Study Guide Cost Accounting - JustAnswerNov 11, 2013 · lesson assignments 7 lesson 1: materials, labor, and factory overhead 9 examination—lesson 1 47 lesson 2: process cost accounting

Study Guide

Cost AccountingBy

John M. Coulter, Ph.D., C.P.A.

About the Author

John M. Coulter received his doctoral degree in accounting

in 1994 from the University of Massachusetts at Amherst.

He’s currently a professor of accounting at Western New

England College in Springfield, Massachusetts, where he

teaches both graduate and undergraduate courses.

Dr. Coulter has had several papers published in business

magazines and currently has a number of other papers in

progress. He regularly gives professional presentations at

business conferences and meetings on topics such as

accounting and decision making. In 2002, Dr. Coulter won

the Western New England College Teaching Excellence Award.

He’s also a certified public accountant in Massachusetts.

All terms mentioned in this text that are known to be trademarks or servicemarks have been appropriately capitalized. Use of a term in this text shouldnot be regarded as affecting the validity of any trademark or service mark.

Copyright © 2008 by Penn Foster, Inc.

All rights reserved. No part of the material protected by this copyright may bereproduced or utilized in any form or by any means, electronic or mechanical,including photocopying, recording, or by any information storage and retrieval system, without permission in writing from the copyright owner.

Requests for permission to make copies of any part of the work should be mailed to Copyright Permissions, Penn Foster, 925 Oak Street, Scranton,Pennsylvania 18515.

Printed in the United States of America

INSTRUCTIONS 1

LESSON ASSIGNMENTS 7

LESSON 1: MATERIALS, LABOR, AND FACTORY OVERHEAD 9

EXAMINATION—LESSON 1 47

LESSON 2: PROCESS COST ACCOUNTING 55


LESSON 3: BUDGETING; STANDARD COST ACCOUNTING 75


LESSON 4: SERVICE BUSINESSES; DECISION MAKING 99


SELF-CHECK ANSWERS 125

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YOUR COURSE

Welcome to the study of cost accounting. The knowledge

you obtain from this course will serve you well in any job,

whether the job is specifically related to accounting or not.

All businesses—whether they make and sell things, simply

sell things, or sell services—must be able to predict, record,

and control their costs. They need this information to run

their company effectively and efficiently and to inform

external parties about profitability and financial structure.

Thus, cost accounting represents an important bridge

between financial and managerial accounting.

You may find some of the material in this course difficult.

Although the mechanics of some cost accounting topics may

require you to perform some numerical analysis and calcula-

tion, you should concentrate on the concepts themselves to

help you obtain the necessary understanding of the material.

This study guide is intended to help you achieve the objectives

of the course. Each assignment in the study guide contains

summaries and insights regarding the required reading in

your textbook, as well as suggested exercises and problems

so you can test yourself on what you’ve read and studied.

Solutions to the “Self-Checks” in this study guide are given

at the end of this booklet. Solutions to the exercises and

problems in the textbook are in a separate Answer Key book-

let. We recommend that you complete all of the exercises to

check your own understanding of the material and to prepare

for the examination.

OBJECTIVESWhen you complete this course, you’ll be able to

■ Determine costs of products and services more accurately

■ Recognize how the knowledge of product and service

costs is used to set selling prices

■ Identify the techniques used to measure the perform-

ance of managers and subunits within an organization

■ Describe how the accounting system is used as a tool to

motivate managers toward the goals of an organization

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Instructions to Students2

YOUR TEXTBOOK

Your textbook for this course is Principles of Cost Accounting,

Fourteenth Edition, by Edward J. VanDerbeck. This book

contains the material on which you’ll be tested during the

course. You should become familiar with its contents and

organization before you begin your studies.

Begin by looking at pages v–ix at the beginning of the textbook.

These pages introduce you to the topic of cost accounting

and present the specific features of your textbook. Next

examine the brief contents on page xiii. Here you’ll see the

chapter titles, which give you an overall idea of what you’re

going to be learning.

Pages xv–xviii present a more detailed outline of the material

in the textbook. Review it quickly now before you begin your

studies. Then as you begin each new chapter, read the mate-

rial in this contents so you’ll know what to expect from your

study of that particular chapter.

The next part of your textbook (pages 1–461) is the study

material for the course. Each chapter begins with a list of

learning objectives, followed by the study material itself. At

the end of each chapter is a list of “Key Terms” that were

introduced in the study material. Use these terms to check

your understanding of the material you’ve read. Each chapter

also includes a “Self-Study Problem,” which you can complete

and check yourself. The answers to these problems are pro-

vided in the textbook. Also included at the end of the chapter

are a series of questions, exercises, and problems. Complet-

ing these exercises will give you practice in applying what

you’re learning. Answers to the exercises and problems are

given in the separate Answer Key booklet.

At the end of your textbook, beginning on page 463, is a

glossary. This section includes the definitions of important

terms presented throughout the textbook. Use this tool

whenever you’re in doubt as to the meaning of a word or

phrase. Finally, an index begins on page 473. This section

includes important topics covered in your textbook, along

with page references where you can locate material relating

to each term.

Instructions to Students 3

COURSE MATERIALSThis course includes the following materials:

1. This study guide, which contains an introduction to

your course, plus

■ A lesson assignments page with a schedule of

study assignments

■ Assignment introductions emphasizing the main

points in the textbook

■ Self-checks and answers to help you assess your

understanding of the material

■ An examination for each of the lessons in this course

2. Your course textbook, Principles of Cost Accounting,

which contains the assignment reading material

3. The Study Guide and Working Papers for the textbook,

which includes blank forms for completing the problems

at the end of each chapter

4. An Answer Key booklet, which contains solutions to the

exercises and problems at the end of each chapter

A STUDY PLANEveryone has a unique style of learning. The object is to find

the method of learning that works best for you. What follows

is a suggested format for using this study guide. Remember

that it’s only a suggested plan. If you feel another method

would help you learn more effectively, by all means use

that method.

1. Note the pages for each assignment and read the

introductory material in this study guide.

2. Carefully review the learning objectives for each assign-

ment. (The learning objectives are presented on the first

page of each chapter.) Think about how they relate to

what you’ve already learned. Accounting is a subject

learned in layers, with each layer building on prior

layers. Taking time to draw relationships between

assignments will help your overall comprehension

of the subject matter.


3. Scan the assigned pages in the textbook. Note the

headings and figures. Write down questions to yourself

in the margin of the book or on a separate sheet of paper.

4. Keep your textbook open to the chapter assignment

and read the assignment text in the study guide. When

the study guide makes references to passages or figures

in the textbook, you can refer to the text to complete

your understanding. It may answer your questions or

inspire more.

5. Read the assigned pages in the textbook. This time pay

more attention to details. Concentrate on gaining an

understanding of the concepts being presented. Relate the

learning objectives to key issues in the text. Don’t worry

about memorizing everything at this point. Accounting is

about application, not memorization. If you’re unable to

recall something, you can always refer to the text. Please

make an attempt to learn the language of cost accounting.

Be able to explain the meaning of the key terms. You

must be able to identify a term when anyone else uses

it or defines it correctly, and you must be able to use it

and define it yourself.

When studying the material in the chapters, carefully

examine any sample accounting statements, charts,

graphs, or tables presented. Since the textbook discussion

often focuses on preparing or understanding these items,

you won’t really grasp what’s being said if you just skip

or skim the examples. Finally, be sure to go through the

“Self-Study Problem” at the end of each chapter. You

may find the other end-of-chapter materials helpful.

We’ve narrowed down the focus a bit in our self-checks.

6. Begin the review phase of your assignment. Read the

assignment text in the study guide again. Check on

anything that’s still not clear, and reexamine the pages

and figures to which the study guide refers. Then complete

the self-check in the study guide. Don’t submit your

answers to the self-check to the school for grading.

Instead, check your answers using the answer key

at the back of this study guide. If you have problems

completing the self-check, reread the sections of the

book that pertain to the problem area. If you still need

assistance, e-mail your instructor.

Instructions to Students 5

7. When you’ve completed all the assignments for a lesson

and you feel confident you understand the material cov-

ered in those assignments, take the lesson examination.

Follow the directions for submitting your exams.

You’re now ready to begin. Good luck with your studies.


NOTES

7

Lesson 1: Materials, Labor, and Factory Overhead

For: Read in the Read in the

study guide: textbook:

Assignment 1 Pages 9–17 Chapter 1, pages 1–33




Examination 06164200 Material in Lesson 1

Lesson 2: Process Cost Accounting






Lesson 3: Budgeting; Standard Cost Accounting






Lesson 4: Service Businesses; Decision Making






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Lesson Assignments8

NOTES

Materials, Labor, and Factory OverheadThis lesson provides you with an introduction to cost

accounting and to the manner in which costs flow through

a manufacturing firm. A great deal of important terminology

is covered in the chapters in Lesson 1. Make sure to read

them with care so you understand these concepts. Many

of them will appear again in later chapters of the course.

ASSIGNMENT 1: INTRODUCTIONTO COST ACCOUNTINGRead this assignment. Then read pages 1–33 in your textbook.

IntroductionAs its title suggests, this chapter provides you with

an overview and introduction to many of the terms and

concepts you’ll be using throughout the course. After you’ve

studied the chapter, you should understand the uses of cost

accounting data, the relationship of cost accounting data to

both managerial and financial accounting, the flow of costs

through a manufacturing firm, and the two primary types

of cost accounting systems (job order and process).

Cost accounting information is used both internally for

management decision-making purposes and externally as

part of the financial reporting process. A fundamental part

of the success of any business is a management team with an

accurate knowledge of the cost of the products and services

they sell. In this chapter, you’ll examine the following types

of businesses:

■ Manufacturing firms transform raw (unfinished) materials

into units of finished product. You didn’t examine

manufacturers as part of your initial study of financial

accounting, because the inventory-costing process for

such a firm is somewhat complicated.

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Cost Accounting

■ Merchandising firms sell already finished goods to

customers. These customers are either retailers, who

sell to final customers, or wholesalers, who resell the

goods to retailers.

■ Service businesses charge customers for services provided.

Like manufacturing and merchandising firms, service

businesses also need to know the costs of the services

they render.

Uses of Cost Accounting Data

Your text briefly summarizes the uses of cost accounting

data on pages 3–7. Firms must have accurate costing

information for a number of reasons:

1. The selling price charged for a good or service must be

adequate not only to cover its cost but also to provide a

sufficient margin to cover the other costs of the business

and to provide for a profit.

2. Businesses need cost information for planning and

control purposes. Planning involves forecasting the

resources (that is, materials, labor, and so on) that a

business plans to consume so it knows how much it

will need to acquire. When the actual figures on resource

consumption become available, they may be compared

against the planned amounts to evaluate the activities.

3. Manufacturing and merchandising firms use cost data

for inventory valuation purposes on balance sheets and

for cost of goods sold information on income statements.

Relationship of Cost Accounting toFinancial and Managerial Accounting

Carefully read the introductory paragraphs to this section

on pages 8 and 9 in your textbook. Make sure you understand

the differences between financial accounting and managerial

accounting.

10

On pages 9 and 10, your textbook compares and contrasts

the methods used by merchandising firms and manufacturing

firms to determine the cost of goods sold. From financial

accounting you should be familiar with the equation used

to find cost of goods sold for a merchandising firm:

Beginning inventory + Purchases – Ending inventory

= Cost of goods sold

Compare this equation with the following one, which is used

to determine the cost of goods sold in a manufacturing firm.

The differences are shown in bold type.

Beginning finished goods inventory + Cost of goods

manufactured – Ending finished goods inventory

= Cost of goods sold

Manufacturing firms actually have three types of inventory:

1. Finished goods inventory

2. Work in process inventory

3. Materials inventory

The finished goods inventory is the first element in the formula

for the cost of goods sold. The materials inventory and the

work in process inventory are used to determine the second

element in the equation—cost of goods manufactured.

Figure 1-5 on page 11 summarizes the characteristics of

service, merchandising, and manufacturing businesses.

Lesson 1 11

When you reach this point in your textbook reading,stop and complete Exercises E1-1 to E1-3 (page 42 inthe textbook) and Problems P1-1 and P1-2 (page 45).Use the appropriate forms in the Study Guide/WorkingPapers booklet. Check your work with the solutionsprovided in the Answer Key booklet.

Elements of Manufacturing Costs

Pages 12–13 provide a detailed examination of cost flows

through a manufacturing firm. Such firms transform raw

materials into units of a finished product. The three types

of costs incurred in this process are

1. Direct materials, which are the costs of the materials

that become part of, and can be directly identified with,

the units of finished product

2. Direct labor, which is the labor cost of those persons

directly involved with the manufacture of the product

3. Factory overhead, which represents all costs associated

with manufacturing that are neither direct materials

nor direct labor

Figure 1-6 on page 13 provides a pictorial summary of these

costs. All manufacturing costs flow through the work in

process inventory account.

Illustration of Accounting forManufacturing Costs

Remember, a manufacturing firm has three different types

of inventory: materials, work in process, and finished goods.

Figures 1-7 and 1-8 on page 14 provides a simplified picture of

the flow of manufacturing costs, on which we’ll now elaborate.

1. Materials are requisitioned from the materials inventory

and placed into work in process.

2. The costs of the direct labor and factory overhead

incurred during production are also added to the work

in process account.

3. When goods are completed, their cost is removed from

the work in process account and placed into the finished

goods inventory account. These goods are the items

waiting to be sold.

4. As the finished goods are sold to customers, their cost is

removed from finished goods inventory and added to

cost of goods sold.

Cost Accounting12

These steps assume that the firm in question is able to

specifically trace the costs of individual products as they’re

completed. For some firms, this is the case; for others, it

isn’t. For example, sometimes the products are specialized,

custom-made, or somehow different from one another. In such

cases, a company may use job order costing, a procedure in

which the costs of each individual product must be known.

For example, an automobile repair shop may perform an oil

change on one customer’s car, a brake job on the next, and

a complete engine overhaul on a third. Each of these jobs

requires significantly different amounts and types of materials,

labor, and overhead.

For other types of companies, determining the costs of indi-

vidual products would be both expensive and unnecessary.

Consider the example of a soda manufacturer that produces

thousands of cans of soda each day. There’s no practical

way to distinguish between the cost of the first can, the five

hundredth can, or the ten thousandth can made in a given

period. To the extent that the materials, labor, and overhead

involved in the production of soda remain largely unchanged

from production run to production run, the costs may not

differ significantly from item to item anyway. Such a firm is

likely to use a system known as process costing. Instead of

accumulating costs by individual job, the firm calculates

total costs incurred in a given period and divides that total

by the number of units produced, which results in an aver-

age cost for each unit.

Lesson 1 13

When you reach this point in your textbook reading, stopand complete Exercises E1-4 to E1-8 (pages 42–44 inthe textbook) and Problems P1-3 to P1-7 (pages 45–49).Use the appropriate forms in the Study Guide/WorkingPapers booklet. Check your work with the solutions provided in the Answer Key booklet.

Cost Accounting Systems

The final section of Chapter 1 (pages 23–31) compares the two

basic types of cost accounting systems: process cost system

and job order cost system. The example you studied in the

previous section (Wicker Works) illustrates the process cost

system. In this section, you’ll study an example of the job

order cost system. Be sure to read both examples carefully

and study the sample accounts presented.

When you complete your study of Chapter 1 and you’ve

finished and checked the exercises and problems, come

back to this study guide and complete Self-Check 1.

Cost Accounting14

When you reach this point in your textbook reading,stop and complete Exercises E1-9 and E1-10 (pages 44 and 45 in the textbook) and ProblemsP1-8 to P1-10 (pages 49–51). Use the appropriateforms in the Study Guide/Working Papers booklet.Check your work with the solutions provided in theAnswer Key booklet.

Lesson 1 15

Self-Check 1

At the end of each section of Cost Accounting, you’ll be asked to pause and check your under-standing of what you have just read by completing a “Self-Check” exercise. Answering thesequestions will help you review what you’ve studied so far. Please complete Self-Check 1 now.

VocabularyMatch each of the terms below with the definitions that follow.

Terms

_____ 1. Accounting information system _____ 7. Work in process

_____ 2. Cost accounting _____ 8. Finished goods

_____ 3. Cost of goods manufactured _____ 9. Budget

_____ 4. Manufacturing costs _____10. Materials

_____ 5. Standard costs _____11. Process cost system

_____ 6. Unit cost

Definitions

a. The branch of accounting that focuses on providing the detailed cost data that management needs to control current operations and plan for the future

b. Management’s operating plan expressed in quantitative termsc. The costs that would be incurred under efficient operating conditions and are forecast

before the manufacturing process beginsd. The inventory account that includes all the manufacturing costs incurred to date for

goods that are in various stages of production but aren’t yet completede. Procedures that provide financial information needed in a business organizationf. The inventory account that represents the total cost incurred in manufacturing goods

that are complete but still on hand at the end of the accounting periodg. The cost of manufacturing one unit of producth. A figure determined by adding the cost of the beginning work in process to the manu-

facturing costs incurred during the period, and then subtracting the cost of the endingwork in process

i. The inventory account that represents the cost of all materials purchased and on handto be used in the manufacturing process, including raw materials, prefabricated parts,and supplies

j. A method or system of cost accounting that’s appropriate for manufacturing operationsthat produce continuous output of homogeneous products

k. All costs incurred in the manufacturing process; the costs are classified into threebasic elements: direct materials, direct labor, and factory overhead

(Continued)

Cost Accounting16

Self-Check 1

QuestionsAnswer each of the following questions in the spaces provided.

1. Define the following terms:

a. Direct labor cost ________________________________________________________________________

________________________________________________________________________

b. Indirect labor cost________________________________________________________________________

________________________________________________________________________

c. Direct materials costs________________________________________________________________________

________________________________________________________________________

d. Indirect materials costs________________________________________________________________________

________________________________________________________________________

2. What are the three elements of manufacturing costs? Give examples of each.

__________________________________________________________________________

__________________________________________________________________________

__________________________________________________________________________

3. Differentiate between a periodic inventory system and a perpetual inventory system.

__________________________________________________________________________

__________________________________________________________________________

__________________________________________________________________________

(Continued)

Lesson 1 17

Self-Check 1

ProblemStudy the following post-closing trial balance for Golden Bear Manufacturing Co.

During the month, Golden Bear Manufacturing had the following transactions:

a. Purchased raw materials on account at a cost of $65,000.b. Issued raw materials to the factory to be used in production, costing $50,000.c. Recorded payroll cost for the month of December as $45,000. Selling and administra-

tive costs are $10,000 of this figure.d. Had total depreciation for the month of $50,000. Of this amount, 70% is on the

building, 10% on the factory equipment, and 20% on the office equipment. Half of the building is used for manufacturing purposes, and half is office space.

e. Incurred a variety of other costs totaling $15,000. Of these costs, 75% were factory-related and 25% are office expenses.

f. Completed and transferred goods totaling $96,000 to the Finished Goods Inventoryaccount.

g. Sold goods costing $196,000 for $312,000. All sales were made on account.h. Collected accounts receivable in the amount of $358,000.i. Paid Accounts Payable totaling $145,000.

On a separate sheet of paper, prepare journal entries to record each of the preceding transactions.

Check your answers with those on page 125.

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slairetaM 000,82gnidliuB 000,094

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000,301,1$ 000,301,1$

ASSIGNMENT 2: ACCOUNTINGFOR MATERIALSRead this assignment. Then read pages 53–86 in your textbook.

Chapter 1 introduced and defined the terms necessary

to account for costs in a manufacturing firm: materials,

direct labor, and factory overhead. Chapter 2 presents a

more detailed examination of the first element—materials—

as well as other concepts that are relevant to the study of

cost accounting.

All organizations must keep track of the costs they incur.

In addition, they should have a means to control these

costs, and they should incur them only as expected—that is,

according to plan. Such controls involve clear designations of

responsibility, are related to the objectives of the organization,

and require regular comparison of actual expenditures with

expected expenditures.

Materials Control

One aspect of materials control involves making sure there

are adequate physical controls over access to materials. In

addition, a manufacturer must make sure that it has neither

too many nor too few materials on hand at any given point.

Don’t be confused by the Wendy’s example on page 55 in the

textbook. The author is trying to make the point that

although Wendy’s is known for its service, it does have

an inventory of materials on hand. It should, and has to,

because it’s a manufacturing firm. The wording of this

example may mistakenly seem to suggest otherwise.

The physical control of materials involves three factors:

1. Access to materials only by authorized personnel

2. Segregation of duties (see page 55 for examples)

3. Accuracy in recording amounts and quantities of

materials requisitioned and used

Cost Accounting18

Lesson 1

An organization also needs to control the level of its investment

in materials. To do this, it must establish levels at which

materials inventory reordering will take place and in what

amount. These levels should be based on tradeoffs between

(1) the costs associated with having to store inventory and tie

up funds in inventory and (2) the costs associated with lost

sales due to stockouts. Your text discusses a mechanism for

calculating the number of units to be ordered, known as the

economic order quantity (EOQ).

Note regarding safety stock on page 56: Manufacturers such

as Dell Computer maintain very little in the way of safety

stocks. Instead, they control their inventory levels through

quality supplier contacts and frequent reordering. This is

known as just-in-time materials control and you’ll learn about

it later in this chapter.

Materials Control ProceduresProcedures must be established to control the purchase and

receipt of materials, the storage of materials, and the requisi-

tion and consumption of materials. Employees involved in

these processes are the purchasing agent, receiving clerk,

storeroom keeper, and production supervisor.

When an item in stock reaches a certain level, it must be

reordered. Between the time the item becomes low in stock

and the time when a new shipment is delivered, control must

be maintained. The documents commonly involved in this

process are purchase requisitions, purchase orders, vendors’

invoices, receiving reports, and debit-credit memoranda. The

textbook provides examples of each of these documents on

pages 62–67. During the procurement process, controls

must be in place so only authorized goods are purchased;

the goods ordered are actually received; and any returns,

credits, and backorders are properly accounted for.

Once acquired and properly stored, materials must be

controlled until their proper use is authorized. To request

materials, the appropriate person sends a materials requisition

to the storeroom keeper. If the request is approved, the materi-

als are released, and both the storeroom keeper and the

19

Cost Accounting

person making the requisition sign the form. If materials

must be returned to the storeroom, the person making the

return must complete a returned materials report document-

ing the reason for the return.

Accounting for Materials

In addition to tracking the flow of materials, a firm must also

make assumptions regarding the flow of costs that will be

assigned to inventories, factory overhead, and cost of goods

sold. The text provides examples of three different cost flow

assumptions for a firm that uses a perpetual inventory system:

■ First-in, first-out (FIFO), in which the most recent costs

remain in ending inventory

■ Last-in, first-out (LIFO), in which the cost of earlier

acquired units remain in ending inventory

■ Moving average, which provides something in between,

an ongoing mix of costs

Pages 68–74 provide a good overview of the mechanics of

these different cost flow assumptions.

The mechanics of recording the flow of material costs in

the company’s ledgers is reviewed on pages 74–79 of your

textbook. Some of this may be familiar to you from your

financial accounting course. If not, please review the journal

entries and the interaction between the documents discussed

in this assignment and the general ledger accounts. You’ll

need a working knowledge of transactions and the related

entries to complete homework and exam questions.

20

When you reach this point in your textbook reading,stop and complete Exercises E2-1 and E2-2 (page 92in the textbook) and Problems P2-1 and P2-2 (pages 96and 97). Use the appropriate forms in the StudyGuide/Working Papers booklet. Check your work with the solutions provided in the Answer Key booklet.

Just-in-Time Materials Control

The management of inventory involves the handling of the

entire supply chain. In just-in-time (JIT) materials control, a

factory receives materials just before they’re needed in pro-

duction. The idea of this method is to reduce or minimize the

amount of inventory on hand. Therefore, a factory using JIT

will arrange for regular deliveries of small amounts of materials.

The philosophy behind this method is to have delivered just

enough material to meet immediate production demands.

Compare the JIT method with the order point and economic

order quantity (EOQ) you studied on pages 55–60. In that

method, the order point was based on maintaining an inven-

tory level based on usage, lead time, and safety stock.

Determining the EOQ takes into consideration such things

as the cost of placing an order and the cost of carrying

inventory in stock.

The JIT method doesn’t work for every plant. It has certain

requirements without which it will be useless. For example,

a plant must be certain that it can have dependable delivery

from its suppliers. In addition, the suppliers must be relatively

near the plant. Otherwise, the delivery time will be too long.

Finally, a plant using JIT must have a relatively steady,

predictable production schedule.

Lesson 1 21

When you reach this point in your textbook reading,stop and complete Exercises E2-3 to E2-10 (pages92–94 in the textbook) and Problems P2-3 to P2-7(pages 97–100), and the review problem for Chapters 1and 2 (pages 102–103). Use the appropriate formsin the Study Guide/Working Papers booklet. Check your work with the solutions provided in the AnswerKey booklet.

Scrap, Spoiled Goods, and Defective Work

As you read this section (pages 82–86), make sure you under-

stand the distinction between the three items discussed:

■ Scrap is waste generated in the manufacturing process.

■ Spoiled goods are products with imperfections that can’t

be economically corrected.

■ Defective work is imperfect products that are considered

correctable because the market value of the corrected

unit is greater than the total cost incurred for the unit.




Cost Accounting22

When you reach this point in your textbook reading,stop and complete Exercises E2-11 to E2-15 (pages 94–96 in the textbook) and Problems P2-8 to P2-12 (pages 100–102). Also complete Mini-Case 1 on page 104 in the text. Use the appropriate forms in the Study Guide/Working Papers booklet. Check your workwith the solutions provided in the Answer Key booklet.

Lesson 1 23

Self-Check 2

VocabularyFill in the blanks with the word or phrase that correctly completes the statements.

1. The _______ is the point at which an item should be ordered because the predeterminedminimum level of inventory on hand has been reached.

2. The anticipated rate at which materials will be used is referred to as _______.

3. The estimated time interval between the placement of an order and the receipt of thematerial is the _______.

4. Supervising the receipt of incoming shipments is the duty of the _______.

5. After materials have been received, the _______ is responsible for making sure they’reproperly stored.

6. The form used to notify the purchasing agent that additional materials are needed isknown as a _______.

7. Materials is a control account supported by a subsidiary _______, which contains theindividual account for each type of material carried in stock.

8. All materials issued during the month are recorded on a _______.

9. Materials that result naturally from the production process or that are spoiled or defective units from mistakes made during production are called _______.

10. Units with imperfections that can’t be economically corrected are referred to as________.

11. Units with imperfections that can be economically corrected are referred to as _______.

12. In a _______ system, materials are delivered to the factory immediately prior to their usein production.

13. The time it takes a unit to make it through the system is known as _______.

(Continued)

Cost Accounting24

Self-Check 2

Questions1. List six things an effective control system should include.

__________________________________________________________________________

__________________________________________________________________________

__________________________________________________________________________

__________________________________________________________________________

__________________________________________________________________________

__________________________________________________________________________

2. Explain the concepts of limited access, segregation of duties, and accurate recording.

__________________________________________________________________________

__________________________________________________________________________

__________________________________________________________________________

3. List the three functions to which materials control procedures generally relate.

__________________________________________________________________________

__________________________________________________________________________

__________________________________________________________________________

4. What are the four different types of materials control personnel?

__________________________________________________________________________

__________________________________________________________________________

(Continued)

Lesson 1 25

Self-Check 2

Problems1. The per unit cost for a pair of shoes at Winny’s Shoe Factory is as follows:

Materials $ 50Labor 30Factory 20

$100a. Record the journal entry for an order of 1,000 pairs of shoes.

b. During inspection, 200 pairs of shoes are determined to be unfit to sell at normal price and are expected to sell at $50 each. Give the journal entry to change unrecovered costs to factory overhead.

2. Daisy Manufacturing Company manufactures plastic silverware for repeat customers. The following costs are incurred during the production of 600 units:

Materials $10Labor 5Factory Overhead 5

$20

When the units were complete, 75 were found to be defective. Costs to convert thedefects were as follows:

Materials $2Labor 2Overhead 1

Record the journal entry if the cost to correct defective work is charged to factory overhead.


ASSIGNMENT 3: ACCOUNTING FOR LABORRead this assignment. Then read pages 107–129 in your textbook.

Chapter 3 covers accounting for an important factory cost:

labor. Recall that direct labor refers to those who are directly

working on the product being manufactured. Indirect labor is

all other labor associated with the factory that isn’t included

in direct labor.

The purpose of this chapter is to teach you four procedures a

manufacturer must perform in recording employees’ payroll:

1. Recording the hours worked and/or output of its employees

2. Analyzing the time worked to see how it should be

charged to individual jobs

3. Charging payroll costs to appropriate jobs, departments,

overhead, and so on

4. Preparing the payroll itself, including determination of all

necessary deductions from employees’ pay

Wage Plans

Direct laborers are generally paid either by the hour (hourly

wage plan) or by the quantity of output they generate (piece-

rate plan). Combinations of these two plans are also possible.

Controlling Labor Cost

Two separate functions must be performed in controlling labor

cost. The timekeeping function keeps track of the number

of hours worked and the type of work that was performed.

The payroll function keeps track of the gross and net amounts

of each employee’s earnings, as well as the details of the

deductions taken from the pay.

Cost Accounting26

The payroll function also requires that certain documents

and records be kept:

■ Payroll records vary from firm to firm, but generally

contain all the information necessary to prepare the

general journal entry for payroll.

■ Employee earnings records are a cumulative record of

employee earnings for the period.

■ Labor cost summary is an analysis of labor costs

recorded in both the job cost ledger and the factory

overhead ledger. It summarizes the debits to work in

progress and factory overhead, as well as the total

credits to the various payables associated with payroll.

Accounting for Labor Costs andEmployers’ Payroll Taxes

One important item in accounting for labor costs is the treat-

ment of overtime hours. An overtime premium is the amount

paid to an employee in excess of the regular hourly rate.

Typically, this rate is an amount equal to 50% of the regular

hourly rate. When added together, the result is an overtime

rate equal to 150% of the regular hourly rate. For a direct

laborer, the premium is considered to be factory overhead,

but the base amount per hour continues to be treated as

direct labor. As the example in your text shows (page 117),

workers who traditionally earn $15 an hour would be paid

$22.50 (15 � 150%) per hour for any hours considered to be

overtime. The $7.50 premium ($22.50 – 15) should be treated

as factory overhead, and the $15 base pay should still be

direct labor, just as any normal hours paid at the $15 rate

are treated.

Lesson 1 27

When you reach this point in your textbook reading,stop and complete Exercises E3-1 to E3-3 (pages 133and 134 in the textbook) and Problems P3-1 to P3-3(parts 1 and 2) (pages 137–139). Use the appropriateforms in the Study Guide/Working Papers booklet.Check your work with the solutions provided in theAnswer Key booklet.

To determine net pay, businesses must deduct certain

amounts from their employees’ gross earnings. In addition,

employers are responsible for other taxes related to their

employees’ earnings:

■ FICA (Federal Insurance Contributions Act). Employers

are responsible for paying 7.65% of each employee’s

earnings to cover Social Security and Medicare contribu-

tions. This amount is in addition to, and equal to, the

amount the employee contributes from wages earned.

■ Unemployment taxes. Employers must pay both federal

and state unemployment taxes to provide compensation

for unemployed workers.

Study the material on pages 117–123, and carefully read

the “Illustration of Accounting for Labor Costs” section that

begins on page 118.

Payroll Accrual

When the end of a company’s fiscal year doesn’t coincide

with the final pay date for the period, then there will be

unpaid wages at the end of the period. This situation

necessitates the recording of an adjusting entry to make

certain that all the labor costs of the period are properly

charged to work in progress and factory overhead.

Cost Accounting28

When you reach this point in your textbook reading, stopand complete Exercises E3-4 to E3-11 (pages 134–137 inthe textbook) and Problems P3-3 (parts 3 and 4) to P3-10(pages 138–144). Use the appropriate forms in theStudy Guide/Working Papers booklet. Check your workwith the solutions provided in the Answer Key booklet.

Special Labor Cost Problems

Other labor costs that an employer may face are described

on pages 126–129. They include shift premiums, pensions,

bonuses, holiday pay, and vacation pay. Here are some

details to keep in mind as you read this section:

■ A shift premium is similar to an overtime premium,

except that it’s paid to all workers for each hour worked

on a nontraditional shift—that is, a shift other than the

normal 8–4 shift. The base amount per hour is treated

as direct labor, and the shift premium is charged to

factory overhead.

■ Pension costs are promises of future compensation to

employees as part of compensation for current work

performed. Accordingly, these costs are part of current

period pay. Determination of such amounts is left for

more advanced accounting classes.

■ Bonuses, vacations, and holiday pay are all charged to

factory overhead, even if earned by direct laborers.




1

Lesson 1 29

When you reach this point in your textbook reading,stop and complete Exercises E3-12 and E3-13 (page 137 in the textbook) and Problem P3-11 (page 144). Also complete Mini-Cases 1 and 2 (pages 144–145) and the Internet Exercise (page 145).Use the appropriate forms in the Study Guide/WorkingPapers booklet. Check your work with the solutionsprovided in the Answer Key booklet.

Cost Accounting30

Self-Check 3

Multiple ChoiceCircle the letter before the choice that best answers the following questions.

1. Factory payroll costs are divided into which two categories?

a. Direct labor and indirect laborb. Direct labor and work in processc. Cost labor and indirect labord. Cost labor and work in process

2. Direct labor costs include all of the following except

a. machinists. c. packers.b. assemblers. d. supervisors.

3. Which one of the following plans is an example of an incentive wage plan?

a. Wage-rate plan c. Hour-rate planb. Piece-rate plan d. Job-rate plan

4. What department computes each employee’s gross earnings?

a. Timekeeping department c. Payroll departmentb. Earnings department d. Bookkeeping department

5. The primary responsibility of the payroll department is to

a. compute the employees’ wages and salaries.b. distribute pay checks.c. determine employee salaries.d. compute and record earnings per share.

6. For all regular hourly employees, the hours worked should be recorded on a

a. wage card. c. labor time ticket.b. hourly time sheet. d. labor cost summary.

7. When an employee receives a higher hourly rate for hours worked in addition to regularlyscheduled time, this rate is referred to as

a. overtime pay. c. additional pay.b. overtime premium. d. additional premium.

(Continued)

Lesson 1 31

Self-Check 3

8. Unemployment benefits are paid by

a. the federal government. c. individual businesses.b. individual state governments. d. the FICA.

9. When a financial statement date doesn’t coincide with the ending date for a payroll period, _______ must be made.

a. accrual for payroll earnings c. both a and bb. accrual for payroll taxes d. neither a nor b

True or FalseIndicate whether each of the following statements is True or False.

_______ 1. An employer may be required to account for a variety of labor-related coststhat don’t fall into the normal routine of accounting for payroll costs.

_______ 2. A shift premium is a regularly scheduled work period for a designated number of hours.

_______ 3. Contributory pension plans require a partial contribution from the employer.

_______ 4. Employees may receive bonus pay for higher-than-usual company profits.

_______ 5. All employees at any company are guaranteed pay for every holiday.

_______ 6. Pension costs originate from an agreement between a company and its employee group.

_______ 7. If the overtime premium equals the regular hourly rate, it’s referred to as double-time pay.

_______ 8. Indirect labor consists of labor costs traced directly to an individual job.

_______ 9. Modified wage plans combine some features of hourly rate plans and some features of piece-rate plans.

_______ 10. Automated technology is replacing timekeeping as a separate department.

(Continued)

Cost Accounting32

Self-Check 3

Problems1. N. Madsen is an employee of Black’s Blankets, a manufacturing firm. She’s paid $13

per hour for an 8-hour day and receives time-and-a-half pay for overtime and Sundays.She’s regularly employed for 40 hours a week, five days a week. Ms. Madsen is a directlaborer.

The following table shows the times Ms. Madsen worked during a period of one week.

IN OUTSunday 10:00 A.M. 5:00 P.M.

Monday 8:00 A.M. 4:00 P.M.

Tuesday 7:30 A.M. 4:30 P.M.

Wednesday 8:00 A.M. 5:00 P.M.

Thursday 8:00 A.M. 6:00 P.M.

Friday 7:30 A.M. 4:30 P.M.

Saturday 9:00 A.M. 2:00 P.M.

a. Compute Ms. Madsen’s total earnings for the week.

b. Prepare the journal entries necessary to distribute Ms. Madsen’s earnings.

(Continued)

Lesson 1 33

Self-Check 3

2. Paul’s Picture Frames has the following payroll summary:

Employee Hourly Rate Hours WorkedJones $12 38Bates 10 40Lake 12 35Santo 8 40Kyle 13 40

a. Determine the net pay for each employee, assuming total taxes withheld for eachemployee is 7.5% of the gross wages.

b. Prepare the journal entries to record and pay the payroll.


ASSIGNMENT 4: ACCOUNTINGFOR FACTORY OVERHEADRead this assignment. Then read pages 147–181 in your textbook.

Chapter 4 covers accounting for all factory costs that aren’t

considered to be direct materials or direct labor. Such costs,

known as overhead, can’t be traced to specific units or jobs.

In this chapter, you’ll learn how to identify and record over-

head costs, how to apply them to production, and how to

account for the differences between applied overhead and

amounts actually incurred. You’ll also consider the procedure

for budgeting overhead costs.

Identifying Cost Behavior PatternsSome costs are variable—that is, their total increases as

activity increases, but their per-unit amount remains the

same. For example, suppose direct labor is $10 an hour.

At that rate, 5 hours is $50 (5 � $10) and 50 hours is $500

(50 � $10). The total amount of the cost changes from $50

to $500, but the per-hour rate remains at $10.

In contrast, fixed costs remain the same in total as activity

changes, but vary on a per unit basis. For example, if

depreciation is $10,000 and 100 units are manufactured,

then the per-unit depreciation cost is $100 ($10,000 ÷ 100).

However, if the number of units produced increases to 1,000,

then the per-unit cost decreases to $10 ($10,000 ÷ 1,000).

Costs that have both fixed and variable components are

called semivariable costs.

Analyzing Semivariable Factory Overhead CostsCosts that are entirely fixed or entirely variable aren’t

difficult to predict. They’ll either remain the same in total

or vary in direct proportion to changes in activity. Many

overhead costs are semivariable, however, and are thus

more difficult to predict.

Cost Accounting34

As an example, consider maintenance on machines. As

activity increases, maintenance increases, but some level

of maintenance is still required even at lower levels of

production activity. Thus, maintenance has both a fixed

and a variable component to it.

Your textbook covers a few methods for predicting how semi-

variable costs will behave. No matter what method is used,

it’s a good idea to plot the cost under consideration in a

manner similar to that in Figure 4-2 on page 153. The

saying, “A picture is worth a thousand words,” can be

applied to predicting overhead cost. It’s often easier to

understand things in pictures—or in this case, graphs.

The formula for predicting a semivariable cost is

y = a + bX

in which y = the total cost (the cost being predicted), or the

y (vertical) axis

a = the predicted fixed cost

b = the predicted variable cost per unit of activity

X = the number of units of activity (units

produced), or the x (horizontal) axis

Thus, when the data are plotted as shown in Figure 4-2,

the points should form some approximate positive linear

association.

The first method your text discusses is the observation

method, in which a cost is classified as either variable or

fixed, even if it’s semivariable. Under such a method, the

cost is labeled according to the type of cost (variable or

fixed) it more closely resembles. This method is used only

rarely at present.

The high-low method basically makes use of algebra to produce

a line from the formula y = a + bX. This line connects the

cost point for the highest observed level of activity to the

cost point for the lowest observed level of activity. This

method assumes that all the points in between represent

the cost whose behavior we’re trying to predict.

The scattergraph method doesn’t use any numerical calcula-

tions in determining a cost prediction equation. It simply

involves looking at the data points after they’ve been plotted

Lesson 1 35

Cost Accounting

and drawing a best fit line to the data—that is, a line that

touches or is near all the points on the graph. (See Figure 4-2.)

The goal is to draw a line that comes as close as possible to

the data points.

Budgeting Factory Overhead Costs

Once overhead costs have been identified as variable, fixed,

or semivariable, a company can budget overhead costs based

on expected activity levels. The company will then have a

good idea of what total overhead costs might be at different

levels of activity.

Accounting for Actual Factory Overhead

As a company incurs actual overhead costs, it keeps track

of them in two ways—according to the type of cost and by

total. Your text lists the primary types of overhead accounts

on page 156. The total for overhead is recorded in an account

called Factory Overhead or Manufacturing Overhead. The

overhead costs can then be tracked by either of the spread-

sheet types discussed in your text: the expense-type analysis

spreadsheet or the department-type analysis spreadsheet.

Important Note: On page 156 in your textbook, you’ll find

the phrase “factory overhead expense.” The text refers to

factory overhead as an expense elsewhere also. Overhead

becomes an expense only when the goods to which it has

been assigned have been sold. It then becomes part of cost

of goods sold. Overhead items aren’t treated separately as

expense items in their own right.

36

When you reach this point in your textbook reading,stop and complete Exercises E4-1 to E4-3 (pages 188and 189 in the textbook) and Problems P4-1 to P4-3(pages 192–194). Use the appropriate forms in theStudy Guide/Working Papers booklet. Check your workwith the solutions provided in the Answer Key booklet.

Distributing Service Department Expenses

Service departments related to factory operations provide

the needs of production departments and other service

departments in the factory, but don’t actually work on the

product being manufactured. To properly determine the

costs of products, the overhead costs associated with service

departments must be charged to the production departments.

Some service department costs may be directly charged to

production departments. Your textbook uses metered power

to illustrate direct charges (page 161). In such cases, the

service department cost can be directly charged to a given

production department. For other costs, there may not be a

good way to directly charge costs. In these cases, methods

such as those described on page 162 may be employed. The

direct distribution method simply allocates service department

costs to production departments, without taking into account

that service departments often provide overhead-related

services for one another as well. The other two methods, the

sequential distribution method and the algebraic distribution

method, do take this into account.

Applying Factory Overhead to Production

Instead of charging work in process with the actual factory

overhead costs incurred, it’s easier for companies to charge

the work in process with an estimated, or predetermined,

amount. Then, at the end of the period, it can reconcile

differences between this amount and actual overhead.

Lesson 1 37

When you reach this point in your textbook reading,stop and complete Exercises E4-4 to E4-6 (pages 189and 190 in the textbook) and Problems P4-4 to P4-5(pages 194 and 195). Use the appropriate formsin the Study Guide/Working Papers booklet. Checkyour work with the solutions provided in the AnswerKey booklet.

Companies use this method for two reasons:

1. Not all overhead amounts are known in their entirety

until later in an accounting period. Jobs worked on

during the year need to be charged with an amount

of overhead sufficient to cover all overhead costs, even

those that haven’t yet been incurred.

2. Some elements of overhead (for example, heating and

cooling costs) vary throughout the year. Charging work

in process with an estimated amount “smooths” the

recognition of overhead throughout the year.

To understand the rationale behind reason 2, consider the

price you pay to have the oil changed in your car. You don’t

expect to pay more for an oil change during those months

when the garage needs to be heated and less when the

weather is nice.

To apply overhead, a company must first estimate the total

overhead it expects to incur for a period. It then determines

the activity base by which it will apply the estimate. For

example, suppose a company estimates that it will spend

$100,000 on overhead for a period and incur 10,000 direct

labor hours in doing so. In this case, the company would

charge $10 of overhead ($100,000 ÷ 10,000) to work in

process for each direct labor hour worked. Actual overhead

should be entered into a separate account. Then, at the end of

the period, any difference between actual and applied overhead

should be closed out to the Cost of Goods Sold account.

Your textbook covers several different methods for applying

overhead costs. The one described in the previous paragraph

is known as the direct labor hour method. Other possible

activity bases include direct labor cost and machine hours.

It may also be preferable to identify several activities that

generate overhead and to use multiple predetermined over-

head rates based on these activities. This method is known

as activity-based costing (ABC). A brief, useful example of

this method is presented on pages 170–172 of your textbook.

Cost Accounting38

Lesson 1 39

Accounting for Actual andApplied Factory OverheadAs already mentioned, at the end of the period there will be an

amount of actual overhead incurred and an amount of over-

head that has been applied to jobs as they pass through work

in process. The final section of Chapter 4 (pages 172–181) goes

through the comparatively straightforward process of closing

any amount of underapplied or overapplied overhead to the

cost of goods sold account. Underapplied overhead is applied

overhead less than actual overhead; overapplied overhead

is applied overhead greater than actual overhead. The

difference between estimated and actual overhead may also

be prorated among work in process, finished goods inven-

tory, and cost of goods sold if it’s fairly large in amount.

In general, however, it’s easier to close it to cost of goods sold.




When you reach this point in your textbook reading,stop and complete Exercises E4-10 to E4-13 (pages191 and 192 in the textbook) and Problems P4-9 toP4-14 (pages 196–200). Also complete the ReviewProblem for Chapters 1–4 on pages 200–203, and theMini-Case on pages 203–204. Use the appropriateforms in the Study Guide/Working Papers booklet.Check your work with the solutions provided in theAnswer Key booklet.

When you reach this point in your textbook reading, stopand complete Exercises E4-7 to E4-9 (pages 190–191in the textbook) and Problems P4-6 to P4-8 (pages 195and 196). Use the appropriate forms in the StudyGuide/ Working Papers booklet. Check your work withthe solutions provided in the Answer Key booklet.

Cost Accounting

This concludes Lesson 1. When you’ve carefully reviewed all

the material in this lesson, including the problems, questions,

and exercises in the “Self-Checks,” take the examination for

Lesson 1 to determine your mastery of the topics.

You now have a basic understanding of the flow of costs

through a manufacturing firm and of the three important

types of production costs: materials, labor, and factory over-

head. In your studies, you read how these costs were applied

to various jobs on which the companies were working and

how they served to determine inventory levels and income for

the period. You’ll be using these concepts in the remaining

lessons to further your understanding of cost accounting.

40

Lesson 1 41

Self-Check 4


Terms_____ 1. Factory overhead _____ 8. Product costs

_____ 2. Outliers _____ 9. Variable costs

_____ 3. Step variable costs _____10. Period costs

_____ 4. Fixed costs _____11. Semivariable costs

_____ 5. Cost driver _____12. Direct charge

_____ 6. Applied factory overhead _____13. Flexible

_____ 7. High-low method _____14. Activity-based costing (ABC)

Definitions

a. All costs incurred in the factory that aren’t chargeable directly to the finished productb. Costs that remain constant over a range of production, then abruptly changec. A method that compares a high production volume and its related costs to a low

production volume with its related costsd. A budget that shows estimated costs at different production volumese. An expense that can be exactly measured and charged to a specific departmentf. A costing method that considers the non-volume-related activities that create

overhead costsg. The account credited when the estimated factory overhead is applied to productionh. Costs included as part of inventory costs and expensed when goods are soldi. Manufacturers’ costs that remain constant when production level increases

or decreasesj. Costs that have the characteristics of both variable and fixed costsk. The basis used to allocate each of the cost activity poolsl. All costs not assigned to the product, but recognized as expenses and charged

against revenue in the period incurredm. Nonrepresentative data points that may be wrongly selected when using the

high-low methodn. Costs that vary in direct proportion to volume changes

(Continued)

Cost Accounting42

Self-Check 4


1. Direct materials and direct labor are classified as _______ costs.

a. indirect c. variableb. period d. fixed

2. Which one of the following methods relies heavily on the ability of an observer to detecta pattern of cost behavior by reviewing past cost and volume data?

a. High-low method c. Scattergraph methodb. Observation method d. Cost method

3. Depreciation is what kind of cost?

a. Mixed c. Fixedb. Variable d. Semivariable

4. Cost analysis is more useful for decision making when all costs are segregated intowhich two categories?

a. Variable and fixed c. Direct and indirectb. Fixed and mixed d. Variable and semivariable

5. How does the special account, Under- and Overapplied Factory Overhead, accumulatedifferences?

a. Year to year c. Month to monthb. Quarter to quarter d. Week to week

6. The segregation of fixed and variable costs permits companies to prepare a _______ budget.

a. variable c. costb. monthly d. flexible

7. Which of the following is not an example of a typical factory overhead account?

a. Heat and Light c. Repairsb. Rent d. Payroll

(Continued)

Lesson 1 43

Self-Check 4

8. All factory overhead expenses incurred during the accounting period, both variable andfixed, are recorded on

a. factory overhead analysis spreadsheets. c. both a and b.b. the factory overhead control account. d. neither a nor b.

9. A _______ department performs the actual manufacturing operations that physicallychange units being processed.

a. service c. shippingb. production d. maintenance

10. The _______ method uses the amount of direct labor costs that has been charged to theproduct as the basis for applying factory overhead.

a. indirect labor cost c. indirect labor hourb. direct labor cost d. direct labor hour

Questions1. What is the difference between fixed, variable, and mixed costs?

2. Explain the difference between volume-related and non-volume-related overhead costs.

(Continued)

Cost Accounting44

Self-Check 4

Problems1. The Labrador Company has accumulated the following data during a period of

six months:

Direct Labor Hours Factory Overhead CostsJanuary 200 $ 5,000

February 350 6,000

March 400 7,000

April 550 8,000

May 700 9,000

June 850 10,000Total 3,050 $45,000

Using the high-low method, determine the variable component of overhead. Use thespace below to do your work.

2. Job MSM800 requires $10,000 of direct materials, $4,000 of direct labor, 600 directlabor hours, 300 machine hours, and one setup. Given the following information, deter-mine the cost of Job MSM800.

Cost Pool Overhead RateDirect labor usage $35/direct labor hourMachine usage $50/machine hourMachine setups $1,200/setup

Use the space below to do your calculations.

(Continued)

Lesson 1 45

Self-Check 4

3. Given the following information about Misty's Mittens Company, determine the total costfor each job.

Job Materials Direct Labor001 $ 600 $ 1,000002 1,065 $ 2,050003 3,200 $ 4,300004 1,375 $ 800

Assume factory overhead is applied on the basis of direct labor costs and the predeter-mined rate is 50%. Use the space below for your calculations.


NOTES

Cost Accounting46

47

Lesson 1Materials, Labor, and Factory Overhead

When you feel confident that you have mastered the material in Lesson 1, go to http://www.takeexamsonline.com and submityour answers online. If you don’t have access to the Internet, youcan phone in or mail in your exam. Submit your answers for thisexamination as soon as you complete it. Do not wait until anotherexamination is ready.

Questions 1–20: Select the one best answer to each question.

1. The form that serves as an authorization to withdraw materialsfrom stock is known as the

A. stores requisition.B. purchase order.C. purchase requisition.D. returned materials report.

2. Marlene works in a garment factory where she sews sideseams in dresses and skirts. She receives no hourly wage.Rather, she’s paid a fixed rate for each seam she sews. Thewage plan used by Marlene’s factory is called a _______ plan.

A. modified wage C. make-up guaranteeB. piece-rate D. hourly-rate

EXAMINATION NUMBER:

06164200Whichever method you use in submitting your exam

answers to the school, you must use the number above.

For the quickest test results, go to http://www.takeexamsonline.com

Ex

am

ina

tion

Ex

am

ina

tion

Examination, Lesson 1 48

3. When should process costing techniques be used in assigning costs to products?

A. In situations in which standard costing techniques should not be usedB. When production is only partially completed during the accounting periodC. When a company has a regular production of similar productsD. If the product is manufactured on the basis of each order received

4. Overapplied overhead always results when a predetermined overhead rate is employedand when

A. overhead incurred is more than overhead applied.B. overhead incurred is less than overhead applied.C. production is greater than sales.D. production is less than sales.

5. An employee regularly earns $10 an hour for an 8-hour day with time-and-a-half for overtimehours. Assuming that the employee works a 10-hour day, the total overtime premium is

A. $5. C. $15.B. $10. D. $30.

6. Rowe Co.’s Job 401 for the manufacture of 2,200 coats was completed during August atthe unit costs presented below. Final inspection of Job 401 disclosed 200 units that weresold to a jobber for $6,000.

Direct materials $24Direct labor 18Factory overhead

(includes an allowance of $2 for spoiled work) 16

$58

Assume that spoilage loss is charged to all production during August. What would be theunit cost of the good coats produced on Job 401?

A. $56.00 C. $60.80B. $58.00 D. $63.80

7. Which one of the following costs is considered a prime cost?

A. Wages paid to production workersB. Wages paid to supervisory workersC. Amount paid for insuranceD. Amount paid for rent


8. The Lucas Manufacturing Company has two production departments (fabrication andassembly) and three service departments (general factory administration, factory mainte-nance, and factory cafeteria). A summary of costs and other data for each department,prior to allocation of service department costs for the year ended June 30, appears below.

The costs of the general factory administration department, factory maintenance depart-ment, and factory cafeteria are allocated on the basis of direct labor hours, square footageoccupied, and number of employees, respectively.

Assuming that Lucas elects to distribute service department costs to production departments using the direct distribution method, calculate the amount of factory maintenance department costs that would be allocated to the fabrication department.(Round all final calculations to the nearest dollar.)

A. $14,674 C. $22,804B. $15,000 D. $27,000

9. If the amount of overtime premium is to be charged to all jobs worked on during the period,the debit will be to the _______ account.

A. Factory Overhead C. Work in ProcessB. Payroll D. Accrued Payroll

10. Of the following industries, which one would most likely use process costing?

A. Canned soup C. PrintingB. Home construction D. Shipbuilding

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Questions 11 and 12 are based on the following information.

The Bisset Corporation uses Raw Material A in a manufacturing process. The balances onhand, purchases, and requisitions of Raw Material A are given in the following table.

11. If Bisset maintains a perpetual inventory record of Raw Material A on a FIFO basis, whatwill be the year-end inventory?

A. $152 C. $162B. $159 D. $170

12. Assume that no perpetual inventory is maintained for Raw Material A and that quantitiesare obtained by an annual physical count. The accounting records show information as topurchases but not as to issues. On this assumption, the closing inventory on a LIFO basiswill be

A. $140. C. $156.B. $152. D. $160.

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13. Selected data concerning the past fiscal year’s operations of the Stanley ManufacturingCompany are presented below (000s omitted):

Based on this information, the cost of raw materials purchased during the year amounted to

A. $385. C. $400.B. $390. D. $430.

Use the following information to answer questions 14 and 15.

Carlos Company reported the following data for a six-month period:

Month Maintenance Cost for the Month Units ProducedJanuary $3,500 400February 3,000 300March 3,750 500April 3,400 350May 2,500 200June 3,800 450

Plot this information onto the graph in Examination Figure 1, and then answerquestions 14 and 15.

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14. What is the estimate of the fixed cost portion of the semivariable cost?

A. $1,000 C. $2,000B. $1,500 D. $2,500

15. What is the variable cost per unit at a volume level of 400?

A. $2.00 C. $5.00B. $3.75 D. $8.75

16. The Eleanor Company payroll for the first week in January was $12,000. The amount ofincome tax withheld was 12 percent and the FICA, state unemployment, and federal un-employment taxes were 8 percent, 5 percent, and 1 percent, respectively. The amount ofthe employer’s payroll taxes are

A. $720. C. $1,680.B. $1,440. D. $3,120.

17. When using a flexible budget, what will occur to fixed costs (on a per-unit basis) as pro-duction increases?

A. Fixed costs per unit will increase.B. Fixed costs aren’t considered in flexible budgeting.C. Fixed costs per unit will remain unchanged.D. Fixed costs per unit will decrease.

EXAMINATION FIGURE 1


18. How should a shipment of completed goods to the customer be debited and credited?

A. Debited to Finished Goods and credited to Cost of Goods SoldB. Debited to Cost of Goods Sold and credited to Finished GoodsC. Debited to Accounts Payable and credited to CashD. Debited to Cash and credited to Accounts Payable

19. An accrued expense, such as accrued wages, is an amount that’s

A. paid and not currently matched with earnings.B. not paid and not currently matched with earnings.C. not paid and currently matched with earnings.D. paid and currently matched with earnings.

20. Inventory levels for firms using JIT inventory systems will be

A. higher both for work in process and finished goods.B. higher for work in process and finished goods but lower for raw materials.C. lower for raw materials, work in process, and finished goods.D. higher for finished goods but lower for raw materials and work in process.


NOTES

Process Cost AccountingLesson 2 encompasses Chapters 5 and 6 in your textbook.

These chapters take what you’ve learned in Chapters 1–4 and

extend that knowledge to manufacturing firms that

produce many units of similar products. Accounting for the

manufacturing costs of such firms is somewhat detailed in

nature, but is no more conceptually challenging than what

you’ve just been through in Lesson 1. As you study these

chapters, focus on understanding why the firm is doing what

it’s doing. In that way, you should be able to follow the

calculations in the problems.

ASSIGNMENT 5: PROCESS COST ACCOUNTING—GENERALPROCEDURESRead this assignment. Then read pages 207–235 in your textbook.

Comparison of Basic Cost SystemsWhen a firm manufactures the same basic thing over and

over again, it doesn’t need a job order costing system. In a

sense, all the jobs are the same. In such a situation, it’s not

important to know the cost of specific individual items. When

a soda manufacturer makes thousands of cans of soda in a

given day, it’s neither necessary nor at all practical to deter-

mine the cost of the first or the last can of soda produced in a

given day. Instead, all the manufacturer needs to know is the

average cost per can for a given period. A process cost system

enables a firm to keep track of such things with less cumber-

some detail than is required by a job order costing system.

In a process cost system, materials labor, and overhead are

charged to production processes as goods are worked on.

Overhead is applied with a predetermined overhead rate, and

under- or overapplied overhead is disposed of in the way you

learned in Chapter 4.

55

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2

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Product Cost in a Process Cost System

In a process cost system, the cost of individual units of product

isn’t determined. Instead, the average cost per unit for a

given period of time is computed. If there are no beginning or

ending inventories of work in process, then the calculation is

comparatively straightforward:

Total costs ÷ Total units produced = Unit cost for the period

When units in work in process exist at the beginning

and/or ending of the period, complicating issues arise in

the determination of unit costs.

Work in Process Inventories

If work in process inventories exist, then management must

make assumptions about the amount of work necessary to

complete them. The two methods by which costs are tradition-

ally assigned in a process costing system are the average

cost method and the first-in, first-out (FIFO) method. Chapter 5

covers the average cost method, and Chapter 6 looks at the

FIFO method.

Once you understand the nature of a firm’s production

process and the cost flow assumption it wishes to make

(FIFO vs. average cost), then calculation of equivalent units

and unit costs is straightforward.

Average cost takes the costs of the work in process at the

beginning of a period and adds to them the costs incurred

during the period. The result is divided by the equivalent

units of production for the period. Equivalent units under

average cost include the units completed during the period,

plus the units in process, multiplied by the percentage of

work completed on the units in process. As a formula, this

process looks like this:

Units completed during a period + (Units in process �

Percentage of work completed on units in process)

Cost Accounting56

Suppose a firm completed 10,000 units during a period.

At the same time, it had 4,000 units in its ending inventory

that were 40% complete. Apply the formula to this situation

as follows:

10,000 + (4,000 � .40) = 10,000 + 1,600 = 11,600

equivalent full units of production for the period

Cost of Production Summary

The remainder of Chapter 5 presents four different examples

of average costing. You should work through each of these

examples to familiarize yourself with the mechanics of the

process. After you study each example, complete the exercises

and problems as listed below. Use the appropriate forms in

the Study Guide/Working Papers booklet. Check your work

with the solutions provided in the Answer Key booklet.

■ A single production department that doesn’t have

beginning inventories

■ A single production department that does have beginning

inventories (Exercises E5-1 to E5-6 on pages 240–241;

Problems P5-1 and P5-2 on page 243)

■ A firm with multiple departments that doesn’t have

beginning inventories (Exercises E5-7 and E5-8 on

pages 241–242; Problems P5-3 and P5-4 on pages

244–245)

■ A firm with multiple departments that does have

beginning inventories (Exercises E5-9 and E5-10 on

page 242; Problems P5-5 to P5-7 on pages 245–246)




Lesson 2 57

Cost Accounting58

Self-Check 5


Terms_____ 1. Process cost system _____ 5. Transferred-in costs

_____ 2. Average cost method _____ 6. Units from prior department

_____ 3. Equivalent production _____ 7. Stage of completion

_____ 4. Cost of production summary

Definitions

a. The number of units that could have been completed during a period; determined byusing the total production costs for the period

b. The portion of a department’s total costs that were incurred by and transferred in from a prior department

c. Units that have been completed as to the transferor department and raw materials asto the transferee department

d. A method or system of cost accounting that’s appropriate for manufacturing operationsthat produce continuous output of homogenous products

e. The fraction or percentage of materials, labor, and overhead costs of a completed unitthat has been applied during the period to goods that haven’t been completed

f. A commonly used procedure for assigning costs to the ending inventories under aprocess cost accounting system. Under this method, ending inventories are valued withthis formula:(Cost of beginning work in process + Current period production costs) ÷

Total equivalent production for the periodg. A report that summarizes production costs for a period for each department and

provides the information necessary for inventory valuation

(Continued)

Lesson 2 59

Self-Check 5

Problems1. MSM Company uses a process cost system and average costing. The following data are

available for a recent month:

On a separate sheet of paper, prepare a cost of production summary for the month.

(Continued)

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robaL 000,54

daehrevO 000,92 000,451

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Cost Accounting60

Self-Check 5

2. Daisy Corporation makes electronic window warmers and uses weighted-average process costing. It adds materials at the beginning of the production process. There was no beginning inventory of finished goods, and the ending inventory is 50% complete as to labor and overhead. A review of the inventory cost records shows the following information:

On a separate sheet of paper, prepare the following schedules as of December 31 of the current year:

a. Equivalent units of production using the weighted-average methodb. Unit costs of production of materials and conversionc. Cost of the finished goods inventory and work in process inventory


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ASSIGNMENT 6: PROCESSCOSTING—ADDITIONALPROCEDURESRead this assignment. Then read pages 249–274 in the textbook.

Chapter 6 introduces two process cost topics that weren’t

covered in Chapter 5:

1. The idea that materials, labor, and overhead may not

be evenly added during the production process

2. The first-in, first-out method of assigning costs to

finished goods and work in process inventories

Equivalent Production—Materials Not Uniformly Applied

Certain inputs to the production process may not be applied

at the same rate as other inputs. For example, all of the

materials could be added at the start of the process, but

the units may be only half completed with respect to labor

and overhead. In such a case, equivalent units need to be

computed separately for materials and for labor/overhead.

These calculations are basically the same as those used in

Chapter 5 for determining unit costs. There are just more

details involved. Your textbook presents three problems to

illustrate this concept with numerical examples.

Lesson 2 61

When you reach this point in your textbook reading,stop and complete Exercises E6-1 to E6-6 (pages 280–283in the textbook) and Problems P6-1 to P6-4 (pages 286–288).Use the appropriate forms in the Study Guide/WorkingPapers booklet. Check your work with the solutions provided in the Answer Key booklet.

Units Lost/Gained in Production

Manufacturers expect to experience a normal loss or spoilage

during production. If losses exceed these expectations, then

they’re treated as a separate expense item on the income

statement. Should the production process be such that

total units are increased as they move through production

(the text gives a detergent example on pages 260–261),

then unit costs are reduced on the newly increased level

of production.

Equivalent Production—First-in, First-out Method

Chapter 5 covered process costing from an average costing

perspective. Another method commonly used is the first-in,

first-out, or FIFO, method. Determining unit costs with the

FIFO method is slightly different than it is for average cost-

ing. First, with FIFO, only current period costs are used in

the numerator of the unit cost calculation. Second, the

denominator also has a difference in its calculation: the

amount of work necessary to complete the units in beginning

inventory work in process is treated separately from those

units that are started and completed during the period. The

total of these two is then added to the equivalent units in

ending inventory of work in process. The text provides a

couple of illustrative examples with numerical analysis.

Cost Accounting62

When you reach this point in your textbook reading, stop and complete Exercises E6-7 to E6-10 (pages 283–285 in thetextbook) and Problems P6-5 to P6-8 (pages 288–289). Usethe appropriate forms in the Study Guide/ Working Papersbooklet. Check your work with the solutions provided in theAnswer Key booklet.

Joint Products and By-Products

A production process may sometimes create not only those

products that a company intends to make, but also by-

products that may have some resale value but are generally

of little value. For proper product costing purposes, some of

the joint cost involved in the overall production process must

be allocated to the principal products and to any by-products

that will be sold. Remember, as long as the revenue to be

gained from the sale of a by-product exceeds any additional

costs of processing it further, then it should be processed

and sold, even if the joint cost allocated to it makes it appear

as if the by-product isn’t profitable.




This concludes Lesson 2. Both chapter that you studied in

this lesson presented the same topic: process costing. Once

you understand the nature of the firm’s production process

and the cost flow assumption it wishes to make (FIFO vs.

weighted-average), then calculation of equivalent units and

unit costs is straightforward.

Lesson 2 63

When you reach this point in your textbook reading, stopand complete Exercises E6-11 to E6-14 (pages 285–286 inthe textbook) and Problems P6-10 to P6-11 (pages 290 and291). Use the appropriate forms in the Study Guide/WorkingPapers booklet. Check your work with the solutions providedin the Answer Key booklet.

Cost Accounting64

Self-Check 6


Terms_____ 1. By-products

_____ 2. Normal losses

_____ 3. Relative sales value

_____ 4. Joint costs

_____ 5. Joint products

_____ 6. First-in, first-out (FIFO) method

_____ 7. Split-off point

Definitions

a. Units lost due to the nature of the manufacturing processb. The point at which joint products become separately identifiablec. Two or more products that are obtained from the same manufacturing process and are

the primary objectives of the processd. An inventory costing method based on the assumption that materials issued are taken

from the oldest materials in stocke. The costs of materials, labor, and overhead incurred during the production of joint

productsf. A basis for allocating joint costs proportionally based on the respective selling prices

of the separate productsg. Secondary products with relatively little value, which are obtained in the process of

manufacturing a primary product

(Continued)

Lesson 2 65

Self-Check 6

Problems1. Kevin, Inc. started a new production process in a recent month. During that month,

18,000 units were started in Department One. Of the units started, 1,000 were lostin the production process; 12,000 were transferred to Department Two; and 5,000remained in work in process at the end of the month. The work in process at the end of the month was 100% completed regarding materials and 60% complete regarding conversion costs. Material costs of $80,000 and conversion costs of $45,000 werecharged to Department One during the month. What were the total costs transferred to Department Two?

Use the space below to perform your calculations.

2. Susan Company manufactures three different products, M, N and O, from a jointprocess. Additional information available on the production is as follows:

Product M Product N Product O TotalUnits produced 10,000 5,000 3,000 18,000Joint costs $100,000 ? ? $180,000Sales value at split-off ? ? $40,000 $240,000

Assuming that joint costs are allocated using the relative sales value at split-offapproach, what was the sales value at split-off for product M?

Use the space below to perform your calculations.


NOTES

Cost Accounting66

67

Lesson 2Process Cost Accounting

You can’t use Exam Express, the Internet, or Tel-Test for thisexam. Use the answer sheet provided after the exam. When youcomplete the examination, cut out the answer sheet and mail itwith your work in the envelope provided to

Penn FosterStudent Service Center925 Oak StreetScranton, PA 18515

Type or neatly write your answers to the following questions andexercises. Read your work over carefully. When you’re satisfiedwith your work, remove the answer sheet for this examination andattach your work to it. Please be sure to include your calculations.Mail your work and the answer sheet to the school in one of theenvelopes provided. Keep a copy of your work for your own records.

EXAMINATION NUMBER:

06164300

Ex

am

ina

tion

Ex

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tionThe Penn Foster

Student Service Center is under contract withPenn Foster College.

Examination, Lesson 268

1. A plant that uses process costing has 8,000 units in beginning work in process, 15,000more started, and 5,000 units in the ending work in process. Using this information, answerthe following questions on a separate sheet of paper. Label each answer carefully andshow all of your work. (Each answer is worth 3 points.)

a. How many units are there to account for?b. How many units are transferred using the average cost method?c. How many units are transferred using the first-in, first-out method?d. How many units were both started and completed during the period?

2. The Spangle Company uses the process cost system and average costing. The followingprediction data are for the month of July:

Use the form at the end of this examination to prepare a cost of production summary forthe month. (This problem is worth 15 points.)

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slairetaM 005,2$

robaL 002,1

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slairetaM 005,31$

robaL 002,9

daehrevoyrotcaF 005,8 002,13

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3. The following data is for a production company:

Beginning inventory 1,000 units, three-fourths completedFinished and transferred 16,000 unitsWork in process, end of month 2,000 units, one-half completed

Assume that materials, labor, and factory overhead are added evenly throughout the process.On a separate sheet of paper, complete the following problems. Label each answer care-fully and show all your work.

a. Using the average cost method, compute the equivalent production.b. Using the first-in, first-out method, compute the equivalent production.c. During the month, Department B received 10,000 units from Department A with a unit

cost of $10; 2,000 of these units were lost during production in Department B.Determine the adjusted cost of these units.

d. During the month, Department 2 received 8,000 from Department 1 with a unit cost of$15. Department 2 added materials that increased the number of units by 50%.Determine the adjusted cost of these units.(Each answer is worth 5 points.)

4. Complete Problem P5-9 on pages 246–247 in your textbook. Use the forms provided in theStudy Guide/Working Papers booklet on pages WP-161 to WP-170. (This problem is worth 20 points.)

5. Complete Problem P6-9 on page 290 in your textbook. Use the forms provided in theStudy Guide/Working Papers booklet on pages WP-201 to WP-204. (This problem is worth 15 points.)

6. Complete the Chapter 6 Mini-Case, Parts 1 and 2, on pages 291–292 in your textbook.Use a separate sheet of paper. Label each answer and show all of your work.(This problem is worth 18 points.)


NOTES

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Budgeting; Standard CostAccountingChapter 7 introduces budgeting, which is the process

companies use to set goals and measure progress toward

achieving them. You’ll study and prepare master and flexible

budgets. Assignment 8 presents a discussion of standard

costing, and accounting for the differences between standard

costs and actual costs.

ASSIGNMENT 7: THE MASTERBUDGET AND FLEXIBLE BUDGETINGRead this assignment. Then read pages 293–314 in your textbook.

Principles of Budgeting

In general, people like to have an idea of how events will turn

out. They do this so they’re not surprised by things when they

happen and so they can compare what happened against

their expectations. Businesses are run in much the same way.

They need to know how busy they’re apt to be so they can

adequately plan to make sure they’ll have the necessary

labor, materials, and overhead to produce the goods needed

to meet sales.

Preparing the Master Budget

A master budget is a compilation of a number of individual

budgets, as listed on page 295 of your textbook.

A sales budget outlines expected sales in both units and

dollars. Therefore, it’s a critical component of the budgeting

process as well as the starting point of the budgeting process.

Firms need to know how busy they’re likely to be so they can

plan selling and administrative expenses and the expected

pattern of cash collections and cash disbursements that

75

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they’ll make over a period. Doing so will ensure that they

don’t run out of, or maintain excessive levels of, cash. Once

all of these items have been determined, the company can

prepare a pro-forma (as if) income statement and balance

sheet. Figure 7-2 on page 296 captures a good deal of this

in one helpful diagram.

A production budget is a plan for producing the number of

units to meet the levels predicted in the sales budget. For

production budgets, the key point is to have an amount on

hand equal to the current month’s sales, plus some at the

end of the month to cover a portion of next month’s sales.

This figure is the total amount a firm needs to have avail-

able. When you subtract the amount on hand at the begin-

ning of the month, the result is the amount needed to be

produced. The company can then use these budgets to deter-

mine its budgets for direct labor, overhead, and expenses.

Flexible Budgeting

To evaluate its performance, a firm must compare actual

results with budgeted amounts. However, before a firm can

make such a comparison, it should adjust its budgeted level

of activity to the actual level. For example, suppose a company

expected to be at a sales level of 10,000 units and made its

budget plans accordingly. The company actually sells 12,000

units. To compare the numbers for 10,000 units of expected

activity with those for 12,000 units of actual activity won’t be

very useful. Revenue will be higher than expected.

Cost Accounting76

When you reach this point in your textbook reading, stop and complete Exercises E7-1 to E7-5 (pages 320–321 in the textbook) and Problems P7-2 and P7-3 (pages 323–324).Use the appropriate forms in the Study Guide/ WorkingPapers booklet. Check your work with the solutions providedin the Answer Key booklet.

Lesson 3

To provide for meaningful analysis, the company must make

its budget flexible—that is, it must adjust the budget upward

to the revenue and costs that would have been expected had

the company known in advance it was going to produce

12,000 units.

Preparing the Flexible Budget forFactory Overhead

Factory overhead is applied to work in process using differ-

ent bases, such as direct labor hours, direct labor costs, or

machine hours. For instance, if direct labor hours are used,

overhead is applied based on the standard number of direct

labor hours allowed for the current actual production.

After receiving the report on the actual volume for a period,

the company can determine what the factory overhead costs

should have been at that volume and compare these costs

with actual costs to determine variances. You’ll learn more

about variances in Assignment 8.




77

When you reach this point in your textbook reading, stopand complete Exercises E7-6 to E7-8 (pages 321–322 in the textbook) and Problem P7-4 (pages 324–325). Alsocomplete the Mini-Case on page 327 of your text and the Internet Exercise on pages 327–328. Use the appropriate forms in the Study Guide/Working Papersbooklet. Check your work with the solutions provided in the Answer Key booklet.

When you reach this point in your textbook reading, stopand complete Exercises E7-9 and E7-10 (page 322 in thetextbook) and Problems P7-6 and P7-7 (pages 325–326).

Cost Accounting78

Self-Check 7

VocabularyFill in the blanks with the word or phrase that correctly completes the statements.

1. _______ costs are those that tend to remain the same in dollar amount through a widerange of activity.

2. A/An _______ is a planning device that helps a company set goals and serves as agauge against which actual results can be measured.

3. A/An _______ budget projects the volume of sales in both units and dollars.

4. A/An _______ budget consists of the estimated individual factory overhead items needed to meet production requirements.

5. A/An _______ budget shows the anticipated flow of cash and the timing of receipts and disbursements based on projected revenue, the production schedule, and expenses.

6. A/An _______ budget influences the cash budget by showing when cash can be expectedfrom the turnover of inventory and receivables.

7. _______ costs don’t change as production changes over a given range.

8. _______ costs include direct labor, indirect labor, and maintenance costs.

9. _______ capacity is the level of production that will meet the normal requirements ofordinary sales demand over a period of time.

10. _______ costs may change with production, but not necessarily in direct proportion.

(Continued)

Lesson 3 79

Self-Check 7


1. Which type of budget is prepared for a single level of volume based on management’sbest estimate of the level of production and sales for the coming period?

a. Sales c. Direct materialsb. Master d. Production

2. Which of the following items would have the likelihood of being able to be predicted in acollege’s budget?

a. Faculty salariesb. Computer resource center chargesc. Dining room revenued. Parking fines revenue

3. To ensure that materials are purchased as closely as possible to when they’ll be placedinto production, there should be a close coordination between which two functions?

a. Purchasing and production c. Ordering and productionb. Ordering and purchasing d. Purchasing and sales

4. After a company has determined its level of activity for sales, it can prepare which typeof budget?

a. Cost of goods sold c. Cashb. Selling and administrative d. Direct Materials

5. Which of the following items is likely to have a low degree of predictability for a college?

a. Faculty salaries c. Dining room revenueb. Computer center charges d. Parking fines revenue

(Continued)

Cost Accounting80

Self-Check 7


_____ 1. One of the requirements of the general principles of budgeting is that management must clearly define its objectives.

_____ 2. In preparing a budget, management must consider only some of the items of income and expenses.

_____ 3. Sales budgets project the volume of sales in either units or dollars.

_____ 4. The usual starting point in the budgeting process is a sales budget.

_____ 5. The format of the direct materials budget is very similar to the production budget.

_____ 6. The cost of goods sold budget may be prepared before the completion of the direct materials, direct labor, and factory overhead budgets.

_____ 7. An accounts receivable budget reflects how the company’s cash position will be affected by paying its debts.

_____ 8. Fixed costs include direct materials and direct labor.

_____ 9. Estimated beginning work in process inventories must be included in the computation of cost of goods sold when completing that budget.

_____10. Only fixed costs influence the flexible budget.

(Continued)

Lesson 3 81

Self-Check 7

Problems1. The sales department of Ruffo Manufacturing Company has forecast sales for its single

product to be 50,000 units for the month of September. The budgeted selling price is$45 per unit. The desired ending inventory for September 30 is 5,000 units. Theexpected beginning inventory is 3,500 units.

Prepare a sales budget and a production budget for September.

2. Complete the Mini-Case on pages 303–304 of your text.


Cost Accounting

ASSIGNMENT 8: STANDARD COSTACCOUNTING—MATERIALS ANDLABORRead this assignment. Then read pages 329–363 in your textbook.

A business must be able to control its costs. This is particularly

so for a manufacturing firm that might be making the same

thing(s) over and over again. Even a small increase in the bud-

geted per-unit materials or labor costs can have a significant

impact on income when these increases are multiplied by

the number of units produced in a period.

To provide for simplicity in recording costs and to better

highlight and isolate differences between expected and actual

costs, many firms employ a standard cost accounting system. In

such a system, all costs entered into the materials inventory

and work in process inventory accounts are recorded at their

standard, or expected, costs. Differences between expected

and actual costs are highlighted as variances, which can then

be meaningfully analyzed for managerial action. This process

is known as management by exception.

Types of Standards

A firm can set its standard, or expected, costs in two different

ways: ideal or attainable. Ideal standards represent the

amount of input (materials or labor) that it would take to

make a unit of finished product under optimal conditions.

This means that materials have as few defects as possible

and that nothing goes wrong in the manufacturing process.

For direct labor, the term optimal conditions implies that

workers arrive on time, work each minute that they’re on

the clock, and produce at a consistently high level at all times.

Not surprisingly, ideal standards will rarely, if ever, exist in

practice. Therefore, all variances between actual and standard

costs are considered unfavorable.

82

Ideal standards may provide a glimpse into what could be,

but they have a potential for creating motivational problems

for employees who may tire of being considered unfavorable

in their performance.

More useful results are generally obtained with attainable

standards. Such standards represent a level of expected

performance that includes some material waste and nonpro-

ductive labor time. As long as such standards are monitored

so they remain meaningful, then they’re more likely than

ideal standards to provide good cost control and to motivate

employees to do their best.

Standard Cost ProceduresStandard costs per unit must be developed for both direct

materials and direct labor. To do this, a business must deter-

mine standard, or expected, quantities of materials per unit,

as well as the standard price to be paid for each unit at this

quantity. For example, suppose a company determines that a

given product should use 2 pounds of a given raw material

and that this material should cost the firm $4 a pound. In

this case, the materials cost standard for a unit of product is

$8 (2 � $4). Labor cost standards are determined in a simi-

lar fashion. The standard amount of time it should take to

make a finished unit is multiplied by the expected wage rate

per hour to produce the standard direct labor cost per unit.

Determination of Variances

As your textbook notes, a variance is the difference between

actual and expected costs. Such variances may arise from

differences in the quantity of materials or labor used, from

the prices paid for the materials or labor, or as is more likely,

from a combination of the two. If these variances are to be of

value in controlling costs, they should be broken down into

the following components:

1. Materials price variance represents the difference

between the actual price (AP) paid per input of materials

and the standard price (SP) that should have been paid,

Lesson 3 83

multiplied by the actual quantity (AQ) of materials used.

Materials price variance is represented by the following

formula:

Materials price variance = (AP – SP) � AQ

2. Materials quantity (usage) variance represents the

difference between the actual quantity (AQ) of material

input and the standard quantity (SQ) that should have

been used given the actual level of output, multiplied by

the standard price (SP) that should have been paid per

input. Materials quantity variance is represented by the

following formula:

Materials quantity variance = (AQ – SQ) � SP

3. Labor price variance represents the difference between the

actual price (AP) paid per input of labor and the standard

price (SP) that should have been paid, multiplied by the

actual quantity (AQ) of labor hours worked. Labor price

variance is represented by the following formula:

Labor price variance = (AP – SP) � AQ

4. Labor efficiency (usage) variance represents the differ-

ence between the actual quantity (AQ) of labor input

that was used and the standard quantity (SQ) that

should have been used given the actual level of output,

multiplied by the standard price (SP) that should have

been paid per input. Labor efficiency variance is repre-

sented by the following formula:

Labor efficiency variance = (AQ – SQ) � SP

If you look carefully at the four formulas just given, you’ll

notice that the formulas for materials price variance and labor

price variance (1 and 3) are the same. Also, the formulas for

materials quantity variance and labor efficiency variance

(2 and 4) are the same.

If the difference between actual and expected indicates that

the company has incurred a higher dollar cost than expected,

then the resulting variance is termed unfavorable. Conversely,

if the difference between actual and expected indicates that

the company has incurred a lower dollar cost than expected,

then the resulting variance is termed favorable.

Cost Accounting84

Accounting for Variances

When variances occur, journal entries must be prepared

to record and dispose of these amounts. Page 338 in your

textbook provides examples for preparing such entries.

The materials price variance may also be calculated by using

the actual quantity of materials purchased in place of the

actual quantity of materials used. Calculating the variance in

this way may be more meaningful, as this variance is typically

used to evaluate the performance of the person in charge of

the purchasing function. Thus, any variance between the

price paid and the price that should have been paid is imme-

diately measured at its full dollar impact once the goods are

acquired.

At the end of the accounting period, variances are typically

closed out to cost of goods sold in the same manner as that

described for under- or overapplied overhead in Chapter 4.

The variances may be prorated out according to ending bal-

ances in work in process, finished goods, and cost of goods

sold. However, prorating is generally done only if the ending

balances in these inventory accounts are unduly large.

Analyses of Variances

So what do these variances mean? First, make certain that

you carefully interpret terms like favorable and unfavorable.

The terms simply mean that a cost is lower or higher than

expected. For example, consider a materials price variance.

One way to ensure a favorable variance would be to buy

inferior-grade materials at a lower price than standard.

Technically, this approach would be termed a favorable

Lesson 3 85

When you reach this point in your textbook reading,stop and complete Exercises E8-1 to E8-5 (parts aand b) (pages 370–371 in the textbook) and ExercisesE8-6 to E8-9 (pages 371–373 in the textbook). Alsocomplete Problems P8-1 and P8-2 (pages 376–377 inthe textbook). Use the appropriate forms in the StudyGuide/Working Papers booklet. Check your work withthe solutions provided in the Answer Key booklet.

variance, because the AP would be less than the SP for

materials. But consider the ultimate likely impact of this

purchasing decision. Inferior materials may result in more

waste than normal, which leads to an unfavorable material

usage variance. Labor will also be affected, since it will take

workers longer than normal to produce finished units of

acceptable quality. Thus, the labor efficiency variance may

also be unfavorable.

Another important consideration is to make certain that the

standards being used reflect the levels of performance that

management would like to see reached. In addition, standards

should reflect current business conditions. For example,

changes in the labor market may make standard prices per

hour for direct labor obsolete. Thus, any variances resulting

from the use of this standard become meaningless. Similarly,

changes in the market for material prices or changes in

production technologies affecting the rate at which products

can be made must also be reflected in updated standards.

Ultimately, a company should strive to maintain standards

that are sometimes lower than employee performance and

sometimes higher than employee performance.

Features of Standard Cost Accounting

Study the features outlined on pages 344 and 345 of your

textbook. Then carefully follow the standard costs example

that begins on page 345.

Cost Accounting86

When you reach this point in your textbook reading,stop and complete Exercises E8-1 to E8-5 (parts cand d) (pages 370–371 in the textbook) and ExercisesE8-10 to E8-13 (pages 373–374 in the textbook). Alsocomplete Problems P8-3 to P8-9 (pages 377–381 inthe textbook), and the Mini-Case on pages 389–390.Use the appropriate forms in the Study Guide/WorkingPapers booklet. Check your work with the solutionsprovided in the Answer Key booklet.

Analysis of Factory OverheadStandard Cost Variances

Just as standard costs were developed for direct materials and

direct labor, they can also be developed for factory overhead.

A firm would first determine what its expected overhead

costs will be for a normal level of production; then it would

develop an activity base, such as direct labor hours, and apply

standard overhead based on this. Your textbook presents

an example of this process on page 352. Notice that this

example is no different conceptually than the idea of a pre-

determined overhead rate developed earlier in the course.

Two-Variance Method of Analysis

What would cause an overhead variance? Your text presents

the two-variance method of overhead variance analysis

(pages 353–358). Other approaches are treated in the

appendix to the chapter, starting on page 358.

The controllable variance in the two-variance method com-

pares the actual factory overhead with the standard amount

of overhead allowed for the actual level of production that was

attained. In general, differences here tend to result from

variable overhead costs, because fixed costs don’t tend to

change with increases or decreases in activity levels. The

volume variance results from differences between the stan-

dard amount of overhead allowed for the actual level of pro-

duction and the amount of factory overhead applied to work in

process for the period.

Activity greater than expected results in a favorable variance,

because more production was obtained from elements of

fixed overhead than was expected. Conversely, activity less

than expected results in an unfavorable variance. The sum

of the controllable variance and the volume variance equals

the total amount of under- or overapplied overhead for the

period. The diagrams that summarize the text examples on

page 357 show this relationship.

Lesson 3 87

Appendix: Four-Variance and Three-Variance Methods of Analysis

The final section of Chapter 8 introduces you to two variations

of the two-variance method of analysis. The main difference

between the three methods is in the way they recognize the

overhead costs. The four-variance method identifies two

variable cost variances and two fixed cost variances. The three-

variance method divides the overhead into budget, capacity,

and efficiency.

Your textbook provides practical examples for each of the

methods of analysis.




This concludes Lesson 3. Only one more lesson and you’ll

have completed your study of cost accounting! Review your

notes carefully and make sure you understand the concepts

and problems in both the text and the study guide before

you take the examination for Lesson 3. The examination

requires you to calculate and interpret spending and efficiency

variances for materials and labor and also the overhead

variances from Chapter 8.

Cost Accounting88

When you reach this point in your textbook reading, stopand complete Exercises E8-14 to E8-17 (pages 374–375) inthe textbook) and Problems P8-10 to P8-13 (pages 381–385).Use the appropriate forms in the Study Guide/WorkingPapers booklet. Check your work with the solutions providedin the Answer Key booklet.

When you reach this point in your textbook reading, stopand complete Exercises E8-18 and E8-19 (pages 375–376 inthe textbook) and Problems P8-14 to P8-19 (pages 385–388).Use the appropriate forms in the Study Guide/WorkingPapers booklet. Check your work with the solutions providedin the Answer Key booklet.

Lesson 3 89

Self-Check 8


Terms_____ 1. Labor cost standard _____ 6. Materials cost standard

_____ 2. Ideal standard _____ 7. Standard

_____ 3. Usage _____ 8. Favorable variance

_____ 4. Variance _____ 9. Unfavorable variance

_____ 5. Price _____10. Labor rate variance

Definitions

a. The difference between the actual and the standard costs of materials, labor, and overhead

b. Quantity of materials used or number of labor hours workedc. A variance indicated by a debit balance in a variance accountd. A norm against which actual performance can be measured and comparede. Cost of materials and wage ratesf. A standard based on the quantity of materials required for a unit of product and

the unit cost to purchase the materials usedg. The average of actual hourly rates paid above or below the standard hourly rate,

multiplied by the actual number of hours workedh. A standard based on estimates of the labor hours required to produce a unit of

product and the cost of labor per uniti. Standards set to the maximum degree of efficiencyj. A variance indicated by a credit balance in a variance account

(Continued)

Cost Accounting90

Self-Check 8


_____ 1. The purpose of standard cost accounting is to control costs and promote efficiency.

_____ 2. The work in process account is always debited with the standard cost.

_____ 3. The two components investigated in analyzing materials and labor variances are quantity and price.

_____ 4. The accounting department doesn’t usually become involved in determining standards.

_____ 5. Variances must be included in the financial statements.

QuestionsAnswer each of the following questions in the spaces provided.

1. Describe the different approaches that may be used in determining standard costs.

2. Is a favorable variance a good or a bad sign? Explain.

(Continued)

Lesson 3 91

Self-Check 8

Problems1. Bill’s House Painting has recently received a new job to paint four houses on a newly

developed street. Each house takes 20 hours to paint, and 5 painters were paid $15an hour each to paint. Each job uses 10 gallons of paint, which costs $20 per gallon.

A previous job similar to this one has data as follows:

5 men worked a total of 389 hours and were paid $17.00 per hour $ 6,61338 gallons of paint were used and cost $18.50 per gallon 703Total cost of the job $ 7,316

Compute the materials price and quantity variances.

2. J&T Corporation has established the following standard costs per unit:

Materials (6 pounds @ $3.15 per pound) $18.90Labor (2 hours @ $8.50 per hour) 17.00

The company budgeted 15,000 units, but only 10,000 were produced. The purchasingdepartment bought 80,000 pounds at a total cost of $248,000. Actual pounds of materialsused were 73,420. Direct labor costs were $187,320 for 22,300 hours worked.

Make the journal entries to record the materials transactions.

Make the journal entries to record labor variance.


NOTES

Cost Accounting92

93

Lesson 3Budgeting; Standard Cost Accounting

When you feel confident that you have mastered the material in Lesson 3, go to http://www.takeexamsonline.com and submityour answers online. If you don’t have access to the Internet, youcan phone in or mail in your exam. Submit your answers for thisexamination as soon as you complete it. Do not wait until anotherexamination is ready.

Questions 1–20: Select the one best answer to each question.

1. The purpose of a flexible budget is to

A. allow management some latitude in meeting goals.B. eliminate cyclical fluctuations in production reports by ignoring

variable costs.C. compare actual and budgeted results at virtually every level

of production.D. reduce the total time in preparing the annual budget.

2. Woodside Company manufactures tables with vinyl tops. The standard material cost for the vinyl used per Style R table is $7.20 based on 8 square feet of vinyl at a cost of $.90 per square foot. A production run of 1,000 tables inJanuary resulted in usage of 8,300 square feet of vinyl ata cost of $.85 per square foot, a total cost of $7,055. The quantity variance resulting from this production run was

A. $255 favorable. C. $270 favorable.B. $255 unfavorable. D. $270 unfavorable.

EXAMINATION NUMBER:

06164400Whichever method you use in submitting your exam

answers to the school, you must use the number above.

For the quickest test results, go to http://www.takeexamsonline.com

Ex

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Ex

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3. RHO Company, which began its operations on January 1, produces a single product thatsells for $10.25 per unit. Standard capacity is 80,000 units per year. This year, 80,000 unitswere produced and 70,000 units were sold.

Manufacturing costs and selling and administrative expenses follow:

Fixed costs Variable costsRaw materials — $2.00 per unit producedDirect labor — $1.50 per unit producedFactory overhead $120,000 1.00 per unit producedSelling and administrative 80,000 0.50 per unit sold

What is the standard cost of manufacturing a unit of product?

A. $4.50 C. $5.50B. $5.00 D. $6.00

4. Which one of the following items is ignored when establishing an ideal standard?

A. Cost of materials C. Vacation timeB. Cost of electricity D. Sick time

5. Belo, Inc. uses a standard cost system. Overhead cost information for Product CO for themonth of October follows:

Total actual overhead incurred $14,750Fixed overhead budgeted $1,800Total standard overhead rate per direct labor hour $4.25Variable overhead rate per direct labor hour $3.75Standard hours allowed for actual production 3,400

What is the overall (net) overhead variance?

A. $100 favorable C. $300 favorableB. $100 unfavorable D. $300 unfavorable

6. What type of direct material variances for price and quantity will arise if the actual numberof pounds of materials used exceeds standard pounds allowed but actual cost is less thanstandard cost?

Quantity PriceA. Favorable FavorableB. Unfavorable UnfavorableC. Favorable UnfavorableD. Unfavorable Favorable


7. Beres Corporation has developed the following flexible budget formula for annual indirectlabor cost:

Total costs = $9,600 + $0.75 per machine hour

Operating budgets for the current month are based on 30,000 hours of planned machinetime. The amount of indirect labor costs included in this planned budget is

A. $2,425. C. $23,300.B. $22,500. D. $32,100.

8. Carlson Co. has a standard material price of $2.80 per unit. During the month of August,the cost of direct materials was $2.50 per unit for the 500 units produced. The formula($2.50 – $2.80) � 500 yields the _______ variance for Carlson Co.

A. combined price-quantity C. volumeB. materials price D. mix

9. Donellan Company has a standard and flexible budgeting system and uses a two variancemethod of analysis of overhead variances. Selected data for the February production activity follows:

Budgeted fixed factory overhead costs $70,000Actual factory overhead incurred $250,000Variable overhead rate per direct labor hour $7Standard direct labor hours 25,000Actual direct labor hours 26,006

The controllable variance for February is

A. $5,000 favorable. C. $7,000 favorable.B. $5,000 unfavorable. D. $7,000 unfavorable.

10. If the total materials variance (actual cost of materials used compared with the standardcost of the standard amount of materials required) for a given operation is favorable, whymust this variance be further evaluated as to price and usage?

A. There’s no need to further evaluate the total materials variance if it’s favorable.B. Generally accepted accounting principles require that all variances be analyzed in

three stages.C. All variances must appear in the annual report to equity owners for proper disclosure.D. Evaluating a favorable variance helps management determine why the

variance occurred.


11. The Johns Company budgeted overhead at $125,000 for the period for Department Abased on a budgeted volume of 50,000 direct labor hours. At the end of the period, the factory overhead control account for Department A had a balance of $126,000. The actual(and allowed) direct labor hours were 52,000. What was the overapplied (underapplied)overhead for the period?

A. $(4,000) C. $(6,500)B. $4,000 D. $6,500

12. Ben’s Climbing Gear, Inc. has direct material costs as follows:

Actual units of direct materials used 20,000Standard price per unit of direct materials $2.50Direct material quantity variance—favorable $5,000

What was Ben’s standard quantity of material?

A. $18,000 C. $22,000B. $20,000 D. $24,000

13. Overapplied factory overhead would result if

A. the plant was operated at greater than normal capacity.B. the plant was operated at less than normal capacity.C. factory overhead costs incurred were greater than overhead costs charged to production.D. factory overhead costs incurred were less than overhead costs charged to production.

14. The direct labor costs for Boundary Company follow:Standard direct labor hours 34,000Actual direct labor hours 33,500Direct labor efficiency variance—favorable $12,000Direct labor rate variance—favorable $15,075Total payroll $252,925

What was Boundary’s standard direct labor rate?

A. $3.87 C. $10.50B. $8.00 D. $12.00

15. Elgin Company’s budgeted fixed factory overhead costs are $50,000 per month, plus a variable factory overhead rate of $4.00 per direct labor hour. The standard directlabor hours allowed for October production were 20,000. An analysis of the factory overhead indicates that in October, Elgin had an unfavorable budget (controllable) variance of $1,500 and a favorable volume variance of $500. Elgin uses a two-varianceanalysis of overhead variances.

The actual factory overhead that Elgin incurred in October is

A. $126,500. C. $128,500.B. $128,000. D. $131,500.


16. Thomas Company uses a standard cost system. Information for raw materials for productRBI for the month of October follows:

Standard unit price $1.75Actual purchase price per unit $1.60Actual quantity purchased 4,000 unitsActual quantity used 3,900 unitsStandard quantity allowed for actual production 3,800 units

What is the materials purchase price variance for Thomas Company?

A. $15 favorable C. $600 favorableB. $15 unfavorable D. $600 unfavorable

17. What type of standard cost is the absolute minimum cost possible under the best conceivableoperating conditions?

A. Practical C. AttainableB. Ideal D. Normal

18. The fixed overhead application rate is a function of a predetermined normal activity level. If standard hours allowed for good output equal this normal activity level for a given period,the volume variance will be

A. zero.B. favorable.C. unfavorable.D. either favorable or unfavorable depending on the budgeted overhead.

19. Alyisa Corporation uses a standard cost system. Direct labor information for product CERfor the month of May is as follows:

Standard rate $8.00 per hourActual rate paid $8.20 per hourStandard hours allowed for actual production 1,200 hoursLabor efficiency variance $800 unfavorable

What are actual hours worked?

A. 1,100 C. 1,330B. 1,300 D. 1,400

20. A company experienced $21,000 in actual factory overhead incurred. During the same period,budgeted factory overhead based on actual hours worked was $19,300. The differencebetween these two amounts, $1,700, is called the _______ variance.

A. volume C. efficiencyB. budget D. quantity


NOTES

Service Businesses;Decision MakingLesson 4 examines several topics that aren’t directly related

to one another. However, as a student of cost accounting,

you should be familiar with them. Chapter 9 takes some of

the concepts that have been covered in prior chapters and

examines their usefulness for service businesses. Too often,

the focus in cost accounting is solely on manufacturing firms,

but service businesses need to understand and control their

costs as well.

Chapter 10 examines several important managerial

concepts that benefit from the examination of cost accounting

information. These concepts include variable costing, break-

even analysis, and relevant-cost analysis. The understanding

you’ve developed in the preceding chapters should serve you

well as you add to the tools you have at your disposal with

which you can make important decisions.

ASSIGNMENT 9: COSTACCOUNTING FOR SERVICEBUSINESSESRead this assignment. Then read pages 391–408 in your textbook.

So far in this course, you’ve studied many different cost

accounting topics—all from the perspective of firms that

are either manufacturers or merchandisers. But many

businesses don’t sell or produce goods—they provide services

to their customers. Still, many of the same concepts that

you’ve examined for other businesses apply to service firms

as well. In Chapter 9, you’ll examine some of these concepts.

Note: Your textbook refers to restaurants as being service

businesses. Other examples of service businesses that

do maintain some inventory of goods include hairstylists

and exterminators.

99

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Job Order Costing for Service Businesses

Service businesses may offer many different types of jobs

to their customers. For example, an auto repair shop may

do an oil change, a brake job, and an engine overhaul all in

the same day. Clearly, each of these types of jobs involves

different types of costs and effort. Similarly, a tax return

preparation service uses different amounts and types of

labor to prepare a simple tax return for an individual with

no dependents than it would to prepare a business return

involving many complicated calculations and schedules.

Such service businesses must maintain a separate job cost

sheet for each customer for whom it performs services.

As compared with a job cost sheet for a manufacturing

firm, a cost sheet for a service business emphasizes the

labor performed, since this is a major cost for most service

businesses. Also important is the firm’s overhead, which

consists of all the support costs associated with the firm

that aren’t part of its direct labor. These costs are allocated

to jobs by a predetermined overhead rate, much as for a

manufacturing firm. If certain costs can be directly traced

or charged to a given customer, they should be.

Budgeting for Service Businesses

As with any business, a service firm needs to establish and

maintain a budgeting process so that it has a reasonable

expectation of how it’s going to perform in an upcoming period.

The starting point is a revenue budget, which is the same

concept as a sales budget. With a revenue budget, a firm

will know how busy it expects to be. From this information,

the firm can develop a budget for professional labor, over-

head, and other expenses. Finally, it can create a budgeted

income statement.

Cost Accounting100

Activity-Based Costing in a Service Firm

The concept of activity-based costing that you studied in

Chapter 4 can also be applied to service businesses—if the

types of services they provide are varied enough to warrant

the expense and difficulty of developing such a system. A

service firm that uses activity-based costing must develop

multiple indirect cost pools and activity rates and then apply

them to individual jobs. This sort of system is of value to a

company only if it has jobs that use different types of indi-

rect costs (overhead). Otherwise, the cost involved in main-

taining and applying separate rates will likely not be worth

the effort, because the resulting costs assigned to the jobs

will be the same as if a single rate had been used.

Carefully study the presentation about Lopez and Wang

on pages 399–401. This example shows the differences

between traditional and activity-based costing for a public

accounting firm.

Allocations Using Simplified Costing versus Activity-Based Costing

The next-to-last section of Chapter 9 presents an example of a

law firm that uses simplified costing. The purpose of this exam-

ple is to show that the results of cost allocations with simplified

costing may differ from those with activity-based costing.

The Balanced Scorecard

In addition to the many performance measures that are

expressed in terms of dollars, companies are now increasingly

using certain nonfinancial performance measures as

Lesson 4 101

When you reach this point in your textbook reading, stopand complete Exercises E9-1 to E9-4 (pages 412–413 inthe textbook) and Problems P9-1 to P9-4 (pages 414–416).Use the appropriate forms in the Study Guide/WorkingPapers booklet. Check your work with the solutions providedin the Answer Key booklet.

part of what is known as the balanced scorecard. The idea

is that there are many important things a company does

that are not directly reflected in the financial statements,

but that should be captured and reported in some meaningful,

systematic way.

Figure 9-12 on page 405 shows the additional dimensions

of performance that are captured by a balanced scorecard:

customer, internal business processes, and learning and

growth. A company that does well only financially but that

neglects these other areas won’t do well in the long run.

Page 406 gives specific examples of the types of measures

that might be used for each of the dimensions of the score-

card. Finally, an illustration of a balanced scorecard for

the Korean manufacturer Daewoo is presented on page 407.

Note that it contains both target and actual measures,

allowing for a meaningful measure of performance.




Cost Accounting102

When you reach this point in your textbook reading, stopand complete Exercises E9-5 to E9-7 (pages 413–414in the textbook) and Problems P9-5 and P9-7 (pages416–417 in the textbook). Also complete the Mini-Caseon pages 417–418 in the textbook. Use the appropriateforms in the Study Guide/Working Papers booklet.Check your work with the solutions provided in theAnswer Key booklet.

When you reach this point in your textbook reading, stop and complete Exercises E9-8 and E9-9 (page 414)and Problems P9-8 and P9-9 on page 417. Use theappropriate forms in the Study Guide/Working Papersbooklet. Check your work with the solutions providedin the Answer Key booklet.

Lesson 4 103

Self-Check 9


Terms_____ 1. Activity-based costing _____ 5. Billing rate

_____ 2. Variance _____ 6. Cost/benefit decision

_____ 3. Service _____ 7. Cost performance report

_____ 4. Professional labor budget _____ 8. Revenue budget

Definitions

a. A method of applying overhead to products that considers both volume-related activities and non-volume-related activities that create overhead costs

b. The hourly rates that a firm charges for various categories of professional labor spenton a job

c. A determination as to whether the benefits of purchasing a certain course of actionexceed the costs of the action

d. A comparison of the budgeted costs for a job with its actual costs, indicating the variance for each line item

e. A budget for which the budgeted hours required for each client service area are multiplied by the budgeted rate for each category to obtain the total wages expense foreach category of professional labor

f. A budget that projects revenues to be received from client businessg. An intangible benefit that doesn’t have physical properties and is consumed at the

time it’s providedh. The difference, during an accounting period, between the actual and standard or

budgeted costs of materials, labor, and overhead

(Continued)

Cost Accounting104

Self-Check 9


1. Which one of the following types of firms would not be considered a service business?

a. Accounting firms c. Hairstylistsb. Plumbers d. Sports stores

2. The main characteristic of service businesses is that they have

a. large quantities of inventory to better serve customers.b. little or no inventory.c. inventory costs that account for most of total costs.d. none of the above.

3. What basic document would a service business using job order costing use toaccumulate costs?

a. Job order cost sheet c. Revenue budgetb. Cost performance report d. Labor budget

4. Which one of the following budgets is the starting budget for the annual budget?

a. Labor budget c. Overhead budgetb. Revenue budget d. Other expenses budget

5. Peanut-butter costing refers to

a. the practice of assigning costs evenly to jobs using an overhead rate.b. the practice of assigning costs evenly to jobs using cost pools.c. both a and b.d. neither a nor b.

(Continued)

Lesson 4 105

Self-Check 9


_____ 1. Travel and meal charges are expenses that can be placed in the “other” category,because they can be specifically identified with a job and don’t have to be allocatedto the job using an overhead rate.

_____ 2. Once a business has budgeted the amount of professional labor hours required tomeet client services, it may prepare a revenue budget.

_____ 3. Firms must prepare an overhead budget that includes all of the expense itemsthat can’t be traced directly to jobs, but must be allocated to them by using anoverhead rate.

_____ 4. The direct-cost category includes all professional labor costs that are traced to jobson a per-hour basis.

_____ 5. Approximately 90 percent of the jobs created in the United States in the last 20years have been in the service industry.

(Continued)

Cost Accounting106

Self-Check 9

Problems1. Joe and Bob Thomas have a professional service firm that has the following budgeted

costs for the current year:

Employee salaries $300,000Depreciation 40,000Benefits 175,000Lease expense 250,000Partners’ salaries 180,000Utilities 50,000

Compute the budgeted overhead rate for the coming year, using direct labor dollars asthe overhead allocation base. Note: Employee salaries represent support costs, notdirect labor. Use the space below to perform your calculations.

2. A client of Johnson and Johnson Attorneys at Law requires 20 hours of partner labor and20 hours of associate labor. Partners are paid $115 per hour, and associates make $55per hour.

Use the space below to compute the direct labor job cost of servicing this client.

(Continued)

Lesson 4 107

Self-Check 9

3. Jones and Smith, partners in a financial services business, budgeted the following professional labor hours for the year ended December 31, 2002.

Partners 6,000Associates 10,000Staff 25,000

Partners have a billing rate of $250 per hour and actually earn $160 per hour.

Associates have a billing rate of $165 per hour and actually earn $90 per hour.

Staff have a billing rate of $100 per hour and actually earn $75 per hour.

Using the space below, prepare a revenue budget with the given information.

4. Using the information in problem 3, prepare a professional labor budget.


Cost Accounting

ASSIGNMENT 10: COSTANALYSIS FOR MANAGEMENTDECISION MAKINGRead this assignment. Then read pages 419–442 in your textbook.

Chapter 10 reviews and elaborates on some of the topics

that have been covered so far. Much of your study has

focused on how costs are tracked for inventory valuation

and performance evaluation purposes. One of the topics in

Chapter 10 examines an issue pertaining to these notions.

The other topics take information generated by a firm’s cost

accounting system and use them as inputs to important

managerial decisions and issues.

Variable Costing and Absorption CostingThe first topic in Chapter 10 addresses the different ways

in which a company can view its fixed overhead for internal

purposes. Remember, a product cost is one assigned to work

in process in the course of production; a period cost is one

charged to expense immediately in the period in which it’s

incurred. For inventory costing purposes, fixed overhead

must be treated as a product cost. It may, however, be

desirable to treat it as a period cost for internal reporting

purposes, because managers can otherwise manipulate

reported income by varying production levels.

The method used to treat fixed overhead in this course has

been the absorption method—some portion of fixed overhead

is absorbed by each unit produced. Thus, a manager wishing

to increase income can do so by increasing production. For

a given amount of fixed overhead, the more that’s produced,

the more fixed overhead that will remain in ending inventory.

Thus, less overhead will be in cost of goods sold. Conversely, as

production decreases, income will also decrease. If the ending

inventory has fewer units, then there will be proportionately

more of fixed overhead in cost of goods sold. Treating fixed

overhead as a period cost for internal performance evaluation

purposes eliminates these concerns, because the entire amount

is expensed each period regardless of production levels.

108

Merits and Limitations of Variable Costing

Now that you’ve had some exposure to cost accounting

procedures, read the material on the merits and limitations

of variable costing (pages 424–426) with a critical eye. In

other words, as you read the material, decide how you feel

about the information presented. Do you agree with the

textbook’s analysis of the method? If you were working

in the cost accounting profession, would you want to use

this method? Why or why not? If you were a manager in

a company, would you want your accountants to use this

method? Would you like to have your information on costs,

revenues, and the like come from a direct costing system?

Why or why not?

Segment Reporting for Profitability Analysis

A cost accounting system generates one important tool for

managerial analysis of information—that is, the ability to

analyze the profitability of given segments of a business.

The principal difficulty is in determining which costs can

be specifically and meaningfully traced to the segments or

product lines being examined and which are common to the

firm as a whole. You’re already familiar with the concept of

contribution margin, which is determined as follows:

Contribution margin = Sales revenue – Variable costs

The only new term associated with segment analysis is

segment margin, which can be expressed as follows:

Lesson 4 109

When you reach this point in your textbook reading, stop andcomplete Exercises E10-1 to E10-6 (pages 448–450 in thetextbook) and Problems P10-1 and P10-2 (pages 453–454).Use the appropriate forms in the Study Guide/WorkingPapers booklet. Check your work with the solutions provided in the Answer Key booklet.

Segment margin = Contribution margin – Costs that are

directly traceable to each segment

Allocation of costs that can’t be traced to specific segments

should be avoided. Otherwise, profitable segments may appear

to be unprofitable. Such costs should be subtracted from the

company totals only when evaluating segment profitability.

Cost-Volume-Profit Analysis

Once a company has identified and separated its costs into

variable and fixed components, it can combine and analyze

them to determine some useful decision-making concepts.

For example, it’s a useful thing for a company to know the

level of sales at which it will break even (that is, have an

income of $0). The break-even point can be expressed in

terms of either dollars earned or units sold. (Page 430 in

your textbook presents examples of the formulas used to

calculate these figures.)

Clearly, a company doesn’t generally want to be operating

at its break-even point (unless it’s currently experiencing a

loss), but it’s still good to know what the break-even point

is. The question is why would a company need to know the

point at which it must operate to earn $0?

A break-even point tells a company how many units it must

sell or how much money it must earn to have an income of

$0. Once a company knows this figure, it can extend the

analysis to determine the level of sales necessary to achieve

desired levels of income. To find this figure, a company must

insert the target incomes into a modified break-even analysis

formula, as explained on pages 432–434. The result of solving

this equation indicates the sales volume a company must

attain to achieve a certain level of income.

If a firm sells more than one product, then it must extend the

analysis to assume an “average” contribution margin per unit.

Other extensions include calculating the contribution margin

ratio, which is simply the contribution margin expressed as a

percentage of sales, and determining the impact of income

Cost Accounting110

taxes on break-even and target profit analysis. The latter

simply involves turning desired after-tax figures into pre-tax

figures and then conducting analyses as before.

Contribution Margin Ratio and Margin of Safety

Both the contribution margin ratio and the margin of safety

are important management tools. As you’ve already learned,

the contribution margin ratio is equal to the contribution

margin divided by sales (page 435). The figure that represents

this ratio indicates the percentage of sales revenue contributed

toward fixed costs and/or profits. For example, suppose a

company has a contribution margin ratio of 22%. This means

that for every dollar of sales this company makes, 22% goes

toward covering fixed expenses.

The margin of safety is computed by subtracting the break-

even sales revenue from the sales revenue (page 435). This

figure tells management the amount of sales over the break-

even sales point. In other words, the margin of safety equals

the amount that anticipated sales must fall before a company

experiences a loss.

Differential Analysis

Another important area involving cost data for managerial

accounting purposes is that of differential analysis. Simply

put, differential analysis is the examination of the costs

involved with alternative solutions to a situation. Businesses

are frequently faced with decisions such as whether to

accept or reject a special order or whether to produce a

Lesson 4 111

When you reach this point in your textbook reading, stop andcomplete Exercises E10-7 to E10-14 (pages 450–452 in thetextbook) and Problems P10-3 to P10-10 (pages 454–459).Use the appropriate forms in the Study Guide/Working Papersbooklet. Check your work with the solutions provided in theAnswer Key booklet.

certain part internally or buy it from an outside supplier.

In choosing between two or more alternative courses of action,

the basis for deciding whether a cost is relevant is this:

If the cost differs between the alternatives under consid-

eration, then it’s relevant. Include it in your analysis.

If the cost is the same under all involved alternatives,

then it’s not relevant. Don’t include it in your analysis.

If you apply this rule to any special order or make/buy

decisions, then you should reach the correct answer.

Distribution Costs

The final section of Chapter 10 deals with the costs involved

in selling and delivering a product. It seems as though it

should be a simple process to add the selling and delivery

costs to a product. However, as you read through this

material, you’ll discover the types of questions managers

ask when considering the costs of distributing a product.

Carefully read the example of the company that sells

bakery products and think about the questions and

decisions management must make as it considers how

to account for distribution costs.




This concludes Lesson 4. When you’ve carefully reviewed all

the material in this lesson, including the problems, questions,

and exercises in the self-checks, you should take the exami-

nation for Lesson 4 to determine your mastery of the topics.

Cost Accounting112

When you reach this point in your textbook reading, stop andcomplete Exercises E10-15 to E10-17 (pages 452–453 inthe textbook) and Problem P10-11 (pages 459–460). Usethe appropriate forms in the Study Guide/Working Papersbooklet. Check your work with the solutions provided in theAnswer Key booklet.

You should now have an appreciation for how cost accounting

is used by service businesses. You should also be aware

of the many different contexts in which cost accounting

can be used to make important managerial decisions.

Congratulations on your dedication and persistence.

Lesson 4 113

Cost Accounting114

Self-Check 10


Terms

_____ 1. Absorption costing _____ 9. Sales mix_____ 2. Segment _____10. Contribution margin_____ 3. Common cost _____11. Break-even analysis_____ 4. Period cost _____12. Break-even point_____ 5. Product cost _____13. Cost-volume-profit_____ 6. Direct costing _____14. Distribution costs_____ 7. Margin of safety _____15. Indirect cost_____ 8. Gross profit

Definitions

a. A method of accounting for manufacturing costs that charges both fixed and variablecosts to the product

b. An analysis technique based on the determination of a break-even point expressed in terms of sales revenue or sales volume

c. The point at which sales revenue adequately covers all costs to manufacture and sell a product but no profit is earned

d. The term used in segment analysis to describe a cost that can’t be traced to, orspecifically identified with, a particular business segment

e. The difference between sales revenue and variable costsf. An analytical technique that uses the degrees of cost variability for measuring the

effect of changes in volume on resulting profitsg. A method of accounting for manufacturing costs that charges the product with only the

costs that vary directly with volumeh. Cost incurred to sell and deliver a producti. The difference between sales revenue and the cost of goods soldj. Another term used to describe common costsk. The amount that sales can be decreased before the company suffers a lossl. All costs that aren’t assigned to the product but are recognized as expense and

charged against revenue in the period incurredm. Costs included as part of inventory costs and expensed when goods are soldn. The relative percentage of unit sales among the various products made by a firmo. A division, a product line, a sales territory, or other organizational unit that can be

separately identified for reporting purposes and profitability analysis

(Continued)

Lesson 4 115

Self-Check 10


_____ 1. All costs, both manufacturing and nonmanufacturing, can be classified as eitherproduct or period costs.

_____ 2. Gross profit is another term for gross margin.

_____ 3. Under absorption costing, selling and administrative costs are added into grossmargin to determine net income or loss.

_____ 4. With absorption costing, inventories have a lower cost than under direct costing.

_____ 5. Segment profitability analysis requires that all costs be classified as either director indirect.

_____ 6. The contribution margin is determined by adding variable costs to sales revenue.

_____ 7. A break-even point can be graphically depicted on a break-even chart.

_____ 8. Two terms frequently used in cost-volume-profit relationships are gross margin andmargin of safety.

_____ 9. Distribution costs include the costs incurred to make, sell, and deliver a product.

_____ 10. A make-or-buy decision is one in which a company must determine whether it’smore economical to purchase a finished part used in production or to manufacturethe part itself.

(Continued)

Cost Accounting116

Self-Check 10

Problems1. The following information is given for Smithfield Co. for the month of October:

Normal capacity 2,000 units for the monthFixed costs $75,000 per monthVariable costs $80 per unitSales price $165 per unit

a. Determine the break-even point in dollars.

b. Determine the break-even point in units.

2. Currently Daisy’s Shoes has the capacity to produce 15,000 units per month. Currentplans call for monthly production and sales of only 10,000 units at $25 each. Costs perunit at the 8,000 unit level are

Direct materials $10.00Direct labor 4.00Variable factory overhead 2.25Fixed factory overhead 2.00Variable marketing expense 1.00Fixed administrative expense 1.75

Determine whether the company should accept a special order for 1,500 units at$16.00 per unit. Use the space below for any necessary calculations.


117

Lesson 4Service Businesses; Decision Making

You can’t use Exam Express, the Internet, or Tel-Test for thisexam. Use the answer sheet provided after the exam. When youcomplete the examination, cut out the answer sheet and mail itwith your work in the envelope provided to

Penn Foster Student Service Center925 Oak StreetScranton, PA 18515

Type or neatly write your answers to the following questions andexercises. Read your work over carefully. When you’re satisfiedwith your work, remove the answer sheet for this examination andattach your work to it. Mail your work and the answer sheet to theschool in one of the envelopes provided. Be sure to keep a copy ofyour work for your own records.

Ex

am

ina

tion

Ex

am

ina

tion

EXAMINATION NUMBER:

06164500



1. Joleen Harmon, CPA, has two clients. Client A requires 20 hours of partner time and 100hours of staff time. Client B will use 12 hours of partner time and 80 hours of staff time.Partners are paid $85 an hour and bill support time at 60% of their hourly rate. Staff arepaid $25 an hour and bill support time at $20 per billable hour.

On a separate sheet of paper, calculate the total charge to each of these clients if profit isadded at 20% over cost. Label each answer carefully and show all of your work. (Thisquestion is worth 10 points.)

2. The Tijama Manufacturing Company has determined the cost of manufacturing a unit ofproduct to be as follows, based on annual production of 50,000 units per year:

Direct materials $20.00Direct labor 15.00Variable factory overhead 10.00Fixed factory overhead 12.00

Operating statistics for the month of August and September are as follows:

August SeptemberUnits produced 4,200 3,500Units sold 3,500 4,200Selling and administrative expenses $25,000 $35,000

The selling price is $75 a unit. There were no inventories on August 1, and there is nowork in process at September 30.

Prepare comparative income statements for each month under both absorption costingand direct costing. Use the forms at the end of this examination to complete this problem.(This question is worth 25 points.)

3. The Donal Company has sales of $800,000, variable costs of $300,000, and fixed costs of $250,000.

On a separate sheet of paper, compute the following. Label each answer carefully andshow all of your work.

a. Contribution margin ratiob. Break-even sales volumec. Margin of safety ratiod. Net income as a percentage of sales

(This question is worth 20 points, 5 points for each part.)


4. Complete Problem 9-6 on page 416 in your textbook. Use theforms provided in the Study Guide/Working Papers booklet onpages WP-283 and WP-284. (This question is worth 25 points.)

5. Complete the Chapter 10 Mini-Case on page 461 in your textbook. Use a separate sheet of paper. Label each answerand show all of your work. (This question is worth 20 points.)


NOTES

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Remove this sheet from the study guide. Attach all of your work for the Lesson 4examination to this sheet, and mail it to

Penn FosterStudent Service Center925 Oak StreetScranton, PA 18515

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125

Self-Check 1

Vocabulary

1. e

2. a

3. h

4. k

5. c

6. g

7. d

8. f

9. b

10. i

11. j

Questions

1. a. Direct labor cost—the cost of labor for those

employees who work directly on the product being

manufactured

b. Indirect labor cost—the wages and salaries of employ-

ees who are required for the manufacturing process

but who don’t work directly on the units being

manufactured

c. Direct materials costs—the costs of materials that

become part of, and can be readily identified with, a

certain manufactured product

d. Indirect materials costs—the cost of items necessary

for the manufacturing process, which can’t be readily

identified with any particular product manufactured

or whose relative cost is too insignificant to measure

2. The three elements in manufacturing costs are (1) direct

materials, such as lumber, fabric, rubber, and iron ore;

(2) direct labor, such as machine operators and assembly

line workers; and (3) factory overhead, which includes all

costs related to the manufacture of a product except

direct materials and direct labor. Examples of factory

overhead are depreciation, heat, power, insurance,

taxes, and so on.

An

sw

er

sA

ns

we

rs

Self-Check Answers126

3. A perpetual inventory system provides a continuous

record of purchases, issues, and balances of all goods in

stock. A periodic inventory system requires estimating

inventory during the year for interim statements and

shutting down operations to count all inventory items

at the end of the year.

yrotnevnIslairetaMwaR.a 000,56

elbayaPstnuoccA 000,56

yrotnevnIssecorPnikroW.b 000,05

yrotnevnIslairetaMwaR 000,05

yrotnevnIssecorPnikroW.c 000,53

sesnepxEevitartsinimdAdnagnilleS 000,01

lloryaPdeurccA 000,54

yrotnevnIssecorPnikroW.d 005,71

esnepxEnoitaicerpeD 005,71

gnidliuB,noitaicerpeDdetalumuccA 000,53,000,05fo%07:gnidliubnonoitaicerpeD

eciffodnayrotcafneewteb05/05tilps

yrotnevnIssecorPnikroW 000,5

tnempiuqEyrotcaF,noitaicerpeDdetalumuccA 000,5

000,05fo%01,tnempiuqeyrotcafnonoitaicerpeD

esnepxEnoitaicerpeD 000,01

tnempiuqEeciffO,noitaicerpeDdetalumuccA 000,01

000,05fo%02,tnempiuqeeciffononoitaicerpeD

yrotnevnIssecorPnikroW.e 052,11

sesnepxEeciffO 057,3

elbayaPstnuoccA 000,51

×stsocsuoenallecsimni000,51 ¾ a dn ¼ ylevitcepser,

yrotnevnIsdooGdehsiniF.f 000,69

yrotnevnIssecorPnikroW 000,69

dloSsdooGfotsoC.g 000,691

yrotnevnIsdooGdehsiniF 000,691

elbavieceRstnuoccA 000,213

selaS 000,213

hsaC.h 000,853elbavieceRstnuoccA 000,853

elbayaPstnuoccA.i 000,541hsaC 000,541

Problem

Self-Check Answers 127

Self-Check 2

Vocabulary

1. order point

2. usage

3. lead time

4. receiving clerk

5. storeroom keeper

6. purchase requisition

7. ledger

8. materials requisition

9. scrap

10. spoiled units

11. defective units

12. just-in-time inventory

13. throughput

Questions

1. An effective control system should include specific

assignment of duties and responsibilities, a list of

individuals authorized to approve expenditures, an

established plan of objectives and goals, regular

reports showing the differences between goals and

actual performance, a plan of corrective action designed

to prevent unfavorable differences from recurring, and

follow-up procedures for corrective measures.

2. Limited access means that only authorized personnel

should have access to materials storage areas. Segre-

gation of duties refers to the separation of employee

duties to minimize opportunities for misappropriation

of assets. Accurate recording means that the purchase

and issuance of materials must be accurately recorded

to have an effective materials control system.


3. Materials control procedures generally relate to (1) pur-

chase and receipt of materials, (2) storage of materials,

and (3) requisition and consumption of materials.

4. The four different types of materials control personnel

are the purchasing agent, receiving clerk, storeroom

keeper, and production department supervisor.

Problems

1. a. Work in Process Inventory 100,000

Materials Inventory 50,000

Payroll 30,000

Factory Overhead 20,000

b. Spoiled Goods Inventory 10,000


Work in Process Inventory 20,000

(200 � $50 = $10,000) (200 � $100 = $20,000)

2. Factory Overhead 375

Materials Inventory 150

Payroll 150

Factory Overhead 75

(75 � $2 = $150) (75 � $1 = $75)

Self-Check 3

Multiple Choice

1. a

2. d

3. b

4. c

5. a

6. c

7. b

8. b

9. c


True or False

1. True

2. False

3. True

4. True

5. False

6. True

7. True

8. False

9. True

10. True

Problems

1. a.Regular wages

Sunday 7 hours � 13 $ 91

Monday 8 hours � 13 104

Tuesday 9 hours � 13 117

Wednesday 9 hours � 13 117

Thursday 10 hours � 13 130

Friday 9 hours � 13 117

Saturday 5 hours � 13 65

$741

Overtime and shift premium

Sunday: 7 hours � 13 � 0.5 = $45.50

Hours of overtime = Total hours worked – 40

Hours of overtime = 50 – 40 = 10 hours of overtime

Overtime: 10 hours � 13 � 0.5 = $65.00

$45.50 + 65.00 = $110.50

$741 + 110.50 = $851.50

b. Journal entry

Work in Process Inventory 741

Factory Overhead 110.50

Payroll 851.50


2. a. If withholding is 7.5%, then each employee keeps

100 – 7.5% = 92.5% of their gross wages as net.

Jones $12 � 38 = $ 456 � .925 = $ 421.80

Bates $10 � 40 = 400 � .925 = $ 370.00

Lake $12 � 35 = 420 � .925 = $ 388.50

Santo $ 8 � 40 = 320 � .925 = $ 296.00

Kyle $13 � 40 = 520 � .925 = $ 481.00

$2116 $1957.30

b. Payroll 2116

Taxes Payable 158.70

Wages Payable 1957.30

Wages Payable 1957.30

Cash 1957.30

Self-Check 4

Vocabulary

1. a

2. m

3. b

4. i

5. k

6. g

7. c

8. h

9. n

10. l

11. j

12. e

13. d

14. f


Multiple Choice

1. c

2. b

3. c

4. a

5. c

6. d

7. d

8. c

9. b

10. b

Questions

1. Variable costs change in direct proportion to volume

changes. Fixed costs remain the same, in total, when

production levels increase or decrease. Mixed costs

have characteristics of both variable and fixed costs.

2. Volume-related overhead changes as the number of

units produced changes. For example, electricity

expense incurred to power the machines increases

as more units are produced. The change in non-

volume-related overhead costs isn’t a function of how

many units are produced. For example, you have to

incur the same setup costs prior to a production run

whether one unit or one thousand units are produced.

Problems

1. High activity = 850 hours, cost = $10,000

Low activity = 200 hours, cost = $5,000

Variable component = ($10,000 – 5,000) ÷ (850 – 200) =

$5,000 ÷ 650 = $7.69

The variable portion of overhead is $7.69.


2. Direct Materials $10,000

Direct Labor 4,000

Overhead

Labor-related 600 � $35 = $21,000

Machine usage 300 � $50 = 15,000

Machine setups 1 � $1,200 = 1,200 37,200

Total cost of Job MSM800 $51,200

3.

Self-Check 5

Vocabulary

1. d

2. f

3. a

4. g

5. b

6. c

7. e

Job Materials Labor Overhead Total

(50% of labor)

001 $ 600 $ 1,000 $ 500 $ 2,100

002 1,065 2,050 1,025 4,140

003 3,200 4,300 2,150 9,650

004 375 800 400 1,575

$5,240 $8,150 $4,075 $17,465


Problems

1. Cost of production for the month

Beginning Inventory

Materials $20,000

Labor 9,000


$ 34,000

Cost of production during month

Materials $80,000

Labor 45,000

Factory Overhead 29,000 154,000

$188,000

Unit output for the month

Finished and transferred to finished goods 19,000

Equivalent units of work in process,

of month (4,000 units, 80% completed) 3,200

Total equivalent production 22,200

Unit cost for the month

Materials ($100,000 ÷ 22,200) $4.50

Labor ($54,000 ÷ 22,200) 2.43

Factory Overhead ($34,000 ÷ 22,200) 1.53

Total $8.46

Inventory costs

Cost of goods finished and transferred to

finished goods during month

(19,000 � $8.46) $160,740

Cost of work in process, end of month

Materials (4,000 � .80 � $4.50) 14,400

Labor (4,000 � .80 � $2.43) 7,776

Factory Overhead (4,000 � .80 � $1.53) 4,896

Total production costs accounted for $187,812

$188 difference is due to rounding error.


2. a.

b.

c. Finished goods inventory =

430,000 � $5.53 = 2,377,900

Work in process inventory

Materials 50,000 � $1.98 = $99,000

Conversion 35,000 � $3.55 = 124,250 223,250

$2,601,150

$150 difference is rounding error.

Self-Check 6

Vocabulary

1. g

2. a

3. f

4. e

5. c

6. d

7. b

slairetaM noisrevnoC

htnomgniruddetelpmocstinU 000,034 000,034

,htnomfodnetadnahnostinUrobalotsaetelpmoc%07

daehrevodna 000,05 000,53

stinutnelaviuqE 000,084 000,564

slairetaM noisrevnoC latoT

stsocgninnigeB 000,003$ 000,005$ 000,008$

stsocdeddA 000,056 000,051,1 000,008,1

stsoclatoT 000,059$ 000,056,1$ 000,006,2$

stinutnelaviuqE 000,084 000,564

stsoctinU 89.1$ + 55.3$ = 35.5$


Problems

1. Cost of production for the month

Materials $ 80,000

Conversion costs 45,000

$125,000

Unit output for the month

Materials

Finished and transferred to Department Two 12,000

Equivalent units of work in process, end

of month (all materials) 5,000

17,000

Conversion

Finished and transferred to Department Two 12,000

Equivalent units of work in process, end

of month (5,000 units, 60% completed) 3,000

15,000

Unit costs for month

Materials ($80,000 ÷ 17,000) = $4.71

Conversion ($45,000 ÷ 15,000) = 3.00

$7.71

Cost of goods transferred to Department B

12,000 � $7.71 = $92,520

2. Joint cost allocated to Product M of $100,000 ÷ Total joint

cost of $180,000 = 55.55%. Therefore, the sales value at

split-off for product M must be 55.55% of total sales value

of $240,000, or $133,333.

Self-Check 7

Vocabulary

1. Semifixed

2. budget

3. sales

4. factory overhead

5. cash

6. accounts receivable


7. Fixed

8. Variable

9. Normal

10. Semivariable

Multiple Choice

1. c

2. a

3. a

4. b

5. d

True or False

1. True

2. False

3. True

4. True

5. True

6. False

7. False

8. False

9. True

10. False

Problems

1. Sales Budget

Unit sales volume � Unit selling price = Total sales

50,000 � $45 = $2,250,000

Production Budget

Need for sales 50,000

Desired ending inventory 5,000

Total needed 55,000

Less: Beginning inventory (3,500)

Desired production 51,500


Mini-Case Problem 2

1. No, I don’t necessarily agree with the production

manager that manufacturing did a good job controlling

costs. This is an “apples to oranges” comparison

because master budget unit volume was 50,000,

whereas actual results were based on the production

and sale of 45,000 units. One would expect the cost

variances to be favorable, given this type of comparison.

2.

Flexible budget 45,000 50,000 55,000

per unit Units Units Units

Sales $25.00 $1,125, 000 $1,250,000 $1,375,000

Less variable

expenses:

Direct materials $4.50 202,500 225,000 247,500

Direct labor 3.75 168,750 187,500 206,250

Variable factory

overhead 2.25 101,250 112,500 123,750

Variable selling and

administrative

expense 1.50 67,500 75,000 82,500

Total variable expense $12.00 $540,000 $600,000 $660,000

Contribution

margin $13.00 $585,000 $650,000 $715,000

Less fixed expenses:

Fixed factory overhead

expense $100,000 $100,000 $100,000

Fixed selling and

administrative expense 150,000 150,000 150,000

Total fixed expense $250,000 $250,000 $250,000

Income from operations $335,000 $400,000 $465,000


3.

Flexible budget Actual Results Flexible budget Variance

per unit (45,000 units) (45,000 units)

Sales $25.00 $1,125, 000 $1,125,000 ----------

Less variable

expenses:

Direct materials $4.50 212,500 202,500 $10,000 U

Direct labor 3.75 175,750 168,750 7,000 U

Variable factory

overhead 2.25 110,250 101,250 9,000 U

Variable selling and

administrative

expense 1.50 70,500 67,500 3,000 U

Total variable expense $12.00 $569,000 $540,000 $29,000 U

Contribution

margin $13.00 $556,000 $585,000 $29,000 U

Less fixed expenses:

Fixed factory overhead

expense $95,000 $100,000 ($5,000 F)

Fixed selling and

administrative expense 160,000 150,000 10,000 U

Total fixed expense $255,000 $250,000 $5,000 U

Income from operations $301,000 $335,000 $34,000 U

4. Manufacturing didn’t do a good job controlling costs. The variances for direct

materials, direct labor, and variable factory overhead totaled $26,000 unfavorable.

The variance for fixed factory overhead was $5,000 favorable, but that was

probably due to a budgeting misestimate.


Self-Check 8

Vocabulary

1. h

2. i

3. b

4. a

5. e

6. f

7. d

8. c

9. j

10. g

True or False

1. True

2. True

3. True

4. False

5. True

Questions

1. Ideal standards are determined by considering estimated

materials, labor, and overhead costs, but no allowances

are made for inefficient conditions such as lost time,

waste, or spoilage. This ideal standard can be attained

only under the most efficient operating conditions.

Attainable standards are set by considering estimated

materials, labor, and overhead, including such factors

as lost time and normal waste and spoilage.

2. A favorable variance simply indicates that price and/or

usage was below standard. Analysis might determine a

good situation, such as more efficiency resulting in a

true savings in quantity, time, price, or rate; or analysis

might show a bad situation, such as a lower price being

paid for inferior materials or unskilled workers, quality

being reduced by using a smaller quantity of materials,

or speeding up production.


Problems

1. Materials price variance = ($18.50 – 20) � 38 = $57 favorable,

since the actual price paid per gallon was less than the

standard price per gallon.

Materials quantity variance = (38 – 40) � $20 = $40 favorable,

since fewer actual gallons were used than the standard

quantity of gallons allowed.

2. Materials 248,000

Accounts Payable 248,000

Work in Process 189,000

Material Quantity Variance 42,273

Material Price Variance 3,671

Materials 227,602

Work in Process debit is 10,000 � 18.90

Material Quantity Variance is [(6 � 10,000) – 73,420] � 3.15

Material Price Variance is 248,000 ÷ 80,000 = 3.10 per pound:

(3.15 – 3.10) � 73,420

Materials credit is 73,420 � 3.15

Work in Process 170,000

Labor Efficiency Variance 19,550

Labor Rate Variance 2,230

Payroll 187,320

Work in Process debit is 10,000 � 17.00

Labor Efficiency Variance is [(2 � 10,000) – 22,300] � 8.50

Labor Rate Variance is 187,320 ÷ 22,300 = 8.4 per hour:

(8.4 – 8.5) � 22,300

Self-Check 9

Vocabulary

1. a

2. h

3. g

4. e


5. b

6. c

7. d

8. f

Multiple Choice

1. d

2. b

3. a

4. b

5. a

True or False

1. True

2. True

3. True

4. True

5. True

Problems

1. Overhead costs include all costs other than partners’

salaries.

Employee salaries $300,000Depreciation 40,000Benefits 175,000Lease expense 250,000Utilities 50,000

$815,000

Expressed as a percentage of partners’ salaries

(direct labor), 815,000 ÷ 180,000 = 452.77%.

2. (20 � $115) + (20 � $55) = $2,300 + 1,100 = $3,400

3. Partners 6,000 � $250 = $1,500,000

Associates 10,000 � $165 = 1,650,000

Staff 25,000 � $100 = 2,500,000

$5,650,000


4. Partners 6,000 � $160 = $ 960,000

Associates 10,000 � $ 90 = 900,000

Staff 25,000 � $ 75 = 1,875,000

$3,735,000

Self-Check 10

Vocabulary

1. a

2. o

3. d

4. l

5. m

6. g

7. k

8. i

9. n

10. e

11. b

12. c

13. f

14. h

15. j

True or False

1. True

2. True

3. False

4. False

5. True

6. False

7. True


8. False

9. True

10. True

Problems

1. a. Break-even point in dollars = Fixed costs ÷

Contribution margin ratio

Contribution margin ratio = $(165 – 80) ÷

165 = .5151515

Therefore,

Break-even point in dollars = $75,000 ÷

.5151515 = $145,588 (rounded to nearest dollar).

b. Break-even point in units = Fixed costs ÷

Unit contribution margin

Unit contribution margin = $165 – 80 = $85

Break-even point in units = $75,000 ÷ 85

= 882 units (rounded)

2. Accepting the special order of 1,500 units wouldn’t affect

normal production, because capacity is 15,000 units a

month and the company is currently producing only

10,000 units. Therefore, the offer should be accepted as

long as the $16 received per unit is greater than or

equal to the differential costs per unit. These costs are

Direct materials $ 10

Direct labor 4

Variable overhead 2.25

Variable marketing 1.00

$17.25

Since each unit costs $17.25 and the firm would

receive only $16 for them, the special order should

be rejected.

Documents

Study Guide Cost Accounting - JustAnswerNov 11, 2013 · lesson assignments 7 lesson 1: materials, labor, and factory overhead 9 examination—lesson 1 47 lesson 2: process cost accounting