Fundamentals of Product and Service Costing: Solutions To Review Questions

Chapter 06 - Fundamentals of Product and Service Costing
Fundamentals ofChapter
Product and Service Costing
Solutions to Review Questions
6-1.
Cost allocation is the assignment of costs in cost pools to cost objects. The cost objects
may be products, services, customers, processes, or anything for which we want to
know the cost. Product costing uses cost allocation to calculate product costs. Product
costing is an application of cost allocation where products are the cost objects.
6-2.
Cost management systems should satisfy the following criteria:
Cost systems should have a decision focus.
Different cost information is used for different purposes.
Cost information for managerial purposes must meet the cost-benefit test.
6-3.
Cost flow diagrams serve two purposes. First, they help describe how a cost
management system works, just like a flow chart helps you understand how a process
works. Second, cost flow diagrams help managers identify and understand quickly the
effect of changes in the system design on reported costs.
6-4.
A job costing accounting system traces costs to individual units or to specific jobs
(typically custom products). A process costing accounting system is used when identical
units are produced through a series of uniform production steps. Operation costing is
used when goods have some common characteristics (process costing) and some
individual characteristics (job costing).
6-5.
The predetermined overhead rate is the value at which overhead is applied to one unit
of the cost allocation base. It is used in product costing to apply the overhead to the
units produced.
6-1
2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution
in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
6-6.
It would be ideal, but unlikely, that an allocation base would reflect direct causality
between the activity and the overhead cost.
6-7.
Continuous flow processing is used when a single product is mass produced in a
continuing process. Examples would include products such as paint, gasoline, paper, or
any others that are mass produced in a continuing process.
6-8.
The basic cost flow model appears as follows:
Beginning balance + Transfers in Transfers out = Ending balance
Beginning balance is the balance of inventory at the beginning of the period. Transfers
in represent inventory purchased or transferred in from another department (for
example, raw materials would be goods transferred in to work in process) for the period.
Transfers out are goods transferred from one department to another (for example, work
in process would be transferred out to finished goods). Ending balance represents the
amount of inventory in a department at the end of the accounting period.
Solutions to Critical Analysis and Discussion Questions

6-9.
Although there may be no one correct way to allocate cost, cost allocation can provide
managers with information about the costs of the resources they use. Ignoring costs that
cannot be directly assigned leads to the possibility that managers forget that it is a real
resource that is being used.
6-10.
There are three important points to consider:
1. The cost system should meet the needs of the users (the decision makers).
2. The cost system must provide the appropriate data for its intended purpose. Different
cost information is used for different purposes.
3. Cost information for managerial purposes must meet the cost-benefit test. The costs
of implementing the system should be less than the benefits derived from the system
(i.e. better decisions).
6-2
6-11.
The basic cost flow model is as follows:
Beginning balance + Transfers in Transfers out = Ending balance
This model is used for finding one unknown or for comparing perpetual inventory system
output to a physical inventory count. An example of finding one unknown is if the
beginning balance is known (from the previous period ending balance), transfers in are
known, and ending inventory is counted physicallyand we are asked to find the cost of
goods sold for the period (transfers out).
6-12.
It is sometimes difficult (and frustrating) for managers when the cost accountant says
that the cost depends on the decision being made. Many people feel that there is one
cost that is correct. However, as we saw in Chapter 2, costs behave in different ways
and this behavior is affected by the decision being made.
6-13.
Reasons to agree with approach: If the products are not contributing to company profits,
then the products should be eliminated. This will increase overall company profits.
Reasons not to agree with approach: The reported product costs and the associated
product profits depend on the allocation of indirect costs. Under a different allocation
process, the results could be very different. In addition, many of the indirect costs are
unavoidable. If the products are eliminated, the costs will be allocated to the remaining
products.
6-14.
The way the products are defined will depend, at least in part, on the decision the
dean is interested in making. They may be defined as degree programs vs. non-degree
programs. They may be the different degree programs. They might be the credit hour
(although it is unlikely you would be able to get much information at this level).
You might ask about the time frame of the analysis (to determine fixed and variable
costs), the source of the data, and how to treat costs that the school does not directly
pay for but where the school consumes the resources (e.g., university buildings).
This is a very difficult analysis in a university setting because of the high proportion of
common costs and the difficulty in defining products.
6-3
6-15.
Answers will vary. Common answers include the number of students, the number of
credit hours, number of classes, number of class sessions, and so on.
6-16.
The two most important criteria in determining an allocation base are (1) causality and
(2) measurability. We would like an allocation base that causes costs. This is rarely
possible, but it is a good criterion to use. Second, we need to be able to measure the
allocation base at reasonable cost.
6-17.
Although it would be ideal for the cost allocation base to have cause-and-effect relation
with overhead costs, it is unlikely to happen for several reasons. One reason is that
some of the overhead is fixed and therefore does not depend on volume (at least within
certain volume ranges). This does not make the choice of the allocation base
unimportant. First, it is helpful to have an intuitive link between the allocation base
(machine hours, for example) and overhead resource (machine depreciation). It serves
as a reminder of the service being provided. Second, it is often the case that the cost is
not solely fixed and there might be some variable component. Finally, cost might be
fixed over a certain range, but not over the entire relevant range.
6-18.
The allocation base determines the costs assigned to the cost objects. If these costs are
used to make decisions and if they are based on inappropriate or improper allocation
bases, they could lead the manager to make bad decisions.
6-19.
There are many reasons why two companies may have different cost systems. First,
firms may be pursuing different strategies (cost containment versus product
differentiation) and want different information from the cost system. A second reason is
that some firms may be subject to regulations (for example, utilities) and the regulations
dictate the information needed from the cost system.
6-20.
A firm can have a two-stage system and use the same allocation base to allocate costs
in the second stage. There will be different costs reported if the allocation base (direct
labor, say) is used differently by the products in the second stage cost pools.
6-4
Solutions to Exercises
6-21. (20 min.)Basic Cost Flow Model: Ofce Mart.
a. $300,000 (see item 5)
b. $1,240,000 = $1,200,000 + $40,000 (see items 2 & 3)
c. $200,000 (see item 5)
d. $1,340,000. BB + TI TO = EB
$300,000 + $1,240,000 X = $200,000
X = $300,000 + $1,240,000 $200,000
X = $1,340,000
6-22. (20 min.) Basic Cost Flow Model: Generic Electric.

a. $100.5 million = $24.0 million + $40.5 million + (.8 x $45.0 million)
b. $72.36 million = .72 x $100.5 million
c. BB + TI TO = EB
0 + $100.5 million $72.36 million = EB
EB = $28.14 million
6-23. (20 min.) Basic Cost Flow Model.
Based on the basic formula:
BB
+
a. $51,000 +
b.
c.
TI
X
TO
$57,000
X
$28,400 + $88,000
X
X
X
$67,000 +
X
$170,000
X
X
=
=
=
=
=
=
=
=
=
EB
$48,000
$54,000
$24,800
$88,000 + $28,400 $24,800
$91,600
$56,000
$56,000 + $170,000 $67,000
$159,000
6-5

BB
X
+
TI
TO
A.
+ $260,000 $270,000
X
X
B. $7,100 + $22,000
X
X
X
C. $156,000 +
X
$280,000
X
X
=
=
=
=
=
=
=
=
=
=
EB
$250,000
$250,000 + $270,000 $260,000
$260,000
$6,200
$7,100 $6,200 + $22,000
$22,900
$128,000
$128,000 + $280,000 $156,000
$252,000

BB
X
+
TI
TO
A.
+ $18,000 $27,000
X
X
B. $30,000 + $110,000
X
X
X
C. $260,000 +
X
$920,000
X
X
=
=
=
=
=
=
=
=
=
=
EB
$21,000
$21,000 + $27,000 $18,000
$30,000
$31,000
$30,000 + $110,000 $31,000
$109,000
$120,000
$120,000 + $920,000 $260,000
$780,000
6-6
6-26. (10 min.)Basic Product Costing: Enviro Corporation.

Materials.............................................
Labor..................................................
Manufacturing overhead....................
Total cost.......................................
Gallons produced............................
= Cost per gallon................................
$714,000
61,200
244,800
$1,020,000
850,000
$1.20
6-27. (10 min.)Basic Product Costing: Poguess Pops.

Materials.............................................
Labor..................................................
Manufacturing overhead....................
Total cost.......................................
Liters produced...............................
= Cost per liter....................................
$650,000
110,000
2,940,000
$3,700,000
10,000,000
$0.37
6-28. (10 min.)Basic Product Costing: Big City Bank.

Labor...................................................
Manufacturing overhead.....................
Total................................................
Checks processed...........................
= Cost per check.................................
$ 35,000
77,000
$ 112,000
2,800,000
$0.04
6-7
6-29. (20 min.) Basic Product Costing: Kim and Smith Refners.
a.
Production:
Gallons..........................................
Percentage complete...................
Equivalent gallons........................
Costs:
Materials.......................................
Labor...........................................
Manufacturing overhead..............
Total cost incurred........................
Cost per equivalent gallon...............
Cost assigned to product................
Total
450,000
Sold
b.
Work-inProcess,
March 31
440,000a
400,000
100%
400,000
50,000
80%
40,000
$188,000
48,400
98,000
$334,400
$0.76b
$334,400
$304,000c
$30,400d
a 440,000
equivalent units = 400,000 gallons completed + 80% x 50,000 gallons

in process.
b $0.76 = $334,400 440,000 equivalent units.
c $304,000 = 400,000 equivalent units x $0.76.
d $30,400 = 40,000 equivalent units x $0.76.
6-8
6-30.
(20 min.) Basic Product CostingEthical Issues: Old Tyme Soda.
a. and b.
a.
Production:
Barrels...............................................
Percentage complete.......................
Equivalent barrels.............................
Costs:
Materials...........................................
Manufacturing overhead...................
Total cost incurred............................
Cost per equivalent barrel...................
Cost assigned to product....................
Total
Sold
10,000
8,800
100%
8,800
1,200
30%
360
$36,960c
$1,512d
9,160a
$18,072
20,400
$38,472
$4.20b
$38,472
a 9,160 equivalent units = 8,800 barrels sold

d $1,512 = 360 equivalent units x $4.20.
b.
Work-inProcess,
November 30
+ 30% x 1,200 barrels in process.
c. (1) He would raise the estimated degree of completion. The change in the estimate
will cause more cost to be assigned to work-in-process inventory and less to finished
goods. As the finished goods are sold, cost of goods will be lower and income
higher.
(2) Unless the production supervisors estimates are incorrect, the controller should
not change the estimates. He or she has an ethical (and legal) obligation to ensure
that the estimates reflect fairly the results of operations.
6-9
6-31. (15 min.) Process Costing: Van Goe.
Production:
Gallons..........................................
Equivalent gallons........................
Costs:
Materials.......................................
Conversion costs..........................
Cost per equivalent gallon...............
Total
300,000
Transferred
to Finished
Goods
Work-inProcess,
January 31
288,000a
240,000
100%
240,000
60,000
80%
48,000
$411,000
525,000
$936,000
$3.25b
$936,000
$780,000c
$156,000d
a 288,000
equivalent units = 240,000 gallons completed + 80% x 60,000 gallons

in process.
a $3.25 = $936,000 288,000 equivalent units.
b $780,000 = 240,000 equivalent units x $3.25.
6-10
6-32. (15 min.) Process Costing: Opech, Inc.
Production:
Barrels (millions)..........................
Equivalent barrels (millions).........
Costs:
Materials (millions).......................
Conversion costs (millions)..........
Total cost incurred (millions)........
Cost per equivalent barrel...............
Total
300
Shipped
Work-inProcess,
May 31
291
270
100%
270
30
70%
21
$5,000
6,640
$11,640
$40a
$11,640
$10,800b
$840c
a 291 equivalent units = 270 barrels shipped

a $40 = $11,640 291 equivalent units.
b $10,800 = 270 equivalent units x $40.
c $840 = 21 equivalent units x $40.
+ 70% x 30 barrels in process.
6-11
6-33. (15 min.) Process Costing: Oholics, Ltd.
Production:
Pounds.........................................
Equivalent pounds........................
Costs:
Materials.......................................
Conversion costs..........................
Cost per equivalent pound..............
Total
20,000
Completed
Work-inProcess,
April 30
19,600a
19,000
100%
19,000
1,000
60%
600
$29,700
36,940
$66,640
$3.40b
$66,640
$64,600c
$2,040d
a 19,600
equivalent units = 19,000 pounds completed + 60% x 1,000 pounds in

process.
d $2,040 = 600 equivalent units x $3.40.
6-34. (15 Minutes) Predetermined Overhead Rates: Tiger Furnishings.
Predetermined overhead rate = $34.82 per direct labor hour.
Units produced.......................
Machine-hours.......................
Direct labor-hours..................
Direct materials......................
Direct labor............................
Manufacturing overhead........
Total Costs.............................
Basic
1,000
4,000
3,000
$10,000
64,500
Burden Rate:..........................
Total overhead...................
Direct labor-hours............
Dominator
250
2,000
2,000
$3,750
35,500
$174,100
5,000
Total
1,250
6,000
5,000
$13,750
100,000
174,100
$287,850
= $34.82
6-12

Predetermined overhead rate = 174.1% of direct labor cost.
Units produced.......................
Machine-hours.......................
Direct labor-hours..................
Direct materials......................
Direct labor............................
Manufacturing overhead........
Total Costs.............................
Basic
1,000
4,000
3,000
$10,000
64,500
Burden Rate:..........................
Total overhead...................
Direct labor cost...............
Dominator
250
2,000
2,000
$3,750
35,500
$174,100
$100,000
Total
1,250
6,000
5,000
$13,750
100,000
174,100
$287,850
=174.1%

Predetermined overhead rate = $29.0167 per machine-hour (rounded).
Units produced..................
Machine-hours...................
Direct labor-hours..............
Direct materials..................
Direct labor........................
Manufacturing Overhead...
Total Costs.........................
Basic
1,000
4,000
3,000
$10,000
64,500
Burden Rate:......................
Total overhead...............
Machine-hours.............
Dominator
250
2,000
2,000
$3,750
35,500
Total
1,250
6,000
5,000
$13,750
100,000
174,100
$287,850
$174,100
6,000 =$29.0167
6-13
6-37. (20 Minutes) Predetermined Overhead Rates Tiger Furnishings.
6-38. (30 Minutes) Operations Costing: Howrley-David, Inc.

The unit costs are:
Fatboy:.............
Screamer:........
$4,000
$5,000
Number of units.........................
Materials cost per unit................
Costs..........................................
Conversion costs:
Direct Labor..........................
Indirect materials..................
Other overhead.....................
Total operation cost.........
Fatboy
2,000
$2,000
$ 4,000,000
Screamer
4,000
$3,000
$12,000,000
Total
6,000
$16,000,000
$ 6,000,000
1,800,000
4,200,000
$12,000,000
Conversion cost per unit in plant.........................

($12,000,000 6,000 units) = $2,000 per unit.
6-14
Operation cost
(@ $2,000 per unit)....................
Material cost...............................
Total cost....................................
Number of units.........................
Unit cost.....................................
$4,000,000a $8,000,000b
4,000,000
12,000,000
$8,000,000 $20,000,000
2,000
4,000
$4,000
$5,000
$4,000,000 = 2,000 units x $2,000 per unit.
$8,000,000 = 4,000 units x $2,000 per unit.
$12,000,000
6-39. (30 Minutes) Operations Costing: S. Lee Enterprises.

The unit costs are:
SL1:.................
SL2:.................
$2,200
$2,700
Number of units.........................
Materials cost per unit................
Costs..........................................
Conversion costs:
Direct Labor..........................
Other overhead.....................
SL1
1,300
$900
$ 1,170,000
SL2
1,800
$1,400
$2,520,000
Total
3,100
$3,690,000
$ 1,200,000
480,000
2,350,000
$4,030,000
Conversion cost per unit in plant.........................

($4,030,000 3,100 units) = $1,300 per unit.
Operation cost
(@ $1,300 per unit)....................
Material cost...............................
Total cost....................................
Number of units.........................
Unit cost.....................................
$1,690,000a
1,170,000
$2,860,000
1,300
$2,200
$1,690,000 = 1,300 units x $1,300 per unit.
$2,340,000 = 1,800 units x $1,300 per unit.
$2,340,000b
2,520,000
$4,860,000
1,800
$2,700
$4,030,000
6-15
6-40. (30 Minutes) Operations Costing: Organic Grounds.

The unit costs are:
Star:.................
$10.60
Bucks:..............
$12.60
Number of pounds.....................
Materials cost per pound...........
Costs..........................................
Conversion costs:
Direct Labor..........................
Star
5,000
$4.00
$20,000
Bucks
20,000
$6.00
$120,000
Total
25,000
$ 140,000
$ 50,000
15,000
100,000
$165,000
Other overhead.....................
Cost per pound in plant.............

($165,000 25,000 pounds) = $6.60 per pound.
Conversion cost
(@ $6.60 per pound).................
Material cost...............................
Total cost....................................
Number of pounds.....................
Cost per pound..........................
$33,000a
20,000
$53,000
5,000
$10.60
$33,000 = 5,000 units x $6.60 per pound.
$132,000 = 20,000 units x $6.60 per pound.
$132,000b
120,000
$252,000
20,000
$12.60
$165,000
6-16
Solutions to Problems
6-41. (30 Minutes) Product Costing: Tiger Furnishings.
The unit costs are: Basic: $186.80 and Dominator: $404.22
Basic Dominator
Total
Direct materials..............................................................
$10,000
$3,750 $13,750
Direct labor....................................................................64,500
35,500 100,000
Manufacturing overhead
a
b
(@174.1% of Direct labor cost) ..................................
112,295
61,805
174,100
b
Total costs......................................................................
$186,795 $101,055 $287,850
Units produced..............................................................
250
1,000
Unit cost.........................................................................
$186.80 $404.22
a
174.1% = $174,100 $100,000.
Adjusted for rounding error.
6-42. (30 Minutes) Product Costing: Tiger Furnishings.

The unit costs are: Basic: $190.57 and Dominator: $389.13
Basic
Direct materials........................................................
$ 10,000
Direct labor...............................................................
64,500
Manufacturing overhead
a
(@29.0167 per machine-hour) .............................
116,067b
Total costs................................................................
$ 190,567
Units produced.........................................................
1,000
Unit cost...................................................................
$ 190.57
Dominator
$3,750
35,500
Total
$13,750
100,000
58,033c
$97,283
250
$389.13
174,100
$287,850
$29.0167 per machine-hour = $174,100 6,000 machine-hours.
$116,067 = 4,000 machine-hours x $29.0167 per machine-hour.
$58,033 = 2,000 machine-hours x $29.0167 per machine-hour.
6-17
6-43. (30 Minutes) Product CostingEthical Issues: Tiger Furnishings.

a. The unit costs are different because the two products use the machine hours and
direct labor costs in different proportions. The Basic model is more machine
intensive (it uses relatively more machine hours than labor compared to the
Dominator model). This means that when the company moves to machine hours to
allocate costs, the Basic model will be assigned more overhead costs resulting in
higher reported product costs.
b. Without knowing more about the production process at Tiger Furnishings, it is not
possible to say which of these is better. Because you get different results, it may pay
to use a two stage system to split overhead between that which is driven more by
machine hours and that driven more by direct labor.
c. The allocation base should be chosen on the basis of how overhead is related to
cost. Income is the result of this decision and not the basis for the decision.
6-44. (30 Minutes) Two-Stage Allocation and Product Costing: Mets Products.
a. The overhead rates are $13.50 per machine hour and 45% of direct-materials cost.
Machine-Hour
Account
Related
Utilities ...................
$ 6,000
Supplies .....................................................
Machine depreciation and maintenance ....
13,200
Purchasing and storing materials ..............
Miscellaneous.............................................
5,100
Total overhead .........................................
Total machine hours................................
Total materials cost..................................
Overhead rate ............................................
$ 24,300
1,800 hours
$13.50 / hour
Materials
Related
$4,200
4,800
____________________________
$ 9,000
$20,000
45%
6-18
b. The cost per unit of output is $3.49 for baseball caps and $4.96 for T-shirts.
Baseball
Caps
Machine hours used............................................
1,000
Direct materials costs .
$12,000
Direct labor costs
4,000
Manufacturing overhead costs .
Machine-hour related overheada.......................
13,500
b
Materials-related overhead ...............................
5,400
Total cost.............................................................
$34,900
Units produced ..
10,000
Cost per unit........................................................
$3.49
a
b
T-shirts
800
Total
1,800
$8,000
2,400
$20,000
6,400
10,800
3,600
$24,800
5,000
$4.96
24,300
9,000
$59,700
15,000
$13,500 = 1,000 machine hours x $13.50 per machine hour;

$10,800 = 800 machine hours x $13.50 per machine hour.
$5,400 = $12,000 materials cost x 45%;
$3,600 = $8,000 materials cost x 45%.
6-45. (30 Minutes) Two-Stage Allocation and Product Costing: Owl-Eye

Radiologists.
a. The overhead rates are $46 per equipment hour and $50 per direct labor hour.
EquipmentAccount
Hour Related
Utilities ......................
$ 4,800
Supplies .........................................................
Indirect labor and supervision .......................
Equipment depreciation and maintenance . . .
8,400
Miscellaneous................................................
3,360
Total overhead .............................................
Total equipment hours.................................
Total labor hours.........................................
$ 16,560
360 hours
Overhead rate ...............................................
$46 per hour
Direct-Labor
Hour Related
$12,600
20,400
____________________________
$ 33,000
660 hours
$50 per hour
6-19
b. The costs per patient are $114.75 per hospital patient hour and $29.44 per other
patient.
a
b
Hospital
Patients
Equipment hours used........................................240
Direct labor-hours................................................480
Other
Patients
120
180
Direct labor costs

$38,400
Overhead costs .
Equipment-hour related overheada....................
11,040
b
Direct labor-hours related overhead .................
24,000
Total cost.............................................................
$73,440
Patients ..
640
Cost per patient...................................................
$114.75
$10,800
$49,200
5,520
9,000
$25,320
860
$29.44
16,560
33,000
$98,760
1,500
Total
360
660
$11,040 = 240 equipment hours x $46 per equipment hour;

$5,520 = 120 equipment hours x $46 per equipment hour.
$24,000 = 480 direct labor-hours x $50 per direct labor-hour;
$9,000 = 180 direct labor-hours x $50 per direct labor-hour.
6-46. (30 Minutes) Operations Costing: Vermont Instruments.
The unit costs are:

Fin-X:.......
Sci-X:.......
$28
$33
Number of units.........................
Parts cost per unit......................
Costs..........................................
Operation costs:
Direct Labor..........................
Overhead..............................
Cost per unit in plant..................
Fin-X
10,000
$25
$250,000
Sci-X
40,000
$30
$1,200,000
Total
50,000
$ 1,450,000
62,000
17,500
70,500
$ 150,000
($150,000 50,000 units) = $3 per unit.

6-20
Overhead
Operation cost (@ $3 per unit). .

$ 30,000a $ 120,000b
First Stage
Material cost...............................
250,000
1,200,000
Total cost....................................
$ 280,000 $1,320,000
Number of units.........................
10,000
40,000
Direct Labor Cost
Machine-Related
Unit cost.....................................
$28 Related $33
Overhead
Overhead
a $30,000 = 10,000 units x $3 per unit.
$150,000
$120,000 = 40,000 units x $3 per unit.

Machine Hours
Direct Labor Cost
Second Stage
6-47. (45 Minutes) Account Analysis, Two-Stage Allocation, and Product
Costing: Tiger Furnishings.
b
a. Cost Flow Diagram
Basic
Dominator
6-21
6-47. (continued)
b.
Basic
Dominator
$188
$400
Units Produced............................................
Machine hours.............................................
Direct labor hours........................................
Basic
1,000
4,000
3,000
Dominator
250
2,000
2,000
Direct materials............................................
$10,000
$3,750
Direct labor..................................................
64,500
Utilities....................................................
Supplies..................................................
Training...................................................
Supervision.............................................
Machine depreciation.............................
Plant depreciation...................................
Miscellaneous.........................................
Total...................................................
Total Costs...................................................
Machine hour rate...................................

Direct labor cost rate...............................
$
13,750
35,500 100,000
Machinehour
Direct labor
related
cost related
$1,800
$0 $1,800
0
5,000
5,000
0
10,000
10,000
0
25,800
25,800
32,000
0 32,000
14,200
0 14,200
0
85,300 85,300
$48,000
$126,100 174,100
$287,85
0
Manufacturing Overhead
Burden Rates
Total
1,250
6,000
5,000
($48,000 6,000 hours)

=
($126,100 $100,000) =
$8.00
126.1%
6-22
6-47. (continued)
Product Costing
Direct material...........................................
$ 10,000
Direct labor...............................................
64,500
Overhead
Machine-related (@$8 per machine-hour)...... 32,000a
Labor-related (@126.1% direct labor cost)
81,335c
Total overhead.........................................
$113,335
Total cost......................................................
$187,835
Units produced.........................................
1,000
= Unit cost (rounded)..................................
= $188
a
$32,000 = 4,000 machine-hours x $8 per machine-hour.
$16,000 = 2,000 machine-hours x $8 per machine-hour.
$81,335 = $64,500 x 126.1% direct labor cost.
$44,765 = $35,500 x 126.1% direct labor cost
$ 3,750
35,500
$ 13,750
100,000
16,000b
48,000
44,765d 126,100
$60,765 $174,100
$100,015 $287,850
250
1,250
= $400
Solutions to Integrative Case

6-48. (45 Minutes) Product Costing, Cost Estimation, and Decision Making: Dolan
Products.
a. To determine product costs and margins, first calculate the Year 1 overhead rate:
Overhead rate
Total overhead
Total direct labor hours
$750,000
(5,000 x 2.0 + 10,000 x 1.0 + 20,000 x 0.5)
$750,000
30,000 hours
= $25 per direct labor hour
6-23
The product costs are:

Red
Yellow
Green
Direct materials ................................
$70.00
$50.00
$30.00
Direct labor (@$20)...........................
40.00
20.00
10.00
Manufacturing overhead (@$25)......
50.00
25.00
12.50
Product cost................................. $160.00
$95.00
$52.50
The product margins are:

Red
Price ................................................. $150.00
Yellow
Green
$100.00
$75.00
160.00
95.00
52.50
Product margin............................. $(10.00)
$5.00
$22.50
Product cost......................................
6-48. (continued)
b. To determine product costs and margins, first calculate the Year 2 overhead rate:
Overhead rate
Total overhead
Total direct labor hours
$650,000 (10,000 x 1.0 + 20,000 x 0.5)
$650,000 20,000 hours
$32.50 per direct labor hour
6-24
The product costs are:

Yellow
Green
Direct materials .......................................
$50.00
$30.00
Direct labor (@$20).................................
20.00
10.00
Manufacturing overhead (@$32.50)........
32.50
16.25
Product cost........................................ $102.50
$56.25
The product margins are:

Yellow
Price ................................................. $100.00
Green
$75.00
Product cost......................................
102.50
56.25
Product margin.............................
$(2.50)
$18.75
6-48. (continued)
c.
Dolan should not drop Yellow.
The problem is that some of the manufacturing overhead is fixed and when a product
is dropped, that cost is not avoided, but added to the overhead allocated to the
remaining products. We know that not all the overhead is fixed, however, because
overhead declined from $750,000 to $650,000 when Dolan dropped Red.
We can use the high-low method from Chapter 5 to estimate the fixed overhead
component and the variable overhead rate. We only have two observations, so these
serve as the high and low observations.
6-25
Variable cost =
Fixed costs
Cost at highest activity cost at lowest activity

Highest activity lowest activity
$750,000 $650,000
= $10.00 per direct labor hour
30,000 20,000
= Total costs variable costs

= $750,000 ($10.00 x 30,000)
= $450,000
or
Fixed costs
= $650,000 ($10.00 x 20,000)

= $450,000
Considering only financial considerations, the variable cost of Yellow is $50 for
materials, $20 for direct labor, and $10 for variable overhead (because Yellow
requires one hour of direct labor). Therefore, the total variable cost of Yellow is $80
(= $50 + $20 +$10) and the unit contribution margin is $20 (=$100 $80). If Dolan
drops Yellow, the firm will lose $200,000 (= 10,000 units x $20 unit contribution
margin) and profit.
6-49. (45 Minutes) Product Costing and Decision Making: Brunswick Parts.
This problem is designed to get students to understand the effect that cost systems
can have on decisions by showing what happens when product cost information is
used to schedule production when plants have very different ages (hence, very
different depreciation expense).
a.
The reported product costs include direct materials, direct labor, and manufacturing
overhead.
6-26
First, compute the plant-wide overhead rates used to allocate manufacturing

overhead. (Note that the corporate administration overhead is irrelevant in the
product-costing question. It is used for performance evaluation only.)
Moncton
Estimated plant overhead.........$1,000,000
Estimate production............... 100,000 labor hours
= Overhead rate....................... = $10 / labor hour
Fredericton
$600,000
150,000 labor hours
=$4 / labor hour
The reported product costs of P28 in each plant can then be determined as follows:
Direct material..........................
Direct labor...............................
Manufacturing overhead...........
Total .....................................
Moncton
$25
3 hrs. @ $9 = 27
3 hrs @ $10 = 30
$82
Fredericton
$25
4 hrs @ $10 = 40
4 hrs @ $4 = 16
$81
b.
Based on the reported product costs, it appears that Fredericton is the plant where
P28 should be produced. However, the Moncton plant is more efficient (it requires
only 3 hours of direct labor compared to 4 hours at Fredericton). The distortion is
caused by the fact that the Fredericton plant is almost fully depreciated whereas the
Moncton plant is new and probably much more automated.
6-27

Fundamentals of Product and Service Costing: Solutions To Review Questions

Загружено:

Сведения о документе

Оригинальное название

Авторское право

Доступные форматы

Поделиться этим документом

Поделиться или встроить документ

Параметры публикации

Этот документ был вам полезен?

Это неприемлемый материал?

Авторское право:

Доступные форматы

Fundamentals of Product and Service Costing: Solutions To Review Questions

Загружено:

Авторское право:

Доступные форматы

Chapter 06 - Fundamentals of Product and Service Costing

Cost systems should have a decision focus.

Different cost information is used for different purposes.

Chapter 06 - Fundamentals of Product and Service Costing

Solutions to Critical Analysis and Discussion Questions

Chapter 06 - Fundamentals of Product and Service Costing

Chapter 06 - Fundamentals of Product and Service Costing

Chapter 06 - Fundamentals of Product and Service Costing

6-22. (20 min.) Basic Cost Flow Model: Generic Electric.

Chapter 06 - Fundamentals of Product and Service Costing

6-24. (20 min.) Basic Cost Flow Model.

6-25. (20 min.) Basic Cost Flow Model.

Chapter 06 - Fundamentals of Product and Service Costing

6-26. (10 min.)Basic Product Costing: Enviro Corporation.

6-27. (10 min.)Basic Product Costing: Poguess Pops.

6-28. (10 min.)Basic Product Costing: Big City Bank.

Chapter 06 - Fundamentals of Product and Service Costing

equivalent units = 400,000 gallons completed + 80% x 50,000 gallons

Chapter 06 - Fundamentals of Product and Service Costing

(20 min.) Basic Product CostingEthical Issues: Old Tyme Soda.

a 9,160 equivalent units = 8,800 barrels sold

+ 30% x 1,200 barrels in process.

Chapter 06 - Fundamentals of Product and Service Costing

6-31. (15 min.) Process Costing: Van Goe.

equivalent units = 240,000 gallons completed + 80% x 60,000 gallons

Chapter 06 - Fundamentals of Product and Service Costing

6-32. (15 min.) Process Costing: Opech, Inc.

a 291 equivalent units = 270 barrels shipped

+ 70% x 30 barrels in process.

Chapter 06 - Fundamentals of Product and Service Costing

6-33. (15 min.) Process Costing: Oholics, Ltd.

equivalent units = 19,000 pounds completed + 60% x 1,000 pounds in

Chapter 06 - Fundamentals of Product and Service Costing

6-35. (15 Minutes) Predetermined Overhead Rates: Tiger Furnishings.

6-36. (15 Minutes) Predetermined Overhead Rates: Tiger Furnishings.

Chapter 06 - Fundamentals of Product and Service Costing

6-37. (20 Minutes) Predetermined Overhead Rates Tiger Furnishings.

6-38. (30 Minutes) Operations Costing: Howrley-David, Inc.

Conversion cost per unit in plant.........................

Chapter 06 - Fundamentals of Product and Service Costing

$4,000,000 = 2,000 units x $2,000 per unit.

$8,000,000 = 4,000 units x $2,000 per unit.

6-39. (30 Minutes) Operations Costing: S. Lee Enterprises.

Conversion cost per unit in plant.........................

$1,690,000 = 1,300 units x $1,300 per unit.

$2,340,000 = 1,800 units x $1,300 per unit.

Chapter 06 - Fundamentals of Product and Service Costing

6-40. (30 Minutes) Operations Costing: Organic Grounds.

Cost per pound in plant.............

$33,000 = 5,000 units x $6.60 per pound.

$132,000 = 20,000 units x $6.60 per pound.

Chapter 06 - Fundamentals of Product and Service Costing

174.1% = $174,100 $100,000.

Adjusted for rounding error.

6-42. (30 Minutes) Product Costing: Tiger Furnishings.

$29.0167 per machine-hour = $174,100 6,000 machine-hours.

$116,067 = 4,000 machine-hours x $29.0167 per machine-hour.

$58,033 = 2,000 machine-hours x $29.0167 per machine-hour.

Chapter 06 - Fundamentals of Product and Service Costing

6-43. (30 Minutes) Product CostingEthical Issues: Tiger Furnishings.

Chapter 06 - Fundamentals of Product and Service Costing

$13,500 = 1,000 machine hours x $13.50 per machine hour;

6-45. (30 Minutes) Two-Stage Allocation and Product Costing: Owl-Eye