CHAPTER-3

SOLUTIONS TO EXERCISES
EXERCISE 3-23 (10 MINUTES)
1. Process
2. Job-order
3. Job-order (contracts or projects)
4. Process
5. Process
6. Job-order
7. Process
8. Job-order (contracts or projects)
9. Process
10. Job-order
EXERCISE 3-29 (25 MINUTES)
JOB-COST RECORD
Job Number

TB78

Date Started

4/1

Description

teddy bears

Date Completed

4/15

Number of Units Completed

Date
4/1
4/5
Date
4/1 4/8
Date
4/15

Direct Material
Requisition Number
Quantity
101
400
108
500
Time Card Number
Various time cards

Direct Labor
Hours
500

Manufacturing Overhead
Activity Base
Quantity
Direct-labor hours
500

1,000

Unit Price
$.80
.30

Cost
$320
150

Rate
$12

Cost
$6,000

Application Rate
$2

Cost
$1,000

Cost Summary
Cost Item
Total Direct Material
Total Direct Labor
Total Manufacturing Overhead
Total Cost
Unit Cost

Date
4/30

Amount
$ 470
6,000
1,000
$7,470
$ 7.47

Shipping Summary
Units Remaining
Units Shipped
In Inventory
700
300

Cost Balance
$2,241*

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

EXERCISE 3-30 (30 MINUTES)
1.

CRUNCHEM CEREAL COMPANY

SCHEDULE OF COST OF GOODS MANUFACTURED
FOR THE YEAR ENDED DECEMBER 31, 20X1
Direct material:
Raw-material inventory, January 1 ..........................................$ 30,000
Add: Purchases of raw material .............................................. 278,000
Raw material available for use .................................................$308,000
Deduct: Raw-material inventory, December 31 ...................... 33,000
Raw material used ....................................................................
Direct labor ........................................................................................
Manufacturing overhead
Total manufacturing costs ................................................................
Add: Work-in-process inventory, January 1 ....................................
Subtotal ..............................................................................................
Deduct: Work-in-process inventory, December 31 .........................
Cost of goods manufactured ............................................................

$275,000
120,000
252,000 *
$647,000
39,000
$686,000
42,900
$643,100

*Applied manufacturing overhead is $252,000 ($120,000210%). Actual manufacturing

overhead is also $252,000, so there is no overapplied or underapplied overhead.
2.

Finished-goods inventory, January 1 ................................................................... $ 42,000

Add: Cost of goods manufactured ........................................................................ 643,100
Cost of goods available for sale ............................................................................ $685,100

Deduct: Finished-goods inventory, December 31 ............................................... 46,200

Cost of goods sold ................................................................................................. $638,900
EXERCISE 3-34 (15 MINUTES)
NOTE: Actual selling and administrative expense, although given in the exercise, is irrelevant to the
solution.

$997,500
$13.30 per hour
75,000 hours

1.

Predetermined overheadrate

2.

To compute actual manufacturing overhead:

Depreciation ...............................................................................................
Property taxes............................................................................................
Indirect labor ..............................................................................................
Supervisory salaries .................................................................................
Utilities .......................................................................................................
Insurance ...................................................................................................
Rental of space ..........................................................................................
Indirect material:
Beginning inventory, January 1 ........................................................
$ 48,000
Add: Purchases ..................................................................................
94,000
Indirect material available for use .....................................................
$142,000
Deduct: Ending inventory, December 31 ..........................................
63,000
Indirect material used ........................................................................
Actual manufacturing overhead ...............................................................
Overapplied
Overhead

actual
manufacturing
overhead

$1,002,000 ($13.3080,000*) = $62,000

$ 231,000
21,000
82,000
200,000
59,000
30,000
300,000

79,000
$1,002,000

applied
manufacturing
overhead

*Actual direct-labor hours.

3.

Manufacturing Overhead ...........................................................

Cost of Goods Sold ..........................................................

62,000
62,000

EXERCISE 3-35 (20 MINUTES)

NOTE: Budgeted sales revenue, although given in the exercise, is irrelevant to the solution.

1.

Predetermined overhead rate

budgetedmanufacturing overhead
budgetedlevelof cost driver

(a)

$364,000
= $36.40 per machine hour
10,000 machinehours

(b)

$364,000
= $18.20 per direct-labor hour
20,000 direct-laborhours
$364,000
$280,000*

(c)

$1.30 per direct-labor dollar or 130%

of direct-labor cost

*Budgeted direct-labor cost = 20,000$14

2.

Actual
manufacturing
overhead

applied
manufacturing
overhead

overapplied or
underapplied
overhead

(a)

$340,000 (11,000)($36.40)

$60,400 overapplied overhead

(b)

$340,000 (18,000)($18.20)

$12,400 underapplied overhead

(c)

$340,000 ($270,000)(130%)

$11,000 overapplied overhead

Actual

direct-labor cost = 18,000$15

PROBLEM 3-52 (30 MINUTES)

1.

MARCO POLO MAP COMPANY

SCHEDULE OF COST OF GOODS MANUFACTURED
FOR THE MONTH OF MARCH
Direct material:
Raw-material inventory, March 1 .............................
Add: March purchases of raw material ...................
Raw material available for use .................................
Deduct: Raw-material inventory, March 31 .............
Raw materials used ..................................................

$ 17,000
113,000
$130,000
26,000
$104,000

Direct labor .....................................................................

Manufacturing overhead applied (50% of direct labor)
Total manufacturing costs.............................................
Add: Work-in-process inventory, March 1 ...................
Subtotal ...........................................................................
Deduct: Work-in-process inventory,
March 31 (90%$40,000) ........................................
Cost of goods manufactured.........................................

160,000 *
80,000
$344,000
40,000
$384,000
36,000
$348,000

*Work upward from the bottom of the statement, using the information available. Direct
labor + manufacturing overhead = total manufacturing costs direct material cost =
$344,000 $104,000 = $240,000. Since manufacturing overhead = 50% of direct labor, then
manufacturing overhead = $80,000 and direct labor = $160,000.
Cost

of goods manufactured = cost of goods sold + increase in finished-goods inventory

= $345,000 + $3,000 = $348,000.

PROBLEM 3-52 (CONTINUED)

2.

MARCO POLO MAP COMPANY

SCHEDULE OF PRIME COSTS
FOR THE MONTH OF MARCH
Raw material:
Beginning inventory ...................................................................
Add: Purchases ..........................................................................
Raw material available for use ...................................................
Deduct: Ending inventory ..........................................................
Raw material used ...............................................................................
Direct labor ..........................................................................................
Total prime costs .................................................................................

3.

MARCO POLO MAP COMPANY

SCHEDULE OF CONVERSION COSTS
FOR THE MONTH OF MARCH
Direct labor ............................................................................................
Manufacturing overhead applied (50% of direct labor) ......................
Total conversion cost ...........................................................................

PROBLEM 3-56 (45 MINUTES)

1.

$ 17,000
113,000
$130,000
26,000
$104,000
160,000
$264,000

Predetermined overhead rate:

Budgetedmanufacturing overhead $606,000*

Budgeteddirect-laborhours
120,000
$5.05 per direct-labor hour

$160,000
80,000
$240,000

*Budgeted manufacturing overhead = variable overhead + fixed overhead

$606,000 = $390,000
+ $216,000
2.

Cost of job 77:

Cost in beginning work-in-process inventory ....................................
Direct material.......................................................................................
Direct labor (3,500 hours$24.00 per hour)* ....................................
Applied manufacturing overhead
(3,500 hours$5.05 per hour).......................................................
Total cost ..............................................................................................

*Direct-labor rate
3.

$ 54,000
45,000
84,000
17,675
$200,675

direct-labor wages
$204,000

$24.00 per hour

direct-labor hours
8,500

Manufacturing overhead applied to job 79:

Direct-labor hourspredetermined overhead rate 2,000 hours$5.05 per hour

$10,100

PROBLEM 3-55 (25 MINUTES)

1.
Quarter
1st .................................................................
2nd ................................................................
3rd .................................................................
4th .................................................................

Predetermined
Overhead Rate
$4 per hour
5 per hour
4 per hour
5 per hour

Calculations
$100,000/25,000
$80,000/16,000
$50,000/12,500
$70,000/14,000

January
$100
300

April
$100
300

80
____
$480

100
$500

January
$480
48
$528

April
$500
50
$550

2.
Direct material.............................................
Direct labor .................................................
Manufacturing overhead:
20 hrs$4 per hr ................................
20 hrs$5 per hr ................................
Total cost ....................................................
3.
Total cost ....................................................
Markup (10%) ..............................................
Price.............................................................
4.

Predetermined rate

annualbudgetedmanufacturing overhead
annualbudgeteddirect-laborhours
$300,000
$4.44 per hour (rounded)
67,500

5.
Direct material...............................................
Direct labor ...................................................
Manufacturing overhead (20 hrs $4.44) ...
Total cost ......................................................

January
$100.00
300.00
88.80
$488.80

April
$100.00
300.00
88.80
$488.80

PROBLEM 3-55 (CONTINUED)

6.

Total cost ......................................................

Markup (10%) ................................................
Price...............................................................

$488.80
48.88
$537.68

Notice that with quarterly overhead rates, the firm may underprice its product in January
and overprice it in April.

CHAPTER-2
EXERCISE 2-24 (10 MINUTES)
The general formula for solving all three cases is as follows:

Beginning
inventory of
finished goods

Cost of goods
manufactured
during period

Ending
inventory of
=
finished goods

Cost-ofgoods sold
expense

Using this formula, we can find the missing amounts as follows:

Beginning inventory of finished goods................

Add: Cost of goods manufactured .......................
Subtract: Ending inventory of finished goods ....
Cost of goods sold ................................................

I
$ 84,000*
419,000
98,000
$405,000

Case
II
$12,000
95,000
8,000
$99,000*

III
7,000
318,000*
21,000
$304,000

EXERCISE 2-29 (25 MINUTES)

1.

ALEXANDRIA ALUMINUM COMPANY

SCHEDULE OF COST OF GOODS MANUFACTURED
FOR THE YEAR ENDED DECEMBER 31, 20X1
Direct material:
Raw-material inventory, January 1 .........................................
Add: Purchases of raw material .............................................
Raw material available for use ................................................
Deduct: Raw-material inventory, December 31 .....................
Raw material used ...................................................................
Direct labor ....................................................................................

$ 60,000
250,000
$310,000
70,000
$240,000
400,000

Manufacturing overhead:
Indirect material .......................................................................
Indirect labor ............................................................................
Depreciation on plant and equipment ....................................
Utilities ......................................................................................
Other .........................................................................................
Total manufacturing overhead ................................................
Total manufacturing costs............................................................
Add: Work-in-process inventory, January 1 ...............................
Subtotal ..........................................................................................
Deduct: Work-in-process inventory, December 31.....................
Cost of goods manufactured........................................................
2.

$ 10,000
25,000
100,000
25,000
30,000
190,000
$830,000
120,000
$950,000
115,000
$835,000

ALEXANDRIA ALUMINUM COMPANY

SCHEDULE OF COST OF GOODS SOLD
FOR THE YEAR ENDED DECEMBER 31, 20X1
Finished-goods inventory, January 1 ............................................................
Add: Cost of goods manufactured ................................................................
Cost of goods available for sale ....................................................................
Deduct: Finished-goods inventory, December 31 ........................................
Cost of goods sold ..........................................................................................

$150,000
835,000
$985,000
165,000
$820,000

EXERCISE 2-29 (CONTINUED)

3.

ALEXANDRIA ALUMINUM COMPANY

INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 20X1
Sales revenue ..................................................................................................
Less: Cost of goods sold ...............................................................................
Gross margin ...................................................................................................
Selling and administrative expenses .............................................................
Income before taxes........................................................................................
Income tax expense ........................................................................................
Net income .......................................................................................................

$1,105,000
820,000
$ 285,000
110,000
$ 175,000
70,000
$ 105,000

PROBLEM 2-42 (25 MINUTES)

1.

a.

Total prime costs:

Direct material ...................................................................................
Direct labor:
Wages ............................................................................................
Fringe benefits ..............................................................................
Total prime costs ..............................................................................

$ 2,100,000
485,000
95,000
$ 2,680,000

PROBLEM 2-42 (CONTINUED)

b.

Total manufacturing overhead:

Depreciation on factory building .....................................................
Indirect labor: wages ........................................................................
Production supervisor's salary .......................................................
Service department costs ................................................................
Indirect labor: fringe benefits ..........................................................
Fringe benefits for production supervisor .....................................
Total overtime premiums paid .........................................................
Cost of idle time: production employees ........................................
Total manufacturing overhead ........................................................

c.

$2,100,000
580,000
534,000
$3,214,000

Total period costs:

Advertising expense.........................................................................
Administrative costs ........................................................................
Rental of office space for sales personnel .....................................
Sales commissions ..........................................................................
Product promotion costs .................................................................
Total period costs .............................................................................

2.

$ 580,000
534,000
$1,114,000

Total product costs:

Direct material ...................................................................................
Direct labor........................................................................................
Manufacturing overhead ..................................................................
Total product costs ..........................................................................

e.

115,000
140,000
45,000
100,000
30,000
9,000
55,000
40,000
$ 534,000

Total conversion costs:

Direct labor ($485,000 + $95,000) ....................................................
Manufacturing overhead ..................................................................
Total conversion costs .....................................................................

d.

99,000
150,000
15,000
5,000
10,000
$ 279,000

The $15,000 in rental cost for sales office space rental is an opportunity cost. It
measures the opportunity cost of using the former sales office space for rawmaterial storage.

PROBLEM 2-57 (25 MINUTES)

1.

Output
(.75 liter bottles)
10,000
15,000
20,000

Calculation
$177,000/10,000
$195,500/15,000
$214,000/20,000

Unit Cost
$17.70
$13.03 (rounded)
$10.70

The unit cost is minimized at a sales volume of 20,000 bottles.

2.

Output
Sales
(.75 liter bottles) Revenue
10,000
$180,000
15,000
225,000
20,000
240,000

Total
Costs
Profit
$177,000 $ 3,000
195,500 29,500
214,000 26,000

Profit is maximized at a production level of 15,000 bottles of wine.

3.

The 15,000-bottle level is best for the company, since it maximizes profit.

4.

The unit cost decreases as output increases, because the fixed cost per unit declines
as production and sales increase.
A lower price is required to motivate consumers to purchase a larger amount of
wine.

CHAPTER-3
Schedule of Cost of Goods Manufactured
Direct material:
Raw material inventory, beginning
Add: Raw material purchases
Raw material available for use
Deduct: Raw material, ending
Raw material used

$xxx
xxx
$xxx
xxx
$xxx

Direct labor
Manufacturing overhead
Indirect material
Indirect labor
Other actual overhead charges
Total actual manufacturing overhead
Add: Overapplied overhead
or Deduct: Underapplied overhead
Overhead applied to work-in-process
Total manufacturing costs
Add: Work-in-process inventory, beginning
Subtotal
Deduct: Work-in-process inventory, ending
Cost of goods manufactured

xxx

$xxx
xxx
xxx
$xxx
xxx
xxx
$xxx
xxx
$xxx
xxx
$xxx

Schedule of Cost of Goods Sold

Finished goods inventory, beginning
Add: Cost of goods manufactured*
Cost of goods available for sale
Deduct: Finished goods inventory, ending
Cost of goods sold
Add: Underapplied overhead
or Deduct: Overapplied overhead
Cost of goods sold (adjusted)

$xxx
xxx
$xxx
xxx
$xxx
xxx
$xxx

* From Cost of Goods Manufactured Schedule

CHAPTER-4
SOLUTIONS TO EXERCISES
EXERCISE 4-16 (10 MINUTES)
The general formula for all three cases is the following:

Work-in-process,
beginning

Units started
during month

Units completed
during month

Work-in-process,
ending

Using this formula, the missing amounts are:

1.

12,000 units

2.

5,300 kilograms

3.

750,000 gallons

EXERCISE 4-18 (15 MINUTES)

1.

6,000 equivalent units (refer to (a) in the following table)

2.

4,400 equivalent units (refer to (b) in the following table)

CALCULATION OF EQUIVALENT UNITS: RAINBOW GLASS COMPANY
Weighted-Average Method

Work in process, October 1 ....

Units started during October ..
Total units to account for ........
Units completed and transferred
out during October ...........
Work in process, October 31 ..
Total units accounted for ........
Total equivalent units ..............

Physical
Units
1,000
5,000
6,000
4,000
2,000
6,000

Percentage
of
Completion with
Respect to
Conversion
60%

100%
20%

Equivalent Units
Direct
Material

Conversion

4,000
2,000
_____
(a) 6,000

4,000
400
____
(b) 4,400

EXERCISE 4-24 (25 MINUTES)

TULSA PAPERBOARD COMPANY
Weighted-Average Method
Direct
Material
Conversion
Work in process, February 1 ...................
$ 5,500
$ 17,000
Costs incurred during February .............
110,000
171,600
Total costs to account for .......................
$115,500
$188,600
Equivalent units .......................................
110,000
92,000
Costs per equivalent unit ........................
$ 1.05
$ 2.05

Total
$ 22,500
281,600
$304,100
$

3.10

1. Cost of goods completed and

transferred out during February:

number of units total cost per

.......................
transferred out equivalent unit
2.

90,000$3.10

$279,000

Cost remaining in February 28 work

in process:
Direct material (20,000*$1.05) .
Conversion (2,000*$2.05) ........
Total ..............................................
Total costs accounted for ................

$ 21,000
4,100
25,100
$304,100

*Equivalent units in February 28 work in process:

Total equivalent units (weighted average) .......................

Units completed and transferred out ...............................
Equivalent units in ending work in process ....................

Direct
Material
110,000
(90,000)
20,000

Conversion
92,000
(90,000)
2,000

PROBLEM 4-36 (30 MINUTES)

1.

a.

Tax
Returns
(physical
units)
Returns in process, February 1 ..... 200
Returns started in February ........... 825
Total returns to account for ........... 1,025
Returns completed
during February ........................ 900
Returns in process, February 28 ... 125
Total returns accounted for ........... 1,025
Total equivalent units of activity ...

Percentage
of
Completion
with Respect
to
Conversion
(labor and
overhead)
25%

100%
80%

Equivalent Units
Labor
Overhead

900
100
____
1,000

900
100
____
1,000

Overhead
2,500
45,000
47,500
1,000
47.50

Total
8,500
134,000
142,500

b.
Returns in process, February 1 ...................
Costs incurred during February ..................
Total costs to account for ............................
Equivalent units ............................................
Costs per equivalent unit .............................
2.

Labor
6,000
89,000
95,000
1,000
95.00

142.50

Cost of returns in process on February 28:

Labor:

equivalent unitscost per equivalent unit

10095.00 .......................................................

9,500

Overhead: equivalent unitscost per equivalent unit

10047.50 .......................................................
Total cost of returns in process on February 28 .........................................

4,750
14,250

CHAPTER-5
An activity-based costing system is a two-stage process of assigning costs to
products. In stage one, activity-cost pools are established. In stage two a cost driver
is identified for each activity-cost pool. Then the costs in each pool are assigned to
each product line in proportion to the amount of the cost driver consumed by each
product line.
A cost driver is a characteristic of an event or activity that results in the incurrence of costs
by that event or activity. In activity-based costing systems, the most significant cost
drivers are identified. Then a database is created that shows how these cost drivers
are distributed across products. This database is used to assign costs to the various
products depending on the extent to which they use each cost driver.
5-5

The four broad categories of activities identified in an activity-based costing system

are as follows:
(a)

Unit-level activities: Must be done for each unit of production.

(b)

Batch-level activities: Must be performed for each batch of products.

(c)

Product-sustaining activities: Needed to support an entire product line.

(d)

Facility-level (or general-operations-level) activities: Required for the entire

production process to occur.

Product-costing systems based on a single, volume-based cost driver tend to overcost high-volume
products, because all overhead costs are combined into one pool and distributed across all products on the
basis of only one cost driver. This simple averaging process fails to recognize the fact that a
disproportionate amount of costs often is associated with low-volume or complex products. The result is
that low-volume products are assigned less than their share of manufacturing costs, and high-volume
products are assigned more than their share of the costs.

The pool rate is calculated by dividing the budgeted amount of an activity cost pool by the
budgeted total quantity of the associated cost driver. The pool rate is the cost of a
particular activity that is expected per unit of the associated cost driver.

SOLUTIONS TO EXERCISES
EXERCISE 5-21 (15 MINUTES)
1.

Material-handling cost per lens:

$50,000
200 $1,000
[(25)(200) (25)(200)]*
*The total number of direct-labor hours.
An alternative calculation, since both types of product use the same amount of the
cost driver, is the following:
$50,000
$1,000
50*

*The total number of units (of both types) produced.

2.

Material-handling cost per mirror = $1,000. The analysis is identical to that given for
requirement (1).

3.

Material-handling cost per lens:

$50,000
5
(5 15) *
$500
25

*The total number of material moves.

The number of material moves for the lens product line.
4.

Material-handling cost per mirror:

$50,000
15 *
(5 15)
$1,500
25

*The number of material moves for the mirror product line.

EXERCISE 5-22 (15 MINUTES)

1.

a.

Quality-control costs assigned to the Satin Sheen line under the traditional system:
Quality-control costs = 14.5% direct-labor cost
Quality-control
costs assigned to
Satin Sheen line = 14.5% $27,500
= $3,988 (rounded)

b.

Quality-control costs assigned to the Satin Sheen line under activity-based costing:
Quantity for
Activity
Pool Rate
Satin Sheen
Incoming material inspection....... $11.50 per type ..... 12 types ........
In-process inspection ...................
.14 per unit ...... 17,500 units ..
Product certification ..................... 77.00 per order .... 25 orders .......
Total quality-control costs assigned ..........................................................

2.

The traditional product-costing system undercosts the Satin Sheen product line, with
respect to quality-control costs, by $525 ($4,513 $3,988).

PROBLEM 5-32 (30 MINUTES)

1.

Predetermined overhead rate = budgeted overhead budgeted direct-labor hours

= $800,000 25,000* = $32 per direct labor hour
*25,000 budgeted direct-labor hours = (3,000 units of Standard)(3 hrs./unit) +
(4,000 units of Enhanced)(4 hrs./unit)

Direct material.
Direct labor:
3 hours x $12
4 hours x $12
Manufacturing overhead:
3 hours x $32
4 hours x $32
Total cost.
2.

Assigned
Cost
$ 138
2,450
1,925
$4,513

Activity-based overhead application rates:

Standard

Enhanced

$ 25

$ 40

36
48
96
$157

128
$216

Activity Cost Driver

Activity

Application
Rate

Cost

Order
processing

$150,000

500 orders
processed (OP)

$300 per OP

Machine
processing

560,000

40,000 machine
hrs. (MH)

$14 per MH

Product
inspection

90,000

10,000 inspection
hrs. (IH)

$9 per IH

A product (or service) costing system accumulates the total cost of

making products and facilitates the calculation of a per-unit cost.
Applications exist in:

A cost driver is any event or activity that causes costs to be incurred. Possible examples
include labor hours in manual assembly work and machine hours in automated
production settings.

The higher the degree of correlation between a cost-pool increase and the
increase in its cost driver, the better the cost management information.

. Managerial accounting is the process of identifying, measuring, analyzing,

interpreting, and communicating information in pursuit of an organizations goals.
*

Line personnel are directly involved in carrying out the mission of the
organization (e.g., assembly workers in a factory, doctors in a hospital, teachers in
a school).

Staff personnel (accountants, lawyers, personnel directors, and other

administrative positions) provide support for the organizations mission.