of labor in the Fabricating or Machining Departments the opposite will be true, and the company will tend to charge too little overhead cost to the jobs if a plantwide overhead rate is being used. The reason is that the plantwide overhead rate (140%) is much lower than the rates would be if these departments were considered separately. 4. The company’s bid was: Direct materials ……………………………………. Direct labor …………………………………………. Manufacturing overhead applied (see requirement 1b) ………………………………………….. Total manufacturing cost ……………………….. Bidding rate ………………………………………… Total bid price ……………………………………… $ 4,600 9,500 13,300 $27,400 × 1.5 $41,100 If departmental overhead rates had been used, the bid would have been: Direct materials ……………………………………. Direct labor …………………………………………. Manufacturing overhead applied (see requirement 2b) ………………………………………….. Total manufacturing cost ……………………….. Bidding rate ………………………………………… Total bid price ……………………………………… $ 4,600 9,500 8,760 $22,860 × 1.5 $34,290 Note that if departmental overhead rates had been used, Teledex Company would have been the low bidder on the Koopers job because the competitor underbid Teledex by only $2,000. © The McGraw-Hill Companies, Inc., 2021. All rights reserved. Solutions Manual, Chapter 2 51 Appendix 2A Activity-Based Absorption Costing Exercise 2A-1 (20 minutes) 1. Activity rates are computed as follows: Activity Cost Pool Machine setups …… Special processing .. General factory …… (a) Estimated Overhead Cost (b) Expected Activity $72,000 400 setups $200,000 5,000 MHs $816,000 24,000 DLHs (a) ÷ (b) Activity Rate $180 per setup $40 per MH $34 per DLH © The McGraw-Hill Companies, Inc., 2021. All rights reserved. 52 Managerial Accounting, 17th Edition Exercise 2A-1 (continued) 2. Overhead is assigned to the two products as follows: Hubs: Activity Cost Pool Machine setups ………………… Special processing …………….. General factory ………………… Total………………………………. (a) Activity Rate $180 per setup $40 per MH $34 per DLH (b) Activity 100 setups 5,000 MHs 8,000 DLHs (a) × (b) ABC Cost (a) Activity Rate (b) Activity (a) × (b) ABC Cost $ 18,000 200,000 272,000 $490,000 Sprockets: Activity Cost Pool Machine setups ………………… Special processing …………….. General factory ………………… Total………………………………. $180 per setup 300 setups $40 per MH 0 MHs $34 per DLH 16,000 DLHs $ 54,000 0 544,000 $598,000 © The McGraw-Hill Companies, Inc., 2021. All rights reserved. Solutions Manual, Appendix 2A 53 Exercise 2A-1 (continued) 2. Each product’s unit product cost is computed as follows: Direct materials…………………………….. Direct labor: $15 per DLH × 0.80 DLHs per unit …. $15 per DLH × 0.40 DLHs per unit …. Manufacturing overhead: $490,000 ÷ 10,000 units………………. $598,000 ÷ 40,000 units………………. Unit product cost ………………………….. Hubs $32.00 12.00 49.00 $93.00 Sprockets $18.00 6.00 14.95 $38.95 © The McGraw-Hill Companies, Inc., 2021. All rights reserved. 54 Managerial Accounting, 17th Edition Exercise 2A-2 (45 minutes) 1. The unit product costs under the company’s traditional costing system would be computed as follows: Rascon Number of units produced (a) …………………. 20,000 Direct labor-hours per unit (b)…………………. 0.40 Total direct labor-hours (a) × (b) …………….. 8,000 Total manufacturing overhead (a) ……………. Total direct labor-hours (b) …………………….. Predetermined overhead rate (a) ÷ (b) ……… Parcel 80,000 0.20 16,000 Total 24,000 $576,000 24,000 DLHs $24.00 per DLH Rascon Direct materials ……………………………………. $13.00 Direct labor …………………………………………. 6.00 Manufacturing overhead: 0.40 DLH per unit × $24.00 per DLH………. 9.60 0.20 DLH per unit × $24.00 per DLH………. Unit product cost ………………………………….. $28.60 Parcel $22.00 3.00 4.80 $29.80 © The McGraw-Hill Companies, Inc., 2021. All rights reserved. Solutions Manual, Appendix 2A 55 Exercise 2A-2 (continued) 2. The unit product costs using activity-based absorption costing can be computed as follows: Activity Cost Pool Labor related ……….. Engineering design … Estimated Overhead Cost* $288,000 $288,000 $576,000 (b) Expected Activity (a) ÷ (b) Activity Rate 24,000 direct labor-hours $12.00 per direct labor-hour 6,000 engineering-hours $48.00 per engineering-hour *The total estimated manufacturing overhead cost of $576,000 is split evenly between the two activity cost pools. Manufacturing overhead is assigned to the two products as follows: Rascon: Activity Cost Pool Labor related ……… Engineering design . Total…………………. (a) Activity Rate $12 per DLH $48 per engineering-hour (b) Activity 8,000 DLHs 3,000 engineering-hours (a) × (b) ABC Cost (a) Activity Rate (b) Activity (a) × (b) ABC Cost $ 96,000 144,000 $240,000 Parcel: Activity Cost Pool Labor related ……… Engineering design . Total…………………. $12 per DLH $48 per engineering-hour 16,000 DLHs 3,000 engineering-hours © The McGraw-Hill Companies, Inc., 2021. All rights reserved. 56 Managerial Accounting, 17th Edition $192,000 144,000 $336,000 Exercise 2A-2 (continued) The unit product costs combine direct materials, direct labor, and overhead costs: Direct materials ……………………………………… Direct labor …………………………………………… Manufacturing overhead ($240,000 ÷ 20,000 units; $336,000 ÷ 80,000 units) ……………… Unit product cost ……………………………………. Rascon Parcel 12.00 $31.00 4.20 $29.20 $13.00 6.00 $22.00 3.00 3. The unit product cost of the high-volume product, Parcel, declines under the activity-based approach, whereas the unit product cost of the lowvolume product, Rascon, increases. This occurs because half of the overhead is applied on the basis of engineering design hours instead of direct labor-hours. When the overhead was applied on the basis of direct labor-hours, most of the overhead was applied to the high-volume product. However, when the overhead is applied on the basis of engineering-hours, more of the overhead cost is shifted over to the low-volume product. Engineering-hours is a product-level activity, so the higher the volume, the lower the unit cost and the lower the volume, the higher the unit cost. © The McGraw-Hill Companies, Inc., 2021. All rights reserved. Solutions Manual, Appendix 2A 57 Exercise 2A-3 (45 minutes) 1. The predetermined overhead rate is computed as follows: Predetermined = $325,000 = $6.50 per DLH overhead rate 50,000 DLHs The unit product costs under the company’s traditional costing system are computed as follows: Direct materials ………………………………………………. Direct labor ……………………………………………………. Manufacturing overhead (1.0 DLH × $6.50 per DLH; 0.8 DLH × $6.50 per DLH) ……………………………… Unit product cost…………………………………………….. Deluxe Standard $72.00 $53.00 19.00 15.20 6.50 5.20 $97.50 $73.40 © The McGraw-Hill Companies, Inc., 2021. All rights reserved. 58 Managerial Accounting, 17th Edition Exercise 2A-3 (continued) 2. The activity rates are computed as follows: Activity Cost Pool Supporting direct labor… Batch setups …………….. Safety testing ……………. (a) Estimated (b) Overhead Total Cost Expected Activity $200,000 $75,000 $50,000 (a) ÷ (b) Activity Rate 50,000 DLHs $4 per DLH 300 setups $250 per setup 100 tests $500 per test Manufacturing overhead is assigned to the two products as follows: Deluxe Product: Activity Cost Pool Supporting direct labor ………. Batch setups ……………………. Safety testing …………………… Total………………………………. (a) Activity Rate (b) Activity (a) × (b) ABC Cost (a) Activity Rate (b) Activity (a) × (b) ABC Cost $4 per DLH 10,000 DLHs $250 per setup 200 setups $500 per test 30 tests $ 40,000 50,000 15,000 $105,000 Standard Product: Activity Cost Pool Supporting direct labor ………. Batch setups ……………………. Safety testing …………………… Total………………………………. $4 per DLH 40,000 DLHs $250 per setup 100 setups $500 per test 70 tests $160,000 25,000 35,000 $220,000 © The McGraw-Hill Companies, Inc., 2021. All rights reserved. Solutions Manual, Appendix 2A 59 Exercise 2A-3 (continued) Activity-based absorption costing unit product costs are computed as follows: Direct materials ………………………………………….. Direct labor ……………………………………………….. Manufacturing overhead ($105,000 ÷ 10,000 units; $220,000 ÷ 50,000 units) ………………….. Unit product cost ………………………………………… Deluxe Standard 10.50 $101.50 4.40 $72.60 $ 72.00 19.00 $53.00 15.20 © The McGraw-Hill Companies, Inc., 2021. All rights reserved. 60 Managerial Accounting, 17th Edition Problem 2A-4 (60 minutes) 1. a. When direct labor-hours are used to apply overhead cost to products, the company’s predetermined overhead rate would be: Predetermined = Manufacturing overhead cost overhead rate Direct labor-hours = $1,800,000 = $50 per DLH 36,000 DLHs b. Direct materials …………………………………… Direct labor: $20 per hour × 1.8 hours and 0.9 hours … Manufacturing overhead: $50 per hour × 1.8 hours and 0.9 hours … Total unit product cost ………………………….. Model X200 X99 $ 72 $ 50 36 18 90 45 $198 $113 2. a. Predetermined overhead rates for the activity cost pools: Activity Cost Pool (a) Estimated Total Cost (b) Estimated Total Activity Machine setups …… $360,000 150 setups Special processing . $180,000 12,000 MHs General factory …… $1,260,000 36,000 DLHs (a) ÷ (b) Activity Rate $2,400 per setup $15 per MH $35 per DLH © The McGraw-Hill Companies, Inc., 2021. All rights reserved. Solutions Manual, Appendix 2A 61 Problem 2A-4 (continued) The overhead applied to each product can be determined as follows: Model X200 Activity Cost Pool (a) Activity Rate Activity Cost Pool (a) Activity Rate Machine setups ……………………………… $2,400 per setup Special processing ………………………….. $15 per MH General factory ……………………………. $35 per DLH Total manufacturing overhead cost (a) Number of units produced (b) …………. Overhead cost per unit (a) ÷ (b) ……… (b) Activity (a) × (b) ABC Cost (b) Activity (a) × (b) ABC Cost 50 setups 12,000 MHs 9,000 DLHs $120,000 180,000 315,000 $615,000 5,000 $123.00 Model X99 Machine setups ……………………………… $2,400 per setup Special processing ………………………….. $15 per MH General factory ……………………………. $35 per DLH Total manufacturing overhead cost (a) Number of units produced (b) …………. Overhead cost per unit (a) ÷ (b) ……… 100 setups 0 MHs 27,000 DLHs © The McGraw-Hill Companies, Inc., 2021. All rights reserved. 62 Managerial Accounting, 17th Edition $ 240,000 0 945,000 $1,185,000 30,000 $39.50 Problem 2A-4 (continued) b. The unit product cost of each model under the activity-based approach would be computed as follows: Direct materials ………………………………. Direct labor: $20 per DLH × 1.8 DLHs, 0.9 DLHs …… Manufacturing overhead (above) ………… Total unit product cost ……………………… Model X200 X99 $ 72.00 $50.00 36.00 18.00 123.00 39.50 $231.00 $107.50 Comparing these unit cost figures with the unit costs in Part 1(b), we find that the unit product cost for Model X200 has increased from $198 to $231, and the unit product cost for Model X99 has decreased from $113 to $107.50. 3. It is especially important to note that, even under activity-based costing, 70% of the company’s overhead costs continue to be applied to products on the basis of direct labor-hours: Machine setups (number of setups) … $ 360,000 Special processing (machine-hours)… 180,000 General factory (direct labor-hours) … 1,260,000 Total overhead cost …………………….. $1,800,000 20 % 10 70 100 % Thus, the shift in overhead cost from the high-volume product (Model X99) to the low-volume product (Model X200) occurred as a result of reassigning only 30% (=20% + 10%) of the company’s overhead costs. The increase in unit product cost for Model X200 can be explained as follows: First, where possible, overhead costs have been traced to the products rather than being lumped together and spread uniformly over production. Therefore, the special processing costs, which are traceable to Model X200, have all been assigned to Model X200 and none assigned to Model X99 under the activity-based approach. It is common in industry to have some products that require special handling or special processing of some type. This is especially true in modern factories that produce a variety of products. Activity-based costing provides a vehicle for assigning these costs to the appropriate products. © The McGraw-Hill Companies, Inc., 2021. All rights reserved. Solutions Manual, Appendix 2A 63 Problem 2A-4 (continued) Second, the costs associated with the batch-level activity (machine setups) have also been assigned to the specific products to which they relate. These costs have been assigned according to the number of setups completed for each product. However, because a batch-level activity is involved, another factor affecting unit costs comes into play. That factor is batch size. Some products are produced in large batches and some are produced in small batches. The smaller the batch, the higher the per unit cost of the batch activity. In the case at hand, the data can be analyzed as follows: Model X200: Cost to complete one setup (see requirement 2a)…….. Number of units processed per setup (5,000 units per setup ÷ 50 setups = 100 units) ……. 100 units (b) Setup cost per unit (a) ÷ (b) ……………………………….. $24 Model X99: Cost to complete one setup (see requirement 2a)…….. Number of units processed per setup (30,000 units per setup ÷ 100 setups = 300 units) … Setup cost per unit (a) ÷ (b) ……………………………….. $2,400 (a) $2,400 (a) 300 units (b) $8 Thus, the cost per unit for setups is three times as great for Model X200, the low-volume product, as it is for Model X99, the high-volume product. Such differences in cost are obscured when direct labor-hours (or any other volume measure) is used as a basis for applying overhead cost to products. In sum, overhead cost has shifted from the high-volume product to the low-volume product as a result of more appropriately assigning some costs to the products on the basis of the activities involved, rather than on the basis of direct labor-hours. © The McGraw-Hill Companies, Inc., 2021. All rights reserved. 64 Managerial Accounting, 17th Edition Problem 2A-5 (60 minutes) 1. The company’s estimated direct labor-hours can be computed as follows: Deluxe model: 5,000 units × 2 DLHs per unit …. Regular model: 40,000 units × 1 DLH per unit … Total direct labor hours ……………………………… 10,000 DLHs 40,000 DLHs 50,000 DLHs Using just direct labor-hours as the base, the predetermined overhead rate would be: Estimated overhead cost $900,000 = = $18 per DLH Estimated direct labor-hours 50,000 DLHs The unit product cost of each model using the company’s traditional costing system would be: Direct materials…………………. Direct labor………………………. Manufacturing overhead: $18 per DLH × 2 DLHs……… $18 per DLH × 1 DLH ………. Total unit product cost ……….. Deluxe $ 40 38 36 $114 Regular $25 19 18 $62 2. Predetermined overhead rates are computed below: Activity Cost Pool Purchasing……………. Processing ……………. Scrap/rework ………… Shipping ………………. (a) Estimated Overhead Cost (b) Expected Activity (a) ÷ (b) Activity Rate $204,000 600 purchase or- $340 per purchase ders order $182,000 35,000 machine- $5.20 per hours machine-hour $379,000 2,000 orders $189.50 per order $135,000 900 shipments $150 per shipment © The McGraw-Hill Companies, Inc., 2021. All rights reserved. Solutions Manual, Appendix 2A 65 Problem 2A-5 (continued) 3. a. The overhead applied to each product can be determined as follows: The Deluxe Model Activity Cost Pool (a) Activity Rate (b) Activity (a) × (b) ABC Cost (a) Activity Rate (b) Activity (a) × (b) ABC Cost Purchasing…………………………… $340 per PO 200 POs Processing …………………………… $5.20 per MH 20,000 MHs Scrap/rework ……………………….. $189.50 per order 1,000 tests Shipping ……………………………… $150 per shipment 250 shipments Total overhead cost (a) ………….. Number of units produced (b) ….. Overhead cost per unit (a) ÷ (b) . $ 68,000 104,000 189,500 37,500 $399,000 5,000 $79.80 The Regular Model Activity Cost Pool Purchasing…………………………… $340 per PO 400 POs Processing …………………………… $5.20 per MH 15,000 MHs Scrap/rework ……………………….. $189.50 per order 1,000 orders Shipping ……………………………… $150 per shipment 650 shipments Total overhead cost (a) ………….. Number of units produced (b) ….. Overhead cost per unit (a) ÷ (b) . © The McGraw-Hill Companies, Inc., 2021. All rights reserved. 66 Managerial Accounting, 17th Edition $136,000 78,000 189,500 97,500 $501,000 40,000 $12.53 Problem 2A-5 (continued) b. Using activity-based absorption costing, the unit product cost of each model would be: Direct materials …………………….. Direct labor ………………………….. Manufacturing overhead (above) . Total unit product cost……………. Deluxe $ 40.00 38.00 79.80 $157.80 Regular $25.00 19.00 12.53 $56.53 4. Unit costs appear to be distorted as a result of using direct labor-hours as the base for assigning overhead cost to products. Although the deluxe model requires twice as much labor time as the regular model, it still is not being assigned enough overhead cost, as shown in the analysis in part 3(a). When the company’s overhead costs are analyzed on an activities basis, it appears that the deluxe model is more expensive to manufacture than the company realizes. Note that the deluxe model accounts for a majority of the machine-hours worked, even though it accounts for only 20% (= 10,000 DLHs ÷ 50,000 DLHs) of the company’s direct labor-hours. Also, it requires just as many scrap/rework orders as the regular model, and scrap/rework orders are very costly to the company. When activity-based absorption costing is used and the company’s transactions are analyzed by product, the overhead cost increases for the deluxe model from $36.00 per unit to $79.80 per unit. This suggests that less than half the overhead cost is being assigned to the deluxe model that ought to be assigned, and unit costs for the deluxe model are understated. If these costs are being used as a basis for pricing, then the selling price for the deluxe model may be too low. This may be the reason why profits have been steadily declining over the last several years. It may also be the reason why sales of the deluxe model have been increasing rapidly. © The McGraw-Hill Companies, Inc., 2021. All rights reserved. Solutions Manual, Appendix 2A 67 Case 2A-6 (90 minutes) 1. a. The predetermined overhead rate would be computed as follows: Expected manufacturing overhead cost $2,200,000 = Estimated direct labor-hours 50,000 DLHs = $44 per DLH b. The unit product cost per pound, using the company’s present costing system, would be: Direct materials (given) ……… Direct labor (given) …………… Manufacturing overhead: 0.02 DLH × $44 per DLH….. Total unit product cost……….. Kenya Dark Viet Select 0.88 $5.72 0.88 $4.12 $4.50 0.34 $2.90 0.34 2. a. Overhead rates for each activity cost pool: Activity Cost Pools (a) Estimated Overhead Costs (b) Expected Activity Purchasing ……….. $560,000 2,000 orders Material handling .. $193,000 1,000 setups Quality control …… $90,000 500 batches Roasting…………… $1,045,000 95,000 hours Blending…………… $192,000 32,000 hours Packaging ………… $120,000 24,000 hours (a) ÷ (b) Activity Rate $280 per order $193 per setup $180 per batch $11 per hour $6 per hour $5 per hour © The McGraw-Hill Companies, Inc., 2021. All rights reserved. 68 Managerial Accounting, 17th Edition Case 2A-6 (continued) Before we can determine the amount of overhead cost to assign to the products, we must first determine the activity for each of the products in the six activity centers. The necessary computations follow: Number of purchase orders: Kenya Dark: 80,000 pounds ÷ 20,000 pounds per order = 4 orders Viet Select: 4,000 pounds ÷ 500 pounds per order = 8 orders Number of setups: Kenya Dark: (80,000 pounds ÷ 5,000 pounds per batch) × 2 setups per batch = 32 setups Viet Select: (4,000 pounds ÷ 500 pounds per batch) × 2 setups per batch = 16 setups Number of batches: Kenya Dark: 80,000 pounds ÷ 5,000 pounds per batch = 16 batches Viet Select: 4,000 pounds ÷ 500 pounds per batch = 8 batches Roasting hours: Kenya Dark: 1.5 hours × (80,000 pounds ÷ 100 pounds) = 1,200 hours Viet Select: 1.5 hours × (4,000 pounds ÷ 100 pounds) = 60 hours Blending hours: Kenya Dark: 0.5 hour × (80,000 pounds ÷ 100 pounds) = 400 hours Viet Select: 0.5 hour × (4,000 pounds ÷ 100 pounds) = 20 hours Packaging hours: Kenya Dark: 0.3 hour × (80,000 pounds ÷ 100 pounds) = 240 hours Viet Select: 0.3 hour × (4,000 pounds ÷ 100 pounds) = 12 hours © The McGraw-Hill Companies, Inc., 2021. All rights reserved. Solutions Manual, Appendix 2A 69 Case 2A-6 (continued) The overhead applied to each product can be determined as follows: Kenya Dark Activity Cost Pool Purchasing …………… Material handling …… Quality control ………. Roasting ………………. Blending ………………. Packaging…………….. Total …………………… Viet Select Activity Cost Pool Purchasing …………… Material handling …… Quality control ………. Roasting ………………. Blending ………………. Packaging…………….. Total …………………… Activity Rate Expected Activity Amount Activity Rate Expected Activity Amount $280 per order 4 orders $193 per setup 32 setups $180 per batch 16 batches $11 per roasting hour 1,200 roasting hours $6 per blending hour 400 blending hours $5 per packaging hour 240 packaging hours $280 per order $193 per setup $180 per batch $11 per roasting hour $6 per blending hour $5 per packaging hour 8 orders 16 setups 8 batches 60 roasting hours 20 blending hours 12 packaging hours © The McGraw-Hill Companies, Inc., 2021. All rights reserved. 70 Managerial Accounting, 17th Edition $ 1,120 6,176 2,880 13,200 2,400 1,200 $26,976 $2,240 3,088 1,440 660 120 60 $7,608 Case 2A-6 (continued) b. According to the activity-based absorption costing system, the manufacturing overhead cost per pound is: Total overhead cost assigned (above) (a) … Number of pounds manufactured (b) ………. Cost per pound (a) ÷ (b) ……………………… Kenya Dark $26,976 80,000 $0.34 Viet Select $7,608 4,000 $1.90 c. The unit product costs according to the activity-based absorption costing system are: Direct materials (given) ………… Direct labor (given) ……………… Manufacturing overhead ……….. Total unit product cost………….. Kenya Dark $4.50 0.34 0.34 $5.18 Viet Select $2.90 0.34 1.90 $5.14 3. MEMO TO THE PRESIDENT: Analysis of JSI’s data shows that several activities other than direct labor drive the company’s manufacturing overhead costs. These activities include purchase orders issued, number of setups for material processing, and number of batches processed. The company’s present costing system, which relies on direct labor time as the sole basis for assigning overhead cost to products, significantly undercosts low-volume products, such as the Viet Select coffee, and significantly overcosts high-volume products, such as our Kenya Dark coffee. An implication of the activity-based approach is that our low-volume products may not be covering the costs of the manufacturing resources they use. For example, Viet Select coffee is currently priced at $5.15 per pound ($4.12 plus 25% markup), which is only one cent higher than its activity-based cost of $5.14 per pound. Under our present costing and pricing system, our high-volume products, such as our Kenya Dark coffee, may be subsidizing our low-volume products. Some adjustments in prices may be required. © The McGraw-Hill Companies, Inc., 2021. All rights reserved. Solutions Manual, Appendix 2A 71 Case 2A-6 (continued) ALTERNATIVE SOLUTION: Most students will compute the manufacturing overhead cost per pound of the two coffees as shown above. However, the per pound cost can also be computed as shown below. This alternative approach provides additional insight into the data and facilitates emphasis of some points made in the chapter. Purchasing ……….. Material handling.. Quality control ….. Roasting ………….. Blending ………….. Packaging ………… Total ………………. Kenya Dark Per Pound Total (÷ 80,000) $ 1,120 6,176 2,880 13,200 2,400 1,200 $26,976 $0.014 0.077 0.036 0.165 0.030 0.015 $0.337 Viet Select Per Pound Total (÷ 4,000) $2,240 3,088 1,440 660 120 60 $7,608 $0.560 0.772 0.360 0.165 0.030 0.015 $1.902 Note particularly how batch size impacts unit cost data. For example, the cost to the company to process a purchase order is $280, regardless of how many pounds of coffee are contained in the order. Twenty thousand pounds of the Kenya Dark coffee are purchased per order (with four orders per year), and just 500 pounds of the Viet Select coffee are purchased per order (with eight orders per year). Thus, the purchase order cost per pound for the Kenya Dark coffee is just 1.4 cents, whereas the purchase order cost per pound for the Viet Select coffee is 40 times as much, or 56 cents. As stated in the text, this is one reason why unit costs of low-volume products, such as the Viet Select coffee, increase so dramatically when activity-based costing is used. © The McGraw-Hill Companies, Inc., 2021. All rights reserved. 72 Managerial Accounting, 17th Edition Appendix 2B The Predetermined Overhead Rate and Capacity Exercise 2B-1 (20 minutes) 1. There were no beginning or ending inventories, so all of the jobs were started, finished, and sold during the month. Therefore, cost of goods sold equals the total manufacturing cost. We can verify that by computing the cost of goods sold as shown below: Manufacturing costs charged to jobs: Direct materials ……………………………………. Direct labor (all variable)………………………… Manufacturing overhead applied (150 hours × $82 hour) ………………………. Total manufacturing cost charged to jobs …….. Add: Beginning work in process inventory ……. Deduct: Ending work in process inventory ……. Cost of goods manufactured ……………………… Beginning finished goods inventory …………….. Add: Cost of goods manufactured ………………. Goods available for sale ……………………………. Deduct: Ending finished goods inventory ……… Cost of goods sold ………………………………….. $ 5,350 8,860 12,300 26,510 0 26,510 0 $26,510 $ 0 26,510 26,510 0 $26,510 At the end of the month, the cost of unused capacity is computed as shown below: Amount of the allocation base at capacity (a) . Actual amount of the allocation base (b) …….. Unused capacity in hours (a) – (b) …………….. 180 hours 150 hours 30 hours Unused capacity in hours (a) ……………………. Predetermined overhead rate (b) ………………. Cost of unused capacity (a) × (b) ……………… 30 hours $82 per hour $2,460 © The McGraw-Hill Companies, Inc., 2021. All rights reserved. Solutions Manual, Appendix 2B 73 Exercise 2B-1 (continued) Consequently, the income statement, prepared for internal management purposes, would appear as follows: Wixis Cabinets Income Statement Sales ……………………………………………. Cost of goods sold (see above) ………….. Gross margin …………………………………. Other expenses: Cost of unused capacity …………………. Selling and administrative expenses …. Net operating income ………………………. $43,740 26,510 17,230 $2,460 8,180 10,640 $ 6,590 2. When the predetermined overhead rate is based on capacity, unused capacity costs ordinarily arise because manufacturing overhead usually contains significant amounts of fixed costs. Suppose, for example, that manufacturing overhead includes $10,000 of fixed costs and the capacity is 100 hours. Then the portion of the predetermined overhead rate that represents fixed costs is $10,000 divided by 100 hours or $100 per hour. Because the plant is seldom (if ever) operated beyond capacity, less than $10,000 will ordinarily be applied to jobs. In other words, $100 per hour multiplied by something less than 100 hours always yields less than $10,000. Therefore, unused capacity costs will arise. © The McGraw-Hill Companies, Inc., 2021. All rights reserved. 74 Managerial Accounting, 17th Edition Exercise 2B-2 (30 minutes) 1. The overhead applied to Mrs. Brinksi’s account would be computed as follows: Last Year This Year Estimated overhead cost (a) ……………………….. $310,500 $310,500 Estimated professional staff hours (b) …………… 4,600 4,500 Predetermined overhead rate (a) ÷ (b) …………. $67.50 $69.00 Professional staff hours charged to Ms. Brinksi’s account………………………………………………… × 2.5 × 2.5 Overhead applied to Ms. Brinksi’s account ……… $168.75 $172.50 2. If the actual overhead cost and the actual professional hours charged turn out to be exactly as estimated there would be no cost of unused capacity. Last Year This Year Predetermined overhead rate (see above) ……… $67.50 $69.00 Actual professional staff hours charged to clients’ accounts (by assumption) …………………. × 4,600 × 4,500 Overhead applied ……………………………………… $310,500 $310,500 Actual overhead cost incurred (by assumption) .. 310,500 310,500 Cost of unused capacity……………………………… $ 0 $ 0 3. If the predetermined overhead rate is based on the professional staff hours available, the computations would be: Last Year This Year Estimated overhead cost (a)…………………………. $310,500 $310,500 Professional staff hours available (b) ……………… 6,000 6,000 Predetermined overhead rate (a) ÷ (b) …………… $51.75 $51.75 Professional staff hours charged to Ms. Brinksi’s account …………………………………………………. × 2.5 × 2.5 Overhead applied to Ms. Brinksi’s account ……….. $129.38 $129.38 © The McGraw-Hill Companies, Inc., 2021. All rights reserved. Solutions Manual, Appendix 2B 75 Exercise 2B-2 (continued) 4. If the actual overhead cost and the actual professional staff hours charged to clients’ accounts turn out to be exactly as estimated, the cost of unused capacity would be calculated as shown below. Amount of the allocation base at capacity (a) …… Actual amount of the allocation base (b) …………. Unused capacity in hours (a) – (b)…………………. Unused capacity in hours (a) ………………………… Predetermined overhead rate (b) …………………… Cost of unused capacity (a) × (b) ………………….. Last Year This Year 6,000 4,600 1,400 6,000 4,500 1,500 1,400 $51.75 $72,450 1,500 $51.75 $77,625 Proponents of this method of computing predetermined overhead rates suggest that the cost of unused capacity should be treated as a period expense that is disclosed separately on the income statement. © The McGraw-Hill Companies, Inc., 2021. All rights reserved. 76 Managerial Accounting, 17th Edition Problem 2B-3 (60 minutes) 1. The overhead applied to the Verde Consulting job is computed as follows: Estimated overhead cost (a) ……………………… Estimated hours of service demanded (b) …….. Predetermined overhead rate (a) ÷ (b) ……….. Verde Consulting’s service-hours required ……. Overhead applied to Verde Consulting ………… Last Year This Year $160,000 $160,000 1,000 800 $160 $200 × 40 × 40 $6,400 $8,000 2. If the predetermined overhead rate is based on the hours of service available at capacity, the computations would be: Estimated overhead cost at capacity (a) ………. Hours of service available at capacity (b) ……… Predetermined overhead rate (a) ÷ (b) ……….. Verde Consulting’s service-hours required ……. Overhead applied to Verde Consulting ………… Last Year This Year $160,000 $160,000 1,600 1,600 $100 $100 × 40 × 40 $4,000 $4,000 3. The cost of unused capacity for both years is computed as follows: Amount of the allocation base at capacity (a) …… Actual amount of the allocation base (b) …………. Unused capacity in hours (a) – (b)…………………. Unused capacity in hours (a) ………………………… Predetermined overhead rate (b) …………………… Cost of unused capacity (a) × (b) ………………….. Last Year This Year 1,600 750 850 1,600 500 1,100 850 1,100 $100 $100 $85,000 $110,000 Proponents of this method suggest that the cost of unused capacity should be treated as a period expense that is disclosed separately on the income statement. © The McGraw-Hill Companies, Inc., 2021. All rights reserved. Solutions Manual, Appendix 2B 77 Problem 2B-3 (continued) 4. Platinum Web Design’s fundamental problem is the competition that is drawing customers away. The company must do something to counter this threat or it will ultimately face failure. Under the conventional approach in which the predetermined overhead rate is based on the estimated hours of service demanded, the apparent cost of the Verde Consulting job has increased between last year and this year. That happens because the company is losing business to competitors and therefore the company’s fixed overhead costs are being spread over a smaller base. This results in costs that seem to increase as the volume declines. Under this method, Platinum’s managers may be misled into thinking that the problem is rising costs and they may be tempted to raise prices to recover their apparently increasing costs. This would almost surely accelerate the company’s decline. Under the alternative approach, the overhead cost of the Verde Consulting job is stable at $4,000 and lower than the costs reported under the conventional method. Under the conventional method, managers may be misled into thinking that they are actually losing money on the Verde Consulting job and they might refuse such jobs in the future—another sure road to disaster. This is much less likely to happen if the lower cost of $4,000 is reported. It is true that the cost of unused capacity under the alternative approach is pretty large and is growing. However, if it is properly labeled as the cost of unused capacity, management is much more likely to draw the appropriate conclusion that the real problem is the loss of business (and therefore more idle capacity) rather than an increase in costs. While basing the predetermined rate on hours of service available at capacity rather than on estimated hours of service demanded will not solve the company’s basic problems, at least this method is less likely to send managers misleading signals. © The McGraw-Hill Companies, Inc., 2021. All rights reserved. 78 Managerial Accounting, 17th Edition Case 2B-4 (120 minutes) 1a. Vault Hard Drives, Inc. Income Statement: Traditional Approach Sales (150,000 units × $60 per unit)………… Cost of goods sold: Variable manufacturing (150,000 units × $15 per unit) …………… Manufacturing overhead applied (150,000 units × $25 per unit) …………… Gross margin ………………………………………. Selling and administrative expenses …………. Net operating income……………………………. 1b. $9,000,000 $2,250,000 3,750,000 6,000,000 3,000,000 2,700,000 $ 300,000 Vault Hard Drives, Inc. Income Statement: New Approach Sales (150,000 units × $60 per unit) ………………. $9,000,000 Cost of goods sold: Variable manufacturing (150,000 units × $15 per unit) ………………….. $2,250,000 Manufacturing overhead applied (150,000 units × $20 per unit) ………………….. 3,000,000 5,250,000 Gross margin …………………………………………….. 3,750,000 Other expenses: Cost of unused capacity [(200,000 units – 160,000 units) × $20 per unit] ………………….. 800,000 Selling and administrative expenses ……………… 2,700,000 Net operating income ………………………………….. $ 250,000 2. Net operating income is more volatile under the new method than under the old method (because the income drops from $500,000 to $250,000 under the new method, whereas it only drops to $300,000 under the old method). This occurs because the reported profit per unit sold is $5 higher under the new method, the difference in the predetermined overhead rates. Therefore, swings in sales in either direction will have a more dramatic impact on reported profits under the new method. © The McGraw-Hill Companies, Inc., 2021. All rights reserved. Solutions Manual, Appendix 2B 79 Case 2B-4 (continued) 3. Under the traditional approach, all of the company’s fixed manufacturing overhead must be included in either cost of goods sold (in the income statement) or ending inventory (in the balance sheet) at the end of an accounting period. For each additional unit produced but not sold, it enables the company to include an extra $25 of fixed overhead in ending inventory, which in turn lowers the company’s cost of goods sold by $25. Since the company has net operating income of $300,000 when it produces 160,000 units and sells 150,000 units, it needs to produce enough additional units, beyond 160,000 units, to raise net operating by $200,000 to achieve a desired profit of $500,000. The following computations show that the company would need to produce 8,000 more units (or 168,000 units in total) to achieve net operating income of $500,000. Additional net operating income required to attain target net operating income ($500,000 – $300,000) (a) ……… Fixed overhead applied to each unit of additional inventory (b) …………………………………………………………… Additional output required to attain target net operating income (a) ÷ (b) ……………………………………………….. Estimated number of units produced ………………………… Actual number of units to be produced ……………………… $200,000 $25 per unit 8,000 units 160,000 units 168,000 units * The answer of 168,000 units assumes that the overapplied overhead of $200,000 is closed entirely to Cost of Goods Sold. © The McGraw-Hill Companies, Inc., 2021. All rights reserved. 80 Managerial Accounting, 17th Edition Case 2B-4 (continued) 4. Under the new approach, all of the company’s fixed manufacturing overhead must be included in either cost of goods sold (in the income statement), ending inventory (in the balance sheet), or cost of unused capacity (in the income statement) at the end of an accounting period. For each additional unit produced but not sold, it enables the company to include an extra $20 of fixed overhead in ending inventory, which in turn lowers the company’s cost of unused capacity by $20. Since the company has net operating income of $250,000 when it produces 160,000 units and sells 150,000 units, it needs to produce enough additional units, beyond 160,000 units, to raise net operating by $250,000 to achieve a desired profit of $500,000. The computations below show that the company would need to produce 12,500 more units (or 172,500 units in total) to achieve net operating income of $500,000. Additional net operating income required to attain target net operating income ($500,000 – $250,000) (a) ……….. Fixed overhead applied to each unit of additional inventory (b) …………………………………………………………….. Additional output required to attain target net operating income (a) ÷ (b)…………………………………………………. Estimated number of units produced …………………………. Actual number of units to be produced ………………………. 5. $250,000 $20 per unit 12,500 units 160,000 units 172,500 units The “hat trick” is a bit harder to perform under the new method. Under the old method, the target net operating income can be attained by producing an additional 8,000 units. Under the new method, the production would have to be increased by 12,500 units. Again, this is a consequence of the difference in predetermined overhead rates. The drop in sales has had a more dramatic effect on net operating income under the new method as noted above in part (4). In addition, because the predetermined overhead rate is lower under the new method, producing excess inventories has less of an effect per unit on net operating income than under the traditional method and hence more excess production is required. © The McGraw-Hill Companies, Inc., 2021. All rights reserved. Solutions Manual, Appendix 2B 81 Case 2B-4 (continued) 6. One can argue that whether the “hat trick” is unethical depends on the level of sophistication of the owners of the company and others who read the financial statements. If they understand the effects of excess production on net operating income and are not misled, it can be argued that the hat trick is not unethical. However, if that were the case, there does not seem to be any reason to use the hat trick. Why would the owners want to tie up working capital in inventories just to artificially attain a target net operating income for the period? And increasing the rate of production toward the end of the year is likely to increase overhead costs due to overtime and other costs. Building up inventories all at once is very likely to be much more expensive than increasing the rate of production uniformly throughout the year. In this case, we assumed that there would not be an increase in overhead costs due to the additional production, but that is likely not to be true. In our opinion, the hat trick is unethical unless there is a good reason for increasing production other than to artificially boost the current period’s net operating income. It is certainly unethical if the purpose is to fool users of financial reports such as owners and creditors or if the purpose is to meet targets so that bonuses will be paid to top managers. © The McGraw-Hill Companies, Inc., 2021. All rights reserved. 82 Managerial Accounting, 17th Edition