Solution Cost Carter Usry 13th Edition

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Part l-Costs: Concepts and Objectives

Management, the Controller, and Cost AccountingCost Concepts and the Cost accounting lnformation System l3Cost Behavior Analysis 25

Part l-Cost Accumulation

4. Cost Systems and Cost Accumulation . . . . 6 |5. Job Order Costing 806. Process Costing 1027. The Cost of Quality and Accounting for Production Losses 1458. Costing By-Products and Joint Products 178

Part 3-Planning and Control of Costs

Mater ia ls: Control l ing, Cost ing, and Planning . . . . . . . ' 203Just-in-Time and Backflushing . DgLabor: Controlling and Accounting for Costs . )45Factory Overhead: Planned, Actual, and Applied )7 |Factory Overhead: Departmentalization 288Activity Accounting: Activity-Based Costing

andAct iv i t y -BasedManagement . . . 319

Part 4-Budgeting and Standard Costs

15. Budgeting: Profits, Sales, Costs, and Expenses 34016. Budgeting: Capital Expenditures, Research and

Development Expenditures, and Cash: PERT/Cost 3 8 5Responsibil i tyAccounting and Reporting... 410Standard Costing: Setting Standards and Analyzing Variances . . . . 443Standard Costing: lncorporating Standards

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into the Accounting Records

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Part 5-Analyris of Costs and Profits

Direct Costing and Cost-Volume-Profit AnalysisDifferential Cost AnalysisPlanning for Capital Expenditures . . .Economic Evaluation of Capital Expenditures . . . .Decision-Making under Uncertainty

5 t 35435 8 86 r 865)

Profit Performance Measurements andI

lntracompany Transfer Pricing 688

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CHAPTER 1

DtscusstoN OUESTIONS

Ot-1. Plrnnhg ir hl drvobprnrnt of e cqrrirron rl

of eglbnr. taaoutc.tr md mer'ur'm'ntt by

which thr lchirvrmrnt of obi'cilivtt cm b'

a.r.$.d Pbnnhg trkor hto eccornl thr irtrr'

Etitlt botwren thr orgrni:atkxr errd itr rnvi'

tqln nl ir whrt'l|r b b br donr'Cqrtrol ir thr preolr by which trlrnrg"r

grutl lhrt rr6urcrr rta obtrir'd rnd urd in

rn ollbbnt and .ttactiw ttlrnn.r !o crtty ot',l ttrtpbn rnd rccornglirh thl orgrnizeti'cri'! obi'c'tivor. Cotrtrol inpliot thrt prrlocnrrc' 'tr{lut..tn.ntr rto rrvilwod to drt.rmin. if corrrctivortbn ir nquircd

Plennirg rnd cantrol rn htrnrbt'd' Canttol

ir crrrird out wilhh thr ortlblirhrd plrnnhg

tnrnrworl elrd rrrrrr !o ovrludo enfqnrrrcrb th. Phn rc ttrd o,Fnirrtisd obieclivor rto

rfiirwd.Of -2. Shod.rrrge plenr ucully d.d with r plrird of e

qu.ttar or I y..1, while long[nga plmr ururllycovrr thr.. to livo yern. Shon'rrngr Pbnt |''d.tdl.d rnangh b prrmit pnprntin of e csn'

Pl.l. l.l of finrnchl rtrt.moritt u cf r lulundd., tiilb bng'nngo plenr cubnindr h r wryturnrnrrizrd rt ol lrpoc{rd ruultr or t hwqurrditie<! obiostivtr, lrdr u firrtcld rdbr.

Ol-3. Lorg.rrngr plrnl contrh quenlitalive rtlultt'wtrilr rtrdogtc ptrnr rn tfir l..|t quryltiti.bl. cilr.[ pbnr. Lary'nngr plrnr urudty lrlrnd lhrcoto tivo yorn hto tho futsrc, wtrib rlntogb pbnrtily csrlomPbta thodar fi much longnr prri'odr. tmgFrrngr plrnr covrrirg r throo'lofivr'yo|r poricd would br ytgr'd.vrty lht.. lofivo yln, or might br ryrtrrnrlialty updetrdreclr you lo mdnlrh I compbtr pbn, wtrilortntrgic plrnr rrc lofirrbt.d rl inrgub irlrr'vrb by en crmtLlly myrtrmrtic Prcort.

01-4. Accounlebility ir klmticrl with ruPonribililyrccounling. Accosntrbilily dmlr with lhr dir'c|rrtgo of gr irdivitulr rrrponrltility to echirvrurignrd otrirctivu wibh hr e*l md .rP.ns'.. dbrd fot.ito prdonnmcr end egrord to bythr irdivilll

01 .5. Thr cqfrolbr 6o nct ccnllol. bst ri! lh. csr'trol tut of tht mrnrgorirl lovrl l by irruing

' ttpodt pohthg out dcvielisc lrqn thl prcdctlr'min d courta oa &iim.

Ol€. Thr st d.plrtrnoflt ko.pt d.teil.d ncordr ol.nattrdr. lrbor, lrsfory ovorhoad, |rld m..k.t'hg rnd tdnhrttntiva axpon3.t: analyrs tirrr

corlr: irturr cgrtrol taPortt; Ptaprt.t cort

dudier tor plrnnhg end d*irbn tridhg; rnd

coordinrt.t cott rnd budgrt drte wilh olhrrcr.trylnril.

O1.7. F Pdrrct roorrdr rnd derign, thr rrrnufr'Urhg cbperirr|.ntr nord ortinrtd cl nrlrrirl.hbor, rnd rtrrdlirr PtE.3l] str; lor m.'rutingsrd officirncy ol rchrduling. producing. rndhtP.siing pmductr, tho drprrtm.ntt n'od lobd |ha codt irun d. Thr plr:anrl drprrr'tnlrt rrrpplba mpfoyror'wrg. r.1.3- Thr trs'|Ury dfrytm-t n..dt rccounting, budg.lrlg.rd nhtrd rlgo.tr h rhrduling culr roqur'tnatrtl. Tho rnrrtothg dlgertmrnl n.'dt cottirlsnrtirr h riting prE.t. Tho ptblic rrblitudagrtltn-n nreir'hfornrtbn qr Ptc... r'F'.

PtoaL, end divUrndr h sdrr to infotm thl puts

Ia Tha Lgal'dapstrnrnt noods st hfo'mrtbn

br frqirg rrny dteirs ol thr snpany h can'b.mfy wlh lhr lrw.

Ol€. ltodrm trctlrluor h csrrnunrcatlcnt giv. th'contrdbr end rntf lh. m.ant to tnnttnil hfor'mdin in thr torrn cl cruttr. sutye.t. end foo'

crtto in r wry ntvrr bdorr poriblr ' Profit

oPPortuni t iar or conl ro l .c l iont h lvo boln

drbyrd or misrd rntiroly bxaurr ttn'ly hfot'

tilli*1 thrt mi!fit frrvr imprw.d lh' cosl 'ndprolit poitbn of thr cornpeny w.s poorty cdtl'mr,'rEsiad.

Ol-9. Thr budgot ir rn oclonlbt colt plennrng tool

brcaser it (r) lupplilr hfonnation and lrrvrl

rl e rtrlderd of prrlormarc. lor c€t cdtttol by

thr luprrviroc rciponriOto lor cg (b) ptwitor

Jr ..tt mrthod for enticipeting prolitr rt rn

$ticiPlt.d nlor'bvol; (c) hrlpr in foncarling

trbl, cotl3. rrponra3. and pro{ils lor t pricd

of orc Yorr or rrlr. h rdYs'tc..Ol-tO. Thlr dendudr rill not nocr*arily bo rbb lo

pt.vonl rilntg.m.nt ftrud' but th'y do give

inttnrrl accounbtrtt scnr guilanct on how lo

preerd il thry rncountar ! qu'stiaublr prr'

ticr.01-ll. CASB rtandard$ (l) rnuncialr a principlr or

pnrriy'rl lo b. lollow.'{ (b) Glablbh Prtdicttis 5rj rpptiod; (c) rpcfy crilrrie to br ornpbyrdh rlcthg lrqrr allrnretivr principbr rnd prl:'

t!.! in orlinrting rccutnubtng, end rcporrr'g

cgltrrst cosb. Th. tttndatds at' btcktd tsf lho

lutt torc. trld .l{.ct ol thr tew.

Chapter 1

. EXERCISES

Ei-1 The exercise requires turo examples of the inseparability of planning andcontnol. Thrce are listed here, and the third one gives two illustrations:

The most obvious erample of the inseparability of planning and con-trot is found in the definition of control: managementb slrstematic effortto achieve objectives by comparing performance to plans and takingappropriate agtion to correct important differences. The definition showsthat the specific results of planning ane an essential input to the controlphenoinenon; there cannot be any such thing as a control effort withoutreference to some set of plans.

A second exampla of the inseparability of planning and controlresults from the fact that they are simultaneous' In practice, the imple-mentation of the first steps of a plan, and any control action needed inthose steps, are begun before all parts of planning are complete. Earlyresults and the early findings of control activity can then be used in final-izing later parts of the same plan. An example is that a single annualbudget is usually not completely finalized before customer orders beginto be received lor that year, and consideration of the number of theseactual customer orders may point to trends that need to be considered infinalizing the budget. Even actual financial results of the early weeks andmonths of the year can provide a basis for better

'establistring the budget

for the later portion of the year.The most elegant example of the inseparability of planning and con-

trol results fronr'the fact that both planning and control are complexhuman activities, and almost all complex human activities are plannedactivities and also controlled activities. In other words, planning can beso compler that the planning effort is itself controlled (and planned), andcontrol can be so compler that control activities are themselves planned{and controlled}. T\,rro illustrations of this are provided as follows:(t) A case in which planning is itself planned and controlled is when a

complieated budget (plan) is to be prepared. To facilitate the cre-ation of the budget, a detailed weekly schedule (another plan) isfirst agreed upon, showing which steps in the preparation of thebudget are to be carried out during each week. Because it isdesired that the creation of the budget not be allowed to fall farbehind schedule, the responsible manager will exercise control bymaking comparisons between (a) the actual progress made on thebudget each week and (b) the schedule. The manager will also takesome corrective action if the difference between the schedule andthe actual progress is considered irnportant.

(21 A case in which control is itself planned is when a manager decideswhat kinds of control reports will be used to compare actuat resuttswith plons in each future period of business operations. That deci-sion, any efforts made to acquire a supply of preprinted reportforms to be f i l led in each per iod, and any changes in the design of

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ChaPter t

El-1 (Concluded)

the cost accounting system to capture and compile the needed informa-

tion about actuat results represent evidence that the future.control activ-lty is being Planned.

El-2(11 B(21 A(3) c(41 A(51 ciOi B - although the time frame involved in this kind of plan may be.�

extremely long, there is nothing strategic about this kind of plan or deci-sion. ln flcti the plan and obligation to pay off the bonds when they

come due is so routine that management would not consciously

aPProach it as a decision.

E1-3(11 paragraph (bl comes closest to describing the kind of control used in

maniging a business, atthough it is described in a nonbusiness setting.

There is I plan lormutated in advance, there is a measure of actual

resutts, there is a decision maker who compares actual results with

plans, ihere is a selection of a corrective action to bring results closer in

line with tae plan, and there is a foreshadowing of repeated periodic con-

trol activit ies (the remaining quizzes)'The fact ifrat i lre measures of ptanning and actual performance ane

nonfinancial measures is not the governing consideration. Much planned

and actual information used in controtl ing a business is non-financial '

including some cost accounting infor:mation such as the number of units

produced, the percentage of units that were defective, and the percent-

age of available machine time that was uti l ized'(21 R-ragraph (a) is a perfect example of an engineering control ' rather than

the kind of control managers use in business. The simple device

described, which is founi in any home bathroom, is the kind of control

device deiigned to monitor a physical condition, and so it is analogous to

; th;r;;;Jt or any of a varieiy of devices called "industrial controls." of

course, devices of tnis kind art used in manufacturing and other busi-

nesses, but they do not possess the essential attributes of control in the

sense used in business and in cost accounting. The device achieves a

continuous monitoring of the results, rather than a periodic comparison

of results with plans, ihere is no human decision maker who selects a

corrective action to be taken. A human decision maker is probably-the

salient attribute of control in managing a business that is missing in

paragraph (al.

Chaoter 1

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E1-3 (Goncluded)

P a r a g r a p h ( c } c o u l d b e i n t e r p r e t e d a s a n e x a m p | e o f p | a n n i n g , b u t i ttacks som! essentiar inntfris'ot "ontiolGven though the word "con-

trol,, is used in its tast senili""i. rn"-te is no periodic comparison of

actuar resutts with plan" ;;;';; provisioi ioi -moairyins

the treatment

based on periodic resuttsl eor "r-".ple, the contract requires five treat-

ments each year, even it no;";dt are visible' The actions taken are

"r.r*J::l"jxtlil'�,";efers to the concept of contror that appries to porice

work and mititary scienc;: ti;;;sts ot being abte to phvsicallv deter-

mine each event ttrat ocJu; il iot" tocaiion- and being able to prevent

certain events from o""rJring. rn" pot""li"i use of coetcive fotee' which

is very ctear in paragraprr rot, i, alwayspreient in achieving this kind of

control. ln paragraph (d), ti;;'r" i" no inOi""tion tft"t resutts wene periodi-

cat tycompanedwi thprans. l ru |e thatsays. 'obta in theobiect iveatanycost" issomet imesassociatedwi th theseact iv i t ies '

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Chater t

CASES .

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( 1 } Y e s , W i | | i a m s h a s a n e t h i c a | r e s p o n s i b i l i t y t o t a k e a c t i o n .d;'nilis

-itanaards of Ethicat Conducl states that manase-

ment accountants t'shall not commit acts contrary to these standards nor

shall they condone the commission of such acts by others within their

organizations.ttl2l ffhe requirement does not ask which standards have been violated' but', - ' r a t h e r r w h i c h o n e s a p p l y t o W l l i a m s ' s i t u a t i o n ' )

Managementaccountantshaveanesponsibi l i tyto:cori-"i"n"": perform their professional duties in accordance with

relevant 6n s, tegulations; and technical-standards' (Dumping toxic

wastes in a residential landfill is generally a violation of law.)Confidentiatitv: Refrain from disclosing confidential information

""quff ieoftheirworkexceptwhenauthorize.d.,u.n|esstegitly obtigated to do so (Williams m€y be legally obligated to take

action and make certain disclosures'!fnteqritv: Refrain from either actively or passively subverting the \

attainmeffi the organizationb legitimate and ethical objectives'(Williams, avoidancJot the issue woutd passively subvert attainment of

ethical obiectives.)Comm-unicate unfavorable as well as favorable information and pro-

fessionatjudgments or opinions. (Williams is obligated to report his unfa-

vorable tindings to appropriate persons')Retr?il tion, engaging in or supporting any activity that would dis-

credit the professionl (lflitlia1ns' sitence would provide support to the

dumping activity and, ihus, could discredit the profession')'Obiectivitvi Disclose fully all relevant information that could reason-

aory G eilffid to influ"ncJan intended usefs understanding of the

reportS, comments, and recommendations presented' (Witliams should

disclose his lindings to the'appropriate persons')(31 Atternative (a|, to seek ttre adiice of his immediate superior, is appropri-

ate. This is itri first step he is reguired to take, unless the superior is

involved.Atternative (bl, communication of confidential information to per-

aons outside the company, such as the local newspaper, is inappropriateunless there is a legai obiigation to do so. lf reguired by laq Williamsshould contact the proper authorities.

Alternative (c), contacting a member of the board of directors, wouldbe inappropriate at this time. Williams should report the problem to suc-cessiveiy trigher levels within the company and turn to the board ofdirectors only if the problem is not resolved at lower levels.

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C1-1 (Concluded)

(4) Wliams should follow the company's established policies for resolvingsuch issues, if such policies erist. lf the issue is not resolved througheristing policies, he shoutd report the problem to successively higherlevels within the company until it is resolved. ffilliams is not required toreport this action to his superior if his superior appeani to be involved inthe conflict. He is not to disclose the matter to persons outside the orga-nization, untess required by taw.) During these steps' Wlliams may clarifyrelevant concepts by confidential discussion with an obiective advisor toobtain an understanding of possible courses of action. lf tfie conflict isnot resolved after erhausting all these coursies of action' VWlliams mayhave no other recourse than to resign and submit an informative memo-randum to an appropriate representative of the olganization. Consultationwith one's personal attorney is also appropriate.

c1-2(i ) 61he requirement does not ask which standards have been violated' but'

rather, which ones apply to the CFO'S behavior.)Mana ge ment acco untants have a' nesponsibility to:CompLtgnce: Perform their professional duties.in accordance with '

relevant tawC, regulations, and technical standards. ffhe CFO has askedDeerling to account for informatlon in a way that is not in accordancewith generatll l accepted accounting principles.)

Prepare comptete and clear reports and recommendations afterappropriate analyses of relevant and reliable informatlon. [The CFobrestrictions on disclosure will resutt in incomplete reports.)

Confidentialitv: Refrain lrom using or appearing to use confidentialinformation acquired in the course of their work for unethlcal or illegaladvantage, either personally or through third parties. (The CFO isattempting to use confidential information to protect the fob security andbonuses of top management.|

Inteqriw; Avoid astual or apparent conflicts of intercst and adviseatl appropriate parties of any potential conflict. fThe CFO has failed toavoid a conflict of interest and has not informed the stockholders of theconflict.)

Refuse any gift, favor, or hospitality that would influence or wouldappear to influence their actions. [The GFO's bonus appears to be aninfluence on his actions.)

Refrain from either actively or passively subverting the attainmentof the organization's legitimate and ethical objectives. (The CFO has sub-verted the attainment of the organization's legitimate objective, profit forstockholders, by pursuing, instead, the job security and bonuses of topmanagement.)

Communicate unfavorable as well as favorable information and pro-fessional iudgments or opinions. fl 'he CFO is attempting to restrict dis-closure of information about the acquisi t ion.|

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C1-2 (Continued)

Refrain from engaging in or supporting any activity that would dis-

credit the profession. fihe CFO's actions could discredit the profession.)Obiectivitv: Communicate information fairly and obiectively. ffhe

CFO is attetnpting to unfairly control the information reported, resultingin a rePort that is not obiective.)

Disclose futty all relevant information that could reasonably beexpected to inftuence an intended userb understanding of the reports'comments, and recommendations presented. ffhe CFO is attempting torestrist disclosure of relevant information.l

(21 fthe requirement does not ask which standards have been violated' but'r:rther, which ones apply to Deerling's situation.)

Management accountants have a nesponsibility to:Comoltence: Perform their professional duties in accordance with

relevant laws, regulations, and technical standards. (Deerling is beingasked to violate generalty accepted accounting principles.)

Prepare complete and clear reports and recommendations afterappropriate analyses of relevant and reliable information. (Deerling isbeing asked to piepare an incomplete report.i

ggg1iEe$bt6i Refrain from using or appearing to use confidentialinformation acquireO in the course of their work for unethical or illegaladvantage either personally or through third parties. (Deerling must notuse the confidential information about the possible takeover to his ownadvantage or to that of the person(s) mounting the takeover attempt.)

lnteqriw: Refuse any gift, favor, or hospitality that would influenceor woutd appear to influence their actions. fihe last sentence of the casesuggests that Deerling is considered a member of the top managementgnoupr so he may be eligible for a bonus.)

Refrain from either actively or passively subverting the attainmentof the organization's legitimate and ethical objectives. (Deerling is beingasked to subvert the attainment of the organization's legitimate obiec-tive, profit for stockholders, by pursuing instead the iob security andbonuses of top management.)

Gommunicate unfavorable as well as favorable information and pro-fessional judgments or opinions. (Deerling is being asked to restrict dis-closure of information about the acquisition.)

Refrain from engaging in or supporting any activity that would dis-credit the profession. (Deerling is being asked to take actions that coulddiscredit the profession.)

Obiectivitv: Communicate information fairly and objectively.(Deerling is being asked to prepare a report that is not obiective.)

Disclose futly atl relevant information that could reasonably beexpected to influence an intended user's understanding of the reports'comments, and recommendations presented. (Deerl ing is being asked torestrict disclosure of relevant information.)

Chaoter 1

C1-2 (Concluded)

(31 tf the company has esta-blished policies for dealing with such issues,Deerling shouia first follow tAese policies. lf such policies do not erist'or if they ane unsuccessful in resolving the problem, Deerling should pre-sent the problem to the chairman of the board. Deerlingb immediatesuperior is involved, so he need not be informed of this action. lf thematter remains unnesolved, Deerling should report to the audit commit-tee, the board of directors, and finally the maiority owners. During thesesteps, Deerling may ctarify retevant concepts by confidential discussionwith an objective advisor to obtain an understanding of possible coursesof action. lf the conftict is not resolved after erhausting all these counsesof action, Deerling may have no other necourse than to rcsign and'submitan informative memoriandum to an appnrpriate repnesentative of theorganization. Consultation with one's personal attomey is also appropriate.

(4) The primary nesponsibility tho company must tulfill betore taking defen-sive actions is its fiduciary nesponsibility to stockholdens. Other respon-sibilities inctude the effects that the takeover and defensive actionswould have on creditors, bondholders, empfoyees, customers' and the 3community. The company also has a nesponsibility to inform its externalauditors and legal counsel to avoid putting them in a compromising posi-tion.

c1-3(f l ffhe requirement does not ask which standards have been violated' but'

rather, which ones apply to Dixon's behavior.)Management accountants have a responsibility to:Comoetence: Maintain an appropriate level of professional compe-

tence by ongoing development of their knowledge and skills. (By system-atically rejecting all minority applicants, Dixon is ieopardizing the level ofcompetence among the staff.)

Perform their professional duties in accordance with relevant laws,regulations, and technical standards. (Equaf opportunity in employmentis required by law.)

Inteqritv: Avoid actual or apparent conflicts of interest and adviseall appropriate parties of any potential conflict. (Dixon's preiudice is inconflict with the company's legat obligatibn to provide equal opportunityemployment, and with the companyfs need for the most competent staffregardless of race.)

Refrain from either actively or passively subverting the attainmentof the organizationb legitimate and ethical objectives. ffhe company'sobiective of equal opportunity employment is being subveded by Dixon'sprejudice.!

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Chapter t

Cl-3 (Concluded)

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Refrain from engaging in or supporting any activity that would dis-

credit the profession. (Such peristent, systematic discrimination in hir-

ing coutd discredit the profession')ff[e requirement does not ask which standards have been violated' but

iather, which on"" apply to Foxworthts situation.) Because management

accountants may noi condone the commission of unethical acts by

;ihd *ig,in ttreir organizations, all of the responsibilities listed in the

solution to requirement (1) also apply to Foxworth's situation.In addition, the following aPPIY:Management accountants have a responsibi|ity to:ConfiJentialitv: Refrain from disclosing confidential information

acquired in the couor of their work except when authorizedr unlesslegally obligated to do so. (Foxworth's suspicions about Dixon's behaviorshould not be disclosed inappropriately' See requirement (3)).

gbiectivitv: Communicate information fairly and objectively'(poxworttr is oOtigated to make obiective hiring recommendations tobiron, in spite oitris belief that Dixon will be prejudiced in acting onthem.)Alternative (a), discussion with the director of personnel, who is one of

Dixonb peets, is inappropriate at this time. lf, however, Foxworthbetieves the directoi bt personnel is an obiective pafty, Foxworth maydiscuss the matter with the director, confidentialln to clarify the relevantconcepts and to obtain an understanding of possible courses of action.

Alternative (b), informal discussion with a group of MAD senior man-agement accountants, is inappropriate.

Alternative (cl, piivate discussion with the CFO, Dixon's superior, isappropriate. Because Foxworth has atready approached his immediatesuperior, Dixon, who is invotved in the conflict, it is not necessary forFoxworth to inform him of this action.Fonarorth should follow the company's established policies for dealingwith this type of conflict, if such policies exist. lf policies do not exist' orif they are-unsuccessfut in resolving the conflict, Foxworth should dis-cuss ihe issue with the CFO. tf the matter remains unresolved, discus-sions with successively higher levels of management, including the auditcommittee and the board of directors, should follow. During these steps'Foxurorth may discuss the matter confidentially with an obiective advisorto clarify the relevant concepts and to obtain an understanding of possi-ble courses of action. lf the matter remains unresolved after exhaustingall of these steps, Foxworth may have no recourse other than to resignand submit an informative memorandum to an appropriate representativeof the company. Consultation with one's personal attomey is also appropriate.

Chagter 1

c1-4 ,

{1) ffhe requirement does not ask lor a list of responsibllities Rodriguez hasviotated, merely which of the fifteen responsibilities apply to hissituation.)

Management accountants have a nesponsibility to :Comoetence: Perform their professional duties in accordance with

relevant laws, regulations, and technical standards. ffhe figuresHodriguel is being asked to prepare might amount to fraud in the loanapplication.)

Prepare complete and clear reports and recommendations afterappropriate analyses of relevant and reliable information. flhe reliabilityof the information is in doubt, and the fact that certain sales figures areor are not sufficient to justify the bank loan are not relevant to prepara-tion of the budget)

lnteoritv: Refrain from either actively or passively subverting theattainment of the organization's legitimate and ethical objectives. (Thereis a push to subvert legitimate objectives to the immediate need for abank loan.)

Recognize and communicate professional limitations or other con-straints that would preclude responsible judgement or successful per-formance of an activity. (Rodriguez has not expressed to Czeista the con-flict between his desire to be a team player and his ethical responsibili-ties.)

Communicate unfavorable as well as favorable information and pro-fessional judgements or opinions. (Rodriguez is being asked to reportinformation that reflects so favorably on the company that lt may not bejustifiable.)

Refrain from engaging in or supporting any activity that woutd dis-credit the profession. (Preparing a deliberately misleading budget as

' part of a loan application could amount to obtaining mon-y by iraud.)Obiectivitv: Communicate information fairly and objecfivety.

(Rodriguez feels pnessuned to abandon his objectivity in preparing thebudget.)

Disclose fully all relevant information that could reasonably beexpected to influence an intended user's understanding of the reports,commentsr and recommendations presented. (A comparison of the newtargeted sales figure with the actual sales of tlre coresponding periodsof past years would be likely to influence the bank's understanding ofjust how large an increase in sares is being portrayed.)

12) Rodriguez coutd have clearly stated his concerns to Czeisla at eachstage of the budget's creation and revision. He could have consultedwith the marketing manager and production manager.i "r.ry stage,rather than only upon receiving the initial budget olata. He coutd presentthe budget, or a summa ry of it, in a comparative form to highlight thedifferences between each guarterts budget and the actual resutts of thecoresponding quarter of the preceding year, and he could even

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Chapter t

C1-4 (Concluded)

calcutate the percentage increase being budgeted and compare it with

actual perceniage increases that were achieved annually in the past. He

could have conJulted with his staff superior at the headquarters ofNorttrwestern (the parent company) - Gzeisla is his line superior'according to the second sentence of the case'

(31 In addition to his ethical responsibiliUes to CD, Rodriquez has ethicalresponsibiliUes to:(a) The banks(b) The management accounting profession

c l -5(1) ffhe requirement does not ask for a list of responsibilities Jones has vio-

iated, merely which of the flfteen responslbilities apply to his situation.)Management accountants have a responsibi||ty to:ConfiJentialitv: Refrain from disclosing confidentlal information

acquirEA in the counse of their work except when authorized, unlesslegally obligated to do so. (lf Jones accepts the consulting engagementwith Crimson, lt is tikely she will be asked to disclose confidential SMIinformation about the desired computer system')'

Refrain from using or appearing to use confidential informationacquired in the counse of their work for unethical or illegal advantageeither personalty or through third parties, [The size of the consulting feesuggests Grimson is seeking to buy confidential information to help winthe job.)-

lnteqritv: Avoid actual or apparent conflicts of interest and adviseall approptiate parties of any potentiat conflict. (The consulting iob wouldconstitute an apparent conflict of interest and probably an actual one'because Jones has been named to the SMI committee that will evaluateand rank all the proposats, inctuding Crimson's proposal, which shewould have helped to write.)

Refrain from engaging in any activity that would preiudice their abil-ity to carry out their duUes ethically. (The consulting iob with Crimsonwould preiudice Jones'ability to evaluate and rank the proposals forSMl, because one of the proposats would be Jones' own work.)

Refuse any gift, favor, or hospitality that would influence or wouldappear to influence their actlons. (Regardless of wbether the size of theconsulting fee is construed as being a gift or favor, lt Is likely that othergifts, favors, or hospitality will be extended to Jones by Grimson duringthe counse of the consulting engagement)

Refrain from either actively or passively subverting the attainmentof the organization's legitimate and ethical objectives. (SMl's legitimateobiective of obtaining the best computer system at the best price wouldbe subverted to Jones' personat need for money, as a result of Jones'disctosing crucial information for Crimson to include in its proposal,especialty i f Crimson might not deliver a system with the crucialattributes.)

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Recognize and communicate professional limitations or other con-

straints that would precluJ" *=ponsible iudgmen-t or sucoessful perfor-

mance of an activity. (Accepting-tfie consutung iob would preclude

responsibte iudgment in .rlfu"ting and ranking the proposals for SMI; on

the otheirr-anu,Lthicat llmitations-of Jones' employment at SMI would

preclude successful performance of the consulting engagement for

Crimson, Liplcially li Crimson does expect her to leveal crucial lnforma-

tion to fr"lp Lin ttre ioU-her ethical duty to SMI would prevent her from

delivering what Crimson is paying for)'Refiin from engagin! in or supporting any activity- that would dis-

credit ttre profession. (Selling confidential SMI information to a vendor

would be a discreditable act)Obiectivitv: Gommunicaie information fairly and obiectively. (Jones

would Ue unliLely to communicate obiective evaluations of proposals lf

she had tretpea write one of ttrem')Disclose fully all relevant information that could reasonably be

expected to influence an intended useCs understanding of the reports'

comments, and recommendaUons presented. (JoneslPtt ln writing the

Crimson pioposat would be relevant information in SMlts use of her eval-

uations oi pioPosals.)(21 Jones might have disclosed, either orally or on her personal vita sheet or

iob application, the extent of her involvement on the SMI task force and

the committee.(3) Jones could have first investigated all her caneer opportunities with firms

that presented no potential conflict of interest of this kind, but for the

sake of the arE,ument, it is reasonable to assume she did exactly thatbelore applyin! for a position at Crimson. Knowing that Crimson ls a sup-plier of computer systems, Jones might have revised her personal vita

sheet and the wording of her application for this one iob interview tolessen the chances of Grimsonis being tempted to pursue an unethicalplan. (Of course, her invotvement in SMt's upcoming purchase might have

become known to Grimson anryay, or it might have been known toGrimson from other sources before her interview or even before herapplication for the position.)

(41 In addition to her ethical responsibilities to SMI (and her financialresponsibitity to the hospltal that provides treatment for her child)' Joneshas ethical responsibilities to:(a) her family(b) the management accounting profession(c) Crimson

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CGt it lha curnnt nrnetary Yaluo c' @'

nqnic tatou.cet givon uP or to bo givcn

up in obta in ing goodr and ! ' rv ices 'Ecgrqnb toloulE.! tnay bo given up by

trandening cash or othcr propcrty, bsuitgcapital stoih prrloming rrvbe, or ircur-

ring liabilttbt.Coclc rrc classifird er unexpirod or

expired. Uncxpired sl! at. aslet! andapply to tho produclict cl fulure r.venues.Erarnplet of uncrpired @sts at. invenlo-rira, prepaH exPent.E, plant and equip'ment. and invcstmcnts. Expircd corls's'hi$ ngl costl bosnc eventually, arethosc that er. not applbable to tho pro'dus{bn ol luturr rcvonuos and are dodud-rd l rom cur tanl tevonues or chargedagohst retahrd oamings.

E:grncr in its broadesl gense hcludesall expired catr; i.r., costl $'hich do nothavc any polential futurc cqlofiiic bene-lil A mar prrcire ddinition linits thc usecil the tcrm'axpcnlc'!o lhe et9ired coslsariring from uring or con3uming goodsand srrviccr in tho preesa ol oblainingrcvenuss: o.g.. co3l of goods sold andmarkelhg and adrninistrative expenses.(t) Cost of 9oo& soH is an cxpired cosland may bc rclorred to ss atr erpensc intho broad t .n !o of thc tcrm. On theincqnr stal.m.nt. it b most sften Uenti'f icd ar e co!|. lnvrnlory held lor salewhich is destroyed by an abnotmal casual'ty strould be dssitied as a loss.(2) Urnollectble accounts exp€nse is usu'ally classilied as an exPenso. Howevcr,some aulhorilicr belicvc thal it is moredesirablc to clasrify uncolleclible accounlsas a direct reductiqr of sales revenuc (anof lset to r rvcnue). An uncol lect ib leaccounl whi:h was nct proviJod for in theannual adiustmcnt, such as bankruptcy ofa maior drbtor, may be classified as abes.(3) Dcprcc ia l ion .xpen!c lor p lanlrnachhcry is a corrpooent o{ factory over-head ard r.presrnts thc rectassifbation ofa portlcn od thc mEdrinory cqsl to productcct (hventory). Whcn the producl ir sold,lho doprcciation bccomes a part of lhoco$ ol gods rold which is an oxponso.Deprccbtian cl pbnt m*hinery durhg anunplanned atd unptoductive perir:d cl iCle-ncss, suctr as during a slriko, should beclassified as a lcs. The torm 'expense'

CHAPTER 2

DrscussloN ouEsTloNs

a2-2.

02-3.

shouH preferably be avoided rr'hon rnak'hg relcrmce to Productbn coss-(a) Orgattizatirr ccls arc tlnse cqsts thatbenefil the lirm for its entire perird ol exs'tcncs and aro most approprbtely classi'fiod ss a rsrcurcnt asset. When lherc ishilbl evijence that a firm's life is limiled'thc orgranizatbn costs Crould be allocalcdovor the f i rm's l i le a! an expeneo otshould bc amortized as a losg whrn agoing conccm foresees terminalion. Inpraclice, however, orgranizalbn costs areoftcn writlen ofl in the early years of afirm's eristence.(5) Spoiled gods reaulling from normalmenulacluring preessing shoub be lreal'cd as a cost of the prodwr rnanulastured.Whcn thc Producl is so ld ' tho coslbecomes an expongs. SPoi led goods

rcrull ing from an abnormal occurrencoshouldbe clrssilied as a kr-ss.

Cost objrts are unils for wlrich atr arrangementis mede lo accumulate and measure cosl. Theyare imporlant because ol thc need lor multipledimensians ct dats (c.9., by produci' csltrasl" or

departtnent) to accornplish the varbus PutPosesof cost accounling, including cosl fhding' pbn'

ning, ard contrcl.(a) To ctassily costs as direst or indirct. the

col t accounlanl musl l i rs t know lheanswens to lhe questlcns -Directly tracedto what?' and'lndirectly identif ied wilhwhat? ' Olherwise, there is no way lo

assess the direct or indirect nature ol acost. lt is the choice ol a cost obiecl lhatanswers lhose lwo qugstbns.

(b) For erample, lhe cost of a department'smanager's salary cannot be cbssified asdirect or indirecl without lelecting the coslobject first. lf the cost obiect is a prcductunit produced in the manager's deparl 'ment, thon the sabry is indirect. ll the cctobject ir the departmonl, lhe salary isdirecl.

(a) The product unil, batch, or b is tho costobiect. (8e careful about the lack cl cbrilyof the term the product' when it is nolknown whether il is intended to meen (a) asingle unil, batch. or lol ol a Ptoducl. Bsoppced lo (b) any large number ol benti'cal unils. lt couH easily bc laken to meatr.say, Product 1321, as oPPosed to somoother item in the cornpany's catalog' anclthat could suggost the grand total ol aliidentical pieces ol t321 produced during

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lhc onliro product lilc eycb. Thr rignili'csnc. o{ lhb dbthstion it thal sstr. cGls.eucn s! product dceign' Ptotoqping, 8ndhilial worker trahhg' arc dincl codr with

rosPccl to th. tolal of all unitc tvct pto-

ducod, bul ero indirccl with tocPesl to e

eingle uil, bdch' or bl')(b) A diaaggrcaatkrn of ovcrhcad would be

uselul for lny ltudy of lpw to brttlr rnan'

age cost!. or ol what cau!'s €tl l'o b'incurr rd. Rola l ivr ly l rw o l lho coeleincurrod.,in a factory arc causld by lherqrthe proargin ol ale npre unit of qte

producl.(c) (l) A bstch of Henlical vnits'

(2) Th. rum o{ all Uenlical unils cver po-

duced.(3) An activity or proco3s carried out inprroduclicr.(4) A gtoup or 'ccll ' ol machinos andworkerc wilhin a d.Parimont-(5) A departmcnt in which productionGUnS.(6) A plant or clher produclion facility.(7) A et ratcgic Aoal o l lhe f i rm (1.9. 'inprovod qualny).

O2-5. A cost system ir a combinalim of prceduresand rccordc dnignrd to providc the varioustypes of informEtiqr reguired in thr conducl o{the enterprise; including cosl lhdhg, planning,and cqllrol.

02€. A gnod hformatinn rystem_reguires lhe crtab'l ighment of (a) long.rangr obicclivcr; (b) anorganization phn rhoing dclegated rreponsibi l'itier in dotail; (c) ddailcd phns for luture opera'tbna, botr bng and rhod-lem; 8nd (d) pree-dures for implomcnling and controll ing lheseplans.

A2-7. A charl of accountr ia ncccraary to clarrifyaccounthg data, ro that thr data may bc uni-'formly rccordrd in irumals and posted to lheledger accountr.

02€. Advantagcr of tho rlectronic data processinglyllem for rccord keeping are: spced. larger!torag., ringb rntry ol mulliplo transaclions.aulomalic conlrol f laturel, and f lexibil i ty inr.port lonrlats.

O2-9. Thc ldbrrhg poceived weaknessos wore mon-lined h lh. text(a) Tnditionel m.rrur.r ettompl to rcrvc

rniny purp€rg, arrd ar a rcault lhey arcnot univorrslly rcanrdcd ar srrving anyqt. purp6. iJcally.

(b) Tredi t ional mea.ur . l aro r l lectcd byaccannting ctroicor that arc rrl ahrayr rol-cvant to lh. purpo.. al hard; cramples odthrsr clrobcs aro c6l flow agsumptisrsand arbhrary fircd et allocatixrs.

(c) Traditional meesuro! arr calculated bysy3lcns lhat aro ueually sbw to rospondto cfnn gin g srditiorrs.

Chapter 2

(d) Tndhbnal m.lrurot of plenl uliliz'attonc8n t .m lo ancourago orrrrutilizatbn of

caPritY'(e) Traditional m.ltuto! of officirncy err

cilton rcPorted b bl.. ato t@ 899m9ai-.4 lrd rt. .rry b mbhlrrPrct-

02-10. Nqtthancbt pcrlonnerrr rn aaur.t rr. basod

an rinplr count! or clh.r phyrical date rathor

tun dlocat.d eunlhg dala. thry !n uncql-nocird to tho grnrral fhrrcial rccounlirg rys-trn, and thoy en cfrorn to rrflcl me sPecifbalp-t ol Prdorrnrncr.

O2-1 1. Four rrampbr ol nonlinancial prrlormancc

mcasunrs givcn h tho lort and the a.rpects ofportonnancr hry mi1t'tl b. ustd lo nsrits, an(a) rcrap woighl .s r p.tc.nlag. of lolel

shppcd wcigfiB lo rnslitot cffbiency of a- prs.s, pariicr.rlarly cllbioncy of matcrial

u8a€l(b) proccring limo er r p.rc.ntaP of total

timc; to nsrita qade etlicicnry or inv.nterY vclcitY

(c) dbtancc rrcvcd by a unil while insUc thrplant to nutitc rinplifbalbn of a prarrs

(d) ruggcrlicnr P.r y.rt P.r cmployoe: lorrr itor rnPryea ilotvrmrnl

O2-12- Tht cfiallcngr poscd by lhr ircrrasod inlcrcrl h' nqrfinanciel pldornam maarBurcs ir to defho

thc cost accountanl't rob broadly cnough loirctude rEr. rnasuror that arr nol preceded bydolhr signs and thst at ncl thi lo the financialeccqlnting !)rrlsn.

Q2-13. Cctr an most co,lutbnly claroified borrd stlhcir rcbtictshP to(a) thc produci (a ahgb bstch' lctt' or unit of

tho gmdorrrubo);(b) thc Yolurnr od Elivity;(c) tho manulacturing dcparlmcnts, Ptsca!-

.t. o6t c||ltoili s othcr aubdivbixts:(d) thc accounthg Pctii;(e) a Propecd decbirr, Elitn, or cvalualbn.

O2-t4. lrdircct rnstedab an thco rnslorials nroded fortho csnplotion of lhc product bul whorc con'aumptict is eithcr so amall or rc cornplex thatthcir trestment ar dirccl nralorialr would no( bcfoasible. For eramplo, nailr uerd lo mako theproduct arc irdirccl malorialr.

02.15. lndirrt labor. in csltrasl to direct labor, b laborrrponded lhat doo not efbc{ thr cqrrtrustiqtor thr snpoilion of tho lhirhrd Produc.t. Fororarnple. thc labor of custodians ie indirct labor.

02-16. (a) A cervicr dcpartmont ir onc that ir notdiroc'tly cngngod in production, brtrl rrndrraa partbular t!rp. of rrybo for the bonolitod otrcr drpartmcntr. Erarmhr cf rorvbodopartmonl! aro rrceiving, ltor.rooms,mainlenancc, t imekeeping, payroll, andcalelcria-

(b) Produchg dcparimentr clauify thcir aharoof rorvice departmrnl .xpcnr.t ar indi-rccl ovorhoad cp.nac8.

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@-17. (r) Cepital expcndilunr are irdended lo beno.lil nprt Oran ql. accounting pcricd. Throxprndiluru rhould lhoroforr br rccordrdby e cfrargr to an ac!.t ac@snt for dls'tin !o thc periodt bcncfiled.

Fbvrnuo cxprnditurcr brncfi l throporationc of |hr cunrnt perird mly. Thryrhould bo rocordrd by chargrr lo thrappmprialr ctp.ilta accounts.It e ccpilal elgcndituro ir irnproperty clar'r if ird ar .n axpantc' 8tlelr, rrtainrdoamings, and hcsnr for thl perird will boundrrstEted. In future pcrids, hqnr willbr overstaled by any arnount thst wouldhavr bcen arrpdiecd had thc epcndiluroborn proprrly capitalizrd. Anrtr andrrtained eamings will bo undersialod sttulurc balanc. !h..13 by ruccoraivrlyrrnaller amounts unlil the erct ha! becnfulty countebalrnced.

lf a rovenuo elgonditurc ie improprrtycapilali:ed, asset!. rclained earninS' andincqno for lhc period will br overstaled.lrsnc will bo underslated in subrcquentperiodr as the impropedy c.Fitalized ilerrtb cfiarged to thr goratbns of thoc peri'ods. Agsets and retained earnings willcqrlinuc to be ov.rstatod in subscqucntbalance sheots by succesrively smaller

t5

arnounlr until thc improperty capilalizedilom has bocn canplelely writlcn ofl.Tho basic critrrkxt for classifying eutbyser rovonu. or capital cxpondituros is theprriod of brncfit. Thr amount ot detailn.cossary lo mairnah subsUiary rccotds.tfu rratcriality of lho ctgrnditurcs, and thccanrirtrncy wilh which vari<rur crprndi'turu roc'rrt ftun period lo pcriod arc dtlrcrileria generally eqrridered in ertablish'h9 a capitalizatbn poli;Y.

Firmr lnqurntty ortablirh ctt stbiltaryrrnount bckrw wtrich all oxpendilurrts ateoxpenscd, inespectivr ol their period olbenefiL Thr level at which thb arnount brot b dctrmined by itr materiality h rrb'tirr to the rizr of hr firm. The obirtivr o{sucfi a policy is to avoid lho rxpcnso olmaintaining exccssivcly detailed sub'rUiary rccordc. E:genditurer for iternt thaltall belnw th. lot snlounl but a't tnatorblin thc aggregale shouH be cePitalized, iltctal expenditures lor these items vary sig'nificantly lrom period to period. A capilal'ization policy lhat roasonably applieslhcsc criteria, although il disreganls thepedod cl benefil and is thsrefore bcking inthooretical just if ication, will not sign il icanttymisstatr periodic incomo.

t6Chaotar 2

s16,957,500

17r458,350

gERCISES

38 + 33 = 39 Prime costSg .31 = 94 variable convet:ion cost

S * Si . ir = $io variable manufacturing cost

ii,oob fired + (Slo r 5oo) = $6'0oo

E2-2 ',({} $1o + $15 + 38 = $?1 convorcion co'st

izi $32 + $t o = $42 Primc costi - i 3 3 2 + i . i o * i r s i $ 3 = $ 6 0 v a r i a b | e c o s tioi (($sz + ${o +g{5 + $6 +$5) x 12'ooo)

i 1ss x 8,ooo) = $8{6'000 + $ 24'ooo.= $84O'OOO total cost incurred with 12'OOO

units Produced and 8,OOO units sold

E2-3 First Method:Sa|es(tilg'95o'ooox85o/o|...............x.........Lcsr: variable costs (irrrizr,o00 x 85chl"' $9'q1?'1?o

FiXgd COSTS...""tr"tt""t"t""t!t"t""tt"t' 7t623tOOO

E,.-l (rll2l(3)(4)

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OperaUng loss.-...

Second Method:

ls t Stap:

2nd Step:Salgg (tlt9r95orooo I 857o)..'........o"""""""L.ass: variable costs (sl6195715OO r .58).'... s9r835'350

Firgd costs .............,.............,............. !1623 |AOO

OpgraUng loSs """"t""t" 'o"""t ' tor"""""""o"

$16,957,500

1714581350 -

s (500,8501-

1 . d2 . b3 . b4 . 45 . tg . c7. c8. I

s (5OO,85O)

Variable costs s l 1 ,57 l , Ooo = .59 variable cost ratiol9A sales s l 9 , 9 5 O , O O O

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E2i5 The cost of direct labor Par computer is sloo'ooo' calculated as follows:

' -"t--l 'rina aac:l---- """' $6ootooo Givgn)Total manufacturing cost"""'o""""""""'L,gssprimocost.....r...............o........."""" 3OOtOOo (giVen)

EquaIsovorheadGoSt.. . . . . . . . . . . . . . . . . . . t . . . . . . . . .$3oo'o09

COnVgfSiOn COSt..............................."""" $4OOtOOO (giVgn)

Less overtlgad cost..,'...................o....."" 3OOtooo (calculated abovel

EqUatS difgCt 1abOf ,..,....-o........-............... SIOOtOOO

E24 Ttre amount of factory overheadlows:

cost per blade is 93O0, calculated as fol-

3l ,OOO (givenf4OO (givenl

LeeTotal manufacturing cost'.'.""""t""""""Lgss convgrsion cost"""'o"""""""'o"""'

Equals dirgct matgrial cost.""""""""""'

Direst labor cost = 116 of direet material cost= 1t6 x 3600 = $1OO

b

Convgrsion costtt"t t t t" t""""t t t t" t t t t t"ott""

Lgss dirggt labor C(13t"""""""""r"o""""Equatrsove.fieadcost..............................

E2-7 The direct labor cost per system is S200'

Total manufagturing costs """""""""""'Lgss prime Cost """""t""t"t"tt""""tt""t '

Equals overfi gad GoSt """""""""""""""

ConYgrsion cost.........t"""'i"to"t"""t"t""Lgss overhgad cost o'..""'r"'o'o"""""'o""'

Equals dirgct tabor cosl..'.......r...""""""

sitoo

calculated as follows:

S1,00O (givenl8oO (givenl

s 200

gAoO (given|2OO (calculated abovel

Szoo

s400loo

(givenl(calculated above|

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Ez-g The ampunt of faetory oyerhead cost per machino is $1'5OO' calculated \-as follows:

Total manuf-acturing c95t......,....r....'.......r S3TOOO (given) L

Lgss conversion cost..,.......r.......,.,.......... 2,.OOO (given)

Equatsdircctmatgrialcost......-.- ' ."......... SITOOO

Direst lalor Gost = 112 oI direet material cost= 112 r $ l '0O0 = 95OO

Conversion cost.. .... $2'OOO (given)

Lgss dirgct labor cost.............................. 5OO (calculated above|

EqualsovgrhgadcoSt. . . . . . . . . i . . . . . . . r . . . . . . . . . . . . Sl15OO

E2-9

(1) The.rclevant cost obiects are:(a) An item of mErchandise. t(bl The use of a bank credit catd'

(21 lt implies that cash-paying customers are paying a part of the cost of thebanks'fees for processing credit card transactionsr bscause these feesare paid by the merchant who then necover€ them in the form of slightlyhigher prices for all melchandise,

(3) The competitive implications ana that the prices paid by cash customensare too high to be competitive with the prices chargad by merchants whodeal only in cash, and the prices paid by customens using bank creditcards arp too low to reflect all the costs of a credit sala.

(4) The raason lor not reducing all prices and charging extra for the use of acredit card is because of the psychological effect of an extra charge. Tocustomsrs, lt sounds like a penalty, as If the merchant wants to discour-age the use of bank credit cards. A discount for cash customers has apositive connotation, even if prices marked on menchandise are higher to vbegin with. Raising all prices and offering a cash discount yields theaame net rsvenue as leaving prices alone and charging extra for using a 'bank credlt card, but the former method feels better to the customer -than the latter.

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(f l Thc rolovant cost obfecta arr:(al A repalr.(b) A PlckuP and daflvery

l1l JTRSb r€palr pricor Include an sllocaUon of thc cost of picking up anddallvering traAors, ln addlUon to thc cost of thc rtpainl' administraUvocoata, markeUng costs, end profll CompeUtont rcpair prices raflect onlytic cost of the llpalrs, adminlgtrstlve snd marko$ng costs' and profit.GompeUtort 8hould bc ablc to prlcc thclr rcpalr rcrvlces lower, becausetSey do not have to reflect plckup and dellvery costs in repair prices.

F2-11

Cluplx2

(11 Dlrect leborVariable factory ove rh eadFifed faCtOfy OVgfh gad...............o......o....o.o..ro.........o............."r

Gonvemion cogt..

(21 Dlrect matoriaf 0umberfDirOgt 1abOf. . .o. . r . . .o. . . . . . r . . r . . . . . . . r r r . r . . . . . . r . .o. . . . . . . . .o.o. . . . .ot . . . . . . . t . . to. . t

Prime GOSI...............r..............

a a a a a o a a a t a a

a a a l a a a o a l a a

sq

$ 1 1

s l2

s l225

s le

s l2251

s20

I

b

II

lE

III

(4) Dlrect material 0 umberl ...'.........o'.......Dlroct laborVariablg factory ovgrfieSd .........o.........r.............'..........oo.......'.Variable markotingTotal variable cost.

I\' a a a t a a a a a a a

Chaoter 220

E2-11 (Goncluded)

(5) Total cost =

(6)

rr)

total variable manufacturing cost+total variable marketing cost+ total fixed cost

2 , O O O r ( $ 1 2 + 3 2 + $ 5 1+ l r g O O r $ 1+ 2,OOO' x ($4 + $3.50)

= $38,OOo + $l '9Oo + ${5'0oo= 55419OO

r The volume used here to catculate total fixed cost is the 2'OOo-unit vot-ume levol that was used originally to calculate the amounts of fixedcosts per unit, as stated in the data given in the exercise. The 2'OOO-unit tevel of production stated in requirement (5) is not the reason that2,OOO is used here to calculate total fixed cost'

The data indicate the bookcases are made of lumber, and some examplesof the indirect materials used in making wooden bookcases would beglue, sandpaperr and nails.

An estimate of costs referred to in the answer to requirement (6! wouldbe inctuded in the variable factory overhead of 55 per unit.

;

E2-12 Factory overhead = 113 x prime cost, so:

Totalmanufacturing

cost= prime cost + factory overhead

= prime cost + (113 x Prime cost)

= 4i:3 r prime cosl;

muftiplying both sides by 314 gives:

Total314 x manufacturing = 314 x 413 x prime cost

cost

3l4xS2O,OOO = 1 x pr ime cost$15,OOO = pr ime cost.

Prime cost .....................Less direct material cost.......Diroct labor cost.......

s15,OOO12,OOO (given)

s 3,ooo

2 l

(3)

(41

i'S

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Ctuotar2

c2-1

(11

CASES

The percentage profit margin will be 82.5oh, calculated as follows:

Rgvenugs (92 r 4)..............,,o........................Cost of iuice (S2o r 4| .....'....""""t"'r"""""

t Cost of ong de|ivery """""""""x""""""t""

Profit ...............ro....,......................o.......r.......

Revenues (S2 r 1!

Percentage profit margin = 36'60 profit divided by SB revenue = 8.2'5oh'

(21 The percentage profit margin will be 6ooh, calculated as follows:

s.80.60

s.20.60

s€!.o0

1 . 4 0

s6.60

s2.o0

.80

s l .20

Cost of iuice (S.2o r 1) .....'....-............'o""o"'Gost of ono dglivery ..'...""'o""""o"""'o"""o'

PrOfi t . .o.. . . . . . . . . . . . . . . ." 'o"" 'r""""""""""t" 'e"" '

Percentago profit margin = $1.2O profit divided by s2 revenue = 609/o'

The manager is treating the menu item as the cost obiect, for erample'

one glass of orange iuice.

The rpfinement of the definition of cost obiect that would result in the

ptanned profit margin is the use of two different kinds of cost obiect' the

Item and the detivJry, which can be priced separately at S.8O and $2'4O'

respectively.

I

z Chaoter 2

C2-l (Concluded)

(5) For an order consisting of four gtasses of orange iuice, the profit margin

will be 75e/ot calculated as follows:

Revenues: ($.8O X 4)......... ' ...+ (92 .4O X 1 ) . . t t " t t " " " " ' i " " " " t " t " " " t " " t " ' o " '

9.80.60

9.20.60

s3.202.40

$5.60

1 . 4 0

9{.20

$ .802.40

$3.20

.80

Percentage profit margin = 90.2o profit divided by $5.oo nevenue = 75oh.

For an order consisting of one glass of orange iuice, the profit margin wil l

af so be 75oh, calculated as follows:

Cost of iuicg ($.2O I 4) ."""""""""""t""""'Gost of ong dglivgry .........--....-..........o...o.r."'

PrOf i t . . . t . . . .aaa. . . . . .a. . . .a. t "" t """" t " t " """ t "o"" t '

COSt Of !u ice . . . . . . . . . . . . . . . . . . . . . . . . t . . . . . . . . . . .o . . "o"" t t '

Cost of ong delivery .............................o......'

RgVgnUgS: ($.8O X' l ) . . . . . . . . . . . . r . . . . . . . . . . . . r .o . . . . . . . . . . . . . . . . . . . .o t '

+ ($2.4O X 1) ..............................................t..

(6)

PrOfit ........o....t........ s2.40

Percentage profit margin = $2.4O profit divided by $3.2o nevenue = 75oh.

The food seryice managerb plan allocates the delivery costs over anarbitrarily selected number of items (two). This plan would result in high-or-than-planned pnofit margin pencentages on noom servico orders thatcontain more than two items, as demonstrated in the answer to require-ment (t). Prices on these olde6 would be higher than those of a Gom-petitor wlro traces costs mone carefully to cost obiects and sets pricessccordingty. The plan would also result in lower-than-planned profit mar-gins on room service orders containinE only one item, as demonstratedin the answer to requirement (21. Prices on these orders would be lowerthan what is needed to achieve the target profitability.

23

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b

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I

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b

Clppter2

c2-2,

(il The cost objects tor which somo amount of cost is identified in the case,and tho amount of cost idenUlied lor each' ate:(al A new product variation r Zsggo (which means all units of Zeggo ever

to be producodl' S25O'OOO.(bl A batch of Zeggo' S1'OOO.(cl A unlt of Zeggo, $5 + $1O = $15. (Notlce the $1o indirect cost

amount Includes all Indireet production costsr so it must include the, $1 amount stated in the problem, along with an allocation or averag-

ing of the $1r0Oo-perbatch setup costs, a shar€ of the S25O,OOOcost amount, and a sharo of any other indirect manufacturing costs.It would be double-counUng to add the $1 and arrive at a total of$16 per unil|

(21 The other items mentioned in the caso that could serve as cost obiects,and a purposo each one could sorv€r ano:(al CCN Company, which is the relevant cost obiect when external

financial statements are prepared.(bl The assembly line on which Zeggo and other products are to be pro-

duced. This cost object would be relevant in a decision on whetherto discontinue production of all the products produced on the par-ticular line, or a decision to shut down the line and shift its produc-tion to other lines due to a redustion in customer orders.

(31 The totat "o.t erpected to result from producing the first batch of 3oounlts of Zeggo is:

Cost accounted for as direct cost of a unit....,.....Cost treated as indirect by the CCN s1ctem........

units

Add: setup costs1,8OO

. . . r . . o . r . . . . . . . r . . t r . . . . . . . 1 tOOO

Total Co*... . .r . . . . . . . .r . . . . . . . . . . . . . . . . . . .r . . . . . . . . .o.. . .r . . . . .rr .rr. s2,8oo

The cost erpected to result from producing ono mone unit of Zeggo is 35+ $ 1 = 3 6 .

For the first batch of 3OO units, the CCN cost accounting system willreport a cost of:(35 direct cost + $1o indirect cost allocation) x 3oO units = S15 r 3OO =s4,5OO

$ 51

S ox 3OO

I

(41

(5)

it-

I

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L

LIL

i-LLI

I!

L

LI

b

t

O3-l . The total dollar amount of a fixed cost is con-stant at difrerent levels of acttvity within the rele-vant range, but f ixed cosl per unit ot activityvaries. In confasl the total amount of a variablecost varies al differeil levels ol acwity, but thevariable cost p€r unit remains consEnt wilhin lherelevant range. A semivariable cost containsboth frxed and variable elements. Consequently,both total semivariable cost and semivariablecost per unil vary with changes in activity.

Q3-2. The relevant range is the range of activity overwhich a fixed cost remains constant in tolal or avariable cost remains constant per unit of activi-ty. The underlying assumptions about the rela-tionship of the activity and lhe incunence ot coslchange oulside the relevanl range of activity.Consequently, the amount of fixed cost or thevariable cost rate musl be recomputed for aclivi-ty above or below the relevant range.

O3-3. The fixed and variable componenls ol a semi-variable cost should be segregated in order toplan, analyze, control, measure. and evaluatecosts at difterent levels of actMty. Separation olthe fixed and variable componenls of semivari-able cost is necessary lo:

CHAPTER 3

DISCUSSION QUESTIONS

03€.

semivariable costs are: (1) the high and lowpoints melhort: (2) lhe statistacal scanergraphmethod; and (3) the method of least sguares.The high and low points method has the advan-lage ol being simple to compute, but it has thedisadvantage ol using only two data points in O|ecomputation, thereby resulting in a signilicantpotential lor bias and inaccuracy in cosl esti-mates. The scanergraph has the aclvantage otusing all of the available data. but it has the dis-advantage of determining the fixed and vanablecomponents on the basis of a line drawn by vGu.al inspection tirough a plot ot the data, therebyresulting in bias and inaccuracy in cost esli-males. The method of leasl squares has theadvan tage o l accu ra te l y desc r i b i ng a l i nethrough all the available data, thereby resultingin unbiased estimates of the fixed and variableelements ol cost. but il has the increased disad-vantage of computational complexity.The $2OO in.lhe equation, referred to as the yinlercept, is an estimate ol the tixed portion ofindirect supplies cost. The $4 in the equation,referrecl to as the slope of the regression equa-tion, is an estimate ol the variable cost a:isociat-ed with a unit change in machine hours. Thesees t ima tes may no t be pe r l ec t l y accu ra tebecause they were derived lrom a sample oldata that may not be entirely representative ofthe universe population, and because activitiesnot inc luded in the regression equat ion mayhave some influence on the cost being predict-ed.The coefficienl ol correlation, denoted r, is ameasure of the extent to which two variables arerelated linearly. lt is a measure of lhe covariationof the dependent and indepenctent variables.and its sign indicates whether the independentvariable has a posilive or negative relaUorship tothe dependent variable. The coeffcient ot dster-mination is the square of the coeffici€nt of corre-lation and is denoted F. fne coefficient of d6ter-mination is a more easity interpretsd measure otthe covariation than b the coefficient of conela-lion, because il represents the percentago ofvariation in the dependent variable explained bythe independent variable.The standard enor of ihe estimate is defined asthe standard deviation about the regression line.tt is essentially a measure ol the variability of theaclual observations of the dependenl varaablefrom the points predicted on the regression line.A small value lor the standard eror ol the esti-mate indicates a good fit. A standatd errcr olzero would indicate a pertect ft, i.e., afi sctualobservations would be on the regression line.

IS

I

!

Itb

03-7.

(a) compute precletermined tactory overheadrates and analyze variances:

(b) prepare flexible budgets and anatyze vari-ances;

(c) analyze direct cost and lhe contributionmargin;

(d) determine lhe break-even ooint and ana-lyze the etfect ot volume on cost and prof-rt; o3-8.

(e) compule differential cost and make com-parative cost analyses;

(f) ma(imize short-run protits and minimizeshort-run dosts;

(S) budget capital expenditures;(h) analyze marketing profitability by terrilo-

nes. proclusts, and customers.O3-4. The obvious advanlage to using managerial

iudgement lo separato fixed and variable costsis expediency, i.e., il requires less time and is,theretore. less cos0y than the use of any of thethree com putational methods. The disadvantageis that the use of managerial judgement to sepl_rate fixed and variable cosls otlen results in O3-9.unreliable estimatG qt cost. Cost behavior is nolalways readily apparenl lrom casual observa-tron. As a conseguence, managers otlen err indetermining whelher a cost is fixecl or variableand frequenily ignore the possibility that somecosts are semivariable.

O3-5. The three computational methods available lorseparattng the ftxed and variable components of

25

26

03.10. Hotuoscodssttcity mcrn:i t|d tha distibulbn olobservations around thc rogrcrsion linc is notunilorm lor dl values of thc indcpcndonl vari-able. tf hetaroscedasticity b prcocnt. thc den-rlard eror of tp Blimde and confdcnct intlr'val catitnd63, btsed on thc Etmdsrd 3fior, lreunreliabh tnolsuros.

03-11. Serial coneladon mourt thd rdtcr tlun bcingrandom, the obsenralions arcund thc rcgresionline are conelated n'l$ onc ltlcfficr. ll ecrid col'relation b prssctlt thc stlrrtttd cnor of t|c 6ti'

Chapter 3

malt tnd coflfidcncc intervai cstimltes. blsed

on thc Etandlrd olrotr atc unrcliabb molsuros.

O$12. Muldcollinaarity moatrs f|at two or moro of tho

Indcpendent veriables in a mutliple regrassionandFb aro conohed witfi one anodtor. Whenthc degrcc of multicollinearity is high. the rela.lionship bctlloon onc or moro of tho corrol8ledindcpcndont vadables and the depondonl vatiablc may be obscured. However, this circum'clt lcc would normdly not aflecl the astimate ofcost

z /

It-

LL

IIL

L

Clppter 3I

E3-1

E)GRCISES

Foo(,

olrfJGg3o

L

!

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IL

L

L

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itiL

I

l-

Il-

Il-

High ........ a a t a a a r a a a t a a a a a a a a a

s]ivitvlgv"l21600 hours2,1OO

_5Og hours

Costs1,3OO

1 , 1 O O

9__399

Low

s l , 1 O O

840s 260

variable nate: s2oo -r 5o0 machine hours = $.40 per machine hour

TOtal COSI.........................

High

$1,30O

I,O4O

E3-2

Variable cost:$.4o x a6o0 hours ....,....,.....$.40 x 2rl O0 houns ...............r.........r.............

Fixgd cost.. . ' . . . . . . .r . . . . . . . . . .r . ' . .rr . . . . . . .r .r ' . . .r ' . . . . . . . .r . . . . . . . s 260

$lroo0

s900

Saoo

3700

3000

3500

$400

3300

!3200

$100

30

S4O7.5O average totat variable cost

800

$757.s0350.O0

$407.50

5.6936 variable cost= p", direct labor hour5,87s total direct tauorffi

Chapter 328

E3-3

E3-4

Janu3fl.. '...February ....MSFCh'........April ...'....o..M?!. . . . . . . r . . . .

J l l l l€ . . . . . . . . . . .

JUI!............August. . . , . . .September.October.,'...November. .December. .

T(ltal ....."

r - x ( x r - x ) ( v r - Y ) _ 8 7 , o o o _ s 6 og - -

x (x r - r ) 2 1 ' 450

a - 9 - b, - $1o,ooo - (Soo x 125) - $z,5oo

Travef and entertainment expense tor 2OO aales calls would be:

! i ' - a + b x r - $ 2 , 5 0 0 + ( $ 6 0 x 2 O O c a l l s ) - S 1 4 ' 5 O O

(1)v

ElectricltyGost

$ 1 ,6001 r 5 1 01,5O01,450114601r52O1r57O1r53O1,48O1r47O1,4501,460

_sl8,oo9

(21v -nGost

Deviation

(3)x

MachlneHourc?,7902,68O2160O2,50O2F1O2161O2r7502,7OO2,53O2r52O2r49O2r52O

(4)F - A

ActMtyDevlatlon

(6)a -nv -n

(a) x (2119,OOO

800o

5,OOO3,6OO

2001O,5OO

3,OOOI,4OO2r4OO515OO3r2OO

s,600

(!l-squared36,1O0

6,4OO. o

IO'OOO8,10O

10022r5OOto,ooo4r9OO6,4OO

12r1OO6,4OO

!e3.0oo

(5)(x -i)2

tg0t oo

Fo)(40)207030(20)(30)(50)(40)

19080o

(1oo)(e0)1 0

150toorfo)(80)

(1ro)(801

31.200 0o

,

,

- 2 y + n - $ 1 8 r o o o * 1 2 - $ 1 r 5 0 o

- Xx + n - 31r2OO * 12 - 2 ,60O

Variable rate (b) -: (x - rXY - t ) cotumn o totat 54'600 - g.4.4

123'OOOr ( x - i ) 2

Fixedcost (a\ - y - bx

= $1,5OO - (S.44X2'6OO)= *t56

Column 5 total

x ( r r - x ) ( v r - y ) 1 , 5 f f _f - ' - f f i - ' 9 2

f f i -y) ' J(sso)(s 'ooo;

r 2 - ( . g 2 ) z - . 8 4 6 4

E3-6

Month

Jenuary-. I 600Fcbnnry - OOOMtl.rch -..... COOAprll...-....., 680Mry.*......., 570Juoa---.. 6ltOJuly..--.-... 600Augurt --- OIOScptcmbcr. GsOOgtobor--.. G2ONovcmbcr.. 6il0Elccambor.. 640

29Ctwpter3

E3-s

(31x

(11v

l2ll y -n

(40)oo

(201(301(60)(r0)t o502030.lo

3 2016003O,OOO20rooo2qooo27,OOO25,^5OO30,OOO33r0OO35,OOO3aooo30,5OOglr50O

IOOO500

3,500

l1600

oo

400900

2,5o,o,rooloo

2,50O4(,0000

1,OOO

(4) (51

F -a I -712

(3rEOO) 12i2j,O,OOO I4O,OOOoo

(aooo) 4,oo0rooo 40,ooo(3,OOO) 0,OO0,oO0 0o,ooo(+5OO) 2O'25O,OOO ?'2SrOOO

0SrOOO I,OO0TOOO 3OTOOO5,OOO Z,,OOOTOOO 25O,OOO

(81 ct)V -AV -tl tv -r12

ailpplng Expcnrc Sdcr ActtvttYErpcmc Dcvlrtlonr Bcvcntr Dcrvlrttonr (4}Squrrsd (a) x F) (2lSquared

(lrOOO) ITOOO,0OO

oo 8t]60.ooo

4TOOOTOOO 4OTOOO

2!lgr@0 l5,ooo12,25,O,O0�O laOrOOO

07.ooo.ooo 97o,ooo t 1.o(x)Totel --.. 373OO

j ' - I y - + f t - $ 7 r 2 O O + 1 2 - $ 6 O O

i - xx + n - $3601000 + 12 - $3o,ooo

J : ( r t - i ) ' z (y , - Y) '

rz - ( .939 )2 - .882

- .93997O,OOO

[9?"ooo,ooo Xl lrooo )

l t>(r r - i ) (v t - y l

x ( r r - ; ) z z (v t

30

E3-7(11

Clpoter 3

l2l

rz=( .98Y=.9216

x ( r r - i X v r - 9 )

2,1OO = . 9 6.',/( e,zso X I,ooo)

2r4OO tt,384 varlable malntenance6,250 cost per machlno hourb -

x ( r r - i ) '

( 3 ) | - \ r 1 + t l

i ' X X l + J l

Slnce 9 - a

a - g _ b Xa - $5rO00a - tl5rooOa - $31464

- t35O r0OO * |

- 4O'O00 + 1O

+ bi, then:

o - $5 'O0O

- 4'OOO houru

($.sar )(4,ooo )$1,536

E3-8

(1) For elsctrlclty cost and dlrost labor hours:

5,7OO . |oH -.e4e7

- +f33 -.88o5

f t

ra = (.9497F =.9O19

For electrlclty cost and machlne hours:

l t7,OOO

(21

I ( x r - r ) ( v r - y )

( r t - i ) ' z ( y r - y ) '

x ( r r - i ) ( v t - v )

x ( : r - i ) ' z ( y t - v ) ' J(so,o0o )(r ,264 )

ra=( .880512=.7753

ln ttrlr e88€, dlrest labor hours shoutd be chosen as the approprlateacthrtty meaauno to be used In predletlng electrlclty cost because thecocfilclent of determlnatlon (ts = .9O19) lc hlgher than that for machlnehours pa = .77531.

(3)

Cluptor3

E3-8 (Goncluded)

( 4 ) b '> ( r , - x ) ( v t - y )

_ 5 r7OO - $ .2O28,5OO

variable electricltycost rate

- Xx t + n r t hen :

3 1

x ( : r - X ) '

Slnce I - a + bi and 7 - ZYr + n and fa ' ( z f t * n ) - D ( x r t * n )s - (42,ooo + zo) - (.zo)(rao,ooo + 2o)a - 2t1O0 - ( .ZOx9,OOO )? - 2tlOO - 1,8OO - $300 flxed electriclty cost

E3-9

MonthJanuary .........r........February ..r.............tMarch ..........r.......r..AFd1........................May..JUng . . . . . . r . r . . . . . . . r . . . . . .

JUI!. . . . . . . . . . . . . . .r . .r . .r . . .

AUgu8t ......r.............SeptembrBl...,..........OctObor ............r.....l{ovombgl ..r............Docgmbg1............,..

TOtal ....r.........r...!

(3)l y i = a + b x )Predicted

UUlltyCost

$ 3,6504rOOO3,9OO3,8OO3r70O3,55O4rOOO413OO4,5OO4r2OO4,05O4,35O

(4)th- vil

PredlctlonError

(2) - (3)

(solo

1 0 0oo

(so)(1oo)(2oo)

oo

25050

(s)lh - til2

(4)Squared

$ 2,5OOo

l O,OOOoo

215OO1O,OOO4O,OOO

oo

62,5002,500

$13O,OOO

(r lX1

.LaborHourc2,65O3rOOO2r9OO2,8OO2r7OO2,55O3,OOO3r3OO3r5OO3r2OO3r05O3r35O

l2lIt

AstualtltllltyCost

$ 3,6004rOOO4,OOO3r8OO3r7OO

. 3r5OO3r9OO4,1OO4,5OO4r2OO4r30O4,40O

36,OOO $4g,OOO $48,OOO o

" ' - {

> ( y , - y ' , ) 'n - 2

/ $ l30 ,ooo G11 10

- 51 14 .O18Column 5 total

32

E3rlO

Chapter:

6 t -i l ( v r - y ' r ) '

n - 2

The g0 percent conlldence lnterval estimate at the 1'SOo-hour level ofactivlty would be:

. ; - r ( x r - , ) 'Y t - t m X S r i l + :

I n > ( x , - i ) t

ssoo = (t.tztXsoz ) {, . # . (t'uotlu;#?oo )'

S5oo - (1.771X$ez)ffi ' .

35oO ; (1.771X$62 X1.1547 )$5OO r $126.79

lb

33Ctvptar3

P3-l

PROBLEMS

Coefllclent of corrtation and co€fnclent of determlnation between:

{a) TFavel oxpsnses 8nd lho numb€r of calls made:(r)

L ({) {5) (6) m -F -a g --rf F -49 -D tu -#

AemtyDcvlrdonr ({l Squarcd (A) r (21 €l-Squt-dilonth

Jrnutty---. 3 3rOOOFobnlry.-.... 3'2OOHfrch-F€-. 2'8OO

Apdl*---. 3rOOil!f-- qtOO

Juno -- qzOO

July...-....--. agOOArilu.t.*-. 3F3OOScptrmbor.-. 3'5OOC)GtoboJ---. 3r.fOONolrrnbor..-.. 3'2OODccamber...... 3r4OO

Tltll ......-- E3&l!99

l l)v

TravclErpcnro

l2l (31V - n x

Erponro CellrDevlaUonr iladc

410120380400430450390a70.180.l90

40aoo

6,000 aO,OOOo o

2{'OOO tOOTOOO4,OOO 40 OOO

1,O@ IO'UOOo o

l5,ooo 0orooo3'OOO lorooo

12,OOO 9O,OOO

l0,ooo 40,oooo o

4,OOO 4OTOOO

79.OOO 520,OOO: :

6 total

12oo)o

(.too)200(1oo)

o(3oolloo300200

o200

o

(301tm)(60)20lro)1 0

(50)30&60o

20

900400

3rOOO400100100

a5oo900

l16002r5OO

o.loo

6.280 0: : _l-g,4oo

l -Column 5 total )(Cotumn 7 total )

79,OOO 79'OOO

J(tg,4oox52o,ooo) i6 '968'OOO'OOO79 .OOO, ' d5;7u

-.9464

fz - .8957

x ( x r - x ) ( v t - r )

x (x r - , ) ' z t y t

34

P3-1 (Concluded)

(r)v

January...... 3 3,OOOFebruary.... 3,eOOMarlh...-,.. aSOOApril ...-.--. 3r4OOMay....-..-. 3,1o0June........... 3'2OOJu|y..,......-. 2,gOOAugust....-. 3,3OOSeptembcr. 3,SOOOctobcr...... 3,400Xovembor.. 3eOODccember.. 3r4OO

Total.-... g?8.40O

(31 (4)x F- i )

(s)tx --xf

l69,OOO,OOOITOOOTO0O

Chap@r 3

(6) ttltr -rw -h tr --y*

(41x (2) (2) Squared2,600,000 4o,ooo

0 O

(b) Travel expenses and otderc neceived:t2l

u-nTnavcl Erpsnsc Ordcrr Achrtty

Erpensc Deviations Rcceived Dcviatons {4) Squarcd(200)

o(4ool200(ro0)

0(3Oo)100300200

tt 53,OOO65,OOO48,OOO73,OOOoaooo67,OOO60TOOO76rOOO82rOOO6210OO64rOOO80,OOO

(t3,oool(t,ooo)

(r8,o0olTrOOO

(4,OOO)

I,OOO(6,OO0l

lO,OOOtorooo(4,O00)(2,OOO)

t4,oooo

200

o

324'OOO'OOO 7,2OO,OOO l60'0004g,ooorooo 1,40O,(X)O 4O,OOOI6,000'000 4OO,OOO lo,oooI,OOO,OOO O O

30,oooro0o lrSoorooo go,oootoo,ooo,ooo I,OOO,OOO lO,OOO2sETOOOTOOO 4,goo,ooo 9O,OOO

t6,000,000 (goo,ooo) 4O,OOO4,O0O,OOO o o

tg6,ooo,qoo 2,8OO,OOO 40,OOO

l -

7 total )

(2' Perfect direct corretation would be evidenced by a coretation coefficientof one' The coefficient of .94il neyealed in (lXa) is closer to one than thecoefficient of .8602 in (l)(b). This means trat the variabte portion of t'v-el expense Yaries mone directly with mov.-"nt" in the number of callsmade than with the value of orfoers received. To exptain this further, therelative coefficients of determination are obtained by squaring the coeffi_cients of correration and expressing the ""=*.i.s a pencentage in eachcase. The coefficients of determinalion are ag,ii oh torcarts made andonly 73'99o/o tor ordens received. This mea"= irt"t approximately gooh otthe movements in the variable portion of travel "tp"r=" are retated tofluctuations in the number of ca[s made, ,no itr" remaining 1o% of themoyements are related to other factors.

s7s2o99 -9 1..'168,000.000 2t,2oo0gg g3o,oog

x ( x r - t X v r - y )

J:(', -;f;G:ry2Tr2OO|OOO

G -

r / ( l , r68,OOO,OOO X52O,OOO )

21,2OO,OOOr - - 8 G O 224 16441675

)r ' - .7399

6Golumn 5 total)(Colurnn

35

o

IL

t-IL

LLIL

LLLL

LI

!

b

I

l-

IIIl-

Clnpter 3

P3-2(1)

Month

(51tr'itz

{a} Squared

0160,00025rEO0lo,ooo28r9OOc2?5OO1O,OOOI/roo

aorooot61900z'5,OO

0orooo

{6)E- rW-n

(al r P)o

42,OOO1O,4OO

lrSoo9r350

21',25O3'5OO

.lool5'OOO4r550

o24,OOO

cr)ly -rP

(2) Squarsd

(r)v

SuppllcrCo.t

(21v-nCost

Dcvlrdonr

5(ro5l

oltt 5Fq(851(351

57535o

80

o

y - 7.y + fr - $181000 * 12 - $11500

i - Xx + t r -601000 + 12 - 5 r00O

l t

(3) (41x F - a

L-abor AcdvltyHoun Dcvlatonr

January.-... 31r5O5Fcbruary.... l'395Mrrth --.... 1't65Aprll --...-.; tr5l5Moy............ f r45Junc..-....... tralSJuly-.-..--. 1rf65Arguet.--. IFOSScp,tcmbcr. 1'576Octobcr...-. 11535NoYombcr - f i6OODcccmbcr.,__-!f99

Totel......9!8,rU

SrOOO4r6OOSrtooSrtoo4'a30417504r9OO6,O805'2OO611304r05O513OO

6O,OOO

0{4o0}180100

(1701(250)(roo)

80200130(50)

300

23111025

4r2i25225

3,0257,2J257,2i25

255,O251,2ir5

og,40o

452.800 131.950 40.250

131,950 - .977J(*sz,Boo X 40,250 )'

12 - ( .g rz )z - .gss

b

: ( x - * ) ( v - l )

ffi

3 7

!.

I!

{6)(x -7W -h

iII

L

I

I

b

IE

Ctnpter 3

P3-3 1

( 1 )

@

(1)

vElcclrlclU

Cort

t2lv-nCott

Dcvirtiorr

{4}F - a

(5)

lt -rPrt)

v -rtz(3)

xLrbor ActvttY

L Jrnulty.'-.. 3 t'OOO

Fcbrue4y.... 1$7OMerch....,-. I 'ClOAprll -...,..-. 1r35O

May---.-... t'530Juna--....- 1r.640July.-.*.-.. 11620Augurt...- f F3OSoptcmbar. 1'580OctobGr..-.. 1'O5ONoYcmbcr.. 11660Dcccmbcr.. IrO2O

13oo (30)4,OOO (230)

4,3OO t3O4,OOO (2301

4,050 (r8ol4,too (l3o)4,t60 -(8Ol

+2n 204,tEO l8o)4FOO tto4,OOO 37O4/rOO 17O

20(rol30(30)(501(40)(ool(60)

o708040

Dovb0onr (a) Squercd (4) x {2} (2) Sguared

(600) 4Oo

2,3OO too3,9OO 9OO6,900 9OO

I,OO0 2,5005r2O0 116004r8OO 3,600(l'OOO) 2,5OO

o o18,900 4r9OO29,600 6140OorSoo lrooo

85.800 25.400

90062r0(x)tor0oo52r90032,400lG'9OO6r4OO

.lOO

0t'fOO

710OOt3o,9oo

28r9OO

ib

ib

b

I

I

b

I

L

ib

I!

Total...... tl&OOO O

, - 2y + rr - $181960 + 12 - 31r58o

x - xx + n - 501760 + 12 - 4,30

I

L

x ( x - r ) ( v - r ). / > ( t - r ) ' z ( v - 7 ) '

. )r - - ( . 8 2 6 ) - - . 6 8 2

424.80050.700 0:: :

85,8OO - .826

I

(-*za,soo X 25,4oo )

u

Pg-3 (Concludcd)

(r)v

ElcctrlcttyHotr$ Co.t

(5)

lx --rr2

{!l_squrt*. o

z2,5AOIO'OOO4N

tgrcootrc@

ta/aOOror0oo

I'COOaorooo67,600zAEo{,

(c)tr -iw -h

(.) x 12)o

t'5oot oootr8ooTrOOO11OOrr2!,Oc'aoo

0t+ooor0'2ooc,ooo

trltv -tF

{21Squrrcd.lOOtooD|00900

asooI 'OOOSrOOO

z6,�0�oo

4190O6"lOOI'GOO

25.aOO

Cllopter3

elu --nCort

Dadrdonr

f3)x

f,lrchlncHourt

(4)

F -ifAEdYttt

Dadedonc

Jlurery-..- E I'EOOFobrurry.... f r57OMlch..--. lr6tOAptl!-....-- tr660Hry--..,.-. tF63OJunr..-.-.- f rAfOJuty-.---- f r52OArrlturt..-- f r.B3OSopilcmbcr. f 1680Oc{ob.r,-. f rttONovrmbcr.. Ir0coDcccmbcr- IrC2O

Totrl....- Ig.gg9 27,COO O 2rt.200

20Irol30(301(to)(40)lcolt60l

o708040

o

2,goo1760244oo2.2&2r7CO2J4o1r801r7O42fi4&O2W2t4tj{)

o(r60)too(60)

(r.o)lco)

lr20)(tso)(401no2&160

oa.aoo

y - 8 + f r - $181960 + 12 - 31r58O

i - Xr + tr - 271600 + 12 - 2r3OO

- rr(y - y) e8,3oo -.93t1x(x -

rz - ( .g33 )2 - .g lo

(21 Slnce the coefllclent of determlnaUon for electrlclty coat and machlnohoune Qe = .a7Q le grestor than the coetficlent of determlnaUon for elcc-trlclty cost and labor houra pe =.682), machlno hours should be used asthe barls for estlmaUng electrlclty cost. Machlne hours explsln morp ofthe varlanco In electrlclty cost thsn do labor houlr,

(3) Wtth machine houru a8 tfio bagls for predictlng elesffcltlr cost, the l|redcogt and Ore varlable cogt rato can be determlned by the method of leastsquanos ae followrr:

var iabte rare ( t , ) - .x(r : iXY I Y)'

X ( x - i ) 'Column 6 to ta l _ 68 ,300 _GGofumn 5 to ta r ' m

- $ ' 32339

Fired cost (a)

t ilfi: - ($'3233e ,.2'3oo)

: ( r - x ) ( v - y ' )r) ' :( v - -v)z (zt'l,2oo )(zs,4oo )

39II

L

I

I

It

!

Ib

br

I!

ib

Clwter 3

P34 ,(11

Janualy'..-.Fcbruary '...March -.--.Apfi1 ...........Mry-....-.'..Juno-.........Ju|y..,........'Atgud.......Soptcmbcr.Oclobcr......llovcmbcr.'Dccombcr..

I2'2OO2r1302rOOO

117O2,O502,2202r7502r25O2r20O

&1602'21O2rlOO

2r5OO

a35O2rOOO2r4OO211OO2rOOO2r*5O2r55O2,7o/0

a45O2rlOO2,3OO

28.800

torooo2r5OO

lOO,OOOo

9OTOOO

40,OOo215OO

22'5,OO90TOOO

2,5OOo

lorotx,430.OOO

4rOOO1,5OO

04,oooo

st,ooo12,OOO

(5Oo)13r5OO39,(XX)

(5oo)o

6,OOO

I'COO000

25rOOOtoo

12r' loo3rOOO

looIrloo

16,9()0loo

15'OO

_g€99

H l g h a a . a t a a a a a t t t t t " t t " " t t " " t " " " r t t t " " " t t " t t t t " t " t t "

LOsf ...... a a a a a o a a t a a a o a t a a " " t t " t " l '

Dlffelonce.'. a a a a a a a a a a a a a a a a " t t t t t t '

(1) l2lvt ln-h

Malntcnancc Cott

Cod DevlaUon

{31 {4} (5) (6) rt} -';; ui-a lou-# tot-lwt-h tu-vf

Machlnc ActtvttYHoure Dcyilqgn! (4) Squercd (4) r (2) Q93urrl!

MalntenanceGost

s2,2902,OOO

3 2s0

MachineHours2r7OO2,OOO

700

Low

$2,OOO.OO828.57

$1.171 .43

Varfabfe rate = 3290 + 7OO hour:s = 3'4142857 per machine hour

Hlgh

Total cG,Et...........r.r.............................r.r......... $2t290t00

Total variable crogt..,.r.'...........................r..'...' l tl 18'57

Average ffxgd c(tSt ............................'...'.......r $1 .1 71 .19

l2lI

E

I

b

I

I

!

40(30)

(roo)t 0

(rroloo(10100

130(r0)50

{o0l

100(50)

(.o0)0

13oo)200

60lEO3{}0

50o

(roo)Totrl.-.. E25,920 O o 172.OOO 76,200

,

,

I

b

II

- I ;Yt + f l - $25r92O + 12 - $2J6O

- Xx, + o - 28r8OO * 72' 2t4GO

I ( x - r ) ( v - i ) Column 6 total- 6lu;;;-5-GGf

- 172'ooo - 3.40 Yariabte cost rate4it0,oo0b -

x ( x - i ) 2

S l n c e Y - 8 + b X ta - y t - b t

a - 32 '160a - t12,160a - $1 '2O0

then:

- ($ .eo ) (2 ,4OO )- s960

10

P3-4 (Concluded)

Chapter 3

l -x ( : - z ) ( v - 9 . ) Column 6 total(31

f t172,OOO a' 1 W , - . 9 5 6 5

(r)X1

(41

1 2 -

MonthJanualy......Februaty....M8hCh.........Aprll r..........M8!. . . . . . . . . r . .Jlllte..r..... '..Jlll!.... '.......AugU8t. . . . . . .September.Octobor......llovembor..Decgmbor..

Tot81.......

t2lIt

ActualMalntonancc

Cort$ 2,2OO

2r1302rOOO2rl7O2,O502r2,2O2rl602rzf',O2CoO2r1502121O2rtoo

(31ly i=a+br ,Prodlstcd

MalntenenceCost

$ 2,2OO2r1402rO(X'2r1602t04o2r2tn2r18f.2r2i2o2r2g02rl802rt60ztl20

(4tlh - v'l

PredlctlonErrpr

(21 - (318 0(ro)

ol ot o

(201(301

. 3 0to

(30)50

_e9)9_e

(s)Ut - t'12

(4)Sguarsd

$ o100

otoo100400900900100900

2r5OO400

$6,4Ot)

2r50O2r3li02,ooo2r4OO2,1(x)2,6002r4EO2,5502,7AO2,45O2,4AO2,3OO

28,800:

- ^ ! A ^ AE t y - Y:: t125,920

Column 5 total -1 2 - 2

8 t -

(5) The 95% confidenco tnterval for matntenance cost 8t the 2r5OO machtnohour level of acdvlty lr

mY ' * t p ; s x s ' . 1 1 + i + \ - - ' - ' f

:! n x ( r , - r ) '

!+ff - sz' .zs*22

s . | , 2oo* (s .eo ) (e , soo ) ' ( z . zz8X?5 .2g822 ) { ' -+ " -w

32'2OO = $59.29

v:(x 1 - i)t :( yt - i lz ./(column 5 total )potumn i totat I

172,OOO _ 172,OOO

@ - @. . ,' ( . 9 5 8 5 ) - - . 9 1 4 8 9

MachlntrHourt

4 1

I

!

IIt

IL

I!

I!

ItE

II

!

I

b

I

!

I'!

I

!

Il-

IIE

Ctnpter 3

P3-5 1

(1) (a) The method of least sguanct:

(11vt

l2ltn-f,

Dtllcrcnccfrorn

Avrngc of

(3) (41 (s) (6) Ct)

\ Fl- i t tn-xr2 h-rui-h ln-iFDlllcrcncc

FromAvcragn of

\ tToo 3F0o K) Squared {4} r (2}

Ebc{rlclty Elcctrlclly Orrcrt OuGtt (OOOI (OOOs

Co.t Drvladon Dryr Dryl omtttcd)- omtttedl

t2lSquarcd

(oOOsomlttedl

Jenuery.-.. $ 4OO g3OO) I,OOO (21600)

Fcbruery -. 5oo (2o0) 1F0O l2'Ooo)ar2,,,o4rOOOI'OOO

EOI'OOOlr0ooIrOOOG'25Oarooo

250trooo

o

3 750400200

o100100900500400

o100

o

s e o4040o

t ol o904040o

1 0l o

M{-..-.-... 600 (tOO) 2'5OO (1'OOO)

March --- 600 (2OOl

Aprll--.-.., 7OO O

Juns--.-... 8OO lOOJuty-..-.-... I'OOO 3OOAu!tt3t..-... 9OO 2goScptcmbcr. gOO 2OOOctobor.-- 7OO ONovcmbcr - 600Dccambor.. 8OO

2,500 (trOOO)3,OOO {5O0}

aFoo I,oooo'5oo 3,oooo,ooo 2r5oo6FOO 2,OO03,O0O l5o0l

gtaoII

tt

lroo) 21600 (1,000)too 3'5OO

Total...... E8.4OO O 42.OOO 0 34.000 . lxl.450

: ( t r - r ) ( v , - y ) Column 6 total - tl3'45o - 3.1015 variable rate34,OOO

b -

I

!

x ( r , - i ) ' Golumn 5 total

S l n c e f - a + b i l t h e n :S T O O - a + ( t l . t O l 5 x 3 ' 5 O O )

a - $7OO -$355e - $345 llxed coat por month

12

P3-5 (Contlnue{)

(b) The hlgh and low Points method:Electrictty

Gost$1,OOo

400$ 600

Clupter 3

GuestDatrs

6r5O0l,OOO5,500

Hlgh ..r. . . . . . . . . .a t a a a a a a t l a a a t a a a a a a a a a a a a a l a a a a a a a a a t a a a a a a a a a a a

Low...

D1ffergnc18..r...r.....r.....................r........... ' .. ' . .t

Varlable nate - #= - $.1091 per guast day5r5 t )O

Fired cost = $1,OOO - (61500 x $.1091)= $1'OO0 - $7Og= 3291

ORFixed cost = S400 - (1,OO0 x ll.1091l

= 9{OO - StOg= Szet

(c) A scattergraph wlth trend llne fltted by Inspectlon:

tEluo,Fooo t

l-> 2= o9 EIEFoulJlll

s1 ,1OO

st,ooos900

:8800

3700

3600

r3500

3400

3300

3200

8r00

$oo t ,ooo

Fixed cost per monthdetormlnecl byI nspcctlort ............_SSSO

Averago cc'61 ......,..,.. SZOOLess llrcd cost......... g5Ovariablo rGrolt ......,..... G:

2,OOO 3,OOO /3rOO0 S'OOO

GUEST DAYS PER MONTH

3s50

crooo 7r00o

$.1O variable costper guest day3r5OO avorlge guest days

43t-t_

IS

tI!

IE

Clpoter 3

P3-5 (Continued)

(Zl The coefflclent of coretatlon (r) and tlre coefficlent of determination (rz)'uslng data from the requiromcnt (lXa) answen

x(r , - , ) (v, - Y) cotumn 6 tota l- -

l : ( t r - x ) '>(v , - y ) ' . ' / (cotumn 5. to ta l ) (cotumn

3 '45o 'ooo -@. l 72r92Or0OOrO0OrOOo

3r+50,O003r5g4 r44g

' '9598

r2 - .9212

7 total )

LIb

II

b

II

b

I

tL

(3) The standard error of the estlmate:

(11X1

(21YI

I

!

lIL

Ib

III

b

I

!

b

MonthJanuary......Fobrualy ....Ma1ch.........4pr11 .......,.r.M8!... . . . . . . . . .J ltJlo .........r.J ll l! ...... '.....August .,,....September,Octobor.,....NoYember.,Decembgr..

Total .......'roundlng eror

iZU t - y ' r ) ' j Golumn 5 total

s (5)' s29,975

GuestDaysI 'OOO1r5OO2,5OO3,O002,5O04,5OO6,50O6rOO05r5OO3rOOO2,50O3150O

42.OOO

AstualElectriclty

Cost$ 4oo

500500700600800

I 'OOO900900700600800

sg.4oo

(3)V i = e + D x 1 )

PredlctedElectrlctty

Cost$ u 7

4f'7599650599ao2

1,OO59S903650599700

39.405'

(4)th-vl

PredlctionError

(2) - (3t'

9(47)3

(ee)50

1l2l(51

(sl(3)

50I

1 0 0

(s)th-vF

PredistionError

Squared(4)

Squaredg 2,209

I9r8O12,5OO

I4

252,916

I2r5OO

I1O,O00

5 ' -n - 2 1 2 - 2 - v s2 ,gg7 .5 - $54.75

chapter 3

1

r3-5 (Goncluded) ,

4)The9o%conf fdence|nterua| fore |ect r |c } tycos i lsat2 'oooguestdayswould be:

tz, ooo - 3,5oo )2

(sg{s + ($.tor5 X2,ooo ))t35483318

(t.atz X330.75 )f * #, *

(t,atz X3s4.zs )(r.ozz )$106.35

!

t

34,OOO,OOO

P3-6

(1) (a) The hlgh and low polnts method:

H l g h a a . . t a . . " " t " t t t " " " " " t " t t t t t t t ' l t " t t " t t t t t t " t " t t t " t " " '

L O W a a a a a a a " l t " t t t " t " " t " " t " " " t t " " " " " " t t " l t " " " l t t " l "

Dlf igrcnc9 . t t t t t t t t t t t t t t """ t""" t t ' l t "" t" t"" t t r" t"" ' r t"

Varlable rate = $f OO + I;OOO Bllletr = $lO

Flred cost = $5Oo - Sl'1o r2r4OO Blllets) = 3260

orFlxed cost = $4OO - (!l'lO x l,4OO Bllletr) = $260

Cost 4stlYttY2r4OOl,4ool.ooo

:1500400

Sloo

45

I

Ib .

!!

I

L

Il

b

L

ChsPwS

P3-6 (Qontinued)

(b) A scattergraph wlth a trend line fitted by insPection:

F

IEl-oulJlll

t500

:oo

9300

$200

$too

30t rOOO I

BILLETS

Fixed cost detormlned by Inspection = $260

Average cogt = S5t52O total cogt + 12 months = $46O

Average aetlvtty = 24,OOO total Blllets + 12 months = 2'OOO

Var|ablecoat=(g460aver iagecost-s26of ixedcost)+29oooaveft lgeagtlvl$ = $.1O Per Blllet

IIg

I

Chapter 3

P3-6 (Continued)

(c) (r) l2l f3) (4) (5) (6) rt)y V-n x F-; l lx- i f lx-rv- t l lv- t r

Elccrriclty Cost llumbcr Activity (a) (21

uonth Cost DcviaUonr of Bllletr Devletionr Squrrcd (4) r (21 Sguarcd

Jenurry,,.... 3455 (51 2,OOO O O O 25Fcbrury.... 450 ll0l 1'8OO (2OO) 4O'OOO 2'OOO tOO

Mrrch........ {35 (251 1,900 (l00l t0'O0O 2'5OO 625Aprf1....,.,.... 4S5 25 2,2OO 2OO 4O'O0O 5,OOO 6251fry............ 4?O 10 2,1oO tOO IO'OOO I'OOO lOOJunc........... 475 t5 2,OOO O O O 2i25Ju1y........,... 4OO (60) l,4OO (8OOl . 3EO'OOO 36'000 3'8OOAugust....... 450 (f O) l,9OO (f O0l i0'OOO I'OOO 'lOO

Scptamber. 4:t5 l25l 1,8OO (2OO) tlO'OOO 5'OOO c,25Octobcr....,. 5OO 40 2,4OO .lOO 160'000 iO'OOO 1'600ilovambcr.. 495 35 2r3OO 3OO g0rOOO 1O'5OO 1r2i25Decomber.. 47O lO 2,2OO 2OO .3O,OOO 2'OOO loo

Total...... 35.529 _9 _?!.OOO ___9 -999,099 gr.OOO _8.950

f - zy + n - $5r52o + 12 - $460i - Lx + f t - 241000 *12 - 2rOO0

variabte rate (b) - :(x - rXv.: f) - Sq9 loFl - i l9x( x *7) '

-cotumn s totat

-6dd;66d'$ '10125

Fixedcost (a) - y - b i- ($.r olzs X z,ooo )- $257.50

(21 The coefficient of correlation (rl and the coofffclent of determlnation (F),using data from the answer in requlrement (lXcl tollow:

- l - \ / - \

- f t x r - x ) l y , _ V )- 81'099-- - .957

V:(x r - i ) ' z (y , - y ) ' J (8oo 'ooo X8 'e5o )1 2 - 1 . s s z ) 2 - . 9 1 6

4 7

t

!

II

L

IL

ItL

ItL

I

L

iI

!

I

-

IIb

Ct8pr( 3

P3-O (Concluded)

(3)

MonthJ8nuary.r....Februaly....M8J1Oh.r...... '

Aprll r..........M8!.r. . . . .r .r . .

J1tJ|9...........Jlll!............Au$ust.......SeptemberOctober......NoYember..Decamber..

Total ..,..'.

g ' -

(r)v

ActualElectrlclty

Gost$ 4{ts

4lto4{ls4854704754004504it5500495470

35.520

(21x

Numberof

Blllets2,O001r8OO119002r2OO2rlOO2rO001r4O0lr9OO1r8O0214OO213O02r2AO

24,OOO

(3)l y '=a+Dx)EstimatedEleetriclty

Cost$ 460

#o4{to480470460399450#o501490480

t15.520

(4)lv - v'l

(1) - (3)

(s)1 0(1s)

5o

1 51o

(5)(r)5

' ( 1 0 )

(5)U-vT

(4)Squarsd

251 0 0?25

25o

225Io

251

25100752o

lcolumn 5 total - $8.672i\,

Ii!

The 9506 conlldsnce Interval level for electrlclty costs at the 2r2OOBlllets level of agttylty would O" 0","--

a + Dx * tesst" ' . , / . t * * * ( t - f ) '=

Y " > ( r - i ) '

$257.5o + ($.rorzs )(z,zoo) ' ( 2.?2s)($a.eze )

1 2 - 2

$48o .25 * (2.zza )($e,ozz )(t.oos )

$48O .25 * $2O.58

or between a low of 3459.G7 and a high of SSOO.83,

!

b

I

b

I

gt52l o

48

P3-7

(1 ) (1)vi

Month

t2lrl'.1-91

Dlffcroncrlrom

(4)

Fi - i )Dlflcrencc

Frctory Dirrct from AveragcOverhead Avcragc lrbor of 1'80O

Coctr of 37,900 Hourr Hours

Chapter 3

(61 (6) rr)lq -|12 lry - rWi -h rq - vlz

(41Squrrrd

'(4) r (2)

l2lSquarcd

4O,OOO |2O,OOO 360,000S60'000 l'2OO,OOO 4TOOOTOOOt0orooo {2oro0o Irt02,5oo2SO'OOO S5O'OOO tr2lOrOOO

4OTOOO 5O,OO0 62,500IO'OOO f3SrOOOl 72i2,5OO

too,ooo 34o,ooo 72t2)5oo640'000 lrl6OrOOO 2tlO2rSOO360,000 OOO,O0O ITOOO,OOOto,ooo 4o,ooo 160,000ao,ooo tSorooo 5o2,5ootorooo (lorooo) to,ooo

90,ooo 2/3O,O0O 84O,OOO250rO0O TOOr0Oo I,060,000t6o,ooo

- 680,000 1,060,000

tSo,ooo S2orooo o4o,ooo4O,OOO 2OTOOO IOTOOO

o 0 c2r6oo360,000 C9OTOOO tr322,5OO25O,OOO 4{tOrOOO 640,000

0o,ooo l6li,ooo 3o2"5ool0,ooo 85,ooo 122,soo9O,OOO 24O,OOo C4OTOOO

o o tbo,ooo

.3O,OO0 !4O'OOO a9O'OOO25O,OOO 7O0,OOO 1,9OO,OOO25O,OOO 75O,OOO 235O,OOOt6o,ooo 320,ooo c4o,ooo4O,OOO 4O,OOO 4O,OOO

o 0 9o,ooo25O'OOO 45O,OOO 81O,OOO360,000 OOOTOOO ITOOO'OOO25O,OOO 4OO,OO0 84O,OOO

o 0 t8o,ooo9O,OOO 27O,OO0 81O,OOOl O,OOO (3O,OO0) 9O,OOO

(3)xi

20A '{

J!ll.'....... 3 81600Fcb....-... gr9O0

ll!1...-... 81050APt- '..-... grOOO

lhy--.., I '160Juno.--. 7'550July --... 7,050Aug....-... 61450Scp......... 6'900OcL........ 7'5OONoY.-.-... 7rl50Dcc...--. 7'8OO

4pJan.....,... 8r7OOFcb.-...... 9,3OOMrr......... 9'.iOOApa........ 8,7OOifry,..--. 8,OOOJune.....- 71650July........ 61760Aug....--. TrtOOScp......... 71350OcL........ Tr25,O!lov..,-... TrtOODcc..-.-. TpOO

20cJrn......... 81600Fcb...,..... g,3OOMer......... gr4OOApr....-... 8r7OO

_ llty..-.... SrtOOJuno....... ?1600July -...... Z'OOOAug.-...... 6,900sop......... ?rlooOsL........ Z,EOONov......... Z,OOODcc.. . . . . . . Z,OOOTotal....... S2g4.4Oo oo

ooo2r0oo1,060I r loo

25O{3so)(8s0)

(1/450)(t,0ool

(4oo)frso)(roo)

800lr4oolr4OO

800loo(2rol

(t,tgol(8ool(6s01(cs0l(8ool(4ool

700lraoo1Foo

800200(3oo)(eoo)

(1,OOO)(8o0)(4oo)(ooo)(3Oo)

2rOOO2,4O02r2OO2,3OO2rOOOlr0oolr4OOI'OOOl'2oolr7OOI'COOlr9OO

2,1O02FOO2.,.OO2',,OO2rOOOtrSootr2ootr3oor'5oo'tr7oorr5oolr8OO

2rOOO2poo2r3OO2,.OO2,OOOt,8oolr3OO1,2O0lr3oo1,8001,5001,9OO

64.800

20060040050020�0ro0(4oo)(8oo){600}lro0)(2oo)100

300500aoo4(}0200

o(oo0l(5oo)(3oo)(ro0)f3oo)

o

200500600aoo200

o(5oo)(0oo)(5o0)

o(3oo)1 0 0

5.280,OO0 11,625.000 29. lA5.OOO

(9

I

LIIlL

t-Ib

I,\,

LIi

b

I

!

Ib

I

b

ILr

iL

I

b

I

qww3

P3-7 (Continued)

p - z ( x t - x ) ( v t - l )

x ( x r - x ) ' Golumn 5 total 51280,0O032.20 variable

cost rate

then:

Column 6 total 11'625'000t -

Slnce j - a + biand t ' I;yt * n and i ' Xr 1 t rtt

(Sesa,4oo + 36) - , + ($z.zo)(o* 'aoo * 36)

, tz ' eoo

: 3.tl fdT:.t ovelhaad cost

(21 The coefficlent of correlation and the coefficient of determination' using

data from the regulnement (1) answen

x(r , - 7)(y, - Y) cotumn 6 totat

11r025,OO0 11rA?S '@9-:' - @)

.v153,938,4OO,OOO,OOO

1 2 - ( . g g z o ) 2 - . . 8 2 8 0

1 11625 ,O0O12r4O7 1191

- . 9 3 7 0

chspttir3

(3)

fi

P3-7 (Continued)

MonthgJanualY......FobruSrY '.'.M8FCh.r.......APrl l . . . . . . . . . . tM8! r . . . . . . . . . . .J11JIo...........Jlll! ..... '......August .......September.OCtobOl......November ..December..ryJanuatY......Feblarary....MdFGh,.. . . . " .Aprll ...........M8!. . . ' . . . . . , . .JUll€ ' . . . . . . . . . .Jlr l ! ' . . . . . . . . . . .August.......September.Ogtobor....,.November ..Decembgr..20cJanuary......February....MihCh.. ' . . . . . .Aprl l . . . ' . .o... .M8!... . . . . . . . . .Jung. . , . . . . . . . .Ju|y . , . . . . . . . . . .August. . . . . . .September.October......November. .December..

Total

$ 8,3409]2i2O8r780I,OOO8r34O811207'p,zo6rl406r58O716807 146081120

8,5O0I,OOO8,78O8r78O8,34O7,9OO6,58O6,8OO7 t24O7,680712447r9OO

8,34OI,OO0I,OOO8,7808,3407r9Oo6,8OO6,5806,8OO7,9OO7,24O

_ 8 ,120

E284.4O9

(4)Ui-vl

PrudlctionEmor

(21- (3)

It 160680170

o(1eo)(5701

303 lo320(r 80)(31o)(320)

140300520(80)

(34o)(250)1703001 1 0

(43o)(r40)(4oo)

260300400(80)

(240)(3o0)200320300(4o0)(240)(s20)

(5)tvi - vF

PredictionError

Squared(Cl_Squarea

$ 25,600462,4OO

28,9OOo

36,1OO324,9OO

90096,1OO

to2,40o32,4OO96,1O0

1O2,4O0

19,6009O,OO0

27Or4OA6,4OO

I l5,60062,5OO28,9OO9O,O0O12, lOO

184,9OOl91600

l60,000

67,6009O,OOo

16O,O(x)6,4O0

57160090rooo40rooo

1O2|4AO90,OOO

160,OOO57,6OO

27O,4OO|x1.580.200

The standard omor of thc cstimate:(r) l2l (3)x1 lr luj= ?.+.brJ)

Actlsl PredlctedDlract Factory FactoryLabor Overhead OverheadHouns Gosts Costs

2rO002'd,oo2r2OO2,3(X)2,OOO1,9O01,4(X)I,OOOl,2oo1r7O01,6001,9O0

2r1O02,30O2r2OO2r2OO2,OOOlr8OO1,2O0lr3oolrSool,7oo1,5OO1,8O0

2,OOO2,3OO2,3OO2,2OO2,OOO1,8OOlr3OOI,2001r3O01,8O01,5OOl r9OO

8r5OO9,9OO8,95OI,OO08rl50715507rO5O6,45O6,9007,5007r l507,80O

8,70o9,3OO9,3008,7OO8,0oo7,6506,75O7rlOO7,3lio7r?So7,10o7r5OO

8,60O9r3OO9,4O08,70O8,1OO7r60O7,OOO6,9OO7,1OO7,500TrOOO7,600

s284.400 off,800

IIiL

II! chtPrer 3

l_ Ps-T (concluded)

5 t

= - - i > ( y , - y - ' , 1 2 - , @ -

; $ i l , 5 6 o ' 2 o o - - [ r g a - z t 2 - s 3 2 4

b i I t - 2 ' \ - 6 : z \ 3 4

| (4) Slncc a large sample ls usod In thls probtem, tgS% = zgsYo and the confi'

r dcnce lnterval ls:

i Y ' t i z e s y r 9 '

(sspm * ($z.eo )(z,zoo )) t (t.eoo )($sze )l38, 78O t $635

IIb

tI

tt

I

I

L

IIb

*

II

E ,

!

I

L

!t

)b

I

Cnsgter 3

52

P3-8

(r ) (1)vt

(4)

Fr -t)ActlvltY

Dovlation

(5)

ui-7f(4)

Squarrd

(6)

Vt-7Wr-htt)

til-h"(2)

Squarsd

(2)ru-h

(3)xi

[.aborjloto

9501rO241rlo0' l , l€

1r3131,.C11155211372t,36011455tp lI r lSo

0091)Oz21por}283r,&?9r'260lr44O

r}20or1335Ir l641$7311124

2,.JCO

Maintenancc Coct

Ug1!r Cost Dovlrdon

.lan, ZOe '.-.$'l'l05 (286)

Feb., 2OA ,.. . l '110 (365)

fnar., 2OA ... tt39O Pf)

Oot., tOO.... l'449 F2)

May, 2OA.'. ' I tGtS t37

.tune,2OA .. lF?5 U

JulY, 2OA -.. 1'687 2Oo

Arg.r 2OA ... I;OSO 169

Sep., ZOI ... f 1595 ll/f

o"t., ZOI .... 1t675 104

not. ,2OA .. . 1,405 t t6)

o"". , 2OA.." 1125.1 1230)

.,;;:;io" ..' eso (cgr)

;;;:, ro",.,. I '175 (3oc)

"" . ,2O8 " ' 1/ ;?5 158)

;;;:;ro' "" r'5oo 25

""r, aOt "" I'COB 127

,;;,2o8 .. l '6s3 172

,ri t , ' to" "" 1'675 tg4

;;;; 2oB "' 1'724 243

;;;. ,2oB "' 1'626 145

O",.r rO" "" 1]576 04

*;".;2oB "' l '633 172

;".: 2oB ..' t,/tt' (63)

Totsl.-..$$ J

(2e0)(210)(13r)

(02)7321

312132128216(ro)(eo)

(24r)(2r8)1zo)4300l o

2006005ct6)133(1r o)

J

84,1@46,656l7 , l6 l

8,{d61329

u197rg17,12116}8764,Sl?,l5

3C18,loo

68108t471324

aoo11849

eBOrloo

40,OOO2"oo9rO2551776

17,68913,456

543.682

82r94O78,84Ot1,921

zo4to,o0t

921c4..:7222FOBr4,30441r?to

1t4/420'7OO

1271''7106'708

Ir l20I1076

12$731'72O

38,8OOt2'150

' t3r776

ct,t+0)2i2,876

T,3S

G51.300

8i1796

133)2258128t

I ,O24

18,769

11936

12143'6

2AF8112199637,636

6t77652,90O

281196193r636

3r136c,25

t3rt2923F8437,6;:!660,o4921rO?5

8rgl6zf�F84

3r9O9<

34€ee

-v7

- I y t + n -

- ! X , j * n -

f -

3 3 5 , 5 4 { + 2 4 - $ 1 1 4 8 1

? 9 , 7 6 0 + 2 4 ' 1 1 2 4 0

x ( x r - t X v , - i )- r 2

x ( x r - f ) " x ( v r - Y ) -

651,30o 651,300

- 0 6 )J(ss3,682 X t 'o

Column 7 total )

651,3OO- fr|sfr

eolum4

ffitumn 5 total

r2 - (,ezotzs )z - .758162

. E59798,983 '092

- .870725

53

I

b

tI!

lS

I

I

b

It

i

I

-

I

!

I

t

!

Cnagter g

P3-B (Cohtinued)

(r) (2) F)vt ru-f, -.-:!

Mtlnttnanct ion Machlnc

Uontf,, . *" Dcvladon ry

,I',-r0o....31'195 (2so) 8oo

;;;:; too,,'. r'116 (365) 7u

;;20A... i '3eo '

Pl) ?ttior- ioo-.. ttas t32) e87

mty, tO",. . . I '018 197 I '186

,;;;, 2oA.. t,EE u l' ltn]",r,'ro"-. 1'087 2Oo 1391

;;;.,20A... t,6o loe 1'2u,

Sep., 2OA... 1 '595 1t4 I t l86

oct. ,2OA* l '675 194 t , l$

Nov.,2OA'.. l '4O5 f'O) 997

Dec., 2OA..' 1331 (23O) 841

Jan.r 2oB '.' 95o ($r) 60'2

Feb.,2OB.' . 1 '175 (306) 73t l

Mar., 2o8... 1,4?5 FO) 1'O*Apr.,2OB... r.rfo 25 1't*MaY,2OB ..' I 'OOB 127 1'174

June, 2o8.. I 'O53 172 :2*July,2oB '-. ,, izo t94 1,.oA

Aug., 2O8... 1t124 28 13,23

SeP., 2OB '.. 1'026 145 133x)

Oct.r 2OB... 11675 94 l '1S

Nov.,2oB'.. 1'653 172 \A7

Dec.,2oB.- 1118 (O3) I 'O35

Totll..-.€5.!!!l J 25'8oo

({)

trl -i)ActivttY

ry!91!gn(2o0)(3:lr)

(88)(88)t t t

70214163t l l171rrsl

t234.l(573)(342)

1 6oo00

17118928'155

00l02

(5)

v,-il'(4)

(6)

V - xW'rtrD

v- jf(2)

Souarcd8rJe6

$332s8,'811'o24

l8'76911936

42,4362,.FO112'99637'Gi:l6

6J7652'9OO

28t'0ol93'636

3'136. o,25

t0'129z?.F8437'33659'o4921,p25

8p3O2aF843,S9

Squrrod

7oJ56to9r50r

7r7U7;t+4

12,321a,|1

a8,65023FOe1215212',3l1

oro84641753

328r38116,964

a253,ooo0r8Ol

29,l19,72101r5O421tQ?s

Irloo26,44

(4) r (2)

76,076120,8t5

8roo821816

15.r2O73,a76

44,4S27F1712,A3133,174

5192853,82O

304,2031041652

(s4ollFOo

121573N,11236'665oo,,:0,�n1476

8'4OO27r8*

I

!

bI,013.8?9 lol0'600

,,

- x Y t + f t - s 3 s r $ &- f ' 2 5 r 8 O 0 *

- - '

1 i r ( x t - x ) ' x ( r r - Y )

+ 24 - $1,48124 - Iro75

(Golumnz tout )

1,O13,8261,o13 ,826

@ , 5 0 6 )

- f f i - 'ee1176

(10) l,600 2F20

J J.o35349

Columq

Cofumn 5 total

r ? - ( . 9 9 1 1 2 6 ) 2 - . 9 8 2 4 3 0

ffi46@366'o88

v

54 chaotar 3

P3-B (Contlnued)'i2l

- ' Th; activlty moa3uro us9-d to predlct- maintenanco cxpcnee should be

machlne h6urs, nrhlch wlll result In ttre following cost cstlmates:

b -x ( : - t ) ( v - Y )

: ( x - f ) 2

Cotumn 6 totalColumn 5 total

s I ,195I , l l 61,39Olr4d.g1 ,6181r5,?S116871,6501r5fi5I ,6751,4o51r?J5',l

950111751r4?S1,5061,6081165!l116751?724116261,57511653I , 4 1 8

sss.5!{

1, Ol3 ,826 3.979213- mEim

- variable rate

slnco y r a + bi rthen the estlmated fixed cost ls determlned as follows:

t r j --blx

r r s1,481 - (3,e2e213 x1'O75 )t - $ l '481 -31 '052.65e r 3428.35

(r) l2l (31x1 rt Ui= 1.+-bx!

Actiral PredletedMachine Malntenance Malntenance

]lours Cogt Cogt

(5)tq -viF(3)

Months

(41ln -vil

PmdlctlonErtor

(2) - (31q26)(4r)(s)

542A(33)

(0)I5 .

27o(r)

3029('tl)(34)30

5Iort)6

i 3 'lze'1

E-lg)'

(4)Squared3 676

1168125

2,9167U

IrO89368t25

729o

. 1900841

5r041I ,156

9002581o

4936

1 6 9576

sl zsr 7

Jan., 2OA....Feb.r 2OA ...Mar., 2O4...Apr . , 2OA.. . .May, 2OA,. .June, 2OA�,.Ju l y ,2OA, . . .Aug. , 2O4. . .Sep. , 2OA.. .Oct.r 20A,...Nov., 2O4...Dec., z0n....Jan. , 2O8. . .Feb., 2O8...Mar., 2O8...Apr., 208,...May, 2OB ...June , 2O8 . .Ju ly , 2O8. . .Aug. , 2O8. . "Sep., 2.O8...Oct . , 2O8. , .Nov . ,2O8 . . ,Dec., 20-Et...

Tot81.... . . .

8097#9879,87

1 , 1 8 61r154-11291112381 1 1 8 611246

997841

. 502733

I,O9OI ,1351;17411246�1126,.1,3231,23O1 , 1 6 511237I ,O35

39.8gg

3 1&211r1571,3951,3951r59O115581,693116411,59O116481,4O51r?52

920Ir l46114961r54O11578116481,66611724116331,5691,ffO1r4f .2

€g€{z''rounding error

j t ( " t - v ' ) 2 Column 5 total2 4 - 2

I\

" ' - \ n - 2

1317 ,817 ,- \ fr- - S2B.4sBlo3

lF

II

>

!I+ Clqter 3

I

I P3-8 (Cgncluded)!

r (a) ffirfflffi:;|;ffi,T:"t""'

lor maintenance cost at the 1'1oo machine

b

II

b

II

I

t

I

!

I

tt

II

!

55

t - t l

{ { r r - x lY ' * tg ; s * S ' . , i 1 + I +r - - ' c v ' -

\ n t ( r , - x ) '

i - _ _ - ^ - . i r ( t r t o o - 1 , o 7 5 ) 29028 .3tt + (s.ezezl3 )(r,1oo) r (e.ozl )(ze.rcarm )! , * * - r,agsff

31,505.48 * $80.26

I

! :

!

b

\,

1

>

I

56Cnapter 3

W = a + b S

CASES

= 5.062 + (.023) (1'20O)= 5.062 + 27.6= 32.662 or about 33 total workens

Total workgl.s negdgd ....,.........rr...............................r.

LeSS pgnnanent WOfkgllS ......'......................t"""""""

Number of temporary workers needed'

Regression 2 appoars to be better than Regrcsslon 1 because:

i"i- O"t outside the rclevant r.tnge have been excluded' thereby nemov'

ing anY bias.(b) fhe standard error of the estimate (s') for Regrcssion 2Js smaller

than the standard error of the estimate for Begression 1 (.432 com'pared to 2.012).

(c) The coefficieni of determinatlon (r2) ls hlgher for Regrcsslon 2 tfian

the coefficient of determinatlon for Regrcssion t (.998 compared to

.962).

Jim Locter can use the legression in his plannlng for tempolary workers

lf the foltowing condltlons exist:(a) The forecasted dally shlpments are greater than 3oo and do rrot

deviate too much from the agtual shlpments.(b) The amount of work to be done is dependent only on the number of

shipments to be made and does not change from shipment to shlp-ment.

(c) Worlier productlvlty is erpected to remain approximately the sameas that experienced during the period used to develop the negnes-sion.

(d) A strong cause and effect relationship exists between the depen-dent variable and the Independent variable.

(e) The time frame for a forecast ls short'term'

The regression could be improved by the following:(a) Redeveloplng the regression using the number of hours worked as

the dependent variable.(b) Performlng another analysis ll rush orders or deviations of actual

otderc fiom forecasts occur wlth any degree of ragularlty.(c) tnvestigating the historical data used as a basis for the regrcssion

to determine lf there aFe any further unusual circumstances thatshould be temoved from the data set.

td) Redoing the regression after a period of tlme' such as four to slxmonths, to discover lf thens have been any changes In the relatlon-shlp between the dependent and the Independent varlables.

c3-1

(r)

331 023

tzl

(3)

(4)

l-

II

t

Clnpter3

c3-2

(1)The|nc toase |nyassoc ia tedwl thaun| tJncnease inx ls . l .2 ,There fore ,eSoo-untt tn"r""i" tn x wtti-J;ilin a 6'O'unitln"t"t"e 11'2 x 5O0) in y

(2) [:i"T,::riJ"i?,1P."rr. unreriable rf the corrararon rs spurious' rhe

' assumpt ion is t t ra t1 ;# i " " ]og i * r .L i " i i " "sh ipbetweenoutpu tand the use of efee#c powgr and dirsct labor'

(b) rrre equa$on may b; Ji"ble undsr ii" "onattions at the time of th

studv,butfconOltiJns-tt'"ng"'theresultsmaybeunreliable'(c) D"tj;;;;;- limitJ i" " l'ige of 5oO.2'ooo unlts.

(d}rts-assumeatrratastralght-| |neassumption|sva||d.(e)rrrecoemcbntofcorrelat|onlg"'""", '"ofttreextenttowhich

two varlables ars ,;;i;ttiearty. n i" t t"railve m€asune of good-

ness of fit. More or iil"-""tiatlon ln yi" ttpl"lned by ora rugrcssion

egua*on for direct f,rl]o, nours than'ior elbctrfc Powen that ls' the

esuatlon for dlrsct ffi;; iiouo ts a uJtt"r flt ttan the equatlon for

elecilric Power'(0Thestandarderoro f thees t lmate . lsameasuneotvar |a t |on f rom

the regrcsston ltne.li il; ;;t "tlon" tt" not-alty dlstrlbuted

about the regrc"",on .qu"ii*, tne sGndard errcr can be lnterpret-

ed ln tllre same r"y'", it " "t"no"tu-i-"'r"uon' The stsndard entr ls

gruater In the case ;id;; i"Uo' f'o'u-o tft"n In trs caso of elestric

power' GGA-canada (adapted). Reprint wtttr permisslon

( 1 ) An advantage of Alternative A ls that using time-as an IndePendent vari-

abte is a conyenl""i*"V to take il; ;;;;ideqtlon all posslble factors

that may be lnfluencing the depeidtnfvartaUrc Juring each period of

time. A disadvantage of Alternatire A rs that there ls no loglcal rclation-

shlp between years and rental expense'An advantage of Atternatf"e b-ts that this method ls loglcal because

as rovenu"" tnciase, the stgryi lnrr""r", and, thus, rsntal exPense

lncreases. A di;-d';tage of eliernatfv" 6 t" that an estimate of ruv-

.n""il"J#[l; of Arternative c is that the mathematicar carcurationr

are relailvely eaiy and the mc-thod ls easy to underctand' A disadvantag

of arternativ, diJ.ffi il; arnrrm"t. .rr-r"9" rs an oversrmptfica*on

that does ,rot *r"oi;;;';;t rchilonship between varlables'

OuPter 3

C3-3 (Concluded)

|2|MotorcoGor?orat ionshouldse|ectA|ternativeBbecau.sethere|at ion-rhtp between neyan,r" riJt} " ,"nt"l .;;;;;b ioglcal' the coefficient of

corrslafion ls hlgh, rnaiii" tt"ndard eqor of the estimate ls low'

(3) A "t"ti#;iirr[iiq* i" "'n-"pp-priati-ieirtoa for es*matins rental

cxpense betorp i[otorro-;;ft.d"iTi'il;[" attto Parts' A statistical

tcchnigue attempts to- -"""r- ttrt "o'"iation between tre variables

trat aru pnesumeO to fral]IE"it "nA ttftA rclatlonshlp' and such a

relailonship appea* to "iriiiirti" "ttuauon' of cout:e' Motorco ls

lssumrng that any neratl-J"iiJs tnat-.rr=t in *re hrstorrcar data wttt con'

tlnue ln ttre ftrture wnnout-ln;ig"' Management mav-want to adiust the

variabtes for chang". i;i rr"ip*tt *irr"t"iu6 and Motorco may wish to

i ntroo uc-e -oit'tt

q Jantltative vari ab les'

c3-4

(r) The phraso ,,-gle""ion provides a rclational statement nther than a

causal statementn means that reg;"ion analysls ls used to determine a

relationshlp, but not nt"""sarffyi cause-and'etfect relationship' A spe'

clftc value for a negnession cosfficlent does not imply that the lndepen-

dentvar|ab|e(s1ca-usesachangeinthedependentvar iab|e.The meaning of each of the "VtJb;i" in tt i basic formula for a tegression

oquatlon follows:y'r = estlmateJ value of the lth observation of the dependent variable'

a = t h e y . a x l s | n t e r c e p t o r c o n s t a n t t e r m ( 9 . 9 . , t h e f i r e d p o r t i o n o f asemivariable exPense)'

b = the rcgrcsston coefficient corresponding to the Independent vari-

ab |er (e .g .g thevar iab tecos te lementassoc ia tedwi thaoneun i tchange in actlvlty r).

x1 = the tth ou""r""tibn-of the first Independent varlable.

c = the regrcsslon coefficlenl iott""ponding to the lndependent vari'

ab |ez(e .9 . , thevar iab |ecos te |ementassoc ia tedw} thaoneun| tchange ln activity:).

21 = the lth observatibn of the second independent variable.

d = the error term associated with the lth observation.

Statistical factors used to test a negrcssion equation for goodness of flt

include:(a) The coefficient of determination,;2, which lndicates the portion of

the varian"" i" the dependent variable erplained by the lndepen-

dent variabtes. A coefficieni of determination approaching I lndi-

cates a good llt.

l2l

(3)

59

(b)

(a)

(b)

(4)

I

lv

IL.

lb

Ilb

I|-

Ib

Lt,I!

II

!

l!

b

II:,

L

Clapter3

l -

C3-4 (Concluded)

c3-5

( 1 )

(c)

(d)

(e)

The standard orror of the estimate which measures the dispersionof the observed points about the regression line. A standard error ofthe estimate approaching zeno Indicates a good flt.The term "linearl$l wlthln a relevant ranget' means that in a specificsltuation, a straight-line relationship between the dependent vari-able and the independent variables can be assumed only within therange of historically observed values.The term rconstant variance (homoscedasticltyl" means that thedistrlbution of the observations about the regression line is unlformfor all values ol the independent varlables within the observedrrange of values.The term "serial correlation" refens to the lack of independence in ageries of successlve observations oyer tlme. The deviation of avalue from the regression line should be unrelated to the deviationof any other point from this line.The term 'normality" means that the ioint probabllity disHbution ofUre variables ls normally distributed (multlvariate normal). The fre-quency of the observatlons should approximate a norrnal curve.The term smultlcolllnearlty' refers to tfie correlatlon of lndependentvariables. When Independent variables are hlghly correlated wltfleach other, the relationshlp(s) between the Independent vzrlableemay obscure the relationship between the lndependent varlables(s)and the dependent variable.

(a ) D = (2 .455+( .188X1,5OO,O0O* 1O01O00) )x 1O,OO0un l ts= (2.455 + 2,821x 1O,0OO unlts= 5.275 x 1O,OO0 unlts= 82,750 unlts

(bl D = (2,491 + (.441(12,OOO,OOO + 1,O0O1OO0)) r IO,OOO unlts= 12,491 + 5.28| x IO,OOO unlts= 7,771r lO,OOO unl ts= 77,71O unlts

The 5o7o confidence interval for demand is calculated as follows:D = 104,160 unlts= {.59X,922 x 10,OOO untts)

= 1O4r16O unl ts * 6,361.8 unl tsor between 97,798 unlts and 1 10,522 unlts.

l:

\

\

tzl

&

c3-5

(3)

Cl?€.pter 3

(Concluded)

Eguation 4 ls the best The coefficient of correlatlon and the coefficientof determination arp the hlghest of ttre four equatlons. The coefficient ofdetermination Indlcates that 70.3oh of the sample variance of automobllesales ls explalned by the rcgrcssion. For predigtlve purposesr the stan-dard arror gf the estlmate a|.922 is also tfie lowest of tfie four models'giving the tlghtest (smallestl phyrsical confidence Interval of any of theequatlons.Equation 3 assumes that factory rebates (R) are dependent on advertls-ing funds (A). The rcsuJts of the analysls show that factoly rcbates andadvertlsing funds are almost totally independent andr ttrereforc' cannotbe used to predict each othea The rcsults of Equatlon 3 lend credlbllltyto the use of A and R ln Equatlon 4. The Independence of A and Rleduces ttte posslble negative aspects of colllnearlty'

(4)

I!

S

I

CHAPTER 4


'I

O4-1. The five Parts arc:(a) Direct nraterblg reqtbn(b) Direct lsbor ceclbn(c) Frlory ovefiead(O Work h Pr@oer hventories(c) Fhbhed grood hvmtorbr

*2. iho bahnc" rhoet ir t 3tal.ment ct finsncblpcrttbt; the hcqrr ctBternont b a dalement of

sttYity. The incqne lbtement is ccnplementaryto thc babnce sheet, munthg in padicubr fortho ctrange in hr prcprietary equrty Bs a resullof operatims during the year. In |hat respecl' theincornc atatemenl ir eeaentially nothing morethan a major rection of the retained eamingsaccounl. Thereforc, tht rsvenue and expenseaccounls in the income 3talemont have beenlcrmed'cxplanatoqf ac@unl3, explaining thecbb and lkrw of r.YcnueE and cxpensee lhatbod to thc new hcqno (or bce) and to the newrrtahed camhgs balancc h the balance sheet.

O4-3. Thr ordinary babncr rhecl and incqne slate-menl aro htended to ptwkJe hlormalist as lofinancial peilion and resulb of operation of aburinesl, in sctordancc wilh several assump'liqs that arc made h preparhg |he stalements.Frqn the standpoinl cil the criticisms rnade, themost important cil these assumptions are lhalcocl lost appropdale arnortization of cost mea'rurca unelgired cct, and that a business meybo a$umod lo bc gohg to conlinue operatbnsindclinilely into lhe future. Accounting state-mcntg sre usually prepared on lhe heory lhal acale or gome other definite event is essenlialbcfore revenur is recognized. Basically, theaseot sUe of a balancc aheet coctaha a preson-tstbn o{ the anrounts cl cost incurred, which canbc presumed lo bencf i t f u ture per iods. 'Anincornc slalement presents the srnounl of rov-cnue recognized as having been realized duringthc period, less the podioo cl all cosls incunedthsl doe3 not appear to be lairly delerrable loftnurc perinds.

Thc ircome staternonl is prirrnrity a m€asurecd what lres been camcd, and not a measure of'camhg power.' For plant assots, the balancerheot b pdnarily a rnasure cl accountability forcxp.nditureE, rhowing acguisit ion cosls leescodr sllocalod to past operatbns. This rneasureof accounlability may br quile diflerent from1rur velue.'

To hcreese ilg usefuhess as one elemerd injudChC eaming porver, the ircsne stalement ispicparcd with a dietinclion between operatingand nonoperaling items. For the samo roason,c.rtain iterns may be climinoled frorn the incorne

slstomenl and shown in the statemont o lnrtained eemings. However, the effec-t of nmre'

curring and nonoperaling transaclions is notentirelY eliminated.

lnfonnalion revoaled by a serios of income3tatcments b morc rignilinnt in iudghg eamingpower than informatbn revcaled by ane hcqncstatcmstl. The incqne of a bushess rnay folbwor .Yen exaggetat€ the ups and downs ol thebueinesg cyclo and, therefore, lhe inccne of anycrc year will ncl represent eaming powor.

Changes in law or local zoning ordinancesmay result in a marked change in lhe eamingpower ol a bushess. Ukewise, changes in public

taste, devebpment of new prodtrts' apPgaranceol new conrpetilion, acquisition ol subsiJiaries'changes in management and lhe like, all maychange earning power and yet not be clearlyrellecled, il reflected at all, ir one incorne stale'menl.

The accounting use of historical. rather lhancurront, dollars in measuring depreciation andcost of goods sold may resull in distoding anyview of earning power obtained frorn a singleincorne statemenl.

ln regnrd to plant ass€ls, il can be said lhattheir value to a going concetn is usually depen'dent uPon the eaming power of the business.Such s value is not necessarily the same as lQ'uidation value, cost, cost legs amortization.repbcement value, or any other kind of value'The phrase .true value'has no definile connota'tion.

O4-4. Actusl describes the way cosls are measured.i.e., at actual historical arnounts; /ull absaptiondescribos which elemenis of cost are allocaledto hvenlory accounls, i,e., all elements of rnanu-lacluring cost are fully allocated to hventories;p/ootss describes how cqsl infonnation is accu'mubted, i.e., costs are accumulated for eachprocoss or deparlment in the laclory.

O4-5. Prime costing systems albcate only lhe primecosts, direct material and direcl bbor, lo hvento-ry accounts. Direct costing syst€ms, abo calledvariable costing syslems, albcale the variablemanulacluring ccts, direcl materbl, direci labor,and variable factory overhead lo lhe inventoryaccounts. Absorpticn costing systems albcate loIlvenlories parl or all of tixed frtory overhead,in addilioo to all varlrble manufacluring costs.

04€. Actual costing m€asuros product costs at actualhislorical arnounts, while standard ceting mea-sures product costs by ueing predeterminedarnounts ol resourceg to be coosurrned and pre-determined prices o{ those resources.

62

Q,4-7. Preess costing aicumulates costs fot oachpt@olts or department in the ladory end rnah'

tains detailcd recordr and calculationr of the

cotl of *ork h preest. Job order cting accu-

mulales cotr lor oach irb, lc', balcfi' or contrasl

and mEhtains detBilsd records and calculalbngod tho cost! of tork in prceas. BacHlush €st'ing accumulal.r coltr by working backwardsthrough ihc availablc inlormatiqr afler produc-

ticn is cornpleted (i.e., at the end of the accounl'hg pori<rd) and rnahtahr no detailed records ol

lhe costs cl ttPrk ir Prcesr.O.4€. Actual cosihg il more cornmon lhan standard

coothg in defense'rebted industries, while stan'dard cosiing ic adnewhat more cornmon else'where.

O4-9. Super'full absorpfbn or suPer absorption refersto tho income lax requiremenl thal some pur'

chasing and storage costs be allocated to inven'tory ac@unts.

O4-lO. Job order costing would be colrlmon in repairshops. buiHhg cotslructicr, and prhting; and in

servicc bushesse€ guclr as medical, legal' archi-leclurat, corutrucliqr engineering, accounling'and consulling lirms, as mentioned in the lexl'Other examples include shipbuilding. bridgebuilding, tool and die manufacturing, arl andantique resloratirn, and contracl rossarch'

o4-1 1. As mentixred h tho text, Pr66!ts costing wouldbe common in thc mill ing, brewing, chemical'and textile industries; in sirnple assembly oP€ra-tions: and in seryice businesseg serving largenumbers o( cuglorners simultanrcusly, ruch asairlhes. Other erampleg include petroleum refin-ing, basic food preessing, and manufacture of

ChaPter 4

low*ost @nsumor products such as toys, dis'posable Pens, na:ronr' and lighters.

04-12. Aspecls cqrtrnon lo icb order and prccess cost-ing are:(a) They can be used by rervice organiza'

tbns.(b) They requin cqrsiderablo detail to calcu'

late tho cost ol *ork h Procells.(c) The wprk h process accotnl in the gener'

a l lcdgcr i r lupported by subsid iaryt€cordg.

O4-1 3. A blended cthg method uee irb order cctinglo accumulate soflrc clement(s) ol cost andprcces3 ccthg to accumulale ofien-

O4-14. Flcxible manufacluring 3yslems consisl of anintegrated collection ol automated productionpnocesges, autornated rnaterials rpvemonl, and

cornputerized systetn csttrob lo utilize facilitiesln etticiently rnanulacturing a highly flerible vari-

ety cl Products.Q4-15. The adnantages of a llexble nranufacturing sys'

le.n over the cther systems include shorl (near-

zero) setuP limes, lhe absence of a learning

curve, lflet lead times to chipmont' lower diresllabor cost per unil, lower direct labor cost in

total, and bwer work in prccess invenlories.O4-16. Thc hilial cost of creathg a flerible rnanufactur'

ing system is much higher than lhat of olher

rngnuf asturing systoms.O4-17. l,lanufacturing setthg suiied for bacHlush cosl'

ing are distinguished by very fasl processing

speeds, which rernoves both the incentive and

the opportunily to track the detailed costs of

work in Pr@ess'

63

l-

It

LI\-

Ib

Ib

IS

Ib

IS

I

b

I

b

Chaptor I

. EXERCISES

E4-1 Calculation of cost of goods sold (in thousands):

TOtal manUfaCtUfing COSt ........... ' ................r.r.....tAdd work in process inventory beginning """""

Less work in process inventory ending.r..........".

Cost of goods manufacturgd r.......o.r.-........ ' ....r.. ' .,Add finished goods inventory beginning ........!....

GOSI Of gOOdS ayaitablg fOf Sa|g.. . . . . . . . . .o. . . . . .oo.. . . . . .Less finished goods inventory, ending ...o...... ' ......

Cost of goods sotd ..... ' . .-,.................... ' ..


DirgCt matgrials used.....................r...,...r,... ' ........DifgCt 1abOf . . . . . . . . . . . . . . . . . . . . . . . ' . r . . . . . . . . . . . . . . . . . . . . r . . . . . . . . . . .FaCtOfy Ovgfh gad .o.. . ' . . r . . . . . . . . . . r . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total manufaCtUring COSt . . . . . . . . r . . . . . . . . . . . . . .o. . . . . . . . . . . . .Add work in process inventory beginning ........ ' ..

Less work in process inventory, endingGost of goods manufactured.. . . . . .Add f in ished goods inventory beginning . . . . . . . . ' . . . .

Gos to fgoodsava i |ab te fo rsa |e . . . . . . . . . . . . . . � � � � � � � � � � � � �Less finished goods inventory ending..............,..

Gost of goods sold .......o............. ..t...... ' ..

s l 1080

$1eo90

$t oo1 5 0

$25060

$.11D

$230250

$480210

$27o'340

$61027fJ

s340

$ s o6080

i

I

Clpptcrl

E44 (Goncluded)

(21 Gost of goods manufactured:

Stores, April 30....... '. '........r.,.. .....--..----.PUfChaSgS. . . . . . . . . . . . . . . . . r r . . . . . . . . . . . . . r r . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . r . . . . .

LoSS: StOrtSt May 3t ro....rr...........r.................r....o......r..o....or....

Dirgct matgr ials COnSUmgd ' . . . . . . " . . . . . . . . . . . . r r . . . . . . . . t . . r . . . .o. . . . . . . . . . . r .Dirgct tabor used (4r25O x5221..r,.....,.........o.,............r.,...o......FaCtOfy OYefhead . . . . . . . r . . . . . r . . . . . . . . . . .o . . . . . . . . . . r . . . . . . . . . . . ' . . . . . r . . . . . . . ' . . . . .

Total manufacturing costAdd work in process, beginning inventory

Loss wgrk in process, ending inventory................r.....,...........COSI Of gOOdS manUfaCtUngd .... '..... '.........r...................... '.......

Ending balance of finished goods:

Finished Cost of Finishedgoods, + goods goods, =

April 30 manufactured May 31

S 4 5 , 6 0 2 + $ 2 8 2 r O g O X =

X =

Therefore, the finished goods ending balances is $47,662.

E4€ (al *",i135";;;;;il..:::.::::::.::::::::::::::-:::::: 35,ooo

(b) Work in Process............ t...........r.... 33'OOOFactory olrgrhead Gontro| ..o............r...,........ 21000

Matgr ia ls .or . . r . . . . . ' r . r . . . . . . . . . . . . . . . . . . . . . . r . r . . . . . .o .

(c) Payroll 4O,OOOAccrugd Payro11.....,....,.r,.r..,.....r....,...r...,

Accrugd Payroll .r................,......,...,.............. 4OTOOOCaSh . . . . r r . . . . . . . . r . . . . . . . . o . r . . . r . . . . . . . . . r . . . . . . . . . o r . . . .

Work in Procgss ... . . . . . . . . . . . . . .r. . . .o,.. . , . , . .r. . . . . . . . . . g2rOOOFactory Overhead control,.. S'OOO

Payroll . . . . . . . . . .

(0 Factory gverhead Control 4,OOO

65

(31

s 1O,25O105,OOO

s l15,25012r7AO

sl 02,55093,50077.390

5273r4/,O61.420

s334,86O52,80O

s282,O60

Cost ofgoodssold

s28O,OOO

$ 47,662

35 ,OOO

35,OOO

4O,OOO

4O,OOO

4O,OOO

4,OOO

(d,

(el

Cash

ffi

E4-S (Concluded)

(g) Factory Overhead Control .."""'r"""""""""Accounts Payable . . . . . . . . . . . , . . . . . . . . . . . . . .""""

Factory Overhead Gontrol .....-................. '."'Accumulated Depreciat ion.. . . . . . . . . . . . . . . . . . ' .Prepaid Expenses .. . .r , . . . . , - . . . . . . . . . . . - . . . . . . . . . .Accrued Property Taxes .,..,........r........"'

WOfk in PfOCeSS .. . . . . . . . . . . . . . . . . . . . . . . r . . . . . . . . . . . . . . . . . .Factory Overhead Control

Finishgd GOOdS.. . . . . . . , . . . . . . , . . . . . . . . . . . . . . . . . . . . . . . . . . , . .Work in Process.. . . . . . . . . . . . . . . . . . . . . . . . .

Accounts Rgceivabl€ . . . . . . . . . . . . . . , . . . . . . . . . . . . . . . . . . . "Sales . . . . . . . . . . . . . .

Gash . . . . . . . . . . . r . . . . . . . . . . . . . . . .Accounts Recgivabl€. . . . . . . . . . . . . . . . . . . . . . . . . . . . "

Cost of Goods So1d.. . . . . . . . . . . . . . . . . . . . . . . ! . . . . . . . . """

E4-6 (al

Work in Procgss ...................... ' ...............,..,.Factory Ovgrhead Control .r....r..,r. ' .............,.Marketing Expenses Control ........-...............Administrative Expenses Control

Payrol l . . . . . . . . . . . , . .

Factory Overhead ControlCash.. . . . . . . . . . . . .

Factory Overhead ControlAccounts PaYable

Work in Process . . . . . - . - . . - .Factory Overhead Gontrol

Finished Goods.. ' .Work in Process """"""

Chapter 4

l8 ,ooo _18,OOO

4 , 1 3 02 , 1 O O

78011254

36,1303 6 , 1 3 0

92,OOO92,OOO

8O,OOO8O,O0O

4O,OOO4O,OoO

60,000 :

1 7 , 5 O O' 1 7 , 5 O O

1 , 8 0 01,800

27,OOO

17,0OO2,0005,0003,000

27,OOO

2r5OB :2,5O8

8,5OOB,5OO

1 4 , 8 O 81 4 , B O B

6 0 , 1 O O6 0 , 1 O O

(hl

(il

o

(k)

Finished Goods . . r . . . . . . . . . . . . . . . . ' . . . , . . . , . , """" 6Ot000

13,50OAccounts Payable 13'5oo

(bl

(c)

(d)Accrued Payroll .....,. ' ...... 27 |OOO

(e)

(0

(gl

(h)

Chaptor I

E4-O (poncluded)

O Accounts R9cgivab18.............o...............oo'....

Cost of Goods Sold'Finished Goods'sl5,ooo + $oo,roo -$1s,roo = $8o,ooo

67

Sa8O,OOO

6O,OOO

8O,OOO

60,o00

E4-7 WALLACE INDUSTRIESCost of Goods Manufactured Statement

For May( in thousands of dol lars)

Direct materials:Direct materials, April 30, 20A.........oPurchases ......,...,.Freight i l l . . . . . . . . . . . r . . . . . . . . . . . . r . . . . . r . . . . r . r . . . t . .

Direct materials available for use.....t.Less direct materials, May. 31r 2OA...

Dirgct materials consumed ..........DirgCt tabOr.........roo........ i ..r.......o.,Factory overhead:

Indirect factory labor ..............,...r.......Utilities ($f gs r go o/o).............,..,...o..r..Propefi t?,if, ..........r.....,.............r.........lnsuran co ($2O x gO%1..r...,...............r.Depreciation Sl2O + $3O).....

Total factory ovgrhgad,r...r..r.r.......Total manufacturing coSt..........o....r............

Add work in process, April 30, 2OA,...

Less work in process, May 31, 20A.,.Cost of goods manufactured

s5f ot 5

$ zs ,

525

sss323

$ e o1 0 8601 250

s s30260

320

$ t , t 1o150

$1,28O210

$ { . 0 5 0:

Chaptor Iffi

E+8 cll{l{ABAR 69ffiplMfStatement of Cost of Goods SoldFor Year Ended December 31

Raw materials:Purchase3 .........'."

Less dlgcounts on rawmaterials Punchagod .""

Lesg raw materials on handtDgcgmbgr 3{ e 2OA.........""t

Cost of raw materials consumodDirgct labor ...........o."""""""""""r'Factory overheads

Factory mainte na!1co"...............Factory suppllgs used ....""'t""'Powgr and hgat-factofl ......'...'lnsuranco erpense-factorY

building and equiPrllollt...."Dep reciation-factory bullding

and eqUipmgnt .."""""""""Factory superintendence ..........tndirgct factory |abor.........."""'

Total factory overhead ........

Total manufacturing costs-,....--.....-.-.Add work in Process, January 1r 2OA

Less work in Process, December 31t204

Cost of goods manufacturgd....-........Add finished goods,Jbnuary 1r2OA.

Cost of goods available for sale o....-..Less finished goodsr December 3l'

2OA' . . . . . . . . . . . . . . . . . . . . .o . . . . . t . . . . . . " t " " "

Cost of goods sold ....................o.......

$40o,ooo

4,2OO $ggs,goo

24,0O0s371'8OO

lEo,ooo

s?8,4OO22t4AO19,400

4,8OO

l7,5OO1O0,00020,OO0

222,5AO

$774,3OO. 84,OOO

$858,30O

3O,OOO

$828,3OO37,5OO

s865,80o

. 7O.OQ0

szggJsq

CGA-Canada (adaptedl. Reprint with permission'

Chaptor I

PROBLEMS

P4-1

(rl BRTDGEWELL COMPANYGost of Goods Sold Statement

For Month Ended July 31(in thousands)

Direct materials consumed,...,....... .....r......r...,.D i r g C t 1 a b O f . . . . . . . . r . r . r . . . . . . . . . . . . . . . . . r . . . . . . . . . . r . . . . . . . . . . . . . . . . . . . r . . r r . r . o . . . . ' r . . r . . r

FactOry ovgrhgad ................ ' ..................................... ' .....r............Total manufacturing cost (a)...............................rr..,....,............Add work in process inventory July 1.......,......,.....,............,........

s7sLgss work in process inventory, July 3'l ..........,.......................,... 25Cost of goods manufacturgd r.....,........r..,r....r...,........o..........,....... 55OAdd finished goods invgntory, July I (b) .............r....................... 20Cost of goods availablg for salg r........r............,.,..........,.....o......... S?OLgss finishgd goods inventory, July 31(G) ................_.-.-.u.r.......... 15Cost of goods sotd ........,......... ' ......r.r....................,..,.....,...r......,.. GCalculat ions:

(a) Costofgoodsmanufactured... . . . . , . . . . . . . . . . . . . , . .Add work in process, ending

Less work in process, beginning.. . . . , . . . . . . . - . , . . .Equals total manufactur ing cost. . . . . . . . . . . . . . . . . .

(b)

69

s 1 62420

s601 5

$5025

s75l 5

_999

(c)

Cost of goods available for sa|e.,.,......,..r...o. $ZOLess cost of goods manufactured.. . , . , . . . . . . , . . . 50Equals f in ished goods, beginning . . . . . . , . . . . , , , . . 14

Gost of goods avai lable for safe. . . . . . . . . . . . . . . . . . . $ZOLess cost of goods so|d. . . . . . . . 55Equals finished goods, ending gg

' 70

(b) Work In Process a a a a a a a a a a a a a a a a a a a a a l a

a a a a a a a t a a a a a a a a a a a a a a '

Chapter 4

25,OOO

16,OOO2,OOO

29,OOO

24rOOO5,O00

25,OOO

29'0oo

5O,OOO5O,OOO

105,O00105,0OO

55,OOO55rO0o

P4-1 (Concluded)

l2l (al Matefia1S.o..r.. . . . . . . . . . . . . . . . . . . . . . . . .o... . . . . . . .o... . . . . . . . .AccountsPayable. . . . . . . . . . . . . . . . . . . . . t . | . . . . . . . . . .

Factory Ovgrhgad Gontrol ....."""""""""""'Matgrials . . . . . . . . . . . . . . . r ' . . . . . . . .""""""""""" '

(cl Payrolt ($ZCrOoO +$5'OOO)"""""""""""t""'Accru gd Payro11 """"""""tr"""""D"""'r '

(dl work in Procgss ..............r....r..................... ' .Factory Ovgrhgad Gontrol r""""""""""t"o"

PayrOl l t . . . . . . . " t " " " " " " " t " t " " r t " " " " " " " t "

(e) Finished Goods

18 ,OOO

29,OOO

Work in ProcesS """t"""""""""""""""

(0 Accounts Rgceivabte""""""""""""""""""Sales ($60'000 + (75o/o of $6O10O0)) """'

cost of Goods so1d............................,..o.......Finishgd Goods """"""""""""" ' r"""""

Chapten4

P4-2(11 SCOTTSBURG COMPANY

Cost of Goods Sold StatementFor Month Ended June 3O

(in thousands)Direct materials:

Materials inventory June 1 ........................Purchases........................., ..........Materials avai lable for use.. . . . . . . . . .Less: Indirect materials used.................... S 1

s ls33

s48

Materials inventory June 30... . . . . . . . . 19 ZO

Total manufacturing cost (b)........Add work in process inventory June 1.. . . . . . . . . . . . . . . . .

Less work in process inventory June 30...............Cost of goods manufactured ......Add f inished goods inventory June 1 (c). . . . . . . . . . . . , .Cost of goods available for sale.,Less finished goods inventory, June 30 (d)..........:.Cost of goods so|d. . . . . . .Ga lcu la t ions :

(a) indirect labor + direct labor = $4gindirect labor + (indirect labor x 6) = $49i n d i r e c t l a b o r x T = 9 4 9indirect labor = 37d i r e c t l a b o r = 6 x $ 7 = 9 4 2

(b) Costo fgoodsmanufac tured . . , . . . . . . . . . . . . . . . , . . . . . $120Add work in process, ending gO

sl 50Less work in process, beginning.. . . . . . . . 40Equals total manufactur ing cost. Sl iO

(c ) Cos t o f goods ava i lab le fo r sa le S19OLess cost of goods manufactured . . . . . . . 12OEqua ls f in ished goods, beg inn ing S ?O

s ,t,

$ 17

1 72

1 3 4

s l 14

s1s3

s l27

s l 93

s l s

72

P4-2 (Concluded)

(d) Cost of goods available for sale r...... '..""""'Lgss cost of goods so1d......................,......,..Equals finished goods, ending ..............."""

Chapter 4

33 ,OOO

29,0OO

49,OOO

49,OOO

120,OOO

210,OOO

155,OOO

l2l (al

(b)

(c)

(d)

(e)

n

Matgf ials . . . . . . . . . . . . . . r . . . . . . . . r . . . . . . . . . . . r . . . , . . . . . . . . . , . . . .Accounts Payable ...,......r.....,.........o..,....

Work in Procgss . . . . . . . . . t r . . . . t t 'o t r " " " " " " " " t ' r " '

Factory Ovgrhgad Gontrol ............................Matgrials . . . . . . . . t . . . . . . . . ' t """"""""" t"" t"" '

Pay ro l l . . . . o . . . . . . . . . . . . . . . . " " " " t t t t " t " t " " t t " " " " " t "

Accru gd Payro11...t..r..""""""""""""""'

WOfk in PfOCgSS . . . , . . . . . . . . . . . . . . r . . . . . ' . . . . . r . ,o . . r . . . . . .

Factory Ovgrhgad Control ....t..r......"""""""Payroll ...............""""""""""""""""""'

Fin ishgd GOOdS.. . . , r r , . . . . . . . r . . . . , . . . , . . . . . . .o . . r . . . . . . . . .

Work in ProcgsS.... . . ' . . . . .""r"""o"""""" '

Accounts Rgcgivabl€... . . . . .". . . . . . . ."""""tt"""Sales ($14o,ooo + (50% ot $14o'o00))...

Cost of Goods So1d...................,....,..ro..........F inishgd Goods . . . ' . . . . . . . . . . """"""""""" '

$1 90{ 5 5

s 3 5

33,O0O

28,OOOI ,OOO

49,OOO

42rOOO7,OOO

12O,OOO

21O,O0O

{55,OOO

- ChaPtar I

P4-3 ,

(11

73

MADEIRA COMPANYSchedule of Cost of Goods Manufactured

For Month Ended March 31

work in process, March I .............r.......r,.......Production costs:

Dirgct matgriats.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $lo4rooo tr

r Direct labor....r.-....." """""""" l6otooo ttt

Factory overhead ..............,......""""""" 8or999 *tt -344t009

Lgss work in procgss, March 31 ............."""'

Cost of goods manufacturgd..-.'....,............... '

r Cost of goods sold ($345,O0O) + ending finished goods inventory($tos,ooo) - beginning finished goods inventory (slo2,ooo) = s348r000.

'rpurchases of materials during March ($l tO,OOO) + beginning materialsinventory (S2O,OOO) - ending materials inventory ($26'000) = SlO4'OOO.

r.' production costs for March ($gCC,OOO) - direct materials ($t Oe 'OOO1 =direct labor and factory overhead ($24O'0Oo).

Letx = d i rect labor1.5r = S24O,OOO

x = $l60'000 direct labor.5x = $8O,OOO factory overhead

(21 Prime cost:Direct materials (requirement (1)) .........,..r.o........, SlO4r0gODirgct labor (requiremgnt (1))....:....,..................... l6OIOOO

_9261poo

(31 Conversion cost:Direct tabor (requirement (1)) ' . . . . . . r . . . . . , . . . . . . . . . . . . . . . . . $160rO0OFactoryoverhead(requirement(1)1.. . . . . . . . . . . . , . . . . . , . . 80'0OO

_9240,999

s 4o,o0o

s384,00036,000

$ a 8 , @ '

P4-4

CompanY A:Salgs " " " " t " " " " " t " t t " " t t t " t t " " t " " " t t t " " " " " t "

Cost ol goods sold:Finished goods inventory Janualy i """Gost of goods manutactlli9d"""""""""

Gost of goods availablo lor sa|e""""""'Finished goods Inventory December 3l

. Cost of goods Sold tt""t'o""t""""t"""t"'

Gross profit l2oo/o Of Sales).o......'..............r.....

GompanY B:' ctst of goods availablg tor 3a1o.,..r.........,......Less finished goods ending inventory""""""

COSI Of gOods Sold "t t"" t""""""""""r""""" '

CompanY C:Sal eS . . . " " " t " ' r t " t " 'o t " " t " " " " " " "o" t1" " " " " " t "

Cost of goods sold:Cost ol goods manufacttlrl9d"""""""""Add bsginning finished goods inventory

Cost of goods availablo lor 8a1e""""""'Less ending finished goods inventory""

Cost of goods Sold """"'o"""""""""""'

Gross profit """"t""""'r""""""""""""""""'

P4-5

S 600,0003,80O,OOO

$4,4oO,ooolr2OO'OOO

51,5{O,OOO_ 2'l o.oooslJggJoo

$ 34O,OOO45,OOO

$ 385,OOO52,OOO

Work in Process

Chaptor 4

s4,oo0,ooo

3,20O,OOO

s Soo,ooo

S 429,ooo

333,OOO

$ 96,000

346,OOO

13 ,OOO55,OOO

2OO,OOO268,N

End.9,Ooo

Finished Goods

Beg.(41

34,0OO348r00O

38Ct,o(toEnd.3O,W

2O,OOO65,OOO

85,O@

End.7S,OOQ

35O,OO0

2O,OOO5O,OOO

70,O@

7,0oo5O,OOO

20O,OOOloo,0oo

357,WEnd.17,@

Beg.ML(2)FOH

Materials and Supplies Accnred PaYroll

(8)(11

259,OOO Beg.

75Chapter 4

P4-5 (Concluded)

Accounts Receivable

54,0005OO,OOO

554,OOOEnd.22,OOO

,Factory Overhead Gontrol

Accounts Payable

77,OOO Beg.(7) (6) 18 ,OOO65,OOO

83,OOO

End.6,00O

2O,00055,00010,00o

2,OOO13,OOOlOO,AOO

(3)

532,OOO

lOO,OOO

55,0002OO,OOO

255,OAO

Payroll Cost of Goods Sold

350,OOO55,00O20O,OOO

255,OOO

(5)

(11l2l(3)(41(51(61rtl(81

Materials issued to production' 55O'OOODirect labor, $2OO,000Total factory overhead' $1OO'0OOGost of goods manufactured, $346'OOOCost of goods sold, S35O,OOOPayment of accounts payable' 577'0OOCol lect ion of accounts receivable, 5532,OOOPayment of Payroll ' S259'0OO

GGA-Ganada (adapted).Reprint with Permission.

Sales

t

1 ,<

76

P4-6

Work in ProcessMaterial8...

Cost ol gOodg SOld ttt"tt""t"""""t""tt""

Add finished goods inventoq/ incl€ase"

Cost of goods manufactllhod..'...'...r..""'Add work in process inventory increase

Total manufagturing cost -....--.-...........o"Less : Factory overhead.t..... $35'OOO

Dirgct t:lbor.......,....o... 4OTOOO

Materials used in manufacturing .,.r,......

Mate r i a l s . . . . . . . . . . t . . . . . t . . . t " " " t " " " t t t t t " t " t t " t t t t "

Accounts Payablg .....'.."""""""""""""

Materials ussd in manufacturing(from above| .........o...."r""""""'rt"""'

Add materials inventory increase ....'.....

Matgrials punchasgd ".........""""'r""""'

Payroll ..... ' . ' . ......

l a a a a t a

Chapter 4

84,OOO84,OOO

91 ,OOO9l ,ooo

40,ooo4O,OOO

4O,OOO4O,OOO

35,OOO35,OOO

35,0OO35,OOO

t57,0oot57,OOO

l40,oool4o,ooo

$14o,oool7,ooo

s157,OOO2,OOO

s159,OOO

75rOOO

l_84,OOO

$ 84,OOO7,OOO

$ er,ooo

a a t a - a a a a a a a

Accnrgd Paytoll.......'.........""""""""to"'

Work in ProcgsS . . . . . . . . . . . . . . . . . . . . . . . . t t " " t " " " t t t r t '

Payro l l . . . . . . . . . r . . . . . . . . . . " " t " " t " " " " " " " " " t '

Factory Overhgad Gontrcl ......r'.r.t,,.....""""'Va ri o u s C rgd its.'........ "' t " " "" " " "r'r t " " "'

Work in Procgs3 . . . . . . . . . . . . . . ' . t " " t 'o " t " t " t t t " r " ' t r

Factory Ovgrhgad Control o..r........ro""""

Finished Goods (12'OOO + 84'OOO + 4O'OOO +35tOOO - 1 4tOOO) ... . . . . . . . . . ."""""""""t

Work in ProcgsS .............'...r"""""r""""

Cost of Goods Sold (28'000 + 157'O0O -45tOOOl . . . . . . . . . . . . . . . . . . . . . . . . . ' . . " t " " t " t " " t " '

Finished Goods ..............

GGA-Canada (adapted). Reprint with permission'

n

(c) Payroll... 86,000'' Accrued Payroll .............. 86,000

Work in Process....................r............................. 6Or5OOFactory Overhgad Contro|..........,.,....,...........,..... 1215OOMarketing Expenses Control ,..............t............., IrOOOAdministrative Expenses Gontrol 5,OOO

86,OOO

92,OOO

26,530

47,33O

188,OOO

241,150

185,5OO(hl Cash !........,r.........,......,.. ZOSrGO2

Sales Discounts,........... ...,...... 4r2igAccounts Receivable........... 212rg2}

(i) Marketing Expenses Control ...,............ 18,oooAdministrative F.xpenses Control 12,OOO

Accounts Payable 3O,OOO

0 Accounts Payable 1O4,OOO

rt

Cash 1O4,OOO

78

P4-7 (Gontinued)

88,25Ol04,o0o

't92,250

212,924

2,25O86,OOO

Materials

Machinery

Chapter 4

9O,8OO

15,5OO92,OOO26,53O3O,OOO,64\030

l / l Bal'(hl

Cash

20,O0O2O8,662

2i28,66236,412

Accounts Receivable

(c)0l

t7,2OO

l /1 Bal '(gl

25,O0O241,15O

26art50

(hl 1/1 Bal . 4O'OOO

53J,3O

Finished Goods

(g) 1B5,5oO

188,O0O

Accumulated DePreciation

111 Bal. 1O,OOO

Accounts Payable

1 t7(0

Bal.

t/ l Bal.(c)(dt(e)

9r5OOl88,OOO

,97,5OO

4,50O6O,5OO82,50O47,330(q4,>e3<t

Accrued Payroll

88,25O 111 Bal.(c)

Sales

104,OOO 1/l Bal .(a)(b)(i)

Retained Earnings

111 Bal. 21,25O

Cost of Goods Sold

(g) 185,5OO I

Payroll

(c)

111 Bal. 1o'ooo I (d)(a) 92,OOO

102,OOO

Work in Process

241,15O

Sales DiscountsI

86,0O0 | (c) 86,OOO

LLLI\

79Clppterl

P4-7 (Concluded)

(b)(cl(d)

(cl(i)

(cl(il

t_I!

I!

II!

b

Administrative Expenses Gontrol

5,O0O12,OOO

17,AOO

Factory Overhead Control

26,53Ol2r5OO

8r3OO47,33tO

(e) 47,330

Marketing Expenses Controf

810oo'l8,0oo2l,ooct

(31 HOPKINS & WHITE COMPANYThial BalanceJanuary 31

Common Stock

CSSh '........AcCOuntS RgCgivabl€...tr..............r............................r......Fin ished GOOdS.. . . . . r . . . . . . . . . . . r .o . . . . ' . . r . . r . . . . . . r . . . r ' . . . . . . . . . . r . . . . . . r .

WOrk ln PrOCgSS......... ' .o,.r.,.....,..r ' .......r. ' .... ' .rr. ' .....r........t

Materfals a a a a a a a r o a a a a a a a a a a t t a a a a a a a a a a a a

$ 36 ,41253,23O12,OOO

6,8301 1 r 2 O O4O,OOO

4,258185,5OO

26,OOOl7'OOO

s 60,030l O,OOO6O,0OO21r25O

241,15O

MachineAccounts Papble a a a a a a a a a a a a o a a a a a a a a t a a a a a a t t a a a l a a

Accumulatgd Depreciation....,...,......,,.,.....,....,................Common Stock..,. a t

Retained Earnin a a r a o t a a a a a a a a a a a t a a a a

SalesSalgs Discounts,...,..

1993,430 _$3e2,499

l

CHAPTER 5


O5-1. The cost attached to 8 Producl il an amount '

assigned by the costing melhods uled-an

amounl contro l led by the c i tcumstancer,

assumptions' and limitations ol lha melhod

under which il was ccrnfiled' Product cosb ato

cornposiles ol historbal outlay thal have, per'

haps, been modifki by estlnateo or slandards,

by processer assigning or proratlng expendi'

tures to periods, or by lracing the direct costs

and allocating the indirect cosls lo particularproducls so thal the total period outby b spread

over the aggr€gatt or'ipli. Despile these shorl-comings, product costs aro uselul in coslinginvenlories, cornpaling prices and tolal unit cost'

measuring current profil or loss, and indicatingthe rninimum cosl below which a sales price

cannot go in the long run. Sorne confusion willresult al times in usitlg cosl intonnatbn h mak'ing management decisions unless informatioorelevant only to the decisbo is used.

O5-2. The primary obiectivc h irb order costing is lodetermine the cost ol materiats, labor, and faclo'

ry overhead used to produce a specific otder orconltact. Cost estimatss ato made when theorder is taken, and the iob order praeduros atedesigned lo reveal cosls as lhe order goesthrough prodrrction, thereby giving an opportuni'ty lo control costs.

O5-3. The typ€ of cost accumulaiion melhod used by acotrlpany will be determined by the tlpe ct man'uf acturing operatbns pedormed. A rnanuf actur'ing company should uso Process c6l accumub-tion lor product ccthg putpos€3 when like unitsare continuousty nrass Produced; when cuslorn'rnade or unQue gpods are produced' icb ordercosting would be more aPProPriale. Processcosting is otten used in industries such as chem-icals, food processing, oil, mining, rubber, andelectrical appliances. With a continuous massproduclian ol like units, lhe cenler ol atlenllcn isthe individual process (usually a dopartmonl)'

The unit ccts by cost category as well as lotal

unil cct lor each Ptocess (deparrment) are nec'

e3sary lor product cosling PutPosss'O5-4. A icb order cost sheet is used:

("i to keep track of the direct rnaterials and

direct labor used on a icb plus atl aPPro-

Priate share cl frtorY overhead;(b) to comPara actual cost3 to estimaled

cqsts:(c) as a subsidiary ledger for the work in

procoss accounl.O5-5. The work in procesr accounl is a conlrol account

in the general ledger, ref lect ing lo la l coslsassigned or applied to jobs. The individual iobcgst shoots lorm the work in process acco{'nt'ssubsidiary ledger, indicathg the direct malerbls'direct labor, and factory overhead charged toeach irb.

05€. Job order cosl sheets serve a control funclion'Comparisons are made between estimates olpb cosrs and cosls actually accumulated lor lhejob. ln addition, cost control is enhanced byaccumulating direcl materials and labor as wellas factory overhead co3l3 by cost cenlers ordepartments, and by comparing lhe aclual coslsto cGt conter budgets.

O5-7. Actual lactory overhead consisls of the day'by'day cosls that ato actuatly experienced andincurred by the cornpany. Applied lactory over-head is the overhead charged to pbs based onthe predelermined factory overhead rate. Thisrale is crealed by divirJing total €stirnated over'head by toial estimated nurnber ol units (or any

other appropriate base). ThE dilference betweenaclual and applied factory overhead is lhe ovet-or underaPPlied faclory overhead,

05€. The characteristic of a service business lhal

rnakes likely the use ol job order costing is lhat

all jobs are not alike and cost information for

each iob is desired.

8 lChapter 5

E5-3

(1) The amount of d i rect labor in f in ished goods:F in i shgd gOOdS. . , . . . . . . . . . . . . o , . . . o . . , . . . . . . . . . . . . . . . . . t t . . ' . ' . . . t ' . . . . .

Mater ia ls inctuded in f in ished goods {$15'5OO - 93'2OO}.. . . . . . .

Direct labor and lactory overhead in finished goods """""""

s l 1 , 8 0 O a= - = ds l4 ,75O

s84,OOO1,5OO

s24,07O2218321OrO24

s56,926

S 4,4202,6002,OOO

s 9,o2o

s37,5OO12,30O

s25,2OO

$ I ,OOO

85,5O0

$94,5OO4,5OO

Let X = direct labor in f in ished goods1.8X = $25,2OO direct labor and factory overhead in f in ished goods

X = 514'ooo direct labor in f in ished goods

The amount of factory overhead in finished goods:X = $14,OOO

.8X = .8 ($14,000)

.8X = $11,2OO factory overhead in f in ished goods

Factory overhead charged to work in process

Direct labor charged to work in process

December mater ia ls used:Materials inventory, Decembei 1 ....................... ' .Mater ia ls purchased.. . . . . . . . . . .Freight-inMaterials availableMaterials inventory, December 31 .......

l2l

(1 )

E5-4

$9O,OOO

82

E5-4 (Concluded)

l2l Work in Process, December 3l:PerUnit

$6,4OO312OO

Chapter 5

s 9O,O0O3O,OOO6O,0OO

sl80,OOO

l4 ,4OO

s 5,ooo3,OOO6,OOO

$ 14,OOO

Directmaterials.......r.. $2.4oDirgct tabor -.r.,-.......--. .8O

, i?.2o r 2,ooo units =

Factory overhead .....'..32 machine hrs' @ $t OO =$9,6OO

(31 Dscember cost ol goods manufactured:Materials used (direct) (requirement (1)) """""t""""""t""""'Di f | 'C t 1abOf . . . . r r r r . . . . . . . . . . . . r . . . . . . . . . r . . ' . . . . . .Dr . . . . . . . . . . . . . . . . . . ' t " " " " " " " '

Factory overhead (600 machine hours (}SlO0)"""'t""""tt"""

TOtal manUfaCtUfing COSt.. . . . . . . . .or. . . . . . . . . . . . ' . . . . . . . . . . . . . . . . t . """""" '

Add work in Process, December 1:Direct Material' S2.4o x 3'ooo =Direct Labor, $.8o r 3'ooo =Overhead, $t0o r 48 machine hours =

Finished goods, December 31:DifgCt matgf ialS., . r . . , . . . . ' . . , . . . . . . . . . . . . . . . . , . . . . . , . . . . . . . . . . . r . . . . . .Di fgCt tabOf . . . . . . . . . . . . . . . . . . . . . . . . . . r . . r . . . . . r . . . . . . r . . r r . . . . . . . . . .o . . t . . . " r " " " t t "

Factory overhead (60 machine hours CDSl OO)""'r""""""""t'r'

December cost of goods sold:Cost of goods manufactured (requirement (3))""""""""""""Add finished goods, December 1'-.............""""""""""""""'

Cost of goods available for sale '............ ' """""""""Less finished goods, December 31 (requirement (4))"""""""

s7,2Oo2r4OO4,8OO

s194,40OLess work in process, December 31 (requirement (2))""'r""" 9'600

s184,8OO

(4)

(sls184,80O

12,00Os196,800

14 ,OOO

9l_93,8oopermission.CGA-Canada (adapted). Reprint with

83Chapter 5

E5-5 Materials:Beginning inventory """"

PUrChaSgS t t t t t t t t t t t " " " ' o " " " r t " " " " " " " " " " " " '

Materials avaitabte for usg """"""""""""" '

LeSS ending inVentOry .. . . .r. . . . . . . . . .r. . . . . .r. . . . . . . . . .

Matgrials us€d..,r. . . .r. . . . . . . . . . . , . . . . . . . . . . . . . .r. . . . . . . . . .Direct labor (($gaO - $s201 'r 1'61""""o""""""""Factory overhead (S225 x '6)""""""""""""""""

' i

TOtal manUtaCtUfing COSt .. . . . . . . . . . . . . . . . . . . . , . . . t"""""o

Add work in process, beginning inventof """"" '

E5-6

(r l

$ 7 5336 (1 )

$ 4 1 185

9geo2251 3 5

s76630

s736 (3)90

s826125

s701 (4)

s13,OOO15,OOO

2,7OO2 , 1 O O

s32,8OO

$13,00015,000

s28,009

s15,0oo4,8O0

s19,8OO

l2l

s58680

(21

(31

Less work in process, ending inventory

Gost of goods manufactured ""'r"""""'Add tinished goods, beginning inventot] """"""'

cost of goods availablg for sa19........,.,..............o.Less finished goodsr ending inventory""""""""'

Cost of goods sold . . . . . . . . . . . . . . ' . . . . . r . . . . . . . ' . " "" ' t """ t "

Materials .... 'r""""Di feC t 1abOf . . . . r . . . . . . . . . . , . . . . . . , . . . r . . . . . ' . . . . . ' . . . . . . . . . t . . . t t " " " " " " " " " " " '

Factory overhead:Molding (1,OOO DLH x $2.70) . . . ' . . . . . . . , . . . . , """""""""""""Decorating ($6,OOO x 35oh1...............

Estimated cost to produce -........-..........,..""""""""

M a t g r i a l s a a . . . . . . . r . . o . . o . . . r r . r . . r . . . . r . . . . . . . . . . . . . t . a . . r . . . . a . . . . a r . . . . . . . . . . . . r a . r o 4 a r

D i f e C t 1 a b O f . . r . . . . r . . r . . . . . . . . . . r . r . . r . . r . . . . . r . . . . . . . . . r . r . r . . . . . o . . . . . . . r . o . t . . . . . . . j 1

Est imatgd pr ime COSt. . . . . . . . . . . . . . . . . . . . . , . . . . . . . r . . . . . . r . . . . . . . . . . . . . . . . " " " r "

Di reC t 1abOf . . . . . . . . . . . . . , . . . . . . . . . r . . . . . . . . . r . . . . . . . . . . . . r . o . . . . . . ' . . . r . . . . . . . . . . . , . " ' t

Factory ovgrhead ($zrzoo + $2rl ool........... '....o..............""""'Estimatgd convgrsion cost................ ' """""""""""'

Est imated cost to produce (requirement (1)) . . . . . . ' , . . . . . . S32'8OOMarkup ($32,8OO x 45'hl 14'760

Bid price S4?F6o

(4)

a

E5-7 I

(r)

Chaoter 5

WADSWOBTH MACHINE WORKSJob Order Cost Sheet-.Job 9O9

Dlrgct MaterlaltDatc

lgsucd

9114 t OOOsl20 3319122 200

st ,13 l

Dlreet l,.abor

HounDatc

gt(ryO

Appligd factory ovgrhead'.r. . ' . . ' . , . . . . . . . . ."" 'D"'

Total factory CoSt...'........t...t.."""""'o"'o"""'

Appllcd Factory OrerheadDatc

(Week o0 Houn Bate Cost

sl20 1 0 s80 s800

s800:

800

s3,OOO1,5OO

Debit Credit134,OOO

12O,O0O

96,O0O

288,OOO

Rata Cogt

sl20 909126 70

3s.20 37.30

558511

31,060

(2) sales price of Job 9o9, contracted a markup of Sooh of cost:DifgCtmatgfia1S.... . . . . . . . . , . . . . . .o... . . . . . . . . . . .r. . . . ' . . . . S1tt31DirgCt labOr .. . . . . . .r.r. . . . . . ' . . .r . . . . . . . . ' . . . . . . . . . . . . . .o.. ' . I tO69

Markup SOoh of cost

SalgS pf iCg.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ! . . . . . .o. . ' . . . S4r500:

E5-8

(f ) Work in Process (35'OOO + 45'OOO +54'OOO)........Matg f ia ls . . . . . . . . . . . r . . . . . . r r r . . . . . . . . .o r . . . . . . . . . . . . . . . . t t . . . .

(2) Work in Process (45rOOO + 4O'OOO + 35r0OO)."....,Payro l l . . . . . . . . ' . . . " " " " " t t ' r " " " " t t " t " " " " t " t " " " '

(3) Work in Process (36'000 + 32,000 + 28'O0O)....1."Factory Ovgrhgad Control ..'o'......r........."""'

(4) Finished Goods (156'000+ 132'O00)........ '- ' ...-.o.,.WOrk in PfOCeSS . . . . . . . . . . . . . . r r . . . . r . . r . . . . . . . . . . . . ' . . . . . .

134,OOO

l2o,oQo

96,OOO

288,OO0

I

I

E

II

I- ,

Ib

Chapter 5

E5-9 , (a )

E5-10

Inv.Purch.

wtP 1 1O,OOO lnv.MaterialsFactoryoverhead

Labor

35,OOO

8,OOO2,OOO

9,4OO

7,6OO1 , 8 O O

1r2OO

1 r 2 2 O

4,5OO

1r25O

6 , 1 0 O

4,50O

Work in Process

I 1O,OOO

90,00018O,OOO

41O,OOO

11O,OOO

85

(b)

(clII

!

(d)

(e)

(0

(g)

I

b

L

b

Materials

35,OOO

10,000

9,4OO

9,4O0

1,2OO

1,22O

4,5O0

1 , 2 5 O

6 , 1 0 O

4,5OO

1O,0OO138,O0O

,48,OOO

5O,OOO3OO,OOO

35O,OOOtSo,ooo

3OO,OOO

:Finished Goods Cost of Goods Sold

2OO,OOO FG 2OO,OOOInv.wtP

CGS

GGA-Canada (adapted) . Repr in t wi th permiss ion.

Es-t I

( f l WOfk in PrcC€ISS.. . . . . ' . . . ' . . . . . . . . . . . . . . . . . . . . . . . . . . .o. . . . . . r . t . . .Matgf ials . . . . . . . . . . . . r . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ' . . . . . . . . r r .

PayfOll . . . . . . . . . . .or.. . .r . . .o.. . .r . . .r . . . . . . . . . . . . . . . . . . . . . . t . . . .

Applied Factory Overhead ................""""""

(21 Finishgd GOOdS.r. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . r . . r . . r . . . . .WOfk in PfOCBSS .. . . . . . . . . . . . . . . . . . . . . . . . . . r . . . . . . . . . . . . . . .

19,1 12 .5O

19,1 12 .5O

Chapter 5

gr25O.OO3r945.0O5rgl7.5O

19,{ t 2.5O

I ,

87Il>

I

Ib

I

:'

\,

Chapter 5

Ps-1

(1) Total

PROBLEMS

cost of work put into Process:MatgrialS.r . . . . . . . . . .o. .r . . . . . . . . . . . . . . . . . . . . ' . . . . . . r . . . . . ' . . . . . . . . S 6OtOOO

Labon Grinding t8r00O hrs. x S5.60l ...............,...o.......... 441800Machining (4,600 hrs. x $6). . . . . . . . . . . . . . . . . ' . " . 27'600

Factory overhead: Grinding (8,ooo hrs. x $6) ......... ' ..,... 48'oooMachining (4,60O hrs. x S8). . . . . . . . . . . . . 36,800

s31l,2oo

s217,2OO15 ,OOO

Cost of goods sold:Cost of goods manufactured (from requirement (2)) .......Finishgd goodsr beginning invgntory. . . . , ' . - . . , . ' . . . . . . . . . . . . ' . . . .

F in ished goods, ending inventory . . , . . . . . . r . . . . . . . , . . . .

s232,2OO17,600

s21_1,699

s214,60022rOOO

s236.60021.000

52{ 5 .600

I

b

(21 Cost of goods manufactured:Total cost of work put into process (from requirement (1)lWork in Process, beginning inventory........

Work in process, ending inventory.. . . . . r , . . . . . ,

Cost of materials purchased:Mater ia ls put into process . . . . . . . . . . . . . . . . . . . , . . . . . r .o. . .oAdd mater ia ls, ending inventory

Less mater ia ls , beg inn ing inventory , . . . . . . . . . . . . . . . . , . . . . . . ! . . . , . , .

(3)

(4) Gonversion cost:Labon Grinding (8rOOO hrs. x S5.60l . . . . . . . . . . . . . . . r r r . . . . . . . . . ' . . $ 4418OO

Mach in ing(4 ,6oOhrs .xSO) . . . . . . . . , . . . . . . , . . . . . . . . . . . . . . . . 271600Factory overhead: Grinding (8,OOO hrs. x $6). . . . . . . . . . . . . . . . 48rOOo

Machining (4,6OO hrs. x $8). . . . . . . . . . . ' . 36'800

g!_qz'209

$ 60,00018,000

$ 78,OoO2O,OOO

s_99p99

(s)

I

.t

I

P5-2

(r) Materials

Chapter 5

Job 206 Total

411 2r75OPurchases t l'5OO

14'"2501,755

lndirectMaterial

DirectMaterial

2r790

gr7o5 |

114s5

r $9,7OS = $2r45O + S97O + 36'285(Job 2O7) (Job 2O4) (Jobs 2O2,2O3,2O5, & 206l

work in process ending inventory consists of iobg 2o3 & 206:

Job 203

Dirgct matgria|s.........................r..... (Slr48O + $ 555)

DifgCt |abOf .,...r............................... ( I rOOO + 115OO)

Appliedoverhead.....'.,.'.........-......... ( SoOr+ 14991Total ...r....r......r..,.................. F3,.280 " #-S-l

'Applied overhead is 80% of direct labor cost'

l2l WorkinProcess....o.....,.................Mater ia ls . . . t . . " " t " " " t " " ' t " " t t " " " t " " " " " " " t r '

Payro l l " " " " r " " " t t " t " " " " " " " " " " t ' r " " " " r " " ' t

Applied Overhgad ....""""""""""'t"""""""'

Finishad Goods (4'7OO + 1r25O + 2,OOO + 116OO) "

work in Procgss ..........r..........r,.....,........r.....

COst of GoodS So1d"""t""""""'o""""""t""""""'Finishgd Goods................................r. ' ..........

ACCOUntS RgCgiVab18.. . . . . . . . . . . " . . . . . . .o. . . . . . . ' . . . . . . . . ' . ""S a l g 3 t t t t t t " " t t " t t t " t " t t " t t t t t " ' r " " t " t t t " t t " ' r " t " " '

+ St '98O+ I 'OOO+ 8OO

+ S3'78O

4,85O

9,550

9,55O

14,325

s 4 ,0153,5OO2,8OO

$1o,gt s

1r25O2,OOOI ,600

9,55O

9,550

141325

I

I

IIL.

I!

t-89

iE

II

!

Chaoter 5

P5-2 (Concluded)

(31 Cost ol goods manufactured = cost of iobs finished in April'

Job 2O5:Dirgct matgrial ........'........Dirgct 1abor......"......... ' .o..Applied overhead'....,.o'....

' Total Job 205... ' ...... ' ....

Job 2O2.. . . . . . . . r . r . . . r ' . . . . t . . . . . . . . . " " t

Job 204 r . . . . t . . . . . . . t . . . . . . . . . t . . . ' r " " " '

JOb 2O7' . . . . . . . . . . . . . . . . . . ' . ' . . r . . ' . . . . " ' t

$ 2,5OO2,7OO (l 05 direct labor hours x S2OlI,O8O (105 direct labor hours x 516)

$ 6,280

9,550 (see requirement (2))6193O5,87O

I

!

Bal.(i)

(4)

s 5,2801r52O

800

$36,420124,2801, (1 ,76s)

$1O,375

s 9,365

7,6OO

91t99

(5) Jobs 2O1r 2O2, and 205 wene sold. Their costs are S8'45O + S9,55O +56'280 = S24'28O.Sales (524,280 x 1.5)Cost of goods sold .......Underappli gd ovgrh€3d ...... ' .......... ' .........r..r.. ' ......

Gross profit for April .'....r...r....'

P5-3

Finished Goods Work in Process

32O,OOO8O,OOO32O,OOO

40O,OOO

36O,OOO

3OrCnO'$?3o,ooo - SSo,ooo - $25o,ooo direct labor and factory overhead.

Factory overhead is l50% of direct labo6 thereforo, direct labor issl oo,ooo

Bal(c)(e)

Tota|.. .r. . , , . . . . . . . . . . . . , . ' . . . . . . S28rO3O

Actuat overhead (1'375 + 2,5OO + 2r7OO + 2r790l.Applied overhead:

Jobs 2O2' 2O3, 2O5' 2Og (330r hours x $16!.Job 207 .'........ ' .... ......... ' .."""'r"""'Job 2O4 ($l rZgO - 5960l.r.. ' .r.......t..........".."

Total appligd ovgrhgad r... ' ........r-........r.....

Undefappl ied. ' . . . . ' . .D.. . . . . . . ' . ' r . . . . . . . . . . . . r . ' . r . . . ' . . . . . . ' . . . . . .' 1 O O + 7 5 + 1 0 5 + 5 O

20,OOO l(il15O,OOOgo,ooo

l OO,OOO'35O,OOO

Materials

90

I

P5-3 (Concluded|

ChwterS

l5o,ooo

I I ,OOO175,OOO

l8o,@o

Cost of Goods Sold

360,OOOBal.(b)

Bal .(a)

l5'OOOloo,ooo

t t ' ,NO29,N

8O,O(X)12,OOO

92,W

(1 tl2lt3)(4)(5)(6)rr)(8)

Factory Overhead Gontrol Applied Factory Overhead

6OTOOOl2'OOO75,OOO147,N

Accounts Payable Accrued Payroll

1O2,O0OBal. TrOOOloo,ooo

707,N

t72,OOO Bal.

5rW

Accounts Receivable

45,OOO5OO,OOO

g5,o@

65,AOO

480,OOO

"Cost of goods sold is 72% of sales (r0o% - 28ohl.

Materials purchased-$l oo'oooCost ol goods sold-$360'OOOFinished goods ending inventoryt4O,OOOWork in process ending invento4;-$3O'O00Direct labor cost-$l o0,00oApplied factory overhead-$l 5O'OOOOvep or underapplied factory overhead-$3,OOO overappliedGlosed out to the cost of goods sold account

Sales

GGA-Canada (adapted). Reprint with permission-

Chaptor 5

P5-4 l

(1 )

9 l

COLUMBUS COMPA}TYCost of Goods Sold StatementFor Month Ended October 3{

Materials:Materials and supplies inventory, OcL IPurghaseS ......... '..r.........o........r................................t

Materials and supplies available for ]|so......,..........,.Less: Factory supplies used.......r...r........ $ 3195O

Materials and supplies inventoryOcL 31 31,75O

Materials consumedDirgCt labOr .........rr..r.......... '...r.'.Applied factory ovgrh€ad.....r.,r.....,.........D,.....rt...............Total manufacturing cost........o..o............r.......r.......r........Add work in process invgntory Oct 1................,........o,..

Less work in process inventory Oct 31Gost of goods manufactunad o.r.,........o..................r.........,Add finished goods inventory Oct 1.,..,..............r......,....Cost of goods available for salg .............r........o..,....o.......Less finished goods inventory, Oct 31 (2,500 units x

53.7O)r. . . . . . . . . . . . . . . . r . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Cost of goods so!d...................... .............r....,....

rCalculations:Units in finished goods inventory, OcL 1Units manufactured 20,4OO

(2Or7OOlUnits soldUnits in finished goods inventory, OcL 31

Cost of goods manufactured

s4O,7OO24,8OO

sgs,5O0

35r7OO

2,8OO

(3oo)

_3's09

s29,8OO18,60027,45O

s75,8504,O7O

s79,9204,44O

$75,480g,g0o

s85,280

9,250s76,03O

Units manufactureds75,480= -t- - '1-.�-.�- - Sif .7O20,4OO

92

I

P5-4 (Concluded)

tzl COLUMBUS COMPANYIncome Statement

For Month Ended October 3{

Chapter S

Sales t a l a a a a a a a a a a a a a a a a a a a a a a r a a a a a a a a r a a a a o a a s144,9OO1,3OO

$143,60076,03O

$ 67,570

$25,O96

19,744 44,940

$ 22,730

Less safes returns and allowances ......................N g t s a | g s . . . . . . . . . . . r . . . t . . . . o . . . . . r . . . . . . . . . . . . . . . r . . . . r . . . . . . . . r r . . . .

Lgss cost of goods so1d...,...,.........,................,.r.r.Gtpss prof i t . . . . . . . . r . . . . . . r . . r . . . . . . . . . . . . . . r . . r . . . . r . . . r . . . . r . . . . . . .

Less commercial expenses:Marketin g expens€r ............Depreclation-building ....,.........Depreciation-office equipmentAdministrativg expense.....r.......Depreciation-building ..............Depreciation-office equipment

Incomg bgforg incomg t?x..........r...r..

Amount of over- or underapptied factoryActual factory overhead:

Factory overhgad paid,.............rIn direct materiaf s ..,...,...............Depreciation-building .....r.....r..Depreciation-machinery and

gguipment . . . . . . . . . . . . . , . . . . . . . . . . . . . r .Indirgct 1abor.,.......r...,...,....,...r..

Applied factory overhgad ..........,......,Underappf ied factory overhead.........

$25,O5O301 6

$19,7OO2024

(3t overhead:

$2O,1OO3,95O

1 5 0

8004,4OO .s29,40O

27,45O$ 1 ,950

\' Chapter 5

- " P5-5 '

(11 MORRISVILLE CANNING COMPANYBalance sheet

December 31, 208

93

Assets-

Current assets:CaSh.. . ' . . . . . . . . . . . . . . . . . . . . . . r . . . . . . . . r . . . . r . . . .D. . . . . . . . . $1 9tOOO

Accounts receivablG!............................... 1O,OOOlnventories:

Finishgd goods .........,......r............r.. S4roooWorkinprocess.. . . . . . . . . . . r . . . . . . . r . r . . . . . . . . l r0O0M atgria lS.. ' . ' . . . .r . . . . . . ' . . . .o... . . . . .r. . . . . . . . . . ' 2tOOO 7t OOO

Prgpaid expensgs....r. . . . ' . . . . . . . . . .o... . . . . . .o... . 5OO

v Property, ;[:1: lllTll,lr',i?",";ffiil::::.::.::::TOtal aSSgtS t . . . . r . . ' . . . . . . . . . . . . . , . . . . . . . . . . . . . . . ' . . . . . . . . . . .

- Liabil it ies

Currgnt l iabi l i t igs.. . . . . . . . . . . , . . r r . . r . . . ' . r . . . . . . . . . . . r . r . .

s3o,ooo15 ,OOO

s36,5OO26,00O

s63,599

sl7,5oo

45,000

s62,5OO

Stockholders' Eguity

Common stock' , . . . ' . . ' . . ' . . . . . . . . ' . . ! . . . , rRetained earnings,. . . . . . . . . . , . . . . . . . . . . . . . . . . .Total stockholders' equity ............

Total l iabil i t ies and stockholders' equity......

94

P5-5 (Concludedf

l2l

Chagter 5

MORRISVILLE CANNING COMPANYlncome Statement

For Year Ended December 31, 2OB

S 3 l e s a r a a a a a a a . . . a a a a r a a a a r . . a a a . a a a a a a . a . a a a r a a a a . a . a a a a a t a a a a a a a a a a a a a a r a a a a a a a a a a a

Gost of goods sold:Materials:

tnvgntOryrJanuary1..... ' ......r... ' .. ' . ......... ' ............ $ 4tOOOPUrchaS gS ....r....................r....r......r..... ' ....t..o.t..t.. I 5t O OO

Matgrials avai|ab|gforuser......................... ' ...... $lgrOOOLgsSlnventOryrDeCgmbgf3l... ' ........ ' ................ 2rOOO

Matgrials consumod.... ' ........o..........r.......... ' ....... SIZpOODirgCt 13bOf .......o..rr..........................r.........o.............. ITOOO

s60,000

Appfied factoly overhead r.,....... I,O0O

Total manufagturing GoSt .....,........,.......,...ro.............. 335rOOOAdd work In process Inventoryr Januafl I ......'..r,..... jrOOO

s37,DDOLess work in process inventoryr December 3l ...o.o... I'OOO

Cost of goods manutactllrr8d...........o....r.....r.........r.... S36r,OOOAdd finished goods inventory Januafl't ........o........o 6'000

Cost of goods availabtoforsale.. '. ' . ..oo................o'..r- $.02rOOOLess finished goods inventory, December 3'l .....-..... 4rOOO

Gost of goods 30ld.. . ' . . ' . . . r . . . . . . . . . . . ' r r . . . . . . .o. . . . . . . . . ' r . . . t t . t t $38ÔOO

Add underappllod factory overhgad.,...,.................... 2t999

COSI Of gOOdS SOld-adiUStgd . . . . . . . . . . . . , . .o. . ' . . . . .o. , . . . . r . . . 4O,OOO

$2O,OOOGross profitLess commencial expenses:

Markgting expgns(0..........,,.............. ' ... ' . . ' . .... ' ... ' . ...r.. $ 6rOOOAdministrativg gxpensg... ' ....o...... ' ............,.. ' ..,.,......t 9t9OO 15tOOO

lncOmg bgfOrg inCOmg t8X.'. . , .J... . . . . . . ' . . . . . . . . . . . . . . . . . . ' r . . . . . ' . . . . s 5,ooo

a a a a t a a a a a t a a a a a a a a a a a a a t a a a . a a a a a a a a a a a a a t t t t " '

Chagler 5

P5-6

(1) and (2)

9:

TROPEZ INC.Job Order Cost Sheets To Post Beginning Inventory Data

March 1, 19-

Matgrials . , . . . . . . . . . r , r . . . . r . .LI lbOr . . . . . . . . . . . . r . . . r . . r r r . . . . .

Factory Overhead.......,TOtal .D. . . . . . . . . . r " . . . . . r .(bl M ............,.......(cl M.., . . . . . . . ,( f } L . . . r . . . . . ' . . . r . . . . . . .

(hl oH ......,.........,.Total . . . . . . . . . . . . .r. . . . . . . .

0l Completed andto warehouse

(21

s29,e49Completed and trans-ferred to warehouse

Job 621

$ 2,8OO2r1OO1,680

$ 6,5805,30O

6r42O51136

s23,436transferred

$ 8,2607r4OO(4oo)

8r1606,528

Job 622

$ g,4oo2r7OO2,160

Job 623

s 1,8001,350I ,O8O

s 4,2305,9OO

6,32O5,056

s21,s99Stil l inpnocess

Cr.(a)

(b)

(c)Materials

Bui ld ing & Equipment. . . . , . . . .

Dr.22,OOO.OO

22,OOO.OO

18,6OO.OO2,4OO.OO

u 21,OOO.OO

600.0o400.oo200.00

800.o0800.oo

38,OOO,O038,OOO.OO

2O,9OO,OO7,6OO.OO5,7OO.OO3,8OO.OO

38,OOO.OO

9,404.5O7,154.5O

2,OOO.OO250.0o

(d)

(e)

(0

(gl

Prepaid Insurance

.t

_ t l

Chatsr 596

P5-6 (Concluded)

(h) Work in ProcgsS""""t""'r"""""ott"t"'t"""""""'

Faaory Overhead Control (or Applied

Factoryoverhead)... '..................... '.....|t...

{ i l F in ishgd GoodStt"" r " " " " 'o t 'or"""" t " " " " t " " " " "o '

Work' in PrcCess """"""""""""""""t"""""

nl AccountS Rgceivab16.............o.."""tto""""""""'Y'

S3 l9s t t t t t t " " " " " t t t t " " " " " t " " " t " " t t " t " " t t1 t " " "

GostofGoodsSo|d..............t...........|.t................Finishgd GoodS"""""""""'r""""""""t""""

( k ) C a S h t " t r t t " " ' t " " ' r t t t " t t " t " t t " " " " " " " t " t " " t t t " t t t t " '

AccountsReceivabIo'... ' ........................t......' (s53,38 4 r 4oohl+ $53,384 = $74'738

Dr.16,720.OO

53,384.OO

741738.OO'

53,384.OO

69,45O.OO

Cr.

16,720.O0

53,384.OO

74,738.O0

53,384.00

69,450.O0

Work in ProcessMaterials

311(a)(c)

Bal . t 4 '00022,OOO

60038,600

14,8N

(b)(d)

21rOO0800

2t,8oo

53,384

3/1 Bal.(bl(0(h)

19,O7Ot8,60020,9OO16,720753X)

40053,384

53,784

(c)(i)

27,506

3/1 Bal '0)

Finished Goods

15,00053,384

68,3U| 5,OOO

(31 TROPEZ INC.Schedute of lnventories, March 31

s14,8OO21,50615 ,OOO

s51,306

Chapter 5

P5-7 '�

(r) and (3)

311(g)

Bal. 78,83O.OO94,5O1.65173,331.65

78,83O.U'

97

Accounts Receivable

I 17,5OO.OO

Finished Goods

(g) 94,5O1.65

Materials

3/1 Bal. 65,000.00(al 42,3OO.OO(bi s,aoo.oo'

tt3,loo.ao59,37O.OO

53,73O.O0

Accounts Payable

42,3O0.O05,8OO.OO48,tOO.OO

Accrued Payroll

(c) I 1 1,364.00

Payroll

(c ) 111,364,00 | (c l 11 1 ,364.00

Applied Factory Overhead

3O,20O.15 30,2OO.l5

(dl

(al(b)

Work in Process

3/1 Bal. 2921627.OO(cl 98'884.00(d) 53,73O.0O(0 3o,2OO.l5

475,435.15380,933.50

12,48O.OO281467.87

40,941.87

94,501.65

3O,2OO.151O,741.72

40,941.87

(g)

Gost of Goods Sold

94,5O1.65


(cl(e)

(f)(3)

Over. or UnderappliedFactory Overhead

281461.87 (311,558.28

.S5I8OO could also be posted directly to the work in process accountr reducingentry (d) to $47,930.

Various Credits

Sales

(g) 117,50o.oo

98

Drrcct matcrrarr.,.. rtlill:ll

Dlrcct labor......-.... 21'4alO.OO26,844.OO

FactorloYerhosd.. l3'8OO.0O7,717.65 '

Total CogL $94,501.65

Chapter 5

3 OO,875.OO slO,O4Olo,49o.oo 5,800 $170,285.00

43,800.O028,920.00 2O'37O 210,414.OO

19,388.009,314.50 0,893 85,736.15

P5.-T (Concluded)

l 2 l T h e t o t a l c o s t o t e a c h f o b a t t h e e n d o f M a r c h :

Job 2O4 Job 2O5 Job 2OO Job 207 Total

t 4or4lio11r32O

33,24Oa2t750

22137O7'375

The balancd in the work in process account(JObS 2O5, 206, an d 207)... . ' . . . . . . . . . . .o' . . . . . . . . .r. . . . . . . , . . . . ' . .

' 3,355.5 hours r sz.go = $7r717.65

Dr.

M at g f i a 1S. . . . . . . r . r . . r . . . . r . . r . . . . . . . . . . , . . . . . . r . . . . . . . . . . ' . . . . r . r . . . I

Accounts Payable......- ' .-......

Pay rO11 . . . . . . . . . . .D . t . . . " t " " t ' r t ' r " " " " t " " " " ' r " r " t " t " " " '

ACCrugd PayfOll . .r. . . .r. . ' . . . . . . . . . . . . . . . . . . . . . . . . . . ' .". . .

(c) Work in ProcessFaCtOry OVgfhgad COntlOJ... ' . . . . . . . . . . . . . . . . . . . . . . . . . . ' . . ' .Marketing and Administrative Expenses """"""

P a y r o l l . . . . . . . t t " t " t " " t t " " t " t " t " " " t " t t " " ' t t t " " " '

Work in Proc8sS..........."""""""""""""""""'t" 'FaCtOry OVgfhgad COnttO1.........r..... ' .............,,...

Matgfials ................................r.................. ' .,

WOfk in PfOC9SS.. . . . . . . . . . . . . . . . . . . . . . . . r . . . . . . . . r . . r ' . . . . r . ' . . . .

Applied Factory Overhead.... . . . . . . , . . . . .""""""

Cost of Goods Sold'.. . .-. , . . .r. . . . . . . . .r. . . . , ' . .""""r"""Work in Procgss ... i .- . . . . . . . . . . ' . . . . . .r" '

$159,605 3171,825.50 $49'503 3475'495j 5

s38O,933,50

Cr.114,52O

I I O,OOo

78rOOO12,00O2O,0OO

I 0 8 , 1 7 57 r52O

42t75,0

190,35O

1 1O,OOO

P5-8

(21(a)

(b)

(d)

(e)

(0

114,520

1 1 O , O O O

1 1 5 , 6 9 5

421750

19O,350

Chapter 5

P5-B (Continued)

99

SalgS DiSCOUntS . . . . . . r . . . . r . r . . .o . . . . . . . . . . . r . . . . r . . . . . . . . . . . r . . .

Accounts Rgcgivablo .....................o....r.........

(hl Marketing and Administrative Expenses...........-Factory Ovgrhgad Gontrol........'.....r........'.....'-..r,

a C a S h a . a a a . a . . a a a . . . . . . r . . r . . a . . . . r r . . . r . . . . . . . . 4 . . . . . . . . . . . . . . . o .

Acc u m u I ate d D e p re c i ati o n{tl a c h i n e ry .......

( i l ACCOUntS Payablg' . r . . r . . . . r . . . . . . , . " . . . . . . . r . r . . . . . . . . . . . . . . . .CaSh . . . . . . . . . . . r . . . . . . . . . . . . . . . . r r . . r . . . . . . . . . . . . . . . . . t . . . . . . . . t .

0) Applied Factory Ovgrhead ... . . . . . . . . . ' . . . . . , . . . . . . . . . .--. . .Factory Ovgrhead Gontrol .....r..r'.....'...'r..-.-r.

GOSI Of GOOdS SOld ... . ' . . . . . . . . . . . . . . . ' . . . . . . . . . . . . . . . . . . . . . . . .Fagtory Ovgrhgad Control . . . . . , . . . . . . ' . . . , . . . . .r. .-. '

(11 and (3) GENERAL LEDGER

Gash

(sl Gash

47,0OO247rOOO

294,OOOl7't,32O

Accounts Receivable

Bal. 5O,00o255,OOO

3O5,OOO

(gl 26O,OOO

Finished Goods

32,5OO I

Work in Process

Machinery

1/1 Bal . 45,3OO I

Accu mulated DePreciation-Machinery

111 Bal.(h)

a a a a a a a a a a a a a a a a o a t t t a t a a a 247 |OOO13,OOO

l5 ,ooo24,68O

85,O0O

421750

1 ,45O

Materials

260,000

37,68O2,O0O

85,OOO

42,750

1,450

1 15 ,6951/1 Bal.(g)

(hl(i)

37168085,OOO122,680

1/1 Bal .(al

22'oOO114,520

138,52O

(dl

1 t1(0

1/1 Bal .

Accounts Payable

111 Bal.(al

lO,OOO2,OOO12,OOO

59,375114,520

173,895

1 t 7(c)(dl(e)

7,5OO78,OOO

1 0 8 , 1 7 5421750236,425

Bal . 19O,35O 85,OOO

IN

P5-8 (Continuedl

Accrued Payroll

Chapter 5

Sales

Retained Earnings

lor 11O,OO0 lrn zss,oooFactory Overhead Gontrol

l2,o0o7,52O

24168041t 200

(cl(dl(ht

42,7501,45Ou,2oo

(gl

1/1 Bal.-MaL1/1 Baf.-[lb.1/1 Bel.-OH(c) Labor(d) Materialc(e) otrerhead

1/l Bal.-Mat1/l Bal.-L.b1/l Bal.-OH(c) Labor(d) Materlalr(e) Overhead

13,OOO I

Cost of Goods Sold

19O,35O1,45O

79r,goo

Common Stock

6001,OOO

4004O,00042,OOO18,OOOto4@o

It/'r e"r. g4,gzs

Sales Discounts Applied Factory Overhead

(t) 42,7so l(e) 42,750

Marketing and AdministrativeExpenses

2OTOOO15,OOO

35,OOO

111 Bal . 100,000

WORK IN PROCESS SUBSIDIARY LEDGER

Job lo i Job 1O3

(cl Labor 18,0oo(dl Materiala 14,575(e) Overhoad 13,5Oo

16,O75

Job l02

Palroll

Chapter 5

P5-8,(Concluded)

(4) MID.STATE COMPANYTrial BalanceJanuary 31

1 0 1

MID.STATE COMPANYCost of Goods Sold StatementFor Month Ended January 3{

1 7 1 , 3 2 O45,OOO32,5OO46,O7520,92545,3OO

35,OOO

13,OOO1 9 1 , 8 O O

12 ,OOO88,895

1 1 O , O O OlOO,OOO

34,925

255,000

600,820 600,820

(sl

Less work in process inventory January 31Cost of goods so1d.. . . . . . . . . . . . . . . . . . , . . . . r . t . . . . . r . . . r .Add underapplied factory overhead .........,,....Cost of goods sold-adjusted......

$ l 0 8 , 1 7 578,OOO42,750

s228,9257,5qO

$236,42546,O75

s190,3501,45O

s191 ,8O0

06-1. The basic obiective ol process costing is lo

determine the costs of the products manufac'

tured by the conrpany. Determinhg the cost of

the productr manutactured is necessary h order

to properly cost ending invenlories for exlemal

reporting Purpo3o! (i'e., teporting to credilorsand ownen of thd company, lhe SEC' and theIRS) and lo evalual. the ptofilability of the man'

ulacturing ac-tivity. In order to cost products, thecosts musl be determined for malerials, labor,and taclory ovefiead used to process each unitof producl lhtough eaclr deparlmenl.

06-2. The products rnanufactured wilhh a departmenl(or cost center) during the period can be helero-geneous il pb order costing is used, but musl behonrogeneous if process costing is used. In icborder cosling, producls are accounted lor inbatches. The cost cil each unil ol product manu-factuted on a pb is determined by dividing lhetotal cost charged to the pb by the number olunils produced on the iob. Since the nranufactur'ing cosl ol each iob is accounted for sepamtely'accuralo and uselul product cosl can be deter'mined even when the producls rnanulac{urad ondilferent ircbs are substantially diflerent' By con'trast, in procesr cosling, all nranulacturing costgare charged to the departrnent, and the unit costis determined by dividing the cost charged to thedeparlment by the number ol units produced' Asa consequence, the unils ol producl manufac-tured within a department musl be essentiallyalike in order tor the cost allaated to each unillo be meaningrtul (i.e., to reasonably reflect theactual c6l of the resources used to manulacturethe prcducl).

06-3. (a) Process(b) Process, unless signilicantly ditferent rnod'

els are manulactured(c) Process(d) Job order(e) Process(t) Process(S) Job order(h) Process, unless dillerent fabrics are used

lor d i f ferent models, in which caso theconversion cosls may be accounled forusing proce*s, but the materials using ioborder

06-4. Three product fkrw fonnats are: sequential, par'allel, ard seleclive,Seouential maans that the producl f lows or ismanulactutod in an unchanging f ixed set o loporalions, 9oin9 lrom one d€parlmsnt to thonen.Parallel moans that certain operational phasestake place simultaneously in othor departments

CHAPTER 6

DtscussloN ouEsTloNs

06-5.

06€.

and the partially completed unils or Parls atg

brought togethet in subsequenl deparlments'

Selective refers to the fact that a product does

not necossatily rnove through every dopatiment'

Depending uPon the characler or shape of the

fhal product, ditlerent deparlments are angagecl

in ccnptethg the desired PrcductMaterials Costs-{n irb order costhg, rnaterials

fiuisitbnr are uged and charges are nrade tojobs; in procoss costing, charges for malerials

isgued to productinn are rnade to departmenls'

with inlrequent usc of rnaterbls requisilians'Labor Costs-Time tickets are used h iob oder

-osting lo accumulate labor costs for each job; in

process cost ing, labor cosls ats chargod lo

departments, and, therefore, dela i led l ime

racords arg nol nocossary.Factorv Overhead-Job order costing requires

lho use of predelerminad rates for charging

overhead to jobs; in process costing, actual

overhead may be used. (However, predeter'

minEd rales are otten used in order lo smooth

ovefiead that is not hcurred at the sarne rata a3

productior activity to the products manulactured

throughoul the Year.)Summarizino Costs-A iob order cosl sheet is

*Ja to accumulate lhe costs of an order in ioborder costing; a cct of production rePorl is usodin process costing. In iob order costing, costsaro summarized on completion of the job; inprocess costing, costs charged to lhe depart-menl and cosls accounted for are summarized in

the cost of production report each month (or

sornetimes each week).Predetermined overhead tatos can and shouldbe used if the pattem of overhEad cost incur'rence does not follow the pattern of produclion

activity. Some items of overhead are fixed and

not responsive to changes in production aclivity'

It production volume varies each month, thenpredetermined overhead rates should be used'

Some items of overhead are incurred only at

cerlain times during the year, but benefil produc-

t ion throughout the year (e '9. , payro l l taxos,

insurance, property taxes, vacalion pay, eic') '

These i t ems can be reco rded as p repa id

oxpenses and amort ized uni lormly to each

rnonth it actual overhead is charged to produc'

tion. Altematively, estimates of such costs can

be included in the predetermined ovefiead rale'and the actual cosi charged to overhead whenincurred. The use of predeterminsd rales is oftens imp le r t han the a l l oca t i on o l ac lua l cos t sbecause a s ingle predelermined ra le requi resonly one overhead charge to aach departmenteach monlh. ln contrast. the capitalizalbn and

l5,

II

L,

I! Clppter6

arnorli:alion of .ach itcm ol astual ovcrheadnogld rcquirc nurrr.,orr. chargcr rach rnoth.

OO-7. A sl of prodtgtioh npod b an offetivo rnqth-ly (c wookly) ourynary of tho cod of rnatorbb,labor, ard overhcad consrrm.d by eadr deparl-rrJrl or cocl c.nl.r, abng with a rrcord cl thoguenlity ol productr menufrclurcd. ll providorhfsnnlbn necrslary lo col prodrctr, prep.r.

irumel .nlrier lo rccord lhr trandcr of coslrbolwecn departmcnlr, end cmtrol cob.

06€. The rectbns ccnnurly lound in a cocl of producttn reporl arc: (a) e quantity achcdub incJi-calhg thc soursr and dispeitim oil thr unib ofproducl, (b) a cel charged lo the departrnentt clbn, indicathg the cost h total and pcr unilfor lho c€l lrenlf.rrod in from tho procodingdopartmont, as woll as rnatcriab, labor and ovcr-hoad cfnrgod lo the depadrnent, and (c) a eleounled for seclisr indicalhg the anpunt ofcod assigned to thr unitr tranderred oti c/ the

143

dsparfnml, as well as tho eet of ending hven-tory.

06-9. Scparalo depar lmenla l cosl of product ionropgrtt arc uced to accumulalo costs moreaccuralely and to prwUe rnore detailed data lorc6t cqrtrol purpooo. than a planl-wUe cct of;roductbn rcport couki prwirto. In sornc ceses(c.9., a msnuteglurhg plant tul hss a sel*liveprodwtim flow for its producta), a planl-widec6t of prcduclirn reporl cannot bo us€d.

06-10. An cquivalenl unit cil produclicr ir thc anrornt cila nrsounco (r.9, malcrbb, labof, or ovrfiead)lhat wouH bc required to csnplcto qrr unit ofthr producl with respecl to thc cost clemenlbehg cansidered- Thc lolal number of equiva-lonl unite. with rcspecl to a particular element ofcod, ropresonls lhe number ol unils of the prcd-usl lhal could have been cornpletod with lheresource3 used durhg the perird.

I

t

Ib

\,

ta1Chaptar 6

Factorylabor Overhead

Cort fromPrecedlng

Department Materlalr

2O,OOO 2O,OOO

5r00o

5,O0O

l5,oo9 __?!,ooo

Cost fromPrecedlng

Department Materialg

EXERCISES

E6-1(11

Equivalent units transferred out """"""Equivalent units !n ending inventorln

Cost from Pniceding dePartment(1OO% r 5rO0Ol "'t"""""r'r""""'

Materials (l00oh r 5'OOO) """"""""'

Labor (60% r 5rOOO)"""""""o't""""

Factory overhead (4O% x 5'OOO) """

Total equivalent units... ' .,..........." 'r""""

l2l

Cost in beginning inventory....."""""""Cost added during current period'.""""

Total cost to be accounted fot'.....,....... ' .Divided by total equivalent units......,. ' ...

Cost per equivalent uni t . . . . . . . .

S15,OOO s 9,200 sls,4oo25,OOO 23,OOO 22,AOO

2O,OOO 20,OOO

3,OOO

23,OOO

2,OOO22,AOO

FactoryOverhead

ost5,4oo

o$4o,ooo$4o,0oo

25,OO0

osl5,ooo

os 9,200

E6-2

WOfk in PfOCgSS-Depaftmgnt X'.. . . . .". . . . . . . . . . . . . . . . . . t . .""" '

WOfk in PfOCgSS-Depaftmgnt Y ... . . . . . . . . . .r. . . . . . . . ' . . ,""""" 'Matgr ia1s. . r . . . . . . . . . . r r . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

WOfk in PfOCgSS-Depaftmgnt X.... . . ' . . ' . .r . . . . . . . . . . . t""""""WOfk in PfOCgSS-Depaftmgnt Y.... . . . . . . . . . . . . . . . . . . . . . ."""t""

P a y r o 1 1 . . . . . . . . . . . " " t " " ' i " " t " " t t " " t t t " t " " t t " " t t " " t t " t "

WOfk in PfOCeSS-Depaftment X.... . . . . . . . .r. . . . . . . . . . . . . . . . , . . . . ."WOfk in PfOCgSS-Depaftmgnt Y ... . . . . . . . . . . . . . . ' . .o.,. . . . . . . . . . . . . .

FaCtOry OVgfhgad ..r. . . . . . . . . . . . . . . . . . . , .r. . . . . . . . . . . . . . . . . . . . ." '

WOrk in PTOCSSS-Depaftment Y ... . . . . . . . . . . . . . . ' . . . . . . . . . . . . . . . .r. .Work in Process-Department X'.. . . .""""""""""

F in ished Goods lnventoryWork in Process-Department Y ..""""""""""""

5O,0OO4O,OOO

8O,OOO70,00o

18O,OOO7O,OOO

31O,0OO

476,OOO

9O,OOO

l5o,ooo

25O,OOO

31O,OOO

476,OOO

105Il>

:Ib

\

L.

l-

ClppterO

E6-3 Tlndol FabricatorE Inc.Cutting and Forming DePartment

Cost of Produstion RePort' For November

QusnUV SchcdubBcglnnlng lnvrntotY!'ttrt d h proccg thb Prrlod

Tnnrfcrrrd to Aromblhg DopertmrntEnd h g lnvcntoty..,...'.........'.......'..--.

Cost Chargcd to DePartmcnt

Eeglnnlng Inventory:

MatcrlafrLaborFsdory ovcrhced

Totel cort h bcglnnhg hvcntory ..otso'-...'..'....Fo..

Cort rddcd durlng currcnt Pcrlod:Matarlalr - .......oo...'...r...'.F......'.'.

[.:borFrctory

Totel coot eddcd durlng currcnt pcdod......*-.-

Total coct chargcd to deparbnct|t.......................'....'..,.'...,.

i/lst rbb Labor

7l4r 1gY. EV.

TotalCort

Overhcad QuanUty

8003"20O

a,ooo3/lOO

ooo4,OOO

Equlvalent UnltUnlta' Cost"

3113,3773137,452

VtGompleta Unlt Cogt

too% 336.70Cort Accountcd tor ar Followr

Tnnrlrrrcd to Arrembllng DcprrtmcntWort In Prccclr, cndlng hvcntory

Equtvebnt unttr tranrfrrrcd o9t......Equlvelent unttr h ondlng Inventory

Total cqulvalent unltr -

s36.70

Total Cogt3124,780

310,1 I O1,128

Unltr

1719232rJ523l8OO

t 21',07|'

t 08,02514r75|,29190O

3U2A81.700.52

3,85O3rO4O3,55O

t22,4aa,709.52

MetrrlelrLaborFactory ovcrhcad 11428 12,f,72

Total coct accounted tor t137,452

.Total number of cquhralent unltr roqulrcd In thc coot accounted tor rccUon detormlned ar tol'lorvr:

Mrt rlsb Lebor Orcrhcad

34oo 3/fOOalro 240

3,8!tO 3rO4O

- Total cort 0,c., thc cort In beglnnlng Invcntory plur thc cort edded durlng thc curront pcrlod)dtvlded by thc total number ol cqulvalent unltr requlred ln thc cost accountod lor ractlon

3/|OO

@ooooooo

75t/.&.hat.h

I

t

3/0OO150

3,55O:

ta6 Chagtor 6

E6-4

Quantlty Scheduls

Beglnning InventorYStarted In procesa thlr per|od...........

Transferred to Flnlshlng DepartmentEndlng inven tory,.................,

Sonora Manufacturing GomPanYMolding DePartment

Cost of Production RePortFor August

Materiatr L:bor Overhead Quantity

75% 25o/o 25o/o

TotalGost

I 'OOO0,ooo

lOrO0O

9,200800

I O,OoO

Equlvalent UnitUnlts' Cost"

Cost Charged to DepartmentBeginning inventonn

Materials

Factory overhead

Total cost In beginnlng inventorY

Cost added during current period:Mater ials[abor....Factory overhead

S 4,1205229El

Total cost added durlng

Total cost charged to department

Cost Accounted for as Followr

Transterred to Flnlshlng DepartmcntWork In Process, endlng Inventory:

Mater ialslabor. . . . . . . .Factory overhead

Total cost accounted for',..-,.............

:::::::::ll ::::::::::::::: ffi:

o/o

Unlts Complete Unit Cost

$e.so

Iotaf Coet

378,200

33,ooo28042O 3,700

s81,900

9r200

800800800

lOOo/t

750h25o/c25%

3 5,603

344,88012,63818�r779

s8.50

35.001,402.10

9,8009,400-!9,400

s5.001,402.10

Total number ol equivalent unlts required In thefollows:

Materials

Equivalent units transferred out....Equivalent uni ts in ending inventory

Total equivalent units

cost accounted for section determlned

Labor Overhead

9,200 9,200200 200

9,800 9,400 9,400

Total cost (1.e. , the cost in beginning inventory ptus the cost added dur ing t f ie current per iod)

d iv ided by the tota l number of equivalent uni ts requi red in the cost accounted for sect ion

9r2OO800

L

\--

I

I

L

IL

I

b

ChapterG

E6-5

QuantitY Schedulc

Beglnnlng InYentotY..Received from Cutting Departmcnt"'

Trangfcrred to Paintlng DepartmenL'

Hypertec CorPorationForming DePartment

Cost of Production RePortFor SePtember

Materialr Labor Overhead

TotalCost

t 21,1205,8802,9145,228

g 34,U2

3178,24O

Unlt Cost

QuantitY

1r4OO4,600

Endlng InventorY 80o/. 3Oo/n 300h

Coat Charged to Departmcnt

Eeginnlng lnventorY:

Cost from precedlng department"""Materials

FactorY overheadTotal cost In beglnnlng lnventory """'t""""""""

Coat added during curent Period:Cost from precedlng department"""""""'Matarialr ....."...-....-.Llbo 1...............o......r.......ro......r.....-......o...o...................

Factory overhcad .""'t"""""

Total cost addcd durlng crrrcnt period"""'

Total cost charged to departmcnt..""""'

3 70,38020,Uo17,52635,052

tl43,398

6,000

5,0oo1,000I ,OO0

Equivalent UnitUnits' Cost"

Coat Accountcd for as Follows

Tranrtcrrcd to PainUng Dcpartmcnl.Work lrr Proccssl cndlng InventorY:

Gort from preccding dcPartrncntMatorlalr ........o.......'..[.abor........Factory overhead

Total cost accounted for ...-.'....-..-..

Equlval ent unitc transf erred out....Equlvalent unlts In ending Inventory

Total equivalent units

5'OOO 5,000 5rOO0 5,0001,OOO OOO 300 3O0

6,O0o

Unlts

ch

ComPlete

o,0oo5,8005,3005,30O

sl5,25O2,82O1 , 1 4 02,28O

5,300

s15.254.703.807.60

331.35

Total Cost

s156,750

21,49O

s178,240

5rOoO

IrO0O1r00oI ,O0O1,00O

1000h $31.35

lAOo/. sl5.258go/o 4.793ooh 3.gO30,h 7.60

I

Total number of cqulvalent unlts required In ths cost accounted tor eecuon determined as

followg:Prior DePL

Gost Materials Labor Overhead

5,OoO 5,300

- Total cost (i.e., tJre cost in beginning inventory plus the cost added during the current period)

dlvlded by thc total numbcr of cqulvalent'unlts required ln thc cost accounted for gecUon

\

1@

E6-o ' Ramirez CorporationAssembly DePartment

Cost of ProducUon RePortFor February

Quantlty Schedub

Beglnnlng InventorYRecahved lrom Cuttlng Departmcnt.-

Trangferrcd to Flnlghcd Goodg..-.....En dln g Inven tory..,..........,..r....,....8....

Cost Charged to DepartmcntBeginning inventory:

Chapter 6

Materlalr l.abor Overhcad QuanUty

400aloo2,5O0

Fooo8Oo/, EO'/o 8Oo/o 50O

2r5OO

Totat Equhralent UnltCoat Unlts' Cost"

s 67,410 2,500 s32.0021,200� 2,400 10.50

Cost from precedlng deparbnent.............,. . $ 12'590Materials 4,OOO

1,20O2,49O

3 20,190

Labor.Factory ove

Total cost In beglnnlng Inven

Cost added during eurrent perlodlCort from preceding department.Materlalal:bor 171060 2r3OO 8.2O

35,320 2,3OO 18.40Factory overhead

Totat cost added durlng current perlod..,.... 8141,59o

Total cost charged to department:-sl81,78O

.h

Cost Accounted tor ag Follory! Unltg Complcta Unlt Cort

Transferred to Finlshed Goodr..,....... 2,000 l00th 387.10Work In Process, cndlng Invcntory:'

Cost from preceding department 500 lOOc/, S32.OO 316'000Materia1s....,............ 500 8O'/, ' l O.5O 4,2OO[abor....,... 500 $Oc/o a.2O 2,460Factory overhesd

Total cost accounted for................... s191,780

' Total number of equlvalent unlts requlred In the cost accounted for gectlon determined asfollows:

Prlor DepLCost Materialg labor Overhead

Equivalent unlts transferred out.... 2,0OO 2,OOO 2,OOO 2,OOOEquivalent uni ts In ending lnventory 5O0 4O0 3OO 3OO

Total equivalent unlts Z"SoO Z*C}O Z,SOO ,"3OO: : : :

- Total cost (1.e., the cost In beginnlng inventory plus the coat added during thc current period)divided by thc total numbcr ol equtvalent unlts rcqulrcd In thc cost accounted tor secUon

s67.10

WIsi34,20o

L.IL

LClppter6

E&7 Zupton Manufacturing CorporationFormlng DePartmant

Cost of Pmduction RePortFor June

Matcrbl A Materbl B

109

Overhead QuanUtYo00

31000

4,500

4, looa00300h

4'50O

Equlvalent UnltUnltr' Coct"

II

Lt

I

I

b

i-

QuanUV tlchsdulc

Bog lnnln g hvcntorr...m'o..--....c.Recolvcd fl.,om Cutdng Drpartmont-.

Tranrlerrrd to Fhlrtrlng DepartmcntEnd lng lnvcntory...-'..--...o..0-......6..

Labor

100% o% 30%

Cort Chargcd to DePartmcntBeglnnlng lnventorY:

Cort trom praccdlng dcpartmcnt......-"'-""""""""""*letarbl A.--..**...,.'.'..-o-oolletrrld 8........*..--........'.-.6.-6'Fts|.e bor....'.....'..........D...................Frctory ovcrhcad

Total cogt ln beglnnhg hventorY

@et addcd durlng curcnt Perlod:Cort from precedlng department...........""Matsrlal 4..-.....................,......

TotalCost

I

I

J 4A222,805

01 , 2 5 O1.875

3 1 0 . 3 s 2:

3 29,32E19,69514,35015163023.4a5

JtOZ.tt$

rl_1_?@o

Unlt Coot

326.00

97'505.003.504,OOo.oo

4,5OO4,5OO4,1OO4,2i2O4,2J20

$!l,ooo2rOOO

o4ao720.

3 7.505.00

326.O0

Total Cogt

3100,000

o,200

sl12,800

Fectory ovcrhcad

3.504.00o.00

'fotat cori rdded durlng csrent porlod"""'

Total cort charged to department..-'.--'--V'

Unltr GompletcCort Aceounted tor r Followr

Trandrrrod to Flnlrtrlng DoparbncntWork h Proccgr cndhtg hvontorY;

Cort from procsdlng dePartmcntMatsrlal A -.-.-*Matsrlal ILeborFectort ovcrhcad r....-................

Totrl cort eccountod for ..-....,...-*..

Equhralcnt unltr tranctcrcd out.... 4,1OOEqutvalent unltr In cndlng Inventory 4oO

Total cqulvatent unltr I,5OO

4rloO

400400400400400

100%

100.hlOOc/.

Ot/o

4r l oo400

4,5OO-

3Oc/o3004

' Tottl numbor of rqutvelent unltr rcqulrcd In the cost eccounted tor rccUon dctormlncd ar

followr:Prlor DepL

Coot {ttttbt A Utt.t"li l ' 'abor Overhead

4rl ooo

4,1OO 4,1OO120 120

4,1OO 4,220 1,220.

- Total cort (1,c., thc coct In beglnnlng Invcntory ptur thc coct added durlng thc current porlod)dtvlded by thc total numbcr of cqulvalont unltr requlrcd ln thc cogt accountod for rcctlon

QuanUty SchcduloBeglnnln g lnvcntotT -x..o'd"""-"'-o".*tr"Recelved from gyn rp Depe rtm c J1t....."""'-'-'Addcd to grocou ln CarbonsUon Departrncnt

Tranrferrod to BotUlng Dcpertmcnt -......-.....End In g brventory...osso....F.r-.-......h"'!"il'

. l

_ _

Pop Cola CompanyCarbonation Department

Cost of Productlon ReportFor October

Hatcrllb Lâbor

100% 25%

TotrlCo.t

Chaoter 6

ry QuenUtYI rOOO2,OOOc,ooo

25V.

e,ooo7"8OO13OO

0,ooo

Equlvelcnt UnltUnltt' Cocti'

o,ooo9rOOO8,loo8,1OO

32.0O

Totel Cort

il5,ooo

1 1 0

E6-8

Cogt Chargcd to Dsprrtmcnt

Beginnlng hvcntorY:

Coat f mm prcccd In g departmcnt..............-lvlaterlalrLaborFectory

Total colt ln boglnnhg hvcntory

Coat added durlng curcnt Pcrlod:Cort from prrcrdlng doptrtmcntMatorlelr[aborFactory ovcrhced

Total coct addcd during current pcrlod....-.,"""'t

Total coet chargcd to deparhnent.........--

Unltr7'800

lSoo112001'3,OO1,200

xComplctr

100%

1oo%100%

25.h25.h

3 1 , 1 2 0190oo

120

t f/a90

3 o,oao1,O1OlFEo3,120

315,e7O3t7/|60

Unlt CctSrLOO

31:O20.20AO

31t€O2AOco

120

tl.2020.20AO

Cort Accountcd for r FollowrTranrforrcd to Botdlng Dcpertrnrnt -Wort In Ploceur cndlng lnvcntoryl

Cort from pncedlng dcPartrncntMats r1a1r,...........,......LaborFactory ovcrhcad -..............'......

Total cort eccounted for -'.-...-.*.

lBOO

317,400

. Total numbcr of rquhutlcnt unltrr rcqulrod ln thr cort eccountod tor locUm dctcrmlncd I

followr:Prlor DcpL

Coct Matcrlab Lrbor Ovcficed

Equlvelcnt unltt trenrfcrcd out ... TBoo TBoo 7,8oO TBooEqulvalent unltr h cndlng lnventory l,2OO 1'200 3OO 3OO

Total cqulvalsnt unttr !'099 I'o99 JrL99 81199

* Totat coet (1.r., tfir cg4t ln bcalnnlng Invcntory plur thc colt addod durlng tlro currcnt perlod)

dhvldsd by thr total numbcr oi oqulwlcnt unltr rcqulrcd ln thc coat eccounted for rcctlon

Chapter6

E6-9 ,

Labor

1 1 1

Quantlty Schedule

Beglnnlng lnventory,.Recelyed trom Reflnlng Department............,..Added !o process In Blending Department..,..

Tranaterrcd to Fin lsh In g Departmen t .............Endlng lnventory..

Cogt Charged to Department

Beglnning lnventory:

Donegal Chemical CompanyBlending Department

Cost of Production ReportFor March

Materials Labor

100ah gooh

TotalCost

Overhead QuanUty

5,0o02O,0OO

5,000

goeh

3O,0OO

26,OO04,OO0

99'o99

UnltCosttt

EquivalentUnits'

Cost trom precedlng department

Gost added during current period:Cost from preceding department...............Materlale

Total cost In beglnnlng Inventory I 8,072

3 4,75021375

1807fJ7

s25,25O_12,A25

2r7408 , 1 1 3

94,8,728

956,80O

Unlt Gost

. . . a . . . a . a a a a a

29,000

4,0004,0004,0o04,00o

'1000h

1000h1000h

aoehsooh

91.90

$1.oo.50. 1 0.30

3O,O0O3O,O0O29,2OO29,600

$4,OOo2,0oo

3201,08O

s1.o0.50, to.30

$1.eo

Total Cost

$49,40O

7,4OO

358,80O

Factory overhead

Transferred to Finlshing DepartmentWorl In Process, endlng Inventory:

Cost from preceding departmentMaterialsLabor........Factory overhead

Total cost accounted for ......._..........

Equ ivalent u nits transferred out....Equivalent uni ts In ending inventoryTotal equivalent uni ts

Total cost added during current period.......

Total cost charged to department...........

Cost Accounted for as Foltowtc/o

Unlts Complete

r Total number of equlvatent units required In the cost accounted for gecUon determlned aafollorrs:

Prior DepLCost Materials Labor Overhead

28,000 26,0004,OOO 4,OOO

3O,0OO 3O,OOO 29,2OO 29,600

26,OOO3,20O

28rOOO3,OOO

" Tgtal cost (i.e., the cost in beginning inventory plus the cost added during the current perlod)divided by the totat number of equivalent units reguired In the cost accounted for aectlon

1 1 2

E6.10 APPENDIX

For JulY

euanUV Schedulc Matertalr ry

onerhead

Bcginnlng Invcntory....""""'o"""''"- AOoh 2O'h 2Oo/o

Starbd ln Procesr thle Perlod

t

Chapter 6

Brimhall Manufachlrlng GomPanYCuttlng Departrncnt

Cort of ProducUon Reoort

\Transferred to Assgmbly DepartmentEndlng lnventorY'.

Cogt Gharged to Department

Beginning inventorln

MaterlallLaborFactory overhead

Total cost In beglnning InventolY

Cost added during current Period:

Cogt Accounted for aa Followr

Transferred to Assembly DepartmentsBeginnlng inventolY.

Gost to complete:Materialg.-LaborFactory overhead """"

Started and comPleted this Period

Total cost transferred to AssemblyDePartment .... '..........

Work in Process, ending inventorY:Materlals..Labor........FactorY overhead

Total cost accounted tor .............. '.. '.

To complete beginnlng inventory..Started and completed this PeriodEnding Inventory..

Total equivalent unlts

- Cost added during thc current period

durlng thc currcnt Perlod

lOOo/. 50'/o 5Oolt

CurentT.

$ 2,940390585

3 3 ,915

340,530t8,10027r15O

39t,78o

395,895:Unit Gost

QuanUtY

100000

I,OOO

850150

I ,OOO

EqulnalentUnlts'

33,915

1,98O1,6002,4O0

87,4251,50O2,25O

UnitCostt'

349.5020.00

. 30.oo

See.5o

Total Cost

$ 9,895

74,A25

s84,520

1 1 1 1 7 5

s95'695

as follows:

TotalGost

Materlala ..............-......Labor...'...Factory overhead t....................................................t.'

Totat cost added during current period'-'-""o""'

Totat cost charged to department """""""'

940905905

Unltc

1 0 0too1 0 0

750

1 5 01 5 0t 5 0

7so1 5 0

40ch8Ac/osooh

100.h

t4e.so20.o030.o099,50

. Number of equivalent uni ts of cost added during t t ro current per iod determined

Materials l:bor Overhead

40 80 80

lOOo/c $49.503Oo/. 20.005Oo/o 3O.OO

750 75075 75

940 905 905

divided by the number of equivatent uni ts of cost added

1 1 3Chapter 6

E6.11. APPENDIX

QuanUty Schodulc

Beglnnlng InventorY

Kandu Tool GomPanYAssembly DePartment

Cost of Production ReportFor November

Materlals

5Oolo

Becelved from Cutung Department...

Transferred to Finished GoodsEndlng lnventorY..

Coet Charged to DepartmentBeginnlng Inventory:

Cost trom precoding department.......... '....Materlals .................LaborFactory overhead

Total cost In beginning inventorY

Cost added durlng current period:Cost from precedin g d epartment."..........................,...

Factory overhead



9Oo/. gooh gooh

l.abor Overhead

4ooh 4Oolo

QuanUty

1r2OO2,80O

4,00O

3,O0O1,000

4,O00


TotalCost

17,28O5,55O2,4OO3,8OO

s 28,830

s 40,60030,89O1A,9�3225 398

I_1_3,610s142,450

2r8OO3,3003,3203,320

314.509.305 . 1 07.65

s36.55

l l 1

E6-1 I APPENDIX (Concluded|

Coat Accountcd tor ar Followa

Tranctcrrcd to Finlghed Ooodg:Beginn ing Inventoty """""""""'

Cost to comPlete:Materlall.-Labor.....'..Fa ctg-rY ove rh ca d ...'....

Started and comPlatcd thll Pcrlod

Total cogt transferrcd to FlnlshcdWork In Proce3s, cndlng InventorY:

Cogt trom Preceding dePartmentMater ialc. .L:bor .................-.Factory overhead

Total cogt accounted tol .......-.-... '....

To complete beginning inventorY -Started and completed thil PorlodEnd in g inventory............................

Unltr Currcnt'/o Unlt Coot

Chagter 6

Total Cott

328,&tO

5,39O3,A725,508 3 {3,590

o5,79O

3100,380

314,5008,37O4,08Oa,12O 3:!,070

s142,45O

determlncd ar totlow::

Overhced

. Number of equlvalent unlts of cogt added during the current perlod

Prlor DepLCott Materialr Labor

1,2001,20O1,20O

I ,8OO

Goodr

1 ,00o1,00o1r0001,00o

3Ot/tsooh60.h

1OOV.

100.h00.h80e/o

800h

EOO1,800

900

3 e.305.107.85

36.55

314.500.305 . 1 07.85

o1,8001,000

7201,80O

800

7201,80O

800

Total equlvalent unlts -2'800 -9'399 -3'339 -3'329

Cost added during thc current pcrlod dlylded by thc numbcr ol cquivalent unitr of colt added

during thc current per iod

Chapter 6

E6-12 APPENDIX

1 t 5

QuanUty Schcdulc

Beglnnlng lnvcntoryRecelved from Retinlng Department..,..........-Added to proceae In Blendlng Department.,...

Transtered to Flnlshed GoodsEndlng Inventory..

Coat Charged to DepartmentBeginnlng lnventory:

Cost from preceding departmentMaterlals ........,.....,L:bor........Factory overhead

Total cost In beginnlng InventoryCost added during current perlod:

Northeastern Chemical CorporationBlending Department

Cost of Production RoportFor May

Materlals Labor100.h 20ch

lOOo/t 800h

Overhead Quantity

4OV. 2rOOO5,0005,0o0

gooh

12,0O0

1O,5O01,5OO

12,0OO


TotalCost

3 2,4905001 5 0600

Cost lrom procedlng departnrant;,Materlals...l.aborFactory overhead

Total cost added during current period,......Total cost charged to department.........

$ 3 ,71O

s12,5OO2,5003,3OO7163O

$25,930

_s29,64O

1O,O0O10,o001 1 , O O O1 O , 9 O O

s1.25,25,30.70

32.50

n6

I

Ef-l 2 APPENDIX (Concluded)

Cort Accountcd lor er FollorYr

frz-"tf-"tt"a to Flnlrhcd Ooodr:

Bcglnnln g Invcntory """""""''-Cogt to complcta:

Matcrlrlr """"""""""""Itbol."*-Fecto rI oYcrh4ad............

Started and comPleted thla Perlod

Total coat trancferrcd to FlnlshcdOoods

Work ln Proces!, cndlng InventorY:Cost from Prsccdlng dePartmentMatedalr . . . . . .Labor...............Factory overhead

Total coat accountsd lor ...................

To complete beginning inventory..Started and completcd thla PerlodEndlng InventorY..

Total equlvalent unltr

Unltr Curcnwl Unlt Coct

Chagter 6

Totel Cort

3 5,030

21,25O

s26,28O

31,875375

3,360

s20,640

Prlor Dept.Coat Materlalt

31.25.25

270840

L:bor Ovarhoad

1,000 1 ,2008,500 8,500

900 1 ,200

2,OoO2,00o2,00O8,50O

1,5OO1,50O1,5OO1,5O0

08,5001,500

ooh8.0chaoch

100%

100ch1000h

6Oc/c80o/c

08,50O1,500

3 .25.30.70

2.50

t3,71O

n

480840

.30

.70

, Number of equlvalent unltr of coct added during thc cutzent perlod detsrmlned aa followg:

l O,OOO ' l O,OOO 1 l ,Ooo 1O,9oO:

Cost added durlng thc currcnt pcrlod dhldad by thc numbcr of cqulvalcnt unltr of cost added

during thc current per lod

Chagter 6

1

P6-1

(1)

1 1 7

PROBLEMS

Modern Cabinet ComPanYCutting Department

Cost ol Production BePort

QuanUV Schedulc

Beglnnlng InventorY..Startgd In proceso this Perlod

Transf erred to Assembly DepartmentEnding Inventoty

Cost Charged _to Department

Beglnnlng Inventorp

For August

Materlalr Labor

Materlalslabor...Factory overhead

Total cost in beginning inventory.... '...-...... '...-.r...

Cost added during current period:Materlals[.aborFactory overhead

Total cost added during current period-.-.-..


Overhead QuanUty

200800

gooh 60ch 600h

TotalCost

800

650150

800

Equivalent UnltUnits' Cost"

S 5,385530795

s 6,890

s28,0358,35O

12,323$48,91O

s53,6O0

Unlt Cost

7A5740740

3f0.oo12.O018.OO

Cost Accounted for as FollowsTransferred to Assembly DepartmentWork in Process, ending inventory:

Materialsl-aborFactory overhead

Total cost accounted for ...................

' Total number of equivalent unl ts requiredfollows:

Unlts

1 5 01 5 0

%0omplete

050 lO0o/c

150 900h

s70.o0

rot"l C*!s45,50O

35,4O01r08O1,620 8,10O

gooh

6Ao/c

970.00

s40.0012.OO18 .00

s53,000

in the cost accounted for sect ion determined as

Mater ials Labor Overhead

Eguhralent unl ts transferred out. . . . . . . . . . . . 05O 05O 85oEqulvalent uni ts in ending inventory.. 135 90 90

Total equivatent unlts _JE _J79 _Jl9

- Total cost (1.e., the cost in beginning inventory plus the cost added during the current per iodldivided by the totat number of equivalent uni ts required in the cost accounted for aecUon

Chaptar 61 t 8

P6-1 (Continuedi

Modern Cabinet ComPanYAssemblY DePartment


QuanUV Schcdulc \

Beglnnin g Inventory.-,........""""'-'dRacelved from Cuttlng Departmsnt"'

Tranaferred to Finiahed Goodr ""'-'-En d in g Inventoty..-..'...-.....'...

Coat Charsed to DcPartmcnt

Beginnlng InvcntorY:

Matcrialr l:bor Overhead Quantlty

Coct trom precedlng d epartnrent """"""""""""""""' 3 17,41O3,4513,8113,011

MaterlalaLabor

Total cost ln beginnlng Inventory 3 28,083

Cost added durlng curtent Pcrlod:Cogt from pt ""oiiJ departrnent"""""""' ' 3 45'5oo

Materlall 13'43:l

tabor...... '. 20'989

Factory ovefiead 20'989

4ooh 2Oo/o 20t/.

250050

900

8001 0 0

TotalCost

900

Equivalent UnitUnlts' Cosf'

sl oo,911$128,994

$ 69.eO20.1030.o030.00

s150.00

900940820820

Total cost addcd durlng curent perlod"""'

Totat cost charged to department"""""'

fi9Chapter6

P6-1 (Goncluded)

Coat Accounted tor as Follows

Trangferred to Finlshed Goods....-....Work ln Process, endlng lnventorY:

Cogt from Preccdlng departmentMaterlala-laborFactorY overhead

Total cost accounted for..... '.......-.....

%Unlts Complete Unlt Cost

100% s'|50.00

Total Cost

sl20,ooo

8,994

s128,994

800

1 0 01 0 01 0 01 0 0

1000h I4Ao/.

69.9020.1030.0030.00

36,99O804soo600

20o/c200h

' Total number of equivalent units reguired tn the cost accounted for section determined as

followr:

Prior Dept.Cost Materials Labor Overhead

Equlvalent unlts transterred out....Equtvalent unlts In ending Inventory

Total equivalent unlts

8001 0 0

80040

80020

80020

420�840900

* Totat cost (i.e., the cost in beginning inventory plus the cost added during t*te current periodl

divided by the total number oi equivalent units required in the cost accounted lor section

(21 Work in Process-Cutting Department""""'Work in Process-Assembly Department

Matg f i a l s . . . . . . . . . . . . . . . . . . . ' . . . . . . . . . r . . r . . . r . . r . . . . . . ' . . . . t . .

Work in Process-Gutting Depattment""""'Work in Process-Assembly Department

Payroll .. ' ........ ' ......."....r..

Work in Process-Gutting Department ........Work in Process-Assembly Department

Appl ied Factory Overhead' , . . . . . . , . . . . .

Work in Process-Assembly DepartmentWork in Process-Cutting Depanment......."

Finished Goods InventoryWork in Process-Assembly Department ..., '

26,O3513,433

39,468

8,35O2O,989

29,339

1215252O,989

33,514

45,5O045,50O

120,OOO12O,OOO

ChaDter 6120

P0.2

(rl

Endlng lnventoty.

Coat Charged to DePartment

Beglnnlng InventorY:

Rathbone Tool GorPorationCasting DePartment

Cost of Production ReportFor December

QuanUty Schedulc Materialg

Beglnnlng Invcntory-""""n"'xo""'r"StartcO In Prcccg thlc Perlod

Trancf errod to Flnlghlng Department

Labor Onerhead QuanUtyI ,OOO8,OOO

1000h 80% 8Oa/c

0rooo

7150O1,5O0

-9'ooo

Equlvalent UnltUnltsr Cost"

Mater lalr

TotalCogt

$ o ts6090

Total cost In beglnn

Cost addcd durlng current Pe

Total cost charged to department...

Cogt Accounted for aa Followg

Transferred to Flnlshlng DepartmentWork In Proceal, cndlng inventory:

Materlalslabor........Factory overhead

Total cost accounted for ..'....--..........

Ing lnventofl ...........-......t..."'

rlod:

s 1,085

Materialr sl7,0854,29O6,435

I,OOO8r7OO817OO

$3,OOO600900

7,5OO1,2OO

32.0O.50.75

s3.25

Total Cost324,375

4,500

FactorY overhead

Total cost added during current period""-' s27,81O

Unltg

7r5oo

1,500115001,500

.hCompleta

100eh

7,5O01,5OO

s28,875

Unlt Cost

$3.25

7,5OO1,2OO

l0Oc/o 32.00gO./o .50ggoh .75

Total number of equivalent uni ts requlredfollowg:

Equivalent unlts transferred out...........Equivalent unl tr in ending inventory..

Total equivalent uni ts

s28,875

ln the cost accounted for gecUon determined as

Materials Labor Overhead

9,ooo 8 ,7OO 8 '7OO

- Total coat ( i .e. , the cost in beginning inventory plus the cost added during the current per iod)

divided by thc total number of equivaient units required In the cost accounted for secgon

- ClpPter6

- . P6-2 (Continued|

Rathbone Tool CorporationFinishing DePartment

Cost of Production RcportFor December

QtrenUV 9chcdulc

Bcglnnlng Inventory..- RccelvcdfromCastlngDcpartmcnt.............-.

Tnnrforred to Finirhed Goodr- Endlng lnventory..

Cogt Charged to DepartnentBcginnlng Inventorp

Cort from praccding departmcnt...............r.r....oo6.ooeoor. 3 a'78!i[.abor-. 291Factory ovcrhead 555

Total cost ln beginning inventory 3 5,54l

Cort edded during currcnt pcrlod:

121

l-abor Ovcrhced QuantitY

1 ,50O715OO

9,00o

7,00O4O.h 'o.h 2,0oo

I,OOO

Totel Equivalent UnhCort Unttr' Cort"

324,375 I,OOO 33242,130 TBOO .303,18 A,OOO AA

Cost from prccedlng departmmt[-abor.-.-Faetory overhcad

Totrl cct charged to dcpertmcnt-.-........

Totel cst rddcd durlng current period....... 32r"g3,

335,180 9r.oo

t2

P&2 (Goncluded)

%Cort &countod tor er Followr Unltr Compbtr Unlt CqtTnnrferrrd to FhLh.d Ooodt.--.- 7,000 1o0% 3t.ooWork ln Ptpcs, oodlng hvrotorn

Cort trom pncrdlng dcprrtrnrnt 2,O0O lOO% 33.2a $S/38O

Crtcplcr 6

Totrt Cort328,OOO

2,OOO /30L 30 21OFretory ovrr.hord 2,0OO 30.A .U 4CO 7,i8O

Totrl cot eccountrd tor,.......--.-- t35,180

' Totel numbcr of rqulvelcnt unttt ruqulrcd In thr cqt rccountcd for rocUon dotcrmlncd erfollowr:

Prlor DrpLCort t-abor Ovcrhcad

Equlvrlcnt unltr tnnrfcrrcd out........... 7,000 7,OOO T'OOOEqulvelcnt unttr h rndlng Invontory.. 2,OOO 8OO I,OOO

Totel cqutvrlcnt un|tr..........-..... g,0OO 7€OO 8,0OO

- Totel coet 0.1., tfrr cort In bcalnnhg lnvcntory plur tfrr cort rddod durlng llrr currant pcrlodl '

dlyldod by t|rr totrl numbrr of rqulvrlcnt unltr nqulrrd h tho cort rccountcd for rocUon

l2l Work in Process--Casting Department | 7,085Matgrials ......,....,.,,..........,..,.............

Work In Process--Casting Departmont....o........... 4r29OWork In Process-Flnlshlng Department... 2,139

Payrol l . . 'o . . . .o . . . . . . . r . . . . . . . . . . . . . . . . . . . . . . r . .

Work in Proces!-Casting Department................ 6,435Work in Process-Flnlshing Department.............. 3,125

Applled Factory Overhead ....,.........

WorkinProcess-FinishingDepartment.. . . . . . . , . . . . . 241375Work In Process-Castlng Departmont ........

Finished Goods lnventory-.................,................. 28rOOOWork In Process-Flnishlng Department ......

17,085

6,429 -

c l EAAg r J v Y

_

24.375

28,OOO

Ctpptcr 6

P€.3

(11

chrtnUty gchodub--Beglnnlng lnirrnbryatrrt d h procrs thb porfoa

Hetrrletr *F.-_.-.€bbor-_.,_Fr ctory ovcrft ced,......8_..,.rts,..

Totrl cct rccountad for.__.**.

Totel rgutvelcnt unltr

Jettcr Engine CorporationGasting Departnrent

Cost of Production ReportFor February

123

Hrt rbb bbor orlrrhcrd QuenUty

5003,OOO

Tnnctrrr.d to Anmbly DcprrtnmtEndhg Lrvrntory-E*_Ea

Tnnrfrrrrd to Arrmbty OlptrtnrntWort_h Proce, rndbrj hyrntorrl

-

Coct Chrrpcd to Dc?rrtnrrtBeetnntng h;;t"m

-

Mltarbb --..-EE----H-E*-8..-bbof -*..s--.E..-*_Frctory ovcrtrced

Totrl cqt h beghnhg trvcntoryCort eddrd durlng currurt prrlod:

Hetrrlelr b&8,I ^ L _ -

H . - . - _ _ * _ c _ a a

Itbof ---.----., D - - - a a - a a - g F a _

Ftelory ovcrhotdTotrl cort rddcd durlng currrnt p.riod_.._

Totrl cst clrergad to rlcprrtmont_.._..-

Co.t A€€orrntrd for rr Folbwr%

Unltr Compbtr

too!a 80'. 90%

TotrlCost

t 1O,9?Sssa

2.&?9

3 ta,1o2

s1.0575to,3E24a/aEl

35OO

2,7ooaoo

3"5OO

Equtvrhnt UnltUnltr' CotF

2r7OO

aoo800800

loo%

100%80%go.h

3211'398s23g5og

Unlt Cctsas.oo

845.OO 33E,OOO5.OO 33OO

15.00 IO,SOO

3,5OO3r3ao3lzo

345.OO5,OO

t5.oo

305.o0

Total Cort3r75^5OO

50,oo03225,5O0

'

A;*mbrr of rqulvlbnt unltr rogulrcd In thc cct rccountad tor rocuon dctarmlncd er

Equlnbnt unttt trenrtrrrrd out..Egulnhnt unttr h rndtng rnvcntory-:*.*.

Mrtarbb Lebor OYcrhced

2,7OO720

3r42O

17ooaoo

2,7ooG40

35OO 3,340

- Totel cct (lr- thr.cort In bcainnlng brvcntory plur thc cor-t edded durrng $rc current pertod)dhddcd by thr totrl numbct ";;;;bnt unti -r.oo-"ii"l'n

t,,a cort rccountod tor rccuon

Chaoter 6121

l

P8-3 (ConUnued) Jetter Engine CorPorationAssemblY DePartment

Cost of Production RePortFor February

QuanUty Schcdulc Matcrials

Bcglnnlng Invcntqtt-Rccclvrd from CerUng DcPartment -

I'latcrialr1:bor

tabor Orerhead QuanUty

I 'OOO2,7OO

3,700

2,9O0800

Trendcrrcd to Flnlrhlng DcparlrnentEndlng lnvcntolY- 7Ot/. 3oth 3Ot/t

Cort Charged to Dcpartmcnt

Beginning lnvcntoDn

Cost trom prcccding departmcnt.*.-...Matcrlalr...[:bor.......-Factory ovcrhcad

Totel coet h bcginnlng

Cost added durlng current Pcrlod:Cost from praccdlng dcparlrncnt -..*-...

3,70O

Equivalcnt UnitUnits' Cost-

TotalCost

3 ql , l5040',2812'42612,424

3128,260

3175,5OO119,480

44r4O844,4O8

3,7OO3,49O3,'t4O3,140

3 04.5045.3018.101 8 . 1 0Factory ovcrhead

Total coct added durlng current period"""' 3380'798

Totat cct charged to departnent.-.--...... €t"ttg

Coat Accountcd for ar Followr

Transf crrcd to Flnlshln g DcpartmcntWorl in Ptlceca, cnding invcntorY

Cost from prcceding dePartmantMaterlalr[:borFectory ovcrheed

Total cct accounted for .'.................

Equhralent unltr transferred out....Equivatant unlts ln cnding inventory

Total oquhrelent unlts

c/o

Units ComPlete Unit Cct

s146.OO

Tottl Coslt423'4OO

351,60025,368

41344

2,9OO24o�

2,90O

800800800800

2,900800

3,7OO

2,9O0s60

2,9O0240

10c�.h s't40.oo

10o�.h s 84.5070�.h 45.3030.h 18.1030ch ' t 8.10 4t3'44 85,65O

3509,058

' Total numbcr ol cquivalent units required in the cost accounted for secUon determined as

followr:Prior DepL

Cost Mate rials Labor Overhead

3 ,400 3 ,140 3 , ' t 40

- Totel coct (k., thr cort ln bcglnning invcntory plus ttrc cost added during thc current period)

dMdcd by tho total numbcr of cqutvetcnt unlts requlred In the cost accountcd for rccdon

125A189ter 6

P6-3 (Cont inued) Jetter Engine CorPorat ionFinishing DePartment

Cost of Production ReportFor February

QurnUtY Schcdulc

Bcglnnlng InvantorY..Rccclvcd from Ascmbty Dcpaftment ."""""""'

Tnnctorcd to Finlshcd OoodlEndlng lnvcntotT..

Cort Charged to Department

Beglnnlng lnventory:

Tnnslcrrcd to Flnlched GoodsWork ln Proceu, endlng Inventory:

Cost trom preceding departmentLabor........Factory overhead

Total coct accountcd for ...................

2,8O9

' Total number ol squivalant unl ts requiredlol lowg:

Equlvalent unl ts transterred out. . . . . . . . . . . .Egulvalent unl ts ln ending lnventory..Total oqulvalent unl tr

- Tota l coat (1.o. , thc cost ln beginning inventorydMdcd by the tota l number o l equivalent unl ts

Lrbor Ovcrhcad QuanUty

3002,9O0

50% 50.h

3,200

2,8O0ao0

100ch 3158.20

100ch s145.7050cL 5.O05Oc/c 7.5O

in the cost accounted lor

Prior Dept.Cost Labor

2 ,800 2 ,8OO400 200

3,200 3 ,OO0

plus the cost addedrequired In the cost

3,2O0

Equlvalent UnltUnlts' Cost"

3,200 3145.703,OOO 5.003,00o 7.30

-

3158.20

Total Cost

34f2,9O0

858,2801,O001,50O oo,78o

35O3'74O

gection determlned al

Ovefiead

2,BOO200

g,ogg

durlng thc current Perlod)accountcd lor recuon

TotalCort

Cort lrom p reced in g d epa rtment.'..............l-aborFactory overhcad ............... '.

Total cost in beginning inventorY

Cort added during current period:Coat f rom p reced in g d epartm ent..... '..........Labor. . .Fectory overfrcad

Total cost added durlng current pcriod...............'

Totel coct charged to department..,,.......

Cort Accountod lor ar Followr

.h

Uni ts Complete

I 42,8402,78�04 ,140

3 49,740

9423,4O012,24018,300

agj,ooo3503,740

Unlt Cost

400400400

tfi

P6-3 (Concluded|

(21 Work in Process-4asting DepartmeJlt """"""""Work in Process-Assembly Departmellt """"""'

Matgrials ..o......,................o.,.........................

Work in Process.-Casting Department """"""""WorkinProcess-Assemb|yDepartmetlt.............Work in Prccess-Finishing Department """""""

Payroll " "" "" """ """""" """"" ""

Work in Process.-Gasting Departmont "..""""""Work in Pttcess-Assembty Department "o"""""Work i n Process-Finish i ng Department """"""o'

Applied Factory Overhead....""""""""""""

Work in Process-Assembly Department """"""'Work in Process'-Casting Department

WorkinProcess-FinishingDepartmellt..............Work in Process-Assembly Departttlgrlt ""'

Finished Goods Inventory'......-.'.Work in Process-Finishing Depalt[lellt """

148,5751 16 ,480

16,36244,4O812,240

48,46144,4O818,360

175,5OO

423,4OO

442,960

haoter6

263,055

73 ,O lO

111,229

175,5OO

423r4OA

442,960

s Ctnptar6

P6-4 ,

(11

- Quandtf Schcdulc

Startad In procegs thls period

Transterrod to Flnlshlng DepartmentEndlng hventory..

Cogt Chargcd to Department

Beglnnlng Invcntory:

Persona Cologne CompanyBlending Department

Cost of Production RoportFor June

127

Materlalg Labor Overhead QuanUty

1rO0O8r000

6Oc/t 2oth %'/.

7,00o

6,4OOooo

7,OOO

Total Equlvalent UnltCost Unlts' Cogt"

Materlalc $ 19,620tabor 9UFactory ovcrhead 2,375

Total cost In beglnning inventory....o..,................. 3 22,939

Coat added durlng current perlod:Matcrlall .to..........'.r....................................i.......-......... $129rloo 61760 S22.ool,.abor o,88O 0�1520 120

29,005 E'55O /3.80Factory oycrhcad ..r..............

Total coct addcd durlng current perlod...,... SlO5,o45Total cort chtrged to department......... ...... 3187,984 328.OO

Total Cortoh

Cort Accountad tor ar Foltowe Unlts Complete Unlt Coat

Traneforad to Finlshlng Department 0,400 lOOc/o 328.00Work ln Pmcess, cndlng Inventoryn

Mater|a|r.,..o......,,....................... 600 6ooh $22.00 $7,920

s179,200

Iabor..........,....... 600 200h 1.20 1UFactory overhead,...................... OOO 25% 4.8O 72o 817&4�

Total cocteccounted for"""""""""' 3187'984

' Total number of equlvalent unlts required In the cost accounted for secUon detarmlned ae, lollowr:

- Materlals Labor OverhaadEqulvalent units transferred out........,.. 6,400 O,4OO 6,400Equtvalent unlts In endtng Inventory.. 360 1?:O 15OTotal cqulvalent unltg

_ | cqulvalent unltg SISS _q,*9 li?gg

" Total cost (1.e., thc cost in beglnning inventory plus the cost added durlng the currsnt pcrlod). dtvidod by tho total number of equivalent units required In thc coet eccountcd for rcsuon

128

P&,4 (Continued)

Pelsona Cologne ComPanYFlnishing Department

Gost of Production RePortFor June

Hrt rbb

100% 70%

ChWter6

Ovrrhoed Quan0Vrroo6,.1o0

10,2O0

70%

27IOOO

20,OOOI,OOO

27,OOO

Equlvalcnt UnltUnltr' ColF

thranUty Schcdub

Beglnn Ing Invcntoty..F--.o.'--E-o.*@'FRccclvcd from Bbndlng Dcpartmcflt*--'-".-Added to proccta h FlnbhlnO Dcprrtmont '."""

Transferrcd to Flnlsh.d OoodrEndlng Invcntory

lrbor

t to,61o

317e'2OOz'r6051g,e looo,75l

Coat Chargcd to DePartrncntBeginnlng InvcntorY:

Total cot h bcglnnlng lnventorY

Cogt eddod durlni currcnt Pcrlod:

Tote!Cort

Coat frpm pnccodln g d cpartmcnt.-..-.--.---..-F.*.-.-MatsrlalrL-cbor...Factory ovcrhced

i g/aso11395

100050

Cort f ro m p nccd In g d epertnrcnt --.---.-.-.'-..Matsrlalrt-aborFactory

27,OOO27t OO2Q,7OO2gr7OO

36.e5t.oo

.752.30

311.OOTotat coot rddcd durlng curront pcrlod-..-....-... 3245/a75

Total cst chergc'd to dcPrrtmcnt 329O,O85

Clppter 6

P€-,4 (Concluded)

Cort Accountad for er FollonTnnrf rrrrd to Flnlrficd Ooodt.-....-Work br Proccr' rndlng lnventorY:

Cort from Pncccdlng dcPartmcntlletcrlrlr-lrbotFectory ovcrhcad

Totrl cott rccounted for .....--.-..---

Equhralent unltr transfered out....Egutvalcnt unltr In cndlng lnvcntory

Totel rquhnlcnt unltr ...................,

VrGomplctr Unlt Coct

129

Total Cost

3280,ooO

t8,950I rOOO

5251 , 8 1 O 1O,O85

329O,O85

26,OOo700

26t7OO

l 29 ,1OO25r605

1541705

6r88O1 9 , 9 1 9

26,799

29,O656O,751

89,816

179,2O4. 17g,2OO

286,OOO286'0oo

Unltr2OTOOO

I'OOOI'OOO1,000I 'OOO

20,0OOlr0oo

100%

100%100%

28rO0OI'OOO

tt 1.oo

3 6.e51.OO.74

230

26,0OO700

7OY.70%

. Totel numbcr ol equlvalent unltt rsqulrcd In thc cot accountod for rocUon determlned er

lollorvr:Prlor DepL

Cort Matsrhlr Labor Overhead

27',0OO 27IOOO 26,7OO

il Total cort 0,c., thc cort In beglnnlng lnvcntory plur thc cort addcd durlng tlrc curront perlod)

dMded by thc total number of cquhyalent unltr reguirsd ln thc cort accounted for recUon

(21 WorkinProcess-BlendingDepartment. . . r . . . . . r . . .oWork in Process-Finishing Department'.............

Matgrials ..."........".....-... ' . '-.

Work i n Process-Blen ding Departmellt ...'.....'....Work i n Process-Finish ing De partment .............'

PayfOl l . . . . . . . ' . . . . . r . . . . . . . . . . . . . . . . . . . . . ' . . . . . . . . r . . . . . . . . . . . . .

Work i n Process-8len din g Department ...r..'...,r.'Work in Process-Finishing Department..........'."

Appli gd Factory Ovgrhgad .'.....o..'......'.....r""

Work in Process-Finish ing Department...'.......o..Work in Process-Blending Department ..'...

Finishgd GoOds Inventory.........,....,.................... ' .Work in Process-Finishing Departmont.-'...

tfr

Hytest Chemical CorPoraUonReltning DePartment

Cost of Production RePortFor March

*btrrLrb Labor

100rA 75i*�

TotelCort

Chaptor 6

Otrcrhcad Quentty

8007r2OO

8,OOO

50}|T'OOO1,O00

P6-5

(rl

ol-nnEhr Uchcduh

Beglnn ln g Invrntory --....-'-"""''d"'d---.*Startod ln procccl thb prrlod """"""'d""-'s

Trenctcrrad to B|cnd In g Dcpartmont'*""""'--Endlng lnvrntort

Coct Chargcd to DaPartrncnt

Beglnnlng InvcntorY:

MatorlelrL-aborFa gtort ovcrhced ....""r"-".-'D-t'-F""""n'-""""-o

Total coet ln bcglnnlng lnvcntory

Cort rddcd durlng cunrnt Pcrlod:Matcrlrlr ......E....-'-r""-"--"'--""-"'Do'-'-'--oF

[ :bor. . ' - - . . ---Mo"h"""""*---H" 'E'F ".- 'F '

Factoryovcrhcrd...-....o8....'.|..g.-'.........-...-....9...d

1o1t1 6oct rddcd durtng curcnt perlod

Total coct chargcd to departmcnt....--...

3 7253000

818

, 7,2721,9204*O

311,732

tl2,550

xComplotr Unlt CoetCoct Accountcd tor ta Followf

Tranglerred to Blcndlng Dcpartncnt.Work In Procc.r, rndlng lnvcntorY:

MaterlalrLabor........,...

Unltr7r0oo

I 'OOOI ,OOOlr0o0

100%

100%73.h50%

ll.ao

31,00.20AO

8,OOO7r75O7,5OO

t1,ooo150200

31.0020,10

31.60

Total Cort

i l1 ,200

1,350

312,550Total cot rccountcd for.-..--**

Totel numbor of oqutvtlcnt unltr rrqulrod ln tfir colt rccountrd for lccUon dctarmlncd ll

followr:Mrt rbb Lebor Ovcrhcad

Fastory

EquhraIcnt unttr trandcrrcd out...........Equlvalcnt unltr ln rndlng Invcnto:y..

Total cqulvalcnt unltt

T'OOO 7,OoO 7,OOoI,OOO 75O 50o

7,5OO8,OOO 7,75O

- Total coct (1.r., ttrr cort ln bcalnnhg lnvcntory plur thc cort added during thc currcnt pcrlodl

dhyldcd by thr total numbcr oi rgulvatcnt unltr rcqutrcd !n thc cort eccountcd for rccuon

8,O0O

Equlvalcnt UnhUnltr' CorF

Chaptor 6

P6-5 (Continuedl

Quandty t]chedulc

BeglnnlngRecclvcd from Refinlng Dcpartmottt ........-..--.Addcd to proccrr ln Blendlng Departmcnt.....--

Transferred to Finlshed GoodaEnding InventorY.. 89t/t

Cogt Charged to Departtnent

Beglnnlng Inventory:

Cort fro m p rcccdln g d epa rtment'......'........Materlala

1 3 1

Hytest Chemical CorporationBlending Department

Cost of Production RoPortFor March

Matcrlalr Labor Overhcad QuanUty

1r4O07'Oo01,80O

40o/c

10,20o

9,20o1,O0O

10,200

Equlualent UnltUnlts' Cogt"

40ch

TotalCort

$ t ,7sl42088

100laborFactory overhead

Total cost ln beglnning lnventorY

Coat addad durlng curront porlod:

t 2,602

Goat from precedlng department 911,2004,3803r looSrOOO

MaterlalrLabor.....,.Factory overhead

Total cost added during current pcrlod 924,280


10r2OO10,000

9,6OOI,OO0

s1.27.50.33.60

t?n

t32

P6-5 (Goncludeil)

Cort Accountcd for ar Followa

Tnngfcrrcd to Flnlghed Good3"""""Worlt In Proccar, cndlng InventorY:

Cort from PrPcedlng departmcntMaterlalaLaborFactory overh gad ..""""""""""'

Total cogt accounted for .........-..---

Equlvalent unib transferred out..'.Eguivalent units In ending Inventory

Total equivalent unlts.......:..........-.

%Complctc Unlt Cost

Chapter 6

Total Cost

s24,840

2rO42

s26,882

9,200400

9r60O

7 12724,38O

1 1 , 6 5 2

I ,5203 , 1 O 0

41620

2r9405,6OO

8,54O

11,2OO11r2OO

24184424,84O

Total number of egulvalent units required in the cost accounted for secuon determined as

followa:Prior Dept.

Cost Overhead

0,200.

I 'OOO' l ,0oo1,OoOI 'OOO

g,2oolrooo

1O,2OO

100%

1OO'/ogooh

49o/c10o/o

s2.70

91.27.50.33.60

sl,270400132240

Materials Labor

9,20O400

9r8OO

g,2oo800

1O,Ooo

- Totat coct (1.c., the cogt tn beginning Inventory plus the cogt added during t|re current period)

dlvlded by thc totat number oi equivatent unlts requlred In the cost accounted tor sectlon

l2 l WorkinProcess-RefiningDepartment.. . , ' . """" 'Work in Process-Blending Department ....,""""'

Matgrials . . . . ' . . """"""" ' t " t ' r"""""""

Work in Process-Refining Department'...... ' t"""Work in Process-Blending Department """""""

Payro l l . t . . . . " t " " " t " " t " " " " " " t " ' r " " " " " " " " " "

Work in Process-Refining Department """' �r"""'Work in Process-Blending Department

Appt ied Factory Overhead' . . , . . . . . . . . . . . . . . . """" '

Work in Process-Blending Department r......."""Work in Process-Refining Department """'

F in ished Goods 1nventory. . . . . . . , . . ' . . . . . . . . . . . . . . . . , . . . . . . . . .Work in Process-Blending Department """

Chapter 6

P6.6 APPENDIX

(1t

Cluand(y SchcdubBeglnnlngStsrtrd h proccs thb pcrlod..-.'.-.

Tranrf rrrrd to Asrombly DopertmontEnd hg lnvrntory........--x..€.

Cort Chargcd to DcpertmrntBeglnnlng Invcntory:

Upton Manufasturing CompanYCuftlng Department

Cost of Production RoportFor October

t33

H.trrbb Labor Orerhead Ouantlty00t6 1AV. 20Vr I ,OOO

0,ooo

100% 80% 'loo.h

1O,OOO

8,5O01,50O

lO,OOO

TotelCoet

l-abor8 ,01O1,750

790Factory overhcadTotal cct h beglnnlng hventory .'...... $ 10'550

Cort rddrd durlng currcnt pcrlod:Matarlelr 3 81,900

18,OOO3930O

l.borFectory ovcrhcrd

Totrl coct rddrd durlng currcrit pcrlod-.'..' 3130'7oo

Equivalont UnltUnltr' Cogt"'

1o61 sot chergcd to depertrncnt

Cort Accountcd for rr Followr

Transtcrrrd to Arocmbty DcpartmcntsEcglnnlng lnvcntoty .s.-6*

Colt to complctr:Metcrlelt-[rbor-*.-Frctory ovrrhred ----

Strrt d end complct d thb pcrlodTotrl coet trenrfrrnd to Ascmbly

Doprrtmcnt --*.fVork ln Proccs, rndlng hvcntory:

Metcdelrl.eborFactory ovcrhced

Total colt eccountcd tor ...................

-... 3150J250

Unltr Current'A Unlt Cogt

I ,OOOI 'OOOl,OOO

7,5OO

1,50O1,50Ol r5OO

10.hgo.h80%

100.h

100chaooh

1O0'/.

3 c.ooLOO4.OO

15 .O0

t c.oo2.OO4.OO

9,1OOor3oo9r800

310,550

ooo1r2OO3,2OO

313,50O2,4OOorooo

$ 9.oo2.004.00

3 l5 .OO

Total Cogt

3 15,850

112,500

3128,35O

21,9O0

$15O,250

134Chapter 6

P6-6 APPENDTX (Contin ued)

. llumbcr of equlvalent unltr ol colt added durlng thc c'urant perlod detsrmined ar follows:

Materlab Labor Overhead

100 0007r5OO 71500 7'5OO

Endlng lnventorY 1,500 1r2OO 1r500

To comptetc bcglnn|ng Invontory"""o'D,""'o"

Startod end complgtad thlr perlod o'�D'-oo"o-"

Total cqulvalont unltr e,1o0 o,3oo e,8oo

- cogt addsd durlng thc current perlod dtvlded by thc numbor ol cqulvalent unlts of cost addod

durlng the current Perlod

i-.'<--

Clwtor6

P6-6 +PPENDIX (Gontinued)

t35

Upton Manufacturing CompanyAssembly Department

Cost of Production RepodFor October

Materials laborQuanUty Schedulc

Beglnnlng InventoryRccetved trom Cuttlng Department...

Tranctcrred to Finished Goods InventoryEndlng lnventory..

75% $Oo/t 8Oo/o

60c/c 4Oo/t 40ch

Overhead QuanUty2,OOO8,50O

' lo,5oo

915OO

1 , O O O

1O,5OO


Cort Charged to DepartmentBcglnnlng Inventory:

Coet from preceding department................................. $MatcrialrlsborFactory overhead

Total cost In beglnnlng Inventory

Coat added durlng current period:Cort from preccdlng department...,........,....................Matorlalr...Labor..........Factory overhead

Total cost added during current perlod.......

Total cogt charged to department,..........

Cort Accounted tor as Followr Units Current % Unlt CostTrangtarrad to Finlshed Goods:

Beglnning inventory,.Cost to completc:

Mater ials. .Labor........Factory overhead ........

Started and completed this period

Total cost transferred to FinishedOoods

Work In Process, ending Inventory:Cost from preceding departrnentMater lalsLabor........Factory overhead

Total cost accounted for . , . . . . . . . . . . . . . . . . .

TotalCost4,000

400800

1,800

$ 0,800

3128,35030,10021,31530,015

$2O9,78O

s216,58O

8,50O816008,7OO8,7OO

315.103.502.433.45

2,0002,OOO2,00o

7,5O0

1 ,0oo1 , O O O1 , O O O1 , O O O

2s%40%40%

1000h

1000h600h400h400h

s 3.502.433.45

24,50

3 1 5 . 1 03.502.453.45

s24,50

Total Cost

$ 6,800

1 , 7 5 01,9602,760 g 13,270

18:t,75O

3197 'o2o

$ 1 5 , 1 O O2.1OO

9801,38O 19,590

93:l'599

t6

P6-6 APPENDIX'(Concluded)

Chapter 6

. llumber of equhralent unlts of cort added during thc current perlod determlned as follows:

7o completc beglnnlng Inventory..tltartsd and completsd thlc pcrlodEndlng Inventoly-r.-...................t..Total equlvalent unltr

Prlor DepLCort Materlale

0 5007,500 715001,000 Eoo

'8 ,500 8,60O

Labor Overhead

800 8007,500 71500

400 4oo8,7OO 8,700

- Coat added durlng thc current perlod dtvlded by the number of equlnalent unlts ol cost addeddurlng ttre currpnt perlod

tzl Work in Process-Cutti n g Dep artm ent'................Work in Process-Assembly Depa rtm e nt ....--....-'.

Matgrials r . . . . . . r . . r . . . r . . . . . . . . . ' . . ' . . . r . . . . . . . .

Work in Process-Guttin g Dep a rtm 8f1t......'..........Work in Process-Assembly De partme nt ....."..'.o.

Payro l l . . . . . . . r . . . . . t . . . . . . . . . . . . . . . . . . . . . t " t " " t " " " t " t t " '

Work in Process-Cutti n g Departm gflt'................Work in Process-Assem bly De partm ent ........'..,.

Applied Factory Ovgrh gad ......".............. ' .....

Work in Process-Assembly Department....r.....r..Work i n Proc ess-Cutti n g Depa rtm gllt'........

Finishgd Goods 1nventory...,....o......"........ ' ,..r.......Work in Process-Assembly Department ..,..

8 1 , 9 0 03 0 , 1 O O

18,6002 1 , 3 1 5

39,20O3O,Ot5

128,350

197rO2O

1 12,OOO

39,915

69,215

128r35O

197,02O

Chapter 6

P6.7 APPENDIX

(rl Marston Manufacturing GompanYFabricating Department

Cost of Production ReportFor August

QuanUty Schedulc Materiala Labor Overhead QuanUty

1OO'/. 4och 80o/o 4001,2OO

1,600

Beglnnlng InventoryStlrtod In process thls perlod

Tranrfered to Finlshlng Departmcnt 1,100

y Endlng Invcntory.. 1OO'h 8oo/c 9Oo/o 5OO

-1f99

Coet Charged to Department Total Equivalent Unlt- Beglnnlng Inventory: Cost Units' Cost"

Materlals .. $ 29,280

Factory overhead1,900

11,80O

Total cost in beglnning inventory

Coat added during current period:I 42,980

Materlalc... $ 9O,OOO 1,2OO $ 75.OO1O,o8O 1,340 I2'OO48,740 1,230 38.00

137

. a . . . a a a a a a a a a a

l.aborFactory overhcad

Total cost added durlng current period....... S152,820

Total cost charged to department........... !199f99 s125.OO

,g

P8-7 APPENDIX {Continued}

ochaoch2Oolc

lOAo/"

3 75.0012.0O38.00

125.OO

942,980

$37,5004,800

1 7 , 1 0 O

80700450

Chaptar 6

Total Coet

g 48,90087,500

$130,4O0

59,4OO

$195,8OO

Cort Accountod for ar!g!!ow:

f-rtf"-.a to Flnlshlng Department:Bcglnnlng lnventory.'

Cort to complste:Materlalr..l-abor..-.--.FactotY overhead """"

Startcd and completed thlr Perlod

Total coct transfcrrsd to FinlshlngDcpertmont

Work tn Procesr, ending Inventory:Materlale..Labor........

' Factory overhead

Total coat accounted for ...-.--.-..........

To completc beglnnlng InventoryStartad and completed thls PerlodEndlng InvcntotY..

Total equlvalent unltg

- Cost added during the current period divided bydurlng the current Perlod

Unitg Current 7r Unlt Cost

o2,88031040

400400400

700

500500500

1000h I 75,00800h 12.OO9Oo/o 38'00

240700400

. llumber ol equlvatent units of cost added during the current period determined ac follows:


o700500

1.200 1,340 1,230: : :

the number of equivatent units of cost added

CluptcrG

7g--7 APPENDX (Contlnuod|

Marston Manufasturing CompanyFinlshlng Departrtent

Cost ol Produstion ReportFor August

Or||nuU&hodub llrt rbb lrbor Ovrrhcrd*tnV. 20V. 3gYr

Rocrlvod from Frbrbrtlng D.p.rbnltt

Tnnrfrrrrd to Flnlrhed Ooodr hvrntoryEndhg lnvrntory...,.o..m..F6.os,,o IOO%

Cort Chrrg.d to Dopertm.otBoglnnlng Invrntory:

Cort from pncrdlng dcprrtnont --*...n...-.,...,. t 74'OOOlbtarfrb-es.e..-F..F= Ant bot I ,OOO

2,52OFrctoryTotal coct h bcglnnlng hvcntory

Cort rddrd durfng curnrnt pcrlod:Cort from pncodlng drprrtmmt---...-,......,,.....,.HltarhbH*ed-nare

s 78r3!to

trbor

3130/a0o2r02O

19,88020,42oFrctory ovrrhred

Totrf coet rddrd durlng currrnt p.r|od.......Totel cct clrtrgcd to dcprrbncnt.,.*.-

ti80,020

Cort Accountod tor rr Followt Unltr Currrnt 16 Unlt CortTnnrfrmrd to Fhlrhcd Ooodr:

Boglnnlng Invcntory .-.-..-F.,-.-Cort to complctr:

Mattrlalr.-F.-.*nEbbor.--€.*ffiFrctory oyrrftlad -*

Ettrt d end complrt d trb p.rfodTotrl cort trrnrfrrnd to Flnbhcd

Omdt Hhs.*Wort h Procan, ondlng hvrntory:

C;ort from pncrdlng dapertnrrntHttorletr _ F.....r........

139

oo?6 oof)6

TotelCo.t

Quentfuooo

1 , 1 O O

1,7OO

l r3OO.3OO

1,700

Egulvelent UnltUnltr' CorF'

oo0oo0

ao.h s 2-oow.A 14.OOw% 2t.oo

100% 101.00

3267,37O

l r l oo1r4OO1t12O1 l2O

t78,&5O

720Q1720

lOrO8O

3124.00LOO

14.0021.O0

3101.00

Totel Cort

3 95p7O

112t7OO

3208"570

58r8OO

3267,370

ooo700

LâborFectory ovcrhcad

Totel coct tccountcd tor ...................

100% sl24.00 3{9,OOO100cA 2-oo aoo

o�o.h 14.OO 3,3OO6O.h 21.OO 5,O4O

400.fOO.3OO400

140Chapter 6

P6-7 APPENDIX,(Goncluded)

. llumbcr of cqulvalent unlta of coct added durlng t{rc curent perlod determlned al follows:

To compteto beglnnlng lnvanto4y "st *.0-"nd comPletcd thlt Perlod

Prlor DepLCoct Materlalr

o700400

Labor Overhead

480700240

380 4ao700 700400 240Endlng InventorY

Total equlvalent uhltl 1,42O 1,42O

9O,O0O21920

921920

16,08019r880

35,960

46,7 4029,82O

76,56O

136,400136,4OO

208,570-208,57O

1,46O

ft Coat added durlng the current perlod dlvided by the number of equlvalent unltc of cost added

durlng tlrc currtnt Perlod

l2l Work in Process-Fabricating Department """""Work in Process-Finishing Department...... '... '...

Matgrials .. . . . . . . . . . . . . . . . . . . . . . . .-. . . . . . . . . , ' . .r

Work in Process-Fabricating Departmeflt ..........Work in Process-Finishing Department.... '..o.r....

PayfOl l . . . . . . . . . . . . . r . . . . r . . . . . . . . . . . . . . r t r . . . . . . . . . . . . . . . . t . t . r .

Work in Process-Fabricatin g Departm ellt .'........Work in Process-Finishing Depa rtme nt ..'.-....,..'.

ApFlied Factory Overhead ......-......... '......,....

Work in Process-Finishing Department........r....,Work in Process-Fabricating Department "

Finished Goods InventoryWork in Process-Finishing Department..... '

1 4 1ClvgtorO

P6.8 APPENDIX

(1)

QrranUV SchcdulcBcglnnlng lnventorYStrrtld In Proccsc thla Pcrlod

Trandcrrcd to BlEndlng hvcntory

ending Departmant.

TWonka Beverage GomPanYMashing DePartment

Cost of Production RePortFor SePtember

Matcrlalr [.abor

9Oc/, 60oh

0�0% 400h 20c/o

gvcrhead QuanUtY

30o/c 8003,OOO

3,6OO

3r loo500

3,600


Cort Ghargcd to DePartmcnt


MatarlalslâborFactory overhead...

Total cost In beginning inventory........... '.. '..,.......

Coat added during current Pcrlod:Materlalr

TotalCost

3 1,088172172

3 1,432

3 O,O0g1.47O3,020

2,84O2r94O3,020

32.10-50

1.O0

33.60

FactoryTotal cort addcd durlng currcnt period....-.. 310'496

Total cogt charged to department............ 3t1i93g

112

P6-8 APPENDIX f0ontin ued)

Cort Accountrd for al Followr

Tnnrtcrad to Etendlng DepartmentBeglnnlng Invontory .......,...""""

Cogt to comPlete:Matgrial g..."""""""""labor.-..,...Factory overhcad """"

Stsrtad and compteted thls PerlodTotal coct trancterred to Blending

Departn ent .....'..................Work ln Proccct, cndlng Inventory:

Materlalr..l-abor........Factory overhead

Total cost accounted for....,..............

Untts Currant 7o Unit Cost

Chaptor 6

Total Cort

$1,4i12

I 2,098

IrOOO

311,008

t 6:10100100 830

800600600

2,5OO

500500500

10%40o/o7Oo/"

'loooh

8Oo/.400h200h

s2.10.50

1 .00

3.60

$2,10.50

1 . 0 0

126120420

. Humbcr ol equlvalent units of cost added during the current period determined ar tollows:

To completc beglnnlng InventoryStartod and com pleted th lg period .................Endlng InventoryTotal cqulvalent unltr

Coat added during the current period dividedduring tfie currrnt period

s l1,928


240 4202,500 2,500

200 100

2,890 2,940 3,020

by the number of equivalent uni ts of cost added

602,500

300

Chapter 6

Po-8 APPENDIX (Gontinued)

143)

Twonka Beverage CompanyBlending Department

Gost of Production ReportFor September

QuanUty Schedule

eeglnnlFg Inycntoty.......,..r.,.........r........,............Recclvcd from Mashlng Department..................Added to process In Blending Department.........

Matarlala Labor

50ch 20.h

Overhcad QuenUty

2otlo I 'OO03,1OO3,1O0

60o/c

73OO

6,40O800

J-,n9

Equlvalent UnltUnlts' Cogt"

Transterred to Finished Goods InventoryEnd ln g lnventory.......... 1000h 6Oc/o

Coat Charged to DepartmentBeginnlng inventory:

Cost trom precedlng department................ $

TotalCost

MaterlalsLaborFactory overhead

Total cost in beginning inventorY

Cost added during current period:Cort from precedlng d epartment........... '...Materials

Factory overhead


Total cogt charged to department...........

Coat Accounted for ss Follows Units Current 7n Unlt Cost

Transferred to Finished Goods:Beginning inventory..

Cost to complete:Materials..l,-abor........Factory overh ead ........

Started and completed this period

Total coat transferrcd to FinishedGoods

Work In Process, ending inventory:Cogt from preceding departmentMaterlalsl:bor........Factory overhead

Total cost accounted for . . . . . . . . . . . . . . . . . . .

1r77O1 0 05574

s 1 ,999

-lt t,ogg1r4O72,OO42,''72

$17,181

$19,180

6,2OOg,7ooo16806,ego

$1.7021.30.40

1 , 0 0 01 , 0 0 o1 , 0 0 0

5,400

goo800sooBOO

500h800hsooh

1000h

1000h'loooh

600hgooh

3 .21.30,40

2.70

s1 .79.21.30.40

$2.70

Total Cost

s i ,999

s 2,66414,580

317,244

s1,4321 6 8144'192 1,930

3 1 9 , 1 8 0

1 0 5240,320

,41

P6-8 APPENDIX (Gonctuded|' Xumbcr of cquhrafent unltr of cogt added during

Chapter 6 .

thc current period determlned as foftows:

To completc beglnnfng Inventory..gt"rt"d and comptetad thlc perl;dEndln g Inven toly..-,F.F.........,.......,Total cqulvalent unltr

Prlor DepLCogt

o5,400

800

6,20o

Materlab Labor5OO 8OO

5,400 5,400800 480

6,700 9.880

Overhead

8005,40o

480

6,ogo"

ff:;ffi'"HlllSil;t"'t perlod divlded bv the number or equivarent units or cost added

(21 Workinprocess_MashingDepartment.. . . . . . . . . . . . . .Work in process_Btending Department,o............

Matgr ia ls ' r " " " . . . . . - . . . r . . . . r . . . - . . . - . r . . . . . . . . . . r . . . . . r . . . .

Work in process_Mashin g Department ...........r,..Work in pro.cess_Blen din g Depa rtm ent .....r..,.,...Payro l l " r " " r " " " r r r " " r . . . - - . . . . r . . . r r . . . . . . . . . r r - . r . - . . . . .

Work in tT: ::s_!l-ashi1 g Dep artm € nt,......,.......Work in process_AlenOini Departmelt ..............Applie d Facto ry Ovgrir ga d r.................,......rD.

6,O067,4O7

1r47O2rOO4

3,O2O21672

7,413

31474

5,692Work in process-B_lending

Department ............,. I 1,Oggwork in process_rraainini oepart-;;f::.:::: 1l,oegFinished Goods Inventory.............. ......... 1Tr244work in process-Biending

oepatt.;;i:::::: I t 'z'rq

12,244

I

CHAPTER 7

DTSCUSSION QUESTIONS

O7-1. Ot slity cost! rnay be groupcd hto the folbwingthree classifications:1. Preventicn costs are the ccts hcurred lo

Ptcvent product failure. They include thecdt ct designing high quality productr andprcductbn rystenrs, irrludhg thc coett o{implementing and maintaining such sys'

' lems.2. Appraisal coots ate the coets incuned to

detecl producl failure. They include lhecet of inspccting and testing malerials,hspecting produc'ts during prodwlion, andthr cogt d obtahhg hlonnatinn lrqn cus'lorners aborn product salisfastiqt.

3. Failure ccts ato the cosls incuned whena product tails, ard may occur inlemally orexternally. Intsmal failure cosls are thosethat occur during the manufacluring gr Pro-ductbn procoss (e'g., scrap, spoilage' andrework), and external failure cosls arothose that occur at ls f the Product hasbeen sold (e 'g. , warranly repai rs andreplacements, 3al€s refunds, handl ingcuslom€r cornplaints, and bsl sales result'hg frorn Poor Producl qualtty).

Q7-2. TOM stands for total quality nwragemenl' whichb a cornpany'wirCe approach to quality improve'menl in all processes and activities. TOM is apervasive philosophy ol doing business thalapplies to all funstional areas of the companyand to ail personnel.

Q7-3. Five characteristics of TQM syslems are:1. The company's obiective lor all business

activily is to serve ils cuslorners' The termproduct' is extended to include services

as well as groods, and'custorner'hcludeshtemal usors as well as those outside ofthe cornpany who purctrase the company'sproducts. Each empbyee's activity is ori'entod to provirCing service to the cuslorner.

2. Top marngement prcvlCes an aclive lead-ership ro le in the qual i ly improvemenlrnovoment.

3. Al l employees are ac l ive ly involved inquslity improvement. Employees aro nolonly asked to contribute ideas, but also lol i nd ba t te r ways o f do ing l h i ngs -Involvemenl can be successlul only whenthere is oncourago.neol and an open andhonest environment cl trust.

4. Thc cornpany has a sysiem of idenlifyingqual i ly problems, developing solut ions,and set t ing qual i ly improvement objec-t ives. This typ ical ly involves organiz ingempbyees lrorn all ranks and lrom dilfer-

enl orgnnizational units along with man'agers who have authority to take the nec-essary actbn lo solve Prcblems.

5. The company places a high value on itsempbyees and proviCes cqrtinuous train-ing, ar well as recognition for achieve'ment. Employees perform besl wfien theyare well lrained, and they have the greal'est capacily to contribute when lhey arehightY educaled.

Q7-4. The concept cl continuous quality improvementditlers frorn the cmcept ol quality optimization inthat csrtinuous quality improvemenl is a dynam-b process of change under lhe assumption thatthe iCeal is not an abrclute loown value; where'as, quality optimization is a slalic approach tofhding the best solutbn to a given set of fixedand knorvn constraints.

O7-5. The first problem with trying to inspect quali lyinto the product is that il delects inlemal lailuresonly afler coosiderable cost has been incurred.The second problem is that the rnagnilude ol thecost of the internal failures, delecled by inspec-lion, is rarely measured and typically ignored.

Q7€. Cornpanies should concEntrale their eflorls onpreventhg poor gualily rather than on lrying loinspect it into the Process, because il will resultin less total quality cost. The approach is found'ed on the belief ihat by increasing preventioncosts, the cosl of in ternal la i lures-such asscrap, spoi lage, rework, and downt ime-wi l ldecline by a larger amount than the increase inprevention cosls'

O7-7. Ouality costs should be measured and reportedlo managemenl in order to provide incenlive and

direct ion for improving qual i ly . Large qual i ty

costs indicate large opportunities for improve-

menl. Also, moasurem€nts provide a basis lor

moniloring the cosl of quality and evaluatingimprovemenls.

07€. Scrap inc ludes (1) the f i l ings and t r immings

remaining aller processing nraterials' (2) defec'

live materbls that cannot be used or returned lo

the vendor, and (3) broken parts resulting trorn

employee €rrors or machine failures' Spoiledgoods differ lrom scrap in that they are parlially

or fully completed units lhat are in some way

delective and are not econornically or physically

conectable. Spoiled goods rnay be unils of theproduct or componont Parts, and they may ofmay not have a salvage value. Bework is lheproc€ss o l correct ing delect ive manufacluredgooos.

Q7-9, Tho cost of scrap, spcilage, and rework shouHnol be ignored, because such costs are oflen

1 4 5

,16

quit. high and ofton re3ult trom hternal failures

tirat can Uc elimihatod lgnoring lhe cosl of these

htemd failures s€nds a signal to rnanagers lhal

urc*r codr arc acceg,table. Reporling such costr

provido inccntivl tor improvement, particularly

il tho cctc are la'rgc'

OZIO. tn ordor to know what to do with lhe cosl' the

accountant musl know whether lhe spoilage or

rework is caused by thc custorner or by an inler'

Chapter 7

nal failure. ll spoilage or rework is the result cl acustorner requiremenl, lhe unrecoverable coslshoutd be charged to the trb. On lhe other hand,il the spoilage o rework is thc cutsequerrc o{an intemal lailuro, lhr unrecovrrabb cocl shouldbe removed l rom thc iob ( i .e . , charged loFactory Ovefiead Control) and reported toresponsible managomenl

CliwterZ

E)GRCISESI

E7-1

(1) Accounts Rgcgivabl8... ' .......o..o..o................."....... 1 r8O0Scrap Salgs (or Other Income)...'.............o....

l2'l AccountS RgCgivab|o......................r..'.................. I r8O0Cost of Goods Sofd

(31 ' ACCOUnIS RgCgivablg."...'."...'......'r.....".'...'.....'.'. 1r8O0Factory Ovgrhgad Gontrof ..r....'.....r..r...........

(4) AccountS RgCgivab19........................ ' ................... I ,8OOWork in Procgss ........,.,.,,,.r....................r..,..

E7-2 Spoiled Goods Inventory.,...,.r....,..ro...,................. 12oFactory Overhgad Control ......,.........,..........o........ 152

Work in Process .........,.. 272

E7-3 $27,OOO total iob cosVl,00O chairs = $27 cost per chair

Spoi led Goods lnventory ($g x 1OO chairs) , . . . . . . , . . . 9OOFactory Overhead Control ((,$zz - $9) x 1Oo)......... 1,80oFinished Goods Inventory ($22 x gOO chairsl ...,... 24,3oo

Work in Process...................,.,..r. 2TTOAO

E7-4 Spoi led goods Inventory ($9o x 1OO'uni ts) . . . . . . . . . . . . 9,OOOGost of Goods So|d.,...., .r.............,...,r...D. 95.OOO

Work in Procgss ,.....,,.....,,.............o.......o..r,.. l O4'OOO

t47

1,8OO

1,80O

1,800

1 , 8 0 0

E7-5 FactoryOvgrhgad Contro1.r..,..,....,............,........,.Mater ia ls (10O uni ts x $1.5O). . . . . , . .Payroll (1OO units x 114 hour r $1O per'hour)Applied Factory Overh ead

(1OO r 114 hr x $12 rate) . , . , . , . . . . . . . . , . . r . . . . . . . .

700

Finished Goods Inventory.....,........ .,.....,. 6,900Work in Process

1 5 0250

300

6,80O

18

E7-6 Work in Pnocess """"""Matefials (1 ,OOO UnitS X $1)...r. . . . . . . . . . . .r, . . . , , . . .Payroll (l 'OOO units x 116 hour x $151...........ApbtieO Factory Overhead (l'ooo r 716 r $3ol

COSt Of GOOdS SO1d........................... 'r...r.........o....

Work in Process ($651000 + $8r5O0!.....'.......

Accounts Receivable ($73r5oo r I 5oVo1...........r...Sal gSt ' . . . . . r . . . . r . . . . . . . . . . . . ' . . . . . . . . . . . . . . . . . r . . . r . . . . . . . . . r . . .

8,5OO

73,50O

I lo,25O

ChapterT

1r0oo215OO5,OOO

73,5OO

1 1O,25O

ChapterT

E7-7 ,

(11

Quantlty Schcdulc

Beglnnlng InvenloryStarted In procesc thla perlod s.........

Transterrcd to Finishlng DepartmentEn ding Inventory............,.....,.............Spolled In procccr.....x..,,........,.'s.....

Gogt Charged to Department

Beginnlng Inventory:

Manx ComPanYForming Department


149

Matarlalr Labor Otrarhcad QuanUty

I ,OOO9r000

19'0098,OOO1,50O

500100%100%

7,rh100.h

50o/o100.h

TotalCogt

$ 1 ,260770

1,4O0g 3,430

$?6,24010,78O21,725

s7.45

3S.ZS1.202.50

s3.7s1.202.50

1O,OOO

Equlvalont UnltUnlts' Coat"

L.aborFactory overhead

Total cost In beginnlng lnventorY

Cost added durlng curent perlod:MaterliglrLabor

Transfered to Finlshlng DcpartmcntChargc to Factont Overheod tor gpollage:

Materlialc....l-abor.....Factory ove rh ead .......................

Work ln Procees, endlng InventorpMaterials,.Labor.....,..Factory overhoad

Total cost accounted for ...................

1O,O0O9,8�259,25O

s3.751.202.50Factory overhcad

Total cost added during current period-..'... Soa'745

Totaf cost charged to department.......,.., Sry-

Cost Accounted for ac Follolvl Unltr '/aComplste Unlt Cost

I ,O0O

500

1r5001,50O1r500

100.h

lOgo/.1000h100.h

1000h750h500h

s7.45

f:trt C-!

s59,OO0

s1,875800

1,250 3,725

s5,6251,35O1,875 8,850

372,175

500500

150Chapter 7

E7-7 (Goncluded|

' Totat number of cqulYalcnt unltr rsqulred h thc cort eccountod lor recuon determlned ar

lollorvr: Matsrlalr Labor ovcrhead

I,OOO I,OOO I,OoO1,500 1,125 750

500 500 500

to,ooo 0$25 er?99= a : : :

Egu hra I ent u n ltr tran cto rrcd ou t "-""'-"'o"""Equlvalent unltr ln cndlng lnventory"Equ lva tent unltr of rpollagc...*."'-"""""':'

Total equlvalont unltf .....'............,..............""

h Total coet fl.c., thc coct In beglnnlng Inventory plut the coet added durlng Bro currant period)

dlvtded by the total numbcr of equlnalent unltr requlrad ln tha cogt accounted for section

(Zl Work In Process-Finishing Depattment............., 591600FactoryOverhgadCOntrol.. . , , . . . . . , . . , . . . . . . . . . , .r. . . ' . . .ro. 3r725

work ln Process-Forming Department.,. . . . , 63'325

Totrl cort ehargcd to dcpertnrcnt.........- 1126'200

Cort Accountcd lor er Followr Unltr %CompletrUnlt CortTnnrlrrnd to Flnlrhrd O,oodr-..---Trenrtcrrr'd to Spollcd Ooodr krvcntory

rt rahrago vrlur .-s-.....-..*..Ghergr to Ftctory Ovrrhod for rpollrgo:

Cort of complctcd rpolbd unttrl.rrr ratvagr vtlur oil tpotlcd unltr

Work h Proccsr rndkrg brwntorfCod from prrcrdlng dcpertnrcntMatrrlelr_L-e bor..-....Fectory ovcrhcad

3B0O

400

400400

800800800800

100.h $27.00

510.OO

100.h s27.oo10 .oo

100.A 31e0010.h 5.oo20ch29Vr

4.OOo.oo

5,OOO

Equlvafent UnltUnltr' Cst"

1 5 1ClppterT

E7-8 ,

(r) Juniper ComPanYFinishing Department

Cost of Production ReportFor Ju ly

QurnU(y Echrdulo

Rccrlvcd trom CutUng Dcprrtmtnt-

Trenrfrrrrd to Flnldt.d Ooodr...-*Frd hg humtot7...*.-.o.s....'......-r.8polbd h prccoE.-.m--..,.x.d.

Cort Chrryo'd to DcprrtmontBoghnlng hvontory:

Coct from prcccdlngMatcrlalrL.aborFrctory ovcrttcad

Total cort In bcglnnlng InventorYGort rddrd durlng cgrrant prrlo'd:

Hdrrlrb Lrbor Orcrhcad Quan$ty

50041500

5,000

3,800800400

&Vr100%

20%100%

20%100.h

TotalColt

3 5r5OO1ro5o1118011770

s 1o,4oo

3 54,50020,olto10.20024,39O

3115,800

Coct fromHrt rlrlt

prrcodlng dcpr

Frctory ovcrhcad

Totrl cort eddcd durlng currcnt pcrld.--..

5,0001r52Oar36Oar3oo

$1O,80O4.O00

s or6oo1,600

040000

31e005.OO

327.0O

Total Coat

t i02,000

4,OOO

6,8OO

12,800

312O,20O

4.OOo.oo

Totrl cort rccountcd for

152Chapter 7

E7-g (Gonctudedl

. Totat numbcr of rqulvrtent unltr nqulrrd h thr cott tccountcd for rccUon dctcrmlnod r

followr:

Equ hva lent unltr trandcrrcd ollt -"Equlyalsnt unttr h rndlng lnvcntoryEqu bra le nt unttr o'f rpof bgc....'.*'

Total equlvalcnt unltr

HorDcoL Gct Metorbb Labor Ovorhced

3BOO 3BOOt8o l8oaoo aoo

15,20 a,3oo 4,3OO

spoo320400

3r8OO800400

5,000

- Total cort (1.o., thr coct In bcglnnlng Invcntory plur thr-colt eddcd durlng llrr currcnt pcrlodl

dtvtdcd by thr toUf i"iUrr oi rquliiini u"ftt rrqutrrd br t1'r cort eccountrd tor rostbn

(21 Finishgd Goods Inventory.., , . . . . . . . .o...r. . ' . ' . . . . . .r. . . . . . . . 1O2t60O

spoiled Goodg Inventory ..'...r...........'..........'...."" 4tOOO

FaCtOly OVgfhgad COntfOl .....,r.......t..""""""rtt"" 6t8OO

Woik in process-finishing Department""" l13t4OO

ChagtarT

E7-9 1

(11

$ 'l,9oo380

127,72O

_320,989

QuanUty

55,0OO53,200

$2,400sro

t53

UnltCogtt'

3.no.15

s.55

Total Coat

326,950

3rO3O

QuanUty Schgdulc

Beglnnlng lnventoryStartsd In procer tfilr perlod

Transfemad to Reflnlng DepartmentEndlng 100chlogt h pnocar

Coet Chargcd to Departmant


Matcr1a1c..............,.o...........'..... .......'.....'.....Convgrrslon cost................,.....,.....................,.o,..F...r...

Total cort added durlng current perlod.....-..,......

Totel cort charged to department...........

Cost Accounted for ar Follorrr

Coastal Petroleum Inc.Cracking Department

Gost of Production RsportFor MaY

Matcrbb Convcrslon Coot

7O'/.

5,OOO55,000

9949949,000

6,0O05,00o

60,ooo

Total EgulvalentCoet Unltr'

Total cost In beglnnlng Inventory.......'...'.........o... 3 2'280

Cost added durlng current Perlod:Materials s2o,1oo

- 7,420Convenlon colt

Trangferrcd to Reflnlng DepartmentWork ln Procesc, ondlng Invontorp

MaterlalgConvcrgion coct

Total cost accounted for

Total number of equlvalent unltstollowr:

Equhralent unltr translerred out....Equlvalent unltr In ending Inventory

Total equlvalent unlts

Z. C"-prclc Unlt Cost100ch s.55

7000h70.h

49,OoO4r2,OO

53,2OO

Unltr49,OOO

o,o0o9,000

40,00oo,0oo

55,00o

,4O. 1 5

s20,980

raqulred ln the cost accounted for lecUon detcrmlncd ae

Materialg Conversion Coat

Total cost (1.c., thc coat In beginnlng Inventory plue the cost added durlng thc currcnt parlodldivlded by tho total number of equlvalent unlts requlred In the cost accounted for rectlon

(2) WorkinProcess-Ref in ingDepartment. . . . . . . . . . . . . . .Work in Process-Cracking Department......

26,95O26,95O

1il

E7.1O APPENDIX

(r)

Chapter 7

15,00o


Sun Valve GompanyTooling Department

Gost ol Productlon ReportFor March

l,lstrrlab Labor

lO0t/o 70%

100%lOOt/o

QuanUV lichcdulr lB eglnnln g InYcntoly',...."""""'€"r"{Startod thlr pcriod........"""""""!"-',

Tranderred to Flnlshlng DapartmentEndlng InYcntory........"'t""""""FF -'

Spolled In proccar.-...................-."'-

Coet Chargcd to DePartment

Beglnnlng InventolY:

Total

Cogt edded duMatcrlalaLabor

Total coct charged to departmcnt

Cogt Accounted tor er Follorvr

Transterrcd to Flnlshln g DcpartmenbFrom bcglnnlng lnvcntory ---*

Coat to complato thla perlod:Materlala,..........F...-d

Chargc to Factory Ovartread for apollagc:Materlalr..Labor.-.....Factory overhead

Work ln Proccu, cndlng Invantory:Mater lalaL:bor........Factory overhcad

Total cqt tccountod 1or.........-...-

Chrerhead QuanUtygo.h 2r0oo

13rO0O

15,000

7r0003r00o5,000

c0%9Ot/o

10?r,90./,

3 1,600290950

3 2,&oO

3 0,7502r32O0,2oo

13,OoO' l1 ,60011 ,500

s2,840

o120640

g?,75O900

3,80O

s2,25O3009EO

3 ,75.20.80

s1,7s

Tota! Cost

$ 3,ooo8,750

sl2,350

8,25O

3 , 5 1 O

324,1 ' lO

TotalGogt

LaborFactory overhead ....

cost ln bcAlnnlng lnventory ..'..........r........-

ring current pcrlod:

Factory ovcrhcad

Total cort added durlng currant perlod'...... 821,270

324,110

Unltr Currcnt % Unlt Cost

labor2,0002,OoO2,000Factory ovcrhead -....-

Startod and completcd thlr pcrlod 5,000

Total cost trangforrsd to Flnlahlng Departmcnt

5,0005,00o5,00o

3,OOO3,0oo3,OOO

o.h30'/t40t/o

100.h

lOOt/.9O'/o99o/o

1000h30c/t40ch

3 .75.20,80

31.75

t .7520.80

$ .zs.20.80

ChapterT

E7 -1O APPENDIX (Concludedl

' llumbcr of cgutvalcnt unltr o,f coot addcd durlng tlto currsnt perlod determlned as follows:Matcrialr Lrbor Overhoad

155

To completo beglnnlng hvcntory,€.*.m.oabrtrd end complctrd thlr pcrlod Em&iEndlng lnvcntory

c o00 8005,OOO 5,OOO 5,OOO3,OOO 1,5005,000 4,500

1r2OO4,5O08pollcd unltr

Total cqulvalent unltr ' t3,ooo 1't,600 11,50O

' Cort added during thc curront period divlded by thc number of cquivalent unlts of cost addeddurlng lfic curent perlod

(2'l WorkinProcess-FinishingDepartment.............,Factory Ovgrhgad Control ..........'......r.,,...'......r....

Work in Process-Tooling Departme[t.....,,.. 2O,600

12,3508,25O

1ffi

E7-1I APPENDIX

(1) Plastico Furniture ComPanYFinishing DePartment

Cost ol Production RePortFor SePtember

Quantlty llchcdutc Mlterlgls ry,

Overhead

Beglnnfng InYontoty"""'F""""""""o' . 8Oo/' 4Oc/o 4O'/o

naiclvcd-trom Fabrlcatln g Dep artment

Tranrtercd to Flnlshed Goodg"""""

Chaptar 7

Quantity

1r2OO0,000

7,2OO

5,0001,50O

7007,2OO


Endlng lnvantorYSpolled ln Prccer

Coat Chargcd to DePartmen!

Beginnlng InYcntorY:

Cort from precedlng department """"'

labor'..............Factory overhead

Totat cost In beginning inventorY

Cost addod durtng current Perlod:Cort from precedlnf department """""""'

Matcrlalr ......'.""""'Labor..'...- ...."i"""""FactolY ovorhead

Total cost added durlng current period"""'

Total coct charged to dcpartmet1t """""""""""""""""""'

lOOo/o1 0 0 %

80.h100.h

80%1000h

TotalCost

i 14,1601r21O1,30O3,250

s 19,920

s 72,0006,24O

12,24f)30,600

!t r1,o803141,0O0

IrOOOa,24O8,1206,120

312.OO' l .oo2.OO5.OO

320.O0

Laborr3oo13oO1r2OOFactory ovsrft cld ....-..

St rt d rnd complctod thb porlod SBOO

Tottl cort tranrfcrrod to Flnbhhg DcprrbncntTrenrfcrrod to Spollod Ooodl lnventort

rt uhragn velur rs...'...-.......s.. 7ooChargo to Factory Ovcrhcad for rpollagc:

Cort of complctrd rpollcd unltr 7OoLcg ralvagc valuc of rpollsd unltr 7oo

Work h Procaor, cndlng hvcntornCort trom Prccedlng dePartment 1r5OO

1,5OO1,500I,50O

MatorlalrbborFrctory ovorhead ...,.......n-....'..,.

Totel cott eccounted tol .......-..........

ChapterT

ET -1 1 APPENDIX (Concluded)

Cort Accountad for lr Followr

Trenrfrmd to Flnlsh.d Ooodr:Frorn boglnnln g lnvontott .-.-..--

Coft to complctc thb Pcrlod:Metr da b.....-o.od-..D.

To completc beglnnlng lnvontory..atert d end complctcd thb PcrlodEnd ln g hventory.........'.....-...........Spolled untts

Unltr Currcnt 116 Unlt Cot

20%@.h

31e,e2o

3 1.00 2a2-oO 1r4.4o�5.OO

3zo,oo

312-OO

320.001LOo

i lzoo t18,ooo1.OO 1,5OO

157

Total Cort

25,80O

t l4t,ooo

oo%100%

100%

100%10a.h

80%oo%

2.005.00

trSoo4,500

3,O00 $ 25too7O,0oo

t lol l2oo

8,4OO

tlJtr0oo8/fOO 5'800

. Xumber of cqutvatrnt unltt of cct addcd durlng tfio currrnt pcrlod dctrrmlncd .r followr:

HorDcpL Coat Materbb Lrbor Ovorhead

o3FOO1,5OO

700

2403B0O1,500

700

720sBOO

900700

7203BOO

900700

Totaf cgulvalent unltr O^0OO 6,rAC' o,120

* Cort tddcd durlng tttr curcnt pcrlod dtvldcd by thc numbcr ol cqulvalont unltr of cort addcddurlng tlrc currant pcrlod

l2l Finishgd GOOdS InVentOfy.oo.... . . . . . . , . . . . . , .r. . . . . . . . . . . . . . . lOlr2OO

Spoilod Goods Inventory .................r.t.o..........r..... 8t4OOFactory Overhead Gontrol .'...............-'.-..-......-.-... 51600

Work In Proce*s-Finishing Departmetlt . . . . . ' 115t20O

a'J20-

tfi

E7.12 APPENDIX

(1)

ouenutv !c!g!g!: iBeglnnlng InvcntotYRacclvcd from Mhlng Depertncnt-

Tranrferred to Botulng E)'epartmont -End In g lnventory..F.o"o""'o'tr-"-i"Loat In procotl ......"o"@'

Gost Chargcd to DePartmcnt

Beglnning InventorY:

Cost from Preccdlng departmcntMatcrlalr[abor....'.....

Local PoP Inc'Cooking DePartment

Cost of Produstion RePortFor December

Mtt rbt! Labor

7s% At%

100.h 73.4 75V.

TotalCort

(hrcrhred QuanUtyat% lorooo

aor0oo60,o9937,0008,OOO5,OOO

ChaptorT

5O,O0O

Equlvalent UnltUnltr' Colt"'

t 2,9�20305140210Factory ovcrhcad

Totel

Cogt added duCost fromMaterlalr

cct In bcgtnnlng lnventory

rlng currcnt parlodlprscedlng dcPartment-..'.

t 3,575

3lo,85Ol,5oo21430�3,645

sl8,425

Unltr Currant 7r

322,OOO

Unlt Gost

35,OoO3715004Or5OO40,500

3-5o

Total Cort

33,575

too/gto673 3 4,8OO

13,50O

3't8 '3OO

32,480320360540 3,7OO

322,OOO

S,31.04.o6.o9

Total coct chargcd to

Cost Accounted for ar Follorvr

Translarred to Bottllng DepartmcntFrom beglnnlng lnvcntotY..."*

Cort to comPlcto thir Psrlod:Mater1a14.................o..La bor........r.'..r""""'..'FactorY ovcrhcad ...--.

Work ln Procesr, endlng Invcnto4nCost lrom preccdlng dcPartmentMaterlalrl-abor........Factory overhead

Total cost accounted lor ...-.--....--..

IOrOOOlOr0OO10,ooo

8,0008,0oo8,oooI ,OOO

100ch100ch

3.31.o4. 06.09

8.04.0E,oo

9.50

25t/o

75%73.h

Started and compteted thla pcdod 27.OOO 1OO'A

Total cost transferrad to Flnlshlng Departmant

7sch7'ch

CtpptorT

E7-72 APPENDIX (Concludad|

s ; ' XumUer of rqutvaturt unltr of eort rdd.d durtng ttrc curcnt pcrlod dctarmlncd rl follorvr:

HorDcpL Cot tlatcrlab lrbor Ovcrhcrd

To cornplctc bcglnnhg lnvcntory.. O 2FOO 7,5OO 7r5OOStlrt d rnd complct d thb pcrlod 27,OOO 27POO 27,OOO 2T,OOOEndlng 8'OOO 8,OOO O,0OO O,O0OTotel rquhnlcnt unttr -3s,o09 gFog _lo'5gg JoFgg

" Cost lddod durlng Ott cgrrent pcrlod dtvHcd by thr numbcr of cgulvelent unltr ol cort tddcddurlng thr curant pcrbd

(21 Work in Process-Sottling Dopartment................ 1gr3OOWork in Process-Cooking Department ....... 18,300

t59

1ffi

4501,35O

IrO0O

3,00o600

86,4OO

120,960

3,OOO

87,OOO

1 2 1 , 8 0 O

Chagter 7

1,80O

550450

3,6O0

86,400

120,960

3,OOO

87,000

121,8OO

PROBLEMS

P7-1(1) Spoiled Goods lnventory (2oo units x $2'25)""""

FaCtOry OVgfhead GOntfOl .r............r................. 'o.r

WOfk in PfOCgSS .................r......r...........t.t..t.

l2l Accounts Receivable ($55O + $450) """""""r""t'SCfap Sa1eS r.,.....r.............r..r....................t...

Spoiled Goods lnventory t..o...."""""""""""

P7-2

S9O,OOO total job cost = S18 per uni t(1 )5,OOO uni ts on job

Spoiled Goods tnventory (200 units x St5 salvage)FaCtOry OVgfhgad COntfOl .. . . . . . . . . .r. . . . . . . . . .r. . ' . ' . . . . . . . .

Work in Process (2OO units r $18 cost).."'r"

COSt Of GOOdS SO1d.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ' . . . . ' . t . . . . tWork in Process (S9or00o - $31600|,.'......,...

Accounts Receivabte (586,400 r l 4O%l,..............Salgs""" """""""' """""

{2) Spoiled Goods tnventory (200 units x $15 salvage}Work in Process . '...... ' ......,..r....r.... ' .... ' . .. ' . ....

COSt of GOOdS SO1d.. . . . . . . . . , . . , . . . . . . . . . . r . , . . . . . . . . . . . . . . . ' . . . . .Work in Process ($90,00o - $3,000).-...-...-...

Accounts Receivable ($azrooo r 1 4a%l,.. '.....--r...Salgs ' . ' . . . " " " " " " " " 'o" ' r " '

ChaPtarT

P7-3

(1) Factory Ovgrhgad Control ,.......,...,.....,...,...,.......,. 2r2ooMatgrials (1 oO units x $4|.....,....,,.,r.....,.,...,..Payroll (lOO units x 112 hr r $12 ratef ..........Applied Factory Overhead

(1 OO r 112 hr x $24 ratgl ,.........,.........,......

Cost of Goods Sold..

161

2OOTOOO

3O0,0oo

2r2OO

400600

l12oo

20O,OOO

3OO,OOO

WOrk in PrOCgSS r.....rr...r...............o.r.o...r......r

Accounts Receivable ($2OO'O0O x 15O%)..,..........SalgS.. . r . . r . . r r . . . . . . . . . . . . . . ' . ' . . . r . . . r . . . . .or . .

l2l Work in Process.,.......Materials (1 0O units r $4).....r......,....r,..........Payroll (lOO units x 112 hour r $12 ratel ...,..Applied Factory Overhead

(1 OO r 112hr r $Ze rate)....,..............D.......

Cost of Goods So1d.,.,.....,....r..........,r...rr.....r.........Work in Process ($200roo0 + $2r20O|,,.........

Accounts Receivable (S2O2.20O x 1 50%) .............Sa | gS . . . . . . r . . . . . . r . . . . . . . r . . . . . . . . . . . . . . r . r . r . r r . . . . . . r r . . . r . . . . .

400600

1r2OO

202,2OO202,2OO

303,3OO3O3,3OO

'te

P7-4 (1) I

QrandU Schcdub

Bcglnnlngtltrrt d ln Procar tlrb Pcrlod

Tnnrferrcd to Ascmblln g DcpartrncntEndlng lnvcntorY.' ...-d-Spolled ln procog

Cort Chargcd to DcPertmcnt

Be!lnnlng InventorY:

MateLaborFactory ovcrhaad

Total cogt ln beglnning InventorY

Coct added durlng curcnt Pcrlod:Materialcl:borFactory ovcrhcad

MetcrlalrLabor

Factory overhead

Total coct accountad fof ..........-*...

' 25,OOO

Total Equhnlcnt UnltCost Unttr' Cort"

3 1,260780

lr78O

$ 3,838

330,240 25,OoO 3150lo,7ot 23,100 5021,311 23,100 t.OO

Chaptar 7 ;

ir.oo

@!$54,OOO

Overstrost GompanYCuttlng Department

Cost of Produetion ReporFor April

Matcrlrb Labor Orcrlrcrd Quen$ty5,OOO

2O,0OO

2!t,ooo:18,OOO

1AO.A OO% 60% a,oootoo% g0% eo% 3,000

Total cort addcd durlng curcnt pcrlod...---..-. $88,312

Total cogt charged to 372,150

Cost Accounted for !t Followt Unltr y.Co.pl"t" Unlt Coat

Trangferrcd to Asscmbttng Departmcnt i8,OOO l0O% if'OOCharga to Factory Ovcrhcad for rpollagc:

3,OOO lOO% 3150 34'5003'OOO eO'/. 50 1'350

Factory overlrcad u.,...-.-.d.--. 3'OOO g}'h 1.00 2r7OO 8'550

Work In Proccsr, cndlng Invantory:Materlalr....... a,ooo 1oo'.h $l.so 80'000

a,ooo ao% 50 l'2oo4,OOO 6O.h 1.00 2,4OO 9'600

$72,150

l:bor.........

. Total number of equlvalent unltc requlred In thc cost accounted tor recUon determlned aafollorvlr:

Materlalr Labor Ovefioad

Squlvalcnt unltr translerrad out.. 18'oOo 18'o0O 18,OOOEqulvatent unltg ln cndlng Invcntory'.. 4,OOO 2,4OO 2'4ooEqulvalent unltr of rpollagc.... 3'OOO 2,7OO 2r7OO

Total cqulvalcnt unltr 3!'099 39'109 -23'199

- Total cort fl.c., thr cest In bcAtnnlng tnvcntory plur thc cott added durlng thc currant pcrlod)

dtvlded Uy tfrc totat numbcr of cqutvatcnt unlb rcqulrcd ln tho cort accounted tor rcstlon

ClppterT

P7-4 (ConUnued|

CFenU(y Schcduh

Rccrlvrd lrom CutUng Dopertm.nt-.

Tranrtrrrrd to Fhlrhrd Ooodr lnvcntoryEndhg hvrntoryEpolbd ln proccs

Cort Chargcd to Departmcnt

Ecalnnlng hvcntory:

Overttreet GompanyAssembllng Department

Cost of Produstion RoportFor April

tletcrtrb Lrbor Otcrhced

,63

QuanUty

80%100%

2gYr100%

20?i',100%

TotalCoct

$ 1O,9OO38,028

t 54,OOO"ll,4.r4g2

15Aat23,1OO

8257,U2

9314,300

4'OOO18,OOO

22,09917,0O04,0ooI rO0O

22,OO0

Equlvalent UnltUnltr' Cort"

Cort from prcccdlng departmcntMatcrlelr

t 57pr8Totel cort ln bcghnhg lnvcntory@rt rddrd durlng currrnt prrlod:

Cort from pnctdlng drprrtmont....-..--.lletrrfaltLrborFectory ovc

Totel cort eddad durlng current pcrlod.......

Total cort chargcd to deparbncnt ..,...,,.........r,....r..............,

22,OOO21,2OO18,8O018,8OO

t ze59.551,O0150

a4,360g?14,3OO

Cort Accountcd for g Followr Unltr % Complctc Unlt ColtTnndcrrod to Fhlrlrcd Ooodt.....-..Trenrfcrcd to Spollod Ooodr hvontory

rt rahragc virlur M-o..mo..o...

17,OOO lOO% 315,OO

Chergc to Fectory Ovcrtrcad lor tpollagc:Cort ol complctod rpollcd unlttbu ralvagc veluc st rpollcd unltl

Work In Proccr, cndlng InvcntorpCort lrom precedlng departmcntMaterlalr..têbor_......Fectory ovcrhcad.

Totel cott rccountod lor .......-...---.

I,OOO $ 5.OO

I,OOO 1OO.A 315.00I 'O0O 5.OO

t15,00

Totel Cort

3255,000

5,000

i15,OOo5,000 10r00o

a,ooo4,00o4,OOO4,O0O

100.480.h29Yr20ch

2.95 311,8000.55 30,5601.00 8001 '5o 1 '2oo

164Chaoter7 .

P7-4 (Concluded|

. Total numbcr od rqulvalcnt unltr rrqulnd In t||r cat rccountcd for rocUon dctcrmlncd ar

follom:

HorDcpL Cot Mtt rbtt lebor Ovcrhcad

Equlyalent unltr tranrtorrsd out-.. l7rOOO lTtOOO l7'O0O '17'0OO

Eiunî"nt unttr ln ondtng Invcntory ''OoO 3,2OO 8oO 8oo

iiuhralent unttr of ryollagc'-"--- I'OOO I'OOO I'OOO I'OOO

Total equlvalent un|tr..r..............r.. 2,OOO. 212OO. 't8eo9 l8po9

- Total coct 0..., thr cort ln bcglnnhg hvcntory ptur thr cort eddrd durhg tfro current pcrlod)

dtyldod by thr total numbcr oi rqulvatcnt unltr rcqulrcd h thc colt rccountcd for rccdon

l2l Work in Process-Assembting Departmellt."...."' 54IOOO

Factory Ovgrhgad COntrOt ....ro.,.....r...................... 8t550

Work in Process-Gutting DepartmeJlt......... 621550

Finished Goods lnventorY.... 255,O00SpOiled GOOdS InVentOfy ..r....r.....r......'....r............ 5r00O i

FaCtOfyOVgfhgad COntfO|......r........,.................'.. lOr00O

Work In Procegs-Assombling Department.. 27O'OOO

ChapterT

P7-5 ,

(11

10.h 1OV.

TotalGoot

4rOO036,OOO

10'9.9928,0OO

6,OOOo,0oo

4O,OOO


34,0OO3O,4OO3O,4OO

165

s.23

Total Cost

36,44O

1r1?8

Hometown Brewery ComPanyMiring and Brewing Department

Cost ol Production ReportFor January

Meterlrb l.ebor Ovcrhcad QuanUty

Matarlaltl,.aborFactory overfiead 124

Total cort h beglnnlng lnventory 3 8 1 0Coct addcd durlng currunt perlod:

Metrrhlr 9{rso8.24

1,O88LrborFrctory ovcrbcrd

Total cott eddcd durlng currcnt pcrlod.......Total cort charged to departmcnt...........

38,752

QuenUU llchcdulc

Bcglnnlng lnvcntoryStartod ln procer thlr perlod

Tranrfrrrrd to Cennlng DcpertmrntEndlng hvcntory 100%loet h pnoc..f

Cogt Chergcd to Dcpartmcnt

Beglnnlng lnvcntory:

Cort Accountrd lor tr Followr UnltrTnnrfcrrcd to Cannlng DcperbnantWork h Procor, ondlng hvcntorln

MatrrlelrlêborFectory ovorhcad

Totel cott tccounted for

Equhratont unttr trancf orrcd ou t...........Equhralcnt unltr h ondlng Inventory-.Total cqulvalent unltr

$ 6008a

$ 1 6.o3.o4

s7,5O8

VrCompleta Unlt Gogt

28,000

6,0oo0,00oor0oo

1OO'/o

lOOt/o40ch&ch

28,OOOo,ooo

34,OOO

3.zs

3.ro.03.04

28,OOO2r4OO

39607296

28,OOO2,4OO

3O,4OO 3O,4OO

h Totel cort (1.c., thr coot In beglnning lnventory plut thc cort added durlng tho currant perlodldtvldcd by thc totat numbcr of cqulvalent unltr roqulred ln tho coet accounted lor tectton

37,568

Totel numbcr ol cqutvalcnt unltr requlrcd In tho cogt accounted for recUon determined asfollowr:


tffi

P7-S (Continued)

ChaoterT

UnltCoett'

Hometown Brewery CompanyCanning Department

Cost of Production ReportFor January

QuanUty Schcdub

Becelvcd from Mlxlng andB rewln g Departm4nt..................

Translerred b Flnlghed Goodg lnventoryEndlng lnvantory..Spolled In procau

Cort Charged to Departmcnt

Beginnlng Inventory:Cost lro m p rec edln g d epa rtment............................'....

LaborFactory overhead

Total coat ln beglnnlng Inventory

Cost added durlng current perlod:Cogt from precedlng department...............Materlalr[-abor...Factory overfrcad ........

Total cort addad durlng currcnt pcrlod

Total cost charged to departmcnt

Mltrr|lb Lebor overhced Quan$ty

,poo

28,00030,OOO

25r0001,OOO4rOOO

3O,00o

Total EqulvalentCogt Unlts'

3 5501 9 075

150

0gtt

1OO'/o,looc/.

30% 50!h800oh ao.a

Cogt Accounted lor aa Followr UnltrTrancferrsd to Flnlshed Goodr lnventory25,0OOChargc to Factory Ovcrhcad tor apollagc:

Cost from precedlng departmcntMatcrlala..Labor...-..-Factory overhead

Work In Proce8s, endlng Inventory:Cost from precedlng departmentMatarialt..Labor........Factory overhcad

Total cost accounted for .................-

a,o0o4,0004,0004,000

1rOO01,O001,OOO1,OOO

100%

100.h100.hao.h80t/c

lOOo/.lOOo/.

50ch500h

3,38o

3.23:t.057.030.060

s.233.057,030.060

V.Completc

3 6,4401,52O

7861,572

i1O,318$11,28dt

Unlt Coat

30,00030,00o28,7OO28,7OO

s932228.96

192

s233571 530

$.23:t.057.030.os0

s.380

Total Coat

I 9,500

lr4/.g

$11,2a3

fuptor7

P7-6 (Concludedf

' Tottl numbrr ol ogulvrbnt unltr nqulrrd In thr cot rccountrd for rcctlon dctarmhed atblbwrs

PrbrDopL Co.t lbtrrbb bbor Ovcrhod

t67

Equlvrbnt unltr trenrfrrrcd out* 2tt,OOOEqulyetrnt unltr ln rndlng Invcntory lr0OOEgulnlcnt unltr of lpol!rgo.-.-.. ar000Totrlrqulvdrntunltr-.*...o...-.. 3OrOoO

25,OOO ZI,OOO Z,,OOO1,OOO 5OO IIOO4,OOO 33OO 3'200

3OTOOO 2,,r7OO 28!7OO

- Totel coct S.l.r thr coet In boglnnhg lnvrntory plur the cort rddcd durlng thc cunrnt pcrlodldMd.d by tltr totrl numbrr of rqulvelont unltr mqulr.d h thr cort eccountcd for rcctlon

(21 WorkinProcess.-€anningDepartmeJtt..,..........,.Work In Procass-Ittliring and

Brewing DepartmeJlt .......................r........

6,44O

6r44O

Flnished Goods Inventory 9,5OO11448

a a t a a a a a a a a a

Factory Overhead ControlWork In Process--Canning Department ....... 10,948

168

P7-A APPENDD(

(r)

Chagter 7

OuenUty Schrdub

Handy Tool GompanyFabrlcatlng Departmont

Cost of Productlon ReportFor April

l/lrt rbb trbor orrcrhred QurnS(Y

Strrtad thlr pcdod*i..-.rude100%?6 7O% 70% 2'OOO

3'000

:l-'oo9Tnndcrnd to Flnbhhg Drplrtnrrt e'OoO

Endlng hvontory-s-dFs lOO% &* 'aota

t'5o0

spoilcd In procctrD-...-..-d-.H lOO% 60% COta EooI I,OOO

Cort Cherged to Dcpertrncnt Totel Equhnlcnt Unlt

Beglnnlng Invontory: Cort Unltr' Cort"

Hgtafletf -t..--.-.dr,....''..s.--qd*o.*.-is I ItgOO

Labor 340IrO2O

I 33oOFactory ovcrhcad

Totat coct h bcglnnlng lnvcntorY

@rt addrd durlng surtrnt Pcrlod:Metadalr-.---.F-H6.E*d*-dd-.*s t gtt80 gtooO 3t'02

1sbor..........--.r.r..-d.m.._..-Fff.-.....-'.'F.* 21125 8r5oo '25 ' I

Fectory ovcrhord ----6-..tr.--.*.-.r.--..-.* C'375 8i5OO '73

Totet coet rddcd durlng curont pcrlod-...' 317'O8O

Totaf coct chargcd to dcprrtrncfrt ---.-aimrp..-..,.m 32O'?4O _-t2,o2

ClppterT

P7-q APPENDIX (Continued)

@rt Accountcd lor er Follon

Tranrlcrrrd to Flnlrhlng DcprrtmcnEFrom bcalnnhg lnvcntoty -........

Cost to complctl thb Pcrtod:1:bor-*.FactorY ovortctd.*-

8trrttd end complctcd thb PrrbdTotrl cort trenrtcrrcd to Fktbhlng

DcpartmontChergr to Ftctory Orrcrhead for rpollagc:

Metorlalr .-.i....-..-.-OlaborFactory ovorhcad'.---.1...-........

Work In Proccsr' ondlng InventorFMatcrlalrlrborFrctory ovcrhead

Totel cort rccountcd fot ..--..-"......

Unltr Currcnt !6 Unlt Cost

2,0002rOOO.TrOOO

500500500 '

1,5O0l"5oo1,5OO

30%3(,%

100%

100%EOV.AOV'

1000h10ch10V.

t 2 5.73

3LO2

31,02.25.75

$1.0225.75

33,26O

1504so

169

Total Cost

3 3BOO

14,140

318,OOO

8 1 0

2,130

32O,94O

3 s lo75

225

91r5:!O150450

r Humbsr of cqulvalent unltr of cott added durlng thc cument perlod determlned ar lollowg:

Materialg Labor Overhead

To completc beglnning lnventorytltrrted end completad thlr perlodEndlng hvcntorySpolled unltl-....... a................,......

Totel rqulvalcnt unltr

oTrOOO1r5OO

500

9,OOO

600TrOOO

ooo300

600TrOOO

ooo300

8,5OO8,5OO

- Cort rddcd durlng trc currcnt pcrtod dlvlded by thc number ot oqulvalent unltr of cost addeddurhg thc curront pedod

,70

P7 -6 APPENDX (Continuedl

Qurndty tlchcdubBcglnnlng InvcntorY

Chapter 7 ;

Handy Tool CompanyFinlshlng Department

Cost ol Produetlon ReportFor APril

Hrt rbb Lrbor otrcftcrd QurnUS

Rccclved trom Febrbrtlng Deplrtnrtt

Tranctercd to Fhlth.d Ooodl--* er000Endlng hvcntory-o-sffiH_ l0Ort 2!'?A zr?i� 2'OOOSpollcd ln procar roo% 100% loot6 100

l2,ooo

Coat Chargcd to Dcpertmcnt Total Equlvelcnt UnhBeglnnlng lnvsntory: Cort Unltr' Cortft

Cort from prccrdlng dcprrtncnt i c,roo

Factory520780

Totel cort h beglnnlng hvcntory 310,000Cort rddcd durlng currrnt prrlod:

Cort from prrcodlng drprrtmMetorlelrl.aborFastory

lO0.A &% /fo?l trOOO

\ I'OOO12,OOO

Totel colt eddrd durlng curront prrlod-.** :l38,too

Total cot cherpod to dcprrtncnt t4rpoo

lt8,ooo o,ooo Szoo ' 'l0Boo o,ooo 1,;o3,720 eFOo ,A5r38O 0,3OO .3O

3r.,:o

I

t7 ,

Fectort ovcrhoed .'......3,OOOSrOOO

Sttrt d rnd elmplctod $b pcrlod 6'900

Total cort trenctcrred to Flnlsh.d OoodrTrrndrrrrd to Spollod Goodr lnvcntory

rt rehregr vrlur ......Fo.o..........xr l OO

Cfrrrgr to Fectory Orrrhead for rpollrgc:Cort ol complctcd rpolbd unttrLor relvagc velur of rpollod unltr

Work h Procc+ ondhg hvcntorPCort trom prcccdlng departmcntMrtrrlelr.-lrbo r......................,..Frctory ovarhaad ..............-.......

Total cort eccounted for .'.................

ChapterT

P7 -O APPENDTX (Concludedl

Cort Accountad for r FolbwrTnnrforrrd to Flnlthod Ooodr:

From beglnnhg lnvcntort ----.Co.t to comPlrtl thb Pcrlod:

To complctr bcglnnlng lnventory..Strrt d end complet d thb perlodEndlng lnvcntoly.....o.......-...o.........Spollcd unltr.......-.,..-......-...........

Unltr Curront !6 Unlt Coct Total Cogt

31O,9OO

7201,O8O 312,700

28,980

3f 1'880

1 0 0

9 .20100 320

3 4,OOO2,4OO

6,90O

s49,O0O

1,8O08,90O

500100

100100

2,OOO2,O0O2,0002,OOO

oor0oo2,00o

1 0 0

60%60%

100%

100rA

100%100%

t r o.60

3f30

tl.oo

3l:o1.OO

32OO1.20

200300

AO,60

%t/.

%rh

. llumbcr of qqulvalent unltr of coot edded durlng thc curront perlod determined ar follows:

PrlorDcpL Cqt Metcrbb Labor Ovcrhcad

oGreoo21000

100

1,8OO6r00o

5ooroo

Total rqulvalent unltr ,POo I,OOO 9r3OO 9r3OO

n Cott rddcd durlng lhc currcnt perlod dhlded by thc number of cquivalent unlb of cogt addeddurlng trr curront pcrlod

l2l Work in Process-Finishing Departmeflt..'.'......... l8roooFactory Overhead Gontrol ..o........ '.... '-.-.......r.-...... 81o

Work in Process-Fabricating Department.. 18'810

Finishgd Goods tnventory'...........,.....o.......r.......... 41r68OSpoiled Goods lnventory.. '...... ' . ' . .o.......r.-......- ' .--.r l OOFactory Overhead Contro|.............. 32O

Work in Process-Finishing Department..-... 42r1OO

172

P7-7 APPENDD( .

(f l )OO( Chemical ComPanYDlstillaUon Department

Cost of Produstion ReportFor June

Chapter 7 -

QuanUty tlchcdub

Beglnnlng lnvcntory.iStlrtod thlr pcrlod

Tranrfcrrcd to Rcflnlng Dcpertmtnt .End In g Invcntory...,.-*,.--l-ot In pnocclr

Coet Charged to Departmcnt


Matedalr

, M8tortlb l^rbor overhced QuenUty1OO% z0.h 20% a,000

1Or00o20r0OO

1{,00o1OOV. 80% 80% 2'OOO

4,OOO20,OOO

Total Equlmlent UnltCost Unltrr Costs'

Labor3 3,824

90480

Total coct h beglnnlng lnvcntorYCoct addcd durlng currrnt parlod:

MaterlalrLaborFactory

t 4,200

sto,8oo 12,ooo 3 ,eO1/480 14r8OO .lO i7,4OO l4r8OO 50

$'t.50Total cort addcd durlng currcnt perlod..,,.-.......- 31e1680

Total coot chargcd to dcparbncnt 323,880

Chapter 7

P7 -T APPENDIX (Gontinued)t

Cogt Accountad for ar Followz Unltr Current 7r Unlt CostTransferrcd to Refl nlng Departnrenb

From bcginning lnventory ......*Cogt to completa thle perlod:

Factory overhead

Total cmt accounted for ..........-..-...

173

Total Cost

94,2OO

labor 4'000 BOV. S .10 32OFactoty overhead........ 4,OOO AOoh .50 1,600 S 6,120

Startsd rnd complstod this period 1O,OOO lOOo/. S1.SO 15,OOOTotal coet transferrsd to Refinlng Department SC1)12O

Work In Proce!1, cndlng Invcntory:Materlalg 2,OOO l00o/c $ .eO 31,800

2'000 8Oo/o .10 1802,000 Sooh ,50 go! 2,78'0

323,880

Labor

' Number of equivalent unlts of cost added during tfie current period determined as tollows:

To complete beginning inventoryMaterials Labor Overhead

0 3,200 3,2001O,OOO IO'OOO IO,OOO

2,OOO lr8OO lrgoo12,OOO 14,800 14"SOO

Started and completed thts periodEndlng InventoryTotal equlvalent unlts .,o..,..,..r

: :

- Cost added during the current period divided by the number of eguivalent units of cost addeddurlig the current period

t71

P7 -7 APPENDTX (Continuedl

QuanUty Schcdulc

Beglnnlng InventoryBccolved from DlcUllaUon Dcpartment

Trangferred to Flnlghed Goodr lnventoryEnd In g lnventory........-...'ar-......D'-..lost In procest

Cost Charged to Departmcnt

Beginnlng lnventory:

Labor

)OO( Chemical CompanyRefining Department

Gost of Productlon ReportFor June

Matcrblr Labor olrefiead QuanttY

339,540

lOO% 50% iOV. 2'OOO1a,0oo

:_6,0Og12'OOO

100.h 30ra 30'h 2,ooo2rOOO

ll'o9.9

Total Equlvalont UnRCct Unltr' Cocti'

Coct f rom preccdlng departrnent..,..-............-.-.-.-.--6. I S'SOOMaterlals 240

tooLaborFactory overhead........'.....,.. 9oo

Total coct ln bcolnning InventorY 3 a,8ooCost added during curont pcrlod:

Cost lrom precedlng department............... . SZtrtZO 12'O0O 31.7CMa terla lr .......,............ 1,Ua 12,OOO .12

1,740 1 l ,600 .151O,t '4�O 1l,600 .9oFactory ovcrhead .....

Chapter 7

t2.03

Total Gogt

Total cost added during currcnt prrlod.--- SSarTaO

Total cost charged to deparbnent

Cost Accounted lor ar Follorw Unltr Current % Unlt CostTransferred to Finlshcd Gooda:

From beginning Inventorlf .....,....Cost to complete thls perlod:

Started and completed thia pedod 1O,O0O lOO'/t 92.93Total coat transferrcd to Flnlshcd

GoodrWork In Procest, andlng Inventory:

Cost from precedlng department 2,000 'l00ch 31.76 33,520

335,150

Materlalr 2,O0O 1OO.h .12 24O2,000 30ch .15 90[abor....

Factory overhead 2,OOO 3}oh .9O 54O 4'390

939,540

$4,80O

[abor 2'000 5ot/o 3 .15 15OFactory ovsrficad..-,-. 2,OoO 50% '90 g0O 3 5'850

20,300

Total cost accounted tor .............,..-.

QEpterT 175

P7 -7 APPENDIX (Concluded)

I Xum,brr of equlvalcnt unttr of cot rddcd durlng thc currcnt prrlod dctcrmlncd er lollorrr:

HorDcpL Cot Hatcrbb Lebor otrcrhced

To complrta bcglnnhg hvcntory - O O I'0OO I'OOOtltlrtrd end completod $b perbd lO,OOO lO'OOO 10'OOO 1O'OOOEndlng 2,000 aooo ooo GooTotrl rsulvalent unltr..................., 12'999 i2'999 _11'099 l_1499

.l Cort rddcd durlng thr currrnt pcrfod dlvHcd by thr numbor of rqulvalcnt unltr of cort eddcddurlng llrr currcnt porlod

121 Workin Procegg-Refinlng DepartmeJlt,.......,.,.... 21r12oWork in Process-Distillation Dopartment... 21,120

Finishgd Goods 1nvOntoryo....o...r...............'......D...o 351150Work in Process-Refining Departmeflt.,.,... 35r15O

t76 Chapter 7

CASES

C7-1 Although improvement in product quality was clearly a stated goal at StarDisk Corporatlon, the company's reward structure suggests otherwise.

Employees cannot be expected to put quality first if rewards are dis'pensed for achieving obiectives that are often in conflict with quality

improvement (i.e., short-run production volume goals). The quality

improvemgnt itto* seems to have been focused solely on manufacturingaciivity, and the approach taken seems to have been to improve quality

by inspecting it into the product. Such an approach is inadequate,blcause it waits too late in the pnocess (i.e., after costs have beenincuped in manufacturing defective prcducts, instead of before) andfocuses on only one piece of the problem rather than the whole problem.

In order to turn the problem anound, top management must becomeactively involved. The reward structure should be changed to ensunecompatibil i ty with quality goals. Quality teams that include employeesfrom all business functions (product design as well as manufacturing)and all levels (labor as well as management) should be created to helpidentify quality problems and find ways to solve the identif ied problems.Top management should actively participate in these teams in order toemphasize the importance of quality, coordinate efforts between organi'zation units, and provide direction. Employees are more l ikely to becomemotivated when they understand the importance of qualitg and top man-agement participation and leadership underscore that importance. Inaddition, alt employees must refocus their efforts on serving theirrespective customers. The data presented in the case suggest that man-agers frpm the different departments put all their attention on meetingproduction volume goals rather than on meeting the needs of their cus-tomers (i.e., the department receiving their output).

Atthough product inspection should be continued, emphasis shouldbe shifted to preventing poor quality rather than detecting it. Preventionshould start with product design and extend throughout the entire manu-facturing process. Some things to be considered include:(al reducing the number of parts required in the product;(bl using higher quality materials;(c) using standardized parts;(d) using wel l -known product ion technologies where possible;(e) minimizing retoolings;(0 increasing employee training;(g) reorganizing the manufacturing facil i ty from production depart-

ments to manufacturing cells to promote teamwork and decreaseinventory costs;

(h) upgrading or modifying machinery;(i) install ing a statistical process control system to monitor production

qual i ty and reduce product ion var iabi l i ty .

Chaptor 7 t77

C7-1 (Concluded)

A few of the biggest and most urgent problems should be identif iedand tackled. In order to achieve results, effort should be concentrated ona lew costly problems that can be solved. Tackling too many problemsresults in dispersed efforG and little observable accomplishment.lmproving guality takes time and never ends. The company and itsemployees need some successes to build confidence and create themomentum needed to turn the quality problem around.

C7-2 Product cost may be increasing as a result of an increasing amount ofscrap, spoilage, and rework. Since the costs of these internal failures arenot measured, management cannot evaluate the significance of the prob-lem. In addition, since these costs are not measured, employees have noincentive to reduce or eliminate them. Treating scrapr spoilage, andrework as a norrnal production cost encourages such waste. As a conse-quence, overall costs rise. The company's cost accountants shoulddevelop a system of determining the cost of scrap, spoilage, and rework;implement the system 0.e., begin measuring such costs); and repodthese costs to responsible managers. lf the cost of scrap, spoilage, andrework is high, management should initiate a guality improvement pro-gram that concentrates on preventing these internal failures. This mayinvolve organizing employee quality teams to identify problems anddevelop solutions, locating new vendors to obtain higher quality materi-als, redesigning products to improve quality, modifying or upgradingmanufacturing machinery, training or retraining employees, andlor reor-ganizing the production processes.

CHAPTER 8


Og-1 . Joint products represenl lwo or more produds

sepaiated in the course ol the same processing

operation, with each produci having such rela-

live vatue that no one produd can be designated

as a maior Produd.A by-product is relatively minor in lerms of

torat vaiue and is derived incidsntally ftom lheproduction or manufac'ture ol onE or more maior

Producls.O8-2. Revenue from the sale ol by'producls may be

listed as olhet incoms, addilional sales revenue.

a deduction from the cost ol goods sold of themain product. or as a deduaion from the cost ofproduclion of the main Product-

O8-3. Yes, when by'producl revenue is deducled fromthe total production cost ol ths main product' lhe

unit cost of the main product is reduced; conse'quen t l y , t he cos t o f t he end ing i nven to rychanges also.

O8-4. The r€placement cost method can be used in

such cases. In this method, the by'ptoducls thatgo into making other unils are valuEd at ths cost

the company would have to pay il it wete to 90out on the market and purchase such materials'

O8-5. (a) Ths treatment described tor by'productsmay be justit ied when, relative to mainproducts, the revenue generated by lheby-producl is insQnilicant; when no clearlydel ined basis o l ident i fy ing by 'productcosls ox is t : or whsn the cosl of morerelined accounting would be disproportion-ato to lho benelits teceived.

(b ) The t rea tmen l desc r i bed has seve ra lshortcomings. All gross profil is ascribedlo maior products and is incorrscl as ameasure of total gross profit, since theinvenlor ies of by-products that may beunsold at the end ol the period wil l have azero value. Failure to assign values lo by'products may well mean lhey are not rsc-ognized as inventoriss at all. This' in turn.could lead to their wasls, lheft, or othermishandling. ll by-products are sold irregu-larly and invenlories are albwed to accu'mulate, bolh a material understatemont otinvenlories and a distorlion ol reported netincome of suqcessive periods may rssun.

QB-6. Yes, some of lhe in i t ia l manulactur ing cosls ,additional manufacturing costs (when by'ptod'ucls aro lurther processed alter separation), andpe rhaps even marke t i ng and admin i s t ra l i veexpensss may be charged to lhe by'produds.

O8-7. Methods for allocating the total ioint produdioncosl to joint products are:

(a) Allocate the pint oost on the basis of therelative market value of lhe pint producls.

(b) Allocate the Fint cosl by using an .werageunit cosl obtained by dMding the tolal joint

manulacturing cost by lhc total number ofunits produced.

(c) Al locate the jo int cosl on the basis o lweight factors such as size' ditficulty olmanufaciure, ot amount ol materials used.

(d) Atlocate the joint cost on the basis of someuni t o f measutement such as Pounds,lons, or gallons. ll lhe ioint products aremt measured in the same way' they muslbe converted to I denominator thal iscommon to all the unils Produced.

O8-8 . The marke t va lue me thod cons ide rs t he

revenuegroducing ability of lhe ioint produds by

assuming that each shouH be valued accordingto ils cost absorption ability. Resulling invenlory@sts are in harmony wilh revenue producingabitity and, il the combined joint producls areprofitable, the market value method avoirJs allo-

cating more cosl lo a producl than hs revenue;thus achieving a neutral elfect. However, this

method may be diflicult to apply if the matketvalue al the splitofl point is nol known.

The average unit cost method, while simple lo

apply when unils are measursd in l iks tsrms'lails to consider the heterogeneous nature of tho

individual Products.O8-9. Joint costs musl be allocated to ioint producls

when lhere is invsnlory to be costed.

O8-10. Not exaaly. A new manufadurer would do well

lo consull the Internal Revenue Service aboul

the methods to be used, so that an IRS agentcan make a decisbn before the tax rslutn is pro'

pa red . l n o the r cases , whe re an a l l oca t i onmethod has been apdied consistently lrom year

to year, to apply for a ruling would not be good

$ralegY.O8-11. The method used in cabulating unil costs pro'

duces the same unh cost lor all grades of lumber

sold. The owner is then led to bolieve thal lhe

same cosls in the sams ratio are attributable to

the low as well as the high grade number.h must also be recognized that because of lhe

inhotent nalure ol thE materials and the mill ingpromss, il is not possible to eliminate low gradenumber. Thus, the profitability of the oPerationcan be viewed best by considering the aggre-gale ol tovonue and costs of both the high andlow grades ol lumber, coupled with conttols toassure that all practical stsps are laken to obtainhigh quality logs and to mill them properly. A

I

I

I

I

LI

!

I|}

CtuptorB

highor prbo lor bgr rf,y b ,utttti.d h tonrr ofr gnclrr erncrnl of ltigh grrado lumbor'

6-1?4 Fq debi'rcrt nnoh,itrg, iinl ab ero inolovanlrnlo{ thoy arc rlgrslcd b changc !| t r..ui

179

of h. docitixr. Uaualty, stly co.ts bcywtd thrlplldl ero rebvanl

Chapter I

E8-l (f l Net revenuo method:

PGRGISES

Grogs ngvenuo lrom sale of by-product..............Productlon cogt aftgr soparatioll.......'.............r..Ngt rgvgnue film sale of by-product'.................

(21 Market yalue (reversal cost) method:Final market valuaLess: Profit ($eOrOOO r lOTo)........... $2,ooo

MarkeUngandadministraUveerpetlsos... 2'OOOPrpductlon cost aftor 8oparaUoJl.............. 5'OOO I,OOO

$2O,OOO5,OOO

glg,ogg

$2o,ooo

Jolnt cost allocated to the by-produGt......'.........

E8-2

(1) Calculation of manufacturing cost betono separation for by-products,

By-Product

A B

Sales. r.............. $61000 $3r5oo

Manufacturing cost gftgr separatioJ| ..............,...,....... $trlOo S 9OoMarketing and administrafive oxpenses..........,.......... 75O 55OProfit allowance (A, l5%i B, 12oh1 ..........,........,,.......r. 9OO 42O

$2,750 $1,87O

s11,OOO

Manufacturing cost beforg separation,.......,...r..,..o..,. S3r25O 9I'639

L

I

IIt'

I\>

II

!

Chapter I

E8-2 (Concf uded)

t2l

t8 l

\

LOGAN COMPAI{Ylncome Statement

For Month Ended Apri l 3O

MainProduct

$zs,ooo

s32,6201 1,5OO

$30,880

6,000S24,ggq

By-ProductA Total

s3,500 sg4,soo-

b

Sa lgS i r . . . . . . . . . . . . r . r . r r . . . . . . . . . . r r r r . r . . . . . r . . . . r . . . . .

Cost of goods sold:Before separation (requirement (1)).Aftgr se paratiort...,..................,.,.....,

GrOSS p rOfi t . . . . ' . . . . . . . . . . . . . . r . . . . . . . . . . . . . . . . . r . . . . . .Less marketing and administrative

gxpgnsgs r . . . . . . . . . . . . , . . . . r . . . . . . . . r , . . , . . . . . , . . . . r .

Profit from operationS..........,.........,....r..

E8-3

s6,0oo

t

\

Productt t ,U l r r r r r r r r r r r r . . . . . . . . . . . r . .\t, 4 . . . . . . . . . . . .

YI r a . a a a a a r a . . a . . . . a a a . . . r . a a a . a a a . r . r . a a r r . . a a t

,G r r r e r r r o r r r o a a a a a a a a a a a a a a r a a a a a a r a a a a a a a a a a t a a a a a r r a r r a t a a ,

? a a a lI V r C t l o r r r e o . . . . . . . . . . . r . . , r . . r . . . .

s44,12O $4,350

s3,250 51,6301 , 1 0 0 9 0 O

$1,650

750s 900

s37,5oo13,500

$2,530 $51,000$ 97O s33,5oo

550 7,300$ 420 s26,200

Apportlonment ofJoint Production

Gost's 64,000

48,OOO32,00016,000

$160,000

$ 6,00

2.AO$ 4.00

2.OO$ 2.00

91'009

Market Valueat Split-Off$ 8O,OO0

6O,OOO40,OO020,000

s200,000

'9Ln9,00O. = goo/o

s200,000

E8'4 z: Market valug pgr untt . . . r . . . . . . . . . , , . . , . . . . . . . . . . . , , , . . . . . . . . . r , .Gross profit, consisting of:

Operat ing prof i t . . . . r . . . . . . , . . . . . . . . . . . , . . . , . . . . . . 31,OOMarkeUngandadministrat iveexpenses.o. . . . . . . . . . 1.OO

Further processing costValue per unit of by-product at split-off..............Value of by-product to be credited to joint cost

(2,OOO uni ts x 52)

rI

I

\

ta

I

E8-4 (Goncludedl

X and Y:

UttlmateMartetValucpor

Product UnR

E8-5

{1}

Product$4.3o

6.OO6.OO

Spllt-Off

ProcessingCostAfter

$ 4O,OOO7O,OOO

ProcessingGostAfter

Split-Off$3O,OOO

2{,OOO27 |OOO

991'o09

Chagter 8

Apportion-ment ot

JointProduction

Cost'Units

ProducedIrOOO

I O,OOO

UltlmateMar|cetValuepor UnitsUnit Produced

UttimateMartetValue

Hy?o-theUcalMarkotValue

$eo25

xY

318O,OOO25O,OOO

UltimateMarketValue

$129,OOO99,OOO78,0OO

33O8,OOO

$l2o,ooo18O,OOO

$ 8O,OOOl20,ooo

s4lO,O{)q sllO,OOO - sstoo,ooo $2oorooo'r

' Ratio to allocate cost prior to separauon :19'999 = 3$3OO 'OOO 3

..$2O4,OOO cumulatlve foint cost less $4'OOO value of credit for by-producl

Hypo-theticalMarketValue

Apportion-ment ol

JointProduction

Cost

Esc

Total

3OTOOO15,OOO13,OOO

$ 99,OOO75,0OO5l ,ooo

$ 66 ,000 '5O,OOO34,OOO

Net eflgct of sgparable processing .""""o""""t

Conctusion: Based on tho Information given, S should be sold at the

split-oft poinL

$(3,7sO)

s225,OOO $15O,OOO

'$15O,OOO + SZ2S'OOO= 2/3; $99,OOO r 213 = 966'000

l2l Differentlal revenue (t5rooox ($6.60'$5'25)1"""""""""'t""Diffgfgntial COSI... . . . . . . . . . . . .r . . . . . . . . . .o.. . .r . .r . . . . . . . . t tr t t t""""""t t ' t t" t '

$20,25O24rOOO

CGA-Ganada (adapted). Reprint with permission'

f

t83ClvpterS

II

II

l>

I

I

EiEgg3q;lgfcl Fs Frfuil is 3Ei:EI iFfli]IiFiti irqgl$fiil iaqfllr

i'sgl $allfll#l ffflfll

I\,

sNFtlooo_ooI,o+0o0_€oq,NJ'

r oeo0(,trItJ

T'9b

ct

Ea

or i r ! 0c 9E 9C L Et o9 . v. L o= E DcL r0d =

o d+ o..t O

r !

cil ssg!r; il ;' '

uJ I

H?

oI

c'lrl

b

\

\

i< !o o 6

F

\

___ __--t\

,u

E8-o (Conctudedi

t2l

Diffgrgntial revgnue per unit ....,""""""""""""""""'Differential cost Per unit:

$25rOOO * 1rO0O.... . . . . . . . .r. . . . . . . . . . . .r. . . . . . . . . . . . . . . . . . . . . . . . .360TOOO + 31O0O..r . . . . . . . . . . . r . . . . . . . . . r . . . .o . . . . r . . . . . . . . . . . . . . . .

Sl O5TOOO + 5rOOO..... . . . . . . . . , . . . . . . . . . . . . , . . , . . . . . . . . . . . . . . . . . . . . .

ProductA B

900 $rs

2520

Chwter I

$zsc

27

3,OOO4,OOO3,OOO

$ 30,ooo4O,OOO3O,OOO

sl oo,ooo

$ 2o,ooo3O,OOO5O,OOO

s 4

$rs1 4

$ r_

TotalProduction

Cost

$ 5o,ooo7O,OOO8O,OOO

s2oo,ooo

$1s

(3)

(ln the long-run decision to invest in the capacity (facil i t ies) needed toiurther process B, the fixed cost should, of course, be considered.)

(4) No. From part (31, the benefit of further processing is 91 for each of the3,ooo units of b,

-or $g,OOO. But that must be compared with the benefit

of the alternative use of facil i t ies, $6,000 - $1,OOO = $5'O0O of short-runbenefit. So it is better in the short-run to selt B at split'off and devote thefacil i t ies (the ones that woutd have been used to do B's further process'

ing) to their alternative use.

CGA-Canada (adapted). Reprint with permission'

Differgntial rcvgnu€................r.........-.Differential cost: ($60,000 - $18rOO0) + 3'OOO ... ' ."""

Bgngfit to furthgr processin$ .........,............... ' .o""""'

E8-7 (1) Average unit cost method:

units ooT;*.1:ilf""t H:,'ffil:

Product Produced Production Cost Split-Off

ABc

$ (5)

Conctusion: Only product Bts differential cost exceeds its differentialrevenue. Therefore, only product B should be sold at the split-off point.

Yes, because the short-run impact ol further processing of B is then:

Total sl oo,ooo

ChagterB

E8-l (concluded)

(21 Market value method:

A

cTotal.....

ProcessingGostAfter

Split-Off

$ 2o,ooo3O,OOO5OTOOO

s1g9'oog

3.02.O4.O2.5


s 4O,OOO8O,OOO4O,OOO

Joint CostPer Unit

s1.401 . 4 01 . 4 01.40

Weighted= Units x

15 ,OOO4O,OOO6O,OOO25,OOO

14O,OOO

Apportion-ment of

JointProduction

Cost$ 25,OO0'

SOTOOO25,OOO

JointCost

s 7,OOO28,OOO21,OOO14,OOO

s?o,ooo

per unit

JointCostPer

WeightedUnit '

$.so.50.50.50

185

TotalProduction

Gosts 45,ooo

8O,OOO75rOOO

JointCost

I 7,5oo2O,00o3O,00012,5O0

$7O,OOo

UltimateMarket

Product Value

I 60,00011O,OOO

9O,OOO

$26q999

5,OOO2O,OOO15,0O0l O,OOO

Joint cost

$169,009 sloo,ooo 9?oo,00g'

$l oorooo * $160,000 = .6zsi $4o,ooo x .625 = $25,ooo

E8-8

(1) Average unit cost method:

UnitsProduct Produced

' Joint costTotal number of units produced

(21 The weighted average method:

UnitsProduct Produced x points

5,OOO2O,OOO15,00O1O,OOO

_so,o99

KLMN

tr|ffi = $1.4o

KLMN

$70.oooiAopoo

= S'5o Per weighted unitTotal number of weighteO units

)

186

l

E8-8 (Concludedf

(31 Ttre market value method:

Product

UltlmateMarketValueperUnit

s5.50 .1 .601.503.OO

UnitsProduced

SrOOO2o,ooo15,OoolO,OOO

UlUmateMarketValue

$ z7,soo32100022r5OO30,0oo

ProcessingCostAfter

Split-Off$ 1,5OO

3,OOO2,500 -5,0oo

Hy?o-theticalMarketValue

$ 2o,ooo29,OOO20,0O025,OO0

Chapter I

JointCost

Allocation$18,2OO

2Or3OOl4,oo017,50O

MaterlaltCost porProduct

Unlt

ConveraionCogt perProduct

= Unlt

37.5o6.00

KLMlf

Joint costHypothetlcal market value

E8-g Materials cost:

Welghtedproduct Unlt r Polnta = Unltr

st t 2.ooo sl2,ooo sl oo'ooo $7o,ooo

- $7o'ooo - .7o = Tooh$1OO,OOO

lo,ooo8,0oo

x topoo 6Y 8,000 1

32

xY

30TOOO

16,00O

50,OOO

32,OOO

82,OOO

MatsrlalrCost pcrWelghted

Unlt =

ConverslonCoct par

WclghtodUnlt

31.5o1 5 0

TotalMaterialg

Coat

360,OoO32,000

392,O00

TotalConvcrrlon

Cort +

3 75,00048,O00

3123,O0O

ProductUnltg

1O,OOO8,000

ProductUnltr

1O,O008,00o

$64

322

40,OOO

Gonversion cost

WelghtedProduct Unlt r Polntr = Unltt

CtnpterE 187

Tot81..,.... 20 00O

PROBLEMS

$53O,OOO slr3OOrOOO

I

P8-t

- ' (ll Average unit cost method:

Apportionmont Processing TotalUnits (kgl of Joint Cost After Production

Product Produced Production Cost Split-Off Cost, B. 1OO0O S2O5,OOOr $ 58O,OOO $ 845,OOO

c f o 0oo 2o5,ooo 72qooo 985,OOOgl,83g,ogg

'Jolnt cost of $59O,0OO less $€O,OOO by-product credit ($f S r 4 OOo kg) =SS3O,OOq $S3O,OOQ + 20 OOO kg = $26.5O per unig $28.50 r 1O OOO kg =$265,00O.

Total Production Units in Finished Finished GoodsProduct Gost per Unit Goods Inventoly Inyentory

B $84.50 I OOO kg $ B4,SOOc 98.50 5OO 49,250

9193,?sg(21 Market value mothod:

Apportion-Processing Hypo- ment of

Ultimate Cost theticat Joint TotalMarket After Market production production

Product Value Split-Off Value Gost CostB $1,300,ooo $ 580,ooo $ 72o,0oo $318,000 $ 898,OOOc 1,2OO,OOO 720rO0O 4go,ooo 2l2,ooo 932'OOO

Total...-.-. $2Ego,ogg 91,3og,ogg $tggg,oog $sgo,ooor $t,B3o,ooor Joint cost loss by-product credit SS3O,OOO * $1,2OO1OOO = .4417; .441T x

$72OrOoO = $318,ro24 = 8ppnoximately S3l8rOoO; .4417 x $ego,o6o =$21 2r0i O = approrimately $Zi 2,OOO.

Total Production Cost ofProdust cost per unit Units sold Goods Sold

B agg^Bo , ooo kg $ 8og"?ooc 93.20 e 5oo 885;4OO

$1,693,6o0

{\

tffi Chapter I

P&l (Concluded)

(31 Neither the market valuE method nor average unit cost method of allo-cating joint cost is a more accurate way of determining ioint productcosts. Joint cost, because of its nature, cannot be accurately split upamong ioint products, sincs joint cost is incurred to producs ono or all ofthe ioint products. That is, ioint cost cannot be reduced by dropping oneof the products. Thus, to make decisions about joint productionr onemust look at the revenue and separable cost of each product to deter-mine whether it ls profitable on the margin. In such decislonsr foint costls not relevant. The only purpose for allocating ioint costs is to determinea cost for inventories on the balance sheet and for cost of goods sold onthe income statement.

For financial statement purposes, in most situationsr better argu-ments can be made for a value-based allocation basis rather than aphysically-based one. At times, the physical base can result in absurdallocations of costs among products because of the disproportionaterelationship between the relative value of the joint product and the unitsproduced, relative to other ioint products.

189ChaptorB

o t o t lo l 0 l lOJ 'f,JInl$ll3alo ln l l'l$llolc, l lIJ tJI$lBllo lo l lot c)tlo to t lFlfill

ooao

o

0o5)tro

oc)oI)|1,

ooou)F

, o cl o ct o nl l j FI F E

ol B oo oo nf , F? o{t6lo oo c )o oo ra)o |1 ,N r!,

o o0 0q ql ()u)O F

t)

o oo oq qo oCD| . )

ooqoCD

o

ss Els! 3{rflE3l

€;=€*li6c* l6 l l

0 0 1o o lo 0 to o ln l ' lg ) |

oIo_ct!t

&t lo00c';!.

s AO . -! t 0 t -

i :8-6x 0 l lX t o a- - N xP { D 56 r r d. g l o F

r C { r, o :R x Po o o

I q EC { ( l l -Q - { tF o . t ?

ststlo t o t l'lgll

I-fqrAa1axSi'lr-qfle - l o o o t o t tE E 318 8 8l8lls s slgr Flgll

d

oF

F i it : 3

F i i I i? a ! g5-!3 iO i l C l yo r ! g o o

egj :! s ! 63 B : *erg g

sl

*sleee= g l u i d d

q l r r c l

! lss lqeq= E s b l R P .

sJ 3tI

e lo l5 l

N S l o J Fob tlo . = N

'_\\

190

P8-3

(rl

ProductAlpha.. . . . .

Gamma '..

Tota1.........

UltimateMarketValueperUnit$ 5

1 2

UnitsProducedl

46,2OO

4O,OOO

MarketValue

ProcessingGostAfter

Spllt-Oft


Chapter 8

JointCost

Allocation3

t$zgt,ooo 1$t 15ro6oe r

38'OOO slgs,Ooo $ 44,4OO23r66O

4SOrOOO 1651000 315,OOO 75,600

Alpha

Beta

s23,76O8,1OO

$15,660

s726.66O $220,O60 S5OO,OOO $l2O'OOO

rDiagram of Flow of Pounds (not raquiredl$?8,OOO

$23,660(41 46,200 pounds

(2) 66,00O pounds

$120,OOOl9,8OO pounds

(11 11O,OOO pounds

$l65,OOO Gamma(31 44,OOO Pounds

-4'OOO Pounds lost

_4O'OOO pounds'

'Computation of pounds of good output of Gamma:Le tX= loodou tpu t44,OOO - . lX = X{o,ooo = X

zMarket value of Beta (19r80o pounds x $1.2O| ...r,.................Less marketing expense of Beta ....r.........."......-...............'...

Ngt rgalizablg ValUe Of Bgta.'....r..............o.....o......... '..r.r......ro

sThe joint cost is 24oh of the hypothetical market value.

Chapter I

P8-? (Concluded)

(2'�1

t 9 l

BROOKS CORPORATIONStatement of Gross Profit for Alpha

SalgS (38r4O0 poUndS X $5) .. . , .r. . . . . . . . . .r. . . . . . . . . . . . . ' . . . . . . . . .r. . , .Productlon costs:

Allocated joint cost

s192,OoO

t a . a r a a a r a a a a a a a a a . a a sl 02,ooo38,O0O23,660

Gross cost of productlonLess net realizable value

(11Sa|es.....................Cost of goods sold:

Joint cost ($236,000 - Bynd net revenue($l1,OOO - $5,000 separable cost))..,.

Separable cost ($215,0OO - $5,OOO forBynd) . . . r r . . . . . . . r . . . . . . . . . . . . . . . . .

Total cost ..........r.r....e...rrr.............

Gross profit (12% of sales).......,o,.....

(21Ultimate sales va1ue.....,..,r..r..Less 72oh gross protit .........t..,.....,Total cost..,....................Separable cost ......................Joint cost allocation......

s163,660l5rgOO r

$147,7602gr552t

Jana Reta Total$2OO,OOO $3OO,OOO S50O,0OO

$23O,000

21O,OOO 2.1O,00O

s44O,OOO$ 60,000

Total Jana Reta

of BetaNgt cOSt Of prOduCtlOIl.... '.. '....... '.....ro.....,.........r......... '...rLess gnding inventory.....r.,...............,...........r.,,..............Cost of goods so1d...........rr.r........ ................,...,GfOSS prOf i t . ' . . r . . r r r . . . r . . . . . . . . . ' . . r . . . . . . . . . . . . . . . . r . . . . . . . . . . r . . . . . . . . . . . r r .

1 1 8 , 2 0 8

s 73,792

'Net realizable value of Beta equals the revenue fnom Beta (S24,OOO) less itsrelated marketing expense t$erf OO).

nEnding inventory eguals the net cost of production (S147,760) times 2O%.

P8-4

$5OO,OOO6O,OOO

$44O,OOO21O,OOO

S2OO,OOO24|AOO

$t76,OOO

$3OO,O0O36,000

$264,0O021O,OOO

$23O,OOO 9176,000 $ S4,OOO

(31 Gross profit for Jana and Reta-see line 2 of requirement (2),

t.

192

P8-5

(ll UltimateMarketValue

Chapter I

Apportion-Processing HYPo- ment of

Uhimate Cost thetical Jointper units Market After Market Produetion

Product Unit Produced Value Split-Off Value Cost'

spr--g 3o.oo Too,ooo S2,8OO,OOO $ 874,000 $1,926'000 $ 960'000 *psT-4 6.00 35O,OOO 2rlO0rooo 816,000 lr281rO0O 640'000

$4,9OO,0O9 9!,690,009 99,2lO,OOO 9!,8OO,OOO

'Joint production cost ............ $l rTO2rOOOLess cost assigned to by-Product

RJ-s (f TOrOOO gallons r (S.7O*S.1O)!....-..... 1O2'OOO$1,8oo,ooo

"(51,926,000 + s3r2lO,OOOl rsl ,6OO,dOO= $960'000

l2l sPL€ PST-4 RJ-s

Jointcosta1toc3tion..................r............ $ g6OrOOO $ 6401000 $lO2,OOOAdditional processing cost.........r,.......... 8741000 81qr090

Total cost $1,83{,OO0 $1,456,000 $lO2,OOODivided by galtons produced.......,........., TOOIOOO 35OrOOO lTO,OOO

Cost per gallon....

lnventory costing:

s2.62 $4.16 $.go: : : :

November I inventory (gatlonS) ....... l8rOOO 52'OOO 3'OOONovember production 700,ooo 35o,o0o 17o,ooo

7t8,OOO 4O2,OOO t73,OOONovember sales 650,000 325,OO0 15O,OOO

November 30 inventoil[.................... 68,000 77rOOO 23rOOOCost per ga||on...o.......,.,.................. $2.62 $4.16 $.OO

Cost assigned to November 30finished goods inventory....,...,.... 9._!-Z91169 $ 32or32o $ l3'8o9

(31 Per gallon sales value beyond the split-off point.,.... $6.00Per gallon sales value at the split-off point.......,...... 3.8o

--Diffgrontial salgs value .r......,.........r..r...r.....r,............ 52.20Additional processing cost per gallon

(S816rOoO + 35O'OOO gallons).....................r.......... 2.33

Per gallon gain (loss! of turther processinft.............. l_!:!31

Alderon lndustries should selt PST-4 at the split-off point, as the difforentialnovenue of the sales beyond the split-off point is less than the additionalcost of further processing.

-T

I

193

I

I

Chaptor I

( ' t o lr \ l O lF . l !o lo t F l

l g , lt F tl ral

g lgtl- l - l l

o t F l l-lsll

I ( ' o lI F o l

F O I- - l

o o ts lI

Folt\1\N

I

No(o{o('{,

q t l(oilco lla? llEllo t lo t ln t lr t l(? t l

5l lo r l(o t lF I Ieil$tl8 i l t l 8 lol l ( ' , o lr-11 d oilS l l o l

8il I tEtlo l l o l o l lql l d ld l l$ll E l8ll

o r o r lI lalr t l r t l l

tEil: : ia a

; : :o : : :

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- - . - - r r

*Ecgs i- L Y F -g ^ r - b- u b . - L

! f i ?E e iE g , [ H ; t- = | / ) t r . U ' :I I o o .o 9- !1t, - 0 E? * P t r ' a fHE A€g E^ - - - 6 -

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0 0 t oo o l oo-o_l o_c0 0 lCon c ' t @& ts,

El=slflE.'l

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o o l o lo o t o lo o l o l

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t t :

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J

!toEt,ooo(t

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ttGoLo0

ooG

!tctl,Lo.ctG

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! t :o :L .

o :C L :o :l - .

a !- o

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6=,oC)

b io :E iE :c t t.- t!

sic ot r >. 6 oo Ff 6

*!3 r- cs a Uc L L

.s3r_5o=

gy E

E ;F O

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E E *q l r r O= o t r: O EE q FP(v) cr- N or . - EU , +6 8 :E 3 €o F t t59? O

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fit

: !> :O 3E :

;, 9EH s tE'E.9P c tL. - f€ frso' i 'Et r l : t

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194

P8-O (Continued)

Additional GomPutations:

Equivalent Production:

Transfgffed oUt " i""""" ' r"""""" 'o"""""r""""" '

Ending inventory (work this period)""""""""""

Unit costs:

Matgrials, Process 1 ............ '....""""""""""

Labor and factory overhead, Process 1""""

Total cost to be accounted for, Plocess 1 ""

Labor and factory overhead, Process 2.......'

Labor and factory overhead, Process 3........

Cost from preceding department, Process 2

Cost from preceding department, Process 3

Joint cost apportionment:

Chapter I

Labor and Factory OverheadProcess 2 Process 3

9,OOO units 20'000 units'l,000 1,000

21,OOO units

= $1.8125 Per unlt

= $ .9375 per unit

= S2.g00O Per unlt

= $2.0000 Per unit

= S3.0ooo Per unlt

= $2.0769 Per unit

= $3.2391 per unit

Process 2 Process 3Product Product

Sa lgs p r i ce . . . . . . t . . . . . . . . . . t . . . . t t t " " " " 1 " t " r t t " t " r t " " ' t " t t " t " " t l "

Less processing cost subsequent to split-off point r"""'

Hypothetical market value at split'off point:

58 x 1Or00O units transferr€d .....'............r""""""""

S12 x 20'OOO units transferlgd ....................""""""'

Joint cost allocation:SSO,OOO x .2625'.

S24O,OOO r .2625

. S84,OOO -. (S8O,OOO + $24O,O00) = -2625

$ 1 02

$ e:

$8O,ooo

$1s3

$te-

9240,009

1O,0OO units

s58,OOO

32,OOO$30,000

32,OOO

$ga,ooo30,ooo

92,0OO + $18'0OO10,0oo

i3,OOO + $60'O0O21,OOO

s27,OOO

13,OOO

$74,500

23,OOO

s21,OOOs63,OOO

f- Chapter I

: - P8-6 (Continued)

.

'"ttt?"t",:oo + lo,ooo units............o.. s2.1o

$691000 + 2o,ooo units :

s3.15-

.- Transferred to finished goods storeroom:Procgss 2.............,r.......,.............r.... 54.O769 x Iroo0 units = $ 361692

, Pnocess 3.........................r............... $6.3864 x 2OTOOO units = S12T.T2Z,

'S6.3864 x 2O,OOO units = $1271728, To avoid a decimal discrepancy, the costtransferred to finished goods storeroom is computed as follows: $137r5o0 -

s S9,773 cost assigned to ending inventory = 51271727.

r *ot[,T":T"";:'-"noins inventory:

Cost from preceding department...,.. $2.0769 x 4,OOO units = Sg,gOBLabor and factory overhead.. . . . . . . . . . . . . S2.O0OO x l ,OOO uni ts = S2,OOO

- Process 3:. Adjusted cost from preceding

. department..............,.....,...,.......,... 53.9864 x 2'OOO units = $61723*

. Labor and factory overhead.. . . . . . . . . . . . . $3.oooo x 1,ooo uni ts = S3,OOO

(2t fii:flTHllSl;:;;;;;;';':::::.::::::::.:::::::::.::::.:. "l;BBlWork in Process-Process 3 ..,.... O3,OOO

Work in Process-Process 1........ 8B,OOOFinished Goods

Work in Process-Process 2. . . . . . , . . , . . . , . . . . . , r . . . . . . . 36,692Finished Goods.. . . . . , , . . . . . . . . . . . . . . . . 1Z7.TZ7

Work in Process-Process 3........ 12Z,TZ7

195

Chaotor I

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F O

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=

oo

t

P 6

I

:\ - .

III

E

Chapter I

P8-6 (Continued|

Additional Computations:

Equivalent production:

Thanslgrrg d o ltt .................. "..r..... t.......o...t... r't....

Less beginning inventory (all units) r..........r........

Started and finished this period........,.,.......... ' ...Add beginning inventory (work this period)........Add ending inventory (work this period).............

Unit costs:

Matgrials, Process 1......,,......,.. 'r..................

l-abor and factory overhead, Process 1........

Total cost to be accounted for, Process 1 ....



Joint cost apportionment:

197

Labor and Factory OverheadProcess 2 Process 3I 'OOO units 2OTOOO units3,OOO 3,OOO6,000 units 17,OOO units2,OOOl,OOO

I,OOO units

358,ooo

units

= 51 .8125 per un i t

= S .9375 per un i t

= S2.8OOO per uni t

= $2,oooo per uni t

= S.3.OOOO per unit

Process 2 Process 3Product Product

!

I

t-2,OOOI ,OOO

2O,OOO

32,00o33o,ooo

32,00o$€t4,ooo

3O,O0O

$18,OOO

9r0oo36O,OoO

20,OOO

Sales price ,ro,.. . , . . . . . . . . , . . . . . . . . . . . . . . . . . . . . . ' . . .Less pnocessing cost subsequent to split-off point ........

Hypothetical market value at split-off point:$8 r 1O,OOO units transferred .....

$12 r 2OrO0O units transferred ..,....,......,.....,,....,.r....

Joint cost allocation:SSOTOOO r .2625t. . . r . . , . . . . . . . . .

S24O,OOO x .2625

r SB4,OOO + (S8O,OOO + S24O,OOO) = .2625

s lo2

s l 53

$_g

99o,ooo

s2lr9oo

s 1 2

9319'099

99!'o99

r - lIr

tw

P8-6 (Goncluded|

Unit cost:$21 rooo + I Or0oo unitS .....r.......r.............r.....r.o...o'.'..

$6{lrOOO + 2OTOOO UnitS r............r...............'......,...."t'

t4l Finished goods.............r.............r.........................I ' WOfk In PfOC.SS-P.OC.SS 2.,......o.....'-""""""""

Work In Process-ProcgSg 3 """"""'t"t"""""""r

WOf k I n PfOC oSSl-PfOC g!l!J I ..............t.o"r" "o"'

Finishgd Goods .. . . . . . . . . . f . .rrrrroIrroirr.r . . . . . . . . . . . . . . .r . . . . . .

work I n Proc gss-Procesa 2................'.........r.

Finighed Goods ...........r.............,.......... ' .,.............work In Proc gss-ProcgsS 3......................'.....

Chapter 8

$2.1o

4r0oo21r00o63,OOO

88,OOO

36,8OO38,600

727 1860127 $60

s3.15

CASES

c8-1

(1) The markot valuo method of ioint cost allocation assigns cost in pnopor-

tion to oa;h productb markel Yaluo to all products as follows:

Market Value of EachProduct at Split-off

Total Market Value ofAll Products at SPlit'off

Jointx Production

Gost

lf thera ls no market valuo at split-off, then the value at the first sales

point, tess separable cost, lg used. lf ioint products have a markot valuo

at the split-off point, the margin for ail ioini products at the split-off will

be the samo.

The joint cost i3 altocated in proportion to n8v€nuo gensrating ability (as

contrastod to some quantita*re'measunes not r€lated to rsvenue)'

Therefore, this accomplishes Jim Simpsonb obiective that inventoriabls

cost shoutd be based on each productb ability to contribute to the recov-

ery ol ioint production cosltt

Chapter I

C8-1 (Continued)

(21 (a) Because both main products have a marketpoint, this value, rather than the tinal salesthe ioint cost

199

value at the split-offvalue, is used to allocate

Joint production cost to be allocated ..r.t..................Net revenue value of by-product (24OrOOO x (.55 -.05))

Joint cost to be allocated to main products

Market Value at Split-off

Product Units Produced Per Unit Total

$2,640,00012O,OOO

93,s20,009

Percentageof Total

Market Value

Pepco-1......,.r.r.......... 900r0OO gallons

Repke-3............r.,...... T20rOOO gallonss2.00

1.50s1,800,oo0

I ,080,0OO62.5o/o

37.5

s1,575,000945,00O120,O00

s2,880,OO0 100.0%

Allocation of Joint CostNovember

Pepco-1 (s2r5Z0r00O x .625)...........................Repke-3 ($2r52or000 x .375) .,...,.......,.....o.........r.......SE-s ............ a a t a a r a r a a a a a a a a a a a a a a a a a a a a

(b)

November ioint production cost.... 52,640,000

Pepco-l Repke-3 SE-s

Allocation of joint productioncost. . . . . . . . , . . . . . . . . r . . r . .

Additional processing costaftgr split-off .....................r'

Total manufacturing cost.........Divide by gallons produced......Manufacturing cost per gallon.

Inventory costing:lnventory November 1 .,......November production........,.I nventory available ..,r.o.......rNovgmber salgs ..................Inventory, November 30 ......

Manufacturing cost per gallon.

Cost of f inished goods

s1,575,0OO

1,800,000s3,375,000

90o,0oo

s 945,000 s120,000

720,OOO

s 3.75

20,000900,000920,000800,o0o

s1,665,00072O,OO0

$120,ooo24O,O00

50,000x $.50

9_23125 g___-99

40,000 10,000720,000 24o,ooo760,000 250,00070o,o0o 200,000

120,Ooox S3.zs

6O,O0Ox 52.3125

inventory :_glggfoo S13B,ZsO S25,ooO

T

E

Chapter I

C8-1 (Gonctuded)

(31 When SE-s becomes a main product, the joint production cost would bealtocated proportionally to all three products on the basis of the marketvaluo of each product at the split-off point. The net revenue of SE-5 willno longer be deducted from the joint production cost prior to aflocationbecause SE-s will no longer be a by-product.

c8.2

There are a number of areas that appear to be problematic in Hayes Products'costing and decision-making pnocesses. These areas, which are outlined below,need to be reviewed and perhaps modified.

(f l The use of the average unit cost method for altocating joint product cost.Units produced, although a simple method of allocation, is not necessari-ly the best method for apportioning cost across joint products. Thismethod can distort the cost-value relationship of a joint product and givean ospecially misleading picture of the gross margin provided by a iointproducl For example, assume that in meat processing of cattle, oneproduced ground beef and steaks. Each pound of ground beef would beassigned the same ioint cost as each pound of steak, yet the sales pricesper pound are quite different. For this reason, it is better to use somevalue-related allocation base, such as the market or sales value method,to allocate cost.

l2l Inclusion of all spoilage costs in product cost. Spoilage in productionpnocesses can be assessed as normal or abnormal. Whether spoilage isnormal (expected) or abnormal (unexpected) should guide the way inwhich spoilage costs are handled in product costing. Normal spoilage ispart of product cost since it is planned for in implementating the produc-tion technology. Abnormal spoilage should be written off as a loss in theperiod, and if the amount is material or the spoilage continues over someperiod, the source of spoilage should be found and corrected. HayesProducts does not seem to be distinguishing clearly between normal andabnormal spoi lage. This needs to be studied, and some changes need tobe made in the appl icat ion of spoi lage costs to product.

(31 Decision making based on fully altocated cost. Hayes appears to beabout to make a product line decision on fully allocated cost data withioint cost included. Decisions with relation to any of the products shouldbe based on the separable contribution margin of products, i.e., separa-ble revenue less separable variable cost. This problem needs to belooked at closely since the al located joint cost f igures should be usedonly for f inancial statement purposes.

Chaptor I

cg-3 ,

(1)

c8-4

201

I

t-

L

The market value mothod does not proviile additional data for the rlsr-keUng deeision. Joint cost sllocation is necessarily arbitrary and'although used lor financial accounting purposes, ls not relevant to thedecision to market DMZ-3 and Pestrol, The VDB joint cost is irrelevant tothis decision because it ls incurred in both cases, i.e.' the method of costaltocafion has no impact on tho differential profit. Talor ChemicalGompany should calculate the differential prolit of its alternate choicesby comparing the differential rsvenues and diflerential costs.

Talorb analysis is incorrsct because it incorporates allocated portions ofthe joint cost of VDB. The weekly cost of VDB (3246,000) will be incurredwhether or not RllA-2 ia converted through lurther processing. Thus' anyallocation of the ioint cost of VDB is strictly arbitraty and not rslevant totho decision to market DMZ-3 and Pestrol. Talorb decision not topnocess RNA-2 further is incorrect The decision results in a loss of$2O'OOO in profit per week, as indicated by the following analysis:

Revenue'from further processing of RNA-2:

(21

DMZ-$ (4OO'00O r ($57.5O + 1OO)|,...................,..............Pestrol (40Or00O r ($57.5O + loO))'... 'r. ' ...................-......

Total nBvenuo f ro m fulther p rocessin 9...............r..........L8SS ngvgnUg f fOm Sale Of RNA-2,. . . . , . . . . . .D.. . . . . . . . . . . . .o,r . . . . . . .

Di f fgfgnt ial f9V9nU9.. . . . . . . . . . ' . . . . . . . . . r . . . . . . . . . ' . . r . . r . . . . . . . . . . ' .Differential cost' . '. '...r'.,....r........"...

Diffgrgntial profit .......,......r........-........, ' .. ' . ' . , ' .

s23O,OOO23O,OOO

s46O,OOO32O,OOO

sl4O,OOO12O,OOO

s 2o,ooo

(11

'The cost of VDB is not relevant and, thus, is omitted lrom the solution.

[The requirement does not ask for a list of responsibilities Vickery hasviolated, but, merely, which of the fifteen responsibil i t ies apply toVickeryb situation,)

Management accountants have a responsibil i ty to:

Comoetence: Perform their professional duties in accordance withrelevant laws, regulations, and technical standards. ffhe inventory costVickery is being asked to accept violates accounting principles of con-gervatism and of matching current cost against current revenue.)

Chapter 8

c8-4 (Concludedl

preparo comploto and clsar reports 8nd nocommondations after .appropriate analy:et of rolsvant and rsllable information. (Vickery hascoiryinclng evidence that lallure to make the adiustment will misstate theresulting fi nanclal stataments.|

lnteoritv: Befraln from either actively or passively subverting theattainmeFt of the organizationb legiUmate and ethical obiectives. fflrereis prrssurc to subvart legitimate and ethical obiectives to the immediateneed for tavorable financial statements.|

Communicate unfavorable, ag welt ag favorable, Informatlon andprofessional fudgmentg or opinions. (Vickery is being asked to thwartcommunlcation of unfavorable information.)

Refrain from engaging In or supporting any activity that woulddiscredit the profession. (Preparing deliberately misleading financialstatements, clearly ls a discredit to the profession')

Obiectivihn Communicate information fairly and objectively., Mckery would violate this responsibility if the inventory wete not

restated.)

Disclose lutly att relevant information that could reasonably be ' -erpected to influenco an intended userb understanding of the rtports'comments, and nocommendations presented. ffhis material overstate-ment of inventory and profit violates this ethical responsibility.) -

(21 In addiUon to his ethical responsibilities to his company, Vickery has eth-ical responsibilities to:(al the bank(bl the companyb stockholders(cl the management accounting profession

:_

CHAPTER 9

DISCUSSION OUESTIONS

O9-1. The mosl lreguently used documents in the pro-curemenl and use ol materials are purchase reg-uisit ions, purchase orders, receiving reports,materials requisil ions, bil ls ol malerials, andmalerials ledger recods.

O9-2. The invoice shouH be routed to the AccountingDepartment immedidely upon receipt. A copy oflhe purchase order and a copy of the receivingreport'with an inspection report should be com-pared by lhe accounting clerK When lhe invoiceis found lo be correcl in all aspects or has beenadjusted for errors or rejects, the accountingclerk approves the invoice, anaches il to theunderlying documents il they are in hard-copylorm, and sends these documenls to anotherclerk for lhe preparation of the voucher.

O9-3. Inventor iable cosl should inc lude a l l costsincrrred lo get the produc.t ready for sale to lhecustomer. lt includes not only the net purchaseprica bul also the olher associated costs, suchas freiThl-in, incurred up to ths lime producls areready for sale to the customer.

Q9-4. No, administration costs are assumed to expir€with lhe passage of time and do not anach lo theproduct. Furthermore, administralive costs donot relale directly to inventories, but are incursdfor the benefit of all lunciions of the business.

O9-5. The three key questions to anstv€r in designingan inventory control syg€m are:(a ) how much to o rde r -economic o rde r

quanlity(b) when to order-order point(c) satety stock required

09€. The firm benefils lrom lhese techniques by hav-ing a crnsistenl, standardized approach to itsinventory managsment. lnventory costs and ser-vica lo customsrs will be optimally balanced.

O9-7. The purpose ol an economic ordor quantilymodel is to determine the optimum quantity toorder or produce when fi l l ing inventory needs.The optimum quantily is delined as lhat quanlitylhal minimizss the cost of inventory manage-ment.

Q9-8. The decision concerning how much to order orproduce at a given lime involves a compromisebelween inventory carrying costs and ordering orsolup cosls , Examples o l inventory carry ingcosts are: in terss l on the monsy invested ininvontories that could have b€en invested else-where, property tar and insurance, warehousingor slorage, handling, deterioration, and obsoles-cence. Ordering costs include ths cost of prepar-ing the requisilion and purchase order, receivinglhe order, and accounling for lhe order. Setup@sts involve the costs ol sening up equipmentto make lhe actual production runs. For all these

costs, only lhose thd vary with adivity are rele-vant lo the E@ model.

O9-9. The @nsequencos of maintaining inadequareinvenlory levels indude hi;her purcfrasing, han-dling, and transportation costs, bss ol quantitydiscounls, produclion disruptions, inllation-relat-ed pr ice increases when purchases aredeferred, and bst sales and customer goodwill.

Mgasursment of the costs of lost orders andz bst repeat business is not easy because mea-

suremenl may be largely subjective. On theother hand, the other factors listed can be mea-sured with fair certainty and grealer ease.

09-10. In computing optimum produaion run size, COropresenls an estimale ol lhe setup cost and CUis lhe variable manulacluring cost per unit.

09-11. (a) The order point is the low poinr ol stocklevef that, when reached, means a replen-ishing order should be placed.

(b) Lead time is the interval between placing anorder and delivery of lhe ordered gmds.

(c) Salety stodt is the minimum inventory tharprovides a cushion against reasonablyexpecled maximum demands and againstvarialions in lead time.

O9-12. Mater ia ls regui rements p lanning (MRP) is acompuler simulation that integratos each prod,rjct's bill ol mderials, inventory slalus, and man-ufacturing process into a feasible productionplan.

09-13. Eftective uti l ization of capital, which inctudesinveslment in inventory, is the responsibil i ty ofgeneral manag€ment; lhere lore. the pr imaryinterest is in linancial control. Atthough generalor top-level managernsnl is inlerested in provid-ing customers with gmd products and services,the scheduling of produaion inrolves unit controlprimarily and is the responsibility of productionand purchasing departm€nts.

09-14. ln the control ol materials, the opposing needsare the mainlenance of an inventory ol sufficientsize and diversity lor efficient operations, andthe mainlenance of an investmenl in inventory ata level that will maximize earnings and minimizacosts.

O9-15. When a relatively few malerials it€ms accountfor a considerable por l ion o l to ta l inventoryinvestmonl selective control is indicatod. Hbh.value ilems would be under tight control, whilulow-value items would be under simple physicalconlrols.

Automatic control refers lo ordering when amalerials record shows that lhe balance on handhas dropped to the order point. At this time, thequanl i ly to ordor is aulomal ic , having beendelermined by balancing the cost to order with

203

(-_ \

2U

the cost lo catry inventory' Aulomatic control ismosl ellective ih companies lhat use an EDPsyslem.

09-16. Appendir The average cost m€lhod assumesthat each batch takon ftom the slore'room is composed ol uniform quanti'ties from each shipment in slodt at thedale of issue. The lilo method is basedon the assumption thd the firsl goodsreceived are the first issued. The lilomethod is based on the assumplionthat lhi latest gds received are lhelirst issued.

O9-17. Appendir In an inflationary economy' lifo pro'v ides a bet ter matching o l currenlcosts with currenl rovenue becausecosts ol inventory issued are at mora

Chapter 9

recen l pu rchase p r i ces . Ne t cashinflow is generally increased bscausetaxab le i ncome i s gene ra l l ydecreased, resulting in payment ofbwer income lax.

O9.18. Appondix Fifo. The higher costs ol the earlierpurchases would be charyed againstcosl of goods sold.

GGA-Canad a (adapted). Beprint with permiss bn.

09-19. Appendix (a) lilo(b) filo(c) fifo(d) lifo(e) lifo(t) lilo

CGA-Canada (adaptsd). Roprint with permissbn.

- ChaPter 9

EXERCISES* \

Eg-l-

(1) Freight allocated to materials based on cost

E9-2

205

= l=21o= = = $- 016 Per doltar of costs17,5O0

Part A: $ 8,600 x S'or0 = $137.60Part B: 5,060 x .O16 = 80.96Part C: 3,840 x .016 = 61.44

qlzrsoo s280,oo

(21 Freight allocated to materials based on shipping weight

s280 = S . 2 0I 400 kilograms

Part A: 63okg x S'2O = S126Part B: 49O x .2O = 98Part C: 28O x .2O = .!!

1:j99kg E289

Units

Total to be provided ...,........,.......Quant i tyonhandrSeptemberl , . . , . . , . . . . ' . . . . . . . ' . . . . . . . .o ' . . ' 4r4OOOn ordgrfor Septembgr dg1ivgryr....r........................ 'r 3r600On ordgr for October delivery,.........,.......................... 4.1OO 12.1OOQuantity to ordgr for Novgmbgr dgliv€]1| '................... 4.800

4,2OO4,4004,7OO3,600

16,90O

I

206

E9-3

(1) Forecast usage:J a n U a r y t t t " " t " " ' t t t " o " " t " " " " t t " " t t t ' t t t t "

February "t"t""""t""""t t"t""tot"t t""" '

M a r c h t " t " " " " t " t " t " t " t ' t ' t " " t " o t " t " t " t t "

Desired March 31 inventory level(61000 x 80%)"""""""" t " t " t " r " " " " " t "

Total to bg providgd""""t""""r"""'Scheduled suPPlY:

January 1 lnvgntoff """"""""o"""""r'On orden

January delivery'.."""""""""""""'February delivery'r""""'o""""""""'

Quantity to order for March delivery """'

4,8OO unlts5,0005,600

15,400 units

4,8O0

6,000 unlts

4 ,1OO:l,6oo

Chapter 9

2O,2OO unlts

l2 l JanUary 1 inVgntOf] . . . . . . . . . . r . . . . .o.r . . . r . ." . . . . . . . . . """"" ' t t " t t ' r t ""

On order for January and February de|ivery"""""""""""'

FOfgCaSt USagg-ranuary and Fgbruar1/.'........""""""t"""'

(a ) MafCh ' l

inVgntOf l . . . . . . . . . . . . . . . . . . .o . . . . . . . . . . . . . . . . . . t . t t " r t t t t t t " t t

To order lor March delivery (requirement (1))"""""""

FOfgCaSt USage-M3lch . . . . . . . . . r . r . . r . . . . . . . . . . . ' . . . . . . . . r . . . . . . ' . "

(b) MafCh 31 inVgntofy .. . . . . . , . . . . . . . . . . . . . . . . . . ' . . . . . . . ' . . . . . . . . . . t . . . . . . .

14.7005.5OO unl ts

61000 units8.700

14r7OO units9.8004r9OO unlts5.500

1O'4OO uni ts5.500

-4eo units

E9-4

(1) EOQ =

tzl EOQ = = fiopoo = 3oo Aiets

, a l(3) EoQ = r l =r $25

= J5iloob- = 24O units

2 x100 x $5S55 x 15o/o

2 1 2 , 2 5 0 x $ 1 2

1 ,440 ,000

L207Chapter 9

E9-4 (Continuedl

(41 (a)

(b)

(a)(6)

(b)

EOQ2 x 2 5 , 0 0 0 r $ 2 0

$8 x 25o/o

= 7O7 cartons

Annual required unitsEconomic order quantitY

= ry = 35 order: per year

J 5OO ,O0O

I

S

\-365 days = 10.4 orevery 1O days orders should be placed35 orders

= Jl8o,ooo = 424

18J990 = 42.4s or approxlmately 42 orders per year424

365 days = 8,2 or approximately one order every 9 days42 orders

(a)(s)

(b)

-(c ) EOQ = -12 x 18 '000 x S15 -

\r| $6 x 2Oo/o

= {450,000 = 677

E O e = - j 2 x 1 8 ' 0 0 0 x S 1 5 -Y 57.50 x 2oo/o

= 600 units. 6 A A A

# = 30 orders per yearOUU

= { 360,OOO

lr

\

365 days in year30 orders per year

EÂ mE L ' I J = ; - =

Y 52.50 x 2Oo/o

= 11039 unl ts

= 12.767 or approxinratelyone order every 12 days

(c)

l ,oooroooalI

540,0ooLN

540,000

54O ' OO0 E---;1i5-

= 11,08O,0OO

I

Chapter 9n8

E9-4 (GonUnuedl

2 x 4 8 r O O O r $ 1 Oftl (al EoQ =

$ 2 O r 1 2 V o '

632 dozen baseballs

lo5-oFdd-l J z ; l r -

t'4o + 1oo/o return on investment$20

Annual ordering cost = $ffi =

-EoO = -f2 r 5t0oo r $Jrooo -

V Sg r 2oo/o

^ /6125O 'OOO = 2 r5OO co lumns

= 12oh

48,OOO r $1O800

= $600(bl

Annual carrying cost = C U T C C T E O Q2

$2O x 12oh r 8OO -

Total annual inventory cost to sell 48'OOO dozenbasgbal1s. . t . . t1. . . . . . . . . . . . . . . . . . r i t t t " "" t t t t t " t " t " t " t " "" t ""

960

sl.560

(8)

(al(e)

(bl

EOQ = 2 r t 2 , O O 0 r 5 1 6$9 r 2ooh

384,OOO1 . 8 0

= 462 units

The frequency of order placement:

l2roo0 annual usage = 26 orders per Year462 EOQ

(cl

365 days26 orders

14 days

2 r 8 , O O O r $ 1 6$9 r 22oh

EOQ =256,OOO

1.98

36O units

- .,!Tzg,zgg

2 x 5 0 0 x 5 6$1O x .25

Chapter I

E9-4 (Qoncluded)

(10) (a) EoQ = 16 ,00o= 4 l - =

Y 2 .50

209

E3,ooo3,OO0

s6,ooo$9,600

5OO x $649

= 49 units

$61.22 + $61 .25 = $122.47= total ordering and carrying cost

per year(b) 49 + (49 x.10) = 54 units per order

5ot}9q . Y = S.5s.56 + $6z.so = $123.06

The effect is small because the total cost curve ls relatively flataround the optimum level.

(11) To compare the two alternatives, the carrying cost and the productioninitiation cost must be calculated for each alternative. These twoamounts are calculated as follows:

Carrying cost = Annual cost of carrying (2OYol x manufacturing cost(SSO1 x average annual inventory.

Production initiation cost - Number of runs x cost to initiate a run(s3oo)

Current situation: 2 production runs of 3,000 units per runAverage inventory: 3,OOO units + 2 = 1,50O unitsPresent costs:

Carrying cost (.2O x $5O x 1,500)..... 51S,O0OProduction initiation cost (2 x $3OO) OOO

s15"600Proposed situation:The EOQ formula can be used to determine production runquantities by substituting cost per order with production ini-tiation cost

production quantity, ,/2 x 6-'000 x 9?00

r $ 5 O x ' 2

= V360,000 = 60O units

$ 1 0 x . 2 5 x 4 9

6 O O + 2 = 3 0 O u n i t s

6,000 + 600 = 10 runs

Carrying cost (.20 x $5O x 300)......,.....,......Production iniUation cost (1O x $3O0)

Average inventory:Number of runs:Proposed costs:

2r4OO

3,600,000

Expected annual savings

2t0

E9-5

(11

(21

Chapter g

-l z r ( ' t z x l , 5 o o ) r S 5 o

E O Q = r l - =1 i 3 r . 4 O

= t';500, ooo = tin?"u

Lots ol 2,AOO units should be ordered, based on the following computa-tions:

QUANTITATIVE DATA

Order size '11225 units 2r00O units'14.7 I

612.5 units 1,000 unlts

a a . a . a a a a a a a a a a a a a a a a a a a a a a

Number of orders Per Year.Average inventory .. . .r. . . ' . . . . ' . . . . . .r. . . . . . . . . . . . . . . . . .r. '

. COST DATA

Gost of placing orders at $5o r..........r.....,..r.,rGost of carrying inventory:

612.5 x $3.00 x .40 ..r......r......... ' ....r...........IrOOO x 92.85 x .4O ..............,........,............

Discounts lost (12 x 11500 x 33 x .05)..,.....,...

Cost to ordgr and carry.. ' ............r.,......r" 'o.....

$ 735

735

2r7OO$4.170

$ 4so

1 , 1 4 0

$1,590

E9-6

(1) Ordering and carrying costs under current policy:

(T , $3Bo)* (sr ' #) = s2,2Bo + $zso = s2,s3o

(21 Economic order quantity and the related ordering and carrying costs:

j2 x 3'ooo t stSo = \fm-o- = 1,5i0 units! s l

i+#x$380). ( t " ry) =$zss + $755 = $1,510 relatedordering and carrying costs

I

Chapter 9

E9-6,(Concluded)

(3) George should decide to order In quantlties of 3'OOO unlts, based on thefollowing computations:

QUANTITATTVE DATA

2 l i

3,000 unltsI

1,50O unlts

COST DATA

Cost of ptaclng orders at $380 '...'...o............. $ 755Gost of carrying inventory:

$1 x755. . . . . . . . . . .o . . . r . . . . . . . . . . t t . ' t r . . r . r r . t . . . t . t . . . . . . . 755

($f - S.05) x 1r500.. . . . . ' . . . . . . . t . . . . 'o. . . . . . . . . . . . . . .orDiscount lost (31000 x $5 x .05).................,..o. 750

Gost to ordgr and carryr.o........................r...... $2r260 $1,805

CGA€anada (

E9-7 91600 + 24O = 4O units daity usageNormal lead time usage (2O days x 4O unlts)...,..................,....Safety stock ((30 days - 2O days) x 4O unlts)..........,i.o.............Ordgr point. . . . . . . i . . . . . . . . . . . . . . . , . . . . . . . . . r . . r . . . . . , . . . . . . . . . . . . . . . . . . . . . . . . , r . . . . . . . . . Le99

E9-8

(1) Maximumuseperday.. . . . . . . . . . . . . . . , . . . . . . . . . , . ,o- . . . . 6OO unl tsNOrmal usg PgrdS!... ' .............r.....................r 500Safety stock (maximum)..........................r.r.... i6-O unlts x 5 days of lgad

tlme = 50O unlts

Order si2g., . . . . . . . . . . . . r . . . . . r . . . . . r . . . r . . . . . r . . . . . .o. . . . . . ' . . . 1r510 unlts

Numbgr of orders pgr year.....,..........'........'... 1.9868,Averageinventory....................o........r..r......... 755 unlts

$ 380

11425

adapted). Reprint with permission.

800400

(21 2,500 unlts500

3.000 unlts

3,000 unlts2,500

500 units3,500

(3)

{0AA units

Chapter 92r2

E9-8 (Concluded)

(41 Order poiot.........r...........rr.....................o....ttt""""'o""""t"""' 3tOoO units

Minimum'*" Juring leaoii;6 (1OO r 5).....,..o....'..---.'..-......... 5oo

on hand st time order ngcgiyod......................................."f' "" 60 units

QUanUty Ofdgfgd ......"..."t""""""r"t""t"t"t"""""""""""""t' 3'500 UnitS

Absolutg marimum inventoly .........................""""""'o"""""' gJQg units

. c G A - G a n a d a ( a d a p t e d } . R e p r i n t w i t h p a r m i s s i o n .

E9-9

(1) Marimum ugo per dS!""""""""""t""o"""""Normal uso por d8!"t"""""t"""""""""""""

Safg$ stock {marimum} """"""""""""""""'

2OO units1206 units r 12 daYs of

lead time = 960 units

l2l Normal use per day (120) r days of lead time (i2!........o......,... lt44O units

Saf ety stock .r......or.................... ' ......o.............." ' tt"t 'o"tr""t""' 96O '

order po1t1t............r....t....r........r..........r..............""tt"t""""tt " & units

2r4OO unitsI ,44O

960 units3,OOO

Order poi

3,960 units

2r4OO units960Minimum uso during lead time (8o r 12)

On hand at time ordor t€ceivod......--..r. 1r44O units3,OOOQ u a ntity o rd ergd ..r..........o....'....""'

Absof utg marimum inventory.........r...,................. ' ...o....r.,....... 4A4O units

CGA-Canada (adapted). Reprint with permission'

(31 Ofdgf pOint . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1. . . . . . . . . . " t " t t t t t t t " '

HOrmal USe dUring lgdd timg (t20 I' '1 2| .'..'.................'........"'

On hand St timg Ofdef t€CeiV€d.........'....,........r'..o..................'QUan$ty Ofdefgd r........r... ' .........r.o...........r................ ' .." 'r""""

NOfmal madmUm inVentOry...r. . . . . . . . . . . . . . . . . . . . . ' . . . . . . . . .o... . . . . . . . ." ' t"

(4)

E9-10

3efcUStock Lcvrl

(Unltel1 0204080

AnnuelHumbcr

ofOrdorr

AnnualStocltout

Coat +

3t50.oo75.OO30.oo15.OO

AnnualllafetyStock

CarrylngCo.t Ffpcr unltl

AnnualComblncd

= Coct3100.oo

95.OO70.ooc5.oo

Probabltl$ ErPcsted Goctof Annual P.r

x Secr(993 =9tockoutlr gglgt =

. 4 � 2 3 7 52 1 7 5.oa .1 75.o4 .2 76

level of saletY stock is 40 units.

66!6

31020tn8('

The recommendod

I!

I

Chapter I

E9-11 APPENDIX

r- (1) Average costing:

II

:,

I!

I

!

! el Fifo costing:

213

Date

Received lssued InventoryQuan- Unit Totaltity Cost Cost

Quan- Unit Totaltity Cost Gost

Quan- Unittity Cost Balance

Jan, I 5OO S1.2O S 6006 200 $1.25 $250 70o 1.21 g5o

1 0 400 1.30 520 l r1OO 1 .25 1 ,3701 5 560 $1.25 SZOO 54O 1.25 67025 500 1.40 700 1,040 1.32 1,37027 400 1.32 528 640 1.32 842

Date

Received lssued InventoryQuan- Unit Total

tity Cost CostQuan- Unit Total

tity Cost CostQuan- Unit Total

tity Cost Cost BalanceJan. 1

6500 $1.20 $600 $ 600

2OO $1.25 $250 500 1.20 600200 1.25 250 850

1 0 400 1.30 520 so0200400

1.20 6001.25 2501.30 52O 1,370

1 5 500 s1.20 $OOO50 1.2s 75

140 1.25 175400 1.30 520 695

25 500 1.40 700 140 1.25 175400 1.30 52050o 1.40 7OO 1,395

27 140 1 .25 175260 1.30 338

140 1 .30500 1.40

182700 882

I

214

E9-1 1 APPENDIX (Concluded)

(3) Lifo costing:

Chapter g

Date

Received lssued Inventory

Quan- Unit Totaltity Cost Gost

Quan- Unit Totaltity Gost Gost

Quan- Unit Totaltity Cost Cost Balance

Jan. 1 s00 $r.zo $600 s 6006 200 $1.25 $250 500 1.20 600

200 1.25 250 8501 0 400 1.30 520 s00

200400

7.20 6001.25 2501.30 52O 1,37O

1 5 400160

$r.go1.25

$seo200

500 1.20 60040 1.25 50 650

25 s00 1.40 700 500 1.20 60040 7.25 50

500 1.40 7OO 1,35027 400 1.40 560 500 1.20 600

40 7.25 50100 1.40 140 790

I

Chapter 9 215

P9-1

(1)

(21

PROBLEMS

Budgeted acquisition costBudgeted purchases

$148r5O0 net purchases x

_ $18, O0O _ 12.Soh applied acquisition= - - - =S144, OOO eosting rate for the month

12.5o/o applledacqulsition = $18,562.50 applledcosting cost addedrate to

materialspurchasedduring themonth

(3) The overapplied acquisition eost of $362.50 (Sig,562.50 applied cost _S18'200 actual cost) should be credited to Cost of Goods Sold or prorat-ed to Cost of Goods Sold and inventories.

P9-2(1) EOe = . /2

x 2-4 '00O x $1.20 -\ l S1O xTOYo

(21 Annual regulrements _ 24.OOOEOe

'W = 100 orders needed peryear

(3) E$ (Cartying::"t ) * Annual reguirements fOrderins cost )z 1 per unrr / EOe ( p", order )5240 total cost

= ry($ro x 1oo/o) .'hi#o ($r.eo ) = $reo + $120 = :t#iltr"illfor the year

(41 The next order shoutd be placed in three days. This conctusion is arrivedat as follows:(a) Number of days' suppty in each orden

Days in year

@ = # = 3 ' 6 d a Y s(b) Number of days' supply left in inventory:

Units In inventory , Days, supply _ 4OO

6 days'f x in each oii"r

= ffi x 3' 6 days - supply

left(c) Days before next order should be placed:

(Days' supply left) - (Delivery lead time) = 6 days _ 3 days = 3

= 24O units57,600

1

Pg-2 (Gonctuded)

(51 some of the difficulties most firms have in attempting to apply the EoQ

formuta to Inventory Problems are:(a) Inventory ls not always used at a_ constant rate; the constant usage

assumptlon ls lmpllclt in the EOQ formula'(b) fne Ede lormularequires estimates of (1) annual requirements' (2)

orde-ng cos! (3) purchase price per unit, and (4) cost of carrying

lnveritoiies. These estimates may be extremeff difficult to obtainwith accuracy.

2,3001,500

8004,0o04.800

2 1 6

P9-3

(1) Normal use per day (2OO) x days of lead time (10) """""""'Safg ty S IOCk. . r . . . . . . r . . . . . . . . . r . . . . . r . . . . . . . . . . . . .o . . . . . . .o . ' . . . r . . . . . . . . r " " "o t "

Ofdgf pOi t1 t . . . . . . r . . . . . . . . . . . . . . . r . . r . . . . . . . . . . . . . . . . . r . . . . . . . . . . . . . . . . .

Chapter 9

2,000 units300

3i3o9 units

2,300 units2,000

300 units4,000

(21 Ofdef pg in t . . . . . r . . . . , . . r . . . r . . . . . . . . . . . r . . i . . . . . . . . r . . . . . . ' .3 . . . ' . r . . . . . . . . . . . . . . . t . t

Normal use during lead time (2O0 x 1O)..... ' .."""""""""""'

On hand at t img Ofdgf fgCgiVed ..........,...... ' .,....r..................QUant i ty Ofdgfgd. . . . . . . . . . ' , . . . . . r . . . . . . . . . . . . .o . . . . . . . . . . . . . . r . . . . . . . . . 'o . . . . . . . .

Normal maximum inventory..-......r.... """"""""""'

Ofdg f po in t . . . . . . . r . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . r . . . . . r . . . ' . r ' . ' . . . . r . ' . " "

Minimum use dur ing tead t ime (150 x 10). . . . . . . . . . . . , . """""""

On hand at time order receivedQuantity ordered.... ' ....... ' . .... ' ..,......

Absolute maximum inventory.,.,..............r............ ' ..""""""'

Let S equal cost of storing one unit for one year.

EOQ =

(3)

4.3OO unlts

units

units

units

(4)

!2 x (2oo x 250) x S8o4 ' o o 0 = r l >, Y S

4'000 =

16 '000 '00O = s8,000,ooo = S . 5 O

1 6 ,0OO , OOO

2 x R U x C OC U x G G

8,0o0,o00

g,ooo,ooo

S -

GGA-Ganada (adapted). Reprint with permission.

2 1 7

.FooI

foo3o

l

I

ir

L

b lg n l€ ; Ir . L Io t l

-

,_:_-.J I8 o Ii c - lS E s lf i ; o lE o Io l

Chapter 9

I

o o o o o FC ' ( \ | F O C D FN ( r | N C { r ' -o

o o o o o 6 |o € N C O r t FC ! r r{,

E 6x oF O

. " .

39 EE 6u,

I

b

I

E

t

:

I

S. o o o o 0 0E r . c o c o c o

o

;fiso o o o o c Dt O $ c ) $ l r -

3 : E3 - " aEEg5 5 8

1x

n n o n | o l o

( ' ) ( ' ( ? ( ' ) ( ' ) ( l )0

I

It

b o o o o o u )( ? ( o g ) N u ) ( oF F Fs,

t l

fui; i r

€ : '

!tI

o)o.

o o o o o t { )v - C { C ? r C l O l { '

Chapter 9218

I

P9.5 APPENDIX

(1) Fifo:

Date

Recelved lssued Inveniory

Quan- Unittity Cost

TotalCost

Quan- Unit Totaltity Cost Cost

Ouan- Unit Totaltity Cost Cost Balance

Marchl 75O 32O.OO $15,OOO $15,OOO

3 40() s19.50 $ 7,800 750 2O.0O 15,0OO4O0 19.50 7,8OO 22,8OO

5 600 $20.00 sl2,ooo 150 20.00 3,0004O0 19.50 7,8OO 1O,80O

1 2 a5o 21.50 7,525 150 20.00 3,0004OO 19.5O 7,8OO35tO 21.50 7,525 18,325

t 5 15O 2O.OO 3,O0O350 19.50 6,825

50 19.50 975350 21.50 7,525 8,500

1 8 s00 22.OO 11,0OO 50 19.so 97535O 21.50 7,5255OO 22.OO 11,000 19,500

22 50 19.50 975350 21.50 7,525 5OO 22.OO 11,OOO I 1 ,OOO

26 550 21.OO 11,55O 500 22.OO 11,00055O 21.0O 11,550 22,550

28 5OO 22.OO 11,000150 21 .0O 3 ,150 4OO 21.OO 8,4OO 8,400

3 1 2AO 20.00 4,OOO 4OO 21.0O 8,4OO200 20.00 4,000 12,400

219Chapter 9

1

roo:'g

ooxozu l oo . =o . J

u)I

d s t

l-

!

Fo

lH

o

ootr.g!oo

t ;E 6

ET,s 6

* ao

l ol ot otutl pIU'

ooqu,F

0

ooctNrn

ou)t\

oo@-N(\|

o oo o0_ @-r o FF

o oo r oct o;N r

o ou t oF ! t

oocl

ooo_F

oodN

ou)u)

u)Nlt'-q,F

o u )O No_qF FF

o oo tf)d ;N N

o oro u)u?(?

ooo_CT'

ooo_CD

og 'oN

oort

ooo_oF

o oo oqo_€ ?

o oq gO NN N

o oo ott ut

oo(\to

o c )o oo- olq , N

o og gO ( \ |N N

o oo o$ r

olo\|F

N

o o oo o u )q qn-C l N r

F

o o oo o oO N rN N N

o o oo o u )! t F u )

ooq@

ooo-CI'

oociN

oC)rf

ooo(\l

o oo oqo_@ ! t

o og qo oN N

o oo o$ N

ttq):'og

E f iE 6

v l

5.g* ao

o oo oq ql \ r tg

o ot r )od c tF Na

o oo o\ ' N

l o oN Oro- 0-F ( '

o ou ? o; c iN N

o ou ) l og , F

oo@_@

oqc.|N

oov

o c )u ) o'o- otF ( \ I

o oq qF (\lN O t

o or o ot ( l r

tto:o('occ

E f i= oI Y O

.= Vl

s 6

* ect

oo@_F

g

oqoooo\t

lt)Nqt\

orqF

N

ou)(l,

ooqF

oqNol

ooro

ou)n_

oqFN

ou?1',

ooo_!t

ooctN

oool

ooo

F

o(tE

(t to GI Lo @ Nol

(oN

@(\| (?

T rII

Chaptor 9

i

!loE5(,

oox 69 3- L

u l oCLE

lot

R O

n

Fo+tcog

o(,cgqt@

5gI

F ao

ooctoolo?o

oooctN0

ou)F

oqooqNN

(DNqt

a

oF

orO

;

o!trtoqoF

(DNqoF

ou)lo

oqo(\|qqt

FFqoN

o0o

ooool-

o

FFrtc;N

o€,tt

oooo?

o

G'G|('.F

$l

ooo

oFF

@@o.F

G,(\|a??6|

ooro

oF

FG|NN

t'u)F

aF

N

ou)o

o(ol-

@l'

Co

llu)F

?N

oo\t

o@

ort(\|.F

o(oFctN

ooo

ttono

EEF O

E 6s 6

* ao

o(outoGo-F

I

oNqotfi

oo(o

ouloc'$to7

FFqoN

oou)

o6|o;o|lo-co

a)Ng??6|

oort

oF

Iolo\g'F

rtu)l-

?N

olOtO

tto.toooG

E f i= oF O

E E3 u )

* ag

ooqFg

oulooooIt

u)({|o-F

oq?c|

oro(t,

ooo-F?

oqNN

oou)

oloro-FF

oqF(\|

orou)

ooo_rt

ogoN

ooN

otEo

C,6=

(, u) (! ro q' NN

(oC!

co(! (?

Chapter I

\. - P9-6 APPENDIX

(1) Cost of the ending inventory under the fifo method when a periodic! inventory system is used:

b 133'"'o 3 tll : tl:i33100 @ 12 = 1,2OO

$4.300

(21 Cost of the ending inventory under the lifo method:

(a) When a periodic inventory system is used:

20ounits @ $tO = S2,0001 0 0 @ 1 1 = 1 , 1 0 0

$3,100

(b) When a perpetual inventory system is used:

221

Date

Received lssued lnventory


Quan. Unlt Totaltity Cost Cost

Quan- Unlt Totaltity Cost Cost Balance

Jan. I 2OO $rO S2,OOO S2,OOO1 2 l OO 31 I $1 ,1OO 2AO 10

1 0 0 1 l2,O00t, loo 3,1OO

Feb. I 100 9r r $1,1oo1OO 10 1,000 lOO 10 I ,OOO I,OOO

Apri l 16 200 12 2,4OO 100 10200 72

1,0002,4OO 3,4OO

May 1 100 12 1 ,2OO 100 10100 12

1,O001,200 2,2OO

July 15 lOO 14 1,4OO 100 10100 12100 14

1,0001,2OO1,400 3,600

Nov. 10 100 14 1 ,4OO 100 10100 72

1,00o7r2OO 2,2OO

Dec. 5 100 1 7 1 , 7 0 0 100 10100 72100 17

1,0001,2OOl,7oo 3,goo

CGA-Canada (adapted). Reprlnt wlth permlsslon.

r +

Chapter 9

Y

j

222

Roco

oo-gGo

EE3 c )

,F eo

o0

a

ooo_o?n

ooqu)I

ooo_N

oo

a

oou)F

ooo

au|

ooloF

o0ooo-t

ooqlo

o0q,

ooooN

t

oo(oto

o0qN

o0

aortqF

ooqu)

oo\t?

ooo0GIN

ooqlo

oou)

0qooc,l|F

ooqF

ooo-N

oqo(oc'ot

ooqF

oo\tt

oo

a

ort.r-rt

ooqt\

oo(o

ooa

o\tFFrF

oo,0F

ootl)-N

oc,6lFF(\l.F

(Dgt0F

oo@

o(ou)o@F

(oo)o

a

F

o0?

t-

tlonn

c 6F 6

E E= c ,

; ao

ooctou)N&

o0qu)6

o0|(|

ooctou)gi,

ooqu,

o0F

ooa

o(oqq,

ooqu)

o0(o

ooct\tortl

ooEu,

oog,

oo

a

0\t-a-t

ooqF

oo(o

ooo(\|q|o

oo\t'.F

ooqt

oN

a

F(oo\t

(og'qF

ooF

oN

t

F(og'

!'

(ooqF

ooF

Ito.:ot)oG

EEF O

, - o' s o= o

* ao

oo0-o?6

u)o

oo0N

oo6lF

(o

oost

ooo-NF

o

oou)-

ooo-oF

F

oosIF

oqto

N

(s?

roc,

N

rio

l.L

u) ctl$l

Nd(oE

u| (, Nl:q

u) oG'

!o

o

oCD(E

^ o=g .Illlo . ?o . g

tiI

O -

.t

Chapter g

P9-7, APPENDIX (Continued)

(b) First-in, first-out method:

223

Dste

Received lssued InventoryQuan- Unlt

tity CoslTotalCost

Ouan-tity

Unit TotalCost Cost


Jan.2 2,000 s5 310,000 2,000 35 $10,ooo15 500 s5 $2,500 t,500 5 7,50031 700 5 3,500 800 5 4,OOO

Feb.2 1,200 6 7,2OO8OO 5 S e,ooo

1,2OO 6 7,2OO 11,2OO1 5 600 5 3,000 20o 5 1,0oo

1,2OO 6 7,2OO g,2oo28 200 5

700 61,0oo4,2OO s00 6 3,OOO

Mar.21,500 8 12,0OO

5OO 6 3,OOO1,5OO g 12,0OO .ts,(x)o

t 5 s00to0

6 3,000I 800 1,4OO I 11,2OO

31 800 8 6,40O 600 8 4,800DOr.2

1,900 7 13,3OO600 I 4,800

l,goo 7 l3,3OO 19,1(X)1 5 600 8 4,8OO

100 7 700 1,800 7 t2,6OO30 700 7 4,900 1,100 7 7 ,7OO

r - rI t

t

224

P9-7 APPENbIX (Concluded)

(c) Last-in, first.out method:

Sales (5,500 uni ts @ SIO)Cost of goods sotd:

s55,000.00

$42,5OO.O07,805.60

s34,694.4Os20,305.60

(21Average Fifo

Chapter I

Lifo$55,oOO

$42,5OO6,8OO

s35,7OO

El e,gqg

permission.

Purchases ........,...Less inventory, Aprit 30..........

s55,00o

$42,5007 r7OO

s34,gOO

939199

Reprint with

Date

Received lssued Inventory




Jan.2 2,000 S5 91O,0OO 2,OOO 35 |S|O,OOO

1 5 5OO $5 $2,500 1,5OO 5 7,5(X'

31 700 5 3,50O 800 5 4,OOO

F e b . 2 1,200 6 7,2OO8OO 5 S 4,0OO

1,200 6 7,2OO 11,2001 5 600 6 3,600 800

6005 4,0006 3,600 7,600

28 600 6300 5

3,6OO1,5OO s00 5 2,500

Mar.2 1,5OO g 12,000500 5 2,5OO

1,500 g 12,OOO 14,5OO1 5 600 8 4,800 500 5

900 82,5OO7r2OO g,7OO

31 8OO 8 6,400 5OO 5 2,500100 g 800 3,300

Apr .2 t ,goo 7 13,300

500 5 2,500100 I 800

1,900 7 13,300 16,6001 5 7OO 7 4,900 500 5 2,500

100 I 8007,2OO 7 g,4OO 11,7OO

30 70o 7 4,9OO 500 5 2,500100 8 800500 7 3,500 6,900

Gross profit

CGA Canada (adapted).

I

Chapter I

CASES

c9-1

(1) (a) Topp Desk Gompany would be attempting to minimize total setupcost and total carrying cost

(b) Variable manufacturing costs per unitt

Di rgCt matgf ia ls . ' . . . . . . . . . . . . . . r . . . . . . . . . . . r . . . . . . . . . . . . . . . . . . r . t . . r . . . . .o . . .

Di fgCt |abOf. . . . . . . . . . . . . . . . . . . . . . . . . . . . . r . . . . . . . . ' . . r . . ' r r . . . . ' . . . . . . . . . r . . . . . . .

Variablg factory overhead..,..........................,.,.,.......*....Total variable manufacturing cost per unit........

Numbgr of dgsks destroyed,.........,r.,..............,...................Total setup cost. . . . . . . . . . . . . . . . . . r . . r . r . . r . . . . r . , r ' . . r . . . . . . . . . . . . . . . . . . . . . . . r . . .

225

$ 5 0x 1 2

s 3 01 46

s600

Optimum production run:

=1 $50 ' x 10 .870

{4F66p6o = 2,ooo desks

rVariable manufacturing cost per unit

(c) Number of production runs per yean

Annual demandOptimum production run

= €#

= 9 Production runs

(a)(21 The following factors affect the desired size of the safety stock forany Inventory itemr '(1) Variability of product demand(21 VariabiliU of lead time(3) Stockout costs(4) Carrying costs

The minimum safety stock level that could be maintained withoutbeing worse off than being unable to fill orders equal to an averagedayts demand is the level at which the safety stock carrying costequals the cost of a stockout, i.e.,

Stockout cost s2,295

(b)

=ff i =42s desks

21,600,000

Per unit carrying cost S50 x 1O.B%

226

c9-2 1

(1)$ 90.00

18.00

Chapter 9

$108.00

Equipment Maintenance Department costs:SalafieS (2 X 5 X $91 ' . . . . . . . . .r. . . . . . ' . . . . . . . . . . . . . . . ' . . ! . . . ' . . 'Employee benefits ($90 x 2O%1.............-.. '....... '.

Production department costs:Salafigs (5 X 5 X $7.501 .....................r........ '........Variable factory overhead:

Direct labor hours base (25 x $2.75).-..'.....-....Maching hours basg (1 x $5).....,.,-..-............,r.

Direct materials ($ZOO - $50).... '.......... '............. '..r.. '..Estlmate of Model JE 40 setup costs...........,..........-,.

$r gz.so

68.75s.00 261.2s

150,00s519.2s

Explanation of costs:

(a) The full cost of the maintenance salaries and employee benefits lsincluded because the $1o.8o St9.0o + ($9'00 x20%17 incurred perlabor hour is incurred solely for the purpose of effecting thechangeover.

(bl The other costs of the Equipment Maintenance Department are notinctuded in the estimate because they are fixed costs of the depart-ment and will be incurred regardtess of the maintenance workers'activities.

(c) The sataries of the 5 production workers for the full 5 hours eachare included in the setup cost because they must be in attendanceall of the time, though they are needed only part of the time. lf theworkers could have been assigned to other iobs during thechangeover, then the full amount would not be charged to setup.

(d) The variable factory overhead costs of the production departmentapplled on the direct tabor hours base are incurred as a function ofthe direct labor hours; therefore, a full 25 hours of cost areassigned to the setup cost.

(e) The variable factory overhead costs of the production departmentapplied on the machine hours base are incurred as a function of theoperation of the machineryl therefore, I hour is assigned to setupcost for the t hour the machinery is used in testing.

(0 All production department fixed factory overhead costs (both thoseapplied on the basis of direct labor and those applied on the basisof machlne hours) are not included in the setup cost because theywould be incurred regardless of the activity in the departmenL

(g) The net materials cost of $f SO is included because it represents theunsalvageable portion of the materials used for the setup and notfor the production of a salable desk.

II!

I

-Chapter 9 227

- C9-2 (Concluded)

\, (21 The cost items that would be included In an estimate of Pointer Furniture

Gompany's cost of carrying desks in inventory include:

' (a) All costs related to warehousing and handting the desks In Inventory! that vary in amount by the number of items stored.

, tb) The cost of the funds committed to the investment in inventory.

b cg-3

' (11 Circumstances necessary to shift raw materials inventory carrying costs

\ (a) Reliability of the supplier. Will the supplier ship products on a mone

rigorous timetable and be willing to keep inventory within its ownstorage facilities?

. lf;:$ff""1H;i*:;iili,g,""""XXiii;i1""ff'il#i:fiS"?$il':i,-traet terms.

* (c) Careful control of inventory requirements. Are production schedules

clearly defined to reduce the potential for stockouts?

(21 Gircumstances necessary to shift finished goods inventory carrying costs! to the customer include:

> (a) i.,?::[FT[il:;:?H'i;ffill=ll?lil?ll#:,'take the risk or

(bl Closer production planning. Gan production schedules be refined tosuch an extent that delays in the sale and distribution of the fin-b ished inventory are minimized?

(c) Gareful controt of inventory reguirements. Are customer orderscarefully monitored and anticipated to reduce the probability of fin-E ished goods stockouts?

OlO-1. The purpooe cil a JIT system is to minimize thelevelc of raw malerials and work in processinvcntory inverlmcnt!, while improving thcwerall rnanufacturing pr€oss. Thc htent b topull inventory through the syslem mly as il isrequired.

010-2. JIT seeks loleliminate all formr of wasle,including produclion losses such as defects.Successful reduclion of these problems con-tribules lo producl guality, and, so, is a part olTOM.

010-3. To avcid inventory buildup, the entire JIT sys-tem shuts down whenaver defecls are found;so to achieve a good rale of flow, lhe numberof defects must be srnall.

Qt0-4. Theoretbally, h an ideaf JIT system the EOQi! o.re; each time nrcre oulput is needed, onemore part or unil is produced.

Ql0-5. Although a zero inventory level is unattainable,JIT stimulates improvernent in the environmen-lal condilions lhat cause inventory buildup,such as long seiup times, high selup costs,

. p@r guliy, and poorly bahnced work loads.O10€. The relalbnship between velocity and WIP lev-

els is an inverse relationship; doubling thevekrcity m€ans lnlving the WIP level, providedlhe outpul rate is held constiant. This is sirnilar,bul not irdentical, to the relationship expressedin lhe familiar inventoqy tumover ratio used inf inancial statem€nt analysis.

010-7. The stralegic advantage ol improving velocityth roughou t l he company , l r om p roduc tresearch and devekrpment to shipping, is thatlhe company can then respond taster to anychanging cuslomer need or to an opportunityfor a new or altered product.

Ql0€. Reducing the level of WIP also reduces lhamaximum numbsr ol detectives, il the defectsare c{ a kind that will be discovered al the nexlwork staiion afler lhe unils are held waitingbelween s la l ions. l f . l00 uni ts are wai l ingb€tw€en stations, up to lOO detectives mightbe produced before the problem would be dis.

CHAPTER 10


covered; il 10 units ars heH waiting, no rpr.than 't0 delectives could b. produced beforelhe prcblem would be discovered.

Q10-9. A blanket purchasc order ir an agreementbetween buycr and seller slaling lho totalquanlity exp€cled to be needed over a periodol three or six rnonthr.

Ot0-10. In many JIT work cells, these distinctionr-between dirrl and indirecl labor and betweenproducing deparlments and ssn6 service lunc-tions--do nol exist, because the sarne workers(lhe leam assigned to the cell) perlorm allthese tasks.

Q10-1 1. In bacldlush costing, the work in process inven-lory accounl is not adjusled lhroughoul lheper iod to re l lect a l l lhe cosls of uni ts inprocess; thore are no dela i led subsid iaryrecords mainlalned for work in process; and asingle accounl may be used lor both raw male-rials and work in process.

010-'12. In bacKlush costing, lhe rnaterials and work inprocess inventory accounts mighl be cornbinedinto a single account because malerials mightbe pul irnmedialely inlo production when lheyare received.

010-13. Posldedusiion is the sublraslbn lrom the workin process accounl cil sorne or all elements dthe cosl of completed work, afler the work iscompleted.

Q10-14. The periodic inventory method used by manymerchandis ing companies is analogous lobackllush cosling as used by manufacturers.

010-15. lf a backflush costing system exp€nses all con-vers ion costs to the cost of goods soldaccount, tho corrgct arnounl of conversion co.slis included in hventory accounts by making anend-ol -per iod adjustment of the invenloryaccounts' balances. The oflsetling entry is anadfustment of lhe cost of goods sold accounl.The corracl amounl of sonversion cost to beincluded in each inventory account is estimaledwhen invenlories are physically counled.

228

I

I

Chapter l0

EXERCISES

b ' Elo'l rhe:::ffi: :llt"ir:1H'""J,rr:ii'.'r'i;l:n',"r'J,'"ll"liiilSlJiJ?I,tollows:

> Carrying cost savings = 2Ooh r reduction in average variabte cost of Wlp= ZOoh r 3O7o x past average variable cost of Wlp= .2 x .3 x (1O r 3OO x SBO)= $14r4o}

Savings in cost of defects= $25 x reduction in number of defective units

\' (reduction innumber of (number of out-of-

= S25 x defective units x control conditionsproduced per not discoveredundiscovered immediately)out-of-control

v ondition)

= $25 x l3O% x 3oO x S%l x (1/3 x 600)= $25 x 4.5 x 2QO= $22,500

\- ElO-z The average lead time wil l be 26 days, calculated as follows:

Reduct ion of vendor lead t ime = 116 x 18 days = 3 days

Because the rate of output wi l l be unchanged, a reduct ion of Wlp to one-third of its present level wil l tr iple the velocity. The average order wil lthen remain in wlP only one-third as long, saving two-thirds of t imepresently being spent in WIP:

Reduction of t ime in WIP = 213 of present t ime in Wlp= A3 x i2 days= g days

New lead time = present lead time - reductions

= 26 days

- IH::iJffx""n.;:H: :ffs,:Tlillff :'xiJ":"J3::i:ff'.:il"i,i11'"components of total lead time are known, as in this exercise, then the

i new lead t ime can be calculated by adding al l i ts components:

( 5 / 6 x 1 8 ) + 2 + ( 1 1 3 x 1 2 ) + 2 + 3 = 1 3 + Z + 4 + Z + 3= 26 days

- -

2g Chaptor 1O

EIO-3 The expeited annual savings is S2,2OO,OOO, calculated as follows:

Doubling the velocity of all tasks, from receipt of order to shipment and

from ordering materials to issuing materials to production, will reduceWIP and materials inventories by half' therefore:

. Reduction in materials carrying costs = Z}oh x materials reduction= 2Ooh x(112 x $3,0O0'OOO)

$3OO'0OO

Reduction in wlP carrying costs = 2ooh x wlP reduction= 2|oh x (712 x $5,OOO'O0O}= $5OO,O0O

This change will also reduce customer lead time from eight weeks tofour weeks. Because customers are will ing to wait up to five weeks forshipment, alt shipments can then be made-to-order. There will no longerbe a need for finished goods inventory. Once the existing finished goodsinventory is liquidated by sales or scrapping, the annual savings from notcarrying finished goods will be:

Reduction in finished goods carrying costs= zloh x finished goods reduction= zloh x (l OO% x $7'O0O'OOO)= sl,400,oo0

Total savings = s300,000 + s5o0,0oo + sl,4oo,o0o - $2,200'OOO

flhis exercise is based closely on an actual case of a partial JIT imple-mentat ion. The name of the company and dol lar amounts have beenaltered.)

E10-4(1) (al Equivalent production = 4,500 + (.5O t-2gl = 4,51O units;

s3OO,74O _4 , 5 1 O $66.683 per unit

. \ -

. -

(b) st,o9l?oo = $i66.067 per unitr - ' 4 r 5 O O

(c) units started = 4,500 + 2O - 24 = 4,496 units;

s3oo,o0o= 566.726 per un i t4 , 4 9 6

(2) 5667, because 2O x .5O x 566.683 = $666.83.5667, because 20 x .5o x 566.667 = 5666.67.S667, because 20 x .5o x $66.726 = $667'26'

i -

Chapter l0

EIO-4. (Goncluded|

(3) Considering that the results of requirement (2) wene the same (to thenearest dollar) for all three methods, then method (il (b) would be recom-mended because of its ease and simplicity. Method-tii ttl is a ctose sec-ond choice, also because of ease and simpticity. The detii ls of method(11 (al may not be iustifiable in these circumstances.

(41 Prccessing speed is very fast, with the result that work in process inven-tory levefs ane kept to a very low level-both in absolute terms and inielation to totat production activity for a month.

Elo-5 Journal entries involving Rrp and/or finished goods are:Raw and In Procgss.. . . . . . . . . . . t . r . . . . ! . . r ! . . . . . . . r r . . . . . . . . , . . . . . . .

Accounts Payable .r . . . . . . ' . . . . . . . . . . . . . . . . , . . . . . . . . . r .o. . . . . .456,OOO

456,OOO

A-summary entry for all receipts of raw materials during the period.when direct materials are used, no entry is needed, be-ause thematerials remain in RlP.

Fin ished Goods. . . . . . t . . . . . , . . r . . . . - . . . , . . . . . . . . . . . . . . . . , . . .o . . . . . . . . r 4SSTOOORaw and In Procgss' . . . ' . . . . . ' . . . r ' r . . . . . . . . . . . . . . . . . r . . . . , . 455,000To backflush material cost from Rfp to finished goods. This is apostdeduction, The calculation is:

Material in May I Rlp ba1ance...,.....,.....,.,. S 19,OOOMater ia l receiveddur ingMay.. . . . . . . . . . . . . . . . . . . 456;OOO

s475,OOOMater ia l in May 31 RIR per physical count 2O,OOOAmount to be backf lushed.. . . . . . . . . $4SSpOO

Cost of Goods So1d.. . . . . . . . . . . . . . . . . . . . . . . . . . r . . . . . . . . . . , . . . . . . . . . . . 461rOOOFinishgd Goods.. . . . . . . . . . . , . . . . . . . . . . . . . . . . . . . . . .D.. , . . . . . . . . . 46i rOOOTo backflush material cost from finished goods to cost of goodssold. This is a postdeduction. The calcutation is:

Material in May I f inished goods r......,....,. S 16,OOOMaterial backflushed to finished goods.... 4S5,OOO

:_--$471,00O

Material in May 31 finished goods, perphysica l count . . . . . . . . . . . . . . r . . . . . . . . . . , . . . . . . . . . . . . . IOrOOO

231

L

Amount to be backf!ushed.. . . . . . . . . . . . r . . . . . . , . . , . . . . . . .$461,OOO

, rIi

Chapter l0232

Eto-5 (Concluddd)

COSI Ol GOOdS SO1d. . . t . . . . . . . . . . . . . . r . . . . . .o . . . . . . . . . . . . . ' . . . . t . . . ' .

Raw and In Procgss.....o.....Finlsh gd Good3... . . t t . t . . . . . . . . . . . t""t""t t t" t""t t t" t t '

Matgriat In Jung I RIP balance o..'....r......i.Matgrial rBcEirgd during June r............... '.

Material In June 30 RIR per physical count

Amount to bg backflushlgd ...........'.......""'

Material in June 30 finished goods' perphysical cou!1t.. . . . . . , . . . .r, . . . . . . . . . . . . . .r. . . . ' .- . ' .

Amount to be backflushed ... . . . . . . . ' . . . .o..r ' . . . '

2,300300

2,OOO

Conversion cost in RIP is adiusted trom the $2,3OO of May I to the$2'OOOosgmato at May 31. bonvsrsion cost In finished goods is

aOjusteJ trom ttre $Sr5bO of May t to the $4'5Oo estimate at May

3i. The offsettlng ontry ls made to the cost ol goods sold account'where all conve*ion costs weno charged during May.

El0-6 The Journal entries Involving RIP and/or finished good! 8r1o:

Baw and ln Ptlc8ss.........o......' '...... 222'OOOAccounts Payablg.....t""'r""'ot"""o""""""""" 222,OOO

A gummary ontry for all receipts ol raw materials during tho period.

When direct maierials atu used, no entry is needed, because the

materials nBmain In BlP.

Finishgd GOOd3...r..r.r...............r........r....r....r......."r.. 221r5OO

RaW and In PfOCSSS..............i.... '........r..o..... '.!. 221 ,5OO

To backflush material cost from BIP to finished goods. This is'apostdeduction. The calculation ls:

I I O,5O0222,AOO

$232,5O01 1 , O O O

s22t,5OO

Cost of Goods Sotd.............................-..............r.tt.. 223t5OAFinishgd Goods....r.....o...........i.....................'... 223r5OO

To backflush materlal cost from finished goods to cost of goods

sold. This ls a postdeduction. Tho calculation is:

Material in Juna I f inished goods............ ' $ 8rO00MaterialbackflushedfromRlP.""""""""' 221r5oo

s229,500

o,ooos223,5OO

II

!

Clppter 1O

Elo-O (Concluded|

Raw and In Process..........r.....................................rFinishgd Goods.....................D........r...r,.....r......Gost of Goods Sold ;..........,.,..................,.!....r..

Elo'7 Journal ontriss Involving the Rlp accounta arl':Raw and in Procgss r................r....................r..........

Accounts Payable .r . . . . ' . . . . . . r . . . . . . . . . . . . r . . . r , ,or. . . . . . . , .

2s3

300200

Gonverslon cost In Rtp ls adjusted lrom tho $lr2oo of June I to the$lrT0oostimate at Juno 3o. convorsion cost in finished goods isadjusted from the 94rooo gt June I to the $3rzoo estima.-te "i .1u""3o. The offsetting entry la made to the cost of goods sofd account,nfiero all conversion costs wero charged durini June.

500

20O,OO02OO,O0O

A-summary entry for all receipts of raw materials during the period.when dlrect materiafs aro used, no entry is needed, belausJtrrevremain a part of RlP.

Finlshed Good8....................r..........r.........o.....o........ 199 ,8OORaw and in Process 199 ,8O0r t a a a o a a a a a a a a a a a

To backflush material cost from Rtp to Finished Goods. This is apostdedugtion. The calcutation is:

Material in March I RIP balance s I ,OOO2OO,OOO

s2O9,OOO9,2OO

Materiaf rcceived during March,..........,...,

Material in March 31 RIR per physical countAmountto be backflushed.,.....,...,,,........,. Si99,gOO

Raw and in Procgss...........................................o...o, 3OOCost of Goods So1d............,.......,........,.......,..,. gOO

conversion cost in RIP is adjusted from the $1,ooo of March 1 tothe $lr3OO estimate at March 31, The offisetting entry is made to thecost of goods sold account, where all conversion costs wenecharged during March.

rIIII

Y - )- . 1

I: . ;!

Chapter lO . e

El0-8 Journal ehtries involving the RIP accounts are:Raw and in Process............ 367'000

Agcounts Payab|e.r............,.,........................... 367rO0O

A summary entry for all receipts of raw materials during the period.When direct materials are used, no entry is needed, because they .'remain a part of RlP.

Finishgd GOOdS,... . . . . . . . . . . . ' . . . . . . .o... . . . . . . .r. . . . . . . . . . . . . . . .o... . 365r4O0Raw and in Process..,.. 365,4OOa a a a a a a a o a a a t

To backflush material cost from RIP to Finished Goods' This is apost-deduction. The calculation is:

Material in April I RIP ba1ance.................. $ 291600Mater ia l receiveddur ingApri l . . . . . . . . . , . r . . . . . . . 36710OO

$396,6O0Material in April 30 RIR per physical sount 31,2OO

Amountto be backf |ushed.. . . . . . . . . . . . . . . . . . . . . . . S365,4OO:

Raw and in Process..........,...r,........,.. 4OO yCost of Goods So|d.,..... .........,.......... 4OO

Conversion cost in RIP is adjusted from the $1,4OO of April I to theS1,8OO estimate at April 30. The offsetting entry is made to the costof goods sold account, where all conversion costs wene chargedduring April. '

_,

EIO-9 Journal entries involving the BIP accounts are:Raw and in Process.. . . . . . . . . . . 246.000

Accounts Payable .............. 246,OOO

A summary entry for all receipts of raw materials during the period.When direct materials are used, no entry is needed, because theyremain a part of RlP.

Cost of Goods So1d...................... ,........o...,. 24Z.OOORaw and in Process........,.,. 247r0OO

To backflush material cost from RIP to Cost of Goods Sold. This is apostdeduction. The calculation is: v

Mater ia l in May 1 RIP balance., $ 11,000Material received during May........ 246,000

$257,OOOMater ia l in May 31 RIR per physical count lO,OOOAmount to be back f lushed. . . . . . . . . . S24Z,OOO

l

, / tt -

1)V

I>-

II

1

Chapter 10

EIO-9 (Concluded|

' Raw and in Process ,..........,...,.r.

Elo- lo

235

800Cost of Goods So1d....,.......o,....... 800conversion cost in RtP is adjusted from the $lr3oo of May I to the$2'1oo estimate at May 3r. The offsetting entry is made tb the costof goods sold account, where all convercion costs were chargedduring May.

(1)

(21

(3)

(41

The most recent purchase involved a quantity greater than the totalmaterials in ending inventories, and that purchase gives a cost of materi-als of $42o'o0o/l,4oo, or $3oo per unit of output; t6erefore,Materials cost of finished goods ending inventory

= 50 units x $3OO per unit = $15'OOO

The conversion cost per unit is calculated by dividing the total GoDV€r-sion cost by (al the number of units startedrlb) the number "o.pl"t"d, or(cl the number completed plus the number oi partially "onu"tt"i units inthe RIP ending inventory (not an equivalent units calculation|:(l) $eSOrlSO + 3,OOO = $96.72 conversion cost per unit(Ot $29Orl6O -r grlOO = 993.60 conversion cost per unit(c) s29o'l6o + t,f 2o = $g3.oo conversion cost per unit

The three possible amounts for the conversion cost of the 5O units in fin-ished goods ending inventory are:5O units @ $96.22 = $4,93O of conversion cost5O units @ $93.60 = $4,690 of conversion cost5O units @ S93.OO = $4,650 of conversion cost

L-owest = g15,OOO materials + g4,650 conversion = $19,650Highest = $l5,OOo materials + $4,g36 conversion = btg,ggbDollar di f ference = $19,936 - $19,650 = $1gODifference, to nearest l/1O percent = $1gO * $19,650 = O.9%

b

7-1-

2ffi Chapter lO

810-1 | r

(f l A $3OO materials cost per unit was calculated in requirement (lf of thepnevious exercise; therefore,

Materials cost of RIP ending inventory = 22O units x S3OO Fer unit =$66,OoO

\

(21 The three possible amounts for the conversion cost of the RIP endinglnventoly ol 20 units, SAoh converted, are:

2O units x SOoh x $96.72 = $967.2O of conversion cost20 units r SOTo r $gg.0O = $9gO of conversion cost2O units x SOoh x $93.00 = 9990 of conversion cost

It seems inconsistent to assign 50% conversion costs to RIP when theunits in RIP lyere counted as whole physical units in the denominator ofthe conversion cost per unit calculation in requirement 2(c) of EIO-IO, yand when they were not counted at all in the denominator of the calcula-Uon in requirement 2(b) of El0-10. But the total dollar differenceassigned to RIP is immaterial. Whatever the amount of conversion costs \dassigned to RIP and finished goods, the remainder of total conver':sioncosts simply remains in cost of goods sold.

- t s

(3) Lowest = $66,000 materials + S93O conversion = $66,930Highest = $66,OOO materials + $S0Z conversion = $66,967Dollar difference = 566,967 - $66,93o = $37 - -Difference, to nearest 1/1O percent = $37 + $66,930 =.1oh

I\-

L1l>

tIt

Clpptsl0

PROBLEMS

Pto-l

(11 The erpected annual savings 8no $72OrooO, consisting of $gg4,ooo csny-Ing costs savings and $336'O00 savings in the cost of defects, calculatebag follour:

Carrying cogt savings = 30% r redustlon In avoriago variable cost of Wlp= 3Ooh r 4Ao/o r past avoriago variable cost of Wp= ,3 r .4 x (4O r 2OO r $lOO1= $384,0OO

Savings in cost of delects= $60 r rsdustion in number of defeetive units

(reduction in number= $6O x of defective units x

produced perundiscovered flaw)

= $60 r (4O% r 2OO r 2Oo/ol x= $ 6 0 r 1 9 r 3 5 0= $33610OO

I

-

b

!

(number of flaws notdiscovered immediately|

(114 r 1,4o0l

(2', Likely benefits that are not assessable from the information givenincluds the following:(al Faster cycle time resulting from the higher velocity of VUlp. (Because

the rate of final output will not change, velocity wiil change'inverse-ly with the change in WIP levets.) The faster cytle time will imptovethe speed with which orders can be filled, thul increasing cusio;ne1.saUsfacUon and perhaps increasing perceived prcduct value so thatprices can be raised (or price cuts delayed oravoided|.

(bl lf, as a rasult of the shorter cycle time, total lead Ume becomes lessthan the Ume customens are willing to urait for an order, then thecompany would no longer need to maintain a linished goods inven-tory. This possibility woutd resutt in additional savings in ffoor spacoand other Inventory carrying costs.

flhe value of the floor spacg ireJo up by eliminatin g 4o7o of Wlp storagelc not an addltional benofig Inventory cirrying cosfi includa etoragecosts, so the valua of the floor space is incluoed in the cirrying cJst s""-Ingr calculated In requiroment 1i;.|(31 Costs and other negatives to be comparsd with the savings inctude:(al Tho Increased liketihood of shutdowns due to work l6cations beinggtarved for WIP; lower WIP levels at each staiion nepnesent lowersafety stocks, so stockouts are mone likely at all toca-Uons,(bl The cost 9f -starting a larger nu-u"iof baiches oi lot" into produq-uon, which incrudes the iost of processing .o* ;;* orderc, pro_

2fi Chapter l0 .- -

Plo-l (Concluded) : -

duction orders, and material requisitions. flo reduce average WIPsize, either smaller batches must be started at shorter intervals, orprotracted stockouts must be allowed to occu6 otherwise, theaverags size of WIP will not drop.l "

(c) The cost of handling more loads of materials. lf lot sizes are smallenough to require only one load per lot both before and after thechanCe, then a larger number of lots will result in a larger totalnumber of loads.

(dl The cost of performing a larger number ol setups to permit runninga larger number of batches or lots of smaller size. ldeally, as part ofthe JtT implementation, setup cost will be driven down to eliminatethis problem.

Pl0-2

(1) Protech could achieve an average lead time on these orders of 42 days'calculated as follows:Reduction of time in WIP = 314 of present time in WIP

= 314 r (360 days + I O!= 314 x 36 days= 27 days

Reduction of vendor lead time = 113 r27 days = 9 daysNew lead time = present lead Ume - reductions

= 78 days - 127 days + 9 days)= 42 days

Note: lt is not stated that Protech defines WIP and WIP turnover in a waythat excludes the two days spent in receiving and the three days spentin linal inspection. To check that the average cycle time of 360 days/lO,or 36 dalrs, does excludE those steps (sothat there is no double-count-ing), note that a cycle time of 36 days, when added to the other intervalsmentioned, gives the stated total lead time of 78 days: 6 + 27 + 2 + 36 +3 + 4 = 7 8 .

(21 The advantages of shorter lead time inctude:(al The value of the floor space freed up by eliminating three-foudhs of

WIP storage,(b) lmprovement in the speed with which orders can be filled, which :

should increase customer satisfaction and perhaps increase per-ceived product value so that prices can be raised (or price cutsdelayed or avoided).

(c) lf the new 42-day total lead time is less than the time customersare willing to wait for an order, ttren the company would no longerneed to maintain a finished goods inventory. This possibility wouldresuJt in additional savings in floor space and other inventory carry-ing costs

-T

IiI

dnpW'10I

rc

Plo-2lConcludcd|

t3l Costs and other negatlver to bc compatrd rxlth Ste savlngs Includa:(al The Incrsaged llkellhood of rhutdonmr duc to work tocations belng

gtaryed for WIB lower WIP levelg rt cach ctatlon repnosont lowersafety rtockr, so stockoutr erc mort llkely at alf locaUom.

(bl Tha co;t of startlng r larger numbcr of bgtchee or totr Into produc-Uon, wlrlch.lncludcr thr cort of pmccedng monc work ordera, pro-ductlon ordan, and mgtorlal nqulgldonr (Beduclng averagc WIPrlza generally rcqulrca rtartlng rmaller batcher gt ghorter Intervals.)

(cl Thc cogt of hendling morr loadr ol materlalr. ll lot sizac arc srnallenough to rcqulra only onc load pcr fot both befgrc and after thechange, then a larger number of lotr wlfl rosult ln a larger totalnumber ol loads.

(d) The cost of performlng e larger numbcr of eetups to permlt runninga larger number ol batchcc, or lo'tr, ol rmaller 3lze. ldeatly, as partol the JIT lmpfementatlon, lotup cogt wlll be driven do*m to elimi-natc thlr problem.

(el The tmc and eftort that may bc rcqulrcd to Induce yendors toreducc thelr lead Umc by onc-tlrlrd.

Pt o€(1) (a) Raw and In Procasg 85O,OOO

AccOunts Payable ........o........................r.......r. 8so;oooA summary entry lor all receipts of raw materials during theperlod. When dlrect materlals aro used, no entry ls needed,because they rrmaln a psrt of RlP.

(bl Fastory Overhead Gontrol l3,oooSupplles ,..or....... 13,OOOlndirest materials ara rccorded as used.

Pa1rro11...........r.D....o..r...........D.rr..............o....o........

AcCru gd Payroll ................r...o.........r.....r.........

ACCru gd Payrott .o...................r..r.........................G a s h r . r o . . . . r . . . r . . . . r - . . . r . . . . r . . o o . r . . . . . . . . r . o . . a a . . . . . . . . . . . . . .

cost ol Goods sold -......r.r........oo............o...,,.,.....Factory overhead contro|.....D....o..,,,...................MarkeUng Erpenses Control ..................o.....o...o.Admlnlstrauvg Expensgg contro|,.o............o.,.,...

P81rO11...............ro.rr..,... 4OO,OOODirost labor ls crpenaed to thc cost of goods gold accounL

(e) Factory Overhead Gontrot......r........,.....t....,..r..,.. 6gi'OOOAccumulated DepreclaUon .,.....D..........,...r...... OggroooPrepald In9urance...............................o........,.. t3'OOO

(c)

(d)

4OO,OOO

4OO,OOO

6O,OOO120,OOOl3orooo

9OTOOO

4OO,OOO

4OO,OOO

\

rI

24)

PlO€ (Continuedl

(fl Factory Overhead Contro1.o,................,......'.

Chaptor l0

83,OOO54,OOO29,OOO

897,OOO

844,OOO844,OOO

CashAcCounts Payab1e................o....................

bl CoSt of Goods So1d.............. 897,OOOFaetory Overhead GontrolOverhead ls erpensed to the cost of goods sold account.

(hl Finlshed GoodsRaw and In Process......r..

To backflush material cost lrom RIP to finished goods. This is apostdedustion. The calculatlon ls:

Materlal in Juno 1 RIP balance '.'r.......r.. $ 4OTOOOMater ia l receiveddur ingJune.. . . . . . . . . . . . . . S5OrOOO

$89O,oOOMaterial In June 30 RIR per phyaical

COUl l t . . . . r . . . . . . . . . . . . . . . . r . . . . . . . .o . . . . . . . 46rOO0

Amounttobebackflushod... . . . . . . ' . . . . . . . . . . . S844.OOO

(il Gost of Goods So|d,...........,.............. '..r....,.. ' tt**Finishgd Good3.. . . . .oo.. . .o. . . . . . . . . . . . . . . . . . .o. . . t . . ' t 852IOOO

To backflush material cost from Finished Goods to Gost of GoodsSold. The calculation ls:

Material in June I Finished Goods.,r....o $ lgor0ooMaterial cost transferred trom RlP..'..... 844'OOO

slr034,OOOMaterial in June 3O finished goods, per

physical CoUtlt.....'r'......r.................'... I 82tOOO

Amount to be backflush€d '...... '.. '.......... 3 852'Ooo

0l Raw and in Procgs3...o... . . , . . .o..r. . . . .r. . . . . , . . . . . . . . . 3ooCost of Goods So1d...,,....r..t......'..r..r..r........... 2r7OO

Finishgd Goods.... . ' . . . . ! . . . . . . . . . .r. . .r. . . . .". . . . .r. . 3IOOO

Conversion costs In tho inventoly accounts are adiusted to theestimates made in ths June 3O physical counl For RIR the adiust-ment is from the $11600 of June I to $1r9OO on June 3Q forFinlshed Goods, the adiustment is from the $18O,OOO of Juno I to$177'OOOon June 3O. The offsetting entry is made to the cost ofgoods sold account, where all conversion costs were charged dur-ing June.

:v\_/

. 242 Chapter 10 . -

P1o-4 (Continued) . -

(gl Gost of Goods So1d..,.,.....,........... 656,000Factory Overhgad Control ....,...................... 656'000Overhead is expensed to the cost of goods sold account.

(hl Finished Goods........rt..........................r....,.... ' . 6t 5roooRaw and In Process................o.................... 615rooo

To backflush material cost from RIP to Finished Goods. This is apost-deduction. The calculation is:

Mater ia l in May 1 RIP ba1ance., . . . . . . . . . . . r . ,o. . $ SO,OOOMater ia l receiveddur ingMay.. . . . . . . . . . . . . , . . . . . 620rOOO

5650,000 !

Mater ia l in May 31 RIR per physical count 35,OOO

Amount to be backf lushed . . . . . . . . . . S615,OOO:

( i ) Cost of Goods So|d. . . . . . . 605,000Finished Goods.. . . . . . . . . . . . . . . . . . , . . . . . . . r . 605,000

To backllush material cost from Finished Goods to Cost of GoodsSold. The calculat ion is:

Mater ia l in May 1 Finished Goods.. . . . . . . . , , . . S15O,0OO r vMaterial cost transferred from RIP ........... 615,OOO

$765,O0OMater ia l in May 31 Finished Goods, Fer

physical count. . . . . 160,000Amount to be backf lushed.. . . . . . . . . $605,000

0) Raw and In Procgss.. . . . . . . , . . . . . . . . . . . . . . , . , . . . . r . . . . , . . . . . 800Finished Goods.. . . 4,OOO

Cost of Goods So|d. . . . . . . 4,8OO

Conversion costs in the inventory accounts are adjusted to theestimates made in the May 31 physical count. For BIR the adjust-ment is f rom the $1,30O of May 1 to $2,10O on May 31; forFinished Goods, the adjustment is from the S13O,OOO of May 1 toS134,OOO on May 31. The offsetting entry is made to the cost ofgoods sold account, where all conversion costs were changed iduring May.

24a

I

I

Chaptar l0

PlO-4 (Goncluded)

(21 The three completed accounts are

Raw and in Process Finished Goods5t1(al(r)5/31

3 l r3OO62O,OOO

80037,1OO

(h) 615,OOO 511 28O,OOO(h) 6i5,OOO0 4,OOO5/31 294,OOO

( i) 605,000

s 12.OO

s4.501 . O O

$5.50

$6.50r 2O,OOOs(l3O,000)

s (4O,OOO'6O,OO0

13,5OO14,OOO

120,000

Gost of Goods Sold511 -O-(d) 50,000(g) 656,000(i) 605,0005/31 1,306,200

Plo-5

(f ) Contribution margin of lost sales (2O,OOO units):Revenue ($1 O,gOO - 900 uni ts) . . . . . . . . , . . . . . . , . . . . . . . . . . . , . . . . . . .Variable costs:

Gost of sales (S4r050 + 9O0),.............................,....Marketing and administrative ($gOO - 9O0).,.,........

Total var iablg cost . . . , . . . . . , . . . . . . . . . . . . . , . , , . . . . r . . . . . , . . . . . . . ,Uni t contr ibut ion margin. . . . . . . . . . , . . . . r . , , . . . . . . . . . . . . . . . . . . . . . . . . . ,Volume of lost sales. . . , , .

Total contribution margin of lost sales,...,.....,........Overtime premiums (overtime cost is less than the.additional contribution margin of tost sales):

15,OOO x $6.50 = 597,500 > $4O,OOORgntal savings.. . , r . . , . . . . . . . . . . . . . . . . . . . . . . . . . . . . r . . . . . . . . . . . . . . . , . . . . , . .Rental income from owned warehouse

(1 2,000 x .75 x S1.50) . . . , . . . . . . . . . . . . . . . . . r . . . , . . , . , . , . . . . . . , . . . . .Elimination of insurance and property taxesOpportunity cost of funds released from inventoryinvestment:

Investment in inventory

Interest belore tax i . tz '1

\ 1 - . 4 0 /

Estimated before-tax dollar savings

$6OO,OOO.20

I

I

II

t>

9_q2tr9_

v

Chapter tO . *

PIO-S (Goncluded) : -

l2l Conditions that should exist in order for a company to install just-in-timeinventory successfully include the following: -(al Top management must be committed and provide the necessary

leadership support in order to ensure a company-wide, coordinatedeffort.

(bl A deQiled system for integrating the sequential operations of themanufacturing process needs to be developed and implemented.Raw materials must arrive when needed for each subassembly, sothat the production pnocess tunctions smoothly.

(cl Accurate sales forecasts are needed for effective finished goodsplanning and production schedul ing. s

. (dl Products should be designed to use standardized parts to reducemanufacturing time and reduce costs,

(el Reliable vendors who can deliver quality raw materials on time withminimum lead t ime must be obtained.

I

L

I

I

!

CHAPTER 11


,l

b

Ol 1-'1. Yes, lo lhe exlent that il is practical to m€asurethe r,ralue added or the productivity of a worker.However, msasurement of lhe cootribution ofeach individual is never exacl. Also, a businesscannot pay more for materials or labor than thesales price will recover. Materials, workers, andmachines produce products and services.There must be a difference belween revenueirnd oosts consumed; othenrvise, lhe businesscannol sun/ive.

Otl-2. Productivity may be defined as the measure-menl of produclion performance using theexpenditure of hurnan elfort as a yardstick. ln abroader sense, it may be described as the etfi.ciency with which resourcas are converled intocornmodities ancVor services that people wanl.

Ql 1-3. Productivity is important to a lirm because highproductivity reduces the unit cost ol the outpuland makes ihe f i rm more compel i t ive. t t isimportant to workers because lheir real earn-ings should be increased when productivity ish igh. Product iv i ty is importanl to societybEcause increased productivity enables societyto gel moro and better oulput from the basicresources of lhe econorny.

Ql 1-4. To measure labor efficiency, it is necessary toeslabl ish a standard of per formance. Thismeans determining how much a worker shouldbe able to produce, or how much a worK cr6wshould be able lo produce. The standard isdelermined by time and motion study, lest runsby skilled workers, and averages oi past per-formance by skilled workers.

Q1 1-5. The purpose of an incentivs wage plan is toinduce a worker lo produce more, iesulting in ahigher wage and reduced conversion cosl oe,unit. Freguenily, machine outpul is l imited byworker performance. lt employee perlormancecan be increased, machine cost per unit of pro-duclion will decreasa. An incentive wage ptanmay atso reduce loaf ing, ind i f ference, andcarelessness, and may generate a cost.con-scious labor force.

Q l 1 -6 . Gene ra l l y , hou r l y ea rn ings go up w i thincreased production, and labor co.-st per unit oloutpul is reduced. High production rates alsoreduce overhead cosl per unit of output, which

_ is often the most significant savings.Ql 1-7. (a) During periods ol curfailejactivity, it is

iust as n€cessary to keep cosls down asi t i s when ope ra t i ng a l f u l l capac r t y ,Assuming that the incenlive wage planresul ted in grealer labor ef f ic iency anolower cosls per unit at full capacily, thanthe labor cost per unit should be lower ina slack period if the incentive wage scate

is conlinued, A shdrter workweek orsorne other syslem of sharing lhe workwouH be indicated.

(b) Ordinarity, it is not a propiliour tine to hi-tiato an hcentive wagr ptan wtren a phntis operating far below capacity, becausethe worker is already fearful d sornethingless than full employrnent. ll a ,eason-able day's work is being received for thegoing rate ol pay, po.stponement of the. incenlive plan is indicated. However,there is a nalural tendency for workers loreduce output durhg such perlgds, there-by increasing cosls, wilh a lendency lobring about further reduction in the vol-ume lhat can be soH. With luft e4plana-lion and underslandhg of thc situation,the incentive wage could be htroduced

- with a planl operating at 6006 capacity.O1 1-8. In the straight piecework plan, each worker is

paiC a certain amount for eadr unit produced,while being guaranteed a base hourly wage. lnthe 100% bonus plan, €ach workor L pai<J forthe standard time to cornplete the job or unils ifthe job or units are finished in slandard time orless. In the group bonus plan, workers in igroup are paid lheir standard hourly wage. lfthe group produces unils in oxc€ss of the stan-dard, lhe workers are paid for the time saved.

Q1 1-9. An organizational or gainsharing incentive planis designed to provide incentive pay to allemployees by way of an organization-wideplan thal rewards for improved productivity.

01 1-1O. The basic concepl underlying the relatbnshipinvolved in the cumulative average lime learn.ing curve modet is that every time the cumula.live quantity of unils produced is doubled, thecumuhlive averags lim€ per unil is reduced bya given pgrcentage.The learning curve lheory is used to solve.problems such as determining labor costs inbids for governmenl conlracls, determhing btcosts tor various slagos ol production runs,predicting labor-hour requirements, permittinglhe calculations of slandard labor cost varilances, assisting in lhe evalualion of a manag-er's performance, and providing a basis forcost control.

0 1 1 - 1 1 .

Q1 1-12. The f inancial accounting aspecl is concemedwilh a record of earnings of each employeea n d p a y m e n t o f t h e w o r k e r s . F i n a n c i a taccounting records income, FICA, and otherpayroll laxes and deductions wilhheld; proviCerlor disbursing lunds lo workers and to taxingand other agencies; reporls io each employeeal least annually the arriount ol wages eamed

245

246

and tho arnountl withheld for various PurP€'es; and recordg the payroll liability and pay'

ment each PaYroll PeriodThc cost accannting 8sP€cl is concemod with

time worked oo each Fb or h each cost conlet,in order to detetmine the labor houn and bborcosil ol Ptoduclion.

Ot1-13. tui eflbient labor force beghs with the designol the producl gnd en analysir of produclionteclrnQuce and i9b reguiremenls. Wi|h he per'sonnel department adeqtntely informed abouljob specifications, it is lhe lunclion ol thisdeportneot !o locura the pcrsanel qualilied lodo each iob. The produclion planning deparl'menl keeps the work llowing smoothly. Thstimekeeping, payroll, and cost accountingdepartments contribute to lhe lotal elficiency byaccounting for the time purchased and by rnak'ing payment lor the work as well as chargingthe cost to lhe proper dePartment and producl.

Q1 1-14. (a) Delermining labor hours worked by eachempbyee is prirnarity lor payroll PurPo3-es and linancial accounting,

(b) Determinatirn ol labot hourc consumedon each irb or h a department is a parto l cosl determinal ion for a job orpnocoss. lt shouH also be a measure oflabor efliciency, since hours consumedand productive output can be cornpared.

Ol 1-15. (a) The cbck card showg the amounl ol timean employee spenl in lhe plant €ach dayol a payroll period. lt is evidence that lheempbyee's time has been purchased.

(b) The time ticket shows tho amounl ol limean employee spends each daY on 6achicb or in each department. ll is an ilem'ized invoice ol the time thal the employ'ee selb to lhe empbyer.

01 1-16. Since the clock cards show the time employ'oes are h the pbnt, the lirst step is to makesure no error exists on the time tickets. lf thetotal time shown on the time tickets is cortecl,trren the workers speot time in the phnt whennol working or not assigned lo specific' jobs otdopartments, gr when assigned lo mainte-nance or repair work For the time thal is idle orassigned to indirect bbor, a chargo is made toFactory Overhead.

Chapter 11

01 1-17. Bar codes are symbols thal can be processedelectronically to identify numbers, letlers, orspecial characlers. Bar-coded empbyee idenlFlication cards or badges, and lask identilica-tbns can be used to replace clock cards andtime tickets to collect payroll data ard to mea'sure worker activitY.

Q1 1-18. Appendix One method would be lo charge thepremium costs directly to lho Prod'usts in thc same rtra rne, as straighl'l ime labor cosls . This would beaPproPr iate when Part icu lar iobshave to be rushed to ccnPlelbn. Asecmd method woub be to tr€at theptgmium as an ovefiead elem€nt lobe ctrarged to all ptoduclirxt throughthe allocation ol overhead. lt wouldbe appropriate when lho ovatlim€ isa recurring condilion normally inci'dsnt to the level of oPeratiens'

011-19. AppendixThe bonus and vacation pay shouldbe accrued ovet the benefited timeperiod. When the bonus and vaca-tinn pay are pairJ, the accrued liabililyaccount is debited and the cash andwithholding accounls are crediled.

Ol 1-20. AppendixThe recornmended method in com'puting costs under a pension plan isto detemine aciuariatly lhe eventualpension paymenls lo covered empkry'ees and to cfrarge these luture pay'menls as a cost gt curt€nt productionover the exPected geriod of acliveservice of covered employees' Costsbased on Past services should bewr i t len o l l over some reasonableperiod on a systematic and rationalbasis that doos not distorl the operat'ing results of anY one Year. Thesecosts are incurred in contemplationof lhe presenl and luture seryices nolonly of the individual employee' bulalso ol lhe organi:ation as a whole'Bene f i t s o l t he P lan -such asimproved morale. removal of super'annuated employees' and attractionof more desi rable Personnel-areexPecled lo imProve the oPeratingetficiencY of a comPanY.

I

217Chapts ll

El 1 -1

EXERGISES

ORANGE CITY CA"I{NING COMPANYtâbor Schedule for Terry Paco

For First Week in June

Units producod a r a a . a a a a a o a a r a . a . a a a a . . . a r . a r

4 01,32O1r2OA110o/o

S99396

s9.90s.30

E11-2

(11 Tuesday Wednesday

Hours x hourly ratg............Unlts above standard.H ou rs saved............r..........Value of tlme gavgd....o...o..SOoh of value of Ume savedEarninga ............................

U9"d"y$64.00

os64.OO

t o.50

s 4.OO$ 3.20s67.20

s64.OOl 5

.75$ 6.00s 4.80$68.80 s200.oos64.OO

(21 Efficiency ratio: lo7,50h

Earnings: 1O7.soh r $8 hourly rate r 4O hours = $344

(31 Earnings: ($8 hourly rate + 5Yc rate increase) r 24 hours =S8.4O x 24 hours s $2O1.EO

860- =800

!

II

Chapter 11248

t oe 5; !: qo E )

8 gE{ tE TE :E ss 3E g. L= oo bE O

r 3S FE r r

$ g3 egtEtg cDr t co !E ! to oO L> 5' 6 9

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- l q I

r = N N N l o l l

I t O q , g g l l F l lN O I r CO ( , lo | l lo N o l ' F l N l l

- t d l

N I O c l r \ ( o l C ) l lF F F r - l @ l l

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- < l r O C {0 ) C O O f - f r lF 1 C { $ l r -

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o r o N o ot r l F Q O r\ t \ t c l o t o

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; F ; F E i l

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. i :! ! t- r P

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o <t o @ c{t ottlc o r - o - - l S l lG

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6

t r ot 3o ct r oi r 0

II

I

I

ChWtar ll

Ell\5 19A productivity ratio =' 194 standard hours for work done *19A total actuar dirsct and Indirect rabor hours =943,823 + | $251324 = .422089

Hours needed for i 98 production at l gA productivity ratio =198 standard hours for work done -r i 9A productivity ratio =558t51o + t422o89 ..r.rr.........o.....r.r....o.....o...............................Less l9B total actual direct and indirect labor hourt,...,....:.-,Hours savgd ............-...o...........r...........r..r...r.r.......

Value of wages saved = hours saved r lgBsvoriage hourly pay plus labor fringe benefits =38,221 r $i4.7O = $561,949

Employee gainsharing incentive totaf =vafue of wages saved r 5OZo =S561,849 x SOoh = $28O,g24.5O

Gainsharing incentive per employee =total gainsharing incentive r- numberof eligible employees =$28Or924.5O + 755 employees = $?Z2.Og

219

1132312041r2g4rgg3

38'227

Ef l-6 I batch ...r. . . . , . . . . . , . . . . . , . . t . , . . . . . . . . . . . . .o... . . . . . . . $60rooo2 batches..........,...,...........,.............,..,.,, $lgroOO lgo% of $6Oroogf4 batchgs..o.r.......................r.r................ Sggrcoo igorh or Scgroooi8 batches....................,..........r...,.r.......,. $gorzzo iaoy" or $grcooi16 batches............r.,..........,........r............ $zorszg igow of $3or72o)

E11-7Cumulative Average

Required Weeks per Bridge1 0 0BO (1OO weeks r 8O%l64 (8O weeks r 8O%f57.2 (64 weeks x 8O%)

7 additional bridges must be buitt in order to bring the cumulative BVB'-age below 52 weeks.

BridgeNumber x

I24I

I

YI

I

Chapter | 1

E l l - 8

(f l The schedule below demonstrates the 8O7o learning curve that the com-pany expects to experienco in producing the time devices:

CumulativeLots x

CumulativeAverage

Time =9O.OO hours72.OO57.6046.08

CumulativeTime

9O.OO hours144.OO230.40368.64

I248

At an SOoh learning factor, the cumulative time to produce 8 lotsshould be 368.64 hours. At a standard labor rate of $9 per direct

' tabor hour, the standard amount for total direct labor cost should beset at $3,317.76 (368.64 x S9).

l2l The company shoutd estabtish the standard for direct labor time equal tothe marginal direct labor time required to produce the eighth lot' provid-ing steady-state production occurc after the eighth lot. To assure thatthis standard time will be accurate, the company should:(al Keep accurate records through the first I tots to determine if an

EOoh learning factor is experienced.(bl Continue to keep accurate records for each successive production

lot to provide a basis for:1. Conformance to expectations about labor time (i.e.' steadystate production after 8 lots)' or2. Determining when steady-state production does occur.

E1 1-9 APPENDIX

(1) Overtime premium charged to production worked on during the overtimehours:

Work in ProcgsS...,......,.....,..............,,.......,.................Payroll (4O hours x $91 + (1O hours x 1.5 x $9)..,,..,.

(21 Overtime premium charged to factory overhead:

Work in Process (5O hours x $91........,....,..,......o.........Factory Overhead Control (1O hours x.5 x S9)...........

Payroll.... .........,.....

495

45045

495

495

II

I

I

IChagter ll

E1 1-1 O APPENDIX

SubsidiaryRecord

Factory Ovgrhead Controt.........,.................Bonus Pg1|... . . . . . . . . . . . . . . . , . . . . , .r. . . . . . . . . . . . . . . . . l34.4OtVaCatiOn P8f.......r........r...r.............o.... G7.ZOz

Liability for 8onus..........r............r,........r.Liability for Vacation Pay .....o.r..........;.....

" (9lO + g32l x 40 hours r 4 weeks = S6'Z20 + 5O weeks2 ($fO + $32) x 4O hours x 2 weeks = g?,36O + 5O weeks

EI 1.' 1 APPENDIXFactory Overhead Controt lgeS,OOo x 2gTo1...,....Marketing Expenses Gontrol (SgrOOO x Zg;/o1......AdministraUve Erpenses Control ($7,ooo x 2a./"1

Liability for Pensions (S5OTOOO r T.go/o1..,...,,-Liability for Other postretirement Benefits

($5o, ooo x 2.3o/o1.....r.r.,,...r......,......Ff CA Tax Payab le (95 0,O0 O r T .S%1..........,...Federal Unemployment Tax payable

($50, ooO x .g/ol ....r,....r.......r.....................State Unemployment Tar payable

($SO, OOO x 4.6Tol ...,..........ro...............,.....,Workerst Compensation Insurance payable

($5o,ooo r l%1.,.,. . . . . . . , . . . . . . . . , . . . . . .Medical Insurance payable ($SO,OOO x 4%1..

GGA-Canada (Adapted). Reprint

El 1.12 APPENDIX

t l ) The entry to record the payroll liabilitpPayrol l . . . t . . . . . . . . . . r . . . . . r . . . . , . . . . . . . . . . . . . . . . . . 26r7OO.OO

Employees Federal Income Tar payable ..........Employees State Income Tax payaL|o.......,......Employees City Wage Tax payable .......,.,...,,....l lCA Tax Payab18....................,.....Accrued Payroll !.,...,,......

25r

l-

b

Dr. Cr.201.60

134.4067.20

= 5134.4O= 67.20

9,8OO2124O1 , 9 6 0

3rgo0

1 , 1 5 03,750

400

2r3OO

5002,OOO

with permission.

2,5OO.OO500.oo267.OO

2rOA2.5O21,430.50

(21 The entry to distribute the payroll:Work in Process,....................,......,..,,........fac-tory Overhead Control ..,............Marketing Erpenses Control ............................r...Admin istrative Expenses Control .............,....,..,...

Payroll

l

18,OOO.OO3,OOO.OO4r2OO.OO1,5OO.OO

l-26,7OO.OO

_\

252

E1 1-12 APPENOfi (Concluded)

(31 The entry to record the employer's payroll taxes:

Factory Ovgrhgad Gontrol .................... '...........--..Markgting EXpenSgS COntrOl ........'.......................Administrative Expenses Control ............or'..........

FICA TaI Payab19.... . . . . ' . .r . . . . . . 'o. ' . . . . . . . . . . . . . . . .r. . . . . . .' State Udemptoyment Tax Payab|g...............,..,.Federal Unemployment Tax Payabl€....'.".........

2,394,OO478.801 7 1 . 0 0

Chagter | 1

2,O02.5O854.40186.90

IL

I

LII

II

!

ChWter tt

Pr l -1

(fl Present cost

Direct labor per hour

PROBLEMS

$101 2

$22 -r 5 units per hour =$4.4O conversion cost perunit

253

Convcnbn Calpcr Unlt

tlI

!

Factory overhead per dirrct labor hour...

PcrWorkcr por 8-Hour Deyunltrlrromblcd Plccowort Dlrcct Fectory Totaf convcrzlonpcr &Hour Day Rrt Labor Ovcrhead Coot

( t )

Boguhr Worksoot

EmployoeHourtyRrtr

Clrnct D--...- !O.OO rl,,ukon, T.--..- B.OO r&hott, J...-..... I.0O r

3 80.oo rs9s.oo05,40 eo.00

110.00 06.0012650 00.00144.00 03.00

Totrl dlnct lebor -

lncrndyo lflagr Plan

Boe PayIncrntlvr Pay

(Unltr Producrd r(Boo Frtr r Wort Hourr) + InconUvo prrmlum) r

10 szoo4ft 2.1250 z.2o55 e.3o80 z4o

3176.00101,4020s.00222.50240.00

Sf.4o1.81.12.3.05a.oo

(21 lf a producuon rate above 4o units per employeo per g-hour day isnoasonably attainable by the worksr, the employeo oarnings wili increaseunder the plecework proposal, Since convercion cost per-unit decreaseswith increased output, management should favor the iieceworkproposal.

P11-2b

TotrlWorl- l'borWork Cort

4O hn, E 32a0,3O h.!. r 320aO hrr e 280

lc.go r 4o hn = 't.to5.5O r 4O hn - 2t2O4.5O r 4O hn = 18O

TotrlLrborCoel

Totrl dnct hbor._._._. _t&ao

flrclt - t8.fo r llog hbor oori Incroor

lO5 r $t ,OO= 3to!t t OO5iO5 r l.OO = t0tt 3S!t105 r l.0O = t0tl O45

tl,ql5

Proot: #*

= 2g.2% trborcort Incro'r

b

254 Chaptor | | '

Pl1-2(Gonctudedl

l2l To assess properly the effectiveness of the new plan, it is nocessary toanallze lts eftect on convorslon costs and not just on direct labor costs.Although dlrect labor cost per unit may rise, this Increase may be morothan offset by distributlng the overhead over a larger Yolume.

A comparison ol the two pay plans and their effects on convsrsion costper unit shows:

Totrl lrbor Tctrl Totrl Unltbbor Cort Frctory Ovorlrerd Convotrlon CorwonlonCort prr Ur*t orrorhod por Unlt Cott Cott

tncsntlvc wagc plan tl,o35 tA.Zt tlr2Oo J|ZZ t2,235 $1355rStnfght hourly ratc 84O 5,OO IJIOO 8.OO 2,O4O 13.002

Dtflcrcncc t .o7 l.El 9_1.09) nctdecrearc

152 ,235+165=$13 .552 $2,O4O + 150 = $i3.OO

The decreaso In conversion cost is minimat; however, the fact that cus-tomels can be s€ryed sooner might be worth additional labor cost.Based on learning curyo theory the productivity of the worker mightincrease sufficiently to reach a more satisfactory output and cost level.

Chapter 11

I

tI

L255

. , I + , l

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, ' , 8

E F g l e E ' n o oFEFI g F E i f iE $ l I q E$t l S ' r t I

II

L

!

$gil ; 5 E E g9 9 9 o oq q q i 69 9 l r @ c , iu r ] \ q , c ,g

Eat

P

otOst

o $ l| ! t r l" .ilF 8lgsl: 9F O

E fir (\l

$ s@ = o

u _Er* 6 l oE j t 6 I I I IE E I F t . - Fu , d r

t t l, ^ o l

E ; l 3 I p s I: l E l F ? d l

G r F

l >>l g .E 6 rl^ sl E E fi s s

s ! t E F ; F E

@ @ q ,iit \t tfg "

oo-,r!ccIr-o! 1O Io lo lo . I

r , o o oh o og d P

gE Ftu ) o o\ q q

F N

eE9ltr,t gl

l i i g o o , o o

5l ., o .,t t

? r

€ i g i e R gs e # l.f gl $ NEgl 5 N s s s

t t l

.e El o.E€t \ ' I p I I= 6 l

F t ' F F Nl - lr i i l

l >! e,i € f i E il: A d l 5 e H 5 dn = , t E P I F E

5;l ;q r @

-1

256

Pl l-3 (ConcludeUf

Hours worked

Chaptar l1

. a a a r a a a a a a a a 40855800

Units producedStandard produgtion (20 units x 4O hours|..-..............Efficiency ratlo (855 + SOOIBase wage per hourBase wage plus bonus (1.O6875 r $91 ...............o.....,..Wggkly earnings ($9.9t975 r 4o hou1s1........r.............Unit cost ($384.75 + 855 unltsl ..or.......t.....r....,....,r.o...

1.06875$9.0o

$9.91975$384.75

$.45

(_

Clpptor l1!

257

g'ilglcr o i IA - - I

i i s$! iq f in$r,3 iE "l'

- o i I

iEfFl fiFFEFt i i { l ; . .EE

;eE^lEs$gl sesss5 i!

tl$ n 6r c! '!

€g;FsF"

i El"*=*=* "

si;l "

sil tFF$s

r : c ! t F S E igsrgli EsfE sl gfiggH5 i i ' i - 5 - E ! = 1 "

l r O r . O U t@ N O t o NO u ) N ( \ | @N N N N N

a a a a

o

E E I B s s s sE $ l g B d d d

NoF

g;l '

! r o 63 s Eo s E: 5 €&l r- r-c t o SJ e g

grliS;$3ifl$; $;l;; $l'

EgE3E33

o o l 'O N NN N N

b s'rg e sleE g l

'lgggFsu l

r 8 l o= : 1 55 F l - -

_ l

G I

l : l3 x l 3

g = i r A

t

r l g i l i .-' gEJEF

o o 6 | ON ( '

: -El€ E l g5 3 l 'o i l

F$ lg33Es

I> !t

I

G g

- i

2fi

P 1 1 - 5Straight Piecework

Units produced-regular tlmePiecework ratePigCgWOfk p3!r. . . . . . .r .o.. . . . . . . . . . . . . . . . . . . . . .r . . . . . . . . t . .r . . . . t . . t . . . .

Downtimo PaY

Chapter | 1

Dodd Hare Lowo

400 410 370$ .66 $ .66 I .O6

$264.00 $270.eo 9244.2030.oo o 24'OO

o 54.OO r 36'00

s294.OO $aZc,oo $304.20284.OO 277.2A 302.20

$ IO.OO $ 47.40 $ 2.99: = - z :

Ober RuPP

a a a a a t a a a a a a a a a a

OVgftime p8!....r...........r....r....rr........r...r........o...........

Total l \ r3$lB3 . . . . . . . t t t " """ t t " " to""" ' r t t t " " t t " "" t " ' t t t " "" '

WaggS por bookst t" t t t " t t t " " t t t " " r t " t t " ' r " to"" t t " t " """ '

U n d efp aym OJ1t...............r......r..... i ....o.r.. r.....o...........r..

t6.r $6 x 15ooh = $54

Percentage Bonus Plan

UnitS pfOdUCgd,o..r . . r . . . . . . . . . . . . . . . . . . . . . . . . . ' r . . . . ' . . . . . ' r . . . . . . . . . ' . . . . " '

Standafd pfOdUCtiOtl................ '..o...... '.......o......r..............

Eff iCignCy fat iO.o... . . ,o.r. . . .rr . . . . . . . . . . .r ' . . . . . .r . . . .r . .r . . .r . . . . . . . t . ." ' r '

RegUla f Wa993. . . . . . . r .o . . . . . . . . . .D . . . . . . . . . . . . . . . . . . .o . . r . . r . . . t . . . . t r . . . . t " '

8OnUS. . . . . . . . . . . . . . . . .oo . . . r . . . r . . r . . . . . . . . . . . r r . . . . r . r . . . . . . . r . . . . r . . . . . . . . . . " "

TOtal wageS .. . . . . . . . . . . . . . . . . . . . . . . . t""t tr t t" t""t ' t t ' t""t"t t""""t"o

WageS pef bOOkS . . r . . . . . . . . . r . . r . . . . . . . . . r . . . r . . r .o . . . . . . . . . r . .o . r . . . . r . . . t . .

UndefpaymO; .1 t . . . . . . r . . . r . . . . . r . . . . . . . . r . . r . . . r . . . . . . . . . . . . . . ro . . . r . . . . . . . . . . . .

r25oh pnemium x $24O regular wage = $60or S6.00 hourly rate

x .25 pnemium

51.5O bonus pay

S1,5O x 4O hours = $60

250200125o/o

s240.oo60.oo1

$3OO.OO280.OO

1 8 0200

goohS2oo.oo

o$2oo.oo

l 7 1 . O O

$ 20.oo s 29.OO=: ::z:

I

I

I

E

Chaptar 11

Pl l-5 (Concluded)

Em erson Effi cien ca System

Unitg produced..t.........r..Standard productionEfficigncy ratio..........BOnUS li l l t8 .......r..,.,....r...............

Rggular wago.r...or............r..........,......r..................r...Bon us'uraff o ...............r.r......r.....r.r...r...................r.r...Downtime pay (2 houra x 35.60}.Total wages ............,.....

b Wages por books........r........,.,

I

b Suggs Ward

259

5905701103.5%

450hs2l2.go3

95.7611.20

240300

80o/o20o/o

5224,oo2$ 44.90

a a t a o a a a a a a a a a a a r a a a a a s268,8O S319.76233.20 2go.o0

:----$ 35.60 $ sg.zoUn d erp aym (!Dt....r..rr".........r........,.r.r.....r.r...... i ..........

t6OO units (standard production for 4O hours ) = 15 units per hour

15 units per hour r 38 productive hours = 57O units (standard production for 3ghours)

z4O hours x $5.60 = $Z24,OOs38 hours x $5.60 = S2i2.gO

P 1 1 - 6

(1 ) Hours worked (5 workers r 4O hours)................,,.r...,,.........,...Regular wage (2OO hours r $61.........,..........Units produced.. . . . . . . . . . r . . . . . . . . . . . r . . . . . . . . . . . r . . . . .D.. . . . . , . . r . . . . . . r . . . . r . . . r . . . .B o n u s " " t ' o t ' r t a D t a a a a . a a a a a t a a a a r a a . a a a a . a r r a a a a a a a a a a . . a a a a o a a a a r a a r r . . . . . a a . a a a a a a o r . a .

we-ekly garnings.o....r......rr........r...................,...........,..o.......r...

unit labor cost Gtl1252 + 452),.. . . . , . , . . . . . . . . . .r. . . . . , . . .o... . . . . .o..r. . . . , . .Unit factory overhead ($f r4O6 * 452).............r..r..,...,...o.r..,.r..,Unit convgrsion coSt... . ' . . . . . . . . . . . . . . . . . . .r. .r. . . . . .rr. . . . . . .r. . . . .r. .r. . . . . . .r. .

t452 unlts produced4OO units standard

_52 units above standard52 units x $i workersr share = $S2 bonus

200s1,2OO

45.2s52 r

$i,252$2.7699$.?.0973$5.8672

b

l-

b

II

Chaptor | |

P11-6 (Concluded)

t 4Oo units per 40 hours = 10 units per hour1O units per hour + 5 workerc = 2 units per hour72 units produced + 2 units per hour = 36 hours standard time

z lf the group bonus is computed for the week, rather than daily' the bonuswould be 36 x 2o hours saved, or $156. Then, $1,356 + 432 units = $3 unitlabor cost. Overhead cost would be S1,4OO + 452 units, or 9?.O973 per unit.

P11-7

( 1 ) THOMAS INC.Quarterly Bonus Allotment

At End of March

Unltl-...'......-..Standard hounfor unltt.--..-..Actual houn..-Bonurr to rhoun ttvcd..-Total carnlngr.Unit labor cort.Unlt factoryovgrhcad ,....,.{Unlt convcnioncoat ,............,.-

72

3 6 1. , 4

3zlo333333

*r.8e8e

glzaul

8t

nrn&

3 s32'tilSr.oooo

33.45A8

toJ508

95

171t210

t r s328!t33,0000

32.94�71

35.947a

102

5tao

f 0 63sooir.oooo

327451

35.74tn

102

5 l40

f o o330033.OOOO

3Z74nl

35.74tt1

152

22A200

3 t 8 o 231,380$3.Os31

33.0073

30.1504

EmployeesParticipating

1 Works managgr....r......2 Produstion engineers.,5 Shop supervisot'tg.........1 Storgkgopor.,.,..,....r...,.5 Factory office clerks ...l5O Factoty workefs ......

PointsAllowed for

Each Employee250200200loo

1 020

Sharaper Points3.125r

3.7253.1253.1253.7253.125

TotalShare

s 781.251,25O,003,125.0O

312.50156.25

9,375.0O

9!9'o99.09

TotalPoints

250400

l ,0oo10050

3,O0O4,8OO

ra27O,OOO24O,OOO

3O,OOO

3O,OOOs15 ,OOO

units actual productionunits normal production

units excess ovor normal

u n i t s r $ 5 O = $ 1 5 , O o O+ 4,8OO points = 33.125 qer point

f' l

I

Chapter | 1

P l 1 - 8

(r lGumulative -Cumulative

Number Number of Units Cumulativeof Lots (Lot Size = 50) Average Time Per Unit Cumulative Time

50 4.0000lo0 3.6000 (4.oooo x.9l 360.00 (3.6000 x 1oo)2OO 3.24OO (3.60OO x .9! 648.00 (3.24OO x 2OO)4OO 2.9160 (3.240O x.9l 1 '166.40 (2.9f 6O r 4OO)8OO 2.6244 (2.916O x .9) 2rO99.52 12.6244 x 8OO)

Time in Hours

I24I

1 6

DireCt tabOr hOUrS reqUired tO prOdUCe the firSt 8OO UnitS r..,............... 2tO99.52

Direct labor hours required to produce the f irst 2OO units .. . . . . . ' . . . .o' . . . . , 648.00

DireCt fabOr hoUrS feqUired tO prOduCe the next Ordet' . . . . . , . . . . . . . . . . . . . . . . . . . 11457.52:Numbgr of units in thg ngxt ordgt' . . . . , . . . . . . . . . . . . . . . . . . . . . , . . . . . . . . . . . . ' . . . . . .r. . . . . .o... --- 600

Direct labor hOUrs per unit for the next order (1'451 .52 + 600) . ' . . . . . . . . . . 2.4192

Catonic Part Number PGB-31Unit Costs and Prices for Rex Engineering Company

EstimatesIncorporating

a 9ooh LearningGurve

Materials S18O.OOLabor and employee benef i ts (2,419 x $20). , , . , . . . . . . . . . . . . r . . . . . . . . , 48.38Variablo overhead (5O% of labor) , . . . . . . . , , . . . . . . . , . . . . . . . . . . . . . 24.19

Total variabtg coSt.,.......r,..r.... i ................,,..,.... ' ..r...... 5252-5|�Fixgd ovgrhead . . . . . . . . . . . . . . . . . . . . . ' . . . . . . . . . . . . . . . . . . , . . . ' . . . . r . . . . r 4O.0O

Fult cost. .....!........ SZSZ.SZProfit contribution (1 Ooh of full cost) .,...........,...,.... . 29.26

Estimated contract price...........,.,. S321.83

l2l The implications of an 80% learning curve as opposed to a gOoh learningcurye are:(a) An 80% learning cunre indicates a greater effect of experience on

efficiency.

(b) Most of the increase in efficiency (decrease in time and cost perunit) due to an SOoh learning curve occurs early in the productionrun; thus, saturat ion in learning is achieved ear l ier wi th an AOohlearning cun e.

f' l

I

Chapter | 1

P l 1 - 8

(r lGumulative -Cumulative

Number Number of Units Cumulativeof Lots (Lot Size = 50) Average Time Per Unit Cumulative Time

50 4.0000lo0 3.6000 (4.oooo x.9l 360.00 (3.6000 x 1oo)2OO 3.24OO (3.60OO x .9! 648.00 (3.24OO x 2OO)4OO 2.9160 (3.240O x.9l 1 '166.40 (2.9f 6O r 4OO)8OO 2.6244 (2.916O x .9) 2rO99.52 12.6244 x 8OO)

Time in Hours

I24I

1 6

DireCt tabOr hOUrS reqUired tO prOdUCe the firSt 8OO UnitS r..,............... 2tO99.52

Direct labor hours required to produce the f irst 2OO units .. . . . . . ' . . . .o' . . . . , 648.00

DireCt fabOr hoUrS feqUired tO prOduCe the next Ordet' . . . . . , . . . . . . . . . . . . . . . . . . . 11457.52:Numbgr of units in thg ngxt ordgt' . . . . , . . . . . . . . . . . . . . . . . . . . . , . . . . . . . . . . . . ' . . . . . .r. . . . . .o... --- 600

Direct labor hOUrs per unit for the next order (1'451 .52 + 600) . ' . . . . . . . . . . 2.4192

Catonic Part Number PGB-31Unit Costs and Prices for Rex Engineering Company

EstimatesIncorporating

a 9ooh LearningGurve

Materials S18O.OOLabor and employee benef i ts (2,419 x $20). , , . , . . . . . . . . . . . . r . . . . . . . . , 48.38Variablo overhead (5O% of labor) , . . . . . . . , , . . . . . . . , . . . . . . . . . . . . . 24.19

Total variabtg coSt.,.......r,..r.... i ................,,..,.... ' ..r...... 5252-5|�Fixgd ovgrhead . . . . . . . . . . . . . . . . . . . . . ' . . . . . . . . . . . . . . . . . . , . . . ' . . . . r . . . . r 4O.0O

Fult cost. .....!........ SZSZ.SZProfit contribution (1 Ooh of full cost) .,...........,...,.... . 29.26

Estimated contract price...........,.,. S321.83

l2l The implications of an 80% learning curve as opposed to a gOoh learningcurye are:(a) An 80% learning cunre indicates a greater effect of experience on

efficiency.

(b) Most of the increase in efficiency (decrease in time and cost perunit) due to an SOoh learning curve occurs early in the productionrun; thus, saturat ion in learning is achieved ear l ier wi th an AOohlearning cun e.

I

I

i

Chapter | 1

P11-a (Goncluded)

(31 '

The degree of tearning that takes place in an industrial operation wouldbe reduced by(al a low proportion of assembly labor to machine labor;(bl an operation ol low complerity;(cl high employoe turnoveq(dl tedium;(el poor working conditions.

Pl 1-9 APPENDIX

(11 Charge to work-in-pnocoss:Normal working houns = 40 houra r 2 = 80 hoursLetX=over t imehours

X =s r , r 4 o - ( 8 o r $ r 2 )

( $ l z r r . 5 )X = 10 hours

Therefore, charge to work in process = gO r $lZ = $l,OgOl2l Factory overhead charge for Emptoyee tloTl:

Gompany benefits paid by employer....,, $273.20Overtimg premium t............oo.................. 6O.O!t ($trf 40 _ Slrogol

s."9€9(31 The cost of idleness should be charged to the departmentaf factory over-

head account

PI I.I O APPENDIX

(l) Apr. 7 Payroll,..,.......... ........,....r.Accrugd Payro|1......r.....r...rr..................r.Employees lncome Tar payable (9.5olo)..FICA Tar payable (2.5|.,.....,....r..r,..,........

14 Payro11........................,..r....,.........Accrugd Pa1rclt.'..........r...............r......,..Employees Income Tar payabfe ..,....,...,.FICA Tar payable ..,...,.......,.....,..,....,,.....

5,8gO.OO

21 Payrol l . . . . . .o...r. . . . . . . . . . . . . . . . . . , . t . . . . . . , . . . . . . . . . . . . . . .r srgoo.ooAccrugd Pa1ro11.... . .r. . . . . . . . .r. . . . . . . . . . . .r. . . . . . . . 4rggZ.OOEmployees Income Tar payabts... . . . . . . . . . . 560.50FlcA Tar payabto .............:..................... 44z.so

2A Payro!| .......r.......r........,..r. ...r.....,. 4rggo.ooAccnred payroll.... ,................... 4,O5O.4OEmployees lnco^me Tar payabfo.............

463.60FlcA Tar payable .............:..................... 366.00

4,92O.OO

4,888.70559.55441.75

4r083.6O467.4A36g.OO

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264

Pl l-1 O APPENDD( (Goncluded|

t2l

Apr. 5189O4rg205,9OO4188O2164(,24.23O

Chapter l1

Dr. Cr.Apa 3O Work In Procgss ..r........r..............o.....

Factory Overhgad Gontrcl'...,....'.......lndirgct Labor .'.......r.........'.....

Payro|1 tt...............................t........

Apa 30 Factory Ovgrhgad Gontrol .................FlcA TaxlS22rOOO r 7.5o/o1.,....Federal Unemploymont Tax

($22rOOO x'8oh1.....................State Unemployment Tar

($2Zr OOO x 4oh1...,..................Vacation Pay l922rOOO x 8o/o1..

FICA Tax Payab19 "..................r.....Federal Unemployment Tar PayableState Unemployment Tar PayableLiability for Vacation Pay.......,......

Payroll

SubsidiaryRecord

5,6OO

16,4005,6OO

4r4eB

22rOOO

1,65O176880

1,760

(31

1r650

17f,

8801,760

Accnred Payroll

I7

1 42128

Apr. I30

71 4212830

2r23O Apa22rOAO24J,sO

Mar.31 Bal.2,23O.OOApr. 7 4r888,7O

14 4,083.6021 4r897.OO2A 4'O5O.4O30 2,04O.0O

2e�789.742,840.OO

2,6402,640

2r23O.OO4r888.7O4,O83.604r897,OO4,O5O.4O20,149.7O

I

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I

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Chapter 11 265

CASESI

c t 1 - l

(1) Arguments used by each proponent:

(a) 1,00O-pieces-per-hour-rate:{1} Studies show that machines can be operated at this rate.(21 Variances determined by this output rate will measure the inef-'' fective use of the machines.(3) This rate can be a target level to be strived for, and the chang-ing variances will show pnogness toward this ta4get.(4) A goal of this natute will motivate the supervisor, and therebythe workers, to reach this rate of output.

(b) 750-pieces-per-hour-rate;(1) This rate of output has been attained by some workers.(21 The IroOo-pieces-per-hour rate has not been attained, nor hasany rate near to it been attained.(3) The 6oo-pieces-per-hour rate is an average of actual perfor-mance and does not represent good economical performance.(4) The standard cost should reflect production rates that can beattained when good economical performance occurs. The 75O-pieces-per-hour rate, capable of being achieved by some workers,would seem to be such a per{ormance.

. (5) The variances would measune the extent by which this economi-cal levef has been exceeded or the extent to which it has not beenmet.(6) lt should provide motivation for the supervisor to improve on the60o-pieces-per-hour cunent rate and in turn motivate the employ-ees to improve their performance.

(c) 6OO-pieces-per-hourrate:(1) This rate has been achieved by the departments as a whole. Thestandard costs should be set to reflect the ability of the wholedepartment.l2l The variances from standard cost based upon the 6Oo-pieces-per-hour rate would measure the departures, favorabte and unfavor-able, from the current effective level of operations.(31 For two thirds of the workers, the 75O-pieces-per-hour ratewould be dlfficult lo attain and would tend to frustrate them, thusmaking even the present 6oo-pieces-per-hour rate difficutt to main-tain. For all workens, the 1r0Oo-pieces-per-hour rate could not beattained' thus lowering the morale of the department and probablylowering output below current levels.(4) The 6oo-pieces-per-hour-rate, when passed down to the pro-duction worker, wourd be an appropriate goal for those threeemployees who are producing fewer than 6oo pieces per hour.

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266 Chapter | |

C11-1 (Concluded)

l2l The purpose of standard costs and standard cost reporting is to measurethe performance of a department against a level of cost incurrence thatnepnesents attainable good economical performance. The variances indi-cate the periods when the performance varied (favorably or unfavorably)from this acceptable level.To be used effectively, the rate to motivate the supervisor and, thereby,

the worker,s to improve performance would depend upon the perceptionsas to what is attainable. lt would also depend upon the reward structureswithin the firm. Other variables would also affect what output rate wouldmotivate improved performances.The value picked (e,9., ir00o, T5o, or 600) must be a compromise

between the level that witt have the most effective motivational resultand that which will be an effective representation of the costs when thedepartment is operating at an acceptabte economicaf level. The 1,OOO-pieces-per-hour rate should be reiected because it does not provide thebasis for a measure of an acceptable cost tevel. lt woutd also be of ques-tionable value from a motivational point of view, because it appears to beunattainable by the production workers.The 75o-pieces-per-hour rate is a possible choice. lt is capabte of being

achieved by some workers and as such may provide motivation to thesupervisor to bring other workers up to that level, thus achieving adepartmental output of 750 pieces per hour. tt also may represent theappropriate basis for a standard cost because it is a possible acceptablelevel of performance. tt may also be a suitable departmental targetestablished in connection with the introduction of the standard cost sys-tem.The 6oO-pieces-per-hour rate is also a possibte candidate. The Punch

Press Department has achieved this tevef, and three of the six employeeshave been able to achieve it. lt is, however, the current level of ouiputand that may make it ineffective in motivating the department and itsworkers to improve the level of output. As the basis for standard costs, itcoufd represent an acceptable level of output; but it does not incorporatethe possible improvement tikely to be obtained in connection with anintroduction of a cost system.The 75o-pieces-per-hour rate seems to be the best choice of the three

alternatives. More information about the conditions under which theengineering studies were done, the training and experience of the work-ers' and the trend of worker and department output in recent periodswould be necessary before the number could bs chosen with someassurance that it would meet the stated objectives.

;I

II

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Ib

Chapter 11 267

c11 -2(1) ' An advantage of the new payroll incentive plan is that it recognizes a

problem' which should improve employee motivation. Action taken bymanagement will be perceived as a positive effort to resotve a problem,and employees may feel more a part of the group and behave as teammembers.

Some disadvantages, which could lower employee motivation, are thatemployees' f i les are open to scrutiny by peers, and that employees mayfeel that they have to be a part of the "in grouptt to be assured-recogni-tion for wage increases. The plan could degenerate into a popularity con-test.

some advantages that should improve employee productivity are theincentives the plan provides for employees to perform effici lnt|y andeffectively, and the beneficial competit ion it promotes among employees,as long as it is in harmony with corporate goals.

A disadvantage that could lower employee productivity is that the plancould lead to collusion among groups of employees to keep productivitylevels artif icialty low. Employees could approve each otherb'wagerequests without appropriate merit. The plan also coutd resutt in ineffi-ciencies, because employees who have had their wage increases turneddown may not work up to capacity due to a loss of inierest.

some advantages that shoutd improve goal congruence between theemployee and the company are that the plan indicates the company'sinterest in the needs of the employees, and that the plan may result inincreased profit through improved productivity, which may lead toemployees earning a larger income through increases in wages.

Some disadvantages that could lower goal congruence are that employ-.ees may mistrust a wage plan suggested and implemented by manage-ment, and that there may be an overemphasis on a l imited range of per-formance measures.

Some advantages that should improve administration of the plan are thatprocedures for requesting a wage increase and for its approvat are clearand unambiguous, and the plan allows for relatively quick positive feed-back and peer recogni t ion.

Some disadvantages that could hamper plan administration are thatthere is a l imited amount of management input and control, and thatthere wil l be additional record-keeping responsibil i t ies associated withthe voting procedures and maintenanJe ot'empiov"" productivity recordsand personnel f i tes.

t!

l>

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a

(21

(3)

(41

It

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l2l

(31

2ffi

c l1 -3

(rl

(41

Chpter 1l

I

The basic premise of the learning curve is increased productivity asexperience is gained in the performance of repetitive tasks. Variouslnputs to the production process may be used more efficienily as cumu-lative output increases, but in most production processes the maiority ofcost savings associated with a learning phenomenon involve the use ofhuman labor.( s , z o o + 2 , 2 4 o ) + 1 6

= ;;3

= BSoh tearnins rate3,200 + 8

With a learning rate up to cumulative output of 32 units, average directlabor hours used to produce these 32 units should equal gs% of theaverage direct labor hours used to produce the first 16 units. tn short,average hours employed for each unit when 32 units are completedshould equal:

340 x .85 = 289 hours per unit .This implies a total of 289 x 32 = 9,249 hours used in the production ofthe first 32 units, or

91248 - 3,200 - 2,240 = 31808 hours

usgd in the production of units lz through 32.lf the average hours perunit in this production batch is taken as the direct labor standard, thestandard per unit becomes:

3,8O8 hours238 hours per uni t16 units

Bid price on order of 96 units:s 1 ,500

5,95O9,52O

1 6 , 9 7 O5,091

22rO61x 9 6

(5)FoT" applications of the tearning curve in the planning and controll ing ofbusiness operations are setting performance siandardi, preparing costestimates in competit ive bidding, determining budget ailowances forlabor and labor-related costs, schedul ing labor requirements, and deter-mining performance evatuat ions in which per iodic progress reports arecompared with accompl ishments expected under the curve.

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Chapter | 1

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Shoitcomings:(1) Actual payroll hours are not approved by production managernent.(21 There is inadequate segregation of duties within the Payroll Department.(31 Personnel Department should not have access to payroll checks.(4) Departmen-t supervisors should not distribute the payroll checks.

Suggested corrective action:(f l All incoming time cards should be signed by both the ernployee and

supervisor.(2'l The payroll clerk preparing the input for data processing should not do

the reconcil ing, but rather a second clerk should reconcile the payrolljournal to the time cards.

(31 An employee of supervisory level should authorize voiding of computer,generated checks and the subsequent preparat ion of a manuat replace-ment check.

(4) Replacement checks should be processed fol towing good internal controlprocedures.

(5) Al l payrol l checks, including unsigned replacement checks, should thenbe given to the Accounting Department rather than to the PersonnelDepartment for storage in a secure location unti l payday. No AccountingDepartm ent emp loyee with payrotl recordkeepi n g responsibil i ty sh ouldhave access to the undistributed checks.

(6) On payday, checks should be distributed, preferabty by a TreasurerrsDepartment employee or by an Account ing Depaftment employee whodoes not have record-keeping responsibi l i t ies.

c l 1 - 5

f i fhe requirement does not ask for a l is t of responsibi l i t ies Osborne hasviolated, but, merely, which of the f i f teen responsibi l i t ies apply toOsborne,s s i tuat ion.)

Management accountants have a responsibi l i ty to:

Comoetence: Prepare complete and ctear reports and recommen-dat ions af ter appropr iate analyses of re levant and ret iable informat ion.(Osborne knows that if he consents to Wallace's request, the resultingmaintenance job cost reports would be mater iat ly misstated and wouldpresent fa lse and misleading informat ion.)

Integrity: Refrain from engaging in any activity that would prejudicetheir abi l i ty to carry out their Out i ls et t r ical ly. (osborne is being asked tobe a party to an activity that woutd erode hii abitity to carry out hisduties ethically.)

Communicate unfavorabte as wel l as favorabte informat ion and pro-fessional judgments or opinions. (osborne is being asked to thwart com-municat ion of unfavorable informat ion.)

Chapter l1

Cl1-5 (Concluded)

Refrain from engaging in or supporting any activity that woutd dis-credit the profession. (Preparing deliberately misteadin! maintenance jobcost reports clearly would be a discredit to the profession.)

Obiectivity: Communicate information fairly and objectively.(Osborne would violate this responsibility if the maintenance job costreports are,altered.)

Disclose fulty all relevant information that could reasonably beexpected to influence an intended user's understanding of the reports,comments' and recommendations presented. (The shifting of cost amongmaintenance iobs would violate this ethical responsibility.)

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012-1. Supervircrs' salaries, hdirect labor, overlimoprcrniurn, lupplier, indirrct nratorials, payrolltarq tactory hlurancc, and deprrciatian.

Ql2-2. Thr nst inportant r.elon fa variatbn in fae-lory ovrfiead b tho pnroncc of lired and rarFablo rrpenrer. Thordorc, ar prcduction vol-urno changs frqn nrnth to rrcrth, tho coCcwill do likowicc. Howcvor, ovcrhead alco wifl'' cltrtgo bccause of inrprovcd or dccrcssed cflFciencies and ctrangos in pricer paU for over-head ilrns LEh s! rupplies ard repairs.

012.3. Predclerminod ra lcs aro ured when i tbeconres obvious that 8ny other melhod ofcharghg overhead resullr in inequilabfc coct-hg and delays tho reporthg ct firancisl results.Charghg aclual overhead io ic6s and producircan resufl h charging unreasonable arnounlsof owrhead to varbur perirdr and in dehyedrcporling of corl data. Thc urr ol prcdclcr-mined ralcs alao onhances control throughanalyria ol over. or underapplied laclory over-head

012-4. Sir bases used for applying taciory overheadaro unitr prodrced, direst rnateriatr cost, direcilabor cosl, direct labor houc, machhe hours,and transaclions. lmportant consideratioog inseleclhg a base are the relatbnship (conela-tion) ol the base used and lhe use d ovefieaditems in manufacturing operalbns, as woll asthe clerical prac-ticability ol using a particuhrbge.

012-5. Predetermhed rde! are used to charge over-head and becorne the basis for determining thecost cil a lcb or producl. Thereforo, the reason-ableness of such costs is to a hrge exlentdetermhed by the reasonableness ol-the rat€.Shce these cqsts are used for costing hvenlories and play sn important ole h esiabtishingsales prices, the selectbn ol proper predeter-mined rates can be appreciated.

Q12€. An objective in seleciing the baso lor a prede_lermined factory ovefiead rale b lo engure lheapplication of factory overhead in reasonableproporikm to a benefbial or causal relatbnshiplo jobr, producls, or work perlormed or lo beporformcd. i ,c . , for r r t imal ing purpose! .Ordiurily, the base selostod ehojj be'closetyrolded to ttnctions represenled by the applioCoverhcad cost. lf tactory overhead cosls arepredorninantly labq oriente4 such as supervi-sirt and indirect hbor, the proper base wouldprobably be dirccl bbor hours. lf taclory over-head costs are predominantly retated to thecosl incurred in the ownership and operatbn olthc madrinery, the proper base would probablybe machhe hours.

GH4pTgR 72


Anotrer otriectivo in selecthg the base b tominimizo clericel st and dfort relativo to thobonrlitr ottaincd. When two or more ber.spro\rid. apprcximatcly thr rgrno applicrJ ovor_hood cst to specilb unils 6t prodrrtbn, therirplcsl ba$ lhouH be usrd.

Q12-7. (a) Theqrfrcal capecity b actuslly tho nrari-rnum produclion possible frorn e givonpbnl wit|r no allo*arrr rnade for ccsla.lion of operations for hotidays, wrok_endr, malerials shorleges, or machinobnakdorns.

(b) precticsl capacity ig theoretical capechylege an ellow.ance for interruptimr euchas brealdo*,na, delayr in recciving rupplict, and worker abgencer. prjcticslcapacily is usualty 75 to 85 pcrcent oftheorelical capacity.

(c) Erprctrd ectual caprcity ir prtcticalcapacity adjusted lor tho lach of autfbiontdcmrnd h a tinglo oporathg period andmay br usod h building oporating bu+gelr tdrcn expected capacity ditfen gub.,stantially lun norrnel capaciV.

(d) Normal.capacity is practical capacityadjusted to give consideratbn to t o tociof suflicient dernand over a pcrird bngenough lo hclude cyclical and reassralfluc.luatbns. This is usually the basis forlong-range p lanning. s landarda, andpreferably for the determinalbn cJ owr-head rates.

012-8. The underapplied overhead wil l be higher lfmarinum capacity is used and bwer if normalis used. ll this cost is charged lo lhc currrnlperird, then nraxirnum capacity will prcducr akrwer, and normal capacrty a higher, operatingprcrtii.

O12-9. (a) ld le capaci ty costs ar isc f rom id lcemployees and idte tac i l i t iec. ld leemployeer give rise lo colte auch arbase wages paid, employor,r sharc ofpayroll laxes, and other lr ingo benefitcosls. ldle facilities cause capacity 6tedue lo delerbratbn with time, appreh-ing obaoleoconce, cost ! for upkorp,readiness, maintenance, repairs, lhelter,and pro lect ion of va luablee ruch arhsurance.

(b) When iile capacity b prescnl, an dtenrptshould be made to regregalr id loemployees and idle lacil i t ier throughproper recbssiticatbn. Tho rcurnula$onol lhe cost attributabte lo theso Ulc work-srs or facililiec in excess _cl a reasonablcbudgnted arnounl migrht be in aorno ki,rd

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ol overhead account to be lreated sepa-rately aa e'rnanagemenl by erceplion'faclor. ldb capacily corlr should btaccounlod lor soparalely lor lhoro rea-!ons: (1) to Pttv.nl dittortkn end srlu-rirr h thr rna[air of ptoduclin cctt;(2) to bililetr ircqne dclominalixt; (3)to csrtrol ogcraticts; 8nd (4) lo phn nrrtyear'r hdget edrquatdy.

(c) Exeorc crpe.*ty cod h8! bem iJentilhJwith thoo capacity.cootr thol rcrull frqngrealrr produclion capacily lhan lhccqnpsny couH rvcr lrqe lo usa, or frcrnunbalancrd rquipmenl or machincrywithh dcparUnenls. In creatng lhc fotecasl budgrl, il ir irportanl lo bobto the.xc.r capacily cosl ro lhal manago-mcnl can bo made aware cil ilr responsi-bility rcaardng the excess invesUnent inlabor and machhec.

Q12-10. (a) Anaty":r and identify the ovefiead trans-actisrs.

(b) Joumali:,c thc lransrlisrs.(c) Enlcr transaclbnr in general and gub-

sktbry lodgen.Ol2-1 1. Ovefiead applicd lo prcduclicn ir enlered as a

credil h |he lactory orerhead control accounLAclual ovrrhrad i t debi led lo lhc same

Chapter l2

accounl Therefore, ovefiead has beon oer-applied when lhc account lras a crcdil balanc..

Q12-1z- Ovcrhead cen br ovcrappliod beceuso (a)actual oveficad waa bss than budg.l.d; (b)capeity utli:.d war greetor |h8n that eslirnaFod h cnpdhg ovofirad rale; (c) lho wcr-hcad cdinatc war lo hiCh (a mirtate); (d) lhrproduclian ortimab wat l€ low (a mirtakc);(r) corn|liulkns of thr abor.

Q12-13. Over. or undcrapplicd faclory ovcrhead maybe proralod arrrcng work h proc.ss, finishedgoods, and cosl of goodr sold, or it may bclrcaled rntirrly ar a period cogl. The firslmethod would have a smsller effcl oo cct ctgoods soH and |hcrelqc qr lho net ircorne forthe pcriod.

012-14. Thr cxislcncc ol largc undcrabcorbed vari-ancis doot nol necossarily mcan ihat unilcosts ar. incorrecl. An analysis of thc under-absorbod figwer will irdlplc (a) whether actu-al ororhead ir loo high or whcthcr oxponseghavo been incorreclty estirnated; and (b) whatpart of thc underabsorplion is caused byunusod capacity. ll Eclual ovrhead is cmtiJ-ered lo b. t@ high and thcro ic Ule capacity,unil coctr ccnpulcd ate morc rearcnablo lhanthey would bc if overhead rale! wero cornput-ed to absorb all of the aclual overhead.

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Chapter 12 2n

EXERCISESI

E12-7

(l) $l'75oro0o fixed overhead and $72o variable overhead per ton, calculat-ed as follows:

For both the ngrmal capaclty and expected actual capacity, the problemstates the total budgeted overhead cost and the number oi ton" of activi-' ty. The high'low method of estimating cost behavlor can be used todetermine the overhead budget, usin-g those two points:

Activity LevelNormal capacityExpected actualDifference

Tons6,0005,000I ,O0O

BudgetedOverhead

$6,O7O,OOO5,35OrOOO

s 720,Ooo- .

Variable 5720,00O .o v e r h e a d r a t e = f f i - = $ 7 2 o v a r i a b | e o v e r h e a d p e r t o n

Budgeted fixed overhead = $5rg5O,0OO totat overhead- ($ZeO x 5,000) variable overhead

= 55,350,000 - S3,OOO,O0O = g1,75O,OOO

or, budgetedfixed overhead = $6,070,000 total overhead

- ($72O x 6,000) variable overhead= $6,070,O0O - $4,320,OOO = gt ,TSO,OOO

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274 Chapter 12

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E12-1 (Concluded)

(2'l The predetermined rate at practical capaclty would be $895 per ton.Using the budget for fixed and variable overhead, a predetermined oyer-head rate can be calculated at any level of acUvity withln the relevantrange. Assuming practical capacity ls wlthln that range, Ore calculationis:

Predeterminedoverhead rate at

practical capacity =

(8,0OO tons )

Budgeted total overhead at practlcal capaeltyPracUcal capaclty In tons

Budgeted fixed overhead+ Budgeted variable

overhead at 1O,O0O tons _ $1,7S0,000 + ($ZZO x lOr0OO)= -{O'0OO tons IO'OOO tons

_ 91,750,000 + $7,200,00O) _ $8r95OrOOO{OTOOO tons IO'OOO tons

o\ $72o variable overhead per ton + ($trT5orooo/lorooo tons)= $72O per ton + $175 per ton = $895 per ton.

Factory overhead..........Direct labor, . . . . . . . . . . . . .o. . ,

515,840 dlolot x20 ,160 56 x

= $895 per ton

$6,6406,640

$12,2005,56O

$ 6,6co

= $2'921.60= 3t718.4O

$6,g4O.Oo

E12-2

Work in process balance, Septernb:r 3O........,....r........r...r.r.....,.........,..Lgss materials sti! l in procgss...,...,......,.,.....,..,.............................,,....r.Factory overhead and dirgct labor sUlf in pnocgss...,.,.......,.r.,...........,..

Charged toV/ork In Process

Amount o/o

s36,o0o 100%'s15,840

* $36,o0o = 44oh(or)

S15,840-(factory overhead) * S2O,16O (direct tabor) =.7gSTLet X = direct labor sti l l in processT h e n , X + . 7 8 5 7 X = S 6 , 6 4 0

1.7957X = 56,640X = $3,218.429T direct labor sti l l in process

.7857X = S2,g21.SZO2 factory overhead stilt in processs6,639.9999

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Chapter 12

El2-3'

(11 135 peopte r 8 hrs. per day r 5 days per w6ek r 4g weeks =259r2OO direct labor hm.

l2l {35 people r lo hrs. per day r 4 days per week r 49 weeks =259,2OO direct fabor hrs.

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Factory overhead rates:

(11 Units of production: $225,000 + 5y000 units = S45

(2f Materials cost $ZeS,OOo * $SoO,oOO =,{5 = 45oh

(3| Direct labor hours: $225,OOO + 56,25O DLH = 34

(41 Direct labor cost: $225,oo0 + (56,2s0 DLH r $81 = .5o = soo/o

(5| Machine houns: $225,OOO + 75,OO0 machine houns = i3

El2-5

(fl Assuming normal capaclty:(al The factory overhead rate: (90OO,OOO + 5O,OOO| + $6.69 = $14.69(bl The fired part of the factory overhead rate: $e6o,ooO + 5o,ooo = 38

l2l Assuming erpected aetual capacitln(al The factory overhead rate: 1$lOo,oOo + 4oroo0! + $6.89 = $i6;69(bl The lixed parf of the factory overhead rata: $lbo,ooo + .to,Ooo = $lo

El2€

Actual llAoty ovgrhgad r....... '.r...r.....r.....r,...r...,.............,..!......r..r,........ SZZgTOOOApplied factory overhead (S2rSoO machine hours r $5.iOrt..............r... 267.TSo\--

underapplied factory ovgrhgad for thg period ......,..........r......,r.........a - r"se'sPP"tttl l.lgtClry overneao tor tne pgrlod ......,..........r,......r............ $ 1j1r?54

! t$255,o0o + 5oro0o budgeted machine hours = $s.1o

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Chapter l2

I

El2-7

(1 l Work in Process.'.'..............................o......o................1 ,45OrOOOMatef|a18..........r..r.........r.......o.....o....rrr.o.....o........ l r45OrOOO

Work in Procgs,.....,......o...o... 928,OOOPa1rc!|...... 928,OOO

563,OOO

551,OOO

551,OOO

Factory Overhead Contrcl... . . . . . . i . . . . 563tOOOMaterials, Palnoll, Accruals, and Various Credlts

Work In Process 551,OOO

Overhead rato :Estimated factoly overhead $57O,OOO

Applled Factory Ovgrhgad,..........,.........,.......,...r

Appfied Factory Overhgad .r.................'.,......'rj-,r.rorr S5lrOOOFactory Ovgrhgad Contrcl...or......,..o.,rrr-ooooorrroiror

Estimated production

l2l Underapplied factory overhead: $563,000

E12-8

E12-9

(f l Applied factory oyerhosdss l6,92O

36,OOO machine hours

30,OOO

. $551,0OO

$19 per dr i l l

= $12'OOO

Agtual factory ovgrh gad r.....t.......r......!.................t.....Applied tactory oyerhead (4rlO0 units x $2.46)r..,....r.Overappligd ovgrhead....?.......o......o..r,,.,..,.......r......,....

* va tiabl g facto ry ovgrh gad fiito .......,...........,r....,..r.o....Fired fastory overhead rate ($ir44O + 4'OOO units)....Total fa ctory overhead rilto ......,.r,...........r......rr.....,..,.

$ 9,5OO1 0 . 0 8 6

s (586)

$2.10.36

92.46

= $ .47 lired portion of rate

2.7O variable portion of rate

_S2€I total rate

$2.57 x 2,7OA machine hours = g6,939 apptied factory

Actual tactory overhead ........................,...Applied factory overheadUnderappl ied overhead

overhead

57,4OO6.939

s 46,1

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Chagter 12

E t2 -10

Agtual factory ovorhoSd ..D.....................r'................r..!....o..,... $836roooApplied factory ovarhoad (2ro,ooo machine hours r tt.:::::. -iio.ooo

o1rgrapplied factory overhe8d............'.................,................. s ta.ooot

E72-17

(21

(11 Fixed portion of the factory overhead application rate:st50, ooo = $1.50 per machina hourtOOTOOO machine hours

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variable portlon of the factory overhead application rate:

= $2.5O per machine hour1OO,0OO machine hours

(31 Actual factory overhead . . . . . . . . .r. . . . . . . . . . . $4i {,OOOApplied factory overhead (lOS,ooo x S4.oo1.....:::::::::: -654

Overapplied factory overhead ... r......... r(9€oo)

E72-12

fctu--al tactory overhgad ......... ' ........r...........r......................... $141334Applied factory overhead (2Oo% of $gri lZ) .........,...,.,,...,..... 16.234overapplied ovgrhg?d.........,...,..........................,....r..,.ro.r...... E_f:.gggl

: t

Chapter 12278

812-13

Work in process ..'o""'r"t""'Finishgd $ood8..,.....t""""""Cost ol goods 8old.-.....,......

Regulrements (11 & (21Account PercentageBalance of Total

5 %31 zgoh631noh

t00 ch

Applled PercentageOverhead of Total

$ 2,ooo16,00032rOOO

$50,ooo 1oo%.

3001,9OO3,8OO

o,ooo

$ 6,00038,00O76,OOO

4%32%64oh

(11

(21

Tota1...............r................... $12OtOO]9

work in Procesz l5o/o of $8r0oo) ,.......,......r.......'..'r....rFinishgd GOOdS 131 Znoh Of $8rOO0)............'......,...'o'..cost of Goods sold 1631noh of $610001.....,................

FaCtOfy OVefhgad GOntfOl.,,.,..'...,..,....'....'..r'o.....

FaCtOfy OVgfhgad Contt!|........,......'.............r..'....'.r"'Work in Process (5% of $6t000|""""""""""'t"'tFinishod Goods 131 znoh ol $6'0OO)""-""""'o""Gost of Goods Sotd (63 lnoh of $6tooo1"""""""

WOfk in PfOCgSS l4o/o Of $6rOO0| .'...,...'..'r..............t.."Finished Goods l32o/o of 361000)""""""""""""""""'Cost of Goods Sotd lA4% of $61000!"""""""""""""'

Factory Ovgrhgad Contt!1 """" """"""t"""t"""'

2401,9203r84O

o,ooo

300l r9OO3r80O

6,O0o ' v

(31

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Chaptu 12

P72-7

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Agtual oVorhead lpcurred .........'...'....'...........r.r...r,.r..........r.....Applied ovorhoadt..........................r.....r.........t......,.o...............

Underapplied ovgrhgad r.......'.........'..............r..tr..D......r..........r

PROBLEMS

MachineHours

lo,oooI,OOO

279

$3r3g5,OOO3.325.000

s 60.000

(21

'acrr3!It41_t_ prodoterminsd rate based on expected astual capacity= 9,5OO MH x ($3,500,000/lO,00O MH)

= 9,5OO MH x $35O per MH = $3,325,OOO

The predetormined rate at practicaf capacity would be $316.67 permachino hour (MHl, calculated as follonrs:

Flrsg find thc budgeted total lired oyorhoad and the budgeted variableovorhead rato par MH. The problem states both the total budgeted over-head cost and thc number of MH of actlvity, at both the normil capacityand orpected astual capacity levels, so the high-low method of estimai-ing cost behavior can bE used:

Astivlty LevelErpected actualNormal capacityDiffersnce

BudgetedOverhead

$3r5OO,OOO

_ 3TOOOTOOO

$ 5OO,OOO2,OOO

Variable $5OO,OOO aor"rf,""J'i"t" =

frffi = $25O variable overhead per MH

Budgeted fixed overhead = S3,50O,O00 total overhead- ($2SO x 1O,OOO| varfable overhead

= s?r500,ooo - $2r500,ooo = $l,ooo,ooo

or, budgetedfired overhead = $3,ooo,oo0 totat overhead

- (S2SO r I,O00f variable ovorhead= $3,0001000 - $2rooo,ooo = $l,ooo,ooo

Then, using the budget for fixed and variable overhead, a predeterminedoverhead rate can be calculated at any level of activity within the rele-vant range. Assuming practical capacity is within that range, the calcula-t ion is:

7-- '1

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P12-1 (Goncluded|

Predeterminedoverhead rate at

practical capacity =

(15,OOO MHI

Budgeted total overhead at practical capacityPractlcal capacity in MH

Chapter 12

Budgeted fired overhead+ BUdgeted variable

overhead at 15'OOO MH _ Sl,ooo,ooo + ($25o x 15,OOO}15,OOO MH

$1,0OO,00O + $3,75O,OOO

15,OoO MH

$4,750,oOO= $316.67 per MH15,OOO MH $15,OOO MH

ot'r $25o variable overhead per MH + ($f TOOO,OOO + 15,OOO MHf= $25O per MH + $66.67 per MH = $.?16.67 per MH.

(31 lt the actual overhead ol $?,405,O0O yyere underapplied by $1O,OOO, thenApplied Overhead would have a credlt balance of $3r4O5rOoO - Slor0o0,or 33,395,000. The closing entries ane:

Applied Overhgad.....r.......,.,......................r...o...... 3r395rO0OFactory Ovgrhgad Control r...,,.........r.,.......... 3r395rOOO

Gost of Goods So|d....... ..,...........r........ ' .. 1or00oFactory Overhead Control .r.............r........t... IOrOOO

(41 AccountBalance

Work in process ............o...r.r.,r.......Finishgd goods.... . . . . . . . . . . . . . .or., . . . , . . . . .Cost of goods sold

Total _s8,ooo,oo9

Work in Process (2.5 % of $lOr0Oo)...........r......r...r.....Finished Goods,.,.Gost of Goods Sold

Factory OYgrhgad GonttD1..............r...'..........t.....

$ 2oo,ooo4OO,OOO

7,4OOrOOO

Percentagsof Total

2.5%5.O%

92.50h

100.ooh

1O,OOO

250500

9r25O

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281C@ter 12:

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CLotr4!loo,G!t(E

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go

o t o t lt o t l

tfllooo-oI'

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o oo on- o-t t NF0

- Ao oo oo o- -rD ra)Y Y

o oE NN'aD I+ +6 6

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t lo l o o l oo l o o l oo t o o l o- l - - l -

o l l o o l nF I r p l pr h l o lv l v v l v

^ l ^ ^ l -o l o o l o8_ 18- t_ 18-o l o x l o. "1 " * l -r l , , l ,3 1 8 8 1 8313 3 lFsl: gl:

G

.o

ooct!cO

'=

=

: :

o ic :r r !3 :€ iL

o. J l -( J 06 r tb oco 6o , c )o . !X n

F S

!too5ooo.CL:ta

!:

Lo

:t r P- 3o

$FE.'iiFi5E I E F f

l l n i l t l

s 3glo 6 0 6o oo- o-o oF Fo 9

or l

;lloN

n

ooN

I

o 6 0 q to ooro-q ' o

F

r h 0

oF

o!l

a

th

l l

=tr5l-Eg il

P12-3

(f l Total cost of Job 50:Work In process, December IDecember costs:

Matorlal8..... a a a a a a a a a r a a a t a a a r a a a a a a a a t a t a a a r a a a a

Chwter t2

3 54,OOO

45,OOO42|OOO15,750

(21

(3)

(4)

(s)

(61

Direct labor ($lO2,OOO + 8,5OO| r 3,5OO|Factory overhead (34.50 r 3,5OO|

Factory overhead costs applied to Job 52 during Decemben$l .SOx2,O0O=$9,OOO

Total factory overhead costs applied during Decomben$4.5Ox8r5OO=$.?8r25O

Actual December factory overhsad incured:

Supplies a a t a a a a a a a a a a a a a a a a a a a a a a t a a t a a

$156,750

$ 3,soo15,00o

6rOOO3r5OO6,OOO5rOOO

Indirect labor lygftos....,...Supervisory sa!ari|B3.........r....or..........oo......r......r......r.r.....rr......Building occupanqy costs..t . . . . . . . . . . . . . . . . . ' r , . . . ' . . . .r. . . . . . . . . . . . . . .o... . . .rFactory equipment costs...o.....'...........o.............................r.o...Othgr factory costs...r. . . . . . . . . . .r. . . .r. . . . . . . . . . . . . . . . . .r ' r . . . . . . . . . . ' .r . . .r. . . . . .

$3e,999

An insignificant amount of ovep or undsrapplied factory overhead woutdbe treated as a period cost.

Agtua l ovgrhgad. . . . r . . . . . r . . . r . . . r . . . . . . r r . . . r . r . . . . r . r r . . . . . r . . . r ' . . . . . . . r . . . . . . t r . . $39,OOO38,25OApplied overhead

Underapplied overhead $ 75o

I

I

Clnpts 12

P724,

(11 Actual factory overtread:

Indlrect materlalg and supp1ies....................................o.,...,.r..lndlrggt 1abor....t....r........r...............r..o......r.o.r........................r.

Employec benefits.....................r...............r,.............r..............Depreciatroll tttt.t............r.....r....r............t........1.............r...r......

Supgrvisioll "tttt...o.'..r.o.r......................1..rrrr.t1..r.......r.....o.r.......

l2l Ovep or undoriapplled factory ov€rhead!Totaf dlrect labor, 2o- r.r.............r........'......r...........r.....rr......oFactory oyerhead rato per direct rabor dofrar o......,,.....,......r.,.

283

$ 18 ,O0o53,0Oo23,00O{2,OOO20.o00

fl?s'qaa

s 7o,0oo1600h

st 12,OO0126.OOO

s 14.000

$ 72,5OO8,OOO

11,2OO

Applied factory ovgrhgad .........o..........o..Actua I factory oygrh ea d ..........o,.,.r,,.......Underapptigd factory overhe3d...........,.o,...........r.,........r.......,.

(31 Amount included in cost of goods sold for Job 1376:Beginning ba1ance. . r . . . . . r . . . . . . r r . . . . . . . . . . . . . . . . . . . . r . . . . . . . . . . . . . . r . . . r . . . . . . . r r .

Matgriafs and labor r 20- ..r.Drr.....r.....r......................r.......r....,.

Appf ied factory overhead, 2O-- (S7,OOO x l6O%)

9_91,?og(41 Gost assigned to the work in process account at the end of 2o-z

$ 72,500

$ 43,ooo7O,OOO

1l2,ooo 225,OOO$297,5OO

91,7O0

s205,8OO

Beginning balance (Job i376). . . , . . , . , . . . . .o. . . . . . . , . . . . . . rCost charged to work in process, 2O-:

Materialg ..........rr...................r...................o..L € b o r a . . a a a a a a r - . a a a . . o . a . a . a . a . - a a . . . . . . . . . a a . . . a a . a a . a r r a . . a . . a

Appfied'factory ovgfi ead .....r,......................

Less cost of Job i376, wtrich was completedand so |d . . . . . . . r . . . . r . . . . .o - . . - . r .o . . . . . r r r . . . . . . . . . . r . . . . . . r . . .

--I

2UCtlpter 12

P12-5

(11 Predetermined factory overfisad rate based on nonnal capacitln$29 t25o ' - r - r - r - - - r ! ^ -

4sroooTF = S.65 variable portion of rate for erpected actual and

normal capaclty$18,OOO

6o,o00TH =

=.19 fired portion ol rate based on norrnal capacity

.-- $.95 total rate based on normal capaclty

(21 Predeterminad factory overhead rate based on expected actual capacitrs 2 9 t 2 5 o r - L r - - ^ r ! - - -

4s,ooo MH = $ .65 variabte portion of rate for erpected actuat and

normal capaclty$18 'OOO

A5ôoo itH = .4o H:,rffon

of rate based on expected actual

9!.Og total rate based on erpested actual capacity

(31 Amount of-factory overhead charged to production if the company usedthe normal capacity rate:

47,OOO MH r $.9S = $44,650

(4) Amount of factory overhead charged to production if the company usedthe expeeted actual capacity ratel

47,OO0 MH r $1.05 = $4g,3SO

(5) Actual factory ovgrhgad .........o..................,..r..r...o....r....,......... $42,1 ooApplied oyerhead (from (3) normal capacity ratel r......,........... 44.650Underappligd overhgad '............'......................rr.o....roo...r....r... $ 2.4so

(61 Actual factory ovgrhgad ....o..'..r........o.o..........D..r....r................, $42,1 ooApplied overhead (fmm (4f erpected actuat capacity;i;t..,.. 4e.3soOverappligd ovgrhgad ...'..............'...r.........,.i........r......o,.o..,...r $(?€gA)

I

I

Chapter 12

Pl2-q

(11 Work in Process:

a a a a a t t a a a a a a a D a a t a a a a a

285

$1O,OOO4O,OOO

l8,0oos68,OOO

s t7,5OO29,05023,goozqpp4,00osOoo6,5.O08,2507r5OO9,goo

9r.z,oog$l l7,ooo

115,200

9_1999

Dfrect materialg ....,..Dlrect 1abor..............Factory overhead

(2'OOO x $3.601.....Total .........,..r....

$ g,ooo161000

7r2OO

Flnished Goods:

Dlreet materials r.....,...Dltuct labor,........,.......Factory overhead

(5r0OO r $3.601 r.....r.b

\-

(21

s32,2OO Total

Heat, light, and powerDepreciatlon-fa ctonr b u ll dlngs

Depreciation-factory eguipment ...Miscellaneous fastory overhead ..

Total actual factory ovgrhgad r.,............................r!.,r..,...

(3) Agtual ovgrhgad ........r..........................Appl led ovgrhEad r. . .o. . . . . . . . . . . . . . . . . r .o. . . . . r . . . . . . . . . . . . . . . . . . . , . . . . . . . . . . . . . . r . .

Underapplied overhead

i-

2ffi

P12-O (Concluded)

(41

ChWter 12

COLUMBUS COMPA}|YCogt of Goodg Sold Statsment

For January

Materialc:Inventory January IPurchasar

lnventory Janualy 3lDlract laborApplied factoryJanuary man ufacturlng cost..,........,............rAdd work in procesr, Janualt 1...................

Lgss work in process, January 3l ,........,...,..Cost of goods manufacturedAdd finished goods, Januaql IGost of goods availablg for galc.......,.,.........Less finishgd goodq January 3l ......,......!....Cost of goods sold gt normal ...r...r...............Add underapplled factory overhead .......D..o..Cost ol goods gold at 8ctua|........................r

$ 2l,ooo$1O8,OOO

Lggt tlturng to rupplleJ''t!,..........r........... 61050 lO2r95O

Matgrials ava11ab1c................................. $123r95O9'OOO $114,950

25O,OOO115,2OO

$488r15O s32r50O

$5l8,6lio32r20O -

9080,450l8,ooo

$so4,lsoo8,ooo

s436,45O ' -l rSoo

$438,25O

I

Cluptcr 12

CASES

Dlres{ l.aborHours

217601000 hours2rl60'000

287

FactoryOverhead Gosts

334r5OO,OOO2grggo,000

$ 4,620,000- '

Lows29rgg0,0oo

lor632,000$13,249,0oo. -

SlT,zloroool3,24g,ooo

s3O,g5g,ooo- -

cl2-1

(t l

High..aa.......r....................a.1...........r......a,

!owDiffersnce

Total OOSt ......r...r....rrr'xlr.aarar..lraal.r....lrr..............

Variable cost $!Z.ZO per dlrcct labor hourl.........Firgd elem gnt ......1.....1.......r.r...r..-.....r...............r.

Total factory oygrhead,................,...,..........

600,000 hours

Estlmated total fagtory oyerhead for next yoanTotal yariable factory overhead (zr3o0;o00 r $7.70).....,........Total firgd fagtory ovgrhgad .........,.,.......r....o.r..,..D.......r..r......

varlabfc rate = ${ro2orooo + 30oroo0 hours = $7.7O per dlrect labor hourHigh

$34r599r9992lr252rOOO

$l3,24g.ooo-

(21 Utility ol cost behavior Informailon:(al EYalustlon ot product pricing decisions-Tha calculation of the fac.tory overhead rate requfred the company to esUmate the variablefagtory overhaad cost. tn short-term-priie-cutting srtuations, theprice get should cover at least the varlable materials, labor, facto'/ovarhead, and nonmanufacturing cost8. For the longer toil, tfr"total cost asslgned to the various products may pnovide some basisfor price dlfferentials among the ltems.(bl cost control eYaluation-Tho calculauon of the factory overheadrate rcqulrsd the company to estimate tho fired t*b;y-;;rhead

cost and thc varlable lactory overhead eost per direct labor hour.The amounts arc esumatesbt what ttro cost shoufd or witl be duringt" let! yoar. Thc amounts can be used aJtnr uasis roi prsparagonof a budget alforvance lor actual activity to U" compared to actualcost incunrd. Any drftenanco between ine ruoget amounts anoactral cogt woufd be I moasuno of the ereaivJness or ractory ovor-head cost contlol.

(c) Development of budgets-The estimates of fixad factory overheadcost and the.variable factoryov_erhead "o"t p"l' direct tabor hour arousefur In budget deveropment. They p.rriith" "o,np"nito carbu_late thc estlmated factory overheal iost roioirerent activity levelsthat arc berng consrdered as the budget tsteveroped.

te l

CHAPTER 13


01},1. Departmental ovefiead ralot aro prcfrrrrd to a. sirgle talc becausc they irprovr tre cmlrcl of

orcfiead by deparlnenl headr rosponrbb forcsrtrollablr ovrrtrrad, and lhry incroar lhr

' accuracy ol product and job corting whcnproductr or iobt rovo througfi variql prduc-h9 depsdmonb.

01$2. Deparlmrnlalizing faclory ovrrhrad ir anexlension of mclhodt used in ralablishing asingle ralc becausr (a) an application basomusl be selected and crtimaled; (b) ovefieadestlnales musl bo rnadc; and (c) adual wer-head musl be accwnubl.d sd cqnparod withapplied overhead. Thcsc rteps an reguired foreach producing deparimenl, whereas wilh asingle rale, mly tolal factory dale ere neccr-sary.

Ot3-3. The surn cil departnatal over- or underapgliedovefiead would be diflerent. Every direct laborhour *ouH havc thc sarno arnount of appliedoverhead whcn a planl-wiJr ovrfiead rato bused, assuming lhal thr applicatbn base irdirecl labor hours. However, tho usc crf depart-menlal ralec resulls in ditlcrcnt amounts olapplied ovorhoad, depending on thr laborhoun in cach dcparlmcnl and tho indivirJualdepartmenlal ovcrhead ratos. For cxarnple, afirm wilh an ovorall ratc ol $2 would haveS20,0@ ol applierJ ovefiead la 10,000 hours;the seme firm wilh departmcntal rates ol 9land $3 lor its twe produchg dopartnents couldhave more or lcss applied orerheed, depcnd-ing an the breakdown c, labor houn receivhglhe S't ard 33 overhead charge.

Thc lotsl cet cf gmdr lold ard tdsl hvcnto-ry rtould also be differerd, becausr departmen-tal rate! could cauro diffrrcnt unil cogts.Thereforc, invenlory and cost of gods soldwould be hfluenced by products s<ld q still qrhard. This hpuH not be thc case il a blanketralc were uced.

Q13{. A prodrrcing department b dhestly csrcomedwith manufrturhg prodrctr or dc*rg ucrk qrvarious jobr. A service department rendenservico to variour deparlmenls and ig notdirectly asrociated with manuf acturing opcra-tbns" Tho naturc cl tho nprt dono by a Otp.rf-ment dclcrmhca rrhrther I b a rcrvicr or ptrducing deprrlmont. Exemplcr ol producingdepa.,tm.nl! arr cuilhg, fhirhing, m*hining.mir ing, and rcf in ing. Exampler of scrv iscdgpartmontr arc mainlenancc, medbal, power-houso , pu rchas ing , recc i v i ng , and cos taccoonting

Q13-5. The kinds o{ deparlments ertablishod to con-trol snd chargo ets depend on (a) simibrity

of a company's operalions, processes, andmachinery; (b) locatbn of operatbns. process-es, and machhery; (c) responsibilities lor pro-duclion and cosls; (d) rclalionship ol opcra.l ions lo l low of product; and (e) number oldeparlments or work centers. Thc number ofdepar lmenls es labl ished depends on lhoemphasis placed on cosl control and on thedevelognenl of overhead rates.

Qt}€. Physbally different segrnents of a departmentor clst pools for ditferent kjrds ol costs wilhina deparlment rnay be driven by activity baserthat are guite dillerenl, lhur callhg for lhc usrol subdepartm€nF tor taclory overhead accu-mulalion, application, and analysis for eachphysical segmenl or cest pool.

Q1$7. No. A more correcl method is the use of thcplanl assel records lo c€mpute deparlmentaldepreciation, property tax, and fire hsurancccharges, provided the recordg arr sufficienllydetailed lor this pufpos. and thc rvork hvolve'dis nol too complex. Swh a rnethod wouH giveproper recognition lo lhe various depreciationrales used and fire insurance premiums paidbecause ol varying tlpea of equipmenl

0198. Factors involved in selecting the mosl egui-table rale lor applyhg factory overhead includeconsideralion of the nature of a department'soperalions, the relationship ol overhead ele-ments to operalians involved, and any clericaldifticuties arising through the use of a particu-lar rate.

0139. The several s leps fo l lowed in es labl ish ingdeparlmenlal factory overhead rales ar6:(a) Estimating direct overhoad ol producing

departments and lhe direcl costs of ser-vice departments.

(b) Preparing a lactory surv€y for the pur-pose of distributing indirect departmentalcosb and servics deparlment costs.

(c) Estirnating and allocating indirect deparl-mental cosls.

(d) Dislribuling service deparlment coste.(e) Compuling deparlmental factory over-

head rates.Ol$10. The questlcnr lhgt musl be resolved in allocal-

ing service deparlment cosl! to benefit ing' departmonts include:

(a) Determhing which departments are bon-elited.

(b) Selecting an allocatiqr base.(c) Choosing the a l locat ion method, i .e . ,

direcl, slep, or simultaneous.Ql3-11. (a) Direct-No service departmenl costs are

allocated to other service deparlments.(b) Step-Service department costs are allo-

288

I

1I

I

t

b

t:

I

b

b

llr

I

Chapter 13

celcd in thr order of th. d.partmonlr, !.rying tho grcatest number of depart-

mentr and rrcriving tcrvic. lrom thoarnallesl numbor, or in thc ordcr of thcbrgesl rorvb. deportmont st allcatodlo oth.r cervict dcparlmrnts. Onco ar.rvicr dcpartmenlie cortr havr bcenrllocalod, no cortr of othrr r. ivicodcpadmontr an a.lteatrd to it.

(c) Simullanoour-Tho full rcciprcal inter-relalio'rshipe ol bcnolitr amo.tg servicod.partrnontr an csrs idcrcd.

Tho rinultanoour method b thr mat accuralt lor prduci coclhg ard for iJerdifying tcfalc6lt tor ogeraling particulnr geryice depart-mmtc. Howevcr, thir mrthod b atao thc nroddifficull to conrput..

01$12. Contrcl of crtrtrhead ia achieved by oornparhgaclual rcsul la wi th ptanned or est imatodrreullr. To makr arrh cornpericcrr, both tlgorof orrcrhead must br aocumubled and rcport-od in lho sarn. rE.tnor. Sincr thc ernputdbnc{ overhead rater with required ovcrhead osti-rndcs procodec lho ircun.ncc and accumuh-lbo of astual o\rcrhcad, th. cqnputatiort prc>duro dolermho tho accounling lq aslual wcr-head.

01313. Oepartmental over- or underapplied ovefieadit determhed by curqrsring astual and appliodovcrhced.

01$14. ll a cornpfer product lhe is produced in a nqr.deparlrnentalized factory or in a single depart-

289

monl of r taelory, onc appnoach lo accurattproducl cosling is to use muhiple overheadcosl p@lr and mulliplo bases wilhin a sirgbrospcrbility c.nlcr.Nqrmanufacturing businorses (lrch ar rrtailltdcr, fluncbl iuilildilu, irsuranc. cdnps-niot, oducalionrl i,nttitutirnr, tnd horpitela)rhouH b. divu.d into dopartrrrnb to brrdgrtand control stl. For oranlpb, a rrtail rtoomighl br dcprrUn nlalhed as folkrp* a*ninir-lralirr, occllplrlc)r, ralc prwnclin and advcr-tirhg,, purc{rarhg, relfing, and dclivcry. Ar hmmulrturhg butirosser, departmcntal cootfafr proreled lo ?ov3nuc-producing ralordopadrncnts by urhg a cfrarging or billi.rg ratc.Departnentalizatinn ir partic ub rty n""J""rrylor hcpitab and cducatioral hstitutbnr, whbimust budgel lheir costr on a deparlmenlalberb fo ccrtrol costs and to chargc adcquatrrut rccorcring feee,Govomrnent agencies employ targc numbcnof people, and as they spend brgei and targersurnt ol lax money for varbus seruicer, lax-payor! arr domending more otficient urr oflhd nrmey. Thercfore, rervices CrouH bo ren-dered al thc l*ost coct with thc Arrdcst cffl.cioncy. Govcmmcntal activilier stpuU b. hrd.gnlod and lheir csts controlled on a reaponsi-bility accounting baeis. The efficioncy of ter-vicer ahouH bc mcasurcd by ushg stch unit3of measurement as per capita, per milo, q porloi1.

01$r5 .

or$16.

\i

290

Et3-1

Work In Proceer

EXERCISES

33,31O

Chagter 13

1 5 1 1 3 0

1 8 , 1 9 O

3,OOO,OO

I,O()0.00

1,0oo.oo

850.00

750.0O

1,8OO.OO

4,6OO.OO

Applied F8story Qverhead--Department A(1 TtOOO r $89 J -.......................,... j..,...,(

Applled Fac,tory Orerhead-Department B(1 SIOOO I $l rOl

--f ...............o..r...........rr.......r.r.r.....

' $l7'8OO + 2O'OOO = ti89*$2or2oo + 2o'ooo = $l.ol

El3-2

Dcprrtmcntal Ovcrh cad Column r Gencral trdgcr

Crcdlt(al

trl

Factory OncrhcrdControl ....,.,D...-.-F

AccumulltcdDoprrSulldhg[

Frctory OvrrtrodCon trol ...,..--ro....-

AccumuhtrdDepr.-filechhrry

Fectory OvcrhcrdControl ......ro........-

Accrucd Proprr$Trr Pryrblo--.-

Fectory (hrrrhrldControl -,....8h-

Accr. WortorrrCompmteUon...

Factory OvrrhodControt-...

Accrucd PoworPeyebb...,...*..

Frctory OvrrhodControl ..........,F...,.

Accountr peyebtr

Ftctory OvrrhredControl

360.00 360.00 18O.0O 1 ,800.00

5OO.OO 4,60O.OO

Mecfilnlng

GenenlFactory

Pelntlng Arrccmbly Cogt Pool

l '5OO.OOO 600.00 300.00 3,ooo.0o

or00o.o0 aooo.oo 1,2oo.oo 4OO.O0 0,800.00

550.00 20it.33 170.00 74.67 1,000.00

450,00 180.00 100.00 850.00

ooo,oo 60.00 90.00 750.oo

(cl

{d)

(e)

tr)900.00

1,8OO.OObl

Mstrrbb2,3OO.OO

t_1E

I

b

Chapter 13

Et3-3 I

(1)

Budgeted factory ovorhoad ""'t""

Oepiltment Sl distribuUon(g o/3OO, 2l o/3o01 ..-u..D-.....""""bepartment 52 distrlbuUon -(64/8Ot I 6180l """"""""o"t"""""r

Budgeted factory overhead "D"o"t'Machlne hoUrlB tt""""t"""o""""'ro'

Prgdetgrmlned rstc ........'r""""o"'

Diroct lsbor houfE'."""""'r"'o"""'

Prgdgtormlned rate ......ro,o"""""D'

Job,437 ovorhead cost:Department Pl(3 x $6.5O) . . . . . . . . . . " " " " t " " t " " t '

Department P2(2 x $4.48)""""""" ' t """" """ '

P2

$346,O0O $368,OOO

3O,OOO 7O,OOO

40,0oo$416,O00+ 64.000

---_$6.5q

I O,OOO

$aae,ooo

- l0q0m$4.48

$19 .50

8.96

$?glg

291

s2$IOO,OOO SSO,OOO

(lOO,OOO)

(5O,O0O)

slP1

I

S

(21 Plantwide predetermined factory overhead rate:

, ,T1lo1o. ' . = $6.40 Per DLHi35,OOO DLH

Job 437 ovgrhead cost (2 x $4.48) """"""""""""""""""""" Sl9 '2O

cGA.Ganada(adapted} 'Hepr in tw i thpermiss ion .

292

E134

(11

(21

I

$4O,OOO +$25'OOO + $361'956 +$420'OOO $846,956

Chaptor t3

= s.83

Budgeted factoryoverhead r.........rr.,..Distribution of:

Building andgnounds .........!..Factoryadministration..

Total

Base:Machine hoursDirect laborho urs, . . . . . . . . . . . . . . ,

Rate.. . . . . . . . . . . . . . .o. . . . . , r

452rgOO + 567125O 1rO19 ,25O

Building Factoryand Admin-

Total Machining Assembly Groundg istration

$846,956 5361,956 $42O,OOO S4O,OOO 325,OOO

18,OOO 2O,OOO (4OrOOOl' 2,OOO

13,2OO 13r8OO l3z€gg)"$846.956 $393.156 s453,800:

195,60O

567r25O$2.01 $,80

t- gl2o, 1ol2o, ltZo to Machining, Assembly, and Factory Administration,respectively.

n 44lgor 46190 to Machining and Assembly, respectivety.

CGA-Canada (adaptedf. Reprint with permission.

E13-5

Main- Admin-Total Gutting Assembly tonanco istration

overhead budget. . Si ,29o,ooo S52O,OOO $42o,ooo S2OO,O0O Si5o,oo0Distribution of:

Maintenance12113O,9/g0l,.. 14O,OOO 60,000 (2oO,OOOlAdministrationl lslzs, lolzsl. 9o,ooo 60,000 (15o,oool

overhead budset.. gl,ZrrJAA S*g€gg fr_4JlQg : :

Machine hours. . . . . . 2STOOO 2O,OO0overhead rate.. . . . . . 3o,oo $27.oo

CGA-Canada (adapted). Reprint with permission.

--1

dlaptcr 13

' E13-C'

293

Producing ServiceDepartments Departments

ProductTotal Mixing Finishing Cafeteria Design

$364,000 $1O4,O0O $2OO,OOO slO,OOO S5O,OOO

3,250 6,500 (1O,O0O) 25O

16,750 33,500 (50,250)

Budgeted factoryoverhead beforedistribution ofsorvictmentr

depart-

DistribuUon of'sorviee department

costg:Cafeteria ($1o,000-r 2OO employees= $5O) ....'.'......'....P;oduct DesignG!SO'250 + 3OOproduct orderc= $167.50| ..,,.,.....

E . g364.000 S124.OOO S24O,OOO

Bases: machine hours 4O'OOO 6OTOOORates r............,. $3.1O $4.OO


E13-7

(f ) Producing ServiceDepartnients Departments

Total Pi P2 Si 52Budgeted overhead ... $5s2,75o $2o8,ooo $300,000 $1o,ooo S34r750Distribution of:

Department Sl ....Department S2....

4,500 5,250 ( lO,OOOr 25020,000 15,000

Total fastory overhead ,$EEZJSO $Z3Z€O_q S3?9€99

' t8O/4OO to Pi,27O|4OO to P2, 10/4OO to 52i ' {,OOO/7,OOO to Pl, 3,OOO lT .OOO to P2

Pl : $232,500 + 4,OOO machine hours = $58.{25 rate per machine hour

P2: 3320,250 + 10,000 d i rect labor hours = 532.025 rate per d i rect labor hour

(35,OOolfi

Elg-l (Conctuded)

l2l plant-wlde rate: $544r75O r- l5rOOO direct labor hours = 336.317 plant-

wide rato Por direct labor hour

(31 Individual fobs lnal rsquiro relauvely different amounts of time in eachdepartmenl ll Pl is machine-intehsive and P2 is labor-intensive, thenssparate departmental rates would provide a-fairer allocation of costs to

iobs.


El3-8

(1) Main-Total tenance Personnel Machining Assembly

Budgeted factorYoverhead....,.......... $27O,OOO s3OrOOO sl5,OOO SI5O'OOO $75'OOOAllocate Maintensnce

(S3O'OOO + 4OTOOOsq. ft. = $75 Persq. ft.) r..!......o..

Allocate Personnel(S18'OOO + 12Oemployees = $15Oper employee|.

(30,0001 3,ooo 14,250 12,750

( l B,ooo) 6,000 12,OOO

$27O,OP

Divided by machinehours ..............

Divided by direct laborhourS.. .r . r . . . ' . . . .

Factory overhead rate

(21 Job No, 37522

MaterialsDirect laborFactory overhead:

1o machine hours O $7.5o..................... 7511 direct labor hours O 36.00

Chapter t3

s170,250 $99,750

, 22,700

16,625s7.50 s6.oo

Machining Assembly Total

s 6 0 s 7 $ o z24 99 123

66 141

slse s172 $331: :

CGA-63nada (adapted). Reprint with permission.

lL - Chapter 13

s Er3-g '

(21

Dcpartmcnt_ oycr|t eed

! bcforr db-

295

(11 Equation 1: E = $2O,0OO +.2OFEquation 2: F = $2O'OOO +.2OEEquation 3: G = $1O,OOO +.3OE + . iOF

SubstituUng Equatlon 2|nto EquaUon l:E = $2OrOOO +.2.O($2O,OOO + .2OE)E = $2orooo + $4,ooo + .o4E

.96E = $24rO0OE = $25'00O

SubstituUng E = $25,OOO into Equation 2:F = $2OIOOO +.2O($25,OOOIF = $25'0O0

Substituting E = $25,OOO and F = $25,OOO into Equation 3:G = $1O,0OO +.30($25,OOOI +.1o($25,o0o1G = $2O,OOO

ProduclnEDcptrtmcntt Mrrlcgng licrvlcc Dcpartrncntr

Dcprrt- OcncnlS T m c n t O f f l c o E F O T o t a l

trlbuUonof rcMcr

> dcpertmrntt iEoroOO igo,OooDlrtrlbutbnol!

Dcprrt-nrnt E.....Dcprrt-

12,50O

mlnt F-..., 7r5OO 1O,OOODcprrt-ment O..... g,o0o O,ooo i4,ooo iz,ooo

Total..... ST5,SOo 311g,5oo S4,ooo S2,ooo

320,000 t20,000 $1o,ooo 32oo,ooo

(25,O0O) 5,OOO 7,5OO

5,000 (25,oo0) 2,5oo

{2O,OO0}

s2oo,ooo

Chapter 13 : -296

il9rr$ll

A

l o ol o o

u-| o- o-t o ol q ' c ,r a Y

ts g t* l3 3ll

ltB�iF'tr

o o t lo o l lo o l l

l l

o o t lN r r l l3 l l

o o to I toilo o N t N i lO O I l r l l

- t d l

N O @ t O l t= r t r l l 0 l lF t$ l l

to tlt\ llo t lo t lo l lF t lglll

o o l o lo o F lo o c0 l

- l

n l o o lN - lI

i o o ol o o o

rulo- o_ o-l|o Qo cot ?t g +

r o o Al o o o^ 1 9 0 0- l d d u t

l l o l Ol g + Y

otrotrLTECLoooo.Eoo

floEoEt-(gCLqtoo.9too

o ' o o t o uo o ( o t ( o i lo \ t c v l l r . l l

- l - { lF ( I l - l O l l

rstl

l ol o' 1 3l FI g ,

l ol o

- l Q- l dl Ft g +

o

€ EO E5 f

F 3a 3

o o oo o oo - q qC\|6

qu

o t l

8ila l lifil

o oo oo ( oq,

@

"ll ol o

o l o -- t ol N@

o I8Jl!t ll- l ltn.tl

t o ol o o"13 sl F, 9 ,

€ El'lFt'l"l Fq

l o r o r l= l o l o l l

f l 3 i o r lr r o l a l l'S a i8 l l

q

;gsir:* jEEES$$Fg Ei E E E g F ; s ;€ 5 3 , . o o u r E{ O s

I(1'

ul

t8 i lI oJl

lsll

tr

El;P

? -

6 9. - F! ba + ,

5 h'tr o.'li o

3 Ei 3" i otlt

o o o l o t lo o l ; l \ i l |@- q 0_16ll l

r r N l o l lt g ' i lt { f^ t l

Chapter 13

Et3-12

Lot Sl = $2O,OOO +.2OS252 - 317,600 + .1OSl

SubsUtutlng: Sl = $2O'OOO + .2O ($iZ,600 + .1OSt)Solving: Sl = $2O,OOO + $3,52O + .O2Sl

.9gSl = $23,520Si = $24,OOO

SubsUtuting: 52 = $17,600 + .1O ($2C,OOO;= $17,600 + $2,4OO= $2o,ooo

Total Pl overhead = $94,OOO +.4O (Stl + .5O (S2l= $94r00O +,40 ($Z0,OOO) +.5O (S2O,OOO}= $94r0OO + $9,6OO + $1O,OOO= $113,600

Ef 3 -13

(11 The dual predetermined overhead rates are:S4OO,OOO

lO,OOOffi = $25 per direct labor hour

$3OO,000

and

= S75 per machine hour

Job f345

4,OOO machine hours

297

l2l

$1,OOO300

1.500

s2.BOO

2ln

E13- t 4 I

(11 The dual predetermined overhead rates are:

$9OO,0OO

Chagter t3

(21

3,600 machine hours

s6oo,0oo30O tonr

= $250 per machine hour

and

= $2'00O per ton

Job f lo3

Parts and matsrialsApplied overhead:

7Or $250 = $17,5OO4 x $2rOOO = 9r0OO . . r . . . . . . . . . . . . . . . . . . . . r . r . . . . r . . .

T O t a l . . . . . . . . r . . . . . . . r . . . . . r . . a a . . r . . . a a a a a a . r a . . . r r . . . . . . . . r . r . . . . . . . . . r .

$22,OOO

25.500

$47.500

b

iL

I

IL

Chapter t3

Pl3 - l

(r)

Overhead beforedistribution otsorvicrg depart-mOntS ....r............rDistrlbuUon ofMaintenanco..,...,..Gentl Factory..r.....Total factory

OVefhgad.r.,........

Machine houtg..,..,Direct labor hour:.Overhead ratos:

per machine hr..,per direct

labor hr. . . , . . , . . . .

PROBLEMS

Producing

Total cringl1g s-ooutilg

SorvicsDepartments-_

f,lain- Genertenance Fector

DigtrlbuUon of Sorulcc Department OverheadUsing the Dirsst Method

$68l,ooo $l7s,ooo $23o,ooo $76,000 Szoo,of 2,667 83,333 (76,000I'

133,333 06,667 ___

s32t,ooo $soo,ooo+ 4'OOO

l3gg,os681,O0o-

$ 80.25

-r 3OTOOO

$ 7 2-

i19:{t,98.o tg Grind-ins, eoo/l,o8o to smoothins6/9 to Grinding, 3/9 t; Smootiiing

b

go

P13-l (Continued)'

l2l First, the simultaneous equations ane solved:

L e t M = $ 7 6 , 0 0 0 + ( l / l O l GG = $2OO,OOO + l72Oll,8OO)M

Substituting; M = $76,00o +.1($Zoo,ooo +.4oM)

Solving: M =, $76,0OO + $2O,OOO + .04M.96M = $96rO0O

M = $1OO,O0O

Substituting: G = $2OO,O0O +.4O ($1OO,OOO1= $2OO,OOO + $4O,OOO = $24OIO0O

Distribution of Service Department OverheadUsing the Simultaneous Method

Chaoter t3


Main- GeneralTotal Grinding Smoothing tenance Factory

Overhead beforedistribution ofservice depart-ments $681,000 S175,OOO S230,OOO S 76,000 $200,0OODistribution ofMaintenance.. . . . . . . .Gen'l Factory

1O,OOO 5O,OOO (1OO,OOO) 4O,OOO : -144,000 72rOOO 24,OOO (24O,OOO)

--

Total factoryoverhead S681,OOO $S29,OOO S352,OOO

Machine hours. . . . . ,Direct labor hoursOverhead rates:

per machine hr...per direct

labor hr. . . . . . . . . . .

+ 4,OOO+ 3O,O0O

s 82.25

s 11.73

180/1 '8OO to Grinding, 9OO/1,8OO to Smoothing, and 72011 ,8OO to General.* Factory

6/1O to Grinding, 3/1O to Smoothing, and 1/1O to Maintenance

Chagter 13 JOi

Pl3- l (Concluded)

(3) Distribution ot Service Department OverheadUsing the Step Method


Main- GeneralTotal qin!!ry Sr*!!gg tenance Factory

Overhead beforedistribution ofservice depart-ments ..r.......,...r.,. $6911000 $175rooo $23orOOO 576,000 S2ooroooDistribution of:

Maintenance.....,Gen'l Factory..... 153,600 76,800

s 84.05

s 1 1 . 4 9

7,600 38,OOO (76,000) 3O,4OO'(23O,4OO)"

Total factoryoverhead.,........,. $691,ooo s336,2oo s344,gOO

Machine hours.. . . . .Direct labor hoursOverhead rates:

per machine hr..,per direct

labor hr. . . . . . . . . , .

+ 4r0OO+ 3O,OOO

' 18o17'8oo to Grinding, 9oo/1,Boo to smoothing, and z2otl,Boo to GeneratFactory'*6/9 to Grinding, 3/9 to Smoothing

w2

P13-2

(1)

Predetermined lactoryOVgfhgad ft1t9...................""'.Actual activity base amount...Applied tactory overhead ...,...

(21

s25,920 s92,oo9

Chaptor l3

FinishingDepartment

$ 1 .60 /DL$

ryg!_os,60o

CuttingDepartment

AssemblyDepartment

s 2.40lMHx 10,800 MH

s s.oo/DLHr 12,4OO DLH

/Actual overhead for\ first six months

f /Proiected overhead for 1/

- |. second sir months )Revised factory

overhead rate /Actual activity base \ . /Proiected activity base \( for first sir months /

- \ for second six months /

Cutting Department (machine hours):

szSro-o-9 + $-z?t'1oo - ry- - s2.3o per machine hour1O,8OO + 9 ,2OO 2O,OOO

Assembly Department (direct labor hours):

$56,80O + S57,5O0 _ $ l 14,3C-12,4oo + rg,ofo:

' f f i

- s4'5o per direct labor hour

Finishing Depaftment (direct labor dollars):

s98 '5oo + $96 '5oo - $1 95 '0o0 - sl .5o per direct labor dol lar566,0OO + $64,000 S13O,O0O

Chapter 13

Pl3-2 (Concludedf

(3) The applied overhead accounts should be adjusted by the differsnce inthe factory overhead rates (revised rate less original rate) ilmes the actu-al activity for the first sir monthg.

GuttingDelartment (9?.3o-$2.4O) r tO,BOOl $ (i,O8OlAssembly_Department (f.!o - $s.oo) x t z,looi is,zooiFinlshing Department ($|.SO:-$1,60) r $gO,ooOi iO,oooi' Dgct8ase in applied factory overhead..............,......... gFa*t,

The applied overhead adiustment is altocated to the inventory accountsand cost of goods sold on the basis of the unadjusted overhead compo-nent in each accounL

Workln Procgss.... . . ' r . . .r. . ' . . . . . . . . , . . . . . . . . . , . .o,.. . , . . . . . . . .D... $ t2rOOOFinishgd Good8.......r ' .r..............r.oo.. '..r...........o.......ro 4BTOOOGost of Goods So1d.... . . . .r. . . . . . . . . . . .r. . . . . . . . . . , . . . . . . .r. . .o...o. f BO;OOO

50h2075

Applied Factory ovgrhgad-cutting ..r......,........,..,.rfnntieO Factory OverheachAssembty...,,......,.......,.Appf ig9 Factory Overh ead-Finishin g r..........,...,..,..

Work In Process Inventory (Sf grggO x.05).....,Finished Goods ($l3rgg0 r .20|............... j .,.,,..Cost of Goods Sotd fit i3rggo r .ZS)........,......r.

$24O,OOO looo/o

Debit Credit1,09o6r2OO616OO

69421776

l0 ,4 lo

n4

P13-3

Chapter t3

Dlrcct departrncntrloverherd:

3u pc rvlr lotl'....-.....'..tndlrcct bbor **Indlrcct ruppllrl.*Labor frlngc bcncfltrEquipmcnt

deprccleUon......--Property ter'. deprecbtlon ol

bulldlngr, ctc..-....

Total ..........'.......6,..-..oProraUon of llght end

pOWCf ...-.......n.'-.--.

Dlrtrlbutlon of rcMcrdepartmenta:General Factory Cort

Pool ..'........-......F..Sto rcroo m ...,...ro-F....Repaln end Mebi-

tenancc...Total--produclng

departmontr .............

Macilnc houn.....-.......

Ovcrhead ratc pcrmech lnc hr.....,....,-.,,

'General Factory Gost Pool can be distributed either on the basis of S.8O persquaro loot ($67p2OO + 84'OOO sq, ftl or on the basis of the following pencent-ages: 25ohr 3goh,35oh, 4oh, and 6oh tor the first five departments. The per-centages aro determined by dividing the squans footage in each departmentby the total sguano footage.

- Storeroom can be distributed either on the basis of $.07 per requisition($18,900 + 2TO'OOO requisit ions) or on the basis of the tollowing percent'sgos: 4gohr 30ohr TSo1r' and 9% for the three producing and one servicedepartments. The percontages aro determined by dividing the number ofrequisit ions in each department by the total rsquisit ions.

*Repairs and maintenance can bs distr ibuted ei ther on tho basis of 31.88 permaintenance hour (S28'2OO + l5 'OOO hoursl or on the basis of percentages:32ohr Zgoh, and 4Ooh to the throe producing departments. The percentagesare determined by div id ing the maintenance hours in each department by thetotal maintenanco hours'

Sorvlcc DcpertrncntrProduclng DepartmentrGcnarelFrctory

Cort Pool

:!8,0007 j2OO3r6tt1

700

1r74O

324,00018,00o

I,O7O2,100

1 1 1 0 0

31{,ooo8r0oo5/a3O

10,14!t

10,000

37r2OOorlglrraoo

640

500

32or3OO5r.4OO'lr85Oap72

!rooo

316roooG,0oo5,OOO0,349

8,000

367,200

167,2OOl'

31O,212

2,688

32i2,4673{5,482

16B0081894

'47,271

20,16051670

35O,38lt

23,52O2,83!t

11,2,�O

!

CluptxtS

Pt3-4I

(tt

Department costs,.....................Allocation ol service departmentcostr:

Repalr ll 19, 8191.......,....,,,,..Power F 18, 7 l8l ......'.r.r.....r

Total ovgrhgad Gost....,,r.....,......Dirsct labor hour:Overhead rate per direct labor

h O Ur .a . . .a .aa aaor . . r . ra r la a r r a a .a . o . . . . . .

(21 Algebralc calcutations:R = Repair DepartmentP = Power Department

Substituting:

Sofvlng:

SubsUtuUng:

DepartmentsRepair

s48,OOOPower Molding Assembly

s2o4,ooo s32o,o0o

5,333218.750

s42soa34O,OOO

$ro.70

42,6673lr25O

s3s3,e1Zl60,o0o

s2.46

R = $48,O0O+.2OPP = $2501000 + .10R

R = $48,000 +.2O (SZ5O,OOO +.1OR)

R = 948,000 + $5O,O00 + .O2R.98R = $98rOO0

R = $IOO,OOO

| = $250,000 +. iO (S1OO,OOOIP = $260,000

DepartmentsHeparr power Molding Assemblv

s ;a,"ro sffio $zo4poo s3zoôooDepa rtment costs...............,......Allocation of seruice departmentcosts:

Repair ll l l0, it7O, g/lO1.....Power l2y'lO, 7 l7O, l/l 0i ..,,.

Total overhead cbst,...,.......r......Dirgct labor hours .......,,.......r.,,.Overhead rate per direct tabor hour

(1O0,ooo)_92,ggg

1O,OOO(26O,OO0l

l O,OOO182,OOO

$396.OOO4O,OOO

s9.90

SOTOOO28,OOO

$426,oo91O0,000

s2.68(3) Altocating service department costs to producing departments ontyignoras any service rendered by one ""fuil" department to another,whlle the simultaneous method t""ogni."s service departments' supportto one another through the use of simultaneous equations. The lattermethod is more complete and shoutd lead to results of greater use tomanagemenL

fis

s25O,OOO

(48,000)(25O,OOO)

ffi

Pl3-5

(rt

Distribution of Sl (4/9' 5/91.'..Distribution of 32lUAr 4l8l....

Total Pl P2 Si 52

Chagter 13

Before distributioJt........,.,...... $65,000 $25,ooo $23r8OO $ TrZOO S9TOOO3r2OO 4,OOO ftr2ool3'OOO 6,000

tzl

Aftgr distributioJl-,.........o........ $65.ooo 53i.20o $33r8OO

Total Pt P2 Sl 32Before diStributiott................. $65'000 $25'OOO $23r8OO $7r2OO $9rOOODistribuUon of 52 (21O, 4l70l

4/1 Ol . . . . . .r . . . . .r . . . . . . . .ro.. .r . . . . .r . t

Distribution of Sl (4/9, 5/91,...l,8oo 3,ooo 3rooo (9,oool4,8OO O,OOO (lO,8OOl

Afterdistr ibutiolt . , . . . . . , , . .o.r.. .o.. S65.ooo $3{.6oo $tgr{OO

(31 Let 3l = 33:333 l:133?Substituting: Si = 37,200 +.40($9r0OO +,10Sll

Solving: .9651 = $iO,8OOSl = $11r25O

Subst i tut ing: 52 = S9,OOO +.10(S11,250)52 = $10,125

Total Pl P2 Sl 52

Before distributioJt................. $65,000 $2s,ooo $231800 $7r2oo I 9roooDistr ibuUon of Sl (4/tO, i l lO

I /1 O1 t..........r..................r..r.Distribution of 32 (U7Or 4l7O,

4,500 5,625 (ll,25ol 11125

411ol 2p25 4,O5O 4,O5O ( lO,t25): -

Afterdistributioll..........,r...,,.,. $65.ooo iCr.szs $33r{75: :

(9,OOOl

\

Chapter 13

Pl3-O

(11 Let r= Powerhouse; y= Perconnel; z= General FactoryEquation l: r = $ 1 6 1 0 0 0 + . f o y + . 2 0 2

x - .f oy - .2o2 = $161000E q u a t i o n 2 : y = $ 2 9 r 5 o o + . 1 o r + . 1 5 2

- . l o r + y - . 1 5 2 = $ 2 9 r 5 o oEquation3: z = $42rOoO + .2ox + .OSy

- .2Ot - .Osy+z = 30aOOO

Muftiply Equation 2by 1O and add to EquaUon l:r - . l O . y - . 2 O 2 = $ 1 6 1 0 0 O

-x + 1o.o0y - 1.502 = 295r0OO9 . 9 O y - l . 7 O z = S 3 t l r O O O

Multiply Equation 3 by 5 and add to EquaUon l:r - . l$y - .2Oz = $ 16,000

-x -.25y + 5.Oot = 2lorooo- .35y + 4.802 = S228'OOO

Then eliminate y between the resulting equations:9 . 9 0 y - 1 . 7 0 2 = $ 3 l t r O O O- . 3 5 y + 4 . 8 O 2 = $ 2 2 8 ' O O O

(.351 (9.9Oy) (.35)(l.7oz) = (.35X$3tl,OOOl(9.90X-,35y1 + (9,90)(4.802) = (9.90)GB226,Oo0l

3.465y-.5952 = $ 1O8,85O-3.465y + 47.5202 = s2r237,40o

46.9252 = $2,346 1250z = g 5O,OOO

From the last equation, z = $5O,oOo; putting z = $SOrooO in any one of theeguations in which r has been eliminated enables one to find f

9 , 9 O y - 7 . 7 O 2 = $ 3 l l , O 0 O9.9Oy - l.7O ($5O,OOO) = $31i,OOO

9-9OY = $398'OOOy = $ 4O,OOO

Then putting y = $4O'0OO and z = $5O,OOO In any one of the original egua-tions enables one to find r

r - . l o y - . 2 O 2 = $ 1 O , O O Ox - . iO($4O,OOO} - .2O($5O,OOO} = $16,000

x = $3O,OOO

Hence the solution is:I = $SOIOOO

Y = $40'oooz = S5OTOOO

g7

w

Pf3-6 (Concfuded)

(2tMhtng Rcftnlng

^-:-irzcsrooo t 0o,ooo

PowrnFtnlattng ilil:

Porrm- ocncnft r d "ooo f f i ##

Chagter t3

!,ggo (3o,ooo, 3,OOO:':::

'-i"-9;'dffi i:3332rooo

Prlmaty @!t........DbtrfbuUon:

Powcrhouro.....Pcltonncl ...._.Ocncref Fectory

Totel-_$g2,goo

3482^3OO-

T'SOOlfrooo12|SOO

- -

Ttoot2rOOOlO,OOO

srs.,ooo fr.gg 3*r"6torooo ro,ooo

r -vtvYv' z.t;,go

# '-'-vv ?'5oo tso@l

P73-7

(1) Annuaf normat cost center overhead ratesl

(21

Departmont 1O:Gost Centgr

!!-f ...............o..,.......cost center I o-2 ;:;::::::::........Department 2O:lost Centgr

?9-! .....r................r...Gost center 2o-2::::::::::.::::::.:.......

Factory overhead applied to:

Department 1O: .Gost Center

l9_1, 7,220 machine hours x $e.eOcost center to-2: tboo rnlinin" hours x $l.ooDepartment 20:Cost Center 2o-1:

?r??O labor hours r 31.15cost Center 20_22 t;6s; ffi; t'ours r S1.25

Jolat Fixed VariabteRato Rate Rate

s2.403.OO

$ l . f s7.25

I .gof . f 5

s .32.30

$f .501.95

$ .83.95

(3)

Costenters Depts.

= S2,928= 6100O Sg,g2g

= $2rsgz.so= 2,O62.5O $4,650

Dept. 2Os4r005.oo4,65O.oo

-$ (ocs.oor- - . - - ,

3-T:lfactory overhead........,..... qe&lqr'actory ovgrh ga d "fi ;;:;!!'!'t""'t""""'.r.... $9, 430. ooUnderapplied (overapptied) ...r..,._..,....:.:_:.;

ffi

Chapter 13&

Pt3-8! i

1

(11 The dual prodetermined overhead ratas art:- $4oorooo _ .ra! ___ r!-

lorooo ffi = $25 Par direct tabor hour

# = S3o Permachinehour

(21 Job 1564

(31

Direct rnateriaf ...... ....................... $2rOOOliregtlabor(3or$101............r.................r,......,...

--t;;;

Applied overhead:3Or$25 = $75O1O X $3O = 3OO...........,.,......r............,....... IIOSO

? a l a lt l 'L t1 "r""""" ' r " . . . . . t .ar . . . . . . r . . . r . . . .oa. . . . r . . . r . . . . . . . . . . . . . . . . . $3r3so

Job l6il2

:i::l :i:gTl.::::.:........r...,............................... S2TOOODirgct fabor (3O x $i 01.......r,o.r..r.r.. 300Appfied overhead:3OrS25 = $ ZSO60 r $3o = lr8oo .....................r..r.... zrsso

Total .........,.r.......,;;.....,...............r....... $4rg5o

(41 (a) A single predetermined overhead rate based on direct tabor hours wouldbe:

S4OO,O00 + $600,00Ol6,000 OirCAlaOor trours

= 362.50 per direct labor hour

310 Chapter 13

Pl3-8 (Conctudedf

(bl Job 1564

Dirsct materlalDirgct labor (3O r $1 O1................'.........."o.D...................t.........Applied overhgad (3O r $62.501....j..................r...........oo.'........

Total

Job f6il2

$2,OOO300

1,875

9!'1?9

(cl

Direct materlalDirgct labor (3O r $l O1..............r......o.........................'....'........Applied ovgrhgad (3O r $82.501............'....................,...D.o......rTotal

$2,OOO300

1,975

(51

$4,175

The competitive lmpllcatlons of a single overhead rate are that on jobsrequiring much labor and littfe machine time (e,9., Job l5gdl, Mn willcompute lts cosB at too high a level and will thsrefore quote too high aprice to the customer. These iobs will probably be lost to competitorswho know their costs betten on fobs requlring much machine time andlittle labor (o.9,, Job 16321, MTI will calcufate its costs at too fow a leveland will, therafore, quote too low a price, These jobs will probably bewon by MTI because of the low price, but will generate less profit thanerpected, or perhaps eygn a loss.

CItWter 13

c13- l

3 1 1

(1)

CASES

Empco Inc. is currently using a plant-wide overhead rate that is apptiedon ths basis of direst labor dollats. In general, a ptant-wide manufactur-ing overhead rate is acceptable only if a similar relationship betweenoverhead and direct labor erists in all departments, or the company man-ufacturcs produc-ts which receive proportional services from each

-

department"' In most casesr departmental overhead rates are preferabte to ptant-wide overhead rates because plant-wide overhead rates do not provide:t a framework for reviewing overhead costs on a departmental basis,

identifying departmental cost overruns, or taking corrective actionto improve departmental cost control.

' sufficient information about product profitability, thus, increasingthe difficulties associated with management decision-making.

Because Empco uses a plant-wide overhead rate applied on the basis ofdirect labor dollars, the etimination of direct tabor in the DriilingDepartment through the introduction of robots may appear to reduce theoverhead cost ol the Drilling Department to zeno. However, this changewill not reduce fired manufacturing expenses such as depreciation, p-lantsuperuision, etc. In reality, the use of robots is likely to increase firedexpenses because of increased depreciation expense. Under Empco'scurrcnt method of allocating overhead costs, these costs wi1 merely beabsorbed by the remaining departments.

(a) In order to improve the allocation of overhead costs in the Guttingand Grinding Departments, Empco should:o establish separate overhead accounts and rates for each of

these departments;' select an application basis for each of these departments that

best reflects the relationship of the departmental activity tothe overhead costs incurred (e.g., direct labor hours, machinehours, etc.);

' identify, if possible, fixed and variable overhead costs andestablish fired and variable overhead rates.

(bl In order to accommodate the automation of the Dritting Departmentin its overhead accounting system, Empco shoutd:o establish separate overhead accounts and rates for the

Drilling Department;' identify' if possible, fixed and variabte overhead costs and

establish fixed and variable overhead rates;' apply overhead costs to the Dritl ing Department on the basisof robot or machine hours.

(21

(31

: * i

(21

312

cl3-2

(11

cl3-3

Chapter 13

I

The company should use departmental ovorhead ratos since the twodepartments ano producing heterogeneous producta. The added accura'cy is requlred for pricing decisions and for better cost control informa-tion.The fixed cost of both seruice departments should be allocated based onlong-range facitiUes utilization. Variable cost of purchasing would be bet-ter lllocated using a cost driver, such as purchase orders, because thereis a stronger explained relaUonship than by use ol volume of materialsordered. Allocation of variabte cleaning cost basod on square footagesoems reasonable; however, the variable cost of maintaining equipmentshould be isolated and charged to departments based on the cost of ser-vices provided.

A futler consideration of the interactive benefits of departmentswoutd be achieved by use of thE step or simultaneous methods' andpreferably the simultaneous method. Such consideration is desirablebecause the ssrvice departments provide services to each other.

A letter to the president of Summerville InC:

Dear Sin

From a study of the manufacturing operations of Summervil le lnc.' i tis recommended that in distributing its factory overhead, the companyuse predetermined overhead rates applied as percentages of the directlabor cost. Tho company should use predetermined rates based on nor'mal capacity rather than actual overhead rates because of the widecyclical flustuations in its business. Using actual rates would, due totarge frxed overhead costs, make the per unit overhead cost high in thelow production periods and low in the high production periods. Usingpredetermined rates, the per unit overhead cost would be level the yearround. For quoting prices and pricing inventories per unit, costs whichare neither Inflated nor deflated by the cost of factory facilities are best.

The company shoutd use departmental overhead rates because therateg obviously yary so markedly between departments. An overall ratewould not be correct for any department. Summerville lnc.ts overhead isa large part ol factory cost, and any inaccuracy in the per unit costcaused by the use of an overall rate would be material. lf all the productsmade used all departments proportionately, an overall rate would resultin a substantially accurate total (but not departmental) unit overheadcost. Howeve6 in Summervil le lnc. the products do not use all thedepartments proportionately. Furthermoner use of de partmental ratesaids in pinpointing cost control responsibil i ty'

(1 )

Chapter 13

C1'3.3 (Concludedl

(21 Wage rates are substantially uniform within the separate depart-ments, and departmental labor costs ara closely proportlonata to labortime. Therefore, distributing the factory overhead on the basis of directlabor cost would in this caso effest about as accurate a distribution aswould the direct labor hours baso. The clerical erpense of the dirsctlabor cost base would be low because the method does not requiro accumulaUon of the number of direct labor. hours applicable to each job.

Applying overhead on the basis of prime cost is not recommendedbecause of the wide differences in the costs of the materials used tomake a given lamp or fixture. Factory overhead is the cost of factoryfacilities. The factory facilities used to make a lamp of silver are notmorc'than those used to make the same lamp of copper. For this nsason,the use of prime cost (since it includes materials cost) would rasult in anercessive charge to lamps using erpensive materials.

Sincerely,

cl3-4

(1) The ten cost items can be categorized into four basic gnoups for purpos-es of discussion:

ItemAllocation

Method JustificationAll ltems in thiscategory should bedistributed.(a) Salaries and

benefits .....,.,,..,,.,(bl Supplies ..,......,,.,....

The costs of these two itemsare directly incurred by theactivity centers and can becontrolled by the supervisor.A part of the salaries andbenefits might be ercludedfrom a variable cost chargingrate.

3 t

l.

DirectDirect

l l .

311

Cl3-4 (ConUnued|

ItemAll ltemr In thlrcategory rhosld bedlstributed becauge adlrast caussl baslrerlstr, but theYghould be crcludedfrom a variable costcharging 18t8.(cl EqulPment

malntenallclg .......(dl lnsurance......-.....

(gl Equipment andfurnituredePreclatloll ........

(el Heat and alrconditlonill! ..'..'.

(hl Buildlnglmprovementsdepreciatig ll ........

lll. This item should bedistributed because areasonable measurefor estlmatlng thecaugal relaUonshiPeristg.m ElgctricitY.........'..

Chapter'13

Justification

The costs of these items aredirectlY Incurred bY the activitYconters but are controlled bYcorporate PollcY' TheY would beincluded in a lull cost chargingrate and excluded from avariable cost charging rate'

The costs of these items arediroctly incurred bY the activitYcenters. TheY are notcontrollabte bY the centerc inthe usual sense. TheY would beinctuded in a lull cost rate andexcluded from a variable costcharging tate.

AllocationMethod

DirectDirect

Direct

Direct(onc eenter onM

Direct(one center on$

Equipmentandwattageratings

A reasonable estimate canbe made of the electricalcharges that can be controlledby effieient use of equiPment.The cost should be includedin a full cost and a variablecost charging rate.

g

Chapter t3

Ct3-4 (Conctuded)

Itamfv. Tlrc roJi6Gis ftems

thould be dlstributedlf r fufl cost chargingrato lg required.m Buitdins

3 t 5

There is no cost controt benefitfrom allocation of these costs.The only reason to ailocate isfor a futl cost charging rate.

other generafbasis

Thc number of hours serected for.determining the charging rate dependsupon the purpo:" 9f estabfishing the rati. ii tie ouiectiie is-to "i"rg"utor departments for all the coslts-of computer-operations, the actualhours that can ba identified wittr ur? $;e;p"ir"nt" wiil be incrudedIn thc base hours. This amounG-to 3r5oo hour:, determined as fogows:

Actual User TimeTesung and debuggingffiSetup of jobs .......,.....,.Procgssing jobs ...r......,...................

Total hout€....r a a a a a a a a a a a r a a a . o . a t a a a a a . r a r a a a a a a a a a a a a a a

To promote cost contror, the company might consider a duar chargingrate, whereby the variabre costs wouid uJ crrirg"d or",. actuar user time(31600 hoursl and fired costs over avairabfe timl (cre42 hours).

occupancy andsecurity............... Squaro

ol Gorporate feet

admlnlstrativechargesr.............. i lumbgrof

employeesor some

AllocationMethod Justification

250500

2,7503,5OO

250500

2,750742

4,242

(21

Chapter 13316

cl3-5

(rl

I

Actual factory overh gad """""""""t""""Applied factory overhgad .....""""""""""

Underapplied tactoly overhe3d """"""""

$85,OOO60,000 (15'O0O hrs. x S4l

l2l (al The too overtime hours resulted in $4oo additional applied tactory

overhead. The overtime premium increased ttre astual factory over-

head of the department 3525 (StO.5O + 2l r lOO hoursl' The extent

to which these items ifect the underapplied factoryoverhead

depends on whether or not they weno included In esumates used in

compuUng the $4 factory overhead-rato'(bl Wagi l;cia""" to direJ laborers do not affect lactory overhead

directly, However, such incteases will cause an increase in numer-

ous lringe benefii costs such as FlcA tar, unemployment taxes'

worter{ compensation, and pensions. lt the incttase wers also

granted to indirect worierc of all categories, the increase in factory

overhead might be substantiat, causing a largor underapplied over-

head amouni, or a smaller overapplied amount'(cl The Fabricatlng Departmentb share of the loss would be sll2'5O

and would be a tactoi in causing a targer, underaPPlied overhead

"roun{ * a smalter overapplieO amount' Slnce the distribution was

mosi tlkely a management decision, the reason(sl should be given in

an erplanatory note in the cost reports and the superuisor relieved

of the responsibility.

Clppter 13

cl3-O

(tl Allocation basis:

3 t 7

October NovemberHours % Hours %

f,lachine hours:Fast lood f urniturg .....r........Gustom fu rnitur9.......r...r.....

Direct labor hours:Fast food furniturg .........o....Gustom fu rniturg.,........,......

Cost reallocation: October NovemberDollars % Dolfarc %

1r32O18r48O19,8OO

IO'OOO30,OOO40,o99

6.6793.33

l_9o,oo

25.OO75.OO

100.oo

17r5OO28)25O43r75O

13.0686.94

100.oo

40.0o60.oo

100,oo

2156017,O4O

_1_Uoo

Machine hour base:MaintonaDCg.................,..... $ 5oroooDepreciatioll ,..,......r.r..,....... 42tAgOProperty tgx .....,.......,....,r..., IrOOOAll othgrr........,.....,............,. 32rOOO

Total to bg allocatgd .,,...,............@f99Fast lood furnitur9.,....,....... $ 8r8OOCustom furniture,,..r.......r..., 123r2OO

s132,OOO

6.6793,33

$ 48,OOO42,OOO

IrOOO24,5OO

_grzpeg$ 16,000

l06,50013.0686.94

1oo.oo S!_egoo 1_gg.oo

October NovomberDoflars % Dollars %

$ 13,0OO1O9,5OO

$122,5OOFagt food furn|ture..............ffi 25.oo Fffirasf rgog rurn1run9.............. $ zTrogo z5.oo $ 49IOOO 4O,OOGustom furniture..r..t,.....,.... 81'OOO 75.OO Z3'5OO 60.00

_$log,ogg l_oo.oo _$123,s99 !-oo.o0

Whon gross profit is recalculated, with the factory overhead reallocatedon the base necommended by the controller, as shown in the fotlowingSchedulo, the figures tend to support the controllerb conclusion. Also,the allocation bases suggested appear to have a neasonable relationshipto the costs being allocated.

Labor hour base:Supervisio|l .........,...r,..r,...... $ 13rO0OEmployee benefits...,.,........ gS,OOO

Totst to be attocated ..................,5io6, oE

(21

318

I

Cl3-O (Concludedl

AEiler 13

AOUA FURNISHINGS COMPANYRevlsed Statement of Gross Prolit

(ln thousandsl

October NovemberFast Food Custom Fast Food CustomFurnituru Furniturc Fumituro Furniture

Gross sa1os...........,......r............. $400.0 $900.0 S8O0.0 $ 800.0

Dirgct matgriats.................r....... $rOO.o $225J $4OO"O $ ,OO.oDirect labon

,FOrming...o.............,.......r..... 17.O 82.O 31.O 72.OFinish|ng.............,............... 4O.O 142.0 7O,O 125.0Assemb1y.....r....,...D...r.......... 33.O 8O,O 58.O 53.O

Factory ovsrhoad allocation:Machine hour base...,........, 8.8 123.2 16.0 106.5labOf hOUf bi!1O.................. 27.A 8l.O {9'0 73.5

Cost of goods gotd....,.........r....., $gzs.g $713.2 $624.0 $ 830.0

Gross profit s 74.2 s180.8 $176.0 s 170.0Gross profit percentaffo............ 18.6oh 20.f|oh 22.Ooh 21.?lt1,:h

Ql.t-1. C.;qnpared to tradticnal coeting, ABC b I rprolhorough applicalion of cost traceabil ity.Tnditioal corthg traccr crly dirccl matcrialrrd dirrsl labor to odput; ABC ncogni:er thatrnany cther cosils aro traceabb, it'ncl to ouput,Uten looftercod obieEtr called activitiec.

Q1+2. The rcle ol aciiviilbs h assigrrhg cctr to prod,uc l r , ur ing ABC, i r to rcrvo ar thc l inkb.lwcon products and cogls; activit iec arcnquired to producr cr.rtput, and it b hc activi-l icr lhat consumo rcaourccg, thur causingcodr to be hcuned This dtten lrorn traditbn-el cooting h whicfi output ir ossurnod !o causecod!.

Q14.3. Examples of rignificant, costly activities inmanufaclur ing ef r rc t t ing up, changingdcrigns, recciving matorials, reguisit ioningmalerials, moving materials and products,oderhg lrorn yendo6, and inspecting.

014-4. Thc two circumgtancer that mugt be presenlfor a traditbna, cocthg ryrtcm to repod distort-ed prodwt c€st! arc a oqnplax cosi strustureand a diverss prodrrt line.

Q1+5. A conrplex €sl Elrusture is presenl if a signifi-cant parl o{ overhead cocl b not related to thevolume ol ouput

Q146. A dversc prdwt lhe is me h sfibh diflerentproducls consumr different mixes s{ volume-relcled and nonnolume-relaled ccts.

Q1+7. Thr four leveb cil cqb and drivers in ABC aretho tnit level, the batch level, the product level,and the plant level.

O1+8. l l a product conrumer l0% of all unit. levelastivities and 3ogl of all batch.level activities,lradilbnal costing will under-report its cost byassigning 10% of all overhead costs lo thoproduct, including l096 of batch-level costs,whon 3096 of batch-level costs should beassigned to tho produc{.

Q14-9. When both bw-vdume and higft-rolume prod.uctr arc produced h a cornpany using tradi-li<mal cethg, lht lorutolume prodrrt is likelyto havr ils coet distorted by a hrger percont-agr than lhe high-volume product. The low-

CHAPTER '4

DlscusstoN ouEsTtoNs

volumr product'r cost b gencrally distortcddownwad by tradilinal ctinq and thr high-volurnc prcdrrfr cct b diCodod rpwerd

01+10. In assigning pbntdvol co€il! to prcclrtr, ABCoffen little or no advantagt ovor traditbnatclh9.

01+11. Thr dillercncc bctwecn CM and ABC tr pri-rnarily rrplahed by thc fact thd AgC b a bngrun decicion-making technique, while CM icahql-run analysis.

Ot+12. lf a procl.rct b dirqrthued, lhe cocir reportedlor that producl by ABC will rpt necessarily borvoided, bocaucr ABC only measuns howrasource3 arc cgrsumed by products, not howspending will be affecled by discontinuing aprdusl. AvoHhg a cosl requircs ttrat lesr brspstl ql sorrp rosqtnoo(s), and ABC docc,ptpredbl changos h spending Cfhis it also lrurof Iraditboal absorption costhg.)

01+13. The relstbnship between ABCand ABM b hatABM uses inlormation obtainod fronr ABC tornake improvornents h thc finrr

Q1+14. The area ol ABM that lollows directly fromABC's revisbn of product ccts b the strategicrealigrnment of thc tirm,r prbhg rtructuro andproduct line, permitting thr firm to retain orregnh high-volume business h spitc of prbhgpressur€, and pronrpling managoment lo reex-amine lhe roles ol sorne lorv-volume prcducts.

Q1+15. The high costs ol eqne activitiea, especiallynon-value-added act ivit ies, can f ocus aientirrm lhe need to reduce or elimirate them.

014-16. ABC can lead to improved dociriona h design-ing a producl becauco ABC tella thr coot c{each activity required h prcduchg thc productThis information permits designen lo makcdesign decisionr more acsuralely, eo that thenpsl cosl-ettsctive design can bc selecled

Q1+17. The link between ABC and TeM is that ABGreveals the cosls ol each activily, includinglhose that do not add value, and TeM aeeks toreduce or elimhalo non-value-added asliviliec.Thus, ABC can focus attenticn h a TOM ollortand can prbritize TOM's imprwernentl.

3 1 9

l2l

Chapter 14

Pl4-4 (Continued)

329

SHAUTON COMPANYProduct Costs from ActiviW Eased Costing System

overhead rates:tl3ttrooo aetup-related costs divided by 90 aetups = 81'5oo per setup

S24O,OOO design-related costs divided by 8,OOO design hourr = 33O per design hour

S825,OOO ou:er overtread divided by 3O,OOO direct labor hours = 327.50 per direct labor hour

Fancy Plain Total

Direct material .....,.....r......... S 60,000 $ 160'000 S 22O,OOODirgct fabor......,.............. ' .. ' . ............ ' .. 28r0OO 272rOOO 3OOTOOOOverhead:

S l r5OOx45setups , . . . . , . . . . . . . ' . ' . . . . . . . . . . . 67r5OO$1r5OO x 45 setups,. . . . . , . . . . . . . . r . . . . . . . . . . .$3O x 3rOO0 design hrs...... ' ........,..... 9OTOOOS3O x S'OOO design hrs. . . . . . . . . . . . , . . . . . . . .S27.5Ox2,800DLH,. . . , . . . . . . . . . . . . . . , . . ' . , , 77'OOOS27.50 x 27 r2OO DLH ,.......,,........r.,...

67,500 135,OOO

15O,OOO 24O,OOO

szoO,0OO sl,OOO.OO

122,5OO 612.5O

993?,s99 q,6l3.59

748,OOO 825,000

(3) Because the existing system used direct labor hours as the only alloca-tion base and Fancy consumed 2,8OO|3O'OOO = I rrcoh of direct laborhours, the existing system allocated 9 lrcoh of all overhead to Fancy. Theactivity information indicates Fancy consumed 45/90 = SOoh of setup-related activity and 3,OOO/8,00O = 37.ioh of design'-related activity, so thereconcil iation is as follows:

perTotal Unit

Cost of Fancy from traditional system,calculated in requirement (1) . . . . . . . . . .

Adjustments fonUnderstatement of setup costs,$135,000x(5O% -g t rcoh l $54,900

Understatement of design costs,S240,OOO x (37.Soh - g t,coh|..,...,.. 67,600

Total adj ustme nts.........Cost of Fancy from ABC system, as

calculated in requirement (2) . . . . . . . . . .

Chagter 14 321

El4-5 The existing system allocated only 5O/5O,OOO = O.l oh of all overhead to'

Product RK last yean but Product RK accounted for 120161000 = 2oh otdesign change activity last year. Therefore, with respect to designchange costs only the existing system understated RKb cost last year bya total of:

(2% - O.1%l r S2,ooO,0Oo = S38'0OO understatement

E14-6 The existing system allocated $40'OOO/S2OO,OOa = 2Ooh of all overhead'to Product BB last yea6 but BB accounted for only 2I2OO = 17o of the

activity of maintaining supplies of purchased subassemblies last year.Therefore, with respect to the cost of maintaining supplies of purchasedsubassemblies only, the existing system overstated BBts cost last year bya total of:

l2o% - 1%l x S5o,ooo = $9,5oo overstatement

El4-7

(11 $126 of overhead cost wil l be allocated to a unit of f456, calculated asfollours:

s l , 4OO, OOox 9O machine hours = $12 , 600;

lO,OOO machine hours

$ 1 2 , 6 0 0 = Sieo per un i t1OO units of Product f 456

9554 of overhead cost wil l be allocated to a unit of #456, calculated asfollows:

## x 6 setups = $15, boo of batch -level cost;

$5O0,000 x 2BO desisn hours = ,r"ot"T:[t"t",olo",,

l2l

x 90 machine hours = s5'4oo of unit-lo ,ooo machine hours

" ' r 'v "v . 's - and p lant - level cost .

4,OOO design hours

Therefore, the overhead allocated to a unit of Product #456 is:

(S15,OOO + $35,OOO + $5,4O0) l lOO units = S55,4OO/1OO units = 5554 perunit

ChWter t4

El4'8 Because itt" toCiti:ltlsJstem uses machine hours as the onty alloca-tion bas-e' Product f456 is allocated 9o/1o,Ooo = O.9079 of all overhead.The actlvlty data indlcate f456 shoutd be assign ed 6112o = 5oh of batch-level costs, 28ol4ro00 = 7Vo of product-level costs, and o.g7o of all otheroverhead. The reconciliation is:

PerTotal Unit

Cost of #456 from traditional system, aseafculated in part (f l of El4-7,.........,..,.

Adiustments for:Understatement of bateh-tevelcosts, $3OO,OOO r (Soh - O.g%1............

Understatement of product-levelcosts, S5OO,OOO r (Zoh - O.9%) .....,..,...

Total adjustments .......,............,rr..r...,. ' .Cost of f456 from ABC system, as

cafculated in part (21 of E14-l,..,....t......

$12,600 $teO

$12,300

30.500$4z,goo

s55,4OO

428

s554

E14-9

(1) 5140 of overhead cost witl be allocated to a unit of #456, calculated asfollows:

s l , 4OO, OOO20, OOO DL hours

r 2QO DL hours = Sl4, OOO;

s l4 , O00= $140 per uni t1OO units of Product # 456

S74o of overhead cost will be alfocated to a unit of #456, catculated asfollows:

$soo, ooo5OO setup hours

x 3O setup hours = $i B,OOO of batch-tevel cost;

ssOO,OOO4O design changes

S2O0,0OO + S4OO,0OO2O,OOO DL hours

(21

x 4 design changes - S5o'ooo of product-tevetcost;

2OO direct labor S6,000 of unit-X . =

houni and plant-level cost.

Therefore, the overhead allocated to a unit of product #4s6 is:(S18,OOO + 35O,OOO + 56,OOO)l lOO uni ts = S74,OOO/1 OO uni ts = SZCO per uni t

Chapter 14

E14- l O

323

Because the traditional system uses direct labor hours as the only alto-cation base, Product f456 is allocated 2ool2o,ooo = 1oh of all over-head. The activity data indicats f456 should be assigned 3O/5OO = 6ohof batch-level costs, 4l4o = looh of product-level costs, and 1 oh of allother overhead. The reconciliation is:

perTotal Unit

Cost of #456 from traditional slstem, ascalculated in part (1) of El4-9...,,....

Adjustments fonUnderstatement of batch-level

costs, $SO0,OOO x (O% - 1oh1.........Understatement of product-level

costs, Ssoo,ooo x (1o% - 1oh1.......Total adjustments ...,...,.

Cost of #456 from ABC system, ascalculated in part (21 of El4-9 ......

s l 4 , O O O 5 1 4 0

$15,000

45,OOO

s6O,OOO

s74,OOO

600

s740

E14'11 Activitias gr u, y, and dd are the only ones that definitety add value.Activity k is questionable, because a single deburring aiter drilling

. would be sufficient to remove all burrs. The first deburring, k, is proba-bly performed to make it easier and safer for workers to handle theproduct in the interim. lf the need for so much handling can be elimi-nated (perh-aps through automated material-handling eguipment), kcould be eliminated with no toss of vatue to the custbmer iand perhapsat a net savings to the company), so it is really a non-value-addedactivity.

Chaoter 1n

PROBLEMS

P14- l

(f l The overhead rates in the eristing costing system are S20 per machinehour, and 31 4 per direct labor hour, calculated as follows:

SSO,OOO of machine -related overhead

S28O,OOO of remaining overhead costs2O,OOO DLH

(21 Making only the changes suggested by the study, the structure of theABC system would be:

Pool Drivermachine operat ion.. . . . . . . . . . r . . . . . . , . . . machine hourssetup and material handling ....... setups *other materials-re|ated.,.,..,........ purchase ordersall remaining overhead.....,.. direct labor hours

. !

The study did not suggest any change for machine operation cost, norfor the "other overheadtt category.

, _

(31 The ABC slEtem's overhead rates (driver rates) are S16.25 per machinehour, $45 per setup, $5o per purchase order, and $1o.ZS per direct laborhour, calculated as follorlrs: -

565,OOO of machine operat ion overhead = S lo .25 per mach ine hour4,OOO machine hours

515,OOO of mach ine-se tup overhead p lusS3O, OO0 of materials handling overhead = $45 per setup

1,00O setups

SgS,ooo of other materials -related cost = S5o per purchase order7OO purchase orders

S215 ,0OO of t r other overhead t l

ZAffi = SlO.75 Per direct labor hour

= S2O per machine.hour

= S14 per direct labor hour

II

Chagter 14

P14 '2- '

11) The three overhead rates in the edsting costing system are S17.5O perl r

machine hour, S.8O per direct material dollar, and $1 .25 per. direct labor

s dollar, calculated as follows:

S8OO, OOO of materials -

refated overhead Sooh of direct material cost or

@ -

S.8o per direct material dollarI

material cost

$2,5OO,OOO of otheroverhead cost 125% of direct labor cost or

m =

$1.25 per direct labor doltardirect labor cost

l1l Making only the changes suggested by the study, the structure of the

ABG system would be:

Pool DrivermaChing OpgfatiOn.......r.....,...,..., maChing hOUfSsetup and material handlio$ ,...... setupsmaterials administration..........r.. purchase ordersf fe ight- in r . . . r . . . . r . . . . . . . r . , r . r . . . . . . . . . . , . . . matgf ial pOUndS

all remaining overh€ad.......,..."... direct labor cost

The study did not suggest any change lor machine operation cost, norfor the "all remaining overhead" categoly.

(3) The ABG system's overhead rates are $12.5O per machine hour, 51'OOOper setup, $35 per purchase order, $.75 per pound ol materials, and$1.25 per direct labor dollar, calculated as follows:

$700,O0O of machine -related overhead = $12.5o per machine hour4O'O0O machine hours

$5OO, OOO of machine -operat ion overhead = $12.50 per machine hour

40,OOO machine hours

b

$2oo,ooo of machine -setup overhead plus$3OO,OOO of materials handling overhead

5OO setups

S35O,OOO of materialsadministration overhead

= $1 ,Ooo pe rse tuP

IO'OOO purchase orders= $95 per purchase order

326

I

P14-2 (Concluded)

$150,0OO of freight - in= $.75 per pound of materials

2OO,0O0 pounds of materials

S2,5OOr00O of otheroverhead cost 125oh ol direct labor cost or

m =

$1.25 per direct tabor dottardirect labor cost

Pt4-3

tl) DRAPER COMPANYProduct Costs from Eristing Costing System

Chaptar 14

Overhead rate: 94,5O0,0OO of overhead divided by $3,OOO,OOOof direct labor cost = 150oh of direct labor cost

Standard Custom TotalDirect materia1.... . . . . . . . . . . , . . . . . . . . . . , . . . . . . , . . , $ 882rOOO S 1215OO $ 894r5OODirgct l?bor'. . . . . . ' . . .r . . . . . . . . . . . . . . . . . . . . . . . .r. . . . 219t 0rO0O 9OrO0O 3rO0Or0OOOverhead:

150ohr $2r910rOOO........,..r,r..,.....,.... 41365rO0O1 SOoh x 59OrO0O... . . . , . . . . . . . . . . . . . . . . t . r . . . , . . 135,OOO 4,5OO,OOO

Total cost .. . . . . . , .-. . . . . . . , . .r. . . . , . . . . . . . . . . . . . . . . . $8r157rOOO $23715OO

Uni ts produced. . . . . . . . . , . . . . . - . . . . . . r i . . . . . . . . . . + 731500 + 125

Costperuni t . . . . . . . . . . . . .o , . r . . . , . . . . . . . r . . i . . . t . . . $ 1 lO.rB S l r rOO

gg,3eds09

I

I

E

v

Chapter 14

P14-3 (Continued)

l2'lProduct Costs

.v

DRAPER COMPANYfrom Activity Based Costing System

Overhead rates:Si:IOOTOOO aetup-related costs divlded by 6O retupr = $STOOO per aetups9oo'o00 deslgn-related costq divlded by 15rooo deolgn hourr = $oo per design hour$il'300,000 other overhead divided @ 1'loo/o of direct labor cost

Standard Custom TotatDirect materialDirgct 1abor. . . . . . . . . . , . . r . r . r . . . . . . . . . . . r . . . . . . . . . . .Overhead:S5TOOO r 3O setups .....................r,....35r0oo x 3o setups .......................,...$60 x 12rO0O design hls.........,........,$6O x 3,OOO design hrs,........,.,....r....I f ioh x $2,91 Or000.........r....,r...........1 1 O% x S90r00o.......,....,..r,..,.,.,.,...r..

Total cost . . . . . . .o. . . . . . . . . . . . . . . . . ! . , . . . . . r . . r . . . . . . .

s 882,OOO2,g1Or0Oo

150,OOO

720,OOO

3,20 l ,OOO

s?effipoo ##

s 12,5OO9O,OOO

15O,O0O

180,OOO

s 8r4FOO3,OOO,OOO

3OO,O0O

9OO,OO0

3,3OO,OO0

2r352

s4E2

s8,394,599125

_L _1,252

Because the eristing system used direct labor cost as the onty allocationbase and custom consumed $9o,ooo/s3,ooo,ooo = JTo of direct laborcos.tr-the existing system allocated 3oh of ail overhead to custom. Theactivity information indicates custom consumed 30/6o = sooh of setup-refated activity and 3,ooo/15,ooo = zooh of design-rerated activity, so thereconcil iation is as follows:

PerTotal Unit

(3)

Cost of Custom trom traditional system,as calculated in reguirement (1)..,..,..

Adjustments for:Understatement of setup-related. _ costs, $3oo,ooo x (So% - g%1........ 51 4 i ,oooUnderstatement of design-related

costs, $9oo,ooo x (Zo% - g%1..... . . . 1s3,oooTotal adjustments.........

Cost of Gustom from ABC system, ascalculated in requirement (2) ............

$237,5OO s1,goo

294,OOO

s531 ,5OO

\* \

Chapter t4

P14-3 (Concluded)

(41 The only costs handled differently by the two costing systems were theS3OO,OO0 of setup-related costs and S9OO,0OO of design-related costs,for a total of $l,200r00O; this nepresents only 27% of the total overheadof $4'500'00O.

The change in the costing system caused the reported cost of Custom tochange from $237,500 to 9531,50O, which is'an increase of 124oh.

P74-4

(r l SHAUTON COMPAI{YProduct Gosts from Eristing Costing System

-

Overhead rate: $l,2OO,OOO of overhead divided by $SO,OOOdirect labor hours = $4O per direct labor hour

Fancy Plain TotalDirect materia|.. . . . . . . . . . . . . . . . . . . .ro... . . . . . . . . . . S 601000 $ 160,000 $ 22O',OOODirgct fabor... . . . . . , . . . . . . . . . . . . . . . .r. , . . . . . . . . . .r. . 28'OOO 272.OOO 3OOTOOOOverhead:

S4O x 2r8OO DLH ... . . . . . . . . . . . . , .o... . . . . . .-.r l lZ,OOOS4O r 27r2OO DLH ... . . . . . .r. . . . . , . . . . . . . . . . , . . lrOBSrOOO ir2OOrOOO

Total cost ...........................o..,.,.......,... Srooilooo $1FzOôoo $1r?ro^0ooUnits produced..........r......,................, + 2OO + l6'000Cost per unit,.....,.....,.....r.................... S lÔOO S 95

l2l

Chapter 14

Pl4-4 (Continued)

329

SHAUTON COMPANYProduct Costs from ActiviW Eased Costing System

overhead rates:tl3ttrooo aetup-related costs divided by 90 aetups = 81'5oo per setup

S24O,OOO design-related costs divided by 8,OOO design hourr = 33O per design hour

S825,OOO ou:er overtread divided by 3O,OOO direct labor hours = 327.50 per direct labor hour

Fancy Plain Total

Direct material .....,.....r......... S 60,000 $ 160'000 S 22O,OOODirgct fabor......,.............. ' .. ' . ............ ' .. 28r0OO 272rOOO 3OOTOOOOverhead:

S l r5OOx45setups , . . . . , . . . . . . . ' . ' . . . . . . . . . . . 67r5OO$1r5OO x 45 setups,. . . . . , . . . . . . . . r . . . . . . . . . . .$3O x 3rOO0 design hrs...... ' ........,..... 9OTOOOS3O x S'OOO design hrs. . . . . . . . . . . . , . . . . . . . .S27.5Ox2,800DLH,. . . , . . . . . . . . . . . . . . , . . ' . , , 77'OOOS27.50 x 27 r2OO DLH ,.......,,........r.,...

67,500 135,OOO

15O,OOO 24O,OOO

szoO,0OO sl,OOO.OO

122,5OO 612.5O

993?,s99 q,6l3.59

748,OOO 825,000

(3) Because the existing system used direct labor hours as the only alloca-tion base and Fancy consumed 2,8OO|3O'OOO = I rrcoh of direct laborhours, the existing system allocated 9 lrcoh of all overhead to Fancy. Theactivity information indicates Fancy consumed 45/90 = SOoh of setup-related activity and 3,OOO/8,00O = 37.ioh of design'-related activity, so thereconcil iation is as follows:

perTotal Unit

Cost of Fancy from traditional system,calculated in requirement (1) . . . . . . . . . .

Adjustments fonUnderstatement of setup costs,$135,000x(5O% -g t rcoh l $54,900

Understatement of design costs,S240,OOO x (37.Soh - g t,coh|..,...,.. 67,600

Total adj ustme nts.........Cost of Fancy from ABC system, as

calculated in requirement (2) . . . . . . . . . .

t - \

330 Chapter tl

P14-4 (Concludedl

(4) The only costs handled differently by the two costing slrstems were the$135'OOO of setup-related costs and S24O,OOO of design-related costs,for a total ol $375,00O; this repnesents only 31.25oh oI the total overheadof $1r20OrOOO. -

The change in the costing system caused the reported cost of Fancy tochange from S20O,OOO to $322,500, which is an increase of 6l .25oh.

P14-s

(11 TUNNry COMPANYProduct Costs from Etisting Costing System

Overhead rate: $1,OOO,O0O of overhead divided by 5O'OOO directlabor hours = $2o per direct labor hour

lrlormal Enhanced Super Total

Direct materia|.. . . . . . . . . .o... . . . . . . . . $ 6OTOOO S 2OTOOO S S'OOO S 85rOOODirect tabor,.. . . . . .o... . . . . . .r. . . . , . . .o 30O,OO0 35'OOO 5rO0O 34O'0OOOverhead:

S2O r 45rOOO DLH.... . . . . . . . . . . . . . 9OOTOOOS2O r 4r5OO DLH.... . , . . .r, . . . . . .D,S2O r 50O DLH.... . . . . . . . , . . . . . . . . ' .

9O,OOO1O,0O0 1,0OO,OOO

91,425,oO9Tota lcost . . . . . . . . . . . . . . . . . . . . . . . , . . , . S l r26OrOOO $145100O S2OTOOO

Uni ts produced. . , . . . . . . . . . , . + 30,OOO + I 'OOO + 5O

Gost per unit . , . . .r. . . . . . , . . . . . ,o... . . . $ CZ $ . t AS $ 409

Chapter ll

P14-S (Concluded)

(21 TUNNEY COMPANYProduct Costs from Activity Based Costing System'

331

Overhead rates:3400,000 batch-level overhead dhvlded by 500 rcgulslUona = 38oo pcr requlsltion$800,000 other overhead dividedby 5O,0OO direct labor houn = 312 per direct labor hour

Normal Enhanced Super Total

Direct materia1....,............... s 60,000 $ zorooo s 5,ooo s 85,oooDirect 1abor,......,...... 3OOTOOO 35,OOO 5'OOO 34O'OOOOverhead:$8OO x 150 t 'ee. . , . . . . . . . . . , . . . . , 120r00O$8OO x 2OO |1ee..............,..,$8OO x 15O Fee..........,.......$12 x 45r0OO DLH.. . . . . , . . . , , . . 54O'OOO$12 x 41500 DLH . . . . . . . . . . . . . . .$12 x 5oo DLH

12O,OOO 4OO,OOO

6,000 600,000

160,OOO

54,OOO

Tota|cost . . . . . . . , , . r . . . r . , . . . . . . . . ! . . Slro2oro0O S269'000 $136roooUnits produced.....,...r........r. + 3OTOOO + I'OOO + 50

s1,425,099

Cost per uni t , , . . . . , . . . . . . . . . , . . . . , . S 34 S 269 $ 2r72O

(31 Because the existing system used direct labor hours as the only alloca-tion base and Super consumed 5OO/5O,OOO = Ioh of direct labor hours,the existing system allocated 1o/o of all overhead to Super. The activityinformation indicates Super consumed 15O/5OO = 3O7o of batch-levelactivity, so the reconciliation is as follows:

PerTotal Unit

Gost of Super from traditional system,as calculated in requirement (1).....,......... $ 2O,OOO $ 4OO

Adiustment for understatement of batch-fevel costs, S4O0,O0O x (3O% - 1%1..,,..., 116,000 2,32A

Cost of Super from ABC system, ascalculated in requirement (21.......... S136,000 $2,720

(4) The only costs handled differently by the two costing systems were the$4oO'oOO of batch-level costs, which represents onty 4}oh of the totatoverhead of $1,OOO,OOO.

The change in the costing system caused the reported cost of Super tochange from S2O,OOO to $136,000, which is an increase of Sa}oh.

3g2

Pl4-6

(r l

Chapter tl

TEKSIZE COMPANYProduct Gosts from Eristing Costing System

Overhead rate: $1,500,00O of overhead divided by 5O,OOO directlabor hours = $gO per direct labor hour

Regular Large Total

S 4o,ooo48O,OOO

l r20OrOOO

$43O,00O 91,72O,OOO+ |OTOOO + IO 'OOO

I 1o,ooo120,OOO

3OO,OOO

s 5O,OOO6OO,OOO

I,50O,OOO

s2d90,999

(21

4 3 $ 172

TEKSIZE GOMPANYProduct Costs from Activity Based Costing System

Overhead rates:S515,OOO setup-related costs divided by 1O3 setups = SS,OOO per setupS985,OOO other overhead divided by 5O,OOO direct labor hours = 319.7O per DLH

Regular Total

$582,O0O $1,568,OOO 52,15O,OOO+ lO,00O + 1O,00O

I l O,OOO120,OOO

255,000

197,00O

Large$ 4o,ooo

48O,OOO

26O,OOO

788,OOO

s 5O,OOO6OO,OOO

5l5 ,OOO

985,OOO

s 58.20 s 156.80

Chapler 14 33?

Pl4-g (Concluded)

(31 Because the existing system used direct labor hours as the only alloca-tion base and Regular consumed 1O,O0O/50,00O = 20oh of direct laborhours, the existing system allocated zooh of all overhead to Regular. Theactivity information indicates Regular consumed 51/103 = 49,51456oh otsetup-related activity' so the reconciliation is as follows:

Gost of Regular from traditionalsystem, as calculated in requirement (11 ...... '.... S43o,0oo S43.oo

Adiustment for understatement of setup-

PerTotal Unit

refated costs, $515,O0O r (49.51456% - 2oo/o1...Cost of Regular from ABC system' as

calculated in requirement (2).".........,...... ' .,. ' . .... 9582'OOq 998.20

Yes, Teksize Company does have a diverse product l ine in the sense inwhich the term is used in ABG. The fact that the two products have thesame annual unit volumes does not matter, because the existing costsystem does not use units as the atlocation base. Regular representsonly 2Ooh of direct labor hours but nearly SOoh of setup-related costs,while Large has a very different mix, so a diverse product l ine is presentin Teksize Company.

152,0O0 15.20

(4)

334

c14-1

(1)

Chaoter t4

CASES

DALI-AS DIVISIONProduct Costs from Existing Costing System

Overhead rate: SSOO,OOO of overhead divided by 2OTOOO directlabor hours = S{Qper direg! labor hour

1327

s 6,0003O,0OO

288,OOO

s324,OOO+ 2r4OO

s 13s

#333

S l so600

4,80O

s5,55O+ 6

s 92s

(21 DALI-AS DIVISIONProduct Costs from Activity Based Costing System

Overhead rates:S24O,OOO batch-level costs divided by 1,BOO eetupe = Si5O per setupS2OO,OOO product-level costs divided by 2,OOO design hours = SlOO per design hours36o'ooo other overhead divided by 20,0oo direct labor hours = sig per DLH

#327 #333

$ 6,000 S30,000

6,OOO

32,00O

12g,600

1 5 0600

600

2O,OOO

2 , 1 6 0

$2O3,6OO+ 2r4OO

s 84.83

s 23,510+ 6

gegeeg

Chaptor l1

Cl4-1 (Cont inued)

(3) Usualsel l ing pr ice. . . . . . . . . . . . .o.PfOdUCt COSt." . . . . . . . . . . , . . . ' . . . . . . r . ' . . . ' . . . . . . . . . . . . r . . . . . . . .o .

Usual selling price ...............,. '.,................ '.......Product cost. . . . . . . . . r . . . . . . " . . r . . r . . . ' . . . . r . . . . . . . . . . . ' r . . . r . . . .

Gross margin 0oss) ......................r..........!.........

Pgrcent of salgs r . . . . . . . . . r r ' . . . r . . . , . ' r . . . . . . ' . ' . . . . t . r" t . . . . .

(4)

#321

sl so1 3 5

9_!s10%

#321

slso.oo84.83

s 6s .17430h

3a5

f333

s1,50o925

s 5753goh

f333

s 1,5OO.OO3,918.33

(s)

s(2,418.331

The ABC system shows that the relative prolitabilities of the two prod-ucts are the reverse of what is shown by the edsting system: the existingsystem shows a very modest gnoss margin of lOoh on f321r which isprobably not enough to cover its marketing and administrative costs,while showing a respectable 38% gross margin on f333. ln contrast, theABC system shows a 43oh gross margin on #321 and a substantial losson f333. The low-volume product appeans to be the more profitable ofthe two under the existing system, but appears to be a money loserunder ABC; the high-volume product appears weak under the existingsystem, but highly profitable under ABC.

Based on the results of the ABG study, Dallas division managementshould consider meet ing the compet i tor 's pr ices on f l321; th is pr ic ingstrategy can be profitable in the long run and should avoid loss of marketshare. The strategy for f 333 is not as clear. Gustomers are not l ikely toaccept the 20O% price increase needed to make #333 reasonably prof-itable, and Dallas could lose some customers who also buy largeamounts of #321, if management discontinues #333 or increases itspr ice too much. Management should consider several possibi l i t ies forlow-volume products such as f333:(a) Reduce batch- and product-level costs enough to become an effi-

cient producer of low-volume products. This may require creation ofa small job-shop environment in a portion of the plant (or in anotherfacil i ty) where low-volume products could be made more efficiently.The case indicates the existing plant was designed to produce longruns efficiently, which may explain the high batch- and product-levelcosts.

(6)

Chaoter l4336

I

C14- t (Conc luded)

c l 4 - 2

( 1 )

(b) Reduce the number of products by designlng " new one that can besubstituted for several low-volume, unprofitable products that canthen be discontinued; this essentially erchanges several low-vol-ume products for one of much higher volume, with substantialbatch- and product-level savlngs'

(c) Convince one of the current buyers of the low-volume products tobecome a distributor of several such products; buying them fromDallas in larger quantities, maintaining small inventories, and sellingthem to othJr customers. This can reduce Dallast batch-level costsand marketing costs, but it risks the loss of customers who like tobuy the full l ine from one supplier.

(d) naise prices gradualty until all products ane neasonably priced. Thisdoes not mean all products must show profits. (lt is acceptable for agood customer to occasionally buy a money'losing product.) Rather'it means that the company should not continue making a money-tosing product without a good reason. lt is not acceptable to have acustomer who buys only the money-losing products, nor for thecompany to continue making a money-losing product that no "good

customerstt are buying.(e) In addition to the usual penunit prices, charge a lump-sum amount

per order for any small order of a low-volume product. This charge. coutd be set at a level to cover estimated batch- and product-level

costs.

WARRENTON DIVISIONProduct Costs from OPICS

Overhead rate: s1,930,000labor hours

of overhead divided by 25'ooO direct= 577.2O per DLH

fl33 #44

sl5,ooo s120,ooo6,000 60,000

341740463,20O

s643,2OO+ 2'OOO

s55,74O+ 1 O O

s5s7.40 s 321.60:

J ) /

Chapter 14

Cl4-2 (Continued)

(21 WARRENTON DIVISIONProduct Costs from TPTCS

Overhead rates:$gCOTOOO machine-related costs divided by 2O,OOO machine hours = S17 per MH

iigO,OOO materials-related gosts divided by $1'32O,OOO direct material cost =25% of direct material cost

S360,000 + $9OO,OOO of remainingcosts divided by 25'Ooo direct labor hours =S5O.4O per direct labor hour

#33 r44

Di fgCt matg f ia1 . . i r . r . r . . . . . . . . . . r . . r . . . . r , . r . . . . r . . . . . . . . . . t . . . . . . . . . t t . . t . . . .

D i rgCt 1abOf . . . . . . . . . . . r . . . . . . . . . . . r . r . . . . . . . . . . . . . r . . . r . . . . r . r . r . . . . . . . . . . r . r . . .

Overhead:$17 X 300 MH .. , . . . . .o. . . . . . . . . . . ' r . . . . . . . . . . . . , . . . . . . . . . . . . . . . t . . . . . . . . . . . . .

$17 f 3rOOO MH .. . . . . . . , . . . . . . . . . . . . . . . . . . . . . . . . . t . . . . . . . . r . . . . . . . . . ' . . . . . . .25oh x $l5rOOO r. . . . . . . . "r ' . . . . . . . . . . . . , . ' . . . . - . . . . . - . - . . r ' . . , ' . . . r . . . . . ' . . .25oh x $12OrOOO . . . . . . . . . . . . . , . . , . . . . ' . . . . '55O.4O X 45O DLH... . . . . , . . . . ' . . . .o. . . . r , . . . ' . . . . . . . . . . . . . . . . . . . . . . ' . . . . . . .

S5O.4O X 6rOOO DLH... . . . . . . . . . , . . . . . r . . . . , . . . . . . . . . i . , . . . . . . . r . . . .o. . . . . .

TOtal COSI., . . . . , . . . . . . . . . . . . . . . , . . . . . . . . . . . . . , . . . . . . . . . . . . r . . . . , . . . . . , . . . . . . . . . . . .Un i ts p roduced. . . r . . . . . . . . . . . . . . . . . . . . . . . . . . r . . . r ' . . . ' . . . , . r . - .

COSt pe f Un i t . . . . . . . . . . . . . . . ' r . . . . . . . . , . r ' . . . . . . ' . . . . . . . . . . . . . . . . . . . . r .

s15,OOO6,0o0

5 , 1 O 0

3,750

2216fjo

s12O,OOO60,000

51 ,OOO

3O,OOO

302,4OO

s52,530+ 1 O O

s563,4OO+ 2,OOO

I

s525.30 s 281.70

(3) TPICS is not an ABG system because all the allocation bases are at theunit level. The changes management made do show many of the attribut-es typicalty associated with a change to ABC: the increase in the numberof overhead cost pools, the attempt to create homogeneous cost pools'and the use of three distinct allocation bases. These changes show anattempt was made to capture differences among the demands placed onresources by the different products. But because there are no batch- orproduct-tevel drivers used, the system cannot capture the demandsplaced on batch- and product-level activit ies, i.e., it is not an ABC sys-tem.

3g

Cl4-2 (Continued)

WARRENTON DIVISIONProduct Costs from Proposed New Gosting System

Overhead rates:SI OO,OOO troubleshooting costs + $140,000 machine setup costs divided by

3,OOO setup hours = $8O per setup hourS135,OoO material handling costs divided by 15,000 loads = 39 per loadS195,Ooo materiali administration costs divided by IO'OOO vendor orders =

919.5O per vendor order3260,000 engineering design costs divided by 4,000 design hours = $65 per

design hour$2OO,OOO machine operation costs + S90O,O0O other overhead divided by

2O,OOO machine hours = $55 per machine hour

f33

(

Chapter tl

(41

s l5 ,OOO6,OOO

24|OOO

1 8 0

1 , 7 5 5

18,2O0

16,5OO

s81,635+ I O O

#44.

sl20,OOO6O,OOO

32,0OO

540

2,925

19,5OO

165,OOO

$399,965+ 2'OOO

s816.35 S 199.98

(5) The proposed new costing system is an ABC system because it uses costdrivers that include non-unit-level drivers. The unit-level driver ismachine hours, the batch-level drivers are setup hours and loads han-dled' and the product-level driver is design hours. Vendor orders couldbe either a batch- or product-level driver, depending on whether ordersare placed for each batch; the case does not tell whether this is so.

(6) For the low-volume product, #33, the proposed ABC system shows a sub-stantially higher cost than did either of the other two systems. This is thegeneral result when ABC implemented and compared with traditionalsystems. At the usual sell ing price of S8OO, the ABC system says thisproduct is a money loser. Equally, or perhaps more importantly, the pro-posed ABG system shows that the high-volume product can be pr icedvery competit ively.

Chapter 11.t r:t

C14-2 (Concluded)

f/) Based on the results of the ABC study, Warrentonb management should

consider meeting the competitorb prices on #44; this pricing strategycan be profitable in the tong run and should avoid loss of market shat€.The strategy for #33 is not as ctear. Some customers may not accept theprice increase needed to make il33 reasonably profitable, and Warrenton

could lose some customers who also buy large amoqnts of #44 ifmanagement discontinues i l33 or hikes its price too much. Managementshould consider several possibil i t ies for low-volume products such asf33:

(a) Reduce batch- and product-level costs enough to become an effi-cient producer of low-volume products. This may reguire creation ofa small job-shop environment in a portion of the plant {or in anotherfacil i ty), where low-volume products could be made more efficiently.

(b) Reduce the number of products, by designing a new product thatcan be substituted for several low-volume, unprofitable productsthat can then be discontinued; this essentially exchanges severallow-volume products for one of much higher volume, with substan-tial batch- and product' level savings.

(c) Convince one of the current buyers of the low-volume products tobecome a distributor of several such products; buying them fromWarrenton in targer quantit ies, maintaining small inventories, andselling them to other customers. This can reduce Warrenton'sbatch-level and marketing costs, but it r isks the loss of customerswho like to buy the full l ine from one supplier.

(d) Raise prices gradually unti l all products are neasonably priced. Thisdoes not mean all products must show profits. (lt is acceptable for agood customer to occasionally buy a money-losing product.) Rather'it means that the company should not continue making a money-losing product without a good reason, lt is not acceptable to have acustomer who buys only the money-losing products, nor for thecompany to continue making a money-losing product that no ' igood

customers" are buying.(e) ln addition to the usual sales price, charge a lump-sum amount per

order for any small order of a low-volume product. This chargecould be set at a level to cover estimated batch- and product-levelcosts.

d l

01$t. Profil plarning oncompasses (a) sales estirnat-hg and sales plannhg prograrns; (b) budgetingprogra,nr lor contol cf all costs, both rnanufac-turhg lnd nqrrnanufacturing; (c) planning andprogramming addilions to or deletions lromworking capilal an'd plant hveslmenl; and, (d) areview of all laclors that have an impacl mretum on inveslmcnt, both from a shorl.lermviewpoinl of one year and longer periods oflime. Thr profil-planning function must not bemerely financial in scope. ll must disckrse themelhodg and programs by which the financialgroals are to be achieved.

O1$2. A budgel is the oxp€cted targ€t that manage-mont strives lo achieve, whereas a lorecasl isa level of revenue or cosl that an organizalionpredicts will occur.

Olt3. The three approaches lor setling profit objec.lives are:(a) A oriori. Management specifies a given

ratc of rolum to be achieved in the longrun ard then draws up plans lor achievingthat rale.

(b) A msteriori. lr/lanagemenl draws up plansand.then sels lhe rate resulting frorn theplans.

(c) Praomalic. Managemenl uses a targetp ro f i t s tanda rd t ha t has been tes tedempirically and sanctioned by experierrce.

Qt$4. Long-range phnning deals wilh specilic areasof the cornpany's plans, such as future sales,long.lerm c-f ilal expenditures, research anddevelopmenl astivilies, financial requiremenls,and the proti l goal. Short-range budgetingplrces the plannhg and particulariy control intoperirds of three. 3ix, or tw€lvo mstths.

Ql$'5. A budget is a detailed financial stalement ofthe organizalion's strategy. lt converts generElls t rategy sta lements in to speci f ic p lans o laction, measured financially. lt is related tocontrol, because it is the fundamental guidelinefor whal the organization should do. Thus, it islhe benchmark against which aclual perfor.manco is cornpared. This process of ccnpari-son is a vital gart ol the conirol function in lheorganizaticr.

QlS. In carry ing out managoment 's lunct ions ofphnnhg, organizing, and control lor lhe deveFopmenl ol a budgetary conlrol program, il isneco3sary to:(a) organize the budget commiilee(b) organize the entire budg€tary control pro-

gra!71(c) plan sales wilh the sales manager(d) determine the linished.gods inventory

CHAPTER 15

DlscusstoN ouEsTtoNs

requirement in harmony with the salesbudget

(e) plan production with the production man-ager based on the sales budget

(f) -meel with heads of all dopartments-tothproducing and service-relative to directrnalerials, direcl labor, and lactory over-head coslr required for the productionbudgeted

(S) es tab l i sh mater ia ls purchase requ i re -menls based on production planning, adoparlment's malerials raquiremenls, ortho produclbn budgel

(h) eslabl ish €xpsnso budgels wilh market-ing, administrative, and financial divisionheads

(i) budget capi lal expenditures and preparea researeh and development budg€t.

0) develop a cash budget(k) coodinate and surnnrarize ccrnpany.wide

budgets into a masler budget..+umma-rized in the budgeled incorne stalEmontand balance sheel

O1$7. Thc periodic budget ropresents a formal com-munication channel within a company for thelollowing r€asons:(a ) The per iod ic budget invo lves a lo rmal

comrnitment on lhe parl of managementlo lake posi l ive actions to make actualevents conespond to the formal budgel.

(b) The periodic budget is usually raviewedand approved by a higher authority and,qrco approvod, is changed only in unusu-a.l specif ied circumslances.

(c ) The per iod ic buc jge t con la ins exp l i c i tslaiemonts of the imolementation of man-agomenl objectives for a period ol time,p u b l i s h e d t o a l l p a r l i e s w i l h c o n l r o lresponsibility.

(d ) Compar ison o l ac tua l resu l ts w i th theperiodic budgel forms lhe basis tor man-agoment control, motivation, and pedor-rrance evaluaticn.

Q15-8. Budgels are required for planning, moniloring,and molivating, and because they include esli-mat6s, they always involve uncertainty. Theprocass ol budget preparation forces idenlifica-l ion ol variables and attsmpts at esl imation.Reiteral ion should improve the process, andthe process should cause a positive atlhude toa t la in goa ls . Of course , a poor ly es t ima ledbudget can causs dysfunctional behavior.

In th is s i tua t ion , the budgst shou ld p rov ideincentive lor going after bids. The inclusion ofbudgsted and actual conlr ibul ion margin data

I

t-

[ ;

a0

Chaptor l5

h periodic roporb c{fers an early hdkxtion c/' bobtf, par ccrlributbn, or the pesible noed lo

reduce bid prices, or olher corroctive actionthst rnay be reguire'd.CGA-Canada (adantcd). Beprinl with permis'airr.

Q15-9. All omployeec (including txoculivr manago'rncnt) must accoPt fir inportancr of budgetingand bo wil l ing to parlicipalr fully in budgolprcparatbn and irnpbmentatirxr, or hc budgnt

. will nst rtork.a1$10. (a) Etlective ur cl budgrthg rholH rocult in

botter perlorrrlinc. by the organizatbnbecause ol betlcr pe rformance by thernanagonr. Tho behavirral bonefit lies hthe ability crf thr budget and he btdgelingproqgss to rnolivalc tnatragtB to accorn'plish thc orgranizatbn objec'lives. This isdone by ushg the budget ss a vehble forcommunicat ing company object ives,etablishhg subobjectivee in accord withrnanager objectives, and providing a thq-qrghly undcrctood ccrrvno.r bssie for por-fonnenco rrreuuilTlont ard fcedbck.

(b) The budgeting procoss has been sublectto criticism by behavioral scienlislr andclhers on sevcral counls:(1) The mosl scrbus charge is that thebudgeling pr€oer faib to recognhc thalindividuals may not accopt companyobjective as their own. The resull is hckcl eflort to achieve these objectives.(2) The level of objectives sel may beeslablished without regard lo how this willmot iva lc lhc manager lo achicve lheob jec t i ves . Tho resu l l s may i nc ludeunderachievcment ol polenlially obtein-able levels o l per formance and/ordostruclbn of employee nrorale.(3) The budget ie used as a pressuredevice lo force conlormity lo and accop-tance of lhe objectives eslablished in thebudgel. This often resuhs in employeesfinding ways lo beat' the budget ratherthan actually impoving pedormancc.(a) The budget b adrnhbtercd by hdivU-uals noi direclly hvolved in the operalingelivrty ol thc organizatbn and not partic-ubrty skillful h dealing wiih people.

(c) Thc rnosl coriour problem lhat must beovercome h qdor to rclve the problemsidenlif ied by tho cri l icisms in (b) is the

u 1

bck o{ understanding of the lorccs thatcause ma Bgcrs to 8cl as they do. ll muslbc recognrized that the tradilbnal assumPtims undedying thc budget and budgel

P roces ! a t c no l . n t i r . l y va l i d . SuchagsurnPliats includo:(l) Managcn tulqnaticslly acc.Pt cqn'pany obiecfivee as lhcir qwn.(2) Tighl gtandards ate best bocaur theyropr.rent hard-to-reach goals, whichrrwt pcople strivc lo achicvc.(3) Uppor levolc of managcment an bolequFped lo ostablish operathg subobirc-tives.

ll is necesssry to rccognize thc bchav-brsl influence (psychobgi=l and rcbbgbal) 6r tho rrprk ol menagers.

The rnost corr[Tron specific neoorrvrpn-dali'on is thc use cd parlbipative budgel-hg, sinco il prwide lor an opportuniiy loidentify objeclivos of thc managcr andccrrrpany, hcreaseg the ability of both todevelop opcralhg activitier to reach throbjcclive, and onhances iho likolihood olsetting objectives at levels elfcctive inmolivaling managors loward companygoals.

01tl1. Conrnercbl €xponsos are grouped into lunc-tions by their actions or operalhg units. Thescfunctisrs are boked upon ae departmenls endshould br gel along organizalional lincg inorder to identify lhe expente with an autho'rized and responsible individual. Grouphg byprcducls and by lenitqies may be desirabL alwell.

015.12. The budgeled incorne stalement summarizerin one stalernent the result! of lhe compleloplan of aclion. lt expresses in financial lermsthe erd resuhs of proposed plans. ll can alsobe used lo lesl the adequrcy or inadeguacy ofthose phns.

Q lF13 . The budge led ba lance shee t revea l r l hcexpected l inancial condition ai the end of Iparticubr perird. One ol the measurec of thoadequary ol propoeed operaling and linancblplanr is the etfed ol the cxecution of thcropbns on the linancial condilbn of the buainesr.lf the budgeied balance gheel shoflg a polen-lial unsatisfactory condilion, propooed plantcsn be reviewed end perhapo revised lo ptc.ducs sallsf aclory resulls.

Chapter 15342

Ei5-1

E)GRCISES

BROWI.I BROTHERSiBudget of Sales Revenue 8nd Grcss Profit

For the Year 2OB

Rer-ZSip-XTok-Y

2O,OOO12,0007r5OO

Saler InProdust Poundsr

AveragcSaler

Pricc perPoundr$34.50 $25,00

24.15 18.0018.90 14.30

20a.oooh140.OAoh1OO.O07o

lncrease115,00%I O5.OO%lO5.O07o

I9A GP

Cost of GrosEGoods Pttlit

Sold per porPoundffi Pound

s9.506.154.60

198 Sales

SalecRevenue

$ 690'000304,29O141,750

s1,r36,O4O

GrcgsProfit

s l90,OOO77r49O34,5OO

$3O1,990

'Product

Rer-ZSiP-XTok-Y

"Product

Rer-ZSip-XTok-Y

*'!'od*!

Rer-ZSip-XTok-Y

E15-2

l9A Sales lncreaselO,OOO9,00o7,50O

l9A Prices30.00

23.0018.OO

19A Price

20,OOOl2,6007,50O

198 Prices34.50

24.1518.90

19A Cost$20.oo

l5.ool3.oo

lncrease

125.OOoh12A.OAoht lO.OOTo

198 Costs25,OO

18.OO14.30

s30.oo23.OO18.OO

$lo.oo8,OO5.OO

FINEFLEX CORPORATIONProduction Budget'

For the Second Quarter Ending June 30, 20-

Units olFlop

21,O0O6,OOO

27,OOO(s,5oo)

2 1 , 5 O O

Units ofOlap

37,50OI o,5oo

Units ofRyke

Salgs forgcast..........,... ...,.........r,Add desired ending inventory (June 3O1,...Quantity required for tho quarter.............,Less beginning inventory (Apr i l 11. . . , . . . . . . . . .Required product ion for the quarter. . . . . . . . .

54,O0O13 .OOO

48,OOO 67,000qf_,o99) (14,soo)9Z€99 l-z'seq

Chagter l5

E15-? '

u3

MAGIC EHTERPRISESProduction Budget

For the Quarter Ending March 31r 20-

Moon Glow Enchanting Day DreamUnits required for sa|9s..............o...,..Add ending lnvontory of finished

Unitg .. i . . . . . . . . . . . .rr . . . . .r . . . . . . . . . .rr . . . . . .o.. . . . t

Total units roguinad ..o.,o,................Less beginning Inventory of finished

U n i t S r a r a a a . . . . t o r . . r . . . . . . . . r ! r . r . . a . a a . . . . . . . . . r r . .

Units to be transfered to finishedg O O d s o . . . . . . . . . . r r . . . a . . . . . a . . r . . . . . . . o o . . . r . . . . r a a .

Add endlng work in processinventOry . . . r . . . . ro . . . . . . . . r . . r . .or . . . . . . . . . . r . . . .

Less beginning work in processinventOry ...............r..........r....o.........

Equivafent units to be ptlduced.......

E15-4

(11

25O,OOO

t5rooo265,OOO

1O,OO0

249,0OO

4r2OO253r2OO

2rOOO

251,2OO

Mid HighBand Band

30030

175rOOO

I O,OOO

185,OOO

12,OOO

173,OOO

2,OOO175,OOO

1,8OO

173,2OO

LowandMid

Band

25050

3OO,OOO

2O,OOO

32O,OO0

25,00O

295,0OO

6,OOO301,OOO

5.600

?p�5Jp9.

MidandHigh ThreeBand Band

35050

Units reguired to meet salesbudget .r . . . . . . . . . . . . .o. . . . . . , . . . . . . . . . r . . . .

Add desired ending Inyentoty....Total units required during

period . , . . . . . . . . . , . r . . . . . . . . . . r . . . .Less beginning inventory ..........Required production quantity....

LowBand

20040

20030

40050

240(sol

1 9 0

330(30)

_999

450(701

_380

300eal

280

400 230(3ol (201

370 210

344

El5-4 (Concludedl

(21 Materialg purchases'req uirements:

MrtrlTublng1O feet

75

1 7

MctrlTublng

l r9OO leet2r1OOl ,9oo

4r780

4,44O41620

lnduc-tort

Chapter 15

Fccd-llnc

Con-ncctorr

1 9 0300380

280

370z'�ro

l r73O500

2'23O

1.500

730

Pcr Unlt Matcrbb Rcqulrrmcntr Total Metcrlrlr Fcqulrcmcntr

Produc'fbn

Requlri-Modcl mcnt

1 9 0300380

280

Fccd'llnrCon'

Inducton nccton

Low band......Mid band,......High band......Low and

mid band.. . .Mid and

high band.. . 37OThree band.... 21O

Quantity rsquired to meet production budget....Add desired ending materials lnventory.....'.......Total quantity of materials required for the

period

1II

7917207,0oo

261720

6.OOO

z,SJ20.

1 9 0300380

560

740630

2r8OO800

3,6OO

I,OOO

-2'609

III

1I

1 222

23

Deduct matorials on hand at the beginning ofthe per iod . . . . . . . . . . . . . . . . . . . . . . . t . t . ' . . . . . . . . . . . . . . . t . . . t . . . . . t . . .

Matgrials punchases rgqui re m e nts .......'.......'.'...

E15-5

(1) Sales budget for fourth quarten

UnitQuanUty PriceProduct

x 4,5OOY 2,OOOz 3,0oo

Budgeted sales in uni ts. .Desired ending inventoryQuantity required ..............Beginning inventoryR e q u i red p ro d u cti ort..,.,..................

$12.OO25.OO20.o0

SalesRevenue$ 54,OOO

5O,OOO6O,000

s184,OoO_

Product

(2)

Total budgeted sa1es...............,...t....

Production budget for fourth quarten

x4,5OO

9005,4OO

600

2,OOO400

2AOO500

1,900

3,OOO500

3,5OO400

Y

lf99 3 , 1 0 0

Chapter 15

E15-5 (Concluded|

(31 Materials usage budget for fourtfr quarten

Product

PlannedPro-

dustion-4,8OOl ,9oo3rl oo

(41 Materials purchase budget for fourth guailen

Material

345

Materials Required Per Unit Total Materials Required

A32I

cBAc242

I23

xYz

l4r4OO3r8OO3,loo

4r8OO3,8OO9,3OO

9,6OOTrgooo,2oo

23,4OO

Total

s83,O5O

21,3OO 17,9O0

cBAProductlon requiremgnt r.......,...Desired ending inventory .....o....Quantity required ..................r...Beginning inventof''lf .......,..........Quantity to be purchased ..,..,....Unit COSI...r . ' . . . .r . . . , .rr .r . . . .r . . . . .r , .r , .

Purchasg req uiremoot....,..........

E15-6

(1)

Units required to meet sales budgetAdd onding inventory

Total units 1equirad.......,.............Less beginning inventory ..,,..............

Planned production............

21,3OO2,5OO

23,8OO2,0oo

21,8OOs ,50

17,9OO2rOOO

19,9OO{ . 0 0 0

18 ,9OO

3 z.oo63z.goo

23t4O42,AOA

25,4OO2,5O0

22,gOO3 1.5o

slo,9oo $34,359

Tribolita Polycal Powder X8O,OOO

6r0oo

86,OOO5,OOO

81,OOO

4O,OOO2,OOO

42,OOO4rOOO

38,OOO

lOO,OOOSrOOO

lOSrOOOI O,OOO

98,OOO

a6

Et5-6 (Concluded)

tzl

TribOli tg r . . . . . . . . . r . . . . . . . . r .Polycal .......................Powder X ............,,.....

Add ending inventory

Less beginninginvgntorY........... '......

Units to be PurchasedCost per kilogt'ar[ ......Total cost ot

pU nC h aSgS . . . . . . . . . . . . . . . .

(31

Material A

8 1 , 0 0 0 1 1 = 8 l O 0 0 k g38,OOO 12 = 76 ooo

Chapter t5

Material B

8 i ,OOO 12 = 162 OOO kg

g 8 r O O O r l = 9 8 O ;

260 00o kg

15 000

275 ooo kg

1 1 0 0 0264 OOO kg

x $ . 1 0

$ZOrlaIl

Total

I 16 ,200l5 ,2OO16,20O

9,8OO

s 57,4OO

s 32,4OO38,OOO

9,8OO

s 80,2oo

Materials:A: gt 'OOO x I x S.2O r. . . . . . . . . . ' .

38rOOO x 2 xS.2O . . ' . . . . . . . . . .B : 81rOOO x2xS. 1O. . . . . . . . , . . . '

98 ,OOO x I x S .1O, . . . . . . . . . . . .

Direct Labon8t r 5O I 38 . . . . . . ' ! . . . ' . . . . t . . . . . . . . .38 r 125 r $8 ...,...............r....98 x 12.5 x58,. . . . . . . . . . . . . . . . . . . . . .

Factory overhead-variable:81 X 50 X 56 . . . . . . . . . . . . . . . . . r . . . . r . . r39 r 125 r 56. . . . . . . . . . , . . , . . . . . . . . . .98 x 12.5 r S6 . . . . . . . . . .

157 Ooo kg

12 000

169 oOO kg

I 500{59 5oo kg

x s.20

s3{.900

Tribolite Polycal Power X

$16,2OOs15'2OO

16,20os 9,8OO

$32,4OO 915,2OO s 9,8OO

s32,4OOs38,OOO

s 9,8OOs 9,800$32,40O s38,ooo

s24,3oO

$24,3OOTotal variable manufacturing

cost. . . . . . . . S89,1OO

s28,5OO $ 7,350 s 60,150

99l,7oo S26,e59 s1e7'75O

s28,50Os 24,300

28,50O7,35O$ 7,350

Fixed manufactur ing cost (not at tocated to products) . . . . . . . . . . 4O'OOO

Total manufactur ing cos1.. . . . . . , . . . . . . . . . . , . . . 'g?%ttg

Chaptor l5

El5-7

u7

wt(z lNc.Budgeted Gost of Goods Manulactured and Sold Statement

For the Year 20-

Materials:Beginning inventory....PUrChaSgS. . . . . . . . . . . . . . . . . . r . . . . . . . .o . . . . . . . . . . . . . . . . i . . . . . . . . . t . t . .

Matgriats avaitablg for usb .........o..........r......r.....Ending invgntory'...........'..'........o...o...-..............'..

Cost of matgrials usgd....................................t't.L3 bO1. . . . . . . . . . . . . . .o . . . .o . .o . . . . . . . . . . . . . . . . . . . . . .o .o . . . r . r . . . . . . . . . . . t t . .

FactOry ovgrh gad .........r........r.........r.t....................

Total manufacturing CoSt .,...................... '..............Add beginning work in process inventotlf........ '.....

Deduct ending work in process inventory.......,..,..Cost of goods manufactungd r.. .r, . . . . . . . . . . ' .r . . .r. . . . . ' . . . .Add beginning finished goods inventory..... '.."......Cost of goods availablg for sa|e......., '...,.....r. '.r. '....Deduct ending finished goods inventory .,...,..,...,.rGoSt Of gOOdS SOld . . . . . . . . . . . . . ' . . . . . .o. . .o". . . . . . . . . . .o. . . . . ' . . . .

tEarnfngr lE h of S2O,OOO,00O = tlr200,OO0lMarketing, administrative, and financial erpense3

Cost of goods sold (Sa,280,00O).. , . .

$ 5OO,OOO.2.600.0oot

$3,1OO,OOO600.ooo

looh ol sales21

31ah of sales69

lOOc/c of sales

s2,5OO,0004,34O,OOO1'840'000e

S8'68O'00001O0,000

s8,780,OOO3OO,OOO

S8r48O,OOOzSOO,OOO

s9,280,00O1,000,000

s8,28O,000r

zCost of goodsrold

s8,290,000

rCost of goodamanufactured

88,480,000

.Total manufac-turlng cost88,gg0,ooo

o Cost olmater lals

useds2,500,000

Ending linishcdgoods inventory

81,oO0,ooo

Ending work Inprocess inventory

q3o0,000

Labor lSOc/o olmanutacturing cost)

94,340,000

Endingmater ialsInventorys600.ooo

Beginning finishedgoods inventory

s8oo,00o

Beginning work inprocess inventory

sl oo,ooo

Cost ol materialgused

32,5oo,ooo

Beginningmater ialsinventorys500,ooo

Cost of goods= manufactured

s8,48O,OoO

Total manulacturing cost(materials, labor' and

= lactory overhead)s8,680,OO0

= Factory overheads1,84O,000

= Mater ia lspurchasess2,6OO,OOO

-----7

ChaDter 15348

E15-8PATZ COMPANY

Budgeted Income StatementSecond Quarter, 20-

Sales (S500r000 first quartgr sales r 2) '..'..,......r...'.."...cost of goods sold ($1'ooo,ooo sales x (1o0% - 4o%llGross profit (9 t rOOOrO0O sal gs x 4Ao/o1,..............,......!o...Commercial erpenses:

Uncotlectible accounts ($l,o0o,ooo sales r2%1.'. ' .. $ 2OrOo0Depreciation (($8OO,OOO + 2O yearsl r 114 year! ..- ' ... 1O'OOOMarketing:

Vafiable ($l rOO0rO0O SaleS X lO%1,..,......r...D..,...... {OOr000FiXed. r . . . . . . . . . r . . r . . . . . . . . . . . . . . . . . r . r ro . . . . . t r . . . . . . . . . . . t . . . . . . . ' .o . . . SOtOOO

Administration (all f ixed).....or..,,... ............. ' . 3o.ooo

lnCOmg bgfOfg inCOmg tax ..,.....,..,............. ' .,..,..............

slrooo,ooo6O0,0oo

$ 4OO,OOO

2{O.OOO

3 l90.ooo

E ls -9


ME)OA CORPORATIONBudgeted Income Statement

For the Year Ending December 3' lr 2OB

Sales (S9,OOO,OOO in l9A x 1.O5 quantity increase x1 . 1 0 pr ice increase) . . . , . . . . . . . . . . . .D' . . . . ' . r . . . . , ' . . . . . . . . . . .

Less cost of goods sold(56,000,0OO r 1.O5 quantity increase xI .O6 cOSt inCfeaSe!...,............,...,.. ' .,.. ' . ..............

GrOSS p fo t i t . . . r . . r . . . . . . . . r . . . . . . . . . r . . . . . . . . r . . r . . . . r . . r r . . . . . . . r . . . t . . . . .

Less commercial expenses:Marketing expenses

(S78O,OOO + S42O,OOO increase in advertising).Administrativg gxpens gs,......,... '...............r............

Operating income before taxes and interest.........-....

sl,20o,0oo9OO,O0O

$1O,395,000

6,578,OOO

s 3,717,000

2,1OO,OOO

Less interest expense($14O,OOO + ($4OO,O0O asset increase x 1oo/o rate))

ln com g bgforg income IEIX.... . . . . , . . . . . , . . . . . . . , . . . . . . . . . . . . . . . . ' . .Less income tax expense ($l ,447 .OOO x .4O tax rate)

Net lncome. . . . . . . . . . . , . . , . . . . . . . . . . . , . . , , . . . . . .

s 1 ,617 ,O0O

180 .OOO$1,437,00O

574.800s a62.200

- anpbr 15 349

Pt5-1

(11

PROBLEMS

Sales Budget

Unit Price Totalb

Thingonc .....................!......oir..oo....oor.....r.............. OO'OOO S 70 34t2OOtOOO

Thingtwo...... . . . . . . .r. . . . . . . . . . 4Ot0OO l OO 4tOOO;OOO

PfOieCted 881OS.r..r........oo...o...........rr..r.............

Produstlon Budget

f f i f f iOejired inventoriosr Decamber 3l' 2O8.. 25'OOO I'OOO

85,OOO 49,OOOLess elpected inventories, Januar! 1, 208...'..... 2O'OO! 8t0!9

99,ooo 41 ,OOO

Raw Materials Purchases Budget

l2'l

(31Raw Mrtcrlrlr

C Total

Thlngoor (O5'OO0 unltrprolcctcd to bc produccd) 260,OoO lbr 130'OoO lbr"

Thlngtwo (41,OOO unltrprolectcd to bc producr'd) 2O5,OOO 123'OOO 41'000 unltr

Produc,t|onrrqulnmrnt..........- 485rOOO br. 5it'Oog br. {1'OOO unltr

Add dcllnd lnvcntorlcr,Dccrmbrr 31, lg8*...- 3E,ooO 32'OOO 7'OOo

Totel nqulrrmcntr..* 5OI,OOO br, 285'000 lbr. 48'OOO unltrL.cr rrpcctcd brvcn-

- torlcr, Jrnuary 1, 198.--. 32,000 20'OOO 5.oooh,rrchar roqulrcmcntt....- 469'OOO lbr. 256'0OO lbr. 43'000 unttlCort pcr pound or unlt.* $8 35

'sr

Totel coct of purchaeGr...... 33,252,000 3i,2go,!o9 'g13gggg

sl,rclpoo

Chaoter l53fi

I

Pt5-l (Concluded)

(41 Dlrect Labor Budget

Prolected HourrProductlon Per

Unit Total Ratc Total

Thingonc .. . . . . .o.ott t t"r"t"t"t t '

Thi n gtwo .. . . . . . . . . . .r .ot"t"t"t t t t '

(Unltslg5rooo4t,ooo

t3o,oool23,OOO

$l,o4oroooIrloTrooo

s2,147'OOO

$89

23

(sl Flnlghcd Goods Inventory Budgc! Deccmber 3l' 2OB

Thingone:Raw materials:

A-4 pOUndA O $8 ...r.....r....r...r.. '. '......... '."""'b2 pOUndS O $5 ...............r..............r...r.......

Direct fabor-2 hourg O $8 o.r............r.......'.."""Factory overhead-2 hours O $2 per direct labor

h o l l l a . . . . . . a r . . . a . . t a a . . . a . . a . . . a a " t t r ' ! " " " t " t t t t " " t t " t

$82 r 25tOOO unlts r...........o.. ' ........"t"""tt"ot"

Thingtwo:Raw materials:

A-5 poundS O $8.......................r. ' ..r......r......B-3 pounds O $5 ..........o..o......o.""""""""""C-l uni t O $3 . . . t . . . . . . . . . . . . . . t . . t t ' r " t 'o 'o"" t " t t " t t t '

Dirgct laborq? hours O $9 r.....................'..""""Factory oyorhoad-.? houra O 32 per direct labor

h o u r . . . . . . . . t t . . . . . . o . . . t 1 . . . t . . . . . . . t . . t . " " t " t " t " t " t " "

591 r IrOOO unit8... . . ' . . ' . . . . . . . . .r. . . . . . . . . . . . ' . . ' .o... . .

Budgeted finished goods inventory,December 31, 2OB

$gzl o 9,42

1 6

4

s62:$l,55O,OOO

$co1 5

3 $ss27

6rlel

8l9,OOO

I34w

Clwptor 15

P15-2 ,

(11

35t

ROLETTER COMPAT.JYBudget for Produetlon and Direct LaborFor the Quarter Ending March 31r 2OB�

Month

January February March Quarter

Salgs (uhitsl .....................'............ IOTOOO l2rOOO I'OOO 3OTOOOAdd ending inventOt'.........,...,.... l6'000 12r5OO 13r5OO 13r5OO

TOtal UnltS feqUifed ....,,..o,....,..,.... 26'000 24r5OO 21r5OO 43r5OOLess beginning Inventoryr...o......... lO'OOO.. l6'000 12r5OO 1or00o

Unlts to be producod.................... IO,OOO 8r5OO 9'OOO 27r5OODirect labor hours per unit......... ' . r 2.O r 2,O r 1.5

Total hours of diract labor timen ggd ed ........o...........r....... 20,0OO t7,ooo 13,5oo 5o,5ooDirect labor costs:

Wages 1$8.00 per DLHI ........r... $l oO,OOO $136'000 $1 O8,OOO S4O4,OOOPension contrlbutlons

($.25 pef DL10...........r..r.,..... 5'OOO 4t25O 31375 121625Workergt componsatlon

Insurance ($.1O psr DLH)..... 2'OOO 1r7OO 1r35O 5'O5OEmployee medlcal Insurancc

(3.4O per DLI[.'.......r............ S'OOO 61800 5r4OO 2O'2OOEmployerb social security and

unemployment tares(ss.oo r.1o = g8o per DLH| 16,000 13,600 1O'8OO 4O'4OO

Total direct labor G(tst......... $191rooo $182,350 s128,925 s4�82,275: : -

rlOOc6 of the first foltowing monthb sales plus 5O% of the second followingmonthb sales.

- - -

Chagter l5

P75-2 (Concludei!)

(2) (al Gomponents of the perlodic budgot, other than thc producUon budgetand the direct labor budget, that would algo use tte saler data include:(1) the saleg budgetl2l the cost of goods manufastured and sold budgetigl the markating and administraiivc oxponsos budget(4) the budgeted Income statement

(b) Gomponents of the periodic budget other than the production budgetand the direct labor budget, that would also use the production datainclude:(11 tho dlroct materiab budgetl2l tho tactory overhead budget(3) the cost of goods manulactured and sold budget

(cl Gomponents of the periodic budget, other than the production budgetand the direct labor budget, that would also use ttro direct labor hourdata include:(1) the tactory overhead budget (for determining the overhead applica-tion rate il based on direct labor hours!

(d) Components of the periodic budget, othcr than thc production budgetand the direct labor budget, that would elso use the dirsct labor costdata include:(11 the lactory overhead budget (for determining the overhead applica-tion rate il based on direct labor dollars and for dstermining the cost ofemployee benefits attributable to wages earned by direct labor)t2) the cost of goods manufactured and sold budget(3) the cash budget(4) the budgeted income statement

Chagtor 15

P15-3 '

(1) EsUmated cales lor third guarter (July-Septemberf .........r.,.....Add ending Inventory p'OOO r 8O96)....,.r.o.....,..........o..o.,............

Lgss bgginning lnventoly ..................r....'.....

313

18,OOO5,600

23,6OO5.600

18.OOO

t2l Material

Unlts to bo producgd'. '.........r.o...............Matgrials I'irto ...,.......,...o,.,.Unltg of matgrials required ...,.......,...o..,..Add ending Inventory:

5t60O I 6 . . . . . . . . . . . . . . r . . . . . . . . . . . . t . . . . . . . . . . . . . . . .

5t6OO I 4 ...............t. 'rr...t................o.t.

5t0OO I 2 .........r............r..........r.. i .......

1 0 1

l8rOOOI 6

211

lSrooot 4

242

18,OOOx 2

36,OOO

1 1,2OO

lOS'OOO

33,600

72,OOO

22r4OO

141,600Less beginning inventory.,.....,.,......,.r..o.. 35rOOOPUrChaSgS......r...........r............................ f OO"gOO

Hourspor

Production Unit

94,400 47,2OO3OTOOO 13.OOO

34r2OOx$1 .20

$4'to4Q

TotalLaborGostProcess

FOrming .o.........tr...rr...ASSem b ly ....r..............Finishing .o... . . . . . , . . . . . . . . ,

Cost per unit r s2.4064,4O0x $3.60

Total cost of purchasoS.............,............. 9255r84O $231,84O

{31TotalHours

TotalLaborRate

18,OOO18,00018,O0O

,802.OO

.25

l4,4OO $8,OO36,000 5.5O

4.500 6.00

54,9OO

$115,2OO198,OOO

27 |OOO

9940'299

(41 ErpectedannualproductioJl.............r........ 60,000 units27,OOOAstual producUon through June 30

: , Erpocted production during last six months of 20A...,.. 33pOO unitsVariable factory oyerhead per unit ($i gZ,Ooo + 27,0ool x $6.00Budgeted variable factory oyerhead...........,.r.,,..o....,..... $lgBrOooBudgeted fired factory overhead 93,OOOTotal budgeted factory overhead

3gt

Pl5-4

(t l

Chagter 15

Revlsed Salea Budget in Unlts Bagod on tho Inder

Terrltorles

1 -lb. pack3ff o......."'2-lb. packago...o.---.-

Total ....'....'.........

t lO ,OOO r .9 = I 'OOO212 'OOO r .9 = lO '8OO

(21 Sales Budget in Dollars

IIrO00 t

1O,8OO r

llf99

. i l

l3,5OOlo,2oo29'-7OO

llltorSOOlo,8oo21,600:-

Other551r7OO704,7OO

1,256,4OO

6-MonthTotal

585,OOO7{2,5OO

tl327,5OO

Territories

I l l$2,ZSO' $ gPZS

5,4OOr I, l OO

E?rsso 9!Jr475

lll Other$2,7OO $137,925

5,4OO 352,350

$8.roo

$2,25os5,4OO

s490,275 $glJ.soo

6-MonthTotal

$146,250371,25Ol -lb. pack?ff o..........

2'lb. package..........

Tota 1................

| 9,9oo revised estimate r i25 (per packago! =,1o;8oo revised estimate x $.5o (per package) =

Materials Purchases(3)

Grain R Grain S Total

January..o..r. . . . . . . . . . .February ........o..r...Malth. . . . . .o . . . . . . ' . . ' . . r

April,...,.................May . . . . . . . . . . . . . . . . . . . . .o.June,............,...,..,.

2,OOO $ 2,4OOI ,0oo 1,2OO3,OOO 3,750.,:o .,ojo

4,OOO 4,OOO

13.OOO sl4,350: :

Bu.5rOOOt,oro

I,OOO3,OOO4,OOO

4,OOO.

@t$ 6,5oo

''rjol2,ooo

4,5OO614OO

$32,200

Bu. Gost Bu.7,OOO3,0o03,00o

1 1 , O O O3,OOO8,0oo

35doo

@t$ 8,9oo

4,OOO3,75O

15,OOO4r5OO

1O,4OO

E4Or5s9

Chapter t5

Pl5-4 (Concluded)

(4) Materials Requirements for Production

a q E

Production of 585rOOO 1-lb. packages.. '.....-..........................r.....Productio n ol 7 4215OO 2'lb. packages ...r....-............-......

Total materials requirements for six months ............... ' ...............

585,OOO lbs.1,485,00O

2,O70,0OO lbs,

Three bushels of grain in the proportions of 2R:1S produce 198 lbs. of f inishedproducl R weighs 7O lbs. per bushel and S weighs 80 lbs. per bushel.

Weight perGrain Bushels Bushel Lbs.

R 2 7O lbs. 14OS 1 8O lbs. 80

2201O7o loss 22Weight of f in ished Product. . ' 198

Since each 198 lbs. of product calls tor 22O lbs' of grain, the total weight ofgrain required tor 2.O7O,O0O lbs. is:attatt# r 2,070,O0O = 2,3OO,OOO lbs., to be apportioned as follows:l Y o

Grain R = x 2,3OO,OO0 = 1,463,636 lbs. = 20'909 bushels @ 70 lbs. each1 4 0220

Grain S = # x 2,3OO,Ooo = 836,364 lbs. = 10,455 bushels @ 8o lbs. each

Materials Account (Fifo Basis)(5)

Grain R Grain SBu. Cost Bu, Cost

1 O , O O O22,OOO

32,OOO

1O,O0O5,OOO2,OOO

3,909

s l2 ,OOO32,2O4

s44,2OO

$12,ooo6,5O02,8OO

5,864

3,OOO2,OOO1,OOO3rOOO11455

$ 3,0002r4OO1r2OO3r75011455

3,0oo s 3,ooo13,0OO 14,350

16,OOO s l7 ,350

2O,9Og s27,1641 1 ,O91 S l 7 ,036

1 0,455 sl 1,8o5

5,545 s 5,545

, rI

Chaotar 15356

P15-5

(1) Budgeted Incomc Statoment(Ooos omittadl

Quarter

Sales:CommglciSl .........."""""t"GovgrnmgJlt.'..........t"""""

tota t . r . . . . . . . t . . . . . . . t t t to" t t " "

Cost of goods 8old ..".,....'..'...Grosg profit .........r.....'.......".t.Other op€rating arponses:

Advertising ..'.............-----.--Sgl l ing . . . . . . . . r . . . . . . . . . . . . . . t """ 'Admi n istrativg ............'...r..Gengral ofticg ...........r. ' ....-.

TOISl . . . . . . . . . . .r . . . . . . . . . . tr . . . . t .

lncome before income t?r..'...Incomg t3I..... ' .................""...Ngt incomo .............................

ft$

s250loo

33sOto t

$l05Sl03

41$ 5 6 ' $ 6 2

Second Third

3268 3275120 l to

Fourth Total

$goo sl,o91115 445

9{1sl 9 l

$113 s 41e$ r r r s 4 1 0

44 163

$1 8e

$ o353223

$ g os e 3

37

s1,536707

$ ezg

$ 2 41 5 51 4 01 0 0

b

- i

s386 s38lt178 177

$208 3208

$ 6393525

$ 6393525

$,224

9 o423827

$los31 03

41s 6 2 $ 6 7 s 247_

j

I

-

357Chapter 15

P15-6 (Goncluded)

(21 Budgeted Income Statementwith 5% Incrtaso In Gommercial Sales

(OOOs omitted)

QuarterFi$

$zsgloo

$36s1A7

$1 e6

$ 8

$27e120

s390184

s2l5

$ 6

$l 08$1 07

439_g!

Second Third Fourth Total

Sales:Comm grci8l ................trt'ttr

. GovgrnmOrlt...........t'.....'."'Total . . . . t . . . . . . . . . .o.. . . ." tr t"t '

Gogt of goods Eold ............-....Gross protit ............o......'...t...'Other operating expensos:

AdvertisingSelling .............................t'AdministraUvc ...................Ggneral oftico .........t....t.r...

TOtSl . . . t . . . . . . . t . . t . . . . t . . . . . . . . . '

lncome befora income tir"....lncOmg t3L.....r.....-................Ngt inCOm|Et t.....r...............tr.....

$zssl l o

$3e9184

$31s1 1 5

$21 5

$ 6

9f301 9 8

s232

$ 643392a

$108sl 07

43S s e s 7 0

s | ,146445

s1r591733

363324

40362g

403626

s 858

$ 2 41 5 91441o'4

$ e g$ e 7

39

s l 1 6$1 rs

46

s 4319 427

171s 2563 5 8

Chapter tS

oto l'Olr-l

o co o o @ (o o lo lrr co lo (D lcolc , l o l

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st nlo o o o iD @ OtOl Ol i

tr co n cD lcol ollF I'l :ll

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ol o l lo l n l l

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< i lol roll| $rl

ol ol lo l o l lot uill

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tl s.3l :

a)

otr l oE t @3 l osr s fll ql fll

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Clapter 15

oooCLEU 7>rOI | N; i o- c o; : o

E D 'c ?

oou(lltrID

€

Eocu3CLEo(,g r3E'ooo

U'l-zFz3o(,ooJo3GouJlrl-G]U().F

tr=ooz=oozo.?

to3c

oo(o

tto

c - Nt

C

Chaptar 15w

P15-6 (Concluded)

(3) JOHNSON AI*ID SMITH, CERTIFIED PUBLIC ACCOUNTANTSBudgeted Income StatementFor Year Ending June 3Or zON

Revenue from chargoable Ume:

EmploveeJohnsonSmi th t . r . . t ' t t t t t t t ' r ' r t to " t " " " " t t " r " " t "

V i ckg r3 . . . . . t t t t ' l " t r " t " " " " t to t " t t t " " " '

Lowe

BlllableHourr

700l , l oo1,5OOl,6001re2511625

500I , l oo1,0o0

siliingRate

$90.oo70.oo52.OO39.OO32.OO32.OO17.50l5.oo15.OO

GrossFees

$ gg,ooo77,OOO78,O0O02,4OO52rOOO52,OOO

8,75Ol6150015.OOO s424,650

stoo,ooo97r76O39r52035,OOO0�2'37o 334,650

s-lgpoo

- a a a a a a a a a a a a a t a a a a r a "

KennedY... ."" 'a a a t a a a a a a a a a a r r r r r o o o o r t r r r r o

Quinn '...G a r C i a . . . o t t . t " " " t ' l t t " t t t t t " t t " " " t ' l " t '

Hammond '.LyOnS . . . . . . . t too" t t " " t ' t t " t " t " t t t " " " " "

Erpenses of Producing revenue:Salaries:

Partner:8....Profgssi onal staff ....,r.r."""'Sgcrgta ri g3""""tt "r" "t "" " "

Frin ge bgn gfits""""""'o"""""'

Other oporating erpenseg .o.."'

Gross prcfit.......o.."t 'o"t"tt""tt"""'

Chapter 15

P15-7l

36t

Schedule 1Saloc Budget

Areas

Model l5OUnits ...r..r.....t..ot.

Unit pricoTotal . . r r . . . . . . . . . . . . . . . t . . . . .o. t . t t . r .o. . t .

Model lOOUnitgUni t pr ice . . t . . . . . . . . . r . . . . . . . r r . . . . . . r . . r . r . .

TOtal . . . . . . r . . . . . . . . . . . r . r r . . . . . ' . r . . . ' . r . . .

Model 50Units ..............Unit price ...............

TOtal r..'.....r....TOta l a .aa .ar . . . . r t r ra . r . . . . r . . r . r .a .aaaa aa aa a . .o . r r t

South

3'OOO 4'OOO9__!-75 9_l_Zgt__925€99 g_7ooeg

Southwest Total

TrOOO775

g!,?ailoo

5rOOOq__! 209_eoop.99

7,OOOt_eo9-_e99€99fllTsE.OOO

I,OOOs___99gl20{99$3fgg,ooo

15,OOO90

il-egpoos{ptlpgg

7,OOO l2rOOO$ r zo $_139E__glgpoo 91,41!.ooo

s

Schedule 2Production Budget

Model

Units required to meet sales budget (Schedule l)Add gnding invento}y., . . , . . , . . . . . . . . r . . r .o. ,r , r . . . . . . . . . . . . . . . r . .

Total units requirad..............r..........................r,.....Lgss beginning inventory.,....,...,...o..,..............r....,.Planned producUon tor thc year........r...............-.. 7 ,OOO 12.100 14 .gOO

t-sTrOOO

2007 r2OO

200

1_99 9912,OOO 15,OOO

400 30012,4OO 15,3OO

300 400

Chapter 15fi2

P15-7 (Continued)Schedule 3

Direct Materials Budget in Units

Unitstq Be

Lumberln Board

Finishln

Pints

Model 15OUtits to be manufacturod

(schgdulg 2! ""t""""""""""Matgrials lSte """""t""""t"tt"

Units of materials rcquired """

Model loO-Units to be manufactured

(schgdulg 2| """""" ' t""""" 'Matgrials lSto "tttt"t"t""to""t" '

Units of materials requlred """

Model 5O-Units to be manufactured

(schedule 2) ......"""""""""'Matgrials lSto ....."""-""""""'Units ol materials required...."

Total units of materials requirad "

Manuiactured Feet 9Peakers

7,O0o1 2

84.OOO 35.000 14.OOO

l2 , l ooI

96,800 36.300 12,100

l4 ,9OO

29,800 14'900

lE-loo 91poo89.400

270.200

Schedule 4Purchases Budget

Materials -. - .@ Finish Total

27O,2AO30,ooo

3OO,2OO40.ooo

26O,20O$ ,75$_esJlg

Units required for Production(Sch edule 3)..............-.......

Add gnding inventofl.........-..

Less beginning inventolY...'..Units to be Punchasod ..........Estimated unit cost ..............Total cost of purchaseS........

l o t , l oo8.OOO

1O9r10OI O.OOO99,1oo

s r5.oo@

41,00O2.OOO

43,OOO1.500

41r5OO$ z.oo$83.OOO s1.764,650

Chaptor 15

P15-7 (GontinuedfSchedule 5

Cost of Materiala Reguired lor Production

3&3

MaterialsLumber Speakerg Finish Total

Model l5OUnitr of materialr roquired

lor producUon(schedule 3|.........,......... g4rOOO 35'OOO i4rOOO

Unit cost..,..........,,.........r... t__ .25 f_l!E.og $ 2.ooTotal ....,....,....,................ t-lgrg0O U2SOgg $28.OOO $ 6i O'OOO

Model 1OOUnits of materials reguired

tor producUon(Schedulc 3f .......,..r..r.,,..

Unit coSt... . . .r. . . . . . . . . . . . . .r. i . . . .Total

Model 5OUnits of materials raquirod

for production(Schedulc 3) .. . . . . . . . . .r. .r. . . .

Unit COSt r.. . .r. . . . . , . . . . . . . . . . . . . . .oTOtal ...... r......r............r....

TOta1...........r.....r..r..r........r..

90r8OO 3gr3OO 12,1OOt_- .75 L-19:oo $ z .ooL72€oo $__gg{,5OO $24,2OO 641,3OO

89,4OOt---75r_o7ggggg?.s5o

2grgoo9__--1-g.og$lrJsee!E! !,soo

l 4 ,9OO$ 2.OO$29,800$82.OOO

543.850$1.801.150

f

url

P15-7 (Continued) '

Schedule ODirsct Labor Budget

Chapter l5

Cuttfns Assombll$ Finishinq TotalModel l50

Hourg per unlt '.................. .375' 2.OOO .375Unitg to be manulactured

(schedulg 2)..........o.....o.. 7.OO0 7.OOO 7.OOOHourg of labor l€quiJ€d..... 21625 l4rOOO 21625Labor cost per holtt.'."..'... 3 6.00 3 5.oo $ 4.oo

Total labor CoEt..,..........., S15.750 i 7O.OOO $1O.5OO $ e6'25O

Model 1OOHciurs per unit................... .375 l '5OO -25,OUnits to be manufactured

(schedule 2). . , . . . . . . . 12. lOO l2. lOO 12.1OOHours of labor rcquircd..... 41537.5 18rl50 3'025l-abor cost per ho1tt........... $ 0.oo 3 5.oo $ 4.oo

TOtal labOr COSI..........!.... 527,225 $ 9O.75O $12.lOO 13OrO75

Model 5OHours per unit... ' ...r ' .......... .375 l '5OO '25OUnits to be manufactured

(Schedule 2) ................... . l 4.900 14.900 l4.9OOHours of labor rlquired..... 51587.5 22.35A 3t725L:bor cost per hour........,.. S 6.00 $ 5.oo $ O.oO

Total labor cost . . . . . . . . . . . . . , . 333,525 Sl I 1.75O $14,9OO 160'175Total....... 376,500 $272.5OO $37,5OO 3386,500

----------T\

Chapter 15

P15-7 (ContinuedfSchedule 7

Factory Overhoad Budget(Applied Overhead|

Cutting ASSqrnb[lg Finishins TotalModel 15O

Unlts to be manufactured"(Schedule 21 ..................r TrOOO TrOOO 7rO0O

Estlmated departmsntfactory overhead.,,or......, $ {'OO $ Z.OO $ .ZSTotal cost..................,..... $ 7,OOO $l 4.oOO S 5.250 S 261250

Model tOOUnits to be manufactured

(Schedule 2f .....,,,.,......... 12r7OO 12r1OO 12r1OOEstimated department

factory overhgad ..r......... $ 1.OO $ 1.5O $ .5oTotal cost........................ 912.1OO S18,150 $ 6,050 36,300

Model 5OUnits to be manufactured

(Schedule.2|................... 14r9OO 'l4r9OO 14r9OOEsUmated department

factory overhead r........... $ Irog $ 1.51 $_'l!!Totaf cost........................ $14.9OO S22.35O $ 7,450 44,7OO

Total factory overhead.......... $34,OOO S54,5OO Sl8,750 SlO7.25O

365

\-I

- \

\

366

P15-7 (Gontinued) '

Chapter 15

Schedule 8Beginning and Ending lnventories

Materials:Lu mb g r.............Speakers ..........Finish .r.....t.......

Total

Work in process: None

Finished goods:Model 150.. . . . . . 'Modgl l OO ...... ' .Modgl 50.. . . . . . . . .

Total r...........Total

Units

4OrO0OlO,OOO

1,50O

Cost

9 .7515.O02.00

ry$ 3O,OOO

150,0003,OOO

s183.OOO

Beqinning Invenlo_ry- Endinq lnventorvUnits Gost Total

3OTOOO $ .75 $22,5OO8,OOO 15.OO l2O,OOO2,0oo 2.oo 4,0oo

$146.500

200400300

200300400

se8.oo62.OO47.OO

s 19,60018,60018.800

s 57,OOOs240,ooo

slos.5066.7550.25

s 21 ,1OO2617OO15,O75

$ 62.875s209.375

Schedule 9Budgeted Cost of Goods Manufactured and Sold Staternent

Materials:Beginning inventory (Schedule 8)............... ' ......,"Add purchasgs (Schedule 4!...........r............r.,......Total goods available for use............,r.......,..........Less ending inventory (Schedule 8) ..... ' .. ' . ...........Cost of materials used (Schedule 5l ............. ' ......

Direct labor (Schedule 6) ....................t.....,.,.........,...Factory overhead (Schedule 7).............. ' ...... ' .oo.. '.,.. ' .Total man ufacturing cost .,....,....r..........r.......r...........

Add beginning inventory of f inished goods(Schedule 8| ............,..r.......................... 'r.... ' ....

Gost of goods available for sale.. ....,.......,...Less ending inventory of f inished goods

(Schedule 8) . . . . . . . . . . . . . . . . . . . . . . , . .Cost of goods sold . . . . . . . r . . . . . . . . . . . . . . , . . . . . . . . . . . .

$ 183,OOO1.764,650

$1,947,650146,500

$ 1 , 8 O 1 , 1 5 0386,5OO107,250

$2,294,90O

57.000s2,351,9OO

62,875

€3;!9,939

%7Chapter 15

P15-7 (Concluded)

ScheduleBudgeted lncome

1 0Statement

Sales-all models (schedule 1) ...."""""""""""""Cost of goods sold (Schgdulg 9) ,. . ' . . . . . . . .""oro""" ' t '

Gross profit.......,......,.........,.,................,....Markgiing' erpgnsS ....--.. '.............. '.. $5o0roooAdministiative expenses ........r.o...r.. 3O0'OOolnCOmg bgfOfg inCOme taX,. . . . . , . . r . . . . . . . r . . . . . . . . . . . . , . . . . . .

PfOViSiOn tOf inCOmg tax i . r . . . . . . ' . . . . . . . . . . r . . . .o. ' . .o. . . . . . . . .

N g t i n C O m € ) . . . . . . . r r . . . , . . o . . . . . . . . . . . o . ' . . . . . . . . . . . . . . . . . . . o . . . . , . . . r r

P15-8

Amounts4,o15,ooo.oo

2,289,O25.OOs1,725,975.OO

800.ooo.oos 925,975.OO

462.987,509192€gZ.so

Schedule 1-Sales Budget

Economv ModelWestern US EuroPe Asia Total

Units.. . , . . . -oqooo

5O,OOO 75,000 25,0oo 210'000Unit price S so S so A------5o $ so S so

Tota1...,.... s3sooJoo s2,soo.ooo I 3,?lo,o0o sl,25o.ooo 9J9r999rOOOStandard Model

Units . , . . . . , 4OTOOO 45,OOO 6OTOOO 35r0OO 18O'OOOUnit price S 70 S 70 S---7o S zO S_-7oTota1........ Si.AOO,OOO $3,15O,OOO SIT2OOP.OO S2.45O.oOO Sl3f99pOO

Deluxe Modeluni ts . . . . . . . 2o,ooo 25,oOO 35,OOO 3O,OOO I 10'OOOUnit price S 90 S go S---9o $ 90 9---9oTotat........ 51.8OO.OOo -S2.25o.OOo q--9rl-99roo0 S2.7oo.ooo S--$99o.ooo

Total ........,... 57.600.000 S7,9OO.OO0 S11rl0op99 €9499p99 q93-ro00p99

Chapter t5368

Pl5€ (Continued)

Schedule 2-Produstion Budget

Units required to meet salec budget

Economy Standard DelureModel Model Model

2lorooo lSorooo l lorooo(from Schedule 1! ............o..o."'lAi Ogslrod endlng Inventory.................o......... 20.OOO l5.OOO IO.OOO

Total units ruquircd lor Year zto,ooo 105rooo t 2o,oool5.ooo ls.o(xt l5.oooLess beginning Inventory..........-.

Productlon required for the year..........,....rorriror 2f 5p99 !-8OPOO 1O5P99

Schedule 3-Direct Materials Budget in Units

Economv ModclUnltr to bc msrutrcUrcd

Tranr Dlodc WlrcBor formcrr Rcstlflcrr Fltten Rcrleton 0n tcet!

(Schcdufu 2)..*......,..*. 2151OOO 215'OOO 215'O0O 2lSrOOO 215'OOO 215'OOO

Metcr lelrquen0Uporunlt 1 2 2 5 5

Total quanU$ o,fmttcrleb pqulrcd..,..,.-. 215,OOO 2I5,OOO 43O.O0O 43O.OOO i.O75.OOO 1.075'OOO

Standard ModelUnltr to bc manufectrrcd

(schcdutc 2)...-.............. 18O,OOO 18O,OOO 180'OOO 18O'OOO l8O'OO0 18O'OOOMaterlalrqutndtYperunlt t 2 3 8 o

Totel quentlty ofmetcrlabruqulrcd.......... ISO,OOO 360.000 72O,OOO 54O,OOO 1.44q.OOO l'08O.OOO

Dclurc ModclUnttr to bt manufecbrcd

(schcdufu 2],.-....-.-...... !O5,OOO lOtt,OOO 1O5,OOO 105'0OO 105'000 105'0OOMatcrlstr quanflV pcr unlt .3 5 6 10 8

Totel quanU$ otmstorlrlr rrqulrod.......... 1O5,OOO 3i5,OOO 525.OOO 630.000 LOSO'OOO 840'OOO

Total unltr of matorlalrrcqulredforproductlon.. SOO,OOO 89O.OOO 1.675,000 1,OOO,0OO 3.585!OOO ?f9EOOO

sti9

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Chapter 15

po5cgooq,

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Chapter 15

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Chaptor 15 371

P15-8, (Continued)

Schedule S-Dlrect Labor Budget

Economy Standard DelureAssemblv Department Model Model Model Total

Units to be produced(schedule 2|......,........ ' 215rOOO lSO'OOO lO5rOOO

Hou.rs reguired per unit.. '5O .75 l.OOHours required...o...r....... 7O7'5OO 135rOOO lO5rOOO 347r5O0Labor rate por ho1tr,.,..... t__ los t____l_o.oo $ lo.oo $ lo.ooTotal departmental labor

cost for pnoduct......... $!ro751Q99 t1€gg'1Q99 $!ro5o€oo 93.{75'1|ooTesting Department

Units to be produced(Schedule 2!,.........,..., 215'OOO lSO'OOO lO5'OOO

Hours required per unit.. ,O5 ,O5 .O5Hours required...D.....r..... 10r75O I'OOO 5r25O 25rOO0Labor rate per hour...,.... A-___l3.oo E__13.o9 S__U.og S__!3,ooTotal departmental labor

cost for pioduGt......,.. t-_Izsoo s-l-9999 t__qg.ooo so.oooTotal labor cost for the

period.............or.r.....,. 9!r?9!r00o $rlggfoo $!rl-!3rooo aJzjpgg

Schedule 7-Budgeted Machine Hourc in Testing Department

Economy Standard Deluxe

units to bo produced Model Model rotal

(Schodule 21 .......... 215'OOO lSO'OOO lO5'OOOb Hours ol machine Ume

required to test ufl it....... .15 .25 .35

b Total machine hoursrequired................,.....r... g2r2so 45rooo 36rzso tl4rooo

Chapter 15372

Pl5-8 (Continuedl

schedule g-Budgeted Factory overhead and Departmental Rates

Variable Budgeted VariableFixed Coit Rate Hours Gost

Assemblv DePartmentlndirect materials and

suPPlies o..........."""'lndirect labor.....-.'......rPayroll t?ros'........-......Employee fringe

bgngfi ts... . . . . . .-. .r. . . . . . .Equipment dePreciationRepairs and

maintgnar|c(t ............Allocated building costAllocated general

factorycosts............ 241t125TOtal depaftmental bUdggtgd OVefhead..'...'.....o..,..........."""""o"'BUdgeted OVerhead attOCatiOn baSe (direCt labOr hOUrS),......""""

Predetermined departmental factory overhead lElt€ ............o...r....

Testing Departmentlndirect materials and

suppl ies. . . . . . . . . . . . . . . . . . . $157,OOO $ .gS 114,OOO S 39'9OO S 196'900

Indirect 1abor..............t 25O;OOO l.OO t l4'OOO 1 l4,OOO 3641000

Payrol l taxes.. . . . . . . . . . . . . . . 55,OOO .tO l l4,OOO l1r4O0 66'400

Employee fringebenef i ts. . . . . . . . . . . . . . r ' . . . . l l4rOOO I l4tOOO

Equipment depreciat ion 215'ooo 215'ooo

Repairs andmaintenanco . . . . . . . . . . . . 35,OOO l .5o I l4,OOO l71rO0O 2061000

Allocated building cost I 'OOO 9'OOO

Allocated generaltactory costsr.........., |ftzr7}O f32'70o

Totat departmentat budgeted overhead r..... ' ............ ' .....""""""'D"' 91t254tOooBudgeted overhead altocation base (machine hours) .........!.t......... 114.OOOPredetermined departmental tactory overhead rate...'....

$158,O0O $r.so 347,5OO $521'25O35O'OOO .5O 347r5OO 773r75O382;5OO .05 347,500 17,375

347,5OO65,000

25,OOO .4O 347'5OO 139,OOOl2,ooo

BudgetedDepart-mental

Overhead

$ 679,2505231750399,875

347,5OO65,OOO

164,00012,OOO

241,125$2,432,5oo

347,500

$-_7.09

s3,9ggE99-

Assembly Department budget factoryTesting Department budgeted factoryTotal budgeted factory overhead .......... j ....

s73

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Chapter 15

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Chapter 15371

Pl5€ (conclud?n"or,e io--Beginning and Ending Inventories

Beolnnlng lnvtntety Endlng Inventory

Matarlrlr:

Trrnrtorm crr ...--..-...--.Dlodc rccttllen -..6-....Fllten ........-.....-.H--.-x

S/lra ........-r....D,.'............

Totel mated8lt.--*...-Worlr ln Prpcccr: lloncFinlghed Ooodr:

Economy ModclStandard Modcl x............Dg lurc Model..-..............Total flnlrhcd goodr .......

Total InvcntotY .....'.-.

IO,OOO 3 r .5O ' t

l5,ooo 4.5ozt,ooo .70*t,ooo 1.75to,0o0 .2o

l5,ooo 5,ooog7r3OO - IOTOOOl7'5OO 2!',OOO€r75O 2O,OOO

2,000 5OTOOO

chranutv unlt cort Total cot Quanutv Unlt colt Tstalsost

I t.5o t 7"5OOaso alt,ooo

.7O 17"5OO1.75 3li,ooo.2O IO,OOO50 20,ooo

Ll3r0oo3OiOOO .5O 15'000 4O'OOO

t loo.750

15,OOO ti2s.oo 3 375,00015,OOO 38,50 7Tf FOO15,OOO 35.25 828'750

tL78'!-e!!991,942f0o

2O,OO0 325.15 3 5O3,OOO15,000 30,25 588,75010,000 58,4!t 564,500

tL,050,25O$J9125o

Schedule 1l-Budgeted Gost of Goods Manufactungd and Sold

Materials:Beginning inVentOfy (SChedUle 10| ........................ 'or.............. ' .Add pUfChaSgS (SChedUle 4). . . . ' . ' . . . . . . . . . . .o. . ' . . . . . . ' . . r r . . . . . . . . . r . . . . . r . . . .

Matgf ials avai lablO fOf USe. ' . . r . . . ' . . . r . ' . . . r . r" . ' . . . . . . ' . . r . . . ' . . . . . . . . . . . . . . . . .Lgss ending inventOry (SChgdUle i0! . . . . . . . . ' . . r . . . . . . . . . r . . . . . r . . . . . ' . . . . r .

Cost of materials used in production (Schedule 5) '..'..........-....DirgCt labOr (SChgdUle 6|.. . . . . . . . . . ' . . . ' . . . . . . . . . . . . . . . . ' . . . . . . . . . . . . . . . , . . . . . . . . .".FaCtOry Overhead (SChgdUle 8)....'..'..'.....'r............r......'...............COSI Of gOOdS manUfaCtUf8d dUfing the pefiOd...........,.....,.........Add finished goods beginning inv€ntory (schedule l0) ...'.-......-..GOst Of goOdS available fof 3a1e.......................... ' .r. ' .............r.r.r..Less fi nished goods ending inventory (Schedule I Ol.--. ' .--.---.-.- ' ..GOSI Of gOOdS SO1d. . . . r . . . . . . . . . . . . . . . . . r . .o . . . . . . . . . . . . . . . r . . . . . . . . r . . . . . . r r r . . . . . . . r . . .

Schedule I 2-Eudgeted Incomo Statemont

$ l60,75010,912,250

$11,073,O0O135,OOO

$1O,938,OOO3,775rOOO3.686.500

$18,399,5OO1.781.250

$2O,18Or75O1.656.250

s18.524,500

Sales (from Schgdule l l .,.......................,...............Less cost of goods sold (Schedule 11!....,............o.Gross pllt i t...............................r.r.o...rr..rr......r........

Less commercial expenses:MarkeUn g exponsgs ... . . . . .o... .r. , . . . . . . . . . . . . . . . . . . . . . . . .r. .AdministraUve erponse3 .r............oor-.ri-r..r

lncomg bgforg taxgs .. ' . . . . . . . . . . . .o... . . t . . . ' . ' . . . . . . . . . . . . . . . . . .Less income tar (4O% tar rate).Net incomo.... . . . . . . . .

s6,145,OOO2.330.500

$33,OOO,OOO18.524,500

$14,475,5OO

8.475.500s 6,000,000

2.400.ooos 3.600.000: -

Clppler 15

Pl5-o '(1)

375

CL CORPORATIONProspccUvo Ststoment of Incomc and Retained Earnings

For Year Ending December 31r 2OB(OOos omitted!

Revonuc:Sale f aa .aa . . r . . .a .a .a4 . . . . . . . r . . . . . . t . . . . t . . r . .o . .a . . r . . . . . . .a

Oth gr' lncorllC ..r..........r.....r...r...r...............t

Erpenrcr:Cost of goods manutacturad and sold:

MaterlglcDlrect laborVariable fagtort ove rh ead ..'.......r...........Firgd factory ovorh gad ......o....'-'...........

Boginning inventol]f ...'...............o..........o...

Ending lnventory r.r.r... i .......r.................. ' .. '

MarkeUng:Salari gr r.r..............r......r..,,..Gommiss1on3............r.rt.......r't......r............PromoUon and advgrtisln$ ........................

General and administration:Salarl es ....o..'.r'...r.............Thavel

S600,OOOI,OOO S609,OOO

s5O7,OOO

81,OOO

$213,OOO218,OOO130,OOO

12,750$573,75O

4g,ooo$621,75O_!l-t!J!o'

$ to,ooo2OrO0O45.O00

$ lg,ooo2r5OO

Office cost3......Incomc flossl bglorc Incomo t8r......'..o..'....'.In comc tar rgfun d (4O%1............r,..............r.llet InCOmO (IOSS|....r........................'.'......'.'.Beginning rctaingd earningS ..'.........r..rr..,....

SubtotalLess dividends

Ending rgtain gd earnings ..,........r.......o.........

t tseginnlng Invcntof l . . . . .o. . . r . . . rr . . . . . . .o. . . . . . . . . . . . . . r . r . . . . . . . . . . . . .oo.. . ror. . .Adding to Invgntory (45OrOO0 - 4OOrO0Ol r . . . . . . . . . r . , , . r . . . . . . . r . . .o. . , .Ending Invento ly . . . . r . .oo . . . . . . c ' . ' . .o . . .o . . r .o . . . . ro . r ' . . . . r . . . . . . ' . . . . . . ' . r r . . . . . . .

198 cost per unit ($573175O + 45OrOOOl ...............,..,,..rr..,...,..Gost of ending lnventory .......i......

9.000 27.500 015.500$ (6,500l

2,60,0$ (3,e001

108.200$lo4,3oo. 5.OOO

4O,0OO units50.ooo9OTOOO units

x s1.275s1 14,750

Chaptar l5376

P15-9 (Gontinuedl

CL CORPORATTO}IBalance Sheet

Prospective as of December 31' 20B(0o0s omittedl

Current asseta:GaSh r..............

Assets

a a o a a t a a a a r t a a a a a a a a a a a a a a t " t t o t t " t "

Accounts receivablelnVentOfy .. . . . . . . .aa..a.. . . . . . .r . .a.. . . .aarr.. . . . . . . . . .rr . . . .ar.. . . . . t . . . . . .-a

lnCOmg taf fgCelvablA ............... '....o...........D...o...r.....o...

Plant and eqUipm6llt-...........,............r.o...... '............ '.....t..LaSS ACCUmUlatgd depfgCiatlOn r.r.'....... '..........D..t..."'t '

TOtal aSSets.....r......r.......1..r..........r.. '...r'.r.....r..............t

i l,2oo80,OOO

1l{ ,75O2.800

$l3o,ooo4l.ooo

$198,550

89.OOOs287.550

Llabilities and Shareholdsrs' Equity

Current liabilitieg:Accountg pa1nb1e.......o...........o.....rr.....r................'....'.' 945tOOOlccruaO paya0tes..r.....................rr....'....o.........rt......... . 23r2SO

Notgs pty"ble .,................!.o.............t......r.........t.......... 5O.OOO Sl l8t25O

Shareholderg' equltfCommon stOCk....o....o.........................................r......... $7Ot0OORgtaingd €arnings ...........................r.........r.......r..... ' ..r. 99t3OO 1O9t3OO

Total liabilities and shargholderst €QUit!......,.....r...r..... :9?!l?:55O

l2l (al The profit performanco lor 2OB is forecast to be much pooner than in

2oA.-A loss after Income tar of 3.?.9 milllon ls prodicted, companod-to a

profit aftor Income tar of $12.6 mitlion. Tlre company erperienced the

loss despitc a ggoh Increase in unit sales Yolumo. The maior problem

sosmE t6 Ue in the inabitity to raisa prices and/or in cost contlol. Tho

costs noso In every anoa of activitp(i l Variable manufacturing costs per unit increased 7.loh (from $1.16 to

sl.2464.(21 Fired manufacturing costs increased s750,000, or g.3oh.(31 Marketing costs, erctuding commissions, increased 316 million' or36o/o.(4) General and administrative costs increased $3.5 mill ion' or 15oh.

Chapter 15 3n

P15-9 (Goncludedf

(bl All srsas will require spectal cost analysis because the costs in all aneasIncreased, but apecial attenUon should be paid to:(ll Produstlon cost Incroaseg, because although relaUvely small in pencentage, the dollar amount ls high due to the volume of units.l2l Selllng and promotlon coat Increases, becauae the rate of thesecost Inc;gaset was lraater tlran the rate of sales increase.Tho saleo prlce wa8 not Increa3ed in spite of the increased cost. Thehlgh sale! volumo Inciaase may be the result of too low a price. FurtherInvestigatlon Into markbt prico and price-volums relationship is needed.

A review of tho balancc gheet Indicateg a material deterioration in thecompanyb working capltal position. Inventory has more than doubled.This increaso appears to have been financed by a significant incraase incurrent llabilit ies (more than a three-fold Increase| and a materialdecllne In cash. The need for so large an Increase In Inventory and theeffeet of dectlning profitability on tho cash and working capital positionneed to ba thoroughly lnvestigated.

(cl The following lmprovements should be considered by management:(ft lmproved coordlnatlon between gales, Inventory contlol' and pro'ductlon, an a no-€Yaluatlon of the product pricing policy'

l2l Development of a standard cost system to monitor product sosts.(31 Development ol a line of credit for short-term liquidity problems.

Chapter l5

CASES

ct5-1

(ll Businesg plannlng and budgetlng acUviUes lor Maiton Company ane impontant because:(al A long-run commitment of resoirrceg to specialized assets is about to

be mide.,A one-time decision for major erpansion that could involve alarge amount of financial resounces ovor a long period of time is aboutto be undertaken. This Investment will be committed to specializedassetg and can be rccovercd only from the production and sale of oneparticular YalYe.

(bl Tfte daily operatlong of the company will becomo mono compler. Maihas had no erperience wlth the day-to-day operaUong of a large busi-ness. The business ptanning and budgeUng proceduras will provide Maithe opportunity to review the company performanco and will allow thecompany to develop and evaluate atternative counses of aetion to satisfycorporate objectives.

(cl They will asslst in obtainlng capital from erternal souncss. An erpansionpnogram ol this magnitude, with a significant amount of initial funding'will require the generation of additional capital either through borrowingor issuing stock Obtaining nacoliliary funds can be enhancad bY andmay requlra an orderly presentation of, the business plan and budgetacUviUes.

(dl They will highlight potential problem situations. Disciplined businessplanning and budgotary procedures could emphasize a variety of prob'lem situations that might be encountered during the period of the plan.

l2l Listed below are the major probtems that would most likely be disclosedbecause Maiton Company is about to erperienco a significant growth.(a) The lack of adequate production facilities to manufacture the valve at

the quantities required. The company has served a small part of themarkeL The new segment is much larger, thus calling for more produc'Uon facilities than previously needed.

(bl The tack of adequate Internal capital gources to finance the asseterpansion (both working capital and plant and equipment). The companyis smalt and probably generates modest amounts of capital. The amountis not likety to be enough to meet the new requiremonts. Gonsequently'the company witl need to seek capital from the outside, and probablyhas little erperience because it grew slowly and had no previous needfor outside capital.

(c) The lack of adequate management nesources (people) to administer thecompany as lt gFo\ rs. The company ls small and, thus, probably solelyrun by George Mai. As lt grows, there will be the neod for more manage-rial people. This need probably cannot be met with current employees.

Chaptor l5 379

Cl5-1' (Concluded)

(d) Lack of planning and budget skills. The company probably has had littleneed for planning. Consequently, it may experience difticulty in organiz-ing for and developing a five-year plan. Specific problems could occurwith regard to forecasting, production, marketing, and cost of capital.

c15-2

(1) Factorc that Marval Products needs to consider in its periodic review otlong-range planning include the following:(al The curent state of the economy and its expected future statusl(bl The current and future availability of resources, such as personnel,

plant and equipment, and capital;(cl Consumer attitudes with regard to product appeal, changing travel

modes and patterns, and changing life styles and affluence;(d) The level of industry sales, Marval's current and projected market

share, and Marvalb degree of influence or dominance in the industry;(el The product lines with respect to the naturs of the production pnocess,

length of t ime the product has been establ ished, and ut i l izat ion ofnesources and plant capacity.

(21 Factors that Marval Products needs to consider when developing the salescomponent of its annual budget include the following:(al The pricing strategy;(bl The size of Marval's market share and the relationship to its competi-

tors;(c) The sales mix of products so that contribution can be maximized;(dl Available production capacity;(el The effect of advertising on sales volume;(f} National and international economic conditions.

g0 Chagter 15

cl5-3

(r) Division and plant personnel biases that may be inctuded in the submission

of budget estimates include the tollowing:(al Budget sales estimates probabfV w9.9lO, tend to be lower than actually

expected because of ths high volatility in product demand and the cur-

rentreward/penaltysystemformissingthebudget.(bl Budget cost'estimates n itt u" higher [han actually expected in order to

protect the divisions against thJ effects of down'side risk of business

stumps and the possibility ol increased higher costs' The reward/penal-

ty system encourages this action.(c) Plant and division management can incorporate slack and padding into

the budget without the litetitrooo that it will bE temoved, because c9r-porate ieadquarters does not appear to get actively involved in the

actual budget PreParation.l2l Sources of information that corporate management can use to monitor divi-

sional and plant budget estimates include:(a) Regional and naiional leading economic indicators and trends in con-

sumer preference and demand;(bl Industry and trade association sales proiections and performance data;

i"i prior year performance by reporting units as measured by their finan-

cial, production, and sales rePorts;(d) Performance of similar divisions and plants'

(31 Services that could be offered by corporate management in the develop'ment of budget estimates are as follows:(a) providir ig economic forecasts with regard to expected inf lat ionary

trends and overall business cycles;(b) providing national and regional industry sales forecasts for products as

developed by corporate rianagement or obtained by management from

other sources;(c) Sponsoring training pnograms for ptant and divisional personnel on bud'

geting techniques;(d) lnforming divisions of overall corporate goals in terms of sales, market

share, and profit.(4) Factors that corporate management should consider in deciding whether or

not it should become more involved in the budget pnocess include consider'ation of costs and benefits and the resulting behavioral effects.(a) Costs to be evaluated include:

(f ) tncreased costs at the corporate level, because mone time and per-haps additionat staff will be required.(2) possible tower profits, due to an unfavorable change in division andplant management attitudes and motivation'

ffi1Chaptsr 15

Cl5-3 (poncluded)

(bl Benefits to be considered inctude possibte profit improvement from:

(il More accurate budget estimates that might reduce lost sales and/or

reduce costs incurred;l2l More effective management because of more realistic budgets;

igi lmproved coordinatlon and control ol the budget pnocess'

(cl bin"rioral variables to be considered Include:(f l Effect on goal congruence;-izi Effect on lhe communication channels between corporate manage-

ment and divisional management;(31 EfeJ of restricting authority over the budget process at the divi-

sional level;iossible negative effect on motivation and morale, due to loss of

authority and autonom$Effect oh pertormance due to a potential reduction or increase in

bonuses.

(4)

(sl

Chapter 15

cl5-4

Schaffer Company appears to havc a woll'doveloped budgetary 3ystom'

Budgetg for each of tlre important areas requiring attention'-€ales, production'

inventory levels, olpense", Jii capltal invesiments-are Included In thc

pnocoss. Insufliclbnt detailg are frovided to properly evaluate the constntction

and uso ol the UuJg"t" lor ssleq capltal lnvegtmentr and prcduction and Inven-

tory levels. Thug, t{re analyslr li this caso must focus on the arponse side of

the budgeting Pnoeac8.Although an elaborate budget pmcosr odsts' analysia- of the elponse proca-

dures raveals a number of gtroricJrJng" for ptanning and contrcl purpose3: Tho

basic Input to the oxpsnso nuOgoi fotift" comlng yoar i9 the first slr months ot

the current yearb actuat pedofrance' tfic oxponso budget (modified to rsflect

unconttollable eventsl, and the corporato olponse rcduction porcontage' The

next erpanse budget ii basically tait yeart actual costs reducod by the com-

puted orpense percentage.This approach does not capture the full potential of the budget lor planning

purpo"."l--niln shoutd Ue torward-looklng. Thc Schaffer budget ls based pri-

marily on past r""rft" and doeg not tpcognizs any planned changes in operating

activi$es, The acrcss-the-board corporata olponso reduction target does not

consider the diffenencss among ptantg in opportunities for cost improvemonF'

The review ol division r"n"g"iJni t"V permit the lrstrong' managers to build

slack into the budget And tho lacts Ao not make ctear whether the proposed

budget is based upon the currsnt yearb sales volume or ttre planned volume lor

the budget year. Witnout such an idiustment, an additional weakness exists in

the procedurc.The process atso falls short for contrcl purpose":-Tl" maior shortcoming is

i ts fai lure to Incorporate changes in operat ions that occur subsequent to

August. Comparisons of perforriancos that inctude these late changes' with

budgets that do not, will not provide usEful information for control' The inclu--

sion of allocat"O "orporatton and division costs in plant budgets would t-afo

the erpense budgets less ettecUre for control purposel-Pe9.ausa they contain

irrelevant data iJr ptant-level cost control' The possibility that some division

managens may be iUte to Introduce slack into their budgets also reduces the

effectiveness for cost control.The budget process appeaF to omit the plant managels trom active partici-

pation in budget preparation "nC revision. Their participationvould improve tho

cost control and'ptanning benefitg of the budget pnoce:s'--The use of acnoss-the-board oxpensc cuts and Inclusion of allocatld costs in tho budgets u19d-f9rperformanco moasurpment lr further avidence that tha connpanlf has 'failed toconsider the effect of lts system on management employees.

With its budgetary syst-em, the company tries to plan and control its opera-tions. To this end, tne company ls be*er off for having developed its_ _tJt"r'However, tuttft"r benefits coulibe gained by eliminating the weaknesses in itsprocedures.

g3Ct;gtpter 15

c15-5

(rl

(21

Tho manstaeturing managert vievrg can bo ssparatod into two argu-monts-thc ugc oi ttre Eamc lmprovement tsrgetr lor all plants sndlnconsistent appltcation of target ravisions. In both casesr the manufac-turlng managefe argumontg 8rc valid.

ihc manufaciuring manager claims that the use ol the aamolmprovement targets'tor att plants fails to racognize the different abllitiesoi-pf"nt" to achiive targeta. His,criUcisrn ig valid because plants do haveditierent opporhrnlues ior lmprcvemenl and thls should be recognized in"gtaUtfnind mprovement tailetr. Wrilo hlr arguments- ma-y be valid to

aupport trir vie* thet older plantr havo lesc opportunity for impmYement'tn6re are Insufficlont dst8 presented to vorify his claim.

The manufaclgring maneger obiects to the nowor plants' obtainingrevised targets and th6n being able to perform better than the ruvisedtargel ThJ modification of targets in light- of new information is an

apiropriate budgefrng technique. Newer plants may need such revisions

because their lnixpeience makes it morc difiicutt to get parameters and

crercise contrpl. ilo*erer, the manufacturing managerb alSumant is

valld becauge adlustmentr iravc not been avallable to ell plants' and' tur-

thermorc, Ute "Oiu*rn"nts granted to new plants appear to make lt easi-

r lorthem to achleve target*The rssultng treatmint in establishing end revising targets' when

coupled with e pertotmanco sppnrisal and rcrvard system' does sppear

to discriminate in fayor of the newsr plants. This would apparently lead

to lower bonuses, appraisats, and morale among management of theolder plants.Both old and new plants have the capability of concealing slack in theirbudgets. The otderptants cannot introduce budgetary slack t*rrough theircost estimates because their costs havo ostablishod a pattern over'theyoars. HoweYer, the ptant managoment knows thoso aneas of operationswtrere changer and'improvements can bs initiated. These operatlng

changes c8n be Initiated after tho budget io adopted'The newer plants can incorporato budgetary slack in other ways'

Their coSt estimates ang mgno uncertain because the plants an6 newar'

The plant operafions havo not stabilized, so ptant management may be

able to intlate costg slightly above what can be realistically erpected ofthom. There may be more o-pportunities for improved operations that maynot be recogniz6d at the ti;; the budget is adopted. In addition, there is

aomo lag ln lncorporat ing Into the budget the cost savings of thoIncreaseJ erperience of tho workerg and the efficiency in functioning ofthe equipmsnt and machinerF

g1 Chlptt 15

cl5-6

(f l The budget practlcg? d?:c4bed ln thc cas. err not llkely to prcduca eftec'r-'

tfuo budget?ontrol In thc long runr'bccsusc rcveral weaknesscr can bc

ldentified:(al There 8ppoars to be no partlclpaflon of plant poFonnol In thc budget

develoPment.Ol Cii"n ttrit ttrere have been flvc manage6 In lour yoarE' thc manags'

havo had nobpportunity to assess whether thc budget lr rcalistic'(cl. lt app""rr ihst adlugtmentr to tho budget, oubsequent to ltr adoption'

are not permitted even In tho tlght of newlnformatlon.(dl The budget la being uoed to pressuts Fc plant menegoa

(21 ile lmmedlite effect wltl Ue a tnrstrated manager, who wlll not meet thc

budget and who will bc reptaced a! 8 noault of belng unwllllng to cacrilfccthe luture for the present, or s frustratsd managorr who meets the budgetby making decisions that raerlflco thc futurc for thc preaent. ln elthercasor Drake Inc. ls unfavorably affected.

Ttre long-term eflect wllt be to rcducc thc management affectivenes! of

Drake Inc. imployeeg. The arbltrary method of budget developmelt' lack ofpartlcipaUon, in,i ttrc usc ol the birdget as t pnossurc devlca wlll result In

loss of talenied managors, development of nonproduetlve methods by man'

agors to nbeat' ttre Uudge! decisions taken to meet the budget but wttich

arc detrimental to the company in the long nrn, and low moralc and motiva-tion.

ll the present methods of budget administratlon continue' Davld Green

may adopi nonptoductlve methods and becomo an Ineflectivo managsr.However, it tre is talented and conUnuas to raise such lssues as the poor

condition of thc plant and hls short tenuto, lt lg likely ho will rssign or be

fired.

r t ' -

Ol&1. A capibl olgcndituro b an upcrditure hlrtd'od to bcnelil futun pcrio6. ll ia nornally asro-cblrd wilh thr acquiritbn or imprwemrnl ofplant asrcte. Thr rral dislinclist betweln acopital and rcvenul cxpendilure is not lheimmediato charging of the expendilurc toilcotnc, as gppood to ita gradual atrprtizatim,but thr bngth cil limr required lor ils recoveryin castr. Bccovericr ol rvenur expenditurel,rtrch ee product c6ll, aro expected to lakoplacr in a matlor ol weeks or, at the mosl,monthr. Thc tinancial rccovery of capitale:gendilures b measured h lerms of years.

O1&2. Purpoces cil e reoearch and devebpmonl PteItarn are:(a) A planned gearch lor new knowlodgc

pertaining to the industry withoul reler'ence lo a specific applicatict.

(b) Crealion of a new producl or improve'ment of an exislhg ptoduct.

(c) lrwcnlkxr cf a new or impoved procostor machhery lo mEke a fhishe'd produciorgnponenl

Bcs,rsrg fc a research and devclopmont Pro-grarn arg:(a) To protcct thc cabc dolbr, that ic, to

meet csnpotitbn. lmproving lhe qualityof pedonnancr cl produds or achievingcod savhgr in eilher openting or capilalerpenditurer falb hlo this categpry.

(b) To do research to promole new salegdollars, eiiher by enterhg a new marketor by aignili:anlly expanding an existingmsrket.

(c) To invesligate problems with respecl loenvironmental protrtbn, saletv"-rvorkingcordilirns, elc.

Q1S3. Budgetary prccecbres for research and devehopment expendituro are designed to:(a) lorce management to lh ink aboul

phnncd elgendilures;(b) coordinate rosearch and developmenl

plans with thr inmediste ard lang-rangepbns of the conpany

(c) lorcc lhs research and developmenlstaf l to considcr major nonl inancia laspects cil lhc prograrn, such as person-nel, equipmcnl. and facil i l ies require-rnenb.

Q1S4, A cash budgct involveo detailed estimates ofanticipaled cash rcceipls and dicbursemenlrfor a rpccified perird cil time. lt Lr designed toassbl monagemenl h coordinaling cssh tlowlrcrn operaticr3 an a basis lor financial plansand conlrol. The cash budget provides a sys-

CHAPTEB 16

DtscussloN QuEsTloNstemalic approach lo lhe synchronization olcaglr regorlrce3 with needs. n a$bt! mansge-rnent h rnakhg hlelligenl dccbionc corccrningcapilal expcnditures, dividend polbies, hvegl-ment3, and other financial matler3, and oftenexerls a caulionary influencc on any ol lheabovc phns. Porirdic roporb wnparhg aciualwith planned receipls and disbursemenl! per-mil effeciivc ard cqrtinuous csrtrol ol cash bysignalhg signili:ant deviations fronr the firan-cial planr for |he perird.

O1S5. (a) Nqrmanulasluring busiresses musl planla the tulure jusl as carelully as rrra lu-faclurhg cqtcerns. Seasonal pattemr inngyonuqr and expenditur€s must be po-v ided for , and requi rcd rquipmcntreplacement and expansions musl bebudgeled.

(b) Not-for-profit organizations generallyoperale on relatively fired incomes lhalare received at ono time. Such recoiplpatlernr aro common for organi:ationsthat rely sr tax dollars lor support. Thesefunds must be allcaled throughout thcyear in order to mainlain operalions.Careful budgel plans are a necessity forsuch albcalbns.

QlS'6. PPBS gtEnds for Planning, Programming,Eudgeting Syslem, and is an analytical loolfocueed on lhe outPul ot final results ralherthan input or inilial dolbrs expended. The oul'put is directly relatable lo planned goals orobjectives.

O1&7. Zerobase budgeting [ZBB) is a planning andbudgeting lool using cost.benefil analysis ofprojects snd functbng to imprwc an orgraniza'l ion's regoutce allocation. Budgel requeclsconsist of declsbn packages lhal are analy:ed,evalualed, and ranked in a priority order basedon cost-benelil analysis. lvlanagernenl can thenevaluate pqssble astivitier for the corning peri'od, selecting those that will best achieve orga'nizalioal grels.

Traditional budgeling tends lo concontraloon the differential change fmm the gdot yean,assumhg hat existhg astivitiec arc essenlial,must be cmtinued, are currently performed ina et-officient and optimum tr16tr1er. and willbe cost-effectivo h the canhg yest Cost! arcdevebped monr on a line-ilem tather lhan atractivity basis. ZBB orgranizer all budget cootrh the lorm of activilies ancl/or operaliau (deci''sion packages) and evalualec tho effeclivc'ness of each decision package as if it were anew aclivity.

85

ffi

I

cl16-8. (!) Zcro'btsc budgcting tcquirc! mlnlgcrgtb justity thclr Lntirc budgat rcQuast' lt

Plates -thc

burdan d Progl on thcmantgcr lo i|J3tify why any.moncy tt tllchould bc budgctc'd' ll docs thb bYsttrting wilh thc essumplion lhet zcrowill bc rpcnl on arch tctivity' to thcbudgating plocctr bcainr with r brrc ofzafo.

(b) Thc two kinds of tllcrnrlivca contidcrcd' for cach rcrNiry erc (1) diflcronl wrp oilpcrforming thc ectivity end (2) diflcrcntlcvcls d cftort In pcrlcming thc lciivity.

(c) A dccirion prckegc include en enrlyrisd an sciivitYt cat rnd Purpotc,sltcmativa courlcl of rclion' mcltura3ol pcrlormencc d thc rctivitY'consaquoncct of not Pcrfaming Urcactivity, and thc tctivity'3 bcncfitr.

(d) A packegc idcntifico end dcscribsr onctctivity in ruffrcicnl dcteil eo thtt it crnbc cvaluatcd rnd compercd with olhcracllviticc.

(c) Succesr in thc imPlemcntation of zcrobasc budgcting rcquirer thc following:1. Unkagc d :aro-balc budgcting

wilh short-.snd long-rangc planning2- Susteincd 3upport end commitmcnl

from axocutivc mlnlgomcnl3. Innovelion bY mtnsgcn in

dcvcloPing dccislon Prclcrgcl4. Acccpttncc ol zcro'besa budgcting

by Pcnont who murt Pcrform thcbudgcting work

O1e9. Prorprtivr hformrtbn lhouH br prwitod hoxlornrl f inencial ltr lom.nlr whrn i l wil lenham thr rli:rbility cil tho ucor'r pndi:ticnr.

016-10. PERT b prttbulatty rpProprhto u e rchlduFhg and ccntotlhg trd'rniquo fot Ptoioctl sl'rirling of e lergl numbor of trskr, roorr olwhidt cannol bl strytrd unlil otrrn rt. corY}'

Plclr, and lsno of rttrbh can br undrriakoncdrcurtontly.

Conceptually. lhr rllrrrncl ir to e nrtrrprlof intordependcnt ectivities wtrijr. rr I group'roquiro cocli.tabb tlm to ccrnpbto. Thrn busually subctsntbl srt.up linr (and cel) a$o-ciated with enatyzing, defhhg, and onln8lhgc6ch discrot. prcied sstivity; thur, lhl bonefiiis h proicctl rcquirhg a cstsUerablo sttpunlol limo and consbth! of r reblivcly ccnplernetrrorlc

PEBT albw: thr ucrr to uPdal. erd rovisrrchrdubd activilis rnd thoroby drtrmilr thrrilrts ol changor st tho worall pojrct. lt bPattbubrty apprgrbte whon thl timing cl irdi'vdual aciivitbr and thr Proi.ct cotplolict dalearc criibal lo lr,rccatt.

016-1 1. Slack is c6npd.'d by rubtracting thr rarlicsloxpocled timo lrsn thc latctt allowablo limo.

Chaptdr t6

Th. .rtlbtl ap.cl.d linr L th. .arl'Ltt titnlhrl rn rctivity cln br orprclrd lo ttrrt.b.ctutt cl'ltn roldbnrhip to pondng rtivitior.Thr btort ellrrrrbb tino b tho blst llna thd

9rr ldh;ily mey brgin rtd nca doby catpblbn

of tho Poioa. Sbck ir drlorminrbb onty in

rrbtbn !o an ontirr path th ngh thr noilorlL

Ol&12. PEBT/iort ir rmtly rtr .xl'nlion of PERT'

Wih linoqtins evailabb, il sootnt sdvttsbb

to .ltign cat to llnr end eclivilior, thorobyproviling load fiu rcbl pbnnhg rd cc'rttol by

I rnctistsl rcPonribilitY.Ot&t3. CanrPulr lrpport olfon dbtirrl advanlagor lo

PEFIT urn. PEF|T'tr e rnethrnltrtbalty'orionl'ed itdrniqur rnd is thlr.ld. U.rlV ruilod to

thr high'rpo.d t.tpont. of compulrn for

drriving lhr crit ical path' l lack l imrr, end

elr, elrd tor storhg erd rrporting tttultt !o

tnanagom.nL Flovisbnr to all sch'dulo olo'mtnlt' whothor during thr initiel retirnalingphar or durirg tho seiiv. Ptoiccl Phar' canbr updatod and thr rlvircd rcluhs PrqnPtlyreporlrd.

Cornputrr'ruPPorf b hdpful in dosling withlargr, canplox nrtworkt cil intrrdepondenciorand whon proirct conlrol roguirol t imrlyprogt.3r rrporting againrt th. uPdat.d Platl'Most program ptcktgrt oflrr e varirly ofrrporling frelunl and tormrl!. includinggtsphic notwork dirphy !t w.ll er prinlrd

r.Porlt el verioul summrty lovrlr. Curronlrrpodhg prwidrl inlonrulbn !o Ptoj.cl tnsn'

agon, rnabling qubk t.|ctigr to dovietiqts'

Cl'ppter 16

Q1&14. Tho lrcditioal budget focurer on qrc rel cl'aseunptirtr. Thc probabilbtic budgel povbes

for tvaluating rlvoral gets of acsumplions,ircludhg the prcbability od each and a ccrnPc'ilc oxpected value, range, ard standard devrs'

tiqr lor eaci budget elemenL

g7

w

EXERCISES

E16-1

Beginning cash balanceBudgeted cash recaipts:

Gollect accounts rtceivable:November cradlt sales:

(S60TOOO r 1 Oohl ..o.'.....,.........'..tDecember credit sales:

GiTO,OOO r OO96) ...GlTO,ooo x 1o%l

January credlt sales:GGGGtsO,ooo r 25%lGlso'ooo r 6O%l(S5O,OOO x lOTo| ....

February credit sales:(S6Ot OO0 r 25%l .........o..............($60rOOO r gO%l .........D.'.r'..r..o...

March credlt sales:(llTOrOOO r 25ohl .,..r......r.,...,..r...

Total cash receipts....................r.t.r........Cash available during month..............,.........Budgeted cash disbursements:

Pay accounts payable:December purchases:

S!2OTOOO r S0ohl ........................January purchases:

Stf 5'OOO t2Oc/o1 ....Gll5rOO0 r 8O%1,...........,.....,.....

February purchases:G$E2S,OOO r2Oohl ...

Chagter 16

January @s March

$ o,ooo s2o,5OO 326,500

$ 6,000

42,OOO

l2,5OO

$ 7,ooo

3OrOO0$ 5,000

f 5,ooo36,OOO

17,50O

$srilooo $sB"soo$72,5OO s85,OoO

$6O,5oO$86,5OO

$16,OOO

3rOOO$l2,ooo

5,O0O$2o,ooo

4,OOO23,OOO

6,OOO26,OOO

$46,000 $4g,ooo$2O,5OO $26,5OO

21,0OO6,OOO

22,OOOTrOOO

s79,OO0$ 6,000

ChaPler 16

E16-2 Finlshed Goodg

g9

April May June

UnitS reqUirad tO meet SaleS bUd9et..........-. I'OOO IOTOOO l2rOOO- Add desired ending inventory l2ooh ot

fotlowing monthb sales|.....o..r...o...o...... _4tOO€ 2r4OO 2r2OO

- Total units required.....i,..r......r.............r... l lpOO I2AOO l{/rOOLess estimated beginning Inventory

l2}oh Of CUrrent mOnthb 8a1e31............. 1r8O9 2rOOO 2r4OO

Planngd productlolt'........... 9,2OO lOr4OO l1,8OO

MaterialgAprfl May June

Units reguired to meet planned pmduction(planned productioll r 3|....-................. 27rgOO 31r2OO 35r4OO

u Add desired ending inventory pO% of follow-ing month's production requirements) 12r48O 14'160

Total matgrials requ|red.....,......,......o..r.... 4O'O8O {51360- Less estimated beginning Inventory (4ooh ot

current monthb requiremoJltsl..........-.. 11rO4O 12r48O

Planngd purchases...,........r,........o..... -2grO4A -92r88O

Gash disbursements during May for payment of accounts payable for materialpurchases:

113 r 29 ,040 r $2O x .98 = $189 '728a3 r 32,880 r $2O x.98 = 4291632

$619,369

CGA-g3nada (adapted). Reprint with permission'

3 n l

Et6-3 Par produetion budgets

Chagter 16

June JulyUnlts regulred to meet sales budget............o....... 5Or0OO 3OrO00Add desired endlng inventot"lf ......... 3'OOO 3,OOO

Total units req 53'OOO 33'OOOLass beglnnlng Inventory S'OOO 3,OOO

3O,OOO \

June JulL

48'OOO r 3 ......... 144,OOO3O,OOO r 3 9OTOOO ,

Add dgsired endlng inventot! .....,..........,,..........r. l4'OOO I I,OOO158ÔOO f Ol "OOO

Lass beginning Invento1yo.................r......r..o.......r 2OTOOO t4'OOO ,

Unlts to bg punchasod..............................r...o......r 138rOOO 87,OOO

Cash disbursements In July for purchasss of Tee:

138,OOO r $5 r 113 r .98= $ZZ5,4OO87,0OO r 35 r 213 x .98= 284r2OO

$5O9,8OO

GGA-Canada (adapted!. Reprint with permission.

Planngd prcductf oll ................'o..

Tee purchases budgets

Units required for producUon:

48,OOO

CMptcr 16

E16-4(rl CROCKETT COMPAT$Y

Gash BudgetFor July

Cash balance, July ICash receipts:

June salgs Sl3OrO0O r 4S%1.....o...............o.r........-.......July sales (S4otOoo r 5O%1,o...r............o..r..........o.........

Cash aYailable r..r........................................r.r...r... 'r.........Cash dlsbursements:

Jung purchasas ($r orooo I 75%1.......'..r...........'........,July purchasgs ($l 5rooo r 25o/o1...,r,o.r.............-..........Other marketing and administrative expeflsoS............Incomg t3Xt....r.................ro.....r................................o...Div idgnds. . . . . . r . . . . . r . . . . . . . . . . . .o . . . . . r . . .o . . ' . . . . . . . . ' . . .o . r . ' . . r . ' . r . . . . r

Gash balance, July 3t o..r..o........................o.........r.o...r...r.

tCalculation of June income tar:S a l e s . . . . . . a a . . . a . a . a . t . . . . . . . . r . a . . . . . . . t . r t a a r . r . . . . . t . r . . . . o . a a . . . a r a . . r r . a r r . . . .

Cost of goods so1d.. . . . . . . .o. . . r . , . ! .o. . , . , . . . . . . . . . . . . . , . . . . r . . . . r . . . r . . . . r

Gross proti t t . . . . . . . . .rr i .rr . . . . ' . . . . . .o.r. . . . . . .r . . . .r .rr. . .r . . . . . . . . . . .r . . . . . .

Commercial erpenses:

$14,4OO20,OOO

39t

s 5,OoO

34,4OO

$39,4OO

I 7,5OO31750

lO,OOO2 r O O O *

1 5 . O O O

DepreCiatiofl ....................r.............,..........Other marketlng and administrative.........

38.250$ 1 . 1 5 0

$:o,oool2,ooo

$l8,ooo

13 .000

sl,gag$.2,99q

arrangements should

$4,OOO9.OOO

Taxablg income................r......... '.r'...r.r...........r....!,...r.....

I ncom g tar ($4 r gg O r 4Oo/o1............................

(21 Since the desired minimum cash batance ls $5,OOo,be made to borrow $3,850 ($S,OOO - $i,1SO),

CGA-g3nada (adaptedl. Reprint with permission,

392

E16-5 I

(f ) PERT netutork:

Chapter 16

l2l Alternate paths and times and the critical path and the erpected projecttime:

1-2€-6-7 = 11 weekg r- critical pathl-2-3-5-8-7 = lO weeks1-2€-4-5-8-7 = lOweeks

The two activities In question ano 3-4 and +5. lf these activities wenoeliminated, thelt would be no effect on the critical path or the expectedcompletion time because 3-4 and 4-5 are not on the critical path.

(3)

Clppter l8

E{ 6-6

(r l Astivlty (to

393

hl396

t 8I56

I2t2434

_bl2 + 1O.673 . 8 3 + 4 + 55 , 8 3 + 6 + 5

= Total -F

66o60o6

Total t,

12.6712.8316.83 + critical path

+ tm(41 +2(416(414(41

1r(416(414(415(41

2.OO5.833.83

10.676.OO{.oo5.OO

t8

1-21-31-42-63-54-55-O

Path

l 23523u302430

l2l1-2-6t-4-5-61€-5-6

CGA-63nada (adapted|. Reprint with permission,

Chwtert6

E16-7

t f ) 6 + 1 1 + 5 + 4 + 3 = 2 9l . + 2 - - 5 - . O - r - f 7 - d 9

6 + r l + S + i + 2 = 2 5I € 2 - - { 5 - r 0 I - r . . 9

6 + I + 9 + 4 + 3 =3Ocr i t i ca lpa th1 . . . . r 2 + 4 . - d O - - . 7 ' d g :

O + g + g + | + 2 = 2 6I . . . + 2 . d 4 6 8 . . - - . I

6 + g + 1 3 + 2 = 2 9I -.+ 2 --.) 4 ..-.+ 8 g

6 + O + 3 + I + 4 + 3 = 2 51 . + 2 - 3 . + 4 6 . - . + 7 - 4 9

I + O + 3 + I + I + 2 = 2 1I - 2 -€ 3 .r- 4 .r..4 0 --+ I ---| I

6 + O + 3 + i 3 + 2 = 2 4l - + 2 - . + 3 - + 4 - { 8 9

i O + 3 + 9 + 4 + 3 = 2 9' l - + 3 - - + 4 - . d 6 . . d 7 . + 9

i O + 3 + 9 + 1 + 2 = 2 51 - + 3 - - r 4 O - - 8 - 9

i O + 3 + 1 3 + 2 = 2 91 - . 3 - . 4 - + 8 - - . . + 9

',21 Earliest Erpected Latest Allonrable SlackEvent Time fime Time

CGA-Ganada (adapted!. Reprint with permission.

o o6 0t l 11 4 01 8 I2 3 02 7 02 A 13 0 0

1 02 03 t o4 1 45 1 76 2 37 2 78 2 79 3 0

Cluptcr 16

E 1 6 - 8 '

(41 CflUCal pathtl t l |O"... . . . . . . . . .r ' . . . . . . . . . . . . . . . . . . . ' . . . . . . .r.r. . . . . , . . . .Less time rsquired after event 2:

Activlty 2.6Agtivity tl-7 ..............

395

(11

(21

to = $o + 4t,,, + ty' + 6 = (1 + (4 r 2l + 9l 'F 6'= 3days

(31Path Time Reguired

O - 1 - 2 - e - - T = 4 + 3 + 6 + 5 = l S d a y s0-1€-4-6-7 = 4 +4 + 3 + 3 + 5 = 19 daYsO - l - 3 - 4 - 7 = 4 + 4 + 3 + O = l T d a Y s0 - 1 € - 5 - 7 = 4 + 4 + E + 6 = 2 O d a y s

The critlcal path is O-1-3-5-7, because lt requires the greatest total time(2O days|.

6 days5 days

2O days

1l dayrs

9 daysMarimum time lO gVent 2 ......................"....'..............Estimated time to event 2:

AgtiVity O-l .t.tr...r.....r...D.............r.........................r..Astivity l-2

. a a . a a r a a a a a t a a a a a a l a a a t

a o a a a a a a a a a a a a a a a a a l a a a a a a a l

4 days3 days 7 daYs

2 daYs:::Sfack t img at evsnt 2.., . .o... . . . . . .o... . . . . . . .r. .r. . . .r. . . . . . ' . . . . . . . . .

I

396

PROBLEMS

P16-l

(11 Budgeted cash disbursements during June:Purchase of materials:

May (1 1r25o1x $2o r 460/;1...,. 'r...."""""" Slo3tsooJung'(l irlgo' r $go r54%l r.........."""""' l3lt544

Marketing' general, and administrative expenses:rufay tSSirSSOa xa6%1,.......t.o.r.......,.......... $23r713June'($a6reOOl x 54%1.............................. 261622

Waggs and salad€S . . . . . . . " t""""" t ' r""" t"""" '

To ta l . t . . . . . . . . . . ' . . . . . . . . ! . . r " " " " " " " ' t " o " " ' t " " " t " " '

$ g,goo38,000

$41,30O3,40O

Budgeted cash collections during May:March sales ($354,OOO x 9%).,t...,.............-,..-...Aprif sales ($gogroo o r 97 oh r 607o)......................- ' ........ ' .-.April sales ($SoS,OoO | 25ohl . '-....-....-.--...

Total

1 May 3l ending inventory (11,4O0 x 130%) ..,..... l4r82O unitsMai pfOdUCtiOn .r.. . . .r. . . . . . . . . . . . . . . . .r.r. . . . . . .r. . . . . .r. . . . . . I l t9OO

Matgf ia lSnggdgdinMay, . . . . . ro . . . . . . . . . , . . . . . . . . r . . . . . . . . 16r??oUni tS

Apri l 3O ending inventory ($309,4OO + $2O1.... . . l5'470

May pUrchaSgS ..r......r....r............t.........r..r......... :!j!r25O UnitS

2June 3O ending inventory (12IOOO x 13O7o)... . . . ' 151600 units

JUng pfOdUCtiOft.. . . . . . . . . . . . . . . . . .r. . . . . . . . . . . . . .r. . . .o... . .o.. I lr4OO

Matgr ia lsnggdedinJung. . . . ' . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 'OOO uni ts

May3l ending inventoryo.... . . . . . . . . . . . . . . . . .r. .r. . . . . . . . . 14r82O

June purchases.........,......,.......,.............-- !-2J!9 units

3 (S357,OOO May sales x t5%) - S2,OOO depreciation = Sst'55O

1 a - ^ - ^ ^- (S342'OOO June sales x 15%l - $2,OOO depreciation = $49'3OO

5Accrugd payroll on Jung 'l .,.......'...Payroll earned during June.......r...r

Accrued payrol l on June 3O... . . . . . . . ,Cash paid out for payro11................ 937,90O

Chaptar 16

$235,O44

5O,335

37r9OO 5

$323,279

$ 31 ,860211,266

90,75O

99s9dz9

(21

397

(3)

Clvpter 16

Pl6-1 (Concluded)

July purchases

Budgeted units ol inventory to be purchtg-d during July- 3ilv 3l ending invento ry l12,2ob x f goohl "" 15'860 units

JUii' ptOOUCtiOn ..,..............r....'.............r....'... | 2tOOO

MatgfialSnggdgdinJUly... . . . . . . . . . . . . . . . .o..t . . . ' .o.. 2?rS60UnitS

June 30 ending inventory (12'OOO I 13O7o!"' l5'600

.......... 12e6O units

. t

398

P16-2

Beglnnlng cash balancc

Cash recclPtr durlng monthlCottecttonr of accounts recelvable:

February sales:($2rOOOrOO O I 4O'/c1""""'o"""t""t"""""""'

March aaler:(Sl 18OO'O0O r 60olo)..'.""""""""!""""""""Glf rSOOrOO O I 4Oohl.-....................ro......""""'ts"'d

Aprll rales:(S2,200,O00 r E0%)..-'.'..-...-...r..

tS212oo'ooo r 40%)-....,..o..-.o...--....-....................dMaY sales:

(32,500,000 x E0%)................-.'- ......o.x.

Total cash collecUons

Cash available tor use during

Cash disbursements during month:Accountc payable lor Purchascs:

FebruarY Purchasec:(S2,OOOpOO February sales I SOoh r 4O'/o t 20ohl(S1,8OO'OO0 March sales r SOch r 600/o | 2Oo/ol ...-

March purchases:(S1'8OO'0OO March sale3 r SOt/t r 4Ot/o I 8Oo/.) ...-(S2,200,000 April sales r 30o/o t 60'/. t 8O%)......-(St,8OO,OOO Mareh eales r SOoh r 4Oo/o | 2O'/cl .....(S2,200'OOO Aprll sales r 50% x 600/o | 2Oo/o1........

April purchases:{32,2OO'OO0 Aprit sales I 5O'h t 4O1/o r 8O%).....-'(S2,5OO,OOO May eales r 5Oo/t t 8O'/o t 80%)......-.(92'2OO,OOO Aprit galG3 r 5Oo/c t 4O'h z 2Ot/ol.*...-(S2,5OO'OO0 May sales r 5O'h r 6o'h t 2O'/c1...-...,.

May purchages:(S2,5OO,OO0 itliy salcg z SOth x 4O'h r 80t41.........(S2'8OO'OOO Junc csler r SO'h r E0% x 8O%)"---.

Wages l2Oo/o ol current sales):April (92'ZOO'O00 t 2Oo/o1...... -.-..-....o.........May (S2'5OO'000 x2Oo/cl-*.. ...................,.Jun e (32'800'000 t 20041..........

General and administrative expenses:Saf arles 11 11 2 r 3480,000).PromoUon 11 112 x SS60,000).Property tar6 1114 r S24o,000)f n guranca 11 I 1 2 t 936o,oO0)UtiliUea (1 I 1 2 z S30o,00O)

lncomc tarer (St,o2Orooo lncomc t 4ooh tar rate) .-..-

Total cash disbureements............

Cash balance beforc borrowing or lnvestment.-...............Cash to be borrowed (or invested)...-.-.-...-

End ing cash balance'............

Aprilt loo,ooo

3 SoO,OOO

1,080,OOO

May3 loo,ooo

t 72O,OOO

l132O,0OO

Chapter 16

June3 lOO,OOO

t 88O,O0O

l ,Soorooo

31,88O,OOO

s1,98O,OOO

i32,o4O,OOO

32r14O,OoO

32,38O,OOO

s2,48O,OOO

3 80,000108,OOO

2g8,OOO528,OOO

44O,OOO

40,00055,OOO

o3O,OOO25,OOO

408,OOO

3 72,oOO132,OOO

352,OOO6O0,OOO

5OO,OOO

40,00055,00o

o3O,OOO25,OOO

o

3 88,OOO150,OOO

400,ooo672,OOO

50o,ooo

40,ooo55,O0O50,ooo30,o0o25,OOO

os2,Oo2,Ooo3 (22,OO0)

122,OOO

3 l OO,OOO

$1,806,OOO s2.07O.OOO

3 334,OOO S 4 'O,OOO(234'0OO) tgro.oool

3 loo,ooo s__1!-qp_q_q

Chaptor 16

Pl6-3TVIAY1I E II/!A1 gP'4"- BIH G COM PA}IY

Ca*r BudgetFor thr Ycan Ending March 31

399

208 20c

Balancc of cash at beglnnln! ..........-.-......Caeh generated from operatlons:

CollecUonc from curtomerg-Schedule A....,..........

Digburgcments:Dlrect materla ls-Sch ed ulc B ...,.,...,.......Dlrect 1abor..........a.-6....F....Varlablc overhead

Total disburrementg 3750,00O

Excess of caeh collectlong over cashdisbursements f rom operationg

Carh avallable lrom opcraUonrCagh recelvcd from llquldaUon of erlsUng

aicountr rcceivablc end Inventorier -.-.Total cash avallablc ....,...........,......,_.....r....Payments to generat credlton

fllguldatlon proceeds)

Balance ol cash at end

3825,OoO

3220,000300,000100,ooo

$1,O65,0oo

3 245,ooo360,00o120,O0Ol3o,00o

3 855,OOO

s 75,OOO

2l0,ooo

s285,OOO

s285,O00

270,OOO2

t ts,ooo

3 75,Ooo

t 75,000

eo,0ootl85,OOO

90,O00

$ 7S,OO91

i Thlg amount could have bcen uaed to ply gcnoral credlton or cerried forward to thc begln.nlng of the next-year.

2 6ooo,ooo r Eoo/c| - sgo,ooo

. :

Pl6-3 (Concluded)

Schedule A--Collections from customets:

S a l o S t t t t t t " t ' t " t t t t " t " t t o " t o " r " o t " " t " t t " t " " t " " " " " '

igginning accounts rgcgivablo """"""""""r"

T O t ! l t t t t t t t t t o ' i t t t t t t " ' o t " t o t t " t l " ' o r r " " " t t " t ' o " " ' o t "

Less ending accounts rccgivabllB """"""""""

ColIections'romcustomen;........................|. ' .

Direct materials requined for production """"'

Requirgd ending inventory o""""""'ot"""""'t"

Tot3 l t t t t t t " " " " t " " r " t " t t " " " " " " " " " " " " " t t t ' l t "

Lgss beginning inventory"'t'Do"""""'t"""""""

PU fC h a S93.. r . . . . . . . . . . . . . . . . . . . . . r . t . . . . . . . .o t " t " t t 'o " t ' r " " '

Beginning accounts payab1e""""""""""""""

T O t a l . . . t t t t t " " " " t " " " " " t " " " " " " t " " " t " " t " " t t t '

Less ending accounts payab|9 ......t.........1....,..

Disbursgmgnts for diract materials """"""""'

3 12,Ooo units | 2112 = 2.AOO; 2'Ooo x S2O p€r unit =. is,ooo units x 2112 = 2-r5oo7 2,5oo x S2o per unit =

208

sgOo,oooo

$9OO,OOO75,0OO

Chapter 16

20csl,08o,ooo

75,OOO

$t,155rOOO9OTOOO

s2oo,ooo4O,OOO3

$240,OOOo

$24O,OOO0

$24o,ooo20,OOO

s220.ooo

$4O,OOOsso,ooo

s 24O,OOO5O,OOO '

S 29o,ooo4O,OOO

$ 25O,OOO2O,OOO

$ eTo,ooo25,OOO

s 245.OOO-

Pl6-4

Production Budget:Required to meet sales fotecast

January ($3601000 sales + 915O per unit}""""""""'Feuruary (Sas6rooo sales + S15o per unit) ""t""""r'March (54-gorooo sales + $150 per unit """o"""""'o'

Desired finished goods ending inventorlr: -((S600,000 A-pril sales * 5f So per r-rnit) a l0ohl'r 1o0)

Total quantity of product to prociuce ""-"""""""""""""

214OO3,0oo3,2OO 8,600

500

9 , 1 0 0

s182,ooo2,OOO

s l B4 ,OOO

Direct Materials Purchases Budget:Materials *quii"J ior proOuttion (9,1Oo units r S2o).. ' ..

Desired materials ending inventotY """""""'

Total di rect materiats pu rchases during first quarter """""""""

s829roo9 $o65poo

Schedute B-Disbursements lor direct materials: - 2oB 20c

Clpptor 16

Pl O?4 (Concluded)

Cash Budget for First Quarter Ending March 31, 2oA:January l, cash balanco .............o..o.........r.'..o...r....Cash receipts:

InYestment by ownerMortgage taken outCoflecUons of sccounts receiyable:

January saleg:(SS8O,OOO r 3Ooh r Seoh r 98%o1.o..,..,..(s360rOOO I 3ooh x 2O%1..,...,.o,.......o...(S360, O0 I 3 O 7of ......o....r,o.,..........r...,...St3 6 O, O 00 I 38 7o) ...,..............oo....o.,.....

February sales:Gt4sOrOOO x 3Ooh x SOoh x g$o/ol,,...,..,rG|45O'OOO x 3Ooh r 20%1,.....r........,ts...(S4 S O, 0 0o x 30 ch1...oo..........r....r.......r...

March sales:

101

os

f 98%1 ...'......

s 5OTOOOt5o,ooo

94167221,6OO

108ro0ot36rgoo

105r84O27',OAO

135,OOO

112189628rgOO

G!48O,OOO x3Ooh xSooh(S480,OOO x3Ochx2O%l

Total cash availabte for use during quarter,r.......D.Cash disbursements:

Accounts payablea a a a a a a t a a a a a a a a a a $184,OOO

265,5OO1361500t5orooo68,8OO36rOOO

IrOOO3O,OOO

l50,ooo

96O,608

$ 960,608

$ (69,18218,4.16.2

$ ts.ooo

Dlrect labor (grlOO r $3O) - $7r5OO1r.,.............Varlablg oyerhgad (grlOO x $l5i .....-.........,.......factory rent (910 r S'OOO capacity x 3) .,.........Sales commlsslons (gr60O unlts x-$g;...........,.,Office rgntals ($t ZrOOo r 3! .,..,...........,.....,.,.,.rfnterest payment ($iSOTOOO x 2oh r 3|.,....,,.....Payment of princlpal on long-term note..........Equipment pu rchasos..........-.

March cash balance before currsnt financing,._...Currgnt financing reguired ..,............r,r..................Desired March 3i cash balance .................r....r.r..r

III

Chapter l6102

Pt6-5

('t l TRIPLE.F HEALTH CLUBBudgeted Statement of Income (Cash Basis)

For the Year Ending October 31r 2OC

(000s omitted)

Cash nevenue!Annual membership fees' $gSS r 1.1 r l.O3

Lgsson and cfass fggs, $234 r $234 '......r............o..o.............'.......-s180

$,402.2

304.2

2.792'0Miscellaneous, ;i"

I $ 2 a . . . a . . . . . . . . . . . . . . . . a . a a . a . . a a a . t . . a . a a a . . a a . a . . a a r a r a t o ' r " '

TOtal CaSh fgVgnUe.......rr.............rr........rr..........r............o...........

Cash expenses:Managefb Salafy and bgngfitSr $gg X 1.15.. '.......................r...........RegUtaf employeest Wages and benefitS, S19O f 1.15'. ' . ' . ... ' . .........Lesson and class employee wages and benetitsr 3195 x 1.3 x 1.15TOWeIS and SUppligS, $16 f 1.25 ... . . . . , . , . . . . . .r. . . . . . . . . . .r. . . . .Utititigs (heat and lightl , 522 X 1.25...................o.r......'r............i..,..Mortgagg intereSt, $gOO X .09....r. . .o... . . , . . . . . . . . ' r . . . . . . . . ' r . . . . . . . . . . . . . . .r. . . . . .MiSCgllangOUS, $2 I, 1.25 ..................r...r....................r..............r.....

$

s709.1

s 41.4218.5291.5

20.o27.532.4

2.5

30.02.5

15.025.O

Total cash expgnsgs.....rr.................ar........r.........o...........t.....r..t.. 3633.8

Cash income.. . . . . . . . . . . . . . . . . . . . . r . . ' . . . r . . . . . . . . . . . . r . . . . . . . . . .o. . . . . . . . . . . . r . . . . . . . r . . . . . . . . . . . . . . . 3 ?53

Cash payments:Mortgage paymgnt . . . .o. . . . . . . r . r . . . . r . . . . . . . . . . . rAccountS payablg balanCg at 10131 IB ....'......".".......o...............'....Accounts payable on equipment at l0l31lB....Planngd new gquipmgnt purchase.................r.

TOtal CaSh paymgnts..r................r.........................r...............t..to. s 72.sCash surp1us.. . . . . . . . . . . . . . . . . . . . . . . . . . . . .o. . . . . r . . . . . . . r . . . . . . . . . . . . . . . . . . . . . . . . . r . . . . . . . . . . . . r . .o. . $ 2.8

Beginning CaSh ba1anC8.. . . . . . . . . . . . . . . . . . r . . . . . . . . . . ' . . . . . . . . . . . . . . r . . . . . . . . . . . . . . . . . . . . . ' t . . . 8.3

Cash available for working capital and to acquire propetty.......o.......... LlQ-t

(21 Operating problems that Tripte-F Health Club could experience in 2OGinclude:(a) The lessons and ctasses contribution to cash wil l decrease because tho

projected wage increase for lesson and class employees is not made upby the increased volume of lessons and classes,

(bl Operating expenses are increasing faster than nevenues from member-ship fees.

(c) Triple-F seems to have a cash management problem. Although thereappeani to be enough cash generated for the club to meet its obliga-tions, past due amounts occur. Perhaps the cash balance may not belarge enough tor day-to'day operating purposes.

Ctle,pta- 16

pto-s (concrudedf tog

(31 Jane c':'::'*fli^d*Tl#$,fn ttre cannuaf iclubb rrmentpun^has-e:6ffi ;iir"irH:rr:r,if rri:fi }H"Tl"v."qui;_-'-purchascant incll"-:9r"!"ins prope'ty, lil"-g;'i;"otr""Tlilt ln: !":F o"li.5" ,osl,ipuonTil.l""nffi

":*i[**_.':l;;*"ff :"","j1*;i1fu:"P'O.E

(1) Schedufe of b.gdgeted cash n(ooos omitted): - -r" '| eceipts by month for the thtrd guarter of zoA

BillingsReceipts

Actuat/

Itfonth |ut"t"o

Percentages

n'6;.-...... # * Timins slv Auou-sr .jip:frli-::-...- T;SSS- ?:" ffi s ffi August L.d;'

.1.:::........... SrOOd ;: 40J,ne""'...'.1 srooo ;9 # 2oo

{.::"....-;; s,ooo nl i9, "'333rf1JDo...,....... ;r;;; uo 20

i{g i'iii ;s # I,o $;ss

u"ry..-...] :,::g to ,ouurv..-....._ :':99 90 # 45.tuf!"....,...,.. :'::: iJ ;3 2'o2s{u1r.,..."'..... iffi l3 20 t8o

&ff"; :,,1?: d; :3 $ ffSi,T$* :;fri J3 'o eooseptembe, f;::: il ;3

soseptembe, F,:9g eo 23

2'2so

."j:#idTfrilfrfu","'.: *: > ;3srota, ";; ;"J;,f::::::::::.--# S _C-- qF....................91980

@ d

Chaptar 16&1

Pt6-6 (Goncludedl

l2l schedule of budgeted cash dlsbursements by month for the third quarter ol

2OA (OOOs omitted):

Disbursements

July August SePtember

SalarierVariable:

$4,500 t 2Ooh$5,OOO t2Aoh$5,5Oo x 20oh

3 900$l,ooo

$1,1oo

FiredTotal variabl g .o.'o"""""""""

t a a aa aa a t a aaaaa t t t t t "

'

$ 9OOl,5oo

Stroool r5OO

$2r5OO':"

$t, l ool r5OO

$z,6ool rSoo

450

13,67O

$tg,g7o

I l ,9OO

$ 2,O7O

185

S 1,885(3.700)

$J915)

Total salarigs """""""""t'trtPurchasgs of pr€vious month """""""'ln tg l tSt . . . . . . t . " """"" t """" t """ t t to" t""o '

Depreciation (not relevant! ""'o""""""'Total cash disbursgm€llt3 """"""""""

$3,750#

s4,55O

$ 300

s2,4OO' :"

$3,60O::

(31 (ooo omitted|Cash balance-.fuly 1, 20A...,.....Cash receiPts in third quarten

J U l ! t t t t t t t t " " t t ' r " " t " " " t " " t t ' o " t " t t " " " t " " " 'o t t t t '

Augus t t t t t t " " t t t " t " " " t t t ' t " " " " t " " " t t " t " " " " r t t t

SeptembgFt t t " t t t t t t t r t t " t ' t t t r " t " " t ' r " " " t " " " " " t '

Total cash availablg .r.................'.....................,.."Cash disbursemcnts ln third quarten

J U l l t t t t t t t t " " " " " t " " " ' t " t " " t t " " " t " " t " t " " t " " " '

August a a l a a a a a a a a a a a a " " t " ' D t "

$4,5804r43O4,660

$3,8OO3r75O4,55O

Septembol t t t t t t t t t t t " " t t t " t " " t " " " t " t t "o t " " " " t t '

Proiected calrh batance-September 30' 20A"""Minimum end-of'month c:rsh balance noquirod

Gtt ;SSO r IOo/o) """""o"""o""""""'t""""""'Cash available to acquire capital items """""""'Gapital erpenditures planned for October l' 20A

Amount of borrowing necessary on October l' 2oA

Cnaprcr tA

Pr8-7 ,

(1'

46

1

7

I

7

tr + 7 +

Rv + 1 0 +

Ee + T +

- - r _ 4Er + S +

1 0

5

5

t o

= 2 27 -

= 2 07

= 1 77

= 2 0

critical path

(2'l Et Activitiest +-i--2 A s

3 A ' BI 4 eo A ' B

I E c , D , E: I ' C , D , E; 5 l ' o , t

16 3,1' o, t

ii i 3;3;i: : F , C , D , I.t: H, c, I: : H , c , l.,: H, C, I.,: H, G, I: : H , G , I

J : H , G , IJ : H , G , I: : H , G , I. ' r H2 2 H

Cost

: : : : * s 8 o o = $ 1 , 6 0 0: : : : * s 8 o o = $ f , 6 o o: ^ : : : * $ 8oo =$ l ,600

ffi*ff*$,ffiill;;li -:,;;; ==s;,i;lse,ood

--'-vv ;Si;lll

f 8 0 0 + $ ,: : 9 9 . $ B o o = $ t , 6 o o

= $2roooGGA-Canada (adapted). Reprint with permission.

Chapter 1616

Pl6-8

(rl

StartFinish

(21 Path

A-B-E-G-H =A-B-E-F-H =A-B-D-E-G-H =A-B-D-E-F-H =A-C-D-E-G-H =A-C-D-E-F-H =

Time Required

2 + 5 + 3 + 3 =2 + 5 + 4 + 3 =2 + 2 + l + 3 + 3 =2 + 2 + 1 + 4 + 3 =l + 4 + l + 3 + 3 =1 + 4 + 1 + 4 + 3 =

13 weeks14 weeksll weeks12 weeks12 weeks13 weeks

The critical path is A-B-E-F-H, because it is the longest path'

(31 The totat cost of the proiect as planned is:

Activity

A-B ...................tt

A-C. . . . . . ' . . . . . . . . . . . .o .

B_D. . . 4 . . . . . . . t . . . o . . . t a

B-E . . . . . . . . . . . . . . . t . . ' . .C-Dt. . . . . . . . . . . . . . . . . . . .D-E.. . . . . . . . . . . . . . . . .o. .E-F .....................E-G.. . . . . . . . . . . . . r . . r . . .

F-H .....................G-H.. . . . . . . . . r . . . . . . . . . .

Total normal cost

Normal Cost

$ {,ooo800

1,50O5,1OO2,5OO

6001,70olr2oot ,4oo1,3OO

stT,too

B Go

rl,% &xxH

A D E I

F#c

\ .\

Chapter 16 407

P16-8 {Concluded}

(41 Since the critical path requires 14 weeks, at least 2 weeks must be cutfrom the project in order to complete it in l2 weeks. As originallyplanned (determined from requirement (2)), the following three pathsrequire mone than 12 weeks:

Path Time Required

A - B - E - G - H = 2 + 5 + 3 + 3 = 1 3 w e e k sA - B - E - F - H = 2 + 5 + 4 + 3 = 1 4 w e e k sA - C - D - E - F - H = 1 + 4 + 1 + 4 + 3 = l 3 w e e k s

The first place to start reducing time is the critical path, A-B-E-F-H,because the largest amount of time must be cut from this path. tn thisproject' each activity on the critical path can be crashed, so the firstactivity to crash should be the one that has the smallest crash cost perweek. By crashing activitr F-H, which costs S2r8oo, path A-B-E-F-H isshortened by one week to 13 weeks. ln addition, since activity F-H is onpath A-G-D-E-F-H, it is shortened to the required 12 weeks. Now onemore week must be cut lrom activity A-B-E-F-H and from activity A-B-E-G-H to bring each path and the total project down to 12 weeks. Theactivity that costs the least to crash and that is common to both paths isactivity B-E, which witl cost $5,2oo to crash one week. The only otherway to reduce both paths by one week would be to crash one activity oneach path (activity E-G for 9rl,6o0 or G-H for $2,300 on path A-B-E-G-Hand also activity E-F on path A-B-E-F-H for s3,zool, which will result in aminimum additional cost of $6,000. Therefore, the minimum cost toreduce the total proiect timo from 14 weeks to l2 weeks is $g,ooo,resulting from reducing activity B-E and F-H by one week each for costsof $2'8oo and $5,2oo, respectively. Since the minimum additional cost of9lqilg two days off of the total time reguired to complete the project is$8rooo, the minimum total cost of compieting the project in 1?weeks is$25'lo0 ($12''loo normat cost from requirement (3) pius $8,o00 addition-al cost).

IL

Chapter 16

Pl6-9

(ll The normal critlcal Path ls:3 + S + I + I + I = i l w e e k s

A B E H - K LThe normal cost to be incurrad in openlng the stors is the sum of thonorrnal cost of all l4 aetivities-$85'ooo.

(2t The minimum time in wlrich the store could be opened is I weeks at anadditional cost of $l l,5OO, or a total cost ol $96,500 ($85,0OO +$t I '5ool'

PotentialAlternative ErPected Time New

Paths Time Redugtion Time

A-B-E-H-K-L l lweeks 4(A-B'B'El TweeksA-C-F-!-K-L 7A-C-F-.,-K-L 10A.D-G.J.K.L 7

2 FJJ-n '"

2 (D-G, J-R 5

The new critical path becomes A-C'F-.r-K-L.

Reduced Ume pnograms would be initiated on the following activities:

Reduced ReducedActivities Time Cost

A - B l w e e k $ 4 , 5 O OB-E 3 3,500F-J 2 2,OOOJ-K I 1,500

sl l,5oo

The activity D-G reduction ls ercluded because it would not contribute toreducing the total proiect time.

(31 The store should be opened on the normal schedule because the costFllr5OOl erceeds the benefit Gt6,OOo). The reduced pnogram would save3 weeks at a cost of $11r5OO, while the earlier opening can be expectedto yietd an operating income of S2,OOO per week' or a total of $6'O00.

\

409

I

1t-

l\.

I

Ib

ib

l

b

II\,

b

Chapter 16

l "b

, CASES

c16-1

(f ) Network snalysis torces the company to plan ahead and develop adetailed plan for proiect completion, lt presents a visualization of alf indi-vidual tasks and their interrelationships. Network anallrsis proyides ;;;-sgement with timely information lor controlling schedules, shorrs theeffects on tho entira proiec! of changes mado lo individuai activiiies, anoallows for the continual updating of project pnogFess.

DisadYantages of netnrcrk analysis as e means of organizing andcoordinating proiects include the use of probabilistic schedules lh"t ."ybe highly subiective, a bias torvard overly optimistic time estimates oftenbased on management erpectations, and the need for cooperationsmong a large number of units to estabtish consistant priorities. A dis-proportionate amount of management time and effort may be requiredfor planning for the benefit reclived; there may be other alternatives thatcould be mors effective.

(21 Norm Robertson would be concerned with the defay in activity A-Dbecause it would shift the critical path from sta*-B-c-F-l-.J-Finish. shielaNeilPs estimate of the time tor activity A-D (i o to r2 weeks) results instart'A-D-G-J'Finish requiring 23 to is weeks. Furthermore, Neillb com-ment that activity A'D cannot start until after activity-B-E means that B-Ebecomes part of this new. criticat path, making ttre criucal path start-B-E-A-D-Gd-Finish with a time requirernent of Cg to 3o weeks. Thus, thechange in the relationship of ths activities woutd change the critical pathoven moror so that the project will be completed I to io weeks later thanthe originaf estimate.(3) Norm Robertson developei tlre PERT diagram for the vector.12 projectwith inadequate input. Robertson stroutJiave consulted alt tho depart-ments involved in the project to ensure that the expected times requiredto complete the activities wora attainable. Because Neill was not con-sulted, the Ume reguirement for activity.q-D was incorrect, and the rela-tionship between activities A-D and g-E was missing from tho network(41 The behavioral problems that could arise within caltron Inc. as a conse-quence of-the pranning of tho vector.l2 project incrude:(al A lack of commitmentJo the proiec[on the part of the departmentdirestors, particularly Neill, beciuse of their exctusion from theplanning process.

(bl conflict among the department directors that could affect futureworkin g relationships.(c) A tack of goal congiuenco among tho departments involved.

l!

-

Ol7-1. Respcrsbilirty accounting b a program encotn'

paming all operalhg managomcn! f.ot whiclt

ihr accountlrg, oill' or budget dMritrrr pro

vidr lcclrni:al aristanc. h thr form ol daily'

wcckly. or rurthly ontrol t'pottt' Th' obiec'

tivt of rerponrbility accounting ir to prcvilo

managcrnont with I weilul cod csrtrol Ool" To

bo clfrctivr u I control mochaniam, thr

rerpontibility accounting tyd.m rccordr andreportr cootr ircurrod ar a neull of roch ecfivFty to the individual in thr company who irreoPonsbb lor cantrolling ho aclivity.

O17-2. Tho crnpharb of nrpcsbility reunting ia orhtemal coct csrtrol raher ttran on deierminhgptdtrt cod. Thb reguircr a rtritt h cnphasirfrqn delcrminhg tho cost of reoouncot used hmanulacluring e product to dctormining lhoamounl of control indivkjual managen hovcovor cost. Fblponribilily accounling deler-minc thc cst ircuncd by an rlivity or group

ol aslivilier, rathcr than thc cost incurred loproduce a Producil.

O17€. Cartrolbbb c6lt arr thool thal arc lrcunodal thc rerult of. or lor thr bcnefil of' a businssactivity. Presumably, suclr a eocl will ircreasoor decrease as a reaull ol lhe lovel of effriencywith which trc aclivity lhal genenles lhc costis conducted or managed. To bc ctfeclive,reoponsbility reunlhg mud hold e managcrresponsble fa crly tlpse cods thal he or shecan conlrol.

Ol 7-4. Tho organization musl br arrangod so thslthcro aro m ovortapphg lher of mrpcnibility(i.c., no morc than onr indivkJual rhouH bercponcbL tor.adt eslivity). In edditbn, caclthdivi48l h thr organizalirr murl havo a cbarunderstandhg cl hir or hcr rcsponsbilities, andmusl havr rulf icirnt aulhority lo lakc thoactbnr necellary to meel ttroot respctsibili'liec.

017-5. Thr cet of any oxpondilurc clarcifhalion irof t*p ebmenll: thr unit pricr and

thr quantity cl thr itenr ured. Ono irdivirJualmay havo cqrtrcl of pricr wtrile ano0ror hdivU-ua! har control ol quantity. Evon in carorwhoro prico door nol changr, lhc quanlityurcd mey nol bo fully cofrollabb by tho irdi-vUual ufio o\^rrilr.r fho acfivity that srrurnectho ilrn. Thr qrality cl tho itsn nrsy dtrt th.guantity urod and tho quality may br delcr-mined by thr purcfrascr, or tho ctfbiency withwhich tho item ia used may be affeclcd bydecbboa rnsd. at the executivo monagemrttlevcl (e.g., porsannel ctranger and machheryacguisit ionr). Sincr lha accounlanl cannota lwayr dc lcrmino absoluto contro l , costs

CHAPTER 17

DTSCUSSION QUESTIONSshould be assigned on lho basis of relaliveconlrol, and variancor should be viewed alquedbnr rather than as atlewcn.

017€. Opinion ic dividcd on this subiecl. Somcbelieve that for thc mel effeclive overheadcqrlrol, &partrnont headr shouH bo chargpdcrly for ho.. codl thal they ircur. lf lhey arccfiargod wilh uncsttrollable costs, they couldspend rignili;ant atrpunt! ol limo lryhg !o cct'tlol cosl that they havl no ability lo cqltrol, orthey may bccqn hultrated and givc tP tryhgto csrbol 8ny stt. On the ofter lrand, ssnebelieve that deparfnent headg should aPprocFatc thc fact that many auxiliary costs musl boincurred to tuPPort their activiliel; thereforc,they $ould bo charged with a fair share ofsuclr cct+ clearly labeled as uncsrlpllable,

Ol7-7. Total costs c/ servica departmenl overhead aroincluded in overhead rales h order lo charge

irbs and prod.rcts wilh all overhead hcurred htheir production. Aclual service deparlmenlcetl et. cqrtolled il they are accumulated inseryice departmenl accounts where they canbc assigrred to setvico deperlmenl managen.ll rervice dePatltnent ccls atc charyed direct'ly to producing departmonte, 3uch costg

becsne an indirect, noncontrolhble item of the

departmantb receivhg lhe charges.017€. Servicc department costs should be charged lo

user deparlments by predetermined bil l ingrales rather than by allocating aclual ccat allhr end of the period. The use of predeler'

mined rates maker i l posrible lo determincsewicc departrnent gfticierEy through lhe corn'putalbn of spending and idle capacily yari-

. anooa. ln addilixr, uscr department elficiencycan bo evaluated nrore elfectively by eliminat'ing noncaltrollable cosb frorn service depart'menl charges. This is parlicularly imporlantwhere user dePariment3 have some controlover lhe anrount of the services usod. In suchcsses, usors thould be held accounlable for

their usc ol seruices, but the rales lor pricing

ttpoc eorviceg strouH be known by the users inaclvancc.

Ql7-9. (a) No. Thc ctrargc is an arbilrary allocalbnol cost. lt cannot bc influenced directlyby acticrs of ihe divisinn rnanagorneni.

(b) Yea and no. The amounl ol computerseruicc used ir within the contol of thedivbbn managemenl However, lho c€tpot unil of service varieg with the effi-ciency of the computer facil i ly and lhcamoun l o f use by o the r d i v i s i ons .Consequently, the charge is cnly partlycontrolbblo by divisicn rnarragemenl-

110

I

I

1

!Clnpter 17

417-10. (e)

(c) Yct. Thr chargr for goods purchaced' tro.n anothor diviridt is conlrotlablo by

thc diVisbn managcment, provided thatthr quanlity of g@ds purchascd b car-trollabL by tho divbbn managcrncnt andlhat thr prb. it an rxtemally sCsblishedrnarkcl prict.

4 1 1

formed during the period into budgetedMaintcnance Dopartment cost for thcsamo period. Using lhis predeterminedralo, cach usor deparlmcnl's maintc-nanor cost rouU deperd qr lhc nunberof furrs of servbe il reeived. By usingthc predetermhed ralr, lho aciual cqtcould be compared with totel chargesmadc to u3ere and thc dilfcrrrrcr decqrFposed into spending and idb capacilyvar iances lor tho Main lcnancoDepartment. These variances arr usefulin tva luat ing the e l t ic ie ncy o lliahtenanco Dopartrned scnivity.

A fudher ref inement would be torequirc ho lr,lahtenanco Dopartmcnt to

- lubrnit estirnates cil cct lo users beforcprovidirg services. This rvoutd not mlygive the dopartment reccivhg the sorvberqne idea of the cogt of tho work, bulwould afso restrain the MaintenanceDepartment from spending loo muchtime on a icb.

Q17-12. The flexiblc budget (a) provides the monthlybudg€t allowance regardless ol the flucluatingnurlhly volume of produclitxr; (b) permits nothaving to estimate the operating activity ol arnooh in advancc ol the period lor wtrich thebudgot is prepared; and (c) recognizes lhefixed and variable nature ol costs, wfrich leadsto easy adjustments when evaluating actualperfornancc,

Q17-13. A spendhg variance is the dilference belweenactual cost and the budget albwance (i.e., thebudgeted anrowtl sdiusted lor the aclual levelof aciivity erperiencod). tt is caus€d by difter-encos b€tween the prices and the quantities ofthe variotrs ilemr ol cost budgotod and actualtyincurred. To the extent that a manager hasconlrol over eilher price or quanlity, or bolh,the manager has control over the_amounl ofthe spending variance. However, il the mrnagcrdoeg not have conlrol over both prices andquanlities, lhe rnanager has mly lirnited csrtrolover lhc amounl ol thc spending variancc.Ncvcr theless, s ince a managcimay havcsomr control over spending variances, theyarp us€d lo evaluale efficiency h responaibitityreportirg.

Q'l 7-14. To aiJ rnanagoment in evaluathg and cqrlrol-ling cosl, a spending narbnco tor each ilem orclassil ication of cost should be reported loresponsib le management each per iod.Itemizcd varianccl tell responeiblc manago-menl which ilem war inefficiently ured. Thicdetoilod hto.rnatbn phpohts wtreie thc roarshio iJentily causos shoutd begin.

at7-15. An idlo capacity variance is lhe amounl ofovor- or underapplied budgeted tired facloryoverhead. In responsibility reporthg, it b used

b

Thr highor al.ctric pcrfler cob rnay bethr resull of any ono or snbination ofthr folbring(t) ircroaser h tir prbes paU tor tuel,labor, rnsinlcnorco, rlc.,(2) incfl icicnt oporaling praclices ormacfiho lailurcr withh thc porrer deport-,nont,(3) lhr acquirit ion ol erpensive newcrFacity, ancl/or(4) incrcarcd production of electricityrequircd to rroot uror demand.To lho oxtont thd any incffbiencies existh tho po'vor drpartmcnt tho cunent slb,calbn rctremr wilt pass them on to thewcr dcparfncntr. Wlth the kind of alb,catirn usod by Errmonr Cornpany, il isnol possiblo lo drlermine wtrat causedlhc cost incroatr. A better syslem ofhandhg lhis depsrtment's cosl wouH beto chargc user deparlments for acluaturagrr on lho basir ol a predeterminedvariablc rdc, and lor available usage onthr basb ol tho power doparlmont,s abili-ty to provUo rowbo at maxinum capaci-ty. Bndgetrd fixcd cogt rhould be allocat.cd on lhc barir of abil ity to provideoeryico, becausr the Electric powerDopartnrent canncl control aclual usage.Thb apprc*h rucuH make it possible-tocompula sprnding var iances lor theElectric Powcr Dcpartment, which areureful in cvaluating lhe department,soptraling effir:iercy.

b

ib

(b)

b

II

b

!

I

tb

Ot7-11. (a) Highcr tota l cor t incurred by theMahlonsrrcr Drpartrnent (i.o., hcreasesir lht priceo andor quantilies ol the varFour ilem! ol corl in the MaintenancoDcportrmrn), fowcr tolaf hours of mshte-nancr rorv icr prov ided lo a l l ure r6partn.nt! during the period, o, a com-binatlxr of both could rcsull in a higheraclual main lonancc co3l pcr hour ,Howcvor, rucfi incrcaser in cosfr shouldremain in thc Maintonance Departmentartd nd be drargred lo the usorc.An improvcd mcthod tor distributingi/binlmancr Dtpartnent cost would bilo rslablbh a prcdetermined rate lo bechargod lor oach hour of maintenancetorvbo prwirJod to users. Thc ratc wor,rldbo octablirh.d annually by dividing thcoudgclcd hours of servico to bc por_

l

(b)

112

l

er a mcarut. of capacity utilizatkxl. To the

ortent thal rnanagement can cstlrol capacity

utilhatinn, thr kilo capacity variancr can bo

controlled. Howevlr, lho arnounl of capacity

utilhed ir cillrn a furction ct fotcs ot ttij' th'

cfittol d hdivHrrsl depadment suprrvboo'

Ql7-16. Thr two primary PutPolct of rrsponsibilityraPotlt tra:(a) To nrolivato inclvi<Juralr b achiovo a high

levol of performancr by reporting etli'cieircbr and helliciencier to rerPonsiblcrninager! and thcir ruPerirrs.

(b) To providr inlormation that wil l helPresponcblc rnanagot'r3 ldernity ineff bien'ciet so that thcy can rnoro rflicirnllyconlrcl code

Afl-fi. Dyslunclianal behavion that can result |tom' the practice ol evaluating managerial perfor'

,nanc. rathr tlrsr cvaluathg aclivitier lcilow:(a) Managera trnd lo lakr aslirmr lhal an

rell acrvirg rathrr than bcndicittl b |hrcqrtPany ar a wfiob.

(b) Managcru coflcontral. or mceling lhebudgBt rather than an obtahhg the beetlevc l of Prr formancc thal can beachieved. Tht usr of budgelr lends lothwarl continuour imProvement.

(c) Since budgell are bared on currentopcraticrr, rnanagoF lend lo fcur lheiraltontivr qr short.run targels and ignorethe bng.lerm needg of hc business.

(d) Managen *tro arl unablo to subwrl thelysl.m rutl icicntly to gcl acceptableevalualbnr, bd who are othelise corrt'petrni and rfficient bccqno fruslraled,do ttot gct prornolcd, and olten bave thecornpany.

Ol7-18. Responsbility accounthg and reporthg shouldnot be abandoned despile lhe lacl trat its usein evaluating lhr perlormancc of rnanagortresultr h dyslunctirnal behavior. To overcornche prcbbm ol dydurrlimal behavix, tcsPo.l'sbillty reportr lhorrld br Lrsod b ovalulr lhlperlornrancr ol burinccs eclivilirr, nol tnan-agen. Maragon rhouH bo ovaluatod qr lhcbasis of multiple ac-tivitjes cil whk*r ccl cstltolis crty ane. lvlanagon shoub bo rncouragedto expcrinent with now approachcr, lo irplwoproducl quality, lo onlist th. coop.ration ofthcir departmonl rc*on in irpoving output,lo cooporalr with cthor departmontt, and lorcrk tor thr fmgttem succosr cil tht canpa-ny. Using respansibilily reports ar an aid incvaludhg thr olficbncy of busho$ aclivities,hslead ol managroo, takcr procsurc off man-ageru to defend hoir acticos ar thoy reble locod, and rnaker il po+rblo for hem to pursuecficr desirable bushess activilioc.

Q17-19. Somo problemt that l lmit thr usofulnesr olcootrol data repqld to rnsnagcr' in a rcspon'sbility accornrhg and reporfhg qFtom 8t :

Chaptor t7

(a) Most rcsponsib i l i ty account ing andrepodhg rlalrns irnpmperly bese allour'ablc budgrtl on volume'based mca'ruret of astiv,ty thal havc litlle to do withcosl incurr rncr (1.9. , labor hour l ,rnacfihc houn, rtc.). lf nqlvolune rnca'surcr (o.g., m*hinl rcluP!, relooling,nrwhg or do.ing parlr or prodtrl' ctc.)arr maior corl driveru, aclivity basedcethg should br uced as thc basis lorbudgct ing end PrcPar ing var iancrreportr.

(b) Conhol daia ryailablc in a nsponsibilityreporting ryrlem are lo aggregated lobc ucaful. Thb ctilicicrn slems frotn ananemPt lo ur rcspotsbility reporis toroperating control. Even ilemized vari'ancr reporlr may nol bc suflicient lorolvo thic problern

(c) Cqrtrol data availabl. lo rnanagen ar.financbl and not oalily intcrpreled byoperating lcvol managers' I'ho are noltrained in accounting and finance. Theaccounting slatf chould provide assil'tance, when practbal h trainhg operal'ing pcrsonnel in lhe use ol t inanciElreporls. ln addition, nonlinancial mea'surer that can bc easily understood byoperating managers shouH be reporledalong with lharcial data, when pnclical.

(d) Control data availablc lo tnanagore atenot tlnefy onough to br weful. This critl'cism cteint frqn an atlempl to use finan-ciat based reponsibility roPorb for day'today operathg controL Morc frequenttePorting will not likely solvc lhir prob'lem, because il slill takeg dalts or weeksto collect tho necegsary dala and pre'pare financial reportr. A better solutitx isto use statistical procesr conlrol andother operatirg control syslems lor day-today openthg csrtrol ard lo use peri-odic financial rcporlr lo cvaluate thlfinancial elfcclivenclc of lhe businesrt)Etomt and thr Prees! cooltol syslemrused h mcriloring activtty.

Ot7-20. Despile thc tact that nsrfinancbl measures ofoporating podormancr arc mot. easily hter'preted and can br nradc avaihble qt a morotimoly bacir than linencial data' f inancialreports genrrated by a responsibility accounl'hg syslem slill havr value bocau3e they Pto-vUc hformation about tho impact ol bueinesssystemr sr incornr. To bc effective, manago'ment musl nd d|ty bclievo lhal roducing invcn-tory, spcilagc, c rework will inprovc proCilabilFty, but also it must rrpnitor thc lmpact that guch

cf for l r havc on incomo. Thc t io belwcenclrogor h bushess s)lstems and the effect ofthoo change3 on it6ne Lr provided by lhan'cial ropodr-

\,

: Chwter tZ 413

RCISES

E17-1

(11 Maintenance Department cqst should be charged to all dopartments onthe basis ol a predetermined charging rate and could be computed asfollorvs:

Fixgd COSt...................r......................r.......r...........r........o

'I

!

b

b

Variable cost (15,00O r $8.5O|$ z,5oo

l27r5OOTotal Maintonance Department cost sl35,OOO

ffi = $g Per maintenance hour

The agtual Malntenanco Oepartnrent cost for November, gl32rOOO wouldbo chargod dirscUy to that departmenl The $9 charging rate is used tocharge other departments for Maintenance Department service received.The November charges would be $1261000 (l4,ooo actual maintenancehours x $9 charging rate|.

The same approach woutd be followed for Generat Factory cost, exceptthat transfem and charges for such costs would be made to producingdeparunents only. The rate woufd be determined as foilorvs:

Fixed cost $3O,OOO20,OOOVariable cost (1rO0O r $201..r..r...,...

Total General Factory cost

lv

sso,OOO

$5O,OOO = $50 per employeeI,OOO employees

The actual cost chargod to tho Gonoral Factory In November would be$51r0o0, and Gonoral Factory cost charged to producing departmentswould be ${srooo (98o actual employees x $50 charging rate}.

{'t11

efl-1 (Concluded!

t2l

Chapter t7

f,lalntenance DepL General Factory

ACtUal COgt ........D......o...... $l 32rOOO $511500Budget ellomnce:

Variable cost:l4rooo hours I $85o.. $119,OOO98O employees r $20 $19'600

Fired cost 7r5OO l20,5OO 3O,OOO 49,gOO

Spending varlancc..r........ S 5r5OO unlav. $ {.90o unfav.

Budget allowancc..,...,..,.. $128r5OO $491600Cost charged oub

l{'OOO hourc r $9.........990 employees r $50....

1 2 3 TotalCarpenter Shop. .................o...,.. $ 4rooo $ Irooo $ 4r5oo $l61500E|octriciansn...............r............. l2'OOO lO'2OO 61600 281800

Tota1......t..........r....,....rrD.......r. $l6rOOO $l8r20O $t I,too $45,300r4oo r $io = 34,o0o; Boo r $to = $8,000; 45o r $io = $4,5oo- 1,ooo r $12 - t l l2,OO0; 85O r $12 = $lo,2oo; 55o r $12 = $6,600.

126,OOO49,00o

ldle capacity varialrcro...... $ 500 unfav. $ 0oO unfav.Total var|ance............... 5-TF unfaY. $ 2.5oo unfav.

El7-2

(11 Billins rates: Carpenter Shop: #ffi

= $lo per hour

Electrlctans: -qggjo-oo = Si 2 perhour2,5OO hrs.

(2) Charged to producing departments: Department

II

It

Ii

! Chapter 17

E17-2 (Concludedl(31 Variances In each service department:

VarlablcGost

1r5

VarlablcRata

Per Hour

Garpenter ShopElectricians

Actual co!t-*-......Eudgct ellowanccl

Varlablc coct (1,050htt. r lXr,OOl.-, 3

Ftcd colt*.-*

Monthly Flrcd CortBudget Percentage

$2O,O0O 70%3O,OOO 80

$l4,ooo24LOOO

Acbral corEt-**Budget allowancc:

Varlablc cost (21400hn r 32,401 ..-. I 51780

FLod Go!t*...-- 24.OOO

Spcndlng yarlancc -

Budget Ellow8ncc...Coat chargcd to

produclng depart-mentr (ttg.2)-....

ldlc capaclty varlancc

$8.70

$6,000 s3.OO61000 2.4O

Electrlclana

FLcdCoet

Carpenter Shop

31e ,8OO

4195014,000 18,050

Variable rate per maintenance hourfor other costs:S up ervis io Jl ...,..,,.....Tools and supplies,.Mlscellangous ..r...r..

$.so.75.o5 1.30 10,00

s27,7OO

2017go

S (2.06O) fav.

t29,760

28,80O

3 96O untav.

$ 4,00 per hour

$1{.99 per hour

$lo per employee2

Spcndlng Ytrlanc. -

Budget rllowlncc.,.Cort chargcd to

produclng depart-mcntr {mq.2}..-,.

ldlc capaclty varlancc

t 85O unfav.

s18,95O

16,500

S 2,450 unlav.

Ib

E17-3

(11 Billing rate for Maintenance DepartmentFired rate! $12r8OO total lired cost + 3,2OO normal

maintgnanCO hOUf3.. . . . . . r . . . . . . , . . . . . . . . . , . . . . rVariable rate: Variable rate per maintenance hour

for labor. . . . . .

T o t a l a a . . a a t a a a a t a a a a . . . . r . . . . . . . . . a a a a a a D . a . a o a r . . . . . . . r . . . . . . r r r . . . r . . . . . . . . . . .

Bllfing rate for Payroll DepartmenbFixed rate: $12'OOO budgeted fired cost + 1,290

aygr:lgg numbgr of employggS ...........,.Va ri ab I g r iNto .. . . . , . . . . . . r. . . , . . . , . . . , . , . . r. , . r,Tota1. . . . . , . . . . . . . ro . . r . . r , . , r , . . . . . . . . _q!_? per employee

The billing rate for the Maintenance Department was based on the rurt-ber ol maintenance hours worked, because it was the only variable givenon which a measure of operating results could be computed. For thePayroll oepartment, the billing rate was based on the number of employ-ees' because it was an adequate measure of operating results for thatdepartment.

416

E17-3 (Concluded)

(21 Maintenance DePartment

E17-4

(11

Firgd costt ...,.....r....Variable cost (rate r hours)n........

Total.......

Actual CoSt..........."""Budget allowance based on actual hours:

Variable cost (31355 hours r $101..'.....Fired cost

Spending varianceBudget allonrance based on actual houls.'.Cost charged out (31355 hours r $14)....,,...

ldl g capacity variar|G19.............'................'.'

Payroll Department:AgtUal 9OSt....'..................... '...."""""t"""t'Budget allowance based on actual number

ol employees:Variable cost (l rl65 employees r $21Fired cost

Chapler 17

g47,2OO

933,55O12r8OO tf6r35o

9_99.9 unfaY.s48,350

46,970

Spending variancg ............'.'.........t........'...'

Budget allowance based on actual numberof employees

Cost charged out fl '165ldle capacity varianco...

employees r $121

ProducingDepartmentr

3oruiceDcpartments

xBAst,2oo $2,4oo

l,600 2,600$ 1 , 4 4 0 $ 9 6 0 $ O , O O O

1r4OO 1,20O 6,800

$2,800 89p99 $2,849$2,840 $2,160 q!?f99

% Firedcost rA = hls.' Dept. Hourcl O,OOO2OTOOOl2 'OOO

I,OOO

$6 ,8oo

hrs.

ABxY

200h40241 6

$l,zoo2r4OO1r44O

960

I,OOOl3,ooo

TrOOOorooo

34,O99

B =X =Y =

$ (62o) lau

s13,875

$ 2,330l2,ooo l4r33o

L:('t9!l tar.

3l{,33Ol3198O

3 35O unfav.

Total

5O,OOO lOOo/o s8,ooo34, OOO hrs.

= 3.20 variable rate

Cltwter 17 4 1 7

El74 (Goncluded)

(21 The two general principles for the allocation of service department costsapplicable under tho circumstances are (a) distribution on the basis ofservics or benefit received for the variable cost; and (bl distribution onthe basis of readiness to serve or capacity that must be maintained forthe fixed cosL

This solution distributes all variable costs incurred. A predeter-' mined variable cost rate should be calculated, so that the efficiency ofthe power plant could be judged. The present $.ZO rate is based on theactual monthly consumption and cost.

E77-5(11

BenefitingDepartmentCutting,... . . . .o...o..

QuarterlyStandby oh of Fixed CostGapacity Total Billing

35'OOO 35oh S2,45O26'000 26 1,920Grindin9,........r...........

Polishing ........,...........,..,.,...,.......... 3OTOOO 30 Z,I OOSt0J€S.'...o.......o.. ' .....rr............ 'r....... I;OOO I 630

TOtaf r................................... '.r........ I OOTOOO lOOo/o

Variable rate = Variabte Cost * ,*""*O Onnr"ilp""i= S30,OOO + 30O,0OO KWH= $,1o per KWH

s?,oo,9

ry

118

El7-S (Concludedl

First Quarter Bllllng:Variable lilto.."""""-"'Agtual consumPtloo ....

Variablg Gost ............'..Firgd CoSt....."...""'o""

Total . t . .oo..t . . . . . . ." t"" t""

Second Quarter Billing:Variable lllto.........-.'.t..Actual congumPtion ....

Variable cost ...............Fired GoSt............""""

Total ...........r........r""tt '

Third Quarter Billing:Variabl g itlto........'.......Agtual consumption ....

Variable cost ...'...........Fired GoSt....................Total .....o............. ' ....... '

Fourth Quarter Billing:Variable rato......,..,......Actual consumption ....

Variablg cost ...............Fixgd CoSt'.........r.........

Total '.'...........

Chapter 17

Benefiting Department

Grindlng Pollshing Stores Total

$ .1o29r5OO

$ 2,9502A50

$ 5,400

$ . 1 020,0OO

S .1o2910OO

$ zrgoo2rloo

$ 850630

s 2rooo1r82O

$ 3,820 $ 5,OOO 3l,2gO S15,5Og

$ . l o $ . t o33,5OO 24r75O

$ g,gso $ 2,4752r45O 1,820

$ 5,goo $ 4,295

$ . 1 0 3 . 1 08,250 9O,O0O

$ ' . 1 023,5OO

$ 2,3502rlOO

s 4,450

$ 2,5502,10o

s 825630

$ I,ooo7,OOO

$1,455 sl6,000

$ . 1 0 $ . 1 0 $ . l o25,5OO 6,500 86,000

$ . l o32.-750

$ 3,2752,45O

$ 5,725

$ . l o21,25O

$ 2,1251r82O

$ 3,945

$ 650630

$ 8,6007,00o

$ 8,5OO7,OOO

$62,60O

AnnualTotal

$ , 1 o28,25O

$ 2,825 $ 2,3oo2r45O 7r8�2O

$ 5,275 $ 4,120

$ . 1o $ . 1o23,OOO 27,75O

i 2,7752r lOO

$ 4,gso $1,280 $15,600

$ . 1 0 $ . l o6,000 85,OOO

$ 600630

$ 4,875 $1,23O $15,500

$5,345

Fourth@s l5 ,4OO$15,450 $16,200 sl5,9OO $ 62,950

$ . t o85,OOO

$ . l o $ . 1 o $ . 1 O $ . 1 O9O,OOO 86,000 85,OOO 346,000

$ 8,5OO7,OOO

s I,ooo7,OOO

$ 8,6O0 $ 8,5OO $ 34,6007,OOO 7,OOO 28,OOO

$15 ,5OO $16 ,000 $15 ,600 $15,5OO s 62,600

s (so) s 2oo s 3oo s (1oo) s 35o: - : : :

l2l

Actual cost.......Less budget allowance:

Variable rato ..............Actual KWH providedVariable cost..............Fired cost..,....Budget allowance ......

Spending variance ......,.,.......

First SecondQuarter Quarter

ThirdQuarter

$ . l o $ . 1 o61500 85,OOO

s 8,5OOTrOOO

lav. unfav. unfav. fav. unfav.

Ctapter 17

E17-{'

4 t 9

\-UNTYERSITY MOTOR POOL

Budget Report for March

Gasoline

MonthlyBudget

$ 5,51337t'236525

2r5OO2,31O

$!1d93. 2 1

63,OOO$ .1819

2,5OO2,31O

March (OverfActual Under

$ 5,323 $ tgo38o (21

186

9!rf99 9--32!21

63,OOO$ .1700 $,ooss

Oll, mlnor repairc, parts, and supp||gs........,......r.Outside repairslnsuranceSalaries and benefitsDepreciation....... ' .r............o..o..!r.rr.,,....r....o...r......

Total

Total m11g3............................r..r.r.......rr.................Gost per mile

Supporting calculations for monthly budget amounts:

Gasoline:

Oil, minor repairs, parts,and supplies:

Outside repairs:

Insurance:

Salaries and benefits:

6(l,000 miles16 miles per gal.

50525

b

b

Depreciation:

x $1.4o pergal lon = $srs lz .So

63,000 r $.000 per mile = $.328

= $23o.25

Annual cost for one auto: $0,O0O + 20 autos = $3OOAnnual cost for 21 autos: 21 r $3OO = $61300Monthly cost $g,3OO + 12 = SSZSNo change

$3O,OOO annual cost = $2,5oo per month12 monthsAnnual depreciation per auto:

$26,400 + 2O autos = $ir32oAnnual depreciation for 2i autos:

$lr32o per auto r 21 = $2T.T2OMonthly depreciation: $27l2O + 12 = $2r3lO

. :

120

E77-7 CLAYTON COMPAITYAssembly DePartment

Flerible Bud g et-9Oc/o lovel

Dirsct materials l9O% r $2O'0O01Dircct labor lg0% x $l 1'2501SUpefViSiOJt.. . . . . . . . . . . . .r . . . . . .1.. . . . . . . . . . . . . . .o.. . . . . . . . . . . . . . . . . . . . . . t . . . . . .o.. . ' . ' ." t ' r" t"

" ' t '

hdirect materiats ($zsO + lgOoh r ($l t75o - $2sQlll """""""'t"""""""PfOpgfty t3I . . r . . . . . . . . . . . . . . . . . . . . . . . . t . . . . . . . . . . . . . . . . . . . . . . . . . . . . t . t . . . . t . .o. t . t . " " t " t t " t t t " t t '

Maintgnanco ($600 + (9O% r Gtlr600 - $600111...'........r....o....................Power Gt2oO + Paoh r ($3OO - $200jll '.........Insurancer....r.r......'........Depreciatioll ..................

a a a a a a a a a a a a a a o a a a a a a a a a a a a a t a a a a a a a a a a a a a

Chapter 17

$18,OOO1O1125

500I,600

3001r5O0

29017s

l1600

Tota t. . . . . .ro., . .D... . . . . . . . . . . . . .r . . . .r . . . .r . . . . . . . . . . . . . . .r . . . . . .r .o.. . . . .r . . . .r . . . . . . . . . . . . . . . . . . t .r . S34 t 09O:

Chapter 17

E174 ONE MONTH FLEXIBLE BUDGET FOR FINISHING DEPARTMENT

Ooeratinq levelBased on labor hours.....,.r.. 8OO 9OO I'OOO lrlOoPercentage of cipScit!....... 80o/o g0oh l00oh l7Aoh

Variable cost:Indirgct |abor.........o.........o.. s lr2oo,oo s 1r35o.oo $ lr5oo.oo $ 11650.00Factory supplies....r.r......,.r.. 1r88O,O0 2rl15.OO 2'35O.OO 2r585.OOPower.,...,......,..r..,............... 600.00 675.00 750.oo 825.OORework operations.............. 4OO.OO 45O.0O 5OO.OO 55O.OOPayroll tares....................... IrO40.OO 1r17O.OO lr3OO,OO 1'43O.OORepair and maintenanco..... 320.00- 360.00 4OO,OO 44O.OOGeneraf factory.......,........,.. 160.00 18O.OO 2OO.OO 22O.OO

Total variable cost........... $ 5,600.00 S 61300.00 $ TTOOO.OO $ 7'7OO.OOFixed Cost:Indirect |abor................,...,. $ 4r000.oo S 4roo0.oo $ 41000.00 $ 4rooo.ooSuperuisior|......,.....r......,...., 2'5OO.OO 2,5OO,O0 2'5OO.0O 2'50O.OOFactory supp1ies............o..,.. 9OO.O0 9OO.OO 9OO.OO 9OO.OOPowgr'..........'....r..........r...... 5OO.OO 5OO.OO 5OO.OO 5OO.OORework operations......,....... 2OO.OO 2OO,OO 2OO.OO 2OO.OOPayroll tares.....,....,....,....... 8OO.OO 8OO.OO 8OO.OO BOO.OORepair and maintenance,.,.. 600.00 600.00 600.00 600.00Property insuranca.........,.... 7OO.OO 7OO.OO 7OO.OO 7OO.OOProperty taxes..................... 3O0.OO 3OO.OO 3OO.OO 3OO.OOVacation p3!.....,......D..,...,.... 2r2AO.OO ZT2OO.OO 2,2OO.OO 2.2OO.OOEmployee pension costs.,... l,2o0.oo 1,2oo.oo 1,2oo.oo i,2oo.ooEmployee health p1an...,...... 1,8oo.oo 1,8oo.oo irgoo.oo f ,goo.ooMachinery depreciation,..... Irooo.o0 l,ooo.oo 1,ooo.oo i,ooo.ooWater and heat..........o......r.. 600.00 600.00 ooo.oo 600.00Building occupanc!......,...... Irooo.oo lrooo.oo Irooo.oo Irooo.ooGeneral factory................... lr5oo.oo irsoo.oo irsoo.oo ir5oo.oo

Total fired Gost................ $ir"goopo $1r"goo"oo $ir"BooJo $lr"BooooTotal co$..................r......... $r5,4oo.oo $A6rtoo.oo $r6"900.00 $r?Fooôo

421

Chapter 17

El7-9Spending

Original Budget Aetual VarianceBudget @ Cost Unfav. (FaY,l

Gapacity hoursVariable costs:

Supplles $ 2 , o o o $ 2 , 2 o o $ 2 , g o o $ l o oRepairc and maintenance ...... 8OO 88O 9OO 20lndifeCt 1abof.......................... 4rO0O 4r4OO 4r3OO (f OOIPowgr and !|ght.....r..............,. lr2OO 1t32O lr4OO 80H63t................r........,...r.....'.r.. 40O 44O 5OO 60

subtotal ................,.......... $ Sroo $ ,"r4o $ ,rooFixed costs:

Buifding orpense.................... $ 8oo $ 8oo $ 84o 4oDepreciation-machinely....... 2r4OO 2r4OO 2r4OO OProperty tar and insumnco.... 4OO 4OO 42O 20

Subtotal $ 3,600 $ 3,600 $ 3,060

8,0oo

Total costs sr rpoo $l r^s4o $13,060 s 220unfav.Appliedfactoryovgrhgad...o.., . . . . . . .r. . . . . , , .o... . . 13r2OO

ldlecapacityvarlaDCo.... . . . .r. . . . . . . . . . . . . . .r. , . . . . .o. $ (36Olfav,

Actual factory ovgrhgad........,..r...,..,..........o. $l3r060Applied lactory overhead l3,2OOOverapplied factory overhead 3 (r 4ol

Spending varianceldle capacityr varianceOverappliedfactoryoverhead.r.................... $ (140)

S 22o untav.(36O! fav.

IL

il-

LIL

Direct labor hout'r8.....'......'............ IOpOO ,"gOO ,1600: = : : :

Variable costs:

Clppter 17

Er7-I o

lndirgct 18bor......r........'r.........Payroll t3xg3.............r......o.....rFactory suppli gs'..r................rEl gctric utility......-.!...r............Gas utility...oo....o..-.o.....'.......or.Wate r Util ity.......'...........,........Machinery ropairB ..................Maintenatlco ...............r..r....'..Ovgrtimg pnomium ..,.r....r.......

Subtotal ....o........r......r.."..

Firgd costs: ............r..................r..Supgrvisiofl ...........r.....'........r.Indirgct labor.......'........r......r'.Vacation p?!....................."....Payrol I t8I33......r................'...Employee insurancg...............Factory 3upp1i6s.......r.r.....'..r.'El gctri c uti1ity................r.......,Gas ut i1i ty, . . . t . . . . . . r . . . . . . . . . . . . r . r . . . .Watgr util ity..... '..!....ror...... r.....Maintgnance ............,........,...,Machinery depreciation .......,.Building rlB!1t.........'.....'.r.........Pro p g rty targs ....,..........tr.......Pro perty insu ra n c g..,.....,........

Subtotal ............o......r.,....,Total costs .r.........D...

.123

SpendingOriginal Budget Aetual VarianceBudget Allonrance Cost Unfav. (Fav.)

!

I

Ib

b

t

L

$ 7O,OOO6lr5OO27rOOOl2,ooo

6,OOOlr5OO

io,ooo2l,ooo

IrOOO

$ gz,zoo59r04O25r92O11,52O

5,76O1r44O9,60O

20,1OO8,640

$ 7o,ooo6O,OOO28,OOO't2,ooo

6 , 1 O Ol15OO

l0,ooo' 15,OOO

IrOOO

32,8oo960

2rO80480340

60400

(5,t 60l360

48,OOO O36'000 O4O,5OO 5O0

I,OOO O72r25O 25O19,OO0 Ol5 ,ooo o

I,OOO O5,OOO O

23,OOO O5O,OOO O15,OOO O13,OOO I,OO015,250 25O

$2O9,28O $2t t,600$2l8,OOO

$ 4g,ooo38,OOO4O,0OO

8,OOOl2,oool9roool5rooo

I,OOO5rOO0

23,OOO5O,OOO15,OOOl2,oool5ro0o

$ 48,OOO36rOOO4O,OOO

8;OOO12,OOO19,OOO15,OOO

I,OOO5,OOO

23,OOO5O,OOO15,OOO12,OOOl5,ooo

S

i-

I

$307,OOO q3O7,OOO$3O9,OOO

91'329untav.

ldle capacity variallcg ...................,.....r........Und erappli ed f actory ove th ead ........,,.....,....

3525,OOO $51O,28O $52O,OOO

S 4r32O unfav.12,280 unfav.

il_6,6OO

Appli ed factory overhoad ..........o........t...,.....ldle capacity variallco ..,...,..,..........r.o,..,.....r

5O4,O0O

$ 12,280 unfa%

Agtual factory overhgad....r.r...........r............ $SzoroooAppliedfactoryoverhead.......,..................... 5O4rOOOUnderappliedfactoryoverhead.................... $ l61600

t_ Spendlng varianco

i-

424

P77-7

(1)

Chapter 17

PROBLEMS

Factory overhead applied for each prcducing department:Dept. A: 20r48O hrs. x $4.2O = S881016Dept, B: 291850 hrs. x 3.10 = 921535Dept. C: 2O,l0O hrs. x 3.75 = 751375

Oner. or underapplled factory overhead for each producing department

Producing Departmants

Erpenses

(21

cAActual department factory

ovgrhgad,. . . . . . . r . r . . .Proration ol seryice departments:

Utilities (on actual hrvh)..........Repairs and maintenance

(on actual dlhl .-....o...'......Total actual department factory

overhead ..o.r......r.................rr.

Applied lactory ovgrhgad ........,..r.(Oven) or underapplied factory

overhead

$56,02O

131755'

181432r'

$88,20786,O16

s52,85O

1 6 1 1 7 0

26,865

s95,88592,535

$42,580

12r53O

18,O9O

$73,2OO75,375

r 39r3OO r $.35 = s13r755t ' 2 0 , 4 8 O r $ . 9 O = 1 8 . 1 4 3 2

(31 Total variance for each geruice department:Repairs andMaintenance

Actual cost befors allocation of UtilitiesDepartment COSt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . r . . . r . . . . . . r r

Utilities Department cost allocation(1 8195O kwh x S.SS; . . . . r . . , . . . . . r . .o. . . . . . . . . . . . . ,o. . . . . .

$ 2,191 unfav. $ 3,95O unfav. $ (2'1751 fav.

Utilities

$56,320

6,633

$5O,O4O

$oz,sssServices allocated (sold) to other departments:

ffOt43O hrs. x $.90;............. ' ........ ' ............. ' .. 63t387(1 4orz5o krrh r gssl r...........,....................... 4gro88

$ (434! fav. $ 952 unfav.

LtL

I

L

I

I

Cllo,pty� 17

P17-2

(f l Maintenancs Department

Total estimated costTotal osUmated malntenance hours

UUlitles Department:

Total estimated cost - S8'40o -Total esUmated kwh 70'OOO

425

= 3 3 per maintenance hour_ sto,Soo3 , 5 O O

9.12 per kwhl

b

b

b

I

b

I

L

(21 Service

Variable overh ga d..........D.......Dr'.Fired ovgrhead .....,...r....,..,,...r...

Direct departmental ovefiead ..DistribuUon-eeruice d epts.:

Maintenance:(2r5OO x S3) .,................,(1 ,OOO r 33)... . . . . . . . . . . .r. . . .

Utilities:(45rOOO r $.1 2|.,............(25'OOO r $.1 2)..............

Total factory ovgrhead..,.,......r...Dirgct labor hours .o..,................Overhead rate per dlh ...............

333,oOO $24,oOO $f o,5oo s8,4OO

3rOO0 (1O,5OO)

5,4OO3rOOO

_$15,eoo12,0O0$3.825

$l5roool8r0oo

I I,OOOl5,ooo

$ 4,5OO6rOOO

Otilities

s3,6OO4,8OO

(8,4O0)

igo,ooo7,50O

$4

126

I

P17-2 (Continued!

(31Spending variance:

Astual factorY overheadAdd distribuUon-

garvice dePartmentsrTotal departmental factorY

ovgrhgad ..........r..o....Budget allowance based

on actual hours:Variable:n

Planera (1'O2O x$2.325;..........r.r. $21371.5O

Radial Drills(680 x $2f .........'

Firgd.t . . . . . . . . " . . . "" t"" l tSOO'OO

Spending Yarianc8..........

Planerg

93,l2o.oo

l ,44O.OO

s4,560,oO

3,871.5O

S 688.50 unfav.

Chapter 17

Radial Drills

s2,3OO

480

$2,780

2,61O

S 170 unfav.

RadialDril ls

480

$2,61o

$1,ggo1r25O

rDistribution of service department costs to producing departments:

Planers

Maintenance:Ptaners(32O hrs. x $31 r,.r.............. ' ......... ' ...r.... ' .r.......... S 960

Radial Dril ls (8O hrs. r $31......... ' ... ' . ....................""""'Uti l i t ies:

Planers (4,OOO hrs. x $,121Radial Drit ls (2,OOO hrs. r $12'..........-.........

$ 24o

240

s1,44O $ 480

RadialDril ls

"Variable ovorhead rate:Planers: 33.825 - ($tS'OOO + 12,OOO} = $2.325Radial Drills: $4 - ($1510oO + 7,5oo) = $2

ldle capacity variance:Budget allowance basod on actual hourE......Lass applied factory overhead:

Planers (1,O2O hrls. r $S.aZq..Radial Drills [680 hrs. r Sa].....'.

ldle capacity varianco ........

Planers

$31871,5O

3 ,9O1.5O2r720

$ (1 10 )s___19_9€9) fav. fav.

Actual sgrvicg department cost..............................,.... $ t1170 $ 710Distributed to producin g departments:

Maintenance(4OOhrs.x$3|. . . . , . . . . . . . . . . . . . . . . . , . . , . . . . . . . . l r2OO

Chaptor 17

P17-,2 (Continued)

(4)

f df e capacity variance...,.....,....,.. g (i gS.7 2ltav.Net variance........ $ (go.oo)t"*r.

427

Maintenance Util i t ies

720

9l1l:o9) rav'$ (lo.oolfav.

s (3ol s (tol

Spending variance:Actual service depart-

ment cost .............,. S1'17O.OO STi O.OOBudget allowance

based on actualhours:Variab1e.,r........,...... $ S14.Z8l $Og.4O2Fixed................,...... 5OO.OO IrO74.28 4OO.OO 7OB.4O

spending variance..... -

$ iss.?z unfav. $ i^6o unfav.

ldle capacity variance:Budget allowance based

on actual hou1s.....................r.. $1roi4.2g $Zog.4oLess applied overhead:

Maintenance (4OO hrs. r S31 ..., i ,2OO.OOutil i t ies (6,000 kwh x $.121 ...... 72o.oo

t Estimated variable expense $4, SOOgst imff i - 3,soo ' Fr

$1.2857 r 40O hours = $5i4.28

Estimated variable expense $31600ffi- zo;ffi - $.0514 Perkwh

2

. . $.0s14 x 6,o0o kws = $gog.qo

Chapter 17

P17-2(Concluded)

(51 Reconcillatlon of total variances:

Agtua I ta gtory ovg rh gad ...........r........Lsss: Applled to work In Process-

Planers...........'..............""tt $3t9Ol'5O

Ngt total Yariance.......'r.r..............o...o

Variances:

$713OO.00

Applied'to work in Procsss-Radiat Dfit13,..........r......o...... 2'72O.OO 61621.50

$ 678,50 unfav.

Spending variance-Pt3ll9!'t3....... $ 688.5OSpending variance--Radial Drills 170.Oold le capacity variance-Plan 8t3..ldle capaclty variance-

Radial Drills ."..........'...............Spending variancFllllaintenance 155-72Spending variance-utilitios.'..... 1.60ldle capacity variance-

MaintgnaDCO ..........'.......r.......'.ldl e capacity variance-lJtilities..

Unfavorable Favorable

$ 3O.0O

110.OO

185.72l l .oo

s1,o15.82 S 337.32

$ 678.50 unfav.Net total variance

Chapter 17

Pr7-q(1) Budget allowance for each producing department in Januarp

(a) Based on scheduled production hours:

Variable factory overhead:(5,000 units r S.45t per unit) or

(1r25O hours x S1,8O per hour) .r......r........(5,OOO units r $.gge per unit) or

(l rOoO hours x S1.9O per hour) ..........,......Fixed factory overhead:

($17r52O + 12 months)... . . . . . . . . .o,,. . . . . . . . .r. . . . . . . . .($34r23O + 1 2 months).........'..............r.r......r

Share of service department cost:Maintenance (1r25O hours r $.SOs per hour)Maintenance (1,OOO hours r S.5O per hour) .Janitorial (9lrggO + 12 months).....,...,..........Janitorial (S2r97O + 12 months)....................

Total budget allowanc€ ...."...,.......,..r.......,.........,..

Machining

S2,25o

1 , 4 6 0

'625

1 6 5

Machining

$2,412

1,460

670

1 6 5

429

Assembly

sl,90o.oo

2,852.5O

500,oo

247.50sdggg s5,5OO.OO

r Machining: S2T'OOO + 6O,OO0 units = S.45 per unit; S2Z,OOO + l5,OOO hours =$1.80 per hour

z Assemblr $22'800 + 6o,ooo units = S.gB per unit; $22,Boo + l2,ooO hours =$1.9O per hour

3 Maintenance: $13,5OO + 27.OAO hours = $.5O per direct tabor hour(b) Budget allowance based

Variable factory overhead:

on actual production hours:

(1,34O hours x $1.8O per hour| , . . . . . . , . . . . . . . . . . . .(1,030 hours x Sl .gO per hour) . . . . . . , . . . , . . . . . . . . . ,

Fixed factory overhead:Gl17r52O + 12 months).,........,r.................r....($34r23O + 12 months),............................,...

Share of service department cost:

Assembly

st ,957.0O

2r852.5O

515.0O

247.50

s4,707 99,s?2.0o

Maintenance (1,34O hours x $.50 per hour) .Maintenance (1,03O hours r $.5O per hour) .Jani tor ia l (91,ggO + 12 months). . . . . . . .Jani tor ia l ($ergZO + 12 months). . . . . . . . . . . . , . . . . . , .

Total budget allowance

Chapter 17

P17-3 (Continuedf

The budget atlowances catculated in (af and in (b) include the servicedepartment shares by two different mothods: the share of theMaintenance Department cost is based on the charging rate of $.5O andthe actual hours worked, which is in harmony with the general procedursadvocated. The share of the Janitorial Department cost is based on 7112of the apportioned cost. This approach ls used because it is believed thatianitorial services have no relationship to the number of hours worked Inthe producUon departments, In fact the lllustratlon could be made moForealistic by basing the apportionment of Janitorial Department cost onthe basis of the relative amount of floor space occupied by the producingdepartments. As long as no change in the spaco has been reportedr theshare would remain as established in the budget figures.

It should be noted further that the maintenance cost could becharged to the producing departments on the basis of maintenancohours and not direct labor hours. An additional refinement would appor-tion fixed cost on the basis of a predetermined maintenance schedule'and the variable cost on the basis of maintenance hours actually used.

(21 Spending and idle capacily variances for each producing department'based on astual produstion hours:

Machining AssemblyAetual departmental factory

ovgrhgad ..............r....... s4,2OO S5,24O.OOAdd share of budgeted service

departrnent costs:Maintenanco Department r.......... 670Janitorial Department................. 165

Total actual factory overhead..........,, $51035 $6'002.50Budget allowance based on actual

production hours.. 4r7O7 8,572.OOSpending variance .,....r......r.......r...... S 328 unfav. S 43O.5O unfav.

: :

Budget allowance based on actualproduction hour:s,......,...........,....o S4r707 S5r572.OO

Applied factory overhead:(1'34O hours r $3.6O per hour).... 41824(1'O3O hours x 95.50 per hour).... 5,665.OO

s15;oo247.50

ldle capacity varianco ...,.... 9_Ill f) ta* $ (93.oo) fav.

Chagter 17

Pf 7-q (Concluded)

(3) Spending variance for each service department:

Maintenance

431

JanitorialActual cost (month ol January) .,....,.. $lr3SO.Oo $iro4oBudget a||owancgt..............r............. 1rl4Z.g3 g?s

Spending variance.,,..o................r...... $ ,OrJ? unfav. S 215 unfav,

*Variable lactory overhead:($S,t AO + 27rO0O budgeted hours

= $.189 per hour) l2r370 actualhours x $.199 per hour) r......,.. $ 447.93

($ZTZOO + 12 months)..............h.. S zasFixed factory overhead:

(SA,COO + 12 months)........ 7OO.OO(S7'2OO + 12 months) ..............t... 600

Budget a||owancg....,.,.....,..,.............. $1rl4Zr3 $ g25

P17-4

Capacit1r...t...,...r............................o....,........ g}oh gooh l OOohDirgct labor hou!s.....................r...,........,,... 4OroOO 4srooo soroooVariabfg costs:..r........t....o......o.....o.............. $ 4rOOO $ OrSOO $ SrOOO

Indirgct |abor..................r....r................ IBTOOO ZO'.2SO 22rSOoPayrolf taxes and fringe benefits.......... slrz4o oc,ggs 71,5solPower and | ight . . , . . , . . . . . r . . . . . . . . . , . . . . r . . . . . . . . , 1r2oo r igso 1r5oo2Inspectiott.........,........r.........,o,.............. 4rgOO SrAOO grOOOg

. Other sgmivariablg costs....,.,.,.,,.......... 6'OOO O'ZSO 7r5OOaTotal variablg costs.r..r..o....r........,..r.r... g 91 ,24o $io2r64s $1 lqoso

Fixed costs:D e p r e c i a t i o n . . . . . . . . . . . . . . . . . . , . . . . . . . . . . . . . . . . . r . . , . $ g r o o o $ g r o o o $ g r o o oInsurance ..r . . . , . . . . . . , . . 1r5OO t,soo l r5OOMaintenance cost......,......,.......r....,..r.,. Z4rooo Z4'rooo 24rOoOPropgrty tdr.,...........r....o.....,.........r...,... l r5OO f 'SOO l r5OOSupervisory staff ' ..,.. ' ....o...r.....,.....t..o... gorooo gorooo 361000Powgr and |ight.,....,..........r...,..,........... 2OO 2OO 2OOInspection......,.............r....r..............r.... 4r2oo 4r2OO 4r2OOother semivariable costs...................... i,4oo i;a;o 1,40oTotal fixed costs,..,....,..... ...... $ 77,goo $ ??"soo $ ??"goo

Total factory overhead ...-.....,--... .. slqt,t* lirttras $t "t,t*

432

P17-4 (Concluded)

rPayroll taxes and fringe benefits:Direc't labor cost = 50'OOO ht€. x S7.50Indirect tabor cost = 5OTOOO hr:s. x $ .45

2Power and light:

s300 $. 03 per direct labor hour10, OOO hrs .Total cost

s375,ooo22,5OO

S397'5OO x

Chaoter l7

.18 = S71r55O

Hours CostLt:-t-t l l U a a a a a o a a a a a a a . . a a a a . a a r a a a a a a a a t a r a o r a a . . . r . . . . t . . . . . . . . a a a a a a a a a a a a a a a a a . . . . . t . . . .

L O W . . r . a . r . . a . a a . a a . . a a . . . . . a a a a a a a . . r . . . . . . . . . . a a a a a a t . a t . . a a a a a . r a a a a a a . a a a a a a a o . a a

5OTOOO4O,OOO

5O,OOO4O,OOO

st,7oo1,4OO

s1o,2OO9,OOO

a a a a a r r a r a a a a a a a a a a . a a a t a a a a a a a t a a a a a a a a a a a a a a a a a a a a a a a a a a r l a a r a a a

10,0oo s 3oo

s1,7OO1,5OO

Fixgd cost. . . . . . . . , . . . . , , . . . . . . . . . . . . , . . , . . ! . . . . . . . . . . . . . . . . . . . . . . . . . . . . r . . . . . r . . . . S 2OO:

clnspection:Hours Cost

Llt- r.I l l ! r a l a . a . . . . . . . a a a a a a a . a a a . a a . . . r a a . a a a a a a . a a a r a a a r o . . . . . . a a a . . a . . . a a a a a . t a a a t a . a a t a l a

Low..... a t a a a a a t a a a a a a a a a a a a r a a . . a a a a a t a a t a a t a t a a o a a a a a a t a a a a

Dif fgrgn cg. . . . . . . . . . . . . . . . . . . . . . . r ! . . . . r . , . . . r . . . ' . . . .

s1 ,2OO .ie-dffi;

- S' 12 Per direct labor hour

10499 $ 1,2oo

Total CoSt . . . . r r . r . . . . . r . .o . . . . . . . . . . . . . . . r . . r . . . . . . . . . . . . . . r . ' . . . . . . . . . . . r . . . . . . . . . . . . . . . . . . . . . . . S l Ot20O

Variablo cost (5OrOOO hrs. x S.12)... . . .r. . . . . .r. ' . ' . . . . . . . . . . . . . . . . . . . . t . . . . . .r ' . . . . . 6tOOO

Fixgd GoSt . . . . . . . . . . r r r . . . . . . . . . . . . . . r . . . . . . . r . . . . r r . . . . . . . r . . . . .1 . . . . . . . . . . r . . . . . . . . . . . . r . . r t . . . . $ 4 t2OO

lOther semivariable expenses:Hours Gost

5O,O0O4O,0OO

1O,0OO

$8,90O7,44O

s1,5OO

s8,9OO7,5OO

s l ,4OOFixed cost

t

Chapter 17

P77-5 .

(1} ONE MONTH FLDOBLE BUDGET FOR FABRICATION DEPARTMENT

Ooeratino levelBased on machine hours,,..Percentage of capacity .......

Variable costtIndirect labor .....o..Factory supp1ies,,r....,...,......POWgr . . . . . . . . . r . r r . . . . . ' . . . . r . . . . . r . . . . r

Rgwork operations.......,.,....Payroll targs ..,.r......r.r.........Repair and maintenanco.....Ggngral factory ..,.............o..

Total variable cost...........Fixed cost:

lrgoo 2,OOO 2,2OO_so% |_oo% 11o%

$ 3,87O.OO $ 4,3OO.OO $ 4,73O.OO1'35O.OO lrsoo,oo l1650.00

goo.oo ITOOO.OO lr loo.oo540.Oo 600.00 660.00630.00 700.oo 770.OO450.oo 500.oo 550.OO360.00 400.oo 440.OO

$ 8,1OO.OO $ I,OOO.OO $ grgOO.OO

1r600gooh

--

$ gr44o.oot,2oo.0o

go0.oo490.00 .580.0O400,00320.0O

s 7,2O0.0O

Indirect |abor....,..o.....,..r.r,.. s 2rooo.oo $ 2rooo.oo $ 2rooo.oo $ 2TOOO.OOSupervision..,...................... 2rooo.oo 2rooo.oo zjooo.oo erooo.ooFactory supp1ies.,................ 600.00 600.00 600.00 OOO.OOPower...,....,..,..............,t..,... 4SO.OO 4SO.OO 4SO.OO 45O.OOPayroll taxes """"""""""'.. lrooo.oo irooo.oo rrooo.oo rrooo.ooRepair and maintenance,.... i,!oo.oo t jooo.oo lr4oo,oo 1r4oo.ool-p"tty insurance.....,........ z5o.oo 7so.oo z5o.oo 7so.ool-p"tty taxes............,...,.... 5oo.oo 5OO.OO 5OO.OO 5OO.OOvacation pay......................., l '7OO.OO l,TOO,OO l'7OO.OO l'7OO.OOEmployee pension costs..... Irooo.oo trooo.oo Irooo.oo Irooo.ooEmployee health p1an.......,.. goo.oo goo.oo goo.oo goo.ooIltlachinery depreciation...... 3,5oo.oo 3,soo.oo 3,soo.oo 3r5oo.ooWater and heat..o..............r.. 4OO.OO 4OO.OO 4OO.OO 4OO.OOBuilding occupancy............. 9oo.oo 9Oo.oO 9oO.Oo 9oO.oOGeneral factory...,.........r..... lrog,g jg ITOOO,OO ITOOO.OO Irooo,ooTotat fired cost.........,,..... !@f9 $lgpoooo !!t sr;ffiTotal cost.....,.,..r..............o.. ffirr* $rrrrrr", *rr*gg ffi

s * ' .

134

I

P17-5 (Goncludedl

t2l

Based on machlnc houn..o-...€Parccntagc ol capacl$ o.........-.-

Varlabla cott:Indlrcct laborFactory suppllctPowerRework opo rat!ont........,..'.....'.....Payroll taret ..........x......,....o,.......Repalr and malntelEDCC...... '.......Gen era I lactory ..................o..o......

Total varlable cost .'............xo

Flxed costlndlrcct laborSupcrvlglonFactory auppllelPowcrPayroll taxegRepalr and malntenancc..........--Proporty In su rancc ......................Propgrty t8jf 8t......,.oo..............-...VacaUon pay -.-..-.Employee penslon cocbEmployec health plan ...-.-.Mach Inery d eprcclaUon ...,.....-..-Water and hcat .............,.,.Eulldlng occu pancyoo...................General factory

Total fired cost

FABHCANON DEPARTMENTVariance Report

For the Month of Februaryr 2O-

Chapter l7

SpendingVariancc

unfav.(lav.)

BudgetAllowancc

HormalCapaclty

1,80000%

I g,azo.oo1,35O.0O

000.00540.O0so,oo450.00360.O0

BudgctAllowancc

ActualCapaclV

ActualCoct

t 4,125,001r5:t4,00

e705011088,25

675.50125,753a5.OO

$ 8,370.00 3 8,924.99

1,88O93'/o

3 3,999.001,395.0O

930.0O558.OO651.00465.0O372.OO

3l2E.OO150.OO40.50

530.2524.50

(ql0.25)13.OO

o.ooo.oo0.ooo.ooo.ooo.oo

35.OO(1O.OO)

o.ooo.oo

+t.qo0.00

olt,o00.00o.oo

3 8,1oO.OO

3 2,ooo.oo2,OOO.O0

000.00&50.00

1rooo.0o1,40O.0O

750.OO500.0o

1,70O.O01,ooo.oo

800.0o3,500.00

400.00900.00

1r000,00sl8,ooo.oo

3 2,OoO.OO2,OoO.OO

600.004no.00

1,ooo.0o1,40O.OO

750,OO500.oo

l,7oo.oo1,O0O.OO

800.0o3,500.0o

400.0o900.00

I,00o.oo

t 2,ooo.oo2,009.0O

o00.004!to.oo

IrOOO.OO1,4OC,OO

785.OO490.00

1,7Oo.OO.1 ,OOO.OO

845.O03r500,OO

405.00900.00

I,O0O.OO

Total costApplled factory overhoad

(S14.5O rate x 1,880 actual hours)...,-......,.......ldle capaclty varlancc

Actual tactory overhead cost..........Applied factory ovsrhead..Un derapplled factory ove rh ead

Spendlng var ianceldla capacity variancc

Underapplied factory ove fi ead

stS,ooo.oo $18,135.00

$2O,loo.og s26,370.00 9p'o5o.o9

28,g7O.OO

@f"".s27,059,0O

2g,97O.OO

9__-_@3 689.00 unfav.

(800.0o) fav.

3 89 .00

3689.0O

untav.

' l

Chaptar 17

P17-6 '

(T} ONE MONTH FLDOBLE BUDGET FOR ASSEMBLY DEPARTMENT

435

1,5OO 1,650Iga% yo%

$ 3r375.OO $ 3,712,50l ,goo.oo 1,ggo.0o

525.OO 577.50750.00 825.00525.OO 577,50225.OO 247.5A300.oo 330.OO

_--S 7,5oo.oo $ 8r25o.oo

Ooeratino levefBased on direst labor hoursPelcentage of capacity.......

Variable cost:Indirect laborFagtory supp11es..................POWOi . . . . . . . . . . . .o. . . . . r r . . . r . . . . . r . r . r

Rgwork operations..............Payoll targs ......................rRepair and maintenance.....Ggngral factory r...........r......

Total variabl g Gost...........

Fixed cost:Indirect labor ...................r..Supervisioll ............r............Factory guppll gs......D...or......POWer.....r.......r.rr.r...............

Rgwork o p g rations ............,.PayrOll targs r..............r.......Repair and maintenance.....Propefi insurance..............Propgrty taxes.....,.....o.........Va cation p8|....................r...Employee pension costs.....Employee health p131t..........Machinery depreciation ......Water an d h gat..............,..r..Building occupancy....r........Ggn gral factory ........o..........

Total fixgd cost.,......r.,.....

$ 6,000.00

lr2OO_80%

$ 2rzoo.oo1,44O.0O

420.0Ogoo.00420,OO180.OO240.00

lr35O

_90%

$ 3r037.5OITO2O.OO

472.50675.OO472.50202.50270.OO

$ o,z5o.oo

$ 2,5OO.OOlrSoo.oo

500.oo150.OO600.oo

ITOOO.OO350.OO150.OO200.oo

lr8OO,OO1'20O.OO

500.oo450.0O400.oo900.oo

IrO00.oo

s 2,500.001,80O.0O

500.00150.00600.00

I,OOO.0O350.0O150.00200.0o

l'8OO.OO11200,00

500,00450.00400.0o900.00

ITOOO.OO

s 2,5OO.OO1,8OO.OO

500.0o150.00.600.oo

ITOOO.OO350.OO150.0O200.0o

lr8OO.OOl,2oo.oo

500.oo450,00400.oogoo.oo

I,OOO.O0

$13r50O.0o

$ 2,5oo.oo1,8OO.OO

500.o0150.OO600.oo

ITOOO.0O350.OO150.OO200.00

1,goo.o01r2OO.O0

500.oo450.oo400.oogoo.oo

lr0oo.oosl3,5OO.OO $l3,5oO.OO $13,5O0.0o-

$21'75O.OOTotal cost.......r............r....r.. slgr500.oo $eor2so.oo s2lrogo.oo

16

I

P17-O (Concludedf

t2l

Bs$d on dlnct hborhourr *Prrccntagr of cePaclU F@n

Verleblc cosi:hdlrrct bborFecloty stppllclPowrrRcwort opcraUonrffiForuPlyroll tarcr ...-o.Hffi6...o.d

Repalr rnd nulnteflttlcl --*--Oencrel tactory ---...*.E.--.-

Totel varlrblc @tt ..-.'...D...s

ASSEMBLY DEPARTMENTVarlance RePort

For the Month Ending August 31r 20-

Budgct BudgotAllowancr Atlowencr

Norrnel ActualCapacltil CaPecltY

ActuelCod

Chapter 17

SpendlngVarirncr

unfev.tfavJ

t 0,750.00 3 6,450.00

tFsO90.t

3 3,Oil75OIrO2o,OO

172.5O675.0O172,4O202-50tlo.oo

t 2'5OO.OOlBo0,oo

500,ool50,ooooo.oo

I,OOO.OO3rio,o0l50.oo200.00

l18OO.OO1300.00

9o0.00450.00400.00000.00

t,ooo.oo

lr2,�080%

t aoo2-5o1r5a&oo

45150o45.OO41t1.50103'50258.0O

t 2,5OO,OOlpoo.oo

500,o0150.00oo0.co

I,OOo.oo3:io.00150.00200.0o

1BOO.O01300.00

500.00450.00400.00900.oo

I,OOO,0O

3 srso.oo1,6!t+OO

405.OO4€a,3rtalt150

1,173.753a5,OO

3 7,800.50

3 2,5OO.OOI,aoo.o0

500.o0130.00ooo.oo

1,o0o.oo3:to.oo1s5.OO21050

2120O.OO1300.00

500.004llo.00a65.00000.00

I,OOO.0O

3a7.50100.0013.50

(150.751o.oo

982.25127.OO

o.ooo.ooo,ooo.oo0,ooo.oo0.oo

15.0010.50

400,0o0.00o.oo0.oo

05.oo

Fhed coaElndlrcct

Factory ruppllcrPowcrReworl opcratlonr-offi-.-.ffiPapoll terarRepalr end malntenlnc!...,......-Propcrty lnlurancc -tr*-ffiPropcrty t-rcr,..-*VacaUon patEmployco pcndon oortt -**Employcr hcrlth phn *.*.-Machlncry dcproclatlotr -o--*Watcr rnd hoetBulfdlng occuprnqyOencrel factory

Totel lhcd cod tl3,50o.ooTotal cst, tt20,250.00Appllcd factory ovcrhred

Fl5.00 retr r 1'290 rctuel houn),.-...,......,-...ldlc capaclty varlrncr..-ActrtI tectory ovrrhud eort...-....,Appl led factory ovcrhcrd...Undonppllcd fectory ovrrhcedSOondlng varlanctldlo capeclty verlancr

o.oo0.oo

Itt3,5OO.oo 313,090.50

319,950.00 321,800.00

19,3!10,00

3 OOO.0O unfav.

321,89O,OO19,35O.0O

3 2 ,510,00

3 1,910'OO unfav.OoO.O0 unfav.

3 2,51O.O0

t1,010,09_unfav.

Undcrappllcd fectory ovc

Chapter 17 43t7

c17-1

' QASES

(f l The factors that influence the behavior of the production managers,described in the case, conflict with the factors that motivate the mainte-nance managens" The production managens have been given a monetaryincentive to improve the costs in their own departments. They requirethe support of the other departments, (e.9., Storrrcom and Maintenance|to achieve their objective; but the incentives (monetary and otherwise)have not changed in the other departments.

To lmprove their costs and earn the incentives, the pmduction man-sgonr have postponed repairs; demanded emergency repairs more fre-quently than in the past demanded repair work be done mone quickly toreduce downtime; demanded special treatment in some cases; pfacedundue pressunes on maintenance manageni; and complained about themaintenance charges.

The results of the demands by the production managans conflictwith the following tactors, which appear to be important io the mainte-nanca managens and reflect on their performance: good relations withother managens; high quality repair work, inctuding making machinerysafe and maintaining its normal life; and orderly work schiduting.

(21 lf monetary incentives to the pmduction managens are to be continued,complaints and conflicts could be reduced by revising the charging sys-tem as follows: develop predetermined hourly charging rates for eachskill level within the Maintenance Department; Oertloi predetermined orbudgeted hours for routine or repetitive maintenance work; develop bud-geted costs for parts and materials; use maintenance job time cards thatare initialed by production managers when the job is done; and develop apenalty rate to be charged to those production man"g"o ;rho need quicfservice that could have been avoided by timely maint-enancs schedut'ing.

lncreased productivity and reduced conflicts between managensprobably could be more effectively achieved by revising the renrard andevaluation structure. Evaluations lnd rewards tor indiv'idual effortsshould be eliminated, and cooperation and continuous imfrovementshould be encouraged and tewarded. High rejection rates and internalconflict suggest that far moro is wrong wittr ttre current "yit"- than justthe charging rates.

KB

c17-2

(11

Chaptor l7

Various alternative answerE may bo considered acceptable dependingupon the lustifications given and top managementb reacUons to anyresutgng wriances. The main objective ig to ensure that the costs areallocated to the aneas that ara rasponsible for the incurrenco of thecosts.(al $8,OOO cost of idle time in the Assembly Department-This should

be charged to the Machining Department because it is a directresult ol their decision to change production schedules. By chargingMachining with this cost, they beeome awano of the overall effectsof scheduting changes and the overalt cost to the company of theirdecision. Some justificaUon could be given to charging $3OO of thisto the Purchasing Department becauss.that would have been theadded cost to the company if the schedule had not been changedand it is a direct result of the Purchasing Depaftmentb decision togo with a new supplier.

(bl $1,OOO savings in costs due to layoffs in Machining Department-This should be credited to the Machining Department because it isa direct result of their decision to lay off machinists'

(c) S1,5OO cost of training in the Machining Department-This shouldbe charged to the Machining Department because it is a directresult of their decision to lay off machinists who must be subse-quently replaced, This would ensuno that they ane aware of the totaleffegt of their decision on the overall company instead of iust theirown department.

(d) S2OTOOO lost profit on sales resulting from Assembly Depaftmentdowntime-This ls an opportunity cost that is not normally recog'nized in the accounting records and, therefore, would not becharged to any departmenl In evaluating the Assembly Department'consideration should be given to the shutdown that occurred in theMachining Department and its effects on the output of the AssemblyDepartment,

Overall, the companyb present budget and leward (bonus) system wouldappear to be causing a fack of goal congruence, poor communicationtand an overatl employee dissatisfaction caused, in whole or in part' bythe following:(a) The company does not appear to be following the basic concepts of

responsibility accountlng and reporting (as evidenced in (1)). Thecompany should try to ensune that the responsibility for a cost isdirectly retated to the authority to control the cost in order to estab-lish a fair evaluation system.

(b) The company appears to have a "budget-constrained" style of eval-uaUon, in that all managers seem to have their prime concernfocused on meeting their budget regardless of tho overall effect onthe company. A sprofit-conscious" style would be more appropriatot

(21

Clppter 17 Ag

Cl7-2 (Concluded)

whery a -manager would feel free to exceed his budget if it wouldbenefit the overall company {without fear of aoreoJlv affectinghis/her evaluation). For example, Winston woutd have been preparedto have the added cost of air freight charged to hirs oepartment,resulting In a considerable cost savings to the overal company(el The companyb present renrard system of giving uonuses based on amanagerb ability to meet budget tends to ptaci ioo mucrr emphasison the short-term, to the possibte detriment of thelong_term.Managers are making decisions to ensuno their bonuses instead ofmaximizing the overarf ggrpany objective". An "-,,.,pr" of thismight be the decision-of Valquez tolay off workers tJsave $l,ooo inthis period and, therefore, gat the bonus, evsn though output wasreduced. This action wourd rssuft in adaed "o=t" ;ili,5oo toreplace the workens in the next period.

(dl Generaily, an ail or nothing bonus "y"i". such as this is a poormotivator, because too much emphisis is praced on meeting thebudget' This may lead to a lack oi goal congruence as evidenced inthis case-manipulation of the dati to meet the budget in one par-ticular period and/or overatl employee frustratio;;;;1, their inabit-ity to meet unreatistic budgets. '

(el The companyb overalf attitude seems to be that yariances frombudget represent poor performance by the ,"n"g"r;-This courdlead to serious motivational and Inot"i" problems with the staff.Emphasis should be ptaced on the raci tirat variances are onlyattention directors and indicate the need to invesiig"t; why thingswere different frcm expected. The variances may indicate that thooriginar budget uras wrong and shourd be up_dated (for exampre, theprice of part # 88 would appear to be unrealistic), that overalt com-pany objectives and/or procedures need to be ";;;;a or thatthings hava happened that are oifterent from ext;;ilbut beyondthe control of anyone within tfr" org"iLtiorr.(0 The company woutd appear to be u-sing a static budget for its evalu-ations, as evidenc-ed by the fact ttraivitquez and Diron receivedtheir bo-nuses for being under ilteiioriginal budgeted costs for theperiod' ft is also evidenced by the ractirrat Wnston had an annuatrimit to the amount of air freiiht costsattoweo instead of anailowance based on the totar purcrrases made in the period.Evaruations shourd be based.il r ""ip"ri"on of actuar resurts anderpected p.sults using a fterible uuog;t, based on actual levels ofactivity achieved' Thi; is to isolat"-trtll"riances caused by efficien-cies/inefficiencies as op.posg{ to ttrose caused by a change in vor_ume of activity from that whict'"r"i o-riginariy;#;i";

440

c17-3

(11

Chapter 17

I

(al Danielb perception of scott, the controlle4 is that she is:(i) an accountant who knows and cares little about the production

aspects ol organization;(21 unsympathetic and not helpful in providing sertices to the pro'

duction dePartments;(3! an accountant who is unwilling to change or nequest executivemanagement to make changes in reporting requirements.

(b) DaniePs perception of corporate headquarters is that it is:(11 unfair beciuse they are using the cost report as the sole-iudgeof performance, thereby ignoring monE realistic cost comparisons'product quality, employee pride, and motivation;iZ1 ins"niitiue io the needs and concerns of production people;

igi resistant to change in reporting policies and budgetary pnocess'

es,(c) Daniel's perception of the cost report is that it is:

(il a shortsighted report overemphasizing cost minimization as a

singfe obiectivei(21 lnflexible and not subject to the changing production levels andoperating conditions of a dynamic production process;

til a biaied repoft highlighting shortcomings and failing to givepnoper recogniiion to lmplovements in performance or innovativepnocesses.

(dl Daniel's perception of himself is that he is a:(il qualii ied production manager interested in a quality product at areasonable price;(2! frustrated manager unable to get satisfactory cooperation fromthe Accounting Department or executive management;(3) discour"gJd production manager recognizing that the currentreporting situation is nearly hopeless, and that others before himhave been equallY unsuccessful.

(21 Danielts perceptions adversely affect his behavior and performance as aproduction manager. Operating in a ttno wintt situation in which hebelieves performance neports do not fairly represent his accomplish-ments, pius the inability to communicate his desires or needs to appro-priate people in top management, can inhibit motivational desires andcurtail incentive.

(3) Ghanges that could be made in the cost reports that would make theinlormation mons meaningful and less threatening to the productionmanageni are as follows:(a) Include a mone detailed breakdown of labor and overhead costs.(b) Use a budget allowance based on actual activity rather than a static

master bulget for measuring performance' so that changed condi-tions, volunie changes, and fixed versus variable costs are recog-

nized in the rePorting Process'

-

ChWter 17

Cl7-3,(Concluded)

cl7-4

lUl

(cl

(d)

Separate controllable costs from noncontrollable costs and clearlyidentify those erements or the report for whicrr the production-man-ager is diresily nesponsibte. Tlrese actions wiii p-ride a morsmeaningful anarysis or operations and manago; wil kn;;Lsponsi_bilities.A variance column that highlights both favorable and unfavorabrecircumstances would provide a less negauve report. significantvariances could be hightighted to drawlftention to them.

(11 Functional_anddysfunctionalbehavioralnesponses:(al Delaying action on certain reports during pttioo" of peak activitycould be dysfunstional. lf the reports contain information requiri-ngimmediate attention' any delay in action woulJ h;r; tr be dysfunc-tional. lf the reports continue io accumulate with no action takingplace (i.e., the department heads do not catch up during the tulls),this definitely is dysfunctionat behavior.(bl Having too many reports so that no action or the wnong action istaken is a dysfunctional nesponse and a gooo eia;;i" of informa-tion o.verloqd. The department heads were unable to assimilate thesupplied information pnoperly, and therefore ttreyeiitrer did not useit, or used it incorecily.(c) Delaying action untit reminded by someone can be dysfunctionat. lf

9"!")rs continuafly take place "nJ re"ult in complications and/ordelays in other departments, this tack of action is dystunctional.(d) The department heads' actions ""n u" considered both functionaland dysfunctionat. The development of information f;m alternativeaourrcss is dYsfunctionaf to the firm because the formal system isnot producing the information in a usable form ano irtl process ofdeveroping information from other "our"", probabry has a cost.However, the fact that the departmeni tr""o ,r"" "dl" io generatethe needed information from other "our""" in order that actioncourd be taken is a functionat nesponse to the probrem.

ra

I

\

Chapter t7

I

C17-4 (Goncluded)

l1l The dysfunctlonal behavior that occurred In McCumber Company was a

dlrect rcsult of management's lailure to recognize that inlormation sys-

tems "r" Jyn"mic. Once a system is designed and lmplemented' it

should be iontinually rcviewed to acknowledge and incorporate any

changes.-A "y"i";situCy committeo' c-omposed of bolh systems staff

and users, siiould Ue estatrtished to reYiew the present system and to

educate ui"rs as to Information needs and the uses of information.

During U," systems review, the committeeb attention should be directed

toward informagon needei by department heads and the information's

form and timing. Unnecessary reports ghould be eliminated, and individ-

ual reports sno-utO be rsdesigned- so tlrat only relevant information is

included. once the reporting system is rovised, the systgm should be

reviewed periodically to seJttrat it is functioning smoothly and to make

any necessarY corections.

Ol&1. Standard clr ar. thr predetermhed coet! ofrnelru{ac{uring prodrdr durhg a specifb pod-od mdcr cunonl or anthipded opcrathg cr-dtkrrr. Stsndardr airJ in phrning and wrtrol-lirp opcntims.

Q1&2. A ftw uscr cil etgrdard catr are:(r) oatablirhhgbrrdgntt(b) conlrclling coetr by nrotivating .rnploy-

oot and rnrarurhg rtfpbncier(c) rirplityhg coting preeduroo and epc.

diilhg cod roportr(d) aaaigning cortr lo materials, work in

proc.sr, and finklhrd god inventqicr(r) forming the barir lor ostablishing con-

lrecl bidr and for retthg saler prbesOt&3. To tol rabr pricct, exccutives need cogt hfor-

malion lumished by tho accounting depart-rnont Sinct $ardard cod! repr$€nt the ostthat shorrld bc a&ained h a weil-nanaged plantoporalrd al nollral capacity, thcy arr ideallycuitrd lor fumishing hfonnati:n that will enablclhr aalor depaimont to prbc products.

Eudgetr are urcd for planning and coordi-nalhg lulurc activitics and tor curlrolling cur-rrnl rliviticr. ttlhcn budget figurec erc bagedqr rtendad c€lq the aocuracy ol lho resultingbrrdgct i! strwrgly hfluenced by the retiability Jtho rtandard costc. With standards avaihLb,prodtrction figurer can be translated into themanufacturhg costr"

Q18-4. Sbrdards are m htegral pE t of irb order andproce$ co3l accumulation, but do nol com-pdr a lydom that ouH b. utilized h licu ofsro of lhc accumulaftxr rnothoclr. C,ets rnaybe r.cumuhtcd wilh or without thc use d stan-ct rdr.

Q1&5. Critcria to bc used wtron rolecthg thc opera-lirnal activitiea lor which rtEndar& are lo berrl includc thc fdbrrhg:(e) Thr activity should be repetit ive in

nalur., with thr repetition occurring inreldively short qrcles.

(b) The hpd-and output (product or rervice)of thc aclivily shoub be measurabte andunilonn

(c) Tho obmonlt ol coal, ruch as direclmeltriab, d,act labor, snd facto.y orer-hoa4 mud b. dsthed cfoarly at the unitlovol of act vity.

Qt8-8. Norrtel or currntly attainablo standards arcproforablo to th.oretbal or Ueal siandafdr for(a) porformancc rvalualion and/or emptoyeernolivation, qn!, (b) budgeting and ptanning.Thoorctirl or Ueal ctan&rds-are nol realisti-cllly attainabtr. Ar a con3oquenc. of using

CHAPTER 18Dlscusstoil QUEST|ONS

rucfr standards, employees rnay bocanr dir.couragcd ralher lhan rrolivated, and budgetror pbns arr likely to be distodod end unroli-abL,

Qt&7. Behavinral bsuer lhat need b br cqrsUendwfien selec.ling tho level of portorrnsnc. to b.ircorporated into ctandards inctudo tho fdl*,hg:(a) Thc standards musl bo fcgitimatc. Tho

atandads noed not rellect thr actual coglol a ahgb ilem or o7clo. Fbrrew?, lhcyiteally will repraent the coci bst thouldbo incuncd in the productbn of a gironprodugt or the perlorrrlance ol a jivenoperatian.

(b) The standardr musl be attainable. tt/trcnthe atandards arc set too h igh, thcropealod failure to chievc them wilt tondlo reduca thc rrotivatbn lor attahment.Thc cqrvenr b sbo trur. Standadr h8taro loo looro represonl an invitatiqr torelar.

(c) The participant shoutd havc d voice orinfluencr in the establirhment of rlan-derda and reeulting pedormancr mea-sures. Innolvement in the formutatbn otstandards gives the participant a gmalorsense ol understanding and commil-ment.

Q18-8. (a) The role of the accounting department inlhe establ ishment of s tandards ia todetermine their ability to be quantifiedand lo provide dollar valuee for ryecificunil standards.

(b) In the establishment of ctandards. thtlole of the depariment in wtrbh thc pcr-formance is being mearured ir to prwidohformatim lor realistic dandards, and toalbw tor subsequent perfonnance evalu-atkrn lor the purposc of delecthg prob-lems and irprwhg perfomance.

(c) The role ol the industrial engineering. department h thc estsblishment of ctan-

darde b to provide reliable nreasurer c,phyaical activitieg related lo thc rtan-dardr ol performance, and lo vcrity thoconsirterry of the pertomancr botwcondepartrnents.

Q1&9. Thr factory overhead variablo etficiorrcy varFanco b ! ,nea3ur. of tho efficient or ineflbirntuac ol lhe tase. thet wac used in allocatingfectory overhead to production. To thc crnontthat the activity used as an allocatircn basodriver variable lactory overhead, lhc variabloefliciency varisncc is a mearurc oil tho cort

/t43

444

savings or cost ircJnence that is attributable to

tho etlicieot or hefficient uso cl lhal acfivity'

01&10. Thr factory overhead spending variance ir a

mealurr cl the ctficient or inefficient use of the

varbur itsns of tsctory ovefiead ll ir caused

by dilfcrmcea in thc prices paiJ lor thc itens cf

ovcrhcad actually used (i.c., lhr differences

between tho ac'tual quantity at thc aclual prbe

and the sctual quantity at the standard prico for

all ilomr ol lactory. overhead) and lhe ditf er'

encee h the quantities ol the varbus ilerru oftactory ovefiead adually used (i.e.' the difler'ences between the standard quantity allorvedfor the actual level of the aclivity base at the

etandatd price and the actual quanlity used atthr gtandard price lor all items ol lactory over'head).

01&11. The factory overhead volumc variance is ameasute ol the under' or over'utilizalion ofpbnt failitier' lt it tho diflererre between thetotal budgeted lixed factory overhead and theamounl charged to (or chargeable to) aclualproduction based on the standard quantilyallowed for thc activity base used lo allocateoverhead. Thc volume vat iance may oothought of as ttle emount cl under' or ov€raP'plied budgeted fixed lactory overhead.

01&12. Atter variances have been dEtermined' rnar:'agemenl should:(a) decide whether each variance ig suffi '

ciently signilicant to require invesligationand explanaliro

(b) hvettigate and obtain, frorn the resPo.r-sible department head, explanations ofsignilicant variances

(c) take coneclive acticn and recognize andreward desirable performance, whsro

(d)

018-13. (a)

spproprialerevise standards if neededFeatures ol lolerance limils include:(' l) A standard cost control syslem isestablished, specilying exPocted perfor-rnance levels.(2) An hforrnation syslem is designed lohighlight the areas most in need ol hves'tigntkrn and poesible coneslivc action.(3) Variancc rangos for areas and ilemsare compuled. Managemenl does notspend tirne on parts of the operationsthal producr satislactory pcrlormanceleveb wilhh theso ranges.(4) lvlanagemenl's Ettenlion and etlodsarr csrcentraled on signifi-nt variancecfrorn expccted resuhs. which sigoal theprosonca of unplanned condilions need-ing investigalion.

(b) Tolerance limils have potenlial benefitsbecause they may resuh in more eftec'live use ol management time. Thc rnan'

Chapter l8

age/s tirne b not wetod on lho prcestol kJentilying important problems or inworkhg m unirnPottant ones. Thc man'ager should bo able lo concenlratbetforls on inPottant problems' becauscthe teclnkPc highlightr lhern.

(c) lt may br difficult to determine whichvariancor ere rigrrilicant. Also. by focus'ing on varianceg abovc a cadain level,other sscful hformatbn, suclr as trends'rnay not be notbed at atl oatly stago.

ll thc evaluatbn lYltrn b h anY waYdircctly tied to thc variances, subordi-nals! ttlsy be ternpled lo cover up n€$a'tive exceptbns or not tePort lhem al all.Jn addilirn, subodinatea tnay not receivote infotcam€nt for tho reducl ion andrnahtenance cf coat leveLg, but only rep'rimands tor those itemc which exceedthe range. Subordinate morale rnay sut'fer because of the lack ol Positive reh'lorcemenl for work well done. Using toFerance limits rnay also atfest supervisoryemgloyeer in an unsatislactory m'vlner'Supervisors may feel that lhey ars nolgetthg a cornplete review of operalionsbecause they are always keying on prcb-lems. ln addiliqt, superisors may thinkthat they are excessively critical of theirsubordinales. A negat ive impact onsupervisorY rnorale rnaY resuh.

01&14. Overemphasis on prico variances can resull in

a large number of lorr cast vendors, high levelsof invenlory, and poor quality materials andparts. Since lhe emphasig is on price ratherthan quslity or reliability, purchasing will likelyhave a large number ol bw cct vendors avaiF

. able, who can be played cre against the other

to got the lowest pqssible prices. ln addition'purchasing wil l l ikely purchase invenlory in

largo quantities to take advantage ol purchase

discounls and to redwe the need to place rushorders that resull in premium prices. Inventorytends to becorne unnecessarily large, resultingin excessive €rryhg costs, and rnaterial qualF

ty tends to decline, resulting in poor produclquality andor excessive spoitage, scrap, andrework

Overemphasis on efticiency variances canreault in long production rung, largc work inptocoss inventories, and attemptr to controlquality through hspestbn alone. Long produc'tion runr reguire lewer mschino set ups andreduce tho amounl ol inelficiency resultingfrorn thc leaming tequired to changc produc'tion lrorn one product to snother. Large work inptocoss inventorier resull frgn bng prodrrclionruns, and large invenlorieg are l ikely to beviewed by department managors as buftero

Clppter 18

thet ern bo utod to rbrorb rnschino broak-rdownr, rmployrt ebrrnlorism, end rlackdemand for thr product. Atthough carryinghrge hvernori.. b €3ty, thr carryhg sn donot affri thr offbienqy yariansf, whi*r in tumoncourlgor d.plrtmantrl rnrnagrn to ovrr-producr. Shco offlcioncy variencot meerur.lho utr cJ inRlr h nhtixr to ouput volum,rtto.tr b sttrol Crrsfrty l.nd to bo orisrtd to

45

intprctbn elone. Stopping lho procorr lrrrprrinrnl wlh allemdivc prodrrtbn nrethoc!.lo pormanen0y conect a problem or improv,,Cualty can rccult h an unlarorable labor rfficbncy v8rianc.. In cqrtrast, increasing tht vol.umr of prodrstbn and rrrodrhg or di*ardingdotccb har e rnaller inpact sr rtrr cttbiencivarianca.

El8'l

Aetual materlals Purchasodat aCtual OOSI """"r""""'

Actual matarials Pur'chassdat standald cogt""""'o""

Materiatg Punchasc PriccYariancc

Actual matariala used 8tactual cost

Astual materialg usod atstandard GoSt """""""""

Materials Prico usagoVafianCO ...."t"tttt"ot"tttt"'

Actual materiat3 usod 8tstandard |ElO8t..."""""""'

Standard quantltY allowedat standald cogt.'.....o"""

El8-2

Actuat materiab Purchasadat actual ClOSt ..'.....-.'.....'.

Actual materials Purchg$orlat standald coSt......'t'....'

Materials purchaso Pricovariance .r........r..r............

Unlt Cost =

$13'4{ actual

13.5O standard

Ll.ogi

Unlt Cost =

$13.41 actual

13.5O standard

9l.oe)

Unit Cost =

$13'50 standard

13.5O standard13.5O standard

Unit Gost =

522.10 actual

22.50 standard

$__J.49)

Unlt Cost =

$22.50 standard

22.50 standard22.50 standard

Chapter 18

Amount

$60,345

60,750

S (4O5) fav.:

Amount

553,640

54.OOO

S (36O) fav.

Amount

s54,OOO

51,3003 2.7OO unfav.

Amount

${ 1o,5oo

I12.500

S (2.00O) fav.

Amount

$112,5OO

99.OOO:B 13.5oo unfaY.

pGBClsES

-a

QuantlW

{,5OO lbc;

4,5OO

4r5OO

Quantltv

4'OOO lbg.

4rOOO

4,OOO

QuanUtv

i,o6o lbs.

3.800Materials quanUty variancc -2AO. lbs'

Quantltv

5,OOO

5,OOO

5rOOO

QugnUtYActual nnaterlals purchased

at standard cost.,.,...or..-. 6,000Actual materialg lssued at

standard cost..,,....,.o...r.., 4.4OOMaterials inventory yariancc __q99

Clppter 18

El8-2" (Conctudedl

Aetuaf materials issued atstandard CoSt .....,...r........

Standard quantity ofmaterlals at standardGOSt aa...aa..........r..o............

Materials guanUty varlanoo

Et8..?

(rtAstual materials purchased

at actual Cost..................Actuaf materials purchased

at standald cost........r.....Materials punchaso price

YafianCO ..rr....r.................

Astuaf materials used atgtandard Gost ......r....ro.....

Standard guantity allowedat standatd cost...........r....

Materials quantity variance(21Materials beginning_ inventOt]f .........................Materials punchasod during

If|O11th...................r..........

Materials avallable for use..Materiafs lssued to

Unit Cost =

$22.50 standard

22,50 standard22.50 standard

Quantitv

4r4OO

Quantitv

6,OOO

6rOOO

6,OOO

Quantitv

Trloo

6.9o0200

Quantitv

2rOOO

I,O00I,OOO

Quantitv

7rl OO

Trloo

7rl OO

Unit Cost =

$4,2O actuaf

4.OO standard

$ .2o

x Unit Cost =

94.OO standard

4.OO standard4,OO standard

x Unft Cost =

$4.12 actual

4.2O actual4.f B average

4.18 avor:lgo4.18 averago

r Unit Gost =

$4.18 average

4.OO standard

_Lli2oo unfav.

unfav.

4.300_t_99

Amount

$99,OOO

447

unfav.96,750

l-3e9

Amount

$25,2OO

24,OOO

produCtiOr1....................... 7rf OOMaterials ending inventory Too

Amount

$28,4OO

27.600g__e99

Amount

$ 8,240

25.200s?3,44O

29.679_$_9,762

Aetual materiats used atactual averago cost........actual materials used at

stan dard GGISI ................r.Materials price usago

varlanca ......o.......

Amount

$29,678

28..400

$ . 1 8 -$_ff78 unfav.

Chaptar 18

El8€ (Concludedl

(31Materials beginning

inventory .t"t""t"'rtt"tttt"'

Materials Purchased duringmOnth . . . t t t t t " t t " t " " t "o t t t t t "

Materials available tor use"Materials issued to

pfOdUCUOfl."t"t""""""""

Materials ending inventorY

Actual materials used atactUal GOSI """"""""t""'

Astual materials ussd atstandard cost.........."'r"ot

Materials Prico usagoYaf ianCO .r . . t " " t t " " 'Dt t t t " t t '

(41Materials beginning

inventoqlMaterials Punchased during

mOnth . . t . . . . " t t t t " t " " " o " t t " '

Materials available lor uss.'Materials issued to

production

Materiats ending inventorY .

Actual materials used ataCtUal COSI ......... '......... '.r

Actual materials used atstandard GoSt.......r..........

Materials price usagovarianCg . . . . . r . . . . r . . .

Unit Cost =

9.12 actual

4.20 actual

4.12 oldest4.29 nowost4.2O newest

Unit Gost =

$4.12 oldest4.2O newest

4,OO standard

Unit Cost =

$4.12 actual

4.2O actual

4.20 newgst4.12 oldest4,12 oldest

Unit Cost =

$4.20 nswest4.12 oldest

4.OO standard

Amount

$ 8,24021.420

$29,66O

28.400

l-11260 unfa%

Amount

$ 8,240

25.200$33,44O

25r2OO4.532

S 3,708. -

Amount

$25,2O04,532

329,732

28'40�0

3 1,332 unfav.r

QuantiW

210oo

Amount

$ 8,240

25,260�$33,44O

8r24O21,420

6,0008rO0o

2rOOO5.100

_900

Quantitv

2rO0O5.1ooTr loo

7,10O

Quantitv

2,0oo

It.ooo8r0oo

6t0oo1 .100_900

QuantiW

6,000t � l o oTrl oo

Tr loo

-

dlg.ptcr rs

Et8:{

Aetual tabor hours rvorkod..Actuaf labor hours work6d,.Labor rate varialtco.............

Aetual labor hours workod..Standald hours allowed

(lr2OO unlts r1l2 hour1abOrf ...r....ror...............o....

Labor efflclency varlancc...,

Et8-5

(11Actual materials purchasedActual materlals purchasedMaterlals purchase prtce

Vafia nCg .r........D...............

Agtual materlals used ........rActuat materlats used,..r,....Materfafs prica usage

Vaf ianCO . . .o . . . . r . . . . . r . . . . . . . . . . .

Actual materials used .........Standard quanilty allowed ..Materlafs guanUty yariance

Rstc =$ 9,8O 8ctu8llO.OO stsndard

qj.2qt

, Rate =$t o.oo standard

lO.O0 standard|O,OO gtendald

Unlt Cost =$3.8O actual

4.OO standard

-Unlt Cost =$3.8O actuat4.OO-Etandard

r Unlt Cost =$4.Oo standard4.OO standard

1.OO standard

x Rate =$12.20 actual

1z.oo standard$ .20

r Rate =$12.0O standard

72.OO standard72.OO standard

Houn650650650

Hourr650

600

Amount$51370

6.500S (i3o) fav.

Amount$6,5oo

I,OOO

Amounts5,7OOo.ooo

l-(3OQl fav.

Amount$5,1305.400

50 $ 5OO unfav.

Quantltvl,5oolr5OO

1,5OO

Quantity1,35O'1,35O

1,350

Quantltv1,35OI,O20

_930

Hours3 lo

340(301

$ (.2o1

$ r.201

I2l HounsAstual labor hours workod..

-Tio-

Actual labor hourc workod.. 3rOLaborrate variallcrg............. 3lO

l$uqt fabor hours worked..Standard labor houre

allowed...r,.....labor "rri;;;;#il::.:

$_EZO fauAmount$5,4OO

4,Ogo$!,329 unfav.

Amount$3,782

3.720

$_0? .unfav.

Amountq?,72O

119

4,OgO$ (geQ) tav.

150Chaptcr 18

E18-6$166,000

Actu a l la gto ry ove dl ea d "" " " """' -'-':: ::;':'::: :: ^ -

" "" " " "'

ililari-o""?rt " " d. chare eab I e to :"Y:1 tP1.::17iil,ffir-"t-"i;;ffip ; ."."d r 312.5o overhead rate).. 137.500-

S 28,5OO unfav.o"Lraff factory ovefi ead varianco """ t a a o a a a a o a a a

Volume variance a o a a a a a r a a a . a a " t " " " o " t " " '

controllablg varianc9...."""""""""" """"""'r"""o'o

volumg variance ......""""""""""o' "" 'r""""""""""

Overatl factory ovefiead variance

s166,OOOACtUal taCtOfy OVgfh gad ..........t.......""""'o't"""""'!"""t"""'

Budget allowancJ Uased on standard hours allowed:--v;;;tle overhead (11'ooo standard machine

hours attowedi'sn.so variable ovefiead rate) s49'5OO

Fi;;;;;;rreal ruageted """""""""""""""' 96'000

COntfOltablg Vaf ianC1O... . . . . . . . . . . . . . . . . . . . . . . . .o. . . . .o. . . . . . """""""""" '

Budget atlowance based on standard hours allowed

( f fOm abOVe) . r . . . . . . . . . . . . . . . . . . . .o . . . . . . . . . . . . " " " " " " t " "o" " 'o " t " " to " '

Sta nda rd factow o"e rhead chargeabt^" !o g"duction(t I rooo standard hours ailow;o r sl2.5O overhead rat6)'.

VOlUmg Va f i anCg r r o r ro ro ro rL ro . . . . o . . . r o t . . . " . " t " " " " o t " " " " t t " t t " " o "oo '

COntfOllablg VafianC8.......................""""o $20t5OO UnfaV'

volumg yariance............................!o...'r..... 8.ooo unfav'

orrerall factoly ovefiead variance """"o"r 128'5oo unfav'

Et8-7

ACIUal f aCtOfy O.Vefh gad o.. . . . . . . . . . . . . . . . . . . . " " " " """o""""""""r"

CianOarO overhead chargeabte to actual producUon- iS,ZOO standard hours allowed x822 overhead rate)""""'

Ove ra tt. f actory overhe ad variance """"' ""'t""""""'

Agtual factory overhgad """"""" """""""o""""""'

Budget allowance based on standard hours:variable o""ttt"iJis,zoo standard hours r 36) 33!'?99Fixgd ovgrhgad """""""""""o""""""""""""

90t0OO

GOntfOllable VafianC18.... . . . . . . . . . . . . . . . . . .""""""""" '

Budget allowance based on standard hours( f fOm abOVe). . . r . . . . . . i . . . . . . . . . . . . . . . . . . . . . . . . . . ' . r . . . . . . . . .or . . . . . . . . . . " " " " "

Standard tactory overneaO chargeable to production( l fOm abOVe) . . . . . . . . . . . . . . . . .o . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . " " t " " t " t " 'oo t '

145.500S 2O.5OO unfav._

s145,5OO

137.500

-t 8.OOO unfav.

$13O,OOO

125.400S 4.600 unfav'

r

$13O,OOO

s130,20o

t 25.4003 4.8OO unfav._

$ (2oo| fau4.8OO unfav.

-$-:!J99 unfav'

v

130.200

Ctnpter 18

Elg-g ,

Overafl factory ovorhsad variance

Actual factory ovgrhgad ..'.........o..........t.o............,....o..o.........Budgat allowance based on actual machine hours:

Variable overhead (41600 actual machine

t*51

Agtual factory ovgrhgad ...-...........-...rD.....................--...........standard overhead chargeabre to actual producuon

(4r2OO gtandard hours aflowed r $2{,gb overhead rate}....

s l2l ,OOO

l04.l go

hours r $5.8O variable overhead ratef .....,..Firgd ovgrhead budgeted ..,..o...Dr.........r..........

Spending variancg ...........,..oerorr--r'orr

Budget allourance based on actual machine hours.......D......,Budget allowance based on standard hours attowed:

variable overhead l4r2oo standard machine hoursallowed r $S.8O variable overhead rate)..... g ZCTSOO

Firgd ovgrhgad budgeted r'........r.......i............ g5.5oovariabla efficiency variance....r.o.......'.r.......o.,.............,r..r......

Budget allowance based on standard hours allowed.,..........Standard overhead chargeabrE to actuar production

(4,2oo standard hoursailowed r $24.gb ;verrreaa rate)...,volume variancg t 'o...........r......r.............o..r..r.......rr.o.........r.....

spending variance "...............'........o.....r....r......................o....variabfg efficiency variancg......r....................r.............r.........volumg variancg " ' . . . . r . . . . . . . . r . ' . . . . . . . . . i . . . . . . . r . . . . . . . . . . . . . . . , . . . . . . r r . . . r . . .overal l factory ovgrhgad variancg.,r . . . . r . r . , . . . r . . . . r . . , . . . . . , r . . . . . . . . . .

_S 2.320 unfav.

$f 09,860

f 04,t 60E_5'7O9 unfav.

$ 8,820 unfav.2r32O unfav.5.7OO unfav.

_$_16.840 unfav.

_L!grq40 unfav.

$12f ,ooo

$26,gBo95,500 I l2,1go

j$__e,820 unfau

$ 1 1 2 , 1 8 0

109.960

r t \

\. \

El8-9

AgtUal ladtOfy OVgfigad ...............................o......tt"""""""t'

sundard oyerhsad chargeable to actual prcductlon--(''OSO Standard hOUrS atlOWed f $5 OVerhead rate1...........

Q1fgfall faCtOfy OVgfhgad VaflanCe ............o....'....""""""'o""'

Astual lastorY overheadBudget atlowance based on actual hourc:

VJriaUle overhead (l,9OO actuat hourg r Sl.5Ol S 2'850FiXgd OVef hgad ............................................... 7.OOO

Spending variance

Budget aftowance based on actual hours ffrom above) """"'Budget atlowance based on standard hours:

Variable overhead (2'O5O gtandard hours rs1.5Ol rr .r , .o. . . . .o. . . . . . . , . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i . s 3to75

Fired overhead 7.OOO

Vafiablg effiCignCy VafianCO........r...o...!.. '...r.......r.......t....."t"'

Budget allowance based on standard hours (from gbovol....

Standard factory overhead chargeable to productlon(from above)..,.. a a a a a a a a a a a a a a a

Chpler 18

3 1O,5OO

I 0.250

_$ 25o unfav.

3 1O,5OO

9,8503 65O unfav.:

t 9,850

fav,

3 65o unlav.(2251lav.(1751 tav.

3 25O unfav.

sToo,ooo

684.OOO

3 1O,O75

10,250s (17s1

Volume varianCg .....r.....o"'.o.'t.... '....."t""'

Spending Vaf ianCg.. . . . . . . . . . . . . .o. . .o. . . . . . . . . . , . . . . . . . . . . . . . . . . . . . . . . . . . . . .o.r . . .Variable eff iCignCy Vaf ianCO... . . . . . . . . . . . . . . . r . ' . . . . . . . . . . . . 'o. . .o. . . . . . .o." 'Volume Yariance... a a r t o a a a r a a a a o a a a a a a a a o a a " " t t t t o " " "

Ovgrall faCtOfy Ovgfhgad VafianCe r..o.........r..'....................""

E l 8 - 1 0

ACtUal faCtOfy OVgfhgad r.....r.r............,......r...r.......r.o.....r.r.t..r

Standard overhead chargeabte to actual produc$on (38'OO0units r 2 standard hours por unit r $9 ovefiead rate|"""'

Ovgrall faCtOry OVgfhgad VafianC9.... . . . . . . . , , . . . . . . . . . . . . . . .r. . . . . . . . . . . . S 16,000 unfav.

I0.o75

Chapter ta

E18-1 O, (Concluded)

(1) Tlro-variancemethod:

Actual factory ovgrhgad ...........rrr.r...r...........r.r.......r.........r.r..Budget allowance based on standard hours ailowed:

Variable oyerhead (ggrOOO units r 2 standardhours per unit x $6 variable rate) .....r......... $456'000Fixed.overhead (SO'OOO budgeted hourcX $3 fiXed riate)..................................,......r.. 24O.OOO

controllablg rrarianc€.-...........r...'.........r........................rr......r

Budget allowance based on standard hours ailowed-

( f rom above)t t t t t " t "4. t . . . . t . . . r . . . . . . . . . . . . . . .o. . .h. r . . . . . . . . . . . r r r . . r . . r rD. . . .

standard overhead chargeabre to actuar producffon (sa,ooounits x 2 standard hours per unit x $9 overhead rate).......

vofumg variancg "tt1..r....rr...r...........r.D...r.rr......................r......

controllablg varianc8....r...r............t.....D..r...........,r.....,......or...vo lumg var iancg t " . r . . . . . r . . . . . - . r . . . . . r . . . . . . . . r r . . . . r . . . . . . . . . r . . . r . ! r . . . r . . . r . . .ovgrafl factory overhgad var|ancg.......,...................r.r...D....,,.(21 Three-varlance.method:

Actual factory ovgrhgad r.....r........ro.r.r..........r....r..........r..t.....Budget allowance based on actual hours worked:

Variable overhead (TTTSOO actuaf hoursx$6 variabfe rate)........,..,......,.....r...o........,. $465rOOOFixed overhead (gOrOOO budgeted hourcx93fixgdrate).,..,............1..........,..r............

24o,oooSpgnding var iancg. . . . . . . . . . t . r . . . . . r . . r r . . . . . . . . . r r . . . . . . r . . . . r . . . r . , . . . . .

Budget allowance based on actuat hours worked- tlry 1!ove)ttt.tr..r.....................r....r.......!...tr....r................rBudget ailowance based on stanoard hours ailowed.-

( from above)tt t . . . . . . .r . . . . . . . . . .r . .r . . .r . . . . . . . . . . .r . . . . . . .r . .D... .r . . . . . . . . .r . . . .

variablg efficiency variancg...r...D......r.......r....r.................r.....

453

s7OO,0oo

6g6.ooo_L {.OOO unfuv.

$696,OOO

694.ooo

$7O5,OOO

696,000

Budget allowance based on standard hours atowed^ -

(from above)...............r...,.......sta n da rd ove rir ea d c rr a rg ea b il i;'#;; ilil;;;;'&ft;units x 2 standard hoJrs per unit x $g overtreJd otry.......volumg var iancg r"" ' r ' r " r . . . r . . . . . . . r . . . . . . . . . r . r , . . . . . . . . . . . . . . . . r . . t r r . . . . . . . r .

.Spending variance .............,........_YbflA b le effi Cie n Cy Va fia n C g.....,..'

" " " "' t " " " " " " " " " " " " " r " " "volumg var iance. : . . - -_-___-__r . , . . , . . . . r . . . . . . r . . r . . . . . . .o . r . r . . .or . . .o . . . . . . . . .overari r*iil;;;;';;;.:::.:.::...::::::..::.:.................

r a a a a a a a a a a a a . a a a

]L__grgqA unfav.

$696,00o

684.000]EIS.OOO unfav.

$ (5,ooo) fav,9r0OO unfav.

12.0OO unfav._L _10pgq unfav.

S_j!-&ggq unfav.$ 4'OOO unfav.

12.OOO unfav._$ 16,]0o9 unfav.

$7OO,OOO

705,OOO

1 { \

E l & 1 1

Materials Price variance:Actual Standard

QuantitY CostIngredients {LFs'}, - Per Lb'

Cocoa nedtls'..... 325rOO0 $eOMi|k... . . . . . . . . t . . . . . . . . 1t425IOOO '5O

Sugar..r. ' . . . . . . . . . . , ! 25O'OOO '4O

Materlals mix varlance:

StandardGost

$ 195,0q,712,5OO100.0q)

31.OO7,500- -

Actual. Cost$2Ol,5oO

684,0(X'97.500

:198{l,ooo::

Chapter 18

MaterlalsPrlce Varlance

$ 6,500 unfav.(28,500) fav.(2,5OOl fav.

$(24,500) fav.-:

StandardForrnula

Actual for ActualQuantitY QuantitY

Ingredients (Lbs.l (Lbs.)'- -Cocoa Ue?DS...'.. 3251000 32OrOOOMi1k.................... 1r425rOOO 1r480r000Sugar.t.r,....,....... 250.000 200.000

2.OOO.OOO 2,0oo,0oo-

Differencein Lbs.5,000

(s5,000150,000

0

StandardCost

per Lb.9.60

.50

.40

MaterlalsMix Variance

$ 3'0OO unfav.(27,500) fav.20.000 unfav.

fav.

'cocoa beans = (8oo + 5,000) x 2'0o0'oooMilk = (3,7OO'+ 5,OO0) x 2'OOOTOOOSugar = (5OO+5,OO0) x 2'OOO'OOO

Materials yield variance:

Expected yield: 2'OOO'OO0 lbs. input + 51000 lbs' ="""'t"o""ACtUal yield in Ong-tOn batCh€S....,........,...'..'.............'..r.t.'."

UnfaVOfablg yigld in batChgs ... . . . . . . . . . . . . ' . . . ' .r . ' . ' . . . . ' . .r .r. . . . . . ."r" 'Standafd COSI pef One-tOn batCh...........'...............r'..rr....r.."'Matgrials yigld VafianC9..., . . . . . . . . , . . . . . . , . .r.o'. . . . . . . . .r. . . ' . . . . . . . ' . . . . . t"r

400387

1 3s 2,530932,890 unfav.

Chapter 18

ela42

(1) Materials purchase price variance:

Actual StandardQuantlty Gost

Purchased por Standard ActuallnErcdients in Llters Llter $]_ CostEchot:..;.........,..... 2s ooo $-zoo f srooo $ sr36sPlotgx.....t..r....r.r!.... i3 0OO .425 S'S2S 6'124089n2.......'............... 40 ooo .iso orooo srgaoCT-40"'...r...r...,.,..... 7 5OO .3OO 2.ZSO 2'.iO

$18,775 $'l9.665

(2) Materials mix variance:Standard

Actual FormulaQuantlty for ActualUsed ln Quantlty

lnqredients Lttens in LitersaEcho| .....,....1...,...,... 26 SOO 2g OOOPtot9r............,........ i2 660 i4 OOOBgnz ...,r.........,.r...,.. 3Z 4OO 95 OO0CT-4O.. , . . . . . . . . . . . . . . , . . . . T l4O TOOO

g1-�org 84 ooo'Echol = (2OO + 600) x g4 O0O lltersProtex = (1OO r. 6O0) x 94 000 llterslenz = (25O + 600) x 84 O0O titersCT-4O = (5O + 6O0i x 84 0OO titers

Materials yield variance:Erpected yiefd: 84 OOO llters input + 6O0 liters E''..--.-'r,Agtual yield in 50o-lltgr batchgi.........,..r..r.......D.....r.r............

I:frYoTbte yield in batchgs ............r..r.....r.........rr..,.,...r..r.,..-o-"-noltd cost per SOo-lltgr batch .........r,..............................f, ' latgriafs yigld variancg..r............,.........r....r...r.....r........r.......

455

MaterialsPurchases

Price Variance$365 unfav.

715 unfav.(160) fav.(3O) fav.

$99O unfau

Dlffen Standardence Gost per

j4 Liters Lfter(1 2001 $.20o(1 340) .4252 400 .150

140 ,300o

MaterialsMlx Variance

9(24O.0O) fav.(569,50) fav.360.00 unfav.

42.OO unfav,fav,@s)

740136

4$13s$SCO unfuv.

Chagtar 181fi

El8-13BENJAITIIH PRODUCTS COMPAHY

DePartment 2FaEtoly €)vertread Varlanco Report

FoiMonth Ending June 3O

Dlrgct labor hourg ................'.CapaClU t . . .o. . . . . . . . t . . . . . " t t t " t t t " t '

Variable factorY overhoad:lndirgct 18bo1.........r.. 't 't"t"'Man ufagturing SuPPli€3......Repairs t....t..........tt!"ttt"t'o"

Heat poworr and llght...-....Total Yarlablg cost ..........

Fired taetory oYefisadsSupervisionlndirect laborManufagturing 8upp|183......MaintgnallCo .'...r................Heat, powor, and light r.....r.Machinely depreciaUotl .....lnsurance and targs ".'r.r.r..

Total firgd co8t..'............

(rlBudget

AllowableNormalGapaclW

6000loo%

$ 2,4OO2,1OO

800100

$, ,5 .4oo

$ o,ooo514OOl r02o

960120540360

$14.4oo

$ 2,1OO1,8O5

850l05

$6020(3012A

$ 4.660

$ 612005,40OI,O20

960720540372

200ooooo

1 2

wunta%

_l 0.830s 2,180

319r272

16.8303 2.442s 282

2.1g�03 2,442

Totat factory overhead ........... J!-g€Oo

Standard factory overhead chargeable towork In process (5'tOO standard hourar $3.3O ratel

Volumg Y4riancg.r.o..rr.........D............r......

Reconciliation of variances:Actual tactory ovg rhead .-.ri.....!.......'.Standard factory overhead chargeable

to work In procesS ........'.....""""'o'Glerall factory overhead v8rlsnce .....

Controllable nrlanCo .."""""""""""'VoI u m g Yarianc e.'.""'o"""""""o""""'Overalt factory overhead varlSnco ""'

l2lBudget

AllowanceStandard

HouruSloo-Eolo

$ 2,o4o1,785

68085

3 {.59O

$ o,ooo5,4O07,O2O

960120540360

$14.400$18,990

$14.612s19,272

unfav.

unfav.unfav.unlav.unfav.

(3)

ActualCost

(4)Controllable

VariancoUnfaY. (Fav.l

(31- (21

< \

Clnpter t8

E18.I4 APPENDD(

$15,OOO budgeted overhead= $8 overhead tato

= $2 variable rate

457

$f 6,500

t4.400lliloo unfav.

$f 6,500

15.400

2,5OO budgeted m-chino houF

SSTOOO variable overhead2r5OO budgeted machine hours

ovgrall factory ovgrh gad variance .............r.r

Overafl factory overhgad variance ...........

Agtuaf factory overhgad.'........................r.....rr........o.....r..r.....standard overhead chargeabfe to astuar producuon

(2r4oo standard hours attowed r $o ovirtrJal ratel..-..or...

Agtual factory ovgrhgad...........'......D...................,...........Dr.....Budget allowance based on actual hours:

Variable overhead l2rTOO actual hours r $2|... $ 5r4OOFiXgd OVgrhgad.........................r..r.............r....

1O.OOOspending variancg.........r.r..r...r.......r..........t..D....r.r,................

Budget allonrance based on actuat hours (from abovef .........2'7oo actuaf hol,' r $o factory overhead ratg...,.,................ldfg capacity variallco..r..........-r..r..r..rrro.rr.rrrr.r...o..r............rr...

2r7oa astual hoTs r $6 factory overhaad rate (from above|standard factory overhead chirgeabre to pruduction (fromabovef t t " "" t """ t ' . . . .a.D. . .a.a. . .aa.r . . . .a. . . . . . . . . . . . r . . . . . . . . . .o. . r . . . . . . . . . . .

Eff ic igncy var ianco . . . . . . . ' . . . . r . . . . . . . . . . r . . . . . . . . . . . . . . . .o i . . . . . r . r . t . .o. . . . . . . . .

spending Yariance.........-......r.....r..............r......r....................l-d.l-e ganacfty varialtcG) .........."::::'..,................r....r..,......r........Efficiency Yariancg .............r......r....................r............ro.......r

_S_l,.:!gq unfav.

$t5,4oo16.200

fav.

$to,zoo

14,400_$_l.8OO unfav.

$ 1,1OO unfav.(8O0| fav.

1.8OO unfav.-jFl.lOO unfav.

Chapter 18

ACtUal taCtOfy OVefhgad......................""tt"""tt"tt""t""""""-Ct"nJ"tU ovirhead chargeable to actu8l producUon-

d;to standard hours allowod I $14 overhead rsto)""""'

iFoTuageted labor hours

$4,8oO variable overhead

iFo-oE-dg eted la b or h ours

orreratl factola overhoad variance

Agtual lactory ovgrh9ad..r......."""""""'

48

E18.t5 APPENDX

$t6'8oO budg"t"d o""th""g

Budget allowancs based1.J2O actual hours r $14ldle capacitY variance

= $14 overhead rate

= $4 variable rato

$15,8OO

16.380

Budget allowance based on actual hours:Variabte overhead (7r12o actual hours x 94|"' $ 4t48O

Firgdovgrhgad"""t"""""""""" 'o ' t""""" ' t "" I2tOOO

Spending VafianCe .. . . . . . . . . . .r . . . . . .r .r . . . . . . . . . t .r . t . . . . . . . t t t t"""ot"t"t"t '

I ta a a aaaa a -a 4" " "

a a a a a a a a t a t a t a a a a a " a t t t t t " '

3 (58o1 fav.'

$15,8OO

$16,48015.680

on actual hours (from above) """"'lactory ovgrhgad 13t8 """"""""""

1r12O astual hourg r $4 Variable factory overhead rate .t......

tittO standard hours x $4 variable factory overhead r8t6...'

Vafiablg gffiCignCy VafianCg ........................t......r't"""""t""r'

1r12O actuat hourS r $1o fiXed factory overhead F3to...........f rtZO standard hOurs x $10 fixed factOry Overhead Fiito """'

FiXgd gffiCignCy YafianC18 .................r..r....r....ttr..t.."""t""""r'

Spgnd ing Vaf ianCe. . . . . . r . . . . . . . r . . . . . . . . . . . r .o . r . . . . . . .oo . . . . r . . . r . . . . . . . . . . . t t t "

ldlg CapaCity Vafia11CO..............rr......... '...................o........""tiVariablg eff iCienCy Vaf ianCg,. . . . . . . . . . . . . . . . ' . . . . ' . . . . . . . . . . . . . " . . . . . . . . "" 'Fi fgd gff iCignCy Vaf ianCO,.. . . . , . . , . , . . . . . . . r . . . . . . . . . . . . " . . . . . . . . . ' . . . .o. . ." 'Ovgral l faCtOry OVerhead YarianCO .. . . . . . . . . . . . . . r rr . . . . r . . . . . . . . . . . . . . ' . "

S (5ool fav.:-E:

$ (6801800(2ool(5001

$ (5801

16,480

S 8oo unfav.#

$ 4,4804.680

S (2OOl fav'-

$1t ,2OO11.700

lav.untav.fav.lav,fav.

\

\

'----

ClpOlcr 18

PROBLEMS

Pt8- l(f l Factory overhead per unit:

Variabl e ($3 o r 2l gl ..'.........,..................o.............Firgd ($go r 1/31 ..............................................r..

Variable tactory oyerhoad por unitDlrcct tabor hours per unit

451

(21Agtuaf quantity purchased .....Agtual quantl$ punchased .....Materlals punchaso prlce

VAfianCO ....-.r.....r................

Actual quantity usgd ...........r..Standard quantity allowed .,...Materials quantity varian co....

Actual hours worked ......,,....r.Ac-tual hours workgd ..............Labor ratg variaJlGo ........r..t.o,,

Actual hours worked .......r..,...Standard hours allowed .........Labor efficiency vgt'ianco .......

r Unit Cost =$1.35 standard

1.35 standard1.35 standard

x Rate$9.15 actual9.OO standard

x Rate$9.O0 stanCarC

9.OO standard9,OO standard

s20to

$go

= $?O _ $5 variabfe overhead rate4 per direct labor hour

l'lormal capacity dircct labor hours (2r4ool r Fired tactory overhead rateper direct labor hour Gtto * 4l = 2r4oo r $zso = $6,000 nr"Ji"Joryoverhead based on norrnaf monthfy capacitp

Yards r Unit Gost = Amountls,ooo $rssaffit St4tiiii;l8rOOO 1.3S standard 24-.gOO

= Amount$ 1 9 , 2 1 5

19.900$ 315 unfav.

= Amount$t8,9OO

19,000$ 909 unfav.

$16,650

t8,ooo

Yards9,5OO

10.000

Hours2,1oo2rlOO2r7OO

Hours2,1002,000

too

$ .o3 $ 54o unfav.

fav.

unfav.

Amount$f 2,825

13.500s l67sl

s .15

lctual factory ovgrhgad....r................r........................,....,.....,.,Budget allowance based on standard hourc aflowed:

Variable overhead (2'OOO standard hours attowedr $5 variable ovgrhgad riltg|.......r...................... $lOrOOO

Fired overhead budgeted.o..........,....................o.... O.OOOcontrollablg varianco........'..................r....................................

Budget allourance based on standard hourg allowed ...............Orerhead charged to production (2rOoO r $2.5o!.......,..........,.r.Volumg variance ..,........... ......................,

f 6.ooo$ 650

$16,OOO15.000

$ 1,000 unfav.

\

1@

P18-2

(1)

Units completed and transferred out thisperiod

Less all units In beginning Inventofl.....'....,...Equivalent units started and completed this

pef iOd . . . . . . .a. . . . . . . . . .o. r . . . . . . .a. . . . . . . . . . . . . . t . . . . .D. . . . . . .

Add equivalent units in spoiled units..............Add equivalent units required to complete

beginning Inventory this period.................,Add equivalent units in ending Inventory.......Equivalent units of production this period......Standard quantity allowed per unit of

pfOdUCt ....r.......r.........r

Standard quantity allowed for current

5,2OO 4,930 5,150

2 units 112 hn t hr.

MaterialsA B

4,600 41600500 500

Chwter 18

Direst FactoryLabor Overhead

41600 4,600500 500

4r lOO 4r1OO200 0

500ooo

4r lOO 4 ,10Ot40 200

0600

150540

250600

4,9OO

3 units

Amount

$73,600

72,OAO

9_11609 unfav.

Amount

$66,600

66.1509__450 unfav.

Amount

s23,4OO

24.OOO

productiol| . . . . . . , , , . . .r. . . . . . . . . . .r. . .r. . . . .r. . . , . . . . , . . . . . . 14.700 lO,40O 2,465 5.15O

(21Actual material A purchased at

aCtUal COSI ........r......o.......r.Actual material A.purchased at

standard Gost .....,,..............Material A purchase price

variancg ...........,..,............,.

Actual material A used atstandard cost .....................

Standard quantity of materialA allowed at standard cost

Material A quantity variancs..

Actual material B purchasedat actual cost..................r.r

Actual material B purchasedat standard cost .................

Material B purchase pricevariance .r...........................

Quantitv x

16 ,000

16,OOO

l6 ,ooo

Quantitv

14,800

14,700___t_99

Quantitv

12,00o

12,OOO

12,OOO

Unit Gost

$4.60 actual

4.50 standard

$ . t o

Unit Cost

S4.50 standard

4.5O standard4.50 standard

Unit Cost

S1.95 actual

2.OO standard

$ (.os1 $ (oool fav.

Clppter 18

P18-2 (Continued)

Actual material B used atstandard COSI .....................

Standard guantity of materialB allowed at standard cost

Materlaf B quanUty variance..

Actual labor hours worked atactuaf labor riatg.................

Astual labor hour: workod atstan dard labor it1to.....,.......

Labor ratg variartco ............,...

Actual labor houru worked atstandard labor lilt€..,..........

Standard labor hours allowedat standard labor JZlto ........

Labor efficiency vSrlilncg .......

r Unit Cost

S2.oO standard


r Rate

$lo.2O actual

461

Quantitv

l l rooo

10.400_6OO

Hours

2,550

2,550.2,550

Hours

Amount

$22,ooo

20.goo$ l,2OO unfav,

Amount

$zo,oto

25.500lO.OO standard$ .2o

x Rate

$ 5tO unfav.

Amount

$25,50o

24.650

fctuql factory ovgrhgad ................r........................o................r..standard overhead chargeable to actual production

(5rl50 standard houns allowed r $lS overhead rate) ...,.....r...Overall factory overhead variance................ ................

Actual factory ovgrhgad ..... '...............................,........,....,.........Budget allorrance based on standard hours:

Variable overhead (5rl50 standard hours x $5!...... $2S'7SOFixgd ovgrhgad'......o............r.............!..r..r..r.r.....ro.. SOTOOO

Controllablg variancl9.... ' ....................r..................,.......r............

Budget allormnce based on standard hours (from ilbov€f........,.Standard factory overhead chargeable to production- - t f rom

above)t t t t . . . . . . . . . . . . . . . . . . . r . . . . . . . r . . . . . . . . . . . r . . . . ro . . . r . . . . . . . r . . r . r . . r . . . . r .

2,550 $lO.OO standard

2.465 IO.OO standard85 lO.OO standard S 85O unfav.

s75,0oo

77.250.il3€99 fav.

$75,OOO

fav.

fau

75,750_$ _l7so)

$75,75O

77,250l.ll_,€gg)

$ rtsol(1.5001

$ (2,2501

Volume varianca .r.. . . . .r. . ! . . . . . . . . . . . .

Gontrol lablg varianGo.... . . . . . . .o.r.. . . . . . . . . . . . . . . . . . .r. . . . . , . . ,r. . . . . . , . . . . . . . . . . . . .Volume variance...r. . . . . . . . . . . . . .r. . . . . . . . . . . . . . . . . . . . . .r. .r. . . . . . . . . . . . . . . . .o... .r. . . . .ovgral l factory ovgrhgad variance.o... . .r. . . . . . . . . . . . .r. . . . . . . . . . . . , . . . . . . . . . . .

fav.fav.fav.

62

P18-2 (Concludedl

(31

Standard cost ol units transferred to finished goods:(41600 units r $37.50 Standard cost per unit of product!,............

Standard cost of apoiled units charged to factory overhoad:Materlal A (2OO units of product r l0ooh complete r 3 units each

f 9 4 a 5 O ) a a . . . . . a a . a . a a . a . a a a a a . . a a a . . . . . a . . . . r . . . a . . . . . a a a . . . . . . r . . D . - . a a a . a . a a a a . . . . a a t a t t t '

Material g (ZOO units of product rOoh complete r 2 unitg each IS 2 a O O l a a . a . . . a a a a t . a a a a a a . a . a a a a a . a . a a . . o a . . . . . . a . a a . . . a a . . a r a . . o a . a a a t . . . a a a . a a a a " " t " t t t t '

Direct labor (20O units tTOoh completa t1l2 hn each r $lO.OOI, Fastory overhead (20o unlts r l0o% completa x I hr. oach

x S15.OO|TOtal COSI Of SpOilgd UOitS,.........rt.....r.o,.........r........

Work in processr ending inventorPMaterial A ((iOO units of product t lAooh complste r 3 units oach

f 3 4 . 5 O ) a . a . a a o . a . . . a a . . a a a . . . o a a a . . . a a . . . . . . . . a a a a a . l . . . . . . . . r a . . t . a a . . . a a a . o . a . . a a ' a t t t " t '

Material A IOOO units of product r loOoh complete x 2 units eachf S 2 a O O l t a a . r r . . a a a a . . . . . a . . . . a a a . a a r a . r . . . . . . . . . . a a . . . . r r . . . . . . . l . . . . . a . . . . . a t r " t t t o " t t t "

Direct tabor (6OO units r 9O% completo r1l2 hr. each x $1O.OOIFactory overhead (6O0 unlts r IOO% complets r I hr. oach x

$ l 5 a O01 . . .ao . aa . .a a . .o a r . . r .ao . . . .a . . . . . .a . . . r . r . . . . .o . . . . . . . . . . . ta . . . taa . .4 .4aa. . . . . a '4 " t "

TOtal Standard Cost Of work in process, ending inventory......r....

Pl8-3

(11 January equivalent production:

Chapter 18

sl72,500

$ 2,7OO

o700

3,OOOs 6,400

$ I, loo

2,4OO2r7OO

9.OOOg 22.200

TFansferred outLess beginning Inventory (all unitsl....Started and finished this period,.,.....,Add beginning invontory (work this

period)Add ending inventory (work this periodlAdd abnormal gpoilage .............,.....,...

MaterialA

8,00o3.0005,O0O

o5rOOO1.OOO

llpoo units

MaterialB

8,OOO!t.o0o5,OOO

3,OOO

ConversionCosts8,OOO3.O005,OOO

ol .OOO9.OOO units

2rOOO2rOOO1.OOO

I O,9OO units

I

L-

ClpOter 18

Pf 8-3 (Continuedf

(21Actual guantity of Material A

USed r...r.....Aetual quantity of Material A

Uged . . . . . . . . . . . . . r . . . . .1a.1. . . .a. . . . r .a

Material A price uliago varianee

Astual guanfity of Material AUSOd ...............

Standard quantity of MaterialA a11OWgd.....or.....................

Material A quantity varianco..

- Actual quanUty of Material B

, USOd .. . . . . j . . . . . . . . . . . . .r . . . . . . . . .o.. . .

s Actual quanfity of Material BUSed .. . . . . . . . . .a.a.. . . . .a.. . ._.. . . . . . . .

Materlal B price ulritgo- VafianCe....r...........rr.........,.

Actual quantity of Material BUSed ..............................

,tA

Gallons

5O,OOO

50,0OO50,0oo

Galfons

5OrO0O

44.OOO6,O00

SquarcFeet

l8ro0o

l8,OOO

l8r0oo

x Unlt Gost

$t.0o actual

l.2O standard$ (,201

x Unit Cost

$1.2O standard

1.2O standardl.2O standard

x Unit Cost

$.75 actuaf

.7O standard

r Unit Cost

$.7O standard

,7O standard.7O standard

r Rate$12.oO actuaf

tl.5O standard.50

x Rate$11.5O standard

11.5O standard1f .5O standard

60.000_$(!-e'.!999) fav.

Amount

s6O,OOO

52.goo

Amount

$ so,ooo

$,05

Standard quantity of MaterialB allowgd ....r..r.................D.

Material B guantity yarianco..

Agtual hours workgd ............r.Actual hours workgd .r,.....,.....Labor ratg variaJtco ................

Actual hours workgd ............r.Standard hours alfowed ......:::La bor effi ciency ydriancg .......

SquareFeet

1g,o0o

l8,0oo__q

Hours7Or2OO10,2007Or2OO

Hourslor2ooI o.o00_ 200

= Amount

$12,600

12.600__!

= Amount$722,4OO

t 17,300

= Amount$l t 7,soo

I t5.ooo

S_5OO unfav.

_Lzi2og unfav,

= Amount

$13,soo

12.600

S gOO unfav.

]9_ 3i99g unfav.

&l

Pl8€ (Concludedl

Actual tactory ovgrlr gad ..D."""""""""'

$t8,ooo

39.OOO

COntfOllablg VaflanCO,... . . . . . . . . . . . . .r .r . . . . . . t . tot. . ." t""""""t t"t t" ' t t" t"

Budget allowance based on standardhOUfg allOWgd (abOVe1r...r....r......r.............rt.t.....t...tt'o"tt"ttt"tr

Standard overhead chargeable to actusl producUon(lO'OOO gtandard hOUrS allowed r $6.80 oyerhead rate) ...'."'

VOlUme YafianC4... . . .r . . . . . . . . . . . .o.. . .r . . . . . . .r . . . . . .or.. . . . . . .r .r . . . . . . . . . ." t t t t t" t '

CGA-Ganada (adapted). Reprint with permission'

-euJget altormnce based on standard hours allowed:--Viri"Ole

overhead (lOrOoO equivalent units r--i *anOard hour per unit r $l'8o Yariable ratel

Fired overhsad budgeted (7'8OO labor houraat normat capacity r $5 fixgd l?ltof ....,.....'.......'.

Pl8-4(11

UnitS COmpleted and tfanSf gffg d OUt'.......................LoSS bgginning lnVentOfy (all UnitS) ..........'....r....r.....Units started and complgted this period .....'."""""'Add beginning Inventoly (work this period) ........"""Add ending inventory (work this period)........""r"""Add abnormal spoilage (work this periodf ..........."""Equivalent units of production this period..........r""'

Chaptor 18

$ 60,100

57,OOO3 3.loo unfa%

#

$ 57,oOO

Materialsl7 'OOO

4.OOO13,OOO

o2,150

85016.OOO

(21 Quantitv rActual materials purchasod at

actuat CoSt ......................... 6O OOO kgActual materiafg purchased at

standard GoSt..'.................. 60 OOOMaterials punchase price

variancg ............r................ 6O O0O

QuantiW

50 OOO kg

48 0002 OOO kg

Unit Gost

$3.95 actual

4,OO standard

Unit Cost

$4.OO standard


$Js) $ (3.0001 fav.

Actual materials used atstandard clost .....................

Standard quantlty allowed atstandard cost (l6,000 r 3 kgl

Materials quantity varianco....

68.OOO$(11,oOOl fav.

ConversionCosts

lTrooo4.000

13,0003,20O

860850

1 7 . 9 1 0

= Amount

$237rOOO

240.OOO

Amount

S2OO'0OO unfav.

192.OOOS 8,ooo unfav.

\

l?1to........o.o......r................... 9r0OO I l.OO standard 99.OOOLabor rate varia11cg................ 9r0o0 $ 1.oo $ 9.ooo unfa%

Chaptar 18

, Pt8-4 (Goncludedl

H o u r s x R a t e = A m o u n t' Actual labor hours at actual

' lZltG!.................'..'................ 9rO0O $1 2.OO actual SI OS;OOO. Actual labor hours at standard

H o u r s r R a t e , = A m o u n tAstual labor hours at standard

rirto..................................... IrOoO $t t.OO standard S99r00OStandard labor houns allowed

at standard rate (l7r9lOequivalent units r 1/,2 hourper uni 8.955 11.OO standard 98.505

Labor efficiency variance....... 45 1 l.OO standard S 495 unfav.

Actual factory overhead.... $134,9OOBudget allowance based on actual hours:

Variable overhead ($6 rate r grOOO actual hours) S54,OOos Budgeted f|Igd factory ov9rhead.......r........r...... 8O.O0O i34.OOO

Factory ovgrhead spending varianc9.r........................r........r.... S 90O unfav.:

. Budget allowance based on actual hours(compUted abOve). ...r ' .....,..................................................... S134tOOO

Budget allowance based on standard hours:Variable overhead ($6 rate r 17,91o equivalent

units x 112 standard hour per unit).,...........,.. $53r73OBudgeted fixed factory overhead...........,... 8O.OOO

Factory overhead variable efficiency variance .........................

Budget allowance based on standard hours (computed above| S133r73OFactory overhead chargeable to production at standard

. ' ($14 rate x 17191O equivalent units x 112 standard hour)...- 125,370Factory ovgrhgad volumg variancg.......r,...................r.............. $ 8r360 unfav.


133,730s 270unfav.

ffi

Pl8-5

(rl

Units completed and translerrsd out this period"""

LgSg all UnitS ln bgginning InVento;1f ...................""'Equivalent units started and completed this period

ld6 equiyatent uni6 nequined to complete beginninginVentOfy this pgfiOd ......................r.......'.......r......

Add equivalont units in ending lnventory""""""r""'Equivalent unitg of producUon this period""'r"""o'r'Standard quantlty atlowed per unlt of product """"'Standard quantlty allowed for current produetlotl""

Materiall32rOOO

5.00027,OOO

o2.000

29,0oo- 3 unltr

87,OOO

Chaptar 18

GonversionGosts32rOOO

5.OOO27 rOOA

3rOOO1.600

3l ,600114 hn

7.900 hrc'

Amount

$654,OOO

600.ooo

$ 54,ooo unlav.:

(21 QuantiW xActual materials Purchased

at actual GoEt ......-r-..........r. I OO'OOO

Actual materials Pur,chasedatstandard cost........'-..r.... lOO'0OO

Materials punchase pricevariance

Actual materials Purchased atstandard G(l8t ..................'....

Actual materials issued atstandard cost ...'.............'.....

Materials inventory varianco..

Actual materials issued atstandard cost

Standard quantlty ol materialsat standald CO8t.....r...!..r'.....

Materials quanUty Yarianco....

Astual labor hours worked atagtual labor riato........,,.........

Actual labor hours worked atstandard labor riatc........o......

Labor rate varianco ........'.......

Unit Cost = Amount

$o.OO standard $600'000

552.OOO

Unit Cost =

36.54 actual

6.00 standard

s ,54

6.0O standard6.0O standard

Unit Gost

$6.00 standard

6.O0 standard6.00 standard

Rate

$l 0.60 astual

l O.OO standards .60

1OO,0OO

Quantitv

loo,ooo

92.OOOI,OOO

QuantiW

92,OOO

87,OOO5.000

Hours

I ,OOO

g,oooI ,OOO

3 48.OOO unfav.

= Amount

$552,OOO

522,OOO3 3o,o00 unfav.:

= Amount

$84,8OO

80.ooo3 4,8OO unfav.

\

Chapts 18

Pl8-5 (Concluded)

Hours x Rate

167

= Amount

$8O,OOO

7g.oooll.OOO unfav.

fav.

fav.

83.gOO

l__ 2oo unfav.

$83,8OO

79.OOO$ 4.8oo unfav.

fav.unfav.unfav.fav.

Actual labor hours worked atstandard labor t'gto............. 8rO0O

Standard labor houru allowedst gtandard labor tilto ........ 7,9OO

Labor efficlency yarianco....... ____!_gg

$lO.0O standard

lO.0O standardIO.OO standard

Agtual factory overhead..r..............'......................'...................Standard overhead chargeable to actual prcductlon

(7r9OO standard hourg allowed x $1O overhead riStrB),...,.,.......Overall factory overhgad variance .,...r...........r..........................

Astua| fagtory overheadBudget allorrance based on astual houra:

Variable ovefiead (81000 actual houns x $21..r...,.. s16,00068,OOOFired overhead (8r5OO budgeted hourc x $81,.......

Spending variance

Budget allourance based on actual hours (from above! ,,....,.,...Budget allonrance based on standard hours:

Variable ovefiead (7r90O standard hours x $21..... $l5r80OFixad ovgrhgad............. ., 68.000

Variablg gfficigncy varianclg ......................................,........r.....,

Budget allonrance based on standard hourg (from above) i.......Standard factory overhead chargeable to pruduction

(from abovef.o....r........................r.....................................r....Volume variance

Spending wriance.. . . . . . . . . r . . . . . . . . . . . . . . . . . . r . r t . . r . r . . . . . . . . . . . r . r . .o. . . . . . . . r . . . .Variablg efficiency variance.......r.,.......................r.,....o.............Vofumg var iancg. . . . . . . . . . . . . . . . r . . . . . . . . . . . . . . . r . . . . r . . . . . r . . . . . . . . r . r r r . . . . . r . . . . . . . .

Ovgrall factory ovgrhead varianca ..........,..........,.....r.......o,.......

975,OOO

79.OOO

_s_rcpgg,$75,ooo

84,OOO3p.ooo)$g4,ooo

$ (e,o00l200

{.800_$_(!poo)

a

--

4@

Pl8-6(1) Standard cost of Production:

QuantitYLot (dozensl22 l,ooo23 1,700i 1,2ao (direct materials)

980 (direct labor andfactory overhead)

Yards x

Sbndard Gostper dozen$53.10

53.1026.&26.70

TotalStandard Gost

i s3'toogor27O31,68025.632

s200,682-

= Amount

$t06,100104.500

3 1,9O0 unfav..

Lot 2428,825

Chapter 18

28.80025

xl-L!-g._$27.50 unfav.

Lot 242,890

2.8801 0

x $4,90$ 49 unfav.

Lot 24s5,oo

4.90$ . 1 0

(2)Actual guantitY Purchased .....Actual quantitY Purchased .',..Materlals purchase Price

variancg ...r. . . . . . . ' . . . . . . . . . . . . . ." '

(3) (alAchral quantity used .........Standard quantlU allowed:

'l rOOO r 24 Yatds ...........1 r70O x 24 Yards'....'.....1 r20O x 24 Yards .'.....'.'.

(b)Actual hours worked r.......'Standard hours allowed:

11000 x 3 hours...."..r....1170O x 3 hourcr. '..,.......

960 x 3 hours'..r.........

Standard cost per hour..'.'.Labor efficiency variance ..

(c)Actual labor rate.........,......Standard labor rate ...........

Actual hours worked .......',Labor rate variallco '.....'-...

95'OOO $1.12 actual95'OOO 1.1O standard

g5,oo0 _$ .o2

Unlt Gost-

Lot 2340t4d,O

40,800

(360)x $1 .1o

$(3961fav.-

Lot 235,130

5,100

30x S4.9O

fav. 3 147 unfav.

100Standard cost per yard..'... x $1.1OMaterials quantity variance -$ l f O unfav'

Lol 2224r1OO

24,OOO

Lot222r98O

3,000

Lot 22$5.OO

4,90$ . ro

x 2,9803 298 unfav.

(2-o)x $4,90-tjgg)

Lot 23$5.oo

4.90$ , 1o

x 5,13O x 2,89O$ Srg unfav. 3 289 unfav.

- \

lm

Pt8-7

Chapter 18

CI-AFFY MAilUFACTURING COMPA}TYDepartment 2

Factory Chlerhead Varlance RePortFor Month

Btrdgd Budgd

t3l

BrdgtrtAllomlrr Allowrncr Allowrncr

lforrill Strtrdrrd A.td Acfirrl9:negry ]bun Houn Coet

(.1(21(r) trlVrrlrHo

Et|lctongtYertrnoe

lJnilv.(Frv.l

Fl-f iD

3 1 7

{o}

SpcndlngVtrlencc

Unfrv.(FrvJ

f.l - {31

tl2t2unfiv.

Proccrelng UmcIn houn....,...'.. O'OOO 5r7OO

Ccprclty,......F.- IOO% 95%6r84O

97.33%

I 1,047 t tr92o

2,gto 2$125073 I'OSO

a2 szlt

t 6Ji48 3 6.620

Varlgblc factory ovcriud:lndlrcct labor... 3 2'OOOManufacturlng

ruppllcr....-.,. 2r4AORepr|rl..,......... I'OOOHcet, powcrr tnd

llght......--.-. 3OOTotalvarhblc

'Fhcd factory ovcrhcrd

Supcrvirlon -... g ar(XX)lndlroct lrbor... 6'200

IOOOtr loo

1/0OO

ar5oo

9q)

t lr9OO

428{)opo

246

q27l

(r 1)77

3.t

oo

o(201

o

o

70

5023

7

cort........-. li 6.700 E 6,415

Menufecturlngrupplloc.........

ilalntcnanco..,.Heet powcr,

end llglht..,.....Mechlncry

deprcclaUon..Inrurencc tnd

lrtc!.......,...-.

Totel lhcdcort........... 32O,1OO t2O.t0O

Totrl frctoryovcrhcrd 32!t,8OO $21t,"5f 5

Strndrrd fostory ovtrhoedchargceblc to wort Inprocrsr (5r7OO rtandrrdhoun r 3l3O rrtcf .r.-.-... 2a.6lO

Volumc verienca... E 1.oo5 unfev.

t a,o@63OO

aoool r lOO

1r4OO

416oo

900

3 +Ooo63OO

aooo1110O

ir4oo

a'5oo

900

3 +OOO63OO

IOOOI'OSO

lr4oo

4r!OO

070

oo

0o

o

o

o

s20.loo 3a0,160

s25.O48 !326,770 31grunfrv,

I

171

s8,"sFp, lgl lgo o F o o o s o

l g l l g

g g F " g g S '

l F a a

s F s eF ! t

' Y

e f*ifl

s $ a e? ?r t Y

E fi g6.6a6o F l ) 6F - Y F

5 Y

o iflg

s f$!flHili

D

o o o o o o o o l g l i

s lJl i$uqfl ;s33i3-Hdl=!tiigl i*uilg ii$sss,iflg1a silsl3-ll $$'31fl ii3333'ff1flI :s tii;le*il i3uqg ils$33"1g$ fl1e gilfl3Fll i$s:lfl iisi*ru1$g1_

'n

' ' i i isii i i iji i i is,; i,s ii i: l

i igi igii i i; i i ;rsFi; f:S;tiig;ifi i;ff3jF;friifi6;

l'--

IIt-

lIL '

IL

t-

I

5

Clapter 18

I

L

t_tL-I

!2

3� ,E,s=iFP 5 s ;9 5 r , S

$ F€EE " I E

f $F,o l

t-

IE

oI

oF

G

l

Chapter 18

I

Pt8-8 (Concludedl

Reconciltatlon of variances:ACtUal faCtOfy Oygfhgad ..................."'t""""""""""""tt""t"'

Standard oyorhead chargeable to work in process """"""""

OVgfalt faCtOfy OVgfh gad Yaf ianC9..""""""""""""""""""""

Spending variance:Spending quantity variancg """o""""""""""Spgnding price Yarlance """"o"""""o""""""

variablg efficigncy YarianctB .,............,......'....'.......VOlUme VafianCe .. . .r . . . .r .r . .r .r . . . . . . . . . . . . .r . . . . . . . tr . . . t"rt ' t"""t t t t t" t t""""

OVgfall faCtOfT OVOfhgad VafianC9.........""""""o""'r"""""""""

$3O,OOO28.800

$ogo unfa%150 untav.

S l.2oo unfaY.-

$ 84o unfav.(36O) fav.72O unfav.

$ 1,2oo unfav.

P18.9 APPENDIX

Equivalent production for Septemben

Than sf g rrg d o lrt.... t. t " " "t " tt"" " t' t " " t' t t t " " " t t t "'

Less beginning inventory""""""""""""t""""Startgd and finishgd this period'""r""rt"i"""t'

Add beginning Inventory (work this periodf ""'Add ending inventory (workthis period!"""""

Equivalent units of product ....""""t"t""i""""

Materials42,00o1O,O0O32,OOO

o5,OOO

37.OOO:z:

.49 standard

.4g standard

.48 standard

gonversion42r0oolo,ooo32rOOO

510oo4,50O

41.500

Pieces x Unit Gost

Actual quantity used.,..,......... Zopoo $'5o aetual

Actual quantity used.............. ZOTOoO ,'48 standard

Materials price us:lgo variance 76'000 S'02

Pieces x Unit Gos!

Amount$38,ooo

36.480$ 1.520

runfa%

Actual quanUty used ..........r...Standard quantitY allowed

76,00o

(37rOOO I 2! ..................'.."' ZI'OOOMateriats quanUty variance.... -3p99

Hours x RateActuaf hours workgd.............. lzrsoo $8.0o actualActual hours worked....r......... 22'tsao 7'60 standardLabor ratg varia11co................ 22r5g0 -$-'4O

Actual hours worked .......-....-.Standard hours allowed

(4t r5OO I 1 121.""""""""""Labor efficiency variance ...""

Hours x RateTz,soo $7.9o standard

2O.75O 7.6O standard1,75O 7.6O standard

= Amount936'48o

35.520S 960 unfav.

= Amount$18O,ooo

17 l .OOOS 9.OOO unfav.-

= Amount$171 'ooo

157.700S 13.3OO unfav'

Chapter 18

Pt &e APPENDTX (Conctudedf

173

Actual fastory overhead .................... $42rOOOBudget allorrance based on astuaf hours worksd:Varlable cost (22r5OO astual hours r

$1.4O variable overhgad ratef r..........r............ g3l,5ooFired cost budgeted

Spending rrariancg......r.................................r..or....D.r.r......r.......g,ooo 39,500

,......,....... _L3rsOOa unfav.'ll|e spending varianco Includes the difference between actual and budgetedfired cost, $zoo ($8'200 - $8,oool. Thil portion coufd ue separately labefed asa fired spending variancc, leaving a batance of S2,3oo ss the varia-ble "p"roiigvarianco.

Budget allovyance based on agtual hours worked..r...r,,..........rActual hours l2Z,SOOl r standard overhead rate (Si.BOi:.:::::::::ldle capacity variaJlco '.......... '........".....r..............r.,rr.......o......o.Actuaf h9gr" l22rSOOl r standard overhead rate ($l.gO).,.....,...Sl9f! hours (4t,5OO r1t2lr standard overhead rate

Gtl tB 0l t t t t " t " t " t t t 'o . . . t . . . .a. . . . . . . t . . . . r . . . . . . . . . . . . . . . . . . . . . .o. . r . . . r . . . . . . r . . . . . . .

Eflicigncy varianco .........-....r......o...........,.............................r...

CGA-Canada (adaptedl. Reprint with permission.

Pl8.1O APPENDIX

Raw material:

Actual quantity purchased..,.,Actual guantity purchased ...,.Materials purchase price

Yariancg . . . . . . . . . , . . . . .o. . . . . . . . . . r . .

Drums:

Actual quantity purchased,....Actual quantity purchased.....Materials purchase price

variance ............................,

Raw material:

Actual quanUty usedStandard quantity altowed .....Materials quantity variance....

g39,5OO40.500

$ (1.OOOI

$4O,5OOfav.

Gallons6OO,OOO6OO,O0O

600,o00

Drums85,000g5,0oo

g5,oo0

Gal lonsTOO,OOO600.oootoo,ooo

x Unit Cost =$t.ef 7 actual. 2.OOO standard

o

r Unit Cost$1 actual

I standard

Unit Gost$2 standard

2 standard2 standard

Amount$ 8s,ooo

g5,ooo

= Amount$1,4OO,OOO

1.200.000$ 2OO,OOO unfav.

37,350l__9'!5g unfav.

Amount$1, i5o,ooo

1.200.o0o

Chapter 18171

I

Pl 8-l O APPENDIX (Continued|

Drums:

Actual quanUty used ....r.........Standard quantltY allowod .-...Materials quantltY varianco....

Dirsct labon

Actual hours workgd .......'......Actual hourg workgd ..............Labor rate var|atlGo................

Actual hours workgd'......r...'..Standard hours allowed '...or...L-abor efficiency varianco ......'

Rate$l gtandard

I standardI standard

r Rate37.231 actual

7.OOO standardg_.231

x Rate37 standard

7 standard7 standard

S l5,OoO unfav.

= Amounts455,OOO

420,OOO

Drums6O,OOO60.ooo

_____9

Hours65,00O65,OOO65,OOO

Hours65,0OO60,000

5,O00

= Amount$8O,OOO

60.ooo_9

= Amounts47O,OoO

455.OOO

Factory overhead:ACIUal faCtOfy OVgfhead....................,....................'..................Budget altoumnce based on actual hours worked:

Variable overhead (65,000 actual hours r36 variable overhead ratel.r.o,.. ' ...r..,............r. S39OroOO

Firgd ovorhgad budget...................................... 275.OOOSpending var iance r. . . . . . i . . . . . . . . . . . . ' . . . . . . . . . r . . . . . . . r . . . . . . . . . . ' . r . . . . . . . . . . . . . . . .

Budget atlowance based on actual hours worked (see above)Actual hourg (ssrOool r standard overhead rate (S10) ..............ldle CapaCity variaJ|C8.... . . .r. . . , . . . . . . . . . . . . .o.,. . . . . . . . ' .r . . . . . . . . . ' . . . . . . . . . . . . ' .

_S 35-OOO unfav-

$666,5OO

665.OOO$ 1,5OO unfav.

$665,OOO650.OOO

$ 15.OOO unfav.

Crlaptr� 18

Pi &1 q APPENDIX (Concludedl

hr,

O8r75O normal capaclty hours r 94 fixed overhead titto...........651000 actual hours worked r $4 ffxed overhead ri8tg,,.......,....ldle capacity variancc (3175o hours r $rll .......................o.........

Budget allowancc bassd on actual hours worked (see above)Budget allourance based on standard hours allowed:

Varlable overhead (60,000 standard hoursallowed r 6 mriable overhead rate).o.......,...,.

Fired ovgrlrgad budgeted r.....r..rr.r.'.....r............

175

$275,OOO260.Ooo

Va ri abl g cffi ci e ncy varia nce .ro............,..,.

hd

65;O00 actuaf hours r $O variable overhead rate601000 standard hourg allowed r $o variabre overhead rate....Variable efficiency variance (5rOOO hours r $61 ,......,..r.........o..

651000 actual hours r 34 firgd ovgrhgad rirtrg ..........................60,000 standard hours allowed r 30 fired overhead J?to.....,...Firgd cffi ciency variance (STOOO hours x $4).............................

... S 3O,OOO unfav.

$39O,OOO360,Ooo

$ 3o.ooo unfav.

$zoo,ooo240,000

$ 2O,OOO unfav.

S l5,OOO unfav.

$665,ooo

s?6O,OOO275.OOO 6:15,OOO

Chapter 18

CASES

cl8-1

(il Fl The use ol participgtive cost gtandards to motivate plant managorgand department heads has several benefits. These benefits rcsultfrom contact with erecutive managoment through the interchangeof ldeab, negotiation between the partles, and a final compromise inestablishing the standard. This allorvs the plant managers anddepartment heads to personally idenUfy with these standards'which wilt increase their desire to achieve a goal they have accept-od.

In this caso, howeve6 the standard-setUng pnocess does notsppoar to be partlcipative. Erecutive management appears to followthrough with the interchange of ideas, but the negotiation and finalcompnomise are missing. Executive management merely reviewsnecomm€ndations before setting the standards, without discussingthe standards further with plant managemenL As a consequence'plant managons may become frustrated with the standard-settingsystem and a negative irnpact upon motivation could result.

(bl The use of tight, but attainable, standards can have a positive moti-vation effect on department heads and plant managers. Ttris is par-ticularly true if they participated In setting the standards and areconfident that good performance witl be recognized and rewarded'However, if the standards aro perceived as being unattainable' thenthe motivation'will probably be negaUve because they leel there isno uso in trying lor an unreachable goal, The unfavorable variancesbeing the norm seems to imply that the standards aro too tight' andthis coutd be part of the causo for the low motivation among first-line supervisors.

(21 Under the present system, there is no motivation for department headsto control overhead costs because all overhead costs are allocated onthe basis of actuat units produced, and the actual production output inother departments can have a significant impact on the overhead costcharged to each department.

The use of standard, pradetermined department factory overheadrates, apptied on the basis of standard activity allowed for actual produc'Uon, should provide useful cost control information and enhance costcontrol on.,the part of department heads.

Chapter ta

c18-2 ,

(r) (a)

477

The characteristics that should be present in a standard cost sys-tem to encoufiage positive employee motivation include:(f) partlcipation in settlng standards from all levels of the organiza-tlon including purchasing, engineering, manufacturing, andaccounting;(21 the integration of olganizatlonal communication by translatingthe organizational goals and objectives into monetary terms for theemployees;(3) support of the standard cost system by executive management;(4) standards that ane perceived as achievable and accurate andapply to contlollable costs.A standard cost system should be implemented to motivate employ-ees positively by:(1) communicating the corporate objectives of a standard cost sys-tem;l2l solicitlng imprcvement in standards fipm employees;(3) using a standard cost system to prcvide a guide-to action, not astraight lacket. (Although signlficant variances should be expiained,employees should not feel that the standard ls a mandate.Gontinuous imprcvement shoufd be the goal.);(4) not overemphasizing variances, although standard cost vari-ances often are used for individual perfotrnance review and reward,(Employees should be encouraged to take actions that will benefitthe company as a whole rather than simply to meet standard.)Management by ercepilon focuses management's attention only onthose ltems that deviate significanily frc; the standanl, Theassumption is that by foregoing a thorough, detalfed analysis of allItems, the manager has morre time to concentrate on other manage_rial activities.The behaviorar rmplications of management by exception Incrudeboth positive and negative implications. on thl positive side, thistechnlque increases management efficiency by concentrating onlyon slgnificant variances, ailowing time for the h"n.gg to concen-trate on other activities. on the negative side, managens tend onlyto focus on the negative variances rather than the positive ones,limitlng their employee interactions to negative reinforcement orpunishment. This technique may not indicate detrimentar trends atan early stage, and fragmentation of efforts can occur fipm deallngonly with the specrfic probrems rather than gtobar issues.

(b)

(a)(21

(b)

Chapter 18

I

ClA-2 (Concluded|

(31 Employee behaylor could be affected advercely when standard cost vari'snces aro the sole basis for performance evaluaUon. Employees maygubyeft the system and attempt to build slack into the standard so thatthey can meet or exceed the standard. There can be a mlnimal level.ofmotivation sinco erceptional performanco is not rewarded' Employeesmay tend to engage In acdvlUes that atp not In tlre best overall Interestof the companffust to mest standard. Oveltmphasis on price variancescan rtsutt in a large number of low cost vendorsr hlgh levels of Inventorytand poor quality materials and parts. Oyet€mphasis on efficiency vari'ancas can ltsult in long production run3, large work ln process invento-ries, and attempts to control quality through inspection alone.

cl8-3

(1) Had Stevens not confined his initiat remarks to telling the employees thatproducgon standards were too tow, but rather erplained whyr the resultsof the confsrence would certainly have been mono effective.Furthermore, he should have lemained with the grouP and ioined the dis-cussion. He lailed to establish two-way cotnmunication' to exchangeideas, to air differences of opinion, and to provide neasons why certainpractices could or could not be followed. Had he remained with thegroupr Stevens coutd have stated that he had been thinking about theproblem of production standards and, In his opinion, such and suchshould be done. Then he could have asked the group what lt thoughtabout fottowing the ouUlned approach. The ensuing discussion shouldshape a suggested course of action nopresenting tho groupb opinions aswell as those of Stevens.

lt is poor pracUce for a manager to abdicate, as Stevens did in thisincidenl An important part of a managerb iob is to provide effectiveleadership, to show tha way by offering a plan, by giving neasons' and bytaking into account suggestions offered by the members affected by thoplan. Using this approa-ch, the managerls ideas, the groupb wishes, andthe needs of the enterprisa can be blended into an effective program.

h might be that the employees wene correct, that standards should bereduced. For example, errors In calcutating the standards ano possible.The employees must be given the opportunity to present reasons fortheir nocommendations.

Both facts and experience are important in determining the level ofproduction standards adopted. Stevens should abstain from forcing anydecision. lt may tako several weeks or months for events to demonstratewhat standards shoutd be established, for they will bo influenced, amongother things, by the verification of the employees' major beliefs, the cor'rectness of Stevens' statements, the extent of modifications requiredtand the fult comprehension of the situation by tho employoes.

Chapter 18179

Ct8-3 (Concludedl

The subject of raising production standards, in itself, is not a popularono among e-mployees. Ons must be quite naive to betieve that an

-

employee will_accept an increase in production standards without someexplanation of the reason it is requested or required. The issue in thisIncident could be better identified as sHow can the enterprise survive?'or sHow to Increaso our production outputD or .rHow to regain " st-ngcompetitive position for our company.tone might also raise the question of whether Stevens was adequately

in touch with the attitudes and beliefs of the Department B employ"u" '

torrard their workn especially prcduction standards, He does not appearto be. Better communication, improved supervision, and effective leader-ship apparenily are in order.(21 Stevens should calt another meeting with the production employees ofDepartmelt-B' indicating that he wishes to off-er to the group additionalper t inent in format iononproduct ionstandards.Next , t re1t rou loget � �

together all data dealing with the companyb produciion it"ndards andfair profits on the ownerb investment, the continuity of the enterprise,and other significant and applicable dlta. Preferabli it " "aoitional datashoufd be in a visual form to increase their effectivdness. Also, it isadvisable for Stevens to talk informally with leaders oi o"p"rtment Bempfoyees t-o discover why-the group recommended tower productionstandards. He can use this information to shape friJpiesentation at theforthcoming meeting,

The best approach for Stevens to foltow at the meeting is to:(al thank each member for his or her interest and past participation,(bl advise that additional information, vitat to the modification of pre-sent production standards, will be presented, foltowed UV a g.oupdiscussion,

(c) present the adrJitional information in a forthright manner,(dl remain with the group and join in the discussion from which thedecision on production standards wifl evorve.

CGA-Ganada (adaptedf. Reprint with permission.

Chapter 18

)18-4

:il Standard direet cost of I ton-gallon batch of raspberry sherbert follows:

Direct material:Raspberrles (25 qtst r $gO per qt.l ..............'. S8.ooOther lngredienb (1O gal. I $45 per gat.!........ 4.5O S1O.5o

Direct labonSorting (((3 min. r 6 qts. raspborries) + 6O min.)

r$gperht- | . . . . . . . . . . . . . . . . . . . . . . r r . . . . . . .o. . . rr . . . . . . . . . . . . . $2.70Blendlng (ll2 min. + 6O min.) r $9 per hB)........ 1'8o 4.5o

Packaglng (4O qts.- r $.38 per qt.l 15,20Total dirsct standard cost per ten-gatlon batch of sherbert ... 99o.2o

'6 qts x (5 qts. + 4 gts.! = 7.5 qts. reguired to obtain 6 acceptable qts."4 qts. per gal. r 1O gal. = 40 gts.

l2l (al For the most Fartr the purchasing manager is responsible for unfa-vorable materials price variances. Gauses of unfavorable materialsprice variances at GoldKing are likely to includo one or mone of thefollowing:(11 failure to correctly forecast price incraasesl2l purchasing nonstandard or uneconomical lot sizes(31 purchasing from suppliers other than those offering the mosttavorable prices

(b) The production manager or foreman is usually held responsible forunfavorable labor efficiency variances. Causes of unfavorable laborefficiency variances could include one or mora of the tollowing:(ll poorly trained emplolrees(21 substandard or inefticient equipment or machinery(31 inadequate supervision(41 poor quality of materials (in particular, the raspberries that mustbe sorted by handl

Clppter 18

cl8-5,

181

$4 .5o.20

9l.zo

(11 Standard unlt cost per cutting board

Diract material:Lumber (1.25 board feet r (F + f) + 5| r $3 per board foot)..Footpads (4 pads r $.O5 per padlTotal direct materials

Direct labonPrcparc and cut 112 + 6O hour per board r ((5 + 1! + 5 x $80Assemble/finish (15 + 6O hour r $8;,.... a a a a t a t a a a a

si.922.00

$3.e2s8.93

(21

Total dirsct laborTotal standard unit cost......r.......r..........r................,..........r.ro.

The advantages of implementing a standard cost system include the lof-lowing:(al Standard costs are incorporated into the accounting system, making

record keeping easier and facilitating cost anallsis.(bl standard costs provide the basis for building a company budgeL(c) standard costs ssrvo as goals; they encourage cooparation and

coordination among all elements of the corporation. The varianceanalysis associated with standard costs provides a feedback slrstemto those responsible for controlling costs.

(a) The role of purchasing manager in the development of standardsincludes establishing the standard cost lor material required by thebill of materials, determining if the company shoutd take advantageof price raductions available through economic order quantity, andobtaining data regarding the availability of materiats.

(b) The role of industrial engineer in the development of standardsincludes preparing the bill of materiats that specifies the tlpes andquantities of material required; establishing, in conjunction with themanufacturing supervisor, any allowances for scrap, shrinkage, andwaste; and participating in time studies and test runs to facilitatethe establishment of time standards.

(cl The role of cost accountant in the development of standardsincludes reviewing all information regarding material and labor stan-dards received from other departments, establishing the labor rategtandards based on the type of labor required, deteimining apptica-tion rates for indirect costs such as material handling and factoryoverhead, and converting physical standards such aJ hours andquantities to monetary equivalents.

(31

/t82

cl8-6

Chapter 18

(r lActual Standard Unit Gost Price

Material Quantitv Cost . Cost \/afiancg Variance

Maran................ 8r48o $2'05 $2.oo So5 $ 424 unlav.SatOI.................. 25r2OO .7O .75 (.051 (11260l laV.cra|yn..o.....r....... l8r54o .9O 1.OO (.tol (1.8541 faV.

Ngt matgrials purchase price varianco..........r.........'...r.....o...' -$(3€9Ol fav.

Actual quantifies at individual standard materials costs:Maxilo...,.... 8r48O gallons O $2.0O......-.r.. S161960

92220-gallons

Standard (expectedl output from actual input (52,22O x.8O = 4lJTAI multlplled by $1.3O wolghted average otstandard materials COSI Outpftt ...,..'...................r........o.....

Matgrials mir Varial|CO......r................'r.................'......o...'.....

Materials yield varianc

Safer......... 25r2OOCralyn....,... 18.54O

Ma:en....

o .75.. . . . . . . . , . 18r9OOo 1.0o.......,... 18.540 s54r4OO.OO

54.308.80

a a r a r a a a a a a a a a t a a a l a a a a a a a t a . a a a r a a a a a

,La.trl

OulndV

Totrl Urlnc at nd.td [lrtrrirb

. Actu.l ttrrd..d Acfirl ltryrdrrd Qurntity lJnlt }Ir

Qr,rrnttt Forrnslr r gg3ggl r Fonnrdr Yrrirdon r- Co.t I Vrr!gg911

8,48o sab. :H 52,220 gay 8,355 salr 1% gab. 32.00 S25o.oo unfav.

Selcr.....253OO

Crayln... 18,540

62,220 25,060

32"220� 18,799 l%0,

300o25

2t23625

.75

1.OO

lOO.5O unfiv.

(259.oo) fav.

(.30)

f_9!39 unfav.

t_9!.2O unfa%

Standard (expectedl output from actual input at weightedaveragO Of etandafd matefials COSI OUtpUt.,.....,..,............. S541308.8O

Actual output quantity at weighted averiage of standardmaterials cost (4OrOOO r $1.3O! ...,................,...,................ 52.OOO.OO

$1i998.8o unfav'

An analysis of the portion ol the mix varianco attributable to each materialfollorvs:

34-9c"r. Wgar". JRoundlng dl f lerencc.

Clppter 18 4&t

Cl8-6 {Concluded}

(21 Belore LAB Chemical Company management can controt costs, theyneed to know which costs ara out of line, within whosa area of-responsi-bility has the cost varianco appeared, what is the ggtuse of the cosi vari-snce' and who has the responsibility to correct the cause of the vari-gnce.

Standard costs and the variances from them help management tobegin to answer thess issues. Specifically, the variances indicate wheremanagement should begin its invesfigation:(al Price variations-the information to identity the causes of the price

variances usually can be obtained in the Purchasing Depart-unt. Areview of purchasing procedures and rccords woutd disclosewhether the variances wena caused by permanent changes inprices, poor purchasing practices, or poor production sJhedulingrequiring incurence of extra costs to expedite shipments. Theinformation obtained wifl identity the department responsible forthe extra cost and provide clues to improve the control.

(bl Mix and yield variances-the information to identity the cause ofthesa variances usually can be obtained in the proiuction depart-ments. A review of materials records and handling procedurcswould disclose whether the mix variance was caused by the use ofwrrong proportions, entering excess materials into the processbecause of carelessness, or adjustment of the mix to accommodateoff-standard materials quality caused by the same factorr. Thus, theyield variance would often be explained by the same information.Nonstandard proportions would often result in nonstandard yieldsand excess materials inputs. Tho information obtained would hetpidentify the department responsible and provide clues to improvethe control,

c18-7

( 1 ) (al

(b)

(c)

Materials-quantity purchased ..............,.........,.....,.. 5,2OO lbs.Unfavorable unit cost ($2.iO - 32) ........,...........t....... x $.lOMaterials purchase price variance.......,...............,,... $ S2O unfav.Materials-quantity used.o.....,...... 5,30O tbs.Materials-qu a ntity req uire d at sta ndard (5, OOO

units produced x 1 lb. per unit)............. ' ..:............. S.OOOUnfavorable quantity.................o............,......r........... 3oo lbs,ItanOlrO cost per lb. ........................ r $2Materiats quantity variance ......,.....:.:::::::::: . $ ffi unfav.Direct labor usedUnfavorable unit hourly rate ($4.1O _ S4).. . . . . . . . . . . . . . . . .

8,20O hrs.x $ .1O

S 82O unfav.Direct labor rate variance

r

i

481

1

C18-7 (Continued|

(dl Direct labor used

Chapter l8

8r2OO hrc.Direct labor required at standard for 5'000 units

pfOd UC gd .r. . . . . . . . . . . . . . i . .r . . . . . . . . . . . . .ooo...r . . . . . . . . . . . . . . . . . t .r . . . 8. OOO

Unfavorabtg dirgCt labor llS€...................................'. 2OO hrs.Standard wagg rate per direct labor houl...-'...r........ x $4DirgCt labOf gffiCignCy VarianC8.............,....rt..........., -9999 unfaU

(el Analysis by expenses of the factory overhead controllable variancefor 5rOoO units of production:

J:*"9.'Ji:-''l:'"f;' or":*'iloJ,:";'9, !:Jll1il,i "ilH:l'.:.Chargcd Output Ovcr (Undcrl

Variable factory overhead:tndirgct 1abor.......o......r.....r.....r......r...,. $ gr84O $lOrOOO s (1 6OlSU ppl ieS.-Oi l . . . . . . . . . . . . r . . . . . . .o. . . . . r , . . . . . . ,o. . . . 3r3 0O 2t5OO 8OO

Allocated variable seryice departmentCOSI.. . . . . . . . . . . . . . . . . . r . . . . r . r . , . . . ' . . . . . . . . . . . . . . . . . 3.2OO 2.5OO 7OO

Total variable factOry overhead....o....r. $16,340 315.OOO 31.34O

Fixed factory overheadzSuperuisiol l . . . . . . . . . . 92,475 $2,250 S 225Depreciat ion . . . . . . . . . . . . . . , . . . . . . . r . , .o. . . . . , . . . . . r . 3r75O 3r750 OOther fixed costs ..,........... ,.... 1,250 1,250 O

Totat f ixed factory overhead .. $ 7,475 $ 7'250 $ ZZS

Totaf ........ro....,......................................... 523.gl 5 522,25O Sl ,5.99

(21 Clearly indicating where the responsibilit ies for price and quantity vari-ances tie and charging the variances to the departments with initialresponsibility reduces the conflict but does not eliminate it.

The specific cause(sl of the variance needs to be determined beforethere can be certainty that the proper department is charged. For exam-ple' if materials were purchased at higher than standard prices becausethe Manufacturing Department required a rush order, then the price vari-ance is the responsibility of the Manufacturing Department. l l the materi- :

als provided by the Purchasing Department were of slighUy lower qualitythan specifications required, due to careless purchasing, the excessquantity used by Manufacturing is the Purchasing Department's respon-sibitity.

Clppter tg .rEs

Cl8-? [ConUnued]

Even if the variances anB pnopedy charged to the two departments, itcan be argued that the purcjrasing b"p"rtrentb varianli is influencedby the orc€sr_quantity requirod bi M;;-"cturing. fi this case, the extra3oo poun ds will increase. itr.e. ryrd_rrasin g -oepartrienit

G ri"n"e (accu-mulated over_several periodsl by $SO t36O lbs. I $,iO;. The S3O is thefoint responsibility of the two dipartments.

(31 Generally, the Manufacturing Department manager cannot controf theprice of the overhead items' T?r"'r-rore, $te prices srrouiJ not inffuencethe data in the departmental repo*. r,irn"r, the allocation method forgervice department costs is not "umci"nliv erptained ioletermine whatpart (if any) of this variation can be identirilo iliut il; ;-";"rtment. Thefixed overhead items listed in this case iirmattv "r.� ort"ioe a depart-ment managerb control. Supplies and indirect labor remain.control can be erercised-it ne o"p"*r"ntal level over the amount ofitems used' Therefore, emphasis srroirci be placed on the quantitieswithin the variances' wittr iittte ;r;;;ii""i" on dolar vatues. Themajor use of the doliar values woutd be io estabfish the guantity level ofeach variance that would be economicatly worth managementb atten-tion.

III

Chapter 18

1

Cl8-7 (Concludedl

TO: Departmont Managen-ManufacturingFROM: Performance AnalYsis

RE: Gontrollab I e Factory Orerh ead Perf orman ce-N ove mb erPercent

Gompared

rndirect tabon Quantitv to standard

Favorable indirect labor use(doltar value-94O01

Supplies-olt:Unfayorable oil use (dollar value-SSOOl I'O0O gals. 2ooh

Commentarv:The dollar value of the oil variation and its large percentage require iden-tifying the cause and applying control procedures.

The indirsct labor variation, although favorable, should be investigated tobe sura that it does not represent unaccomplished activiUes affectingother aspects of the operatlons.Gomoutations:lndirect labor:

Hours usgd.. .r . . . . . . . ' . . , . . . r . . . ' r ' . . . . .o. . . . . ' .o. . . . . . . . . . ' . . . . . . . . . . . 214OO hrs'

Standard hours for 5,OOO units of output(5rOOO r .5 hrs.)...............,o...,....r.... ' ................ ' ..,

' Favorable indirect 1aborvariation...,.......................Dollar value at standard wage rates.........,....... ' .

Supplies--oil:Oil consumed....,..............r................,.......r.... ' ..... ' . ' 6rOOO gals.Standard quantity for 5,OOO units of output....... ' ... 5.OOOUnfavorablg oil consumption........o.........,............... lrO0O gals.

Doltar value at standard oil prices,..................r ' ..... lSOt(4) The immediate reaction might be to dismiss the department managen

However, careful thought would require analysis of the situation to detenmine (al if, on an overall basis, the department is being operated eco-nomically (if so, then dismissal may be undesirable|; and (b| if the causeof such behavior is due to management reaction to unfavorable vari-ances without regard to size, or to undue emphasis by managsment onindividual variances to the erclusion of measurement of overall perfor-mance.

lf it is assumed that the manager is porforming satisfactorily on anoverall basis and should not be dismissed, then two possible solutionscan be considered:(al Revise reporting methods to emphasize overall performanco.(b) Revise reporting on labor to combine direct and indirect labor into

one item for performance evaluation-

1OO hrs. 4oh

2.500__1991199

hrs.

I

Chaptor l8

cl8-8

(1 )

487

(21

(a) Revising the standards immediately would facltitate their use in amaster budget. Use of revised standards would minimize productioncoordination probfems and facilitate cash planning. Revisld stan-dards would facilitate monE meaningful cost-volurie-progi anafysisand result in simpter, mono meaningfuf variance analysis. Standardsare.often used in decision analysis such as make-o".-lrv, p-ar"tpricing, or product discontinuance. The use of obsolete standardswould impair the analysis.

(b) Standard costs are carried through the accounting system in a stan-dard cost system. Retaining the current standaroianJ eifanoingthe analysis of variances would eliminate the need to make changesin the accounting system.Changing standards could have an adverse psychological impacton the persons using them. Retaining the current standards wouldpreserve the well-known benchmarks and aftow for conJi"tln"y in,reporting variances throughout the year.Variances a-re often computed and ignorcd. Retaining the currentstandards a1d expanding the anallrsis of variances wou-tJ-io.r" "diagnosis of the costs and woutd increase the lirerirroooltrit signifi-cant variances would be investigated.

(a) changes in prime costs per unit due to the use of new directmaterial.

Changes due to direct material price:((new material price - old material price) x new

material quantity = ($T.Zt - $Z,OO) x t pound).,Changes due to the effect of direct materialquantity on direct material usage:((old material quantity - new miterial quantity) x

ofd materiar price = (1.25 - 1.ool r iz.ooi.:.:..... (r.75)fav.Ghanges due to the effect of direct materialquantity on direct labor usage:((ofd labor time - new rabor time) x otd rabor rate =((24 + 60) - (22 + 60)) r $i2.6oj............:.:........... (.42ltav.Total changes in prime costs per unit due to theuse of new direct materia|............,.....,.............. $(i.4Olfav.

(b) changes in prime costs per unit due to the newlabor contract((new rabor rate - ord tabor rate) x new rabor time= (S14.4o - Si2.60l rl22 * 6d))............:.:.:......... .66 unfav.Reduction of prime costs per unit ($1S.OS _ $13.79) $ (.7alfav.

$ .77 unfav.

, r- \

O1$'1. Whm rtandetd cotr an nof ircorponlc4 hryrnay b. uced fotth. Putpocs cl prichg' budgrel'hg, and canlrolling 6t bd if |hcy an not uscdtor twrntory cocthg, tho advaniager lrqn lhoBving cl clodcal dlorl in accounthg cannol bcoblahed

O1$'2. With actual cost methodq it ir tirsl noceesaty lorolect a coat flow melhodJifo, fifo, averago,ob. lt

'l lhen ncccsgary to keep detsiled rccordr

ol quarililicr and prbo atd b mrko laidy cun'phx calcubticrs cl invontory cods. Wilh a statl'dard cocting syclm, crly quantitieg, nol prirxs,murl br taken into accounl' facililaling bothncod keephg and cabubtbnr. Stan&rd codlabo prwiJr el stllol

Ol 9'3. Tho nurnber of variance occountg is delermhedby (a) the nunrber ard typc cil variancec lhat areto lppeat in ttatomont! for managemont u!c,and (b) lho need for casy dbp€al of variarcerat thr ond O ,6" ;ircal prrird, particularly whonthr variancec are not trested uniformly h finan'cial Catementg and for analyrcs.

Ol$.t. (a) The standad coct ol prcduc-tr csnpletedand productc sold can be detorminedinmedbtely withord wailing lor lhe asludc€l to be cabuloted. With stsndsrd costr,rnmhly stalomontr can be prepared nrorcqubkty.

(b) A firm producing a greal many dillerentproducts finds it praclically impossible todelermine the actual cost of each productThe use ol standard costs will facilitate thepreparaticn of hcorne statements by prod-ucl lines.

(c) Keeping linished goodr stek recor& inquantiiier mly will result h derical savhg,s ince lh is e l iminales lhe necessi ly forrecording lho aclual unil cost of eachnceipl and i*ruc or strbmml.

0195. Thr standard cethg ol invcntorics depends cr(a) lhe types of standardr cmployed, (b) thedegree of guccesg that the company haa inkceping overall sstual cost! h lhe with standardcod!, std (c) the ccrrcept hcld with regard io thensl suilablc khd of cost.

at$€. (a) Defenal of variancor is supported qr thegrounds that. il th. rtandardg in usc arcbasod qr nqmal prbr, efficienqy, and orn-pul levels, posilive and negstivc varioncescan be expoctod to offget src anothcr hthc long run. Becaule varisncc accountbelances al any givon point in limo aroduc to recurring rcasonol and businesr

CHAPTER 19

DtscussroN QuEsTloNS

cycb llwtuatbnr. and brcaur prrkdicreporlhg requirementr rcault in arbilrarycutcill daleq varianc. smt balarcer da parlicuhr culrff dalc ar nd astignabbto oprrating r!!ull! of lhr prriod lhrnond€d They will carrcel oul ortr lino andherefore shorrH br carriod b |hc balarrcorheeLVarbrccq appesrhg ar clrarger or credilrqr |frr ircqnr rtdemrnl an rognrdrd arapproprbr ctrarges or crcdils in thr pcrFod in whk*r they arise. Thcy an conskirrcd tho resuh €t larrorable or nfavorsblodcpadurcs frqn nonnd (ttatdatd) condi'tione and aro disckcscd rcparalely frorncot of goodr soH at stendatd" Thb pro'vUer rnanagemerd wih mobscured hlo.'mElbn for inmedialc correclivc aclkxt

lnventory etl and cod cil goods soldshouH not b. digtortod by variancer thatrepresenl abnormal etficienciet or ineffi'cionci.t. Thc slandard cocl roprorenlrthal Irnount which is rearcnably fieces'sary to produce finishcd products andshould lherelon be considored the bcctmeasure of the scst of goods mgnufac'tured and inventory cool, as bng ar theunderlying operating conditionr remainundranged.The argumenl for allocating varianceabelrvo€n invenlories and cost of goodssold is that standard cogts are a uselul tolfor purposes ol managerial control, bulshqrld not bc substitutes for actual hictorFcal cetr h the financial slatemenla Onlyaciual historical costs shouH be used fortinancbl reporlhg, even though lhey arcgreater or leas than stEndatd cootl, andwilhgut regard to lho reasqlr for their dif-fersnceg lrom stan&rd costt. Standardcod varianco3 are no{ gahs or loeses butcosts (or reductions therein) ol goodlmanufactured and should be allocaledbetween invenlorieg and cosl ol goodrrcld. To treat |hem ar gahs or lcser hthe period h which they arise disfofi boththo inventory and gres profit figurea. Thirdistortbn will bo cven gtealer if tho clatl'dardr are Lackhg in rccuracy or rcliability.Further, lo tubsliluto standard coslt loractual historicaj cost8 h thc lirancbl atal*.rnrnb rgptslontr an unwarranled cacrilicrol objeclrvity.

(b)

(c)

488

Clupter t9

Er9-1

E)GRCTSES

Price Yarlance rocorded at the time materials are received and pfacad in thestorcltom:

8,400600

6rggg42

189

ilaterials (2oroo0 r $.421 ..r.o.r..........o..........D..........,....Materials Purchase prico Varlance (2O,O0O r $.O3)....

Accounts Payable,(2o,OOo x $.45)..,..,,.r.,...............Work In Procass (8r2oo r 2 r ilZl r...............,..........o.Materf atd euanuty Varlance (t oo i $.42; ...,..:::.::::,,.,..

Matgrlalg (l 0r5Oo r $'lzl .................,.................o...

Materials rscorded at astuaf cost when- reccived, and price variance determinedat the time materials ars lssued to production:Mater ia ls (2O,O0O x $.45) . . . .

Accounts Payabte .'.......'.....,..r.r.r......r.....o..-....r...r..

work in Proggss (8r2oo x 2 rg42l ..,..,..........,.o,....D....Materials Prica Usqge Varianca lio,soo , S.0g1.........Materials euanUty Variance (t oo , i.ce;...J..:...::::,.....

9,OOO

6,930

9,OOO9,0o0

6,ggg49542

7 1425Materials (16,500 x $.as).

Prica variance determined when the materials ara- received, but not charged toproductlon until the materiars are actuarty praced In process:Matgrials (2oro-oo r $a2)....,........................,............,. grfooMateriats purchase prici variance ,iid,doo x $.o3).;. 600Accounts payable (2o,oo0 , S.asi..... 9,oooWork In Prccgss (gr2o0 x 2 r-$.42) ..,,......,...........o..r... 6rgggMaterials

luqntitrVariance (ioo;C.4t::.,.,...,,n..,.... 42Materials (i 6rsoo r $,42) .-................,:::........,.......,. 6,930Materials

|rig Usage Variance (16,500 x $.o3) 4ssMateriars purchase price varianie.,1..,.,................. 495E19-2

(1) Materials (l2'O.OO Ae purchased r $S Sp) ..........or..,.o. 961000Materials purchase piice Vari"n""..,...,:.:.:....,............ g60Accounts payable 96,9g0

Work in process (12,BOO Se r Sg Sp) lOZ,qOOMateriats euantity Variance .........::.:.::.:::::...... 1,600Materiats (r3,ooo Ae issued r 38 apt::::.........:.::::: 1o4,ooo

#n1

E19-2 (Concluded)

l2lAveraqe costing Total Cost

$ 15r88O96.900

Chaptor t9

UnitCosts7,94

g.og8.OO averago

96rg6096,96O

780I 04,78O

Beginning inventof!..,..............PUrChaSgg.........".rr..................Available for use.

Quantitv2,OOO

12.OOO14.OOO

Materials...Accounts Payable ...r..........o....r..r... '................r.r....

Work ln Process (12r8oo SQ r $S Sn,............o......t...! lO2rdooMaterials Quantlty Vadance (i3,OOO - l2rBOO) r $S Sn i,600Materials Price Usage Variance (t3'OOO Ae r

(s8.o6 AP - $8 SP))Materials (13rOOO AQ r $8.O9 AP}.,..,..,..,,..........,...

(3) Fifo inventorv

Work in Process (same as abovg|...............,.............r.Materials Quantity Variance (same as above|.,........i..Materials Price Usage Variance

Materials (($Z.ge r 2'OOO units) +(S8'o8 r I l rooo units)) ..........o......o...............,..r.,.

(4) Lifo inventorv

work in Procgss (same as above) ...........................o...Materials QuanUty Variance (sarne as above}..........,..Materials price Usage Variance.....,.......r...,..,.......r.,...

Materiats ((SB.OA r 12,OOO units) +(S7.94 r l r0oo units)) ............,...........o..........,......

E19-3

Payrol l ' . . . . . . . . . . . . . . . t , . . , r . . . . .o . r . . , . . . . . . . . . , . , , r . . , . . . . . . . . .Accru gd Pa1rrclt. . . . ' . , . . . . . . . ,r. . . , . . . . . . . . . . . . . . . . . . . . . . , . .r. , . .r, . .

Work in Process (2rdOO x 314 r Sg.5O).r.. . . . . . .r. . . . . .r. .r,r.Labor Efficiency Variance (1Zo x Sg.io)

L a b o r R a t e V a r i a n c e ( 1 , g 2 O x S . 1 O ) . . . . . . . . . . . .Payro l t (1 ,92O x $9 .4O)

102,4OO1,600

760

102,4OO1,600

900

1 8 , 0 4 8

1 7 , 1 O 01 , 1 4 O

1O4,760

104,90O

18 ,048

19218 ,O48

Ctlr,Ots t0

Elg-4'

191

Work in Prpcess(lO'OO0 unltg r 2 SQ per unlt r $2 Spl'....,..r.,....

Materials Prlce Varlancc(($e.tO AP - $Z S4 r 2lrO0O AQI .....................,..

Materialg QuanUty Varlancc($2 SP x (2O'OOO SQ - 2l'OOO AQ)).........r...,.....,..

Materlals (21,OOO AQ r S2.1O API

Work in Procass(lo,oo0 unlts r 114 SH per unlt r $i2 SR)

Labor Rate Variance( ($1Z.ZO AR . $12 SR) x 2,4OO AH). . . . . . . . .

l-abor Efficiency Variance[$12 SR r (2,40O AH - 2,500 SHD

Payroll (2,4OO AH x SIZ.ZO AR) ... . . . . .

Work in Process Gt7 FO rate r l2rO0O SH)..................Applied Factory Ovefi ead ..,...,,,,...................,.......

Applied Factory Overhgad ....r.........r........,..................Fa gtory Ovgrhoad Contro1...r.,..,...r.........-,..roo.

Volume Variance(S4.5O fix. rate r (l5'OOO BH - l2'OOO SH)f ........,

Controllablg Varianc6.....................r......,.......,........Factory Overhead Control

(S91,00O actual - S84,O0O appt ied). .

Factory ovgrh gad Contro1....................r................,.....various crgdits r-...,..r........r.......,............................

Work in Process (i l 'OOO SH r $5 FO rate)..,........,......Applied Factory Ovorhead .o....,........

Applied Factory Overhead ............r.,....,..........,.......,...Factory Overhead Controt.. ..,,.....,....

Controllablg Variance ....,........r....... ' ...............r....,.,...Volume Variance

_ (S2 fir. rate r (1O,OOO BH - 1i,OOO SH))Factory Overhead Control

40rooo

2,too

2,OOO44, lOo

Er9-5( f )

l2't

(31

3OTOOO

480

84rOOO

84,OO0

l3,5OO

56,OOO

55,OOO

55,OOO

4,00o

1,2O029,2go

84,0OO

84,00O

6,5OO

7,00oE19-6

(1)

(21

f3)

(4)

56,0OO

55rO0O

55,O00

2rOOO

2,OOO(S57,OOO ac tua l - $55,OOO app l ied) . .

r - l

- \

KP

=79-7

llt Work In Process (4rgOO SH x $10 FO tiato),.,...............Applled Factory Overhead

i2l

B}

Applied Factory OverheadFactory Overhead Gontrol

Variable Efficlency Variance($4 var. rate x (5r2OO AH - 4r8OO SH)l ............,.,.r

Volume Varlance($12 llr rate r (5

Spendlng Varlance;OOO BH - 4800 SHll .......,,r.......

Factory Overhead Contml($78,200 actual . $7618OO applied)..r,..,.,.,...,...,...r.

:19-8

f l Work in Process (Z'0OO SH r $11 FO ritof ,..........r,.....Applied Factory Ovgrhgad r...........o........r.........o.....

2l Applied Factory OverheadFactory Overhead Control

3) Variable Efficiency Variance(98 var. rato i (Z1600 AH - Zroog SHlt ..........,....,.

Volume VarianceGt3 fix. rate x (BTOOO BH - T'OOO SH}!...........o......

Spending Variancg'.........r.r...............r..r..r.........r.....,r..Factory Overhead Control

($86,500 actual - $ZZ,OOO appl ied). . . . . . . . . . , . . r , . . , . . . . . .

7618OO

76,8OO

Chagtor 19

76,8OO

76,8OO

I'OOO

214OO

77,OOO

77,OOO

4,8OO

3,OOO1,7OO

2,6OO

1r4OO

77 |OOO

77 |OOO

9,50O

I

l-

I:

Clppter rg

Ei9-9 .Percentage of curnent-year labor cost element In finished goods and costgoods sold:

Flnishad goods, lgrooo units x $,0 1abor..,...............D.. ##:;Gost of goods sold (ftom cumont production),(91ro0o unib - lSroOO unitsix Sl faiot ............._g94.ooo

of

sgsq@9

oh

20

80too

b Allocation of cumant-year tabor variances:

I

b

Allocation of variances:

Finished goods (*?f0_9o_l 2o%o1,.............r...r.............. Sior4oocost of soods sotd (g52,ooo r tioy"1...............:::::....... 4t.600lga€99

End-of-year batances:

FinishedGoods

$tTirooolO'4OO

Balance at standald...'.........r......o........r...r...o...............

P:f:ll:arb Jabor variances aiiocation...................,.I

!t

Last yearb variances, alt appllcable to "o"i-oi-;;il;sofd on a fifo ftow assumrition .r......................-__-_--

E19- t o

Percentage of units in inventories and cost of goods sotd:Direct Labor and

Factorv OverheadUnits %

5OO lOVo7 r2OO 24oh3.300 660h5.OOO 10c.o.h

Gost of .Goods Sotd$819,OOO

41,600

5,goos866.400-

Gost ofGoodsSofd

$ (82.so)275.OO396.OO7g2.oo990.oo

(1 ,188.OO)

$:,i-g3.sg

MaterialsUnits o/o

1'500 2sohl r2OO 21oh3,300 55oh_q@@@@@@@@@@@@@@@@�g 7_oo%

II

>

I

TotalAmount

$ (150.001500.oo600.0o

l12OO.OO1,5OO.OO

(1,800.00t

$r,sso.gg

Work inProcess

$ (37.501125.OO60.oo

120.oo150.oo

(180.oo1

FinishedGoods

$ (3o.ool100.oot44.OO288.OO360.oo(432.OO1

s43o.og

- \

$1

E19.I I APPENDD(

Work In Procest ($4 FO rate r 3'{5O unltr I 1.5 SH per unltlApplled FaCtOfy OVgfhgad.............................'..............F...

Appllgd FaCtOfy OVeffiead .r........o............x'or8r.o.,............-.o.Lifci"n"y Varlinco St4 Fo rate r (5'320 All -5'175 SHll """ldle Gapiclty Varlanco (33 llr rats r (8,000 BH - 5'320 Al0!

Spendlng VarlanccFagtory Overhead contJol ..-.

EI9-i2 APPENDX

Work In Process ($2o FO ratc r 9'4OO SHIApp ll g d Factory Overh ea d .......r....rr.....

Apptled FaCtOry OVefhgad....o...........'....o..o....'.....o.'........D..Varf able Efticlenqy Varianco

Gt4.5O Yaf. I (f 0'600 All - 914OO SH))..'......'.'...........Flxed Efflclency Varlanco

GNl5.5O fh. r (10'600 Alf - 9r4OO SHll ..'.""r"""'o""Spending Variance ...o.o....ldle Capacity Variancc

Glt5.5O fir. r (lO'OOO BH - lOr6OO Al'l)1.............'.o...Factory Overhead Control a a a a t a t a a a a a a

2Or7OO

2Or7OO680

4040

188,OOO

188,OOO

614OO

18,600

ChWtor 19

20r7OO

1r97O21r35O

t88,OOO

7,2OO

9r3OO195 ,5OO

1lE

t\,

tI

t

l\-

I

L

It'

I

I

\,

IL

I

!

Clpptcr19

PROBLEMS

Pt0-l

Materlats (33rOOO AQ purchased x 32 SPI ..'........r................tMaterials Purchasg Pricg VariancO ..............,............o'....Accounts Payable (33,OOO AQ purchased x ${.96 AP) ..,.

Work In Prcces8 (OroOO oqulyalent unlta r 6 SQ r $2 SPf '.'...Materials Quantlty Variancc

Materlals (4O,OOO AQ lssued r 52 SP)

Work In Prtcess (5r8OO equivalent unlts r7l4 SH r $8 SRl.,.Labor Rate variance ($g.zo AR - $s snl r 1r5o0 AH)......,.....labor Efficlency Variance ($8 SR r (1,5oo A]l - 1,45O SR]l....

Payroll Gb8.2O AR r l 'SOO AH|.....,.......,....o...........,...........

Factory Ovgrhgad Contrc|..,...r.....Various Crtdits...

Work in Process(5,5OO equivalent units r 314 SH r Sl0 FO rate1........

Applied FaCtory Ovgrhgad '.D......'.......'......o.................t...r

Appli gd Factory Overh gad .'...'.'............o...r...........r................Controtlab lg Varianco ......,.,..r..........r..........r.r....r........r.,..,.....

Volume Variance ($12 fired rate r (4,OOO BH - {,125 SH}}Factory Overhead Control ....,r...............,.................,.......

Finished Goods (5r2OO units r $26 standard cost),......r....o....Work ln Procgsg ..........,,.......,.,,.., ..r,.,.r....r,

Accounts Receivable (5r50O units r 940 sales pricel ..,..,......Sa1es.. . . . . . . . . . ' . r . . r . . . . . . . . . . . . . . . . . . , . . . . , . , , . . . . . . . .

Cost of Goods Sold (5r5O0 units r 326 standard cost).,.........Finlshgd Goods.. . , . . . r . . . . . . . . . . . , . . . . . . . . . . . . . . . . . . t . . . . . . . r . . . . . . . . , . . . . r . . .

b

tt

I

L

tr

iD

!

I

>

I!

I

66rOOO1r32O

64,68O

72rOOOSrOOO

80,OOO

l1 ,600300400

12,3OO

65rOOO65rOOO

66rOOOg6,ooo

66,OOO500

1,5OO5,OOO

135,2OO135,2O0

22O|OOO22O,OOO

f 43,OOO143rOOO

t

I'''

1#

P19-2Materials Labor

2r4OO 2r4OO300 300

Chapter 19

Overhead2r4OO

300

2rloo 2,1oo

Units completed gnd transferred out this periodLess all unltg In bgglnning Inventofi,...............,rEqulvatent unlta gtsrted and completed thla

period 2r1OO

o2ao

Add equiyalent unlts requlred to completcbeginnlng Inventory

Add eguivalent unlts In endlng lnventory r......-..Equivalent unitg ol producUon this period.........Multlply by standard guanUty of lnput per unit

of productStandard quantity of Input allowed for work

produced during the period

Materials (l1,0OO AQ purchased r $0 SPIMaterials Purchase Price Vari

Accounts Payab1e.. . . . . . . . r . . . r . . . . . . . . . . . . r r . . . . . . . . . . . r . . r . . . . . r . . . . . . . . . . .

Work in Process ($O SP x 11r5OO SQ allow€d).....,.,,......,.......Matgrials QuanUty Variancc r...........o................o....................

Matgrials ($6 SP r 12roO0 AQ lssugd|............o.....,,........r

Work In Procesg ($i2 SR r lrT25 SH aflowodf .............,...o.....l-abor Rate varlance ($12.10 AR - $rz snl r l,7oo AH!........

Labor Efficiency Variancc($12 SR r (1 ,7OO All - 11725 SH)l ...,...r i..........,,.......r.

Payrolla a a a a a a a a a t a a a a a a a a a a a t a t t a a

15050

2r3OO

2MH

1_J25 !.600

66rOOO1 , O O O

67,OOO

69rOOO3rOOO

72,OOO

20t7OO170

69,OOO

64,4OO

64,4OO

8404r48O

30020r57O

09,ooo

64,4OO

72069,OOO

213OO

5 unlts

l_l.5oo

too100

2r3OO

3/4 DLH

Factory ovgrhgad Controt..............................o.....,.................Various Grgdits. . . . . . . . . . ro, . . . . . . . . . . . r . . , . . . . . . . . . , . r . . , . . . . . r ,

Work in Process (Sf 4 FO rate r 41600 SH a!!owod|...........,....Applied Factory ovgrhgad........,..-.r.r.,r.......,..r..........,,....

Applied Factory overhgad ......o.,........,r............r..o.r....,..r........Variable Eflici ency Variance

(S2.80 yar. rate'r (4,9OO AH - d,6OO SlIl) .................Volume Variance (St t.Zo fix raten x (5,oOO BH - 4,600 SHI)

Spending Variancg.t,........,,.. ...........r,.Factory Overhead Control ,..........,.....................

'S14 FO rate x2Ooh var iablo = S2.gO var iabte rate" 314 FO rato - S2.8O variabte rate = 311.2O fired rate

I

I\-

IL

I

b

Ib

I

I

-

t

\

Ctaplstg

Plg€'

-Unlts ggmqfot-od and transfermd out this period .......L'8gs all unfts In beglnnlng lnventoty........:......:.:.,......Equlualent unlts startod and compteteO this perlod...Add equlvalent u-nfts rcqutred to complete

beginnlng lnvantofl ...r.......D...t...................Add egulvalent unlts ln ending Inventory....D...o....r....,Equlualent unlts of producUon Urtg penoA ....,........,...Multlpfy by standard quanilty of lnput p"i uiii

---'

_ Of prOdUCt. . . . . . . . . . . . . . . .Dor. .ea11..11. . . .1. . i . . . . . . . ! . . . . .

Standard quanilty of fnput altowed for workproduced durlng thc perfod,............o.,........

197

ConversionMaterials Cost

5,ooo -Efoo3,OOO 3.OOO2,OOO 2'OOO

o2,OOO4,O0o

2rOOO1.5005,5OO

6 unlts 1t2 hour

24.OOO Z,ISO

Materlals ($'5q sP r gorooo Ae purchasedt .,,.........,..o.......... lsroooMatgrials Purchase Price variancg.........ror.....................,o..r., lroooAccounts Payab|ett"rr.........r.........r..... '...........r...r.r.......... 16rooo

work fn PrccesL.F:?o _sp , 24rooo Se altowed),.................., izroooMaterlals euantity Variance .....Materiars ($.sb sp;-;d#iliiffiil':::::.::.::::.::.::::.:::: 2so

72,zsoWork In prccess 6f 9-9! , 2r7SO SH -a-fl91ved| .............,....o..o. 2TTSOOLabor Rate varianco ((sro:t6 AR - sro $ii;'iiiiooAH usedt r,esoLabor Effi ciency Variance

Glf o sR r (2r8oo AH - 2r7s_?sl0).....,..............ro,.......... 1r5ooPayron Gto.zs AR r 2,600 ax useii:::::::::::.:...............::: 27,e5o

Work In Process ($12 FO rate r 2rlSASH allowrod),............... 33roooAppligd Factory ovgrhgad.'.......................,....t,............... 33rooo

Factory Overhead Contro|.....,.....various credits......:.::::::::::::::.::::::..::::.:.::::.:.:..:.,::::::..::.:: 3 i ,ooo

sr,oooApplied Factory Overhead ....,..,..controltable varian"" .....,....:::::::,

""""""""""'..r.... '...........,. 33rooovofume varfance Fe nred;;;i{iilH;ffi;1iil. 2so

2,2soFactory overhead controt .-.::............,r............,...,......o.... 3i rooo

rI

i

Chapter 19

P19-3 (Concludedf

Finished Goods Inventory (5,OOO unlts x $14 standard costr) 7O,OOOWOfk in PfOCeSS ..r.........o...r.r...........o.........r..................... 70tO0O

'Materials (6 unlts O $'50 eachl'.'... $ 3.oo5.(X'Labor lll2hovr O $1O per hour)

Overhead: Varlable lll2hour e 33 por hourl...... 1'50Fixed (1/2 hour O $9 per hour).......,.. 4.5O

Total standard cost per unlt of product.............. 9!4.00

Cost of Goods Sold (5r1OO units x $14 standard cost).,......... 71r4OOFinishgd Goods lnventory...................'.'...o...........'.......... 71t4OO

Accounts Receivable (5r1OO units x922 sales prlce|....,....... 712eOO1"l2r2OO

P19-4

GGA-Canada (adaptedl. Reprlnt wlth pe rmlsslo n.

ENSLry CORPORANONIncome Statement

For Year Ended December 31. 2OASales ((2O'0OO unlts + 1101000 unlts - 12r0O0 unltsl r $251.....r...... $2,950,000Cost of goods sold at standard (118,0OO unlts x $17.60) .. 2.076.800Gross profi t at standard ... . , . . . , . . . . . . .r. . . .r. , . .o.,, . . . . . . . , , . . . . . . , . . . . . . , . . . . . . . . . . , . . $ 87312OOAdd ngt manufacfuring variancg....r. . . . . , . . .r. . . .o.,. . . . , . . . . . . . . . . . . , . . . . . . . . . . . . . 9O1Gross profiq adjusted to actua1...,..... $ 873,290Lgss markgting and administrative expe[s€s,...,..............r,...t........ 68O.5oOOpefat ing InCOme... . . . . . . . . . . . . . . . ' t . ' . ' . . . . .o. . . r . . . . . r . . . . r . . . ' . . . . . . . . . . . ' . . ' . " . t . r . ' r . . $ 192.79O

I Manufacturing variances: Unfavorable Favorable

$ 3,750

44,OOO

1 ,100s48,85O

48,780Net favorabte vartanco ........

s48.760

!:-s fa*

I

I

IvI

L

s37tr25O

375.OOOE_e,7sof

I:

Clnpter 19

Pl9-4 (Gontinuedf

Materials:Agtual quantity r average cost

[25OtoOO fbs. r 1.485 per lb.]..........,...,.........rr.r....,.........Astual quantity r standard cost

(250,OOO lbs. t $i.5O per lb.f

199

fav.

$360,OO0

345.OOO-L _!5l0o9 unfav.

I

l-

!

I

Matgrials purchase price variance .........,..........,..............r.

Thansferred into production (24O'O0O lbs. x $1,So1 ...ri.......standard quantity for l is,ooor eguivafent production

ynits (23O'OOO lbs. r $1.5o per lb., or liS'OOO units r$3 pgr unitl.t...............r..................o...r..............r........o....

Matgrials quantity variance...........,.,.........

Thansfgrrgd out of work in process..,...r.............,.,.r..Beginnlng inventory (all completed|..........................Startgd and compfgtgd this period .............,.r...........Add gnding inventoly....,.......................o.........r...,.....

To ta l 'D r " t t . . . . t . . . . o t . . . r . . . . . . . . . r r . . . . . r . r . . . . . . . . . . . . . . . . . . . . r . . . . . r r

Labon

PoundBasis

22OLOOO20.ooo

2OO,OOO30.ooo

?39e9

UnitBasis

110,O0olo.ooo

I O0,oo015.OOO

1 1 5 , O O O

Ac'tual labor cost.......D......".. ' ...r............r.,......r....o.........,. $l,3l3rzGoActual hours r standard rabor rate (16r,ooo hours r $81 -iiiea,ooo

l-abor ratg variallco ,'.'."........'.'......r...,..,....r,,.,........,.,.,.i. E-zsrzeo unfav.v

-

$1,288,OOO

1.332.000S__(4!.,OOO} fav.

Actual hours x standa rd labor r?ttG)....,................,........,...Standard hourc r standard labor rate (l661500 hrs.il I. $8 per hour, or ll irooO units * r $i 2 per uniU..........Labor efficiency Yariance..,..,.,........................r......,.,......

I

ffi Chapter 19I

P19-4 (Concluded)r* Computatlon ol equivatent pmductlon for labor and tactory overtread:

Hour UnitBasis Basis

Thansferred out of work In Process 165,000 11O,OOO15.OOO IO,OOO

l5OrOOO lOO,OOOI,OOO 6,OOO7.500 5.OOO

166.500 I I l ,OOO

Factory overhead (two-variance rnethod):ACtUal fagtOfy OVgfh gad ....o....,.r.'...r..........r'.......... '..... '..o.'.

Budget allowance:Variable overhead (1 I t 'OOO units r $1 .5O| ... $169'500Fifgd OVgfhg4d........,...r..,.....,...,...........r....... -!3L@

COntrOltablg VafianC8.... . . . . . . . . . . . . . i . . . ' . ' . . . . . ' . . . . . . . . ' . ' . . . . . . . . . . t . . . . .

BUdget a11OmnCO.. . . . . . . . . . . . . .o . r r . . r . . . . . . . . r .o . . . . . . . . . . . . . . . . . . . . t . . . .o . . . .

Applied lactory ovorhead (t I l r0OO units r $2.601 ..............VOlUmg var ianCg. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .o . . . . . .o . . . . . . . t t . . . . . . . . . . . .o .

287.500

Beglnning InVentOltsflOfk In pfOCeSS.'....................

Staftgd and COmplgted this pefiOd .,...........o.............Add 3/5 tO COmplete beginning inYefltgtJ..........r......Add I /3 Ol endlng inVentOfy.r..t..........'............o...r.....

T O t a l . a a a a . . r a . . . r . r . . . a . o . . o . . . . . a a a a . a a a . . . . . r . . . a . a o a . . r a r . . a a a r . a a r . a a

KALMAN COMPANYlnterim Income Statement

For the Second Quar te r , 2O-

$295,5OO

$ 8.OOO unfau

$287,5OO288,600

S (l,1ool fav.:

P19-5

SalgS (SOOTOOO f $3Ol ....r....o.....o..................r....................'............COSI Of gOOdS SOld at Standard (600'000 f Sl 81 ......'..'...t.o'.......o...GrosS prOfit at Standald .. . . . . . . . . . . . . . . . . . .r. . . .r. . . . . . . . . . . . . . . ' . . . . . . .ot.. . . . . . . . . . . .Adjustments for standard cost variances:

Matgrials price variance 1.......... ' ... ' . ..o.................Labor efficien cy Yarianco2......'...........................Overhead spending yariancos....Variabl e oyorhoad eflicie ncy yarianco4 ..............Ovgrh gad Yolumg yariance5.....................o..... ' ... ' ---j

Adjusted gnoss profit o...,........, ......,....... .............Less commercial erpenses:

MarkeUng orpensos ($t8,OOO,OOO r 1Oo6).. '....... $1'8OO'OOOAdministrative oxpensos (SOTOOO,OOO r 25oh)'.... 1'5OO.OOO

lncome before Income tax. . . . . . . . .Loss income tar erponse (S3,483,4OO r

(s3 ,75O,O00 / 57 ,5OO,OOO)) . . , .Ngt incom€ . , . . . . . . .o . . . . , . . r . . . . . . . . . . . . r . . . . . . . . . . . .o . . . . . . . . . . . . . ' . ' r . . . . . . ' . ' . . . . . ' . " " "

$ 237,80038,OOO

t35,OOO8,00o

$18,o0o,ooo10.800.ooc

$ 7,2oo,ooo

416.600$ 6,783,400

3.300,oooS 3,483,4oo

' 1 ,741.700

sJJ4E-9e

501

tt

LIl>

II

=

I!

iIE

lb

Chapter 19

Pl9-5,(Continued)

rrhe materials price variance should be prorated between work in process,ished goods, and cost of goods sold as ioltows:

Ending balance ofwork in process -

Ending balance offinished goods

$72,OOO

$18 per unit

Total units in ending invgntori€s...,........................

Jo!"! units produced during second quarter..........Total units in ending inventori€s.....,....,.........,.......Units produced and sold during second quarter..,

fin-

$18 per unit

$goo,ooo

- 4'OOO units

5O,OOO units

5!_,ooo units

45O,OOO54.ooo

3g6.ooo-

I

b

\,

I

lL

Materials price variance charged 396,OOOto cost of goods sold

- T56:FOO x 27O,OOO = 5237'600

zsince the tabor efficiency variance is not regarded as significant, all of it ischarged against second quarter income.

oA portion of thE overhead spending variance is attributable to the overtime pre-mium paid. since the overtiire-premium was incurred in order to meet salesforecasts for the entire year' the portion of the spending variance resuttingfrom the overtime premium isg.ob rabor p",' unii at regurar rate x Sooh =S4'50/unit) should be prorated over the entire y""r. in proportion to the sales ofeach quarter as follows:Production in excess of capacity (euarters 1 and 2 onry):Quarter 1 = 465,000 _ 43OrOOb = 35,0OO units

Quarter 2 = 4SOTOOO - 43O,OOO = 2O,OOO unitsovertime premium resurting from ercess production:

Quarter I = 35,OOO unit! x $4.SO/unit = $f SZ,SOOQuarter 2= 2OTOOO units x$4.5o/unit = 9O.OOOTotal overtime premium for first six months _S24Z,SOO

Proration of overtime premium portion of spending variance based on sales:

Quarter 2 = -s600'ooo A' Et.-^r^^-.$l FoAooo

x s247'5oo total overtime premium = $99rooo

I

>

-

Chapter 19

Pl9-5 (Goncludedl

The overhosd spondlng varlanco charged against second quarter income is

calculated aa follorvs:

Total overhead spending variance for second quarter.-............... 91261000AmOunt resulting frOm SeCOnd qUartef OVertime premiUm......,... 9O'OOO

Amount rgtatgd io unexpgctgd Ingff|cignc|93.................r............ $ 36tOOOAmount ol overttme premium chargeable to second quarter on

the basts of salgs attocatlon dgtgrmingd abovg .................... 99.OOO

Total spending variance charged against second quarter income SI-95'O0O

aSince tactory overhead is charged to production on the basis of direct laborhours, an unfavorable variabte overhead efficiency variance occurs because ofthe inefficient use of direct tabor. The amount of the unfavorable overheadvariable efficiency variance is determined as follorvs:

5The company pollcy is to report a volume varianco on Interim statements onlyil actual producgon Oitters irom the ptanned production schedule. Sincs actualproduction is equal to budgeted producUon through the end of the secondquarter, there is no volume yariance to be charged against second quarterincome.

labor eff lclency varlanccl-abor coot per unR

P19-6

(1) Material MaterialA B

Units completed and transferred out...... 15r0OO 15rOOOLess beginning Inventory (att unitsl....... ' . 6.000 6.000Started and compteted this period..... ' .... 9rOO0 IrOOOAdd work this period in inventories:

r varlablc ovsrhead per unlt = #

r 32 = $g,ooo

o 2,OOO5,OOO 2.500

14,0OO 13r5OOx i x o

FactorYLabor Overhead

.| 5,0oo 15,OO06.000 6,0009,000 I,ooo

3,OOO 2rOOO1,250 2.500

13,250 13,5OOx 11l2 x 113

Beginning inventorlf ..........,.r.'....r......Ending inventory .............r.................

Equivalent units of Wgstco.....,..,......,......Standard quantity per unit of Westco......Stand ard quantity al I owgd.................,.....

Materials ((15,OOO r 314) + (BO,OOo x $21) .

14.OOO 81,OOO 6,625 --l!I! ioo: :

, . 3TO'OOO65rOOO

435,OOO

358,OOO5,4OO

363,4OO

Materials Purchase Price Variance,..............,.r......'........Accounts Payable (15,OOO r $13) + (8O,OOO x S3l)....

Work in Process ((14,OOO r $f e} + (81,OOO x $2)1...........,.Materials Quantity Variance ........r....... 'r............

Materials ((14,2oO r $14) + (82,3oO r $2ll

503

t

I

I

tI

-

I\-

I\t

!

C@ter 19

I

Pl9-6 [Goncluded]

Work In Plocgss (0t825 r $r o) ........................,...r.........r..labor Rate Varlanco (61500 r GltO - $l l)l ror,,,......,.,.....,..

labor Efficienciltariance ((6,025 _ tirsoo, r $lO) .....Payroll (8t5oo r $l ll ..o...o........'..rts...,...........,........o.-.

Work In Procggr (4r5OO I $24.............................r..........,Applled Factory Overhead.....

Applied Factory Ovorfi o8d .......Volume Variance ((5,OOO - {,5001r $241 ........,..............oD.

a a a a a a . a a a a

o6,25O6,5OO

12l ,5oo

t2t ,5ool2,OO0

1,25O11r2OO

30076,150

7r25O71,50O

1 2 1 , 5 0 0

1 1 , 2 O O300

722,OOO

65rOOO5,4O061500

12,OOO

:

b

Ib

S

b

\

Spending Variance ..............o.......-.........o...o...ro.....oo..Variable Efticiency Variance ([4'SOO - dr4oOl x $3]..::Fa gtory Ovgrhead control ....r..........................,.........

(21Labor-Efficiency Varianc4.................o..............................Spending Variance.D............r...............................r..,........rVariablg Efficigncy Vartanco...........,................................Income^ Summary.. . . . . . ! . . . r . . . . . . . . . . . r . . . .o. . . . . . . . . . . . . . . . . . . r . . . r . . . . . . . .

Materials purchase price Variance .......,......:::..........Materials QuanUty Varian ce,..........o....r.,......r..,..,......Labor Rate Variancg............o.....o..........r.o..................Volumg Variance....r.r.......r.......r...o.....................r......

PACIFI C MANUFACTURING COMPAilYIncomo Statement

(3)

I

v

lales ((4r0oo + l5rooo - 3roool r $601......t,...........r...r.....Cost ol goods sold (f 5r4oo x Slol r............o........,o........o..9-* profh at standald ..............D...................................Adjustments for standard cosi variancos:

Matgrlals purchase price variancg....,.........,.............Matgrials quantity variancg ..............................,r...,..Labor rate varianto.......... i ........!..............o..r.........r...La bo r effi c i en cy va ria n ce ........,......,..r....... t....,.........,.spending var iancg.. . . . . . . . . . . ' r . . . . . . . . . . r . . . . t . . . . . . . rD.. , . . . . r . . . . .Va ria b I e e ff i ci e n cy va ri a n ce :..........,.......r.,....,.t.........Volume yarianco.. . . . . . . . . r . . . . . . . . . . . . . . . . . . . . . . . . . . . . . r r .

Adjusted gross profit.....Less commenciir expen";; ::::::::""""""""""""""""""'

::.::::.:::::::::.::. ::.::::::::.::::l n c o m e t a x e x p e n s e ( 3 O 7 o x S 1 1 1 , g S O ) . . . . .Net income,. . . . . . .

s924,OOO. 6t 9.000s3O8,OOO

s65,ooo5,4OO6,5OO

(1,2501(1t ,2ool

(3oo)l2.ooo 76,150

$231 ,850120 .OOO

$1 I 1 ,85O33 .555

s_7q.?95

I, tI

w

t2o,ooo4,OOO

35rOOO2,O16

75,0OO

8lr5OO

230,OOO

184,OOO

32OlOOO

5O,oOo

Chapter 19

800159,2OO

124rAOO

I ,4OO351016

75rOOO

81,5OO

23O,OOO

184,OOO

320,OOO

5O,OOO

?79-7

ill Materialg (4O OOo llterr AQ purchas€d rMateriale Purchase Prico Varlancc ..ACCOUntg Payable ....'...r.......................................ro..

Work In Process flO'OOO units r 3 liters SQ Per unit r$4 SPI

Matgrials QUanUty VarianCe ...,......r.'r.............o.r.....'o......Materials (31 ooo llters AQ issued r $tl SP|...........".

Work In Procegs (lOrOOO unlts r 112 SH r $Z Sn1.'-'...---tLabor Rate Variancs ($7.42 AR - $7 SRI r {1800 AH).-....

Lâbor Efflclency Varlanco Sl7 SR r (4'8oo All -StOOO SH)|.. . . . . . . . . . . . . . . . . . .r . . . . . .r . . . ' . . . . . .r .o.. . i . . . . . . . . . . . . . . . t .

PayfOll Gt7142 AR f 4180O AH) .......,......r.o....r.r...........

Work in Process (iO'OOO units ,,112 SH r $15 FO ratel...Appl ie d FaCtOfy Ovgrh gad.. . . . . .o. . , , . . . . ' . r . . . . . ' . . . . . . . . . . . . . . . .

FaCtOry Ovgrhgad COntrOl .o.r.............o...'...................t.....VariouS Grcd1t3....r...o.r.........r......................t..............

Finished Goodr (l O'OOO units r $23 standard costl ........Work In ProcgS8.. . . . . . . . . . . . . . . . . . . . . . . . ,o. . . . . . . . r . . . . . . . . . ' . . . . r . . . . .

Cost of Goods Sold (8,00O units x $23 standard cost) .'.-Fin ishgd GOOdS.. . . . . . . r ' . . . r . . . . r . . .o . . . . . . . . .o . . . . . . . . . . . . . . . . . r . . t . ' .

Accounts Receiyable (81000 units x 340 sales ptieo) ""..S a 1 g S . . . . r . . . . . r . . . r . r r . r r r . . r . . . . . . . . r . . . r . . . . . r . . . . . . . . . . t . t . .

Markgting and Administrative Expenses......'...D..'...........VariouS Ct€dits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . r . r . . . t t . t . . . . . .

94 Sn.r............ IOOrOOO

Chapter 19

P1s-7 iContinueCl

121 Aetual factory overhead.Budget aflowance based on ir8OO sctuaf hours:

Variable overhead ($8 variable r:ate r4rgoo Al{ ....... ...........4..... S28r8OO

Firgd ovgrhgad.............r...r....................r.,...r 4g;5ooSpending variance......r.......'.......r.o.......rr.r.......rr...r........rr..r

Budget allorlrrance based on 4r8OO actual hours(from above)......... 'D.....r..r..rr....t....r....... ' .................

Budget allourance based on B'OOO standard hours:Varlable overhead ($6 varlabfe rate r

5rO0O SH) ... . . . . . . . . , . . . . . . . . . , . . . . . . , .r. . . . . . . . . .r. . . . . 33OTOOOFirgd ovgrhgad.'.o...-....r'.-....r.o...r.'.D.............. lgrsoo

Variable efficlency Yariance....'.........o...........r.,..........,....or..

Budget allonrance basod on S'OOO standardhours (from above) ........o.. ' ......r..r...............,...r.....,r

Applied factory overhead (Sf S FO rate r 5,OOO SH)............Volume variancg.. ' . . . . . . ' . . . . . . . r . . . . . . r . . . . . .o. . . . . . r r . , . . .o. . . . . , . . . . , . . . , . . r .

505

s81,5OO

78,3OO$ 3,2OO unfav.

s78,30o

s79,5OO75,OOO

$ 4,5OO unfav.

(3) GRINDLE CORPORATIONIncome Statement

For November

S a I e s t t t t t t " " " " " t t o " " ' . o . . . . t . . . . . . . . . . . r r . . . . . . . . . . . r . r . . . . r . . . . . r . r . . r . . . . . r . . . . . . . . . . . . . . . . . . rLess cost of goods sotd:

Standard cttSt............i............o..,r................ri. $l g4rOOONetunfavorabtevariances(Schedule i1.. . . . . . , . . . . . , . . . . . . 1O.316

Gross pro f i t t t " " " to " . . . . . . r r . . . ro . . . . . . . . . . . r . . . . . . . . . r . . . . . . . . r . r . r . . . r . . . . r . . . . . . , . . rD . . . . r . . ,

MarkeUng and administrative orpenses.............. ...,r............Income bgforg tar95.. . . . . . r . . . . . . . ' . . . . . . . . . . . . . . . . . . . . . . . . . r . . . . . . . . . . . r . . . . . . . . . r . . rr . . . . . . .

$320,OOO

194,316s125,684

50.o00$ 75.684

i l 'I

ffi

P19-7 (Goncluded|

Chaptar 19

Schedule 1GRINDLE CORPORATIOII

Schedule of VariancesFor November

Materials purchase price varianceMateriala quantlty variance ...........Labor rate variallco .................'.....Labor effi ciency varianceFactoly Overhgad epending YarianC9..................................r..Fa ctory ovg rh gad va ri a bl g eftl ci gncy vari anc8 ...............r...'..Factoryovgrhgadvolumg variancg.. ' . . . . . . . . . .r. . . . .r ' . . . . . . . . . ' . . . . . . . . . 4r5OO

t a a a a a a t a t a S 8oo

1r4OO

1r2OA

$ 4,OOO2rO16

3r2OO

$13,716 $3,4OO(3.4001

Ngt unfavorablg YarianCg.... . .r. . . . .r. . . . . .r.r. . . . . . . . . . ' . ' . . . .r . .r. ' . . . . . . . . . . SlOt316

CGA-Canada (adaptedf. RePrint with pennission.

P19-8

( 1 )

Materials price usage variance......r..Materials quantity variance.......,.......Direct labor rate variaflco .......,.........Factory overhead spending varianceTotal variances ..r..r.,.................,.......,Discounts lost on purchases............,

Allocatad to Coctof Goods Manufachrred

Coat otFlnlghed Goodl

Total Gooda Sold

sl,ooo $gzs s625440 165 2752AO 75 125l24ol _(99J (1501

4

$1,4OO $SZS 987580 30 50

Allocatedto

Wor|r InTotal Procaar

sl,5oO ssoo660 220250 50

(30o) (60l

$z,t 1o $7ro120 40

Tota1 ..................................,.....,,.... $2,23o $75Q Si,48o 35€5- S925: : : : :

MaterialsPro-

ductionUnits

Work in Procesg:Materials (t r2OO units r I O006).....,..,.. .l r2OODirect labor (1r2OO units t 5O06).......,.Factory overhead (l,2OO units x 5O%)

Finishod goods (9OO uni ts x lOO%).. , . . . " 9OOGost of goods sold (1,5oO uni ts r 1OO%l 1.5Oo

Total . . . . . . . . . ' . . . . . . . . . . . . . .o. . . . . . . . . . ' t . . . """"" ' 3teOO

FactorYDirect Labor Overhead

33 lrs

2541 2B

1_99_

Pro-ductionUnits %

600 20

9001 ,500

_gpoo

Pro-ductionUnits %

600 20900 30

1 ,500 503 .OOO too: -

%

3050

1 0 0

Chapter 19

Pl9-8 (Conctuded)

(21

Work in process at standard costlOOVol ...

Direst labor 17r2AO units r $g r SOo/o1..Factory overhead (ir2OO units r

$2 r SOTol . . . . . .r . . .r .o.. .r .r . . .r . . . .r .r . . . . . .r

Finished goods at standard cost:tt tai"@.....,r,.......Dituct labor (9OO units x $g) .....D......r..Factory overhedd (9OO units x $2)....,..

Cost of goods sold at standard cost:tvtatg .........Direct labor (i'SOO units r Sgl ............Factory overhead (lr5OO units x S21..,.

Total mfg. cost at standatd cost...Less work in process, Dec. gi, t9_...Gost of goods manufactured at

Standard COSI ....................r....,...r.Add: Variancg a11ocation.................,.r

Allocation of discounts lost onpurchases...............,........r......

Cost of goods manufactured at actual

(3)

Materials at standard cost ...........,Materials-price variance ailocation........ ' ..

-quantity variance allocation .......-allocation of discounts lost onpurchase3............,............r....

Total matgriats.,........,... ,........rDirect labor at standard cost .....,.........,.,.....Di rect labor-rate va riance allocation ..........

Total direct |abor....................................!a ctorV overh ead at sta n dard cost...D..r........Factory overh ea d--op.n ain g r"ii"n ""

allOCation .........,.....................r.....r...

_ . Igt"l factory overhead ....,.,....,loull inventories at actuat cost...

fi7

Materiafs

s 8,4OO

FastoryDirect OvenLabor head

$ 4,8oo

Total

6,3OO

1O,5OO

7r2OO

12,O0o

sl,2OO $t4,4OO

l ,goo 15,3OO

s25,2OO9.400

$16,8001r44O

80

s24,OOO4,800

$1g,2oo200

3.OOOs6,OOO

1,200

$4,8oo(24o1

25,500$55,2OO

f 4.400

s4O,80O1,4OO

80

cost...,.......r...............r.....,.,........... [q€20 $lgrgoo $4€so s4e/80

Work inProcessS 8,4oo

500220

40$ 9 . 1 6 0$ 4,8OO

50$ 4.950$ 1,2OO

(601$ 1 . 1 4 0$ 1 5 . 1 5 0

FinishedGoods

$ 6,3003751 6 5

30$ 6,870$ 7,2oo

75$ 7.275$ i,Boo

(e0l$ 1 . 7 1 0$15.955

Total$14,7OO

875385

70$18.030$tz,ooo

725$12,t25$ e,ooo

(150)$ 2.850$gl .oo5

*t

PI9.9 APPENDIX

CottonCloth

Units comploted and transferred out this period....,. 3'OOOLgss all units In beginning Inventol'1f ........................ 1,00OEquivalent units started and completed this period 2,OOOAdd equiyalent unitg required to complete

bgginning InvgntOfl .t................'..........r.............. OAdd equivalent units in ending inventory.............r..., 75OEquivalent units ol producUon this period.........,o...., 2r75aMultiply by standard quanUty of Input per unit

Ol p rodu Ct ........................o...........r.o.i..........r.......3-@.g.Stardard quantlty of input allowed for work

produced during the period......,..,............,......... Eg99

Materials-Cotton Cloth (5,OoO yards AQ purchased r $f SPIMaterials Purchase Price Variance--Cotton Gloth ................

Accounts Payable (5r0OO yards AQ purchased x $1,1O AP)

Materiats=Dyes [2r5OO pints AQ purchased x $,50 SP]......,..Matgrials Purchasg Pricg Variancg-f,l1/€s ........r...,.........Accounts Payable (2,5OO pints AQ purchased x $.49 API

Work in Process (5r5OO yards Se allowed r $l Sp) ..,.,..,..,....Materials Quantity Varian ce-Cotton Ctoth ....................,..,..,

Materials--Cotton Ctoth (5,OOO yards Ae issued r $1 Spl

Work in Process (2r75O pints Se atlowed x $.5o Sp) ........,....Matg ri a I s Q ua ntity Va rian c e-Dy€s ......,..........,,...,........,.Material-Dyes (2r7O0 pints AQ issued x S,50 SP|.....,....

Payroll (1 ,55o All r $5.9o AR| ................................................Accrued Papoll (and employee withholding accounts),..

! ' l/ork in Process (lr5OO SH attowed r $6 SR)............,..........t.Labor Efficiency Variance ($e SR r (1r5SO AH - I,SOO SR)}..,.

Labor Rate Variance ((gs.go AR - $6 sRl r i,550 AHi .....Payrol l " ' . . . . . . . . . . . . . . . . . . .r . .r . . . . . . .r . . ' . .r .r r . . . . . . . . . . . . . . . . . . . .

Factory Overhead Contro1....,......r..,, ..rr.....Various Credits.......,.......................

Work in Process (1r5OO SH altowed r $1O FO rate)....,..Applied Factory Overhead..........,... ......o....r.......

Dver3rOOOLOOO2rOOO

o750

2r750

I pint

2J50

5rO0O500

1r25O

5,5001 0 0

1,375

9 , 1 4 5

9,00o300

Chapter 19

Convcr-alonCost

3rOOOI,OOO2rOOO

750250

3,OOO

tt2hour

1 .500

5,5OO

257 1225

5,goo

251,35O

9 , 1 4 5

1 5 591145

1 6 , 1 O O

15 ,OOO

l6 r l OO

15 ,OOO

I

C,lWter 19

Pt 9-9 )APPEHDIX (Conctr.rdedl

Applled Factory ovgrhead ......r...........r....,.............r...............Chlerhead Spending Variancg...o........r...r..............or................Overhead Effielency Variance gllO rate r

llt55o fH - lt5oO Slfl) .............r.....................r.r........

Overhead fdle Capactty Varianco Gt7 flxed rata r(t t600 BH - 1 t55O AH)l ....:...'...............r,o......o............

Factory overhgad Cohtroi.......r...........,..................,.-,...r.

Finished Goods (3'OOO units r $i O.5O standard c(lst!.....,,.....Work In Process......o.............o..........r...r...r..rrrr......D.........

Accounts Receivabre (3rroo units sotd x $rc sales price)...,.Sa1gs t t t r " " t t t " " t t . . . . . . . r . r .o . r . r r . . . .D . . r . . . . . . . . . . . . . . . . . . . .a . .a . . . . . r . r . . . .o

Cost of Goods Sold (3rlOO unlts r $lO.SO standard costl...,..Finishgd Goods '....r........o.tr.................o......r.rt..o............r,

Cost of Goods So|d tt...........o.......r.r.o.......................r..............Matgriafs Purchase price variance-DyiErg..,.,......,....or....o......Matgrials Quantity varf ancg-.Dygs.............r,........!.........,,...t.Labor Rate Variance............rr.....t..............o........o..........r.......

Materiafs Purchase price Variance_Cotton G|oth..........Materlals Quantity varianc+--cotton croth.,....D......r..,....Labor Efficiency variancg ......r.......,............,......,.......,....Overh ead Sp_en d in g Varia nce,....,..,.................................Overh ead Efficien cy Varia n ca ..r.....................,,...............overhea d I dle Ca piclty Varia n cr) .,..,...::.::::::...,...............

Pl9.IO APPENDIX

Materiafs (1o ooo kg Ae purchased r $z sp).........,...............Materials Purchase Pricg variancg,..,...,.,........r..............Accounts payabte (tO OOO kg Ae purctraieJ r $i.9S Apl

Work in Process (90O units r 9 kg Se per unit x $2 Sp1......;..Matgrlals Quantity variancg '.:..............................,.........,......Materiats (B 600 kg Ae issueo r $z spt.:::::::..................

Work in Process (9OO units r 2 SH per unit r $1O.5O SR) ......Labor Rate Variance ((Slr.55 An-_-S_to.so sR) r 1,74oAH)...l-abor Efficlency Variance (SlO.5O SR r(71740 A|l _ 1,goo sH)) ...,....r..........,..Payroll fSt r.ss AR r i,7do AH) ........::::::::::::::::::::.::.:..::::

509I

lr

I

> 15,OOO650

500

350

31,5OO

{3,4OO

32r55O

2r1952525

t55

2O,OOO

1612OO1,0o0

18,goo11927

16,5OO

3l,5oo

43r4OO

32,55O

500100300650500350

5001g,5OO

17r2OO

63020,Og7

t.I

5to

Pl g-l o APPEIIDX (Concludedf

Factory Ovgrhead Conttpl.....-...........'............................'...... 24rOOOVarlOur Crgd1t4...r....................................r.....o................t

Work In Procegg (9OO unlts r 2 SH r $13 FO rgtel .............ror. 23r4OOApplled Factory Oryerhead

Applled Factory Overhead 23r4OO

2rOOOldle Gapaclty Varlano SilO fhed rate r

[2,OOO BH - I,74O At0'Spendlng Varlancc...Varlable Eftlclency Varlancc Str? var: rstc r

ll,74o Alf - 1,8OO SHllFixed Efticloncy Variance ($f O fir. ratc r

11,7 40 All - 1,800 SHllFactory Overhead Gontrol

Chagtor 19

2d,ooo

23,4OO

520

180

00024,7OO

Finished Goods (9OO units r $65 gtandard costt..........o......... 58r5OOWork In Procgss r..'...........................r..rr.......................... 58t5OO

CGA-Canada (adapted|. Reprint with permiesion.

-TII

5 t l

LI\-

iIf-

LLtIb

!It:

Chaptcr tg

l

CASES

c l9- t

(1) The guotation implies that sactuaf'manufacturing costs form tha prefer-able basis for inventory costing because they we; incurred in producingthe inventory,The notion that actuaf costs are the only acceptable costs for inven-tory purposes has been ctrallenged by advotates of stanoard costs.Accountants who advocate usinl stanoaru "o=tr-1or repo*ing purposesbelieve that standard costs ate iore nepnesentative of the true cost ofthe product than actuat costs. Ttr"v r"intain that r"t"n"us ars mea-sunes of abnormal inefficiencies oiabnormal efficien"i""; therefore, vari-ances cannot be inventoried and should bs immeJiai"iv t""ognized indetermining net income of the period-rather than p--#"o to inventoriesand cost of goods sold. Thus, tire costs attached t'o irre-product aru thecosts that shoufd have b?:n in"uo"J, not the costs itr"t rrur" incurrpd.Many accountants believe that u"ri"n""" do not have to be invento-ried as long as standards ale currentty attainable. gut it standalds anonot up to date, or if they reflect ttreoriticat pe*orm-ance rather than per-f ormance und er t""=onib ty efficieni "onoition", irr "i, l-on""ptualty, th evariances should be split uet1vg.en,rr" o"r,ion tirai;it}" departuresfrom attainabre standirds and til;;i;n that does not.Most accountants agree that unfavorabfe r"ri"ni"lresutting fromthe difference between standarus uaseJ on theoleticai parformanca andthose based-on normat p-erforman* "r,ourJ i" ti"ffi'i" product costsand pr''orated to inventoiiu" "nJ-il"t iiiooo= sotd. n ; is ress agres-ment relating to variances. resulting fror; the diffeilr""'i"t,reen actuatperforman ce an d standards based ;; ;;;,nd (attainabrel perforrnance.standard cost advocates befieve irr"lii-"=e variances should beexpensed because they nepresent abnormal conditioi"-.'t,,"ny otheraccountants believe that tirese t"ri*t"" nepnesent part of the actuatcost of producing the goods and, theref;, shourd u":irr"t"d as productcosts and prorated to inventories and "o"t or goods sord.(21 The three

To"t-appropriate atternative me$rods of variance dispositionwoufd require the ioltowing entries:{a} Cost of Goods SolJ..Finished cooJ" rn;;;i;:::::::::::::.::::.:::::::::.:::.:: r,l3lVariance.. . . . . . . . . . . . . .fb) Cost of Goods Sotd. . . . . . - - - - - - - - - -"""""""""""o"" ' l tso0

variance........:.::.:::""""".. l ,soo(c) Finish.ed Goods rnr"ntorr::::::::::::::::::::::::::::::_:::

1,soo t,soo

variance............... .............:.:..:::::..:::: , 1,soo

I

Ir ' l

5t2 Chaptor 19

Ct9-l (Concludedl

(3) The first journal entry is in accordance with the discussion in part (ll as.the most appropriatE method of handling variances. Cost of Goods Soldis charged-with the excess cost above what it should have taken to com-plete the proiect, based on a nonnal (attainable) standard. Tho costs

ivariancei| resutting from the differencs between the theoretical stan-dard the normal standard should be prorated to cost of goods sold andinventories, based on the relative proportion of the associated cost con-tained in each. ln the situation presented, the entire $l'OOO is charged toFinished Goods tnventory instead of being prorated to inventories andcost and goods sold because the production is included solely in finishedgoods inventorY.

The second;ournal entry can be justified as an appropriate methodfor disposition of the variance primarily on practical considerations buthas litge theoretical justification. The practice of charging all variancesto Cost of Goods Sold (or against current revenue! often has been justi-fied on the grounds of simplicity, convenience, and immateriality.

The last entry woufd be appropriate where it is desired to adiust thestandard cost inventory to actual costs. Many accountants would advo-cate this entry in the circumstances presented because the inventorywould then bi stated at actual costs of production. However, when thismethod of variance disposition is foltowed, the asset inventory will becarried on the financial statements at an amount that exceeds the costthat should have been incurred. Thus, inefficiencies in operations anebeing capitalized as assets in the financiat statements when this methodis appl ied.

O2Gl. Diracl cosls arc dirccl tnaletials, dirccl labor.

and clhcr cost3 ditccuy assignrabb to e product

Aj1qgl-Cailigg ir r procrduro by which only

prirn costt plur variabb faclory ovrrhoad aro

rttigrt d !o ! Ptoducl or irvrntory; ell firrd cods

aro srrUorcd porbd cstc.O*Z Ptoduc{ €ir rt esrcietd wilh thc mrnulac'

turo of e product end ircludo di?cct mat.tieb'

dirrl labor, and lactory orcrhead. Thcs. catr

arc chstgod againsl rcvcnuc Es s€sl of goods

rold. or shovn on thr bahnco sheel as invenle

rier of work in ptocett and f inished gooda'

P.riod costs are asseiatcd with thc passage cil

t imc and sre included as cxponggs in lhe in'

cdrrc stalemerd. Under dircct esting, lired frc'

tory overhead is trealed as a pcriod coet ntherthan !s a produc'l cosl.

O2O3. Under direct costing, only Ystiabl. manulac'

turing 6ts are ircludcd in invcntory. Undcr ab'

rcptioo costing (thr cunrnt. gcncrally acccpledmethod of cor'ling invtnlory for extemal rcporl'hg), all nranufeeturing coets, bolh variablt andtixed, are included h invontory.

O2G4. lt iB argued that lired manulacturing cosls 8tethc exp€nses of mahtahing productive capacfy.Such expenses ara mo.c closoly associatod withthc passage ol time than with produciict activityand rhou ld , there forc , bc chargcd lo Per ioderp.nre ralher than to tho product.

O2$5. The direcl costing method ir useful lor hlemalroport ing because i l locuses attention on lhofixed-variable cosl relalbnshp and the contribu-l ion marg in concept . l t fac i l i l a tes manager ia ldecisioo making, product pricing, and cosl con-Irol. l t al lows corlain calculal idrs lo bo readi lyrnade, guch as break-even pohts-and contribu-tian mirgins of products, cales lerrilorios, oper-alrng divisions, otc. Tho leus on the contributionmargrn (salos revonue less variabie costs) en-ables managemont lo cmphasizo prolitabilily inmsh ing shor l - run bus incss dec is ions . F ixedcosls aro ncl oasiv cstlrollable in the short runand hence may not bo parl icuhdy relevanl forrho.l.run bushess decisistr.

O2O€. Argumenls lor thc urr c{ direcl cosling hcludetho lollrwing:(a) For prof i t-planning end decit ion.making

purpo3es, mln lgem.n l requ i r6 r cos l -volumo-profi l rolel ionship data that 6r.moro rradi ly evei labb from direcl cortl ta l .mcnt r than f rom ab3orp t ion cor trtalements.

(b) Sincc lixcd laclory overhead is abrcrbedas a perird cogt, fluctuatbns in productionand dif fcrcncrr briwcen thr numbcr oluni ls produccd ahd tho numbcr rold do

CHAPTER 20

DrscussloN ouEsTloHsnd aflect the per unil Ptodttt cosl.

(c) Dirrct costing toports Ete mote oasi ly

undcctood by managemcnl becausc lhcEtal.mmi! f ollo* mrna genronl's doctsbn'rnsking Ptoc.r33s morc closely than doa\rorption 6l gal.ments.

(d) Rrpodhg thc tctal fixed ccl lor thc perirdin tho incorrrr rlatcrnent dirccts manag.-rncnfs dlentian lo the relatirnship of such

6l to Prolils.(o) Thr dirninatbn ol allocated jcint fixed cet

pr rmi t r a mot . ob jec l i ve appra isa l o lincornr conlributions according to prod-

ucls. tafes areas, kinds of cuslorners, elc.Cot-nclurnr rclaticnships are highli ghled.

(f) Thr rinilarity ol lho undertying concepts oldiroc'l cosling and flexible budgels facili-tatca th. adopibn and use of theso meth-ods for reporting and cost conlrol.

(S) Dircct coeling provides a means ol cGtinginvrnloqy lhat ir similar to managemenl'scqrcopl of invenlory cosl as lhe currenloul-of-pockel erpenditurei necessary loproduco or replace the hvenlory.

(h) Cle&al costs ate lower under direcl cosl-ing because the m€lhod is simpler anddosr nol require involved al local ions olfired cosis o special analyses of absorp-tion data.

(i) The cornputation ot product cosls is sim-pler and rnore reliablo under direct cclingbecause a bas is lo r a l loca t ing lhe f i xedcosts, which involves eslimales and per-aonal ludgment, is sliminatod.

0,20-7. Argumenls 8gainsl lhe use of direcl cosl inginclude the follaring:(a) Separalian of costs inlo fixed and variable

might be d i f f i cu l t , espec ia l l y when suchcos ls a ro semivar iab le in na lu re . More-over, all coslsincluding fixed c6ts{tcvariable at sorne level ol produclion and inthe bng run.

(b) Long-range pricing ol products and olh€rl o n g - r a n g e p o l i c y d e c i s i o n s r e q u i r e aknowledge o l comple le manufac tur ingcost, wtrich would reguire addilirnal sepa-rsto computalions to allocale lixed over-head.

(c) Thc pricing of invenloricr by tho directcotl ing method i3 not accoptable lor in-co.r|c lax cornpulation purpo!os.

(d) Direcl costing has not been recognized asconlorming with general ly acccpled ac-cotnling principles applied h lhc prepara'tbn of financial statomonls for rtockholcl-orr and lho gencral public.

5 1 3

5 1 1

(r) Prbfitr dotorminod by dirrct cothg ennot'trua rnd prcpor, b*llr cl lhr uclu-rixr cl fnrd prcductixt qtr thrt rn prnof tolel prcductbn corl. .nd invontory.Pradwtion rculd nd br porbb wilhortplrnl frilitiel, rquipmonl, olc. To dirrrg.rd lh€. fu.d str violdeo tho grrnlpdrrcipb cl mrbhhg co.t, with rov'rrnu..

(f) Tho olnirdim ol tir.d str lrqn hvrn.tory r.rultr ir r lowor figuro end @rutqurot red|rticn G|| rrpodod *odrhg crpfdfq firerrciel rnrr),!b purpor.

A2O€. Assrrnhg thrt h. qurntity cf rndhg invmtory blarger than thr qurntity ol btginning invrntoryand lhr lilo mothod b urod, op.nling incqnrurhg dirrt strrp rpuld br rrnallor tun oprr-ating irrornr urhg abtorptbn corting. Diroctcorling oxcludor firod lrctory ovrrhord fronrinvonlorio boceul ruclr cotr rro conridrrcdto bo porbd cortr which rf. axponrod whonincunod. In cqrlrerl, ebrcrptin sthg ircludottirrd frtory ovtrhred in invrntorio bocrurosirch cotr en suidond to br product ots,whbh aru rxprcrod crly whon thr prcdLnt arcsold. Whrn tho guentity of invrntory irrcrotrlduring a poriod, dr.st c6ti1g producco a brrerdolbr ircroaro in hvrntory than obcorptbn ccot-ing, bocaurt firtd cortr aro oxp.nsod rathrrlhan cherg.d lo invrntory. Sincr e rmelbranpunt of cuntrl prird sl ir chargnd epirutincornr undrr tht lbrorptioo corting mrthodwhrn invonlorior incrour, ebrorptioo catingIncom. would br lergor thcn d i r rc t cot t ingncgTl..

Q2G9. Thr brrah-ovm pcirl b the Xint et rtrbh costrand r.vcnua irrc h eguilbrium, rlowing noitherpofil nor lora lor thr busirrsr.

O2Gl0. Thc ccntrbutixr rnargh it lhr nsutt ol rrrbtract.n9 variablo cql lrcrr tho ralcs figun. Tho con-

. tributiqr margh indicatcr lhr arrpunt rvailablofq th. [email protected] of tirrd co.t arrd lot proltl.

o2Gt 1 . , F(a) R(BE) = -t - v

or (ir *ordr):

Brv$uo rt tho Totst tir.d c6tbrrakrvrnpc*rt = EJ,ilf,Gffilr

por dollar cl ralos

(b) O(BE) =;LP _ C

or (h rords)

Unilt of ubr atbroehrvrn pc*rt = Total tix.d coot

Cartribulbn rrrargin

Clnpter fr

(3) Totrl cat lin .(4) Verieblo cod rna.(t Firrd coet rrrr,r(0) &rl-rvon pcirlm Lorenr-(8) Pnlil enr(9) Sd..litr.

@o13. An rdpb of tho rrpra.d bohrvbr cl a firm.tfrporrr.f end rtvrnur lor thr purp€o of csr-dructhg r bn hvm ch.rf b uruetly nrtrictodlo tho qrtpr, lovrlr rt whi*t Uro firm i likrly tooponh. Artumplbor rbout thr lovrl of firodgod, tro nlo of verirbb st, and salcs prbosrn buod qr tho oprnting srditisrr ard msn.rgrriel policior thtt will bo in olfrct ovor thoreoclrd ostpul bvob. Thesc oxp.cled outputlovrlr roprcsrnt thr firm,r rrltvanl rangc, andthr sl-vplumr-prc{it rrbtlxrr}ripr r}ronn in ebrodr.evtn ctrerl err applkrblo mly to outputltvob within thir rango. Tht bohavior of fixcdcod. variablo cod, md ralot prbco at tcvob olorjtpul bobw or oboyr thr rebvenl rangc er.lik ty lo ruuft in an ontiroly dilforrnt rt of cool-yoluntr-prc{il nlaticxrshiu bccauro of cfungrdop.trling csrdtbnr c nranagrrbl polbio. Thotrl Srat hr cct and nvtnuo lirer qr e breal.rvon cherl arc typically txtrndcd past thc upporand lowcr lirnitt of thr rcbvant rango thouH no!thordoro, bo intrrprotod to mean that thcy arovrJU for lhrao bvob of ouqpd.

A bnakrvon chart rtr*ing cot-volumoprof.it relalicnrhigr for rll bvdr ol ovtput could btdrvolopod. Tho rhrpor of hr cod and rovonuolinrr in euch r chart could not, howcvor, botrpoclod lo approrimatr rtraight-l inr (l inmr)p.ncrnt. By rcstricting thc undorlying ccl.and

. rov.nua bchavior aslumptionr in broak-ovonInalys.s to a relatively narrow output range (thorang. orcr whi:h thr firm b likcly to opcrate), itir urually poesiblo lo rlsumo linear bchaviorpaltornr wilhoul any rignificant dietortbnr insl-volurno-prc{il rc latianrh pr, th e reby a irnplify-ng the analyris.

tf tho rangr wer wtrich o firm ir likely to opor.a|l ir guitr widr, curvilinear funclionr may boompbyrd; or it may bo dcsirsblo lo dcvclop enumblr of brcak.ovrn charlr, oach hlving i lrown rl lovanl rang., for which thr undrrlyingcort and rcvcnua bohavior arrumplionr ercvaliJ.

O2G14. Woaknesses hherenl h thc preparatbn and uscof brcak.cven analpis arc:(a) Whon morc thst ane product ir producrd,

lhr cqrtribulicr margin of ooch produclwill probably diflor. Accordhgly, a broak.ovon analyrb for tho urholo oprratbn wiilnot hdbat. tho csttribtuirn of rach pred-uci to firod co.t and thc volunr rcquirodlor oach product

o2or2. (r) Dolr' of 'vonw #;1of product

(21 Volurrr oa orrtp{rt, rxprrsed h unrb, ptr-cant of capacity, lelol, or lom. othi lrnaatun|.

Ctugtcrfr

, (b) Somo'costr en elrnosl impouible todalsify ccrduJvcly ar bchg ri{rer firedavarbbh

(c) Grnrnl rcqronic conditioor and othrrrrtrmal hcton rmy rflect ho dete urodh th. rrtsl)ttb.

(d) In thr final enalyrb, fird coct b nlatod!o productir:n end ralor rn4 thrrofon,may drcnrtr romrwhat dur todocreard production and ralcr-cndvbr vonr.

(r) Ouilr oftcn cstr hcrcare tharpt el crr-. tah pcirn! in prcdraion and raler lcvett

and lhen levol or,lt until a ccrtain gmsterrlagr of production andlor rahs irrcedrcd, el wtrbh tino hc phrnanoncrir rcpealcd ar production and/or talrrare agair ircreased.

(0 Pedormancr murl bo conrlanlly com-parod to thr bnal-ovcn analyab h olderto determhr whrihcr thr csrdilirrrr thatrxirlrd at tho timr of thr colculatlonshavc heH lruc, and whether any changeshave been cqrsUered.

42S15. (a) With cales pricr prr unit and totat firedcogl rcmaining cqrrtant, thr brcak.evcnpoinl movcr up rapidly ar unil variabb

- cool ir increased; at thc samc timc. thebrcak-ovon poinl moves down as unilvariablc cost ir decreased

. (b) A decrease h fired cst krwerc the break-even poinl. An increase in fired costnpver the break-cven poht higher.

Q2S16. The mangh ol salefy b a seleeted Lbs fgureless break-even sales. The rnargh cl satety is acushion agninst sales decreases. The greaterthe margin, lhe groatef the cushbn against suf-fering a bsc.

Q2Gl7. Cct-ye1g6r-profil relationship i: lhe retatron-ship of pofil to sales volurne. Thb relaticrshipis importsnt lo,rnnagement because ,rEvrago-ment lr ies el all t imos to keep volume, cost,prrce, and product mix in a ra l io that wi l lachievc a desirod level ol profit.

O20-'t8.Thc.Tf,"9ty of Conrtreints lr r spccializadycnion d dirud corUng for urc in ghorl-runoptlmizaton dccirionr. A dittincUon batwecnTOC and dircct costing ir thgt TOC focuscc ononly thc purely verieblc coltr rnd doa notconsider dlrcci labor to bc puroly verieblc.

Q20-19.Mosl cornpenict thrt deesify 6nt tnto ftxeOand variablc c8tcgoric! bcst dircst lebor arverlablc, co In dirrl cottinE, dircct lebor i,arigncd to productr ar e wrleblc or- incramantsl cort-of producilon. tn thc Thcoryof Conrtreintr, dlrcct labor lr sdpuletcd to banot purcly vsriablc rnd lhcrclorc is not traltcdar an incramcntsl cost of output.

Thc diffcrcncc betwccn thc contributionmargln rnraruru ln dlrcct coillng snd thclhroughput mcalurc in TOC lr that ilroct leborlr onc of thc cost! daduclcd from sslcr tocelculsle conlrlbutjon mergin, but dircct hboris not r coEt to bc drductcd hom relcr incalculetin0 throughput

Thcrc arc mrny dtflcrencs in Grnphesirbctwecn dlrcct corting and tha thc6ry olconrtraints. For aremplc, whllc dlrect coitlngir widaty ug6d er sn eccounling epproach foii:t!"ln"t reporting of incomc and pioduci cort.TOC dcalr hcavily wlth thc improyorncnl otconslreinl! or botilaneckr In . producllonsyslcm.

Q2o-20.Throughput ir tho rata at which a rystemgangratas moncy through s8ler. lt i3cslculsted ar srlcr minur thc purrty varisbtecoslq and ottrn th. only purcty varieblc cost iglhc cost of materials.

Q20-2l.Elevating a conrtraint maanr improving thaconslrairtimproving thc condltions at abonlenecl In the lystsm. tts slgnificanca isgrcatrst lf the constraint ls thc fightast one in' lhc aystom: thcre, any improvcmcnt wilfincreaaa lho totsl throughput of lhe entire3yElem.

An improvoment in product guallty can hetpelavalr a constraint bccausc lt can iaducc theworkload on r bottlcnecl resourca. Foroxemplo, ramoving - dctecilva unilt _baforaralhor lhan eftor thsy roach thc bottteoeckmeens therc wll l bo fewer units passingthrough lhe botilanock. Thig har approrimatetfthc samo cffect on thc bottteneck aiincreesing ita capacity.

5t5

\\

516

E20-l

a a a a a a a a a a a a a a a a t a a o a a a $ 72O,OOO

18,OOO

s 702,O0O

340.OOO$ 362.OOO

S3O per unit

35 per unit

Chapter2O

slrOSO,OOO

14O,OOOl OO,OOO

4O,OOOs30

sl ,20O,OOO

Variable marketing and administrative expenses(9o,00o r $2ol

Contribution marglJl ........ '.........o...r.......r.r.r...r...o....r............r,Less fixed expensess

FaCtory Overhgad .'..'................................o.. $2OOTOOOMarketing andadministrativeexpenses..... 14o.ooo

Operat ing incomg.. . . . . . . . . . . . r . . . . . . . r . . r . , . . . . . r . r . . r . . . . . , . r r . . . . . . . . . . . . . . . . r r

E20-2

(1) Variable cost per unit:. ST,OOOTOOO total variable cost

eO% manufacturing cost portionql2oo'999- total variable man ufacturing costS4,2OO,OOO total variable manufacturing cost

1 nFixed cost per unit:S11,2OO,00O total fixed cost

59o/o manufacturing cost portionq_5,6oo,00o total fixed factory overhead

55,600,00O total fixed factory overhead160,000 units normat production votume

E)(EBCISES

Operating income tor 2OA using direct costing:Salgs (9Or0oo r $1 21.............r.rVariable cost'of goods sold (gOrOOO rGross contribution margin

Full cost per unit at standald ..........................Number ol units sold during the year.. . . . . . . . , . . . .Cost of goods sold at standard under

absorption costing .., , .r. . . . , . .r. , . . , , . . . . . . , , . . . . . , . . .r.

s65x lOO,OOO

s6fggooo(21

9nit" actual ty produced dur ing the year. . , . . . , . . . . . . . .Uni ts sold dur ing the year. . , . . . . . . . . . . .Unit increase in inventoryStandard var iable manufactur ing cost per uni t . . . . . . . .Ending inventoty at standard direct cost ..............r.........t..

Chagterfr

E9,O-z (Concluded)(31 Normal producUon volume

a a a a a a a a a a a a a a a a a a a a a a a a a a a a

5t7

lgo,oool40,ooo20,ooo

$ss$ Too,ooo-

$ tg,ooo,ooo

3,OOO,OOO

$ 15,OOO,OOO2,9o0,000

$ l2,2OO'OOOl l '2OO'OOO

$ I,OOO,OOO

$ 27O,OOO135,OOO

$ i3s,ooo50.ooo

$ 85.OOO-

$ zzo,ooogo,ooo

$ iBo,ooo

Unlts actually produced during thg ygar,..o..........,r..........o.Ercgss of budget over actual productiort .............r.............Fixed fagtory overhgad per unll...,....D..........o...o..............r..Factory ovgrh gad volume variancg...,..-..,..............,,......o,...

(4) Sales (tOO,0OO unlts r $f AOlStandard varlable cost of goods sold (iOOTOOO units x $?O

unlt variable cost!.........r............r.......r...r......r.....r..r........Gtoss contribution margin...D....,........variabfe selling erpense (sz,oooroOo variabfe cost r 4avol.Contribution margill ........,.'...............D.'...o...........o...r..........Less fired costs.operating income undgr dirgct costing.......,,........,.,.....r....

E20-3(11 Income statement using absorption costing:

Salgs (9'OOO r $SO1 .....,. '...........,......."...,....,...,.......,.......,...Cost of goods sold (9r00O r ($lO + $S)l .....r,..........r.,...r......Gross p fo f i t . . . . . . . r . . . . . . . . . . . . . . . . r . . . r . . . . . . . . r . . ro . r . r r . . . r . .o . . . . . . . r r r . . r . . . . . .

Less commercial expenSBS ... . . . . . . . . . 'or.. . . . .o... . . . . . . . . . . . .r. . . . . . . . . .Operating Incomg..o............r"....o...rr.........o..,............,,........

(21 Income statement using direct costing:9ales (g,OOO r $30)..........,.... ....r,............,..r.........Variable cost of goods sold (9r000 r $1o)................D....,..o..Contribution marg ilt ...................or..,,,.........Less fired erpenses:

(3t

Factory ovgrhgad.,..or.. .ro... . . . . . . . . . . . . . . . . . . . .r, $COTOOOCommgrcial erpens€S...,...,..................,.. so.ooo go.ooo

Operating incomg '....................,...,.........r,..,.r....,..........,.* ll_goJqgcomputations explaining the difference in operating income:Absorption costing operating income..,.....o,.,.....,...o,.o..r..... $ g5roooDirgct costing operating incomg.,,.........,...,.,..................... go.oooDiffgrgnc8""..................r.....,o...................r.......................,.

l_.(5,ooglUnlts produced during the period.....................,........,.,..r... grOOOUnits sold during the period................,............ grOOOUnit decrease in finished goods inventory ...,...,....o. f f "OOOIFired factory overhead charged to each unit of product

under absorption costing .......................,........ r 35Differenco............ ....,.,...,.......r.......r....., g_ (SrOOO}

.=

I

5 1 8

E20-5

Dirgct 18bor..........Variable lactory oYefiead a a

Variable marketing gxpsnsG)...'.....'................o!......'.......r.r...r........'....r..

Totaf variable cost per unit

SalgS price per Unit. ' . . . . . . . . . ' . . . .o' . . .r. . ' . . . . . . . . . . . .r. .Variablg cost pgr U11it..r. . . . . . . . . . . . .r. . . .r.r. .r. . . . . . . . .r. . . . . . . .".r. .r. . . .r. . . . . . . . . . . . . . . . . .

Contribution margin per urt i t . . . . . . .o... . . . . ' . .r .r. . . . . . . . . . . . . . . . ' . . . . . . . . . .o... . .rr. . . . ' . .

Fixgd factory ovgrfrgad.... . . . . . ' .r . . . . . . .r. . . . . . . t . . . . ' . . . . . .r. . . . . .rr.r. . . . .r. . . . . . .rr. . . . . . .Firgd markgting erpensrg ... . . . . . . . . . . . . . . . . . . . . . . . . . ,r, . . . .r. . . . . . . . . . . . . . . . . .rFirgd administrative expeflSg.... . . . ' . ' . . . . . . . . . . , . ' . . . . .r. ' . . . . . . . . . . , . . .rr. .r.r. . . . . . . .r.Total f ixgd grpgnse,... .r. . . . . , . . . . . . . . . . , . . . . .o... , . . . . , . . . . r. . . . . . . . . . .r.

(1) 326,000 total fixed cost = 13,000 units of sales to break even$2 contribution margin

Chagterfr

E20-4$6ro00 = $e'ooo - $g,ooo = $iorooo break-eyen point in dollars

t E - i - . e o - 6 0s2.OO

$lO'OOO + $2 = 5rOoO break-even point in units(orl

$8'ooo - $,6'ooo - srooo break-even point in unitsStroffi-o m-5,OOO units r $2 = $lO'OOO break-even point in dollars

$ 1 .oo1 . 2 0

,50.30

s__g,og$ 5.OO

3,OO

(21 13,OOO units r $5 per unit = S65'000 sales to break even

(3) $26,00O lixed g.ost.+ $1O,09O profit = i8,000 units$2 contribution margin

(41 18,OoO units r 35 per urit = $9O,OOO sales

E20-6

Plannod salgs r . . . . . . . . .o. . . . . . . . . . . . . . . .o. . . . . . . . . . . . , . . . . . . . , . . r , . . . . . .o. . . . . .Break-even sal es .....r........

Margin of safety

-oo'90=o llryin of,stP = zs'h Margin of safety ratio52,OOO,OOO Planned saleJ

S 2.oo

$15,OOO5,OOO6,OOO

s26,OOO

$2,OOO,OOOl r5OO,OOO

s 5oo,ooo

LLLLLLLLLLLL

L

Clpptarn

E,.o-7'

5r9

$82,5OO25,OO0

$37,5OO

r{r $9r3OOl - ,

.42$l 5,OOO break-even salos

t2l

(31

S'o99= $16'ooo = g2o,ooo agtual saleo1 - .25 .76

PR = C/M r M/S; PR = .62 t .25 =.15532O,OOO r .155 = $3rlO0 profit for the month

E20-8

(r) $3o'ooo = $so,ooo brsak-evon saleg.oo

(21 T0'oo:o = $59'9oo = $o2,5oo sales for the year1 - . 2 0 . 8 0

PR = C/M x M/S; PR = .2O t .6O = .12$92,500 t .12 = S7,5OO profit for the year

(3) S a l g s a a . . r a a a a . . . a a a . . . a . a a a r a a . r a . . r . a a a a a . . r . . r . o . . . . . .

variable cost stg2rsoo r (l -.60)).......contrfbution margin (38215oo r .8o)..,..r...,........,....,.,..............

!

Ilb

L

L

E20-9

Sales:(1 OOTOOO r $S! ..o.......r......r........,...(2OOTOOO r $61 .,, . . .o... . . . . . . . . . .r. . . . . . . . .

Variable cost:GIaOOTOOO r 30g6)............r....

GfrDl,2OO,O OO r "5oA1....,............,....Co ntri b uti o n ma rg i n...r...o.,......r........Planned operating prcfit.........r.o......Firgd cost .r..............,.........,.

Chip A

$8OO,OOO

24O,OOO

Chip B

$l,2oo,ooo

Total

$2,OOO,OOO

540,OO0

$1,460rO00

270.OOO$ 1 . 1 9 0 . O 0 0

3OO,OOO$560,000 $ 9OO,OOO

Ii-

5m

E20-10

Chairs$gs

20

_81_€$l'5OO,OOO salesto break even

Chaptor2O

= $st

Sales price per unit.Variable cost per un|t,.......r.........Gontribution margln per ultit ......

$72O,OOO fixed cost1 - ((Sso + (4 x $zop * (9t 1o + (4 x $3s))l

or alternativelp

$72O,0OO flxed cost($60 + (4 r $15)l * (911o + (4 r S35)l

$1,50O,OOO salesto break even

Produst L$20

1 2

s 8x 2

s 1 6

Tbbles$ 1 1 0

50

s 6 0

$lr5OO,OOO sales

rc = 6,0o0 hypothetical packages

or alternatively;

S72O,OOO fixed cost

61000 packages r I table per package =61000 packages x 4 chairs per package =

360 + (a r Sis| CM= 61000 hyryothetical packages

6,000 tables to break eyen24'OOO chairs to break €ven

6,000tab fesr31 iOper tab le = $ 660,00024,oOO chairs x $ 35 per chair = B4O;OOOTotal salgs to brgak evgn.....,...o....,. $l r5oorooo

E20-1 1

Salgs price per unit ................-...r...Variablg cost per unit,..........r.....r,r..Unit contribution margin..................Expected sales mix,........,r,..........r...Contribution margin per

hypothetical pickigo .................. +

Product Ms ls

1 0

s sx 3

s15

Ctpptcrfr

eo-1i (Concluded)

(11 S372'OOO fired cost$31 contribuUon marginl2'OOO packagee rl2'OOO packager r24rO0O units of L r36,000 units of M x

l5'OOO packages x15,OOO packages r3O,O00 units of L x45,O0O units of M x

Bfgak-gVgn Sa1gS.t......r..................r.

$372,OOO fired cost + $93,OOO profit -$31 contribution margin

521

= l2rOOO packages to brsak ovon

= 24rO0O units of L= 38,OOO units of M$ 48o,ooo sales of L

54O,OOO sales of M

9l,o2o,oo9

l5rO0O packages to achieve profit

= 3OTOOO units of L= 45,OOO units of M

l2l

2 unlts of L3 unlts of MS2O =$ f 5 =

2 unlts ol L3 units of M$zo =$ 1 5 =

$ 600,000 sales of L675,000 sales of M

$2to,ooo8O,OOO

105,OOO6O,OOO

_$4s9,oo9

(21

(3)

Sales to achieve profit....D......,...r..... $1 1275,OOO

E20-12

(il Variablg manufacturing CoSt........r......'.........r.........r.,.........Firgd manufacturing Gost.,....,.,.........r...r..,..............,.........,Varia ble marketing expenso ..........,..r..,.........r...o..D....r.Fired marketing and administrative axpenses .r.,,,.............Total costs to produce and sell 70,0OO units...oo............,...,

S455,OOO total cost = S6,50 sales price per unit to break even70,OOO units

($80r9OO.+ 360,0O0) fired cost = Si,g52 units38 -$4 .5o - ( r o%r$B)

($124,ooo + $5o,ooo) f ixed cost = 8o,ooo uni ts

38 - $4.5o - (r 5% r S8l


AnW20P

( t S- =o - 6t oto U ,< t9 a -e -a

mNC't

J(t

tpeErIoo:toE;ra a

. ' t t r l | | o J l g l t - t , | a= - l J9 = N ! f r q q ! o r g oo o o o c r o c r o c r o 6 c t

s s E s B ' s E ' s s s E g8 g : g E 3 E 3g E g g g g s g

o'ooo

6r31oC,O

ta

attaaa

taa

a

cta

EaI

Ima:'ogt

Ioaoo

ro

3- -1 6 O I- o to o l. o - ' o - lq o lP - O I

o 1 9 lo i t

; b

' 3 ) ] t

t 8 os E 3

5 o € a r . . J t J t 3 l

3 6 B 3 3 t s t d Bs s E E g ' s E ' g g

l , 5 0 o a J 1 9 6 6- N O - U d l ! O @o o c l o o o o o o9 a - o ' o ' o - o ' o - o ' o9 O o O o l O o c 'e g c r c r c t O o c r O

g-r3c)o2cfa

o30a

oCTeErIoo:'otrt

r

.oI u,

I

ot:0oo

ot-

o

(Dot-m

E

E

;oo

r5o

ot 2

./ 'o

/ ?

o

ot

I

!!

L I

L173

. E2&|4I

L (i) throughpuUunit =sales-materiats cost= $45-($fC+ ${) = $i:}0

, (2) Maximum thmughput per mon0r is ${44000. Total thmughput tur a period is tre

L g3o/unit (hom rcquircmed f) multiplied by the number of units shipped; units are

limited by ttre loyrestcapacdy operation, which ls Surface Prep's 4800 units per

i month: d800 units/monfi x $3olunit = ${44y000lmonth.I

(3) Surface Prep is the tightest constraint with a dS0Gunit capacity.

r- E2o|5

(f ) No, Orey should not acquire tre equipment Gloss Coat ls nst the tightest

! constraint so increasing its capacity will not help.

(2') Tgto,llaximum monfily tlrroughput will not increase'

! (3) Yes, an addifonal Surface Prcp (SP) crew should be hired. The increase in overall

thmughput rnore thaniustilles ffre cost!

. (4) Maximum ttrrcughput witl increase by about ${5'000 per montfi (500 unitsfnronth

x $3o/unit). SP is the tiglrH constrain! so increasing its capacity will incrcase: $roughput of the entire system until SFs improvement causes anofrer

conslraint to become tfre tightest Glcs Goat, tre secon&tightest constraint

! presentfy has capacity 500 units higherifian SFs.

E2G'6

s (1) Yes, an inspection should be created just prior to Surface Prep (SP). For each

1,000 shipped, 50 defectirrcs enter SP-26, 1d and 10 arising in tlre tfree

s preceding operationq rcspectivcly. SP trs tlre tightest constraintr so removingde{ectives priorto SP will increase total system tfrroughput At S30 throughput

, p€runi! the 50 added units (perthousand shipped) doiustify the added\' inspection.

', (2) Removing all defuctives just prlorto SP will increase tfie number of good units! entering SP by 5U1r000 or atrout 5"/o. Vyilfi SP presenffy handling 4800 units per

rnonffr, a 5o/o inclease in units shlpped lE .05 x d80O = ?4r0. Additional thtoughput

\. will be 240 unitstnontr x $30funit = f/r200 per mon0r. BGGau$e ltre inspectionwill cost $1,800 per montlr, tre monfirly adrantage of the added inspection

' operation will be Ft,200 minus $11800, or $5'4O0 per nrcnffr.

I

I

521 ChwterZ0

PROBLEMS

P20-1

IIIASTERPIECE TOOL CORPORATI ONProduct-Llne lncomo Statement(ContribuUon Marg in App roachl

Ecctronlc PncumaUc HandTotal Tooh Tooh lpolr

Sslct.-,-....-.....o*...s--...roo.ru- StrOOOrOOO 31 '5OOIOOO tir00O'OOO 35OO'OOO

Locr varlrbb co.t of goodr told-..*. lrOOr00O 7O0r000 5OO'O0O 2OO'OOq

Orocr.contrlbuUon mlrgh.....o-o.F. llr6O0rOOO t 800'0OO 3 SOOTOOO 33O0'OOOl-acr wrlcbb markcUng crpcnrc!

(packlng rnd drlppln!).....-..-...-.-.. 25O,OOO 1OO,99q IOO'OOO 5OTOOO

Contrlbutlon nargln sl,3:to,ooo t 700,000 3 aoo,ooo 3250,000

Leu tracceblc thcd opanlc*Manufacturlng t 25O,OOO t loo,ooo 3 loorooo 3 5o,oooMarkcUng (advertblng)..,.............-.. 450'O0O 200'O0O 2OO'0OO s0r0q!-

Totel tnccrble lked arpcntc...-. ! 7OO'OO0 t 3OO,OOO 3 3OO'OOO 31OO'OOO

Product contrlbuUon-.*..-.-H-- t E|IO,OOO f aoo,099- U9'009. l1!0'@_Leo common lkcd arpontrt:

Manufuctrrlngl.MarkeUn92

AdmlnlgtraUon ...--.

3 3r0,oooIOOrOOO

150 .O00Totel common thed crpcnrc3 --. S 550.000

OporaUngIncomc $ IOO.OOO

r $1,950,000 abaorpUon coat of gmdr rold - $tTAOO,OOO vnrlablc costr - $250'000 traceablcfhed coct

2 Ssoo,ooo total marlcettng cottr - i2sgrooo yarlabto openao - 3+5o,ooo advertlalng expenaa

Ctpptcrfr

P2A-2'�(rl

$78O,OOO2,OOO

525

787,OOOc 513'OOO

232.OOOs 281.O00

5O,OOO49,O0O

I'OOO$s

$ 5,000

ROBERTS CORPORATIONIncome Statement

For Year Ended 2O-

Sales (52,OOO r $251Cost ol goods gold:

$1,3OO,OOO

Standard full cost (52rOoO r $f 5! ...'...'.....Net unfavorablo variable cost variancos '.Untavorablo volumg varlancer.'.'.......r...... SrOOO

Grcsr prlflt.Less commenclal erpenseo:

Variable orponses (52'OOO r $11.,......o......Fired orpsnses

Operating fncome under absorption costingrUnlts budgeted for production during ttte year.........r......,

Unlts actually produced during the year ....o.....................

Fired factory overhead chargedto gach unit.......,..,...,....Unfavorable volume variance

ROBERTS CORPORATIONlncome Statement

For Year Ended 20-

$ 52,OOOt80.ooo

l2l

Sales (52,OOO r $251Cost of goods aofd:

Standard variable cost (52r00O r $lO)...... $52O,OOONet unfavorabla variable cost variances.. 2,OOO

Gross contrlbution margin......D.....'...'...........................o.....Variable commencial expensgs (52rO0O x $11 .....,,....,..,...,..Contribution margill ...........,.,r.........Dor..........Less firsd costs:

Factory sverhead(5O,OOO units budgeted r $51 $25O,OOO

180 .OOOCommgrclal expensBs .........,o...,,...r...,......Operating Incomg undgr dirgct costing..,.............,Do....o....r.

(31 Operating income under absorption costing.......,..,.....,.....Operating Income undgr dirgct costing...,o..o..i.........r....,....D1ffgrgnco. . . . . . t . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ' . r ' . . ' . . . . . . . r . . r . . r

Unlts produced during the year... . . . . . . . . .o.o... , . . . . . . i . . . . . . . . .r. . .r. .Units sold during the year .. . . . .r. . . . . , . . . . . . . . . . . .o,.. . . . .r. . . . . . . . . . . . . . .rUnit decrease in finished goodsFired factory overhead charged

inventory.

$1,3OO,00O

522,OOO

$ 778,ooo52,00o

$ T26,000

430.OOO

$_?egJgq

to each unit under

$ 281,000296.O00

l__0_9'o99149,OOO52,OOO(3,OOO)

35$ (15,OOO)

rII

g l

526

720-3(1)

Chapter 20

PLITCID CORFORATIOHIncome Statement

For Year Ended 20-Sales (48,000 x $161 $768,0OOCost of goods sold:

Standard full cost (481000r $9)............... 9{32'OOONet unfavorable yariable cost yarlancos,, lr0OOFavorable volume variance' (3,OOO}

Gross profltLess commenclal erpenses:

Varlable erpenses (48'OOO r $l)...............Fixgd oxpenses......o..........t......r..........r.....

Operating Income undgr absorptlon cosdng ...,o...........r.,...tUnlts budgeted for productlon durlng the yoar.................Units actually produced during the yoar...,r.....,..r.......,.,...

$48rOoO99.O00

€o,ooo$338,OOO

147.AOO

$_1e,Lqoo50,OOO51,000(r,o0o)

x 3 3

tzl

Fixed factory overhead charged to each units (3.OOO)

PLACID CORPORATIONlncome Statement

(3)

ded 2(FSales (48t000 x $f 0) ......r ' ..................... ' ..............,......o.r.r...Cost of goods sold:

Standard variable cost (481000 x $61......., $2g8r0OONet unfavorable variable cost yariances.. 1,OOO

Gross contribution margin.......................o.............,,Variable commercial expenses (48,000 x $11Contr ibut ion margiJ| . . . . . . . . . . r . . . . . r . . r . . . . r . r . . . t . . . . . r . . . r . r . r . r . . . . . . . . . . . .Less fixed costs:

Factory overhead_ (50'000 units budgeted r $3)...-........,.. $15o,o0oCommerclal expenses.................,..,...r..... gg.0oo

Operating income undgr dlrgct costng.,.......,...................,

Operating income under absorption costtng,..,,.......o.,r..,...uperating income undgr dirgct costing........................o.....D i f fg rg n c ,e . . . . . . . . . ' . . . . r . . . . r . . . . . . . . . . . . . . . o o . . . . ' . . r . . r . r . . . . . . . r . . . . . . . . . . . . . . . . .

Units produced during the year.......r.........,...,..r,................Uni ts sold dur ing the year. : . . , . . . . . . . . .Unit increase in finished goods inventoryFixed factory overhead charged to each unit under

absorption costingDiff erence............

$768,0OO

289,OOO

$czg,ooo48,OOO

$431,0O0

249,OOO

$1_g2J9g

$19{ ,OOOt82 .OO0

$__9,OOO51,OOO48,OOO

3,0oo

$ I,ooos3

Qppterfr

P204

(rl

527

I

Absorption costing;

Sa1 gS r . .a. . . . . . . . . . . . r . . . . . . . r . r . . r . . . r . . . r . . . . . . . . . . t . . . . . . . . . .

Dirgct matgrlals ......,..............,......Dirgct 1abor.......... '..,r.r.... '.. '... '......r.......rr..r.Variabl g factory overhead ..,...........,......r.....Fixgd fagtory overhoad ......'.................'..o.r.Cost of goods manufagtured ....r,......,.........Beginning inventoryCost of goods available for 8a19..r............,..Ending inventoryor..'..........'................'..r.'...

Gost of goods so1d......................,...r........o..GrOSS pnOfit.............. ' ...........r....rrt..............t

Marketing and administrative oxpenses,....Operating incOme ....'................r.......r.........

| $1 + $2 + $1.5o + ($62,coo + 30,0001 = $6.s8$6.58 x IO,OOO units = $65,9OO

2 $1 + $2 + $1.5O + ($6Z,COO + 2O,OOO) = $7.O2$7.62 x 4,ooo units = S3o,4Bo

Direct costing:

Sa lgs . . . . i r . o . . . . . . . ' . r r . . . . . . . . . . r . . r . . . r . . . . . . r . . . r r . . . . . r . . . .

Dirgct matgrials .......,..r....r..r..............r...,....Dirgct 1abor...........................r.....,.....,,........Variable factory overhead ........r..................Variable cost of goods manufactured......,..Beginnin g inventory......o...,.....r.....,r............Variabte cost of goods availabfe for safe....Ending inventory........,.....,.,................,.....,.Variable cost of goods so1d,..,....,................Gross contributi o n marg in,...........,...,.........Variable markeUng and administrative

exp9ns9s..............

Gontribution margin...............................r....-- t-Hfi".iffffffi:............. .......

Marketing and administrativeTotal f ired expenso ..r.................,,.Operat ing income . . . . r . . . . . . . r . . . . . . . . . , . .

J

QuarterFirst

$2OO,OOO3 3O,OOO

6O,OOO45,0OOg2,4OO

$197,4OO

sl97,4OO65,800 t

s131,600

$ 68,40025,OOO

$ o3.4oo

Seconds26O,OoOs 2O,OOO

4O,OoOSOTOOO62,40O

s152,4OO65rgOO

s2l8,2oO3o,480 2

s187,7203 72,zao

28,OOO

s_9.289

(21 QuarterFirst Second

s2oo,ooo $260,ooo$ 3O,OOO $ 2O,OOO

6O,OOO 4O,OO045,OOO 3O,OOO

$135,OOO $ 9o,ooo45,00o

$135,0O018 ,OOO

$1 17 ,OOO

$143,O00

13,O00

$13o,ooo

$ 82,40015,OOO

$ 77,4oo

s 52.600

$l35,OOO45,OOO

$ go,ooo

$l l o,ooo

1O,O0O

$1oo,ooo

$ gz,4oo15 ,OOO

$ 7z,4ooE 22,609

'528

P2O-4 (Concluded|'

(31

OperaUng Income under absorption costingOperating lncome under direct costing......DiffefgnC g ............!..........r.r............ i ...r.......t

Change In inventoly under absorption costing:Ending inventory,.. . . .r. . . .r. . . . . . . . . . . . . .r. . . . . . . , . .Beginning inventofl . . . . . . . . . . .r.r. . . . . . . . . . . .r. .r. .

lncreasg (decrease| in invento[.....,.......Ghange in Inventory under direct costing:

Ending inventory......, i ,....,...,...D........o......Beginning inventorlf ................o.,,.....r......In crease (decrease) in inve ntor]......,......

Differencs between absorption anddirgCt COSt ing. . . . . . .o . . . . . r r r . . . . , . . . . . . . . . r . . . . . r . r . . .

P20-5(11

Chapter 20

QuarterFirst

$4g,4oo22,AOO

$2O,8OO

$65,8OOo

$os,goo

$4s,oooo

Qrri nnnw v t v v v

_$2o,8og

Second$ e4rzgo

52,600glg'3291

s 3O,48O65,80O

s(3s,320)

S 18,ooo45,OOO

s(27,O001

CapitalIntensive

s (8,320)

LaborIntensive

Sales price ....,........,Variable costs:

Matgrials ............,...........,...Direct labor ....,....,.,..Variable factory overhead.,..........,........Variable marketing expens€s ...............

Gontribution margin per uflit......,..........,.r

$30.oo

$5.6o7.204.80

_l_6.0.9 2.oo

sg

s30.00

19 .60

sl o.40

$2,44O,0005OO,OOO

_S2,94o,oog

break even

s1,32O,oOO5OO,OOO

_S1,829,ogq

to break even

ss.oo6.OO3.002.OO

(al Gapital-intensive manufacturing method:Fixed factory ovgrhgad..........r. ' .... ' ..............r.rr. ' ...r..r...rFixgd markgting grpenses....,.................r.....,..........,....

Total f ixgd cost...................., ...........r..r......t...S2,940,OOO fixed cost = 21O,00O units of sales tos l4

(b)

contribution margin per unit

S1,820,OOO f i red costSlO.4O contribution margin per unit

= 175,OOO uni ts of safes

-\

Clppter fr

P2O-5,(Concludsdl

(21 Klmbrgll Company would be indifferent betweon tho two alternaUve man-ufacturing methods at the volume of sales for which total cost was egualunder both alternatives. Let O equal the quantity of units of product man-ufactured and sold.

6lo r al + $2,94o,oo0 = l$ig.oo r el + $f ,B2o,ooo$2'94O'OOO - $1,82O,OOO = (Stg.eO x Ql - ($fS r O1

$i '12O'OOO = $3.6OrQ3 1 1 ' l l l = O

Total cost will be the same for both manufacturing methods at 311,l i lunits of sales.

P20-6

(11 The number of units to break oven at a per unit sates price of $38.5o:Variable costs:

$ 60,0004O,OOO2O,O0O1O,O00

Dirgct 1abor... . . . . , . . .r. . .r, . . .r. . . .Variablg factory ovgrhgad,.r..............Variable marketing and admlnistrative erpensgs r,.......o......

s?o'ooo + $15ro99 = Y,ulo=o,o = 3,60o break-even unitss38.50 - $26.00' 512.50

(21

(3)

g

$13O,0OO

'S13O,OOO -r 5,OOO units = $26 variable cost per unit

units that must be sold to produce an $1g,ooo profit, at a g4o per unitsales price:

$45'990 + $18,ooo = su?'99o = l,soo units90o - $zs S14

The price castleton must charge at a SrOOo-unit sales level, in order toproduce a profit equal to 2Ooh of sales:

Let r = sales price per unitS,OOOx = 5,000(926) + S45,OOO + 5,OOO (.2x14,OOOx = $175,OO0

r = $Cg.ZS sales price per unit


T 't

ChWter fr5g

P2A-7 I

Saleg prlce Per unitLess:

92 E4$180.OO s176.00.

Variable manufacturing cost per un|t......,..,.... $121.oo $ 96.00Variable gelllng erpenso per unit

15oh of sales pricel 9.OO 8.8O !

Total varlablg cost per unit...........,....i............. $1 3O,oO $1 04.8o

ContrlbuUon margin per unit 3 50.oo $ 71.20

*S160 sales price per unit In 1 9A + (9f 00 r 107c increase in 19Bl

Total fixed factory overhead((2O'O0O B2b + 4Or00O B4ts) r S25 per uni$,....,.....,,...... Slr50OrOOO

Totaf fixed selling and administrativa orpenseS............r..r, 2O7r33O v$1,7o7,33O

S1,7O7,33O fired cost + (S135,OoO protit + (1 - .4!fl2B2\ x $5O GM eachl + (3 B4b r $71.20 CM eachf

$1,7O7,33O fixed cost + $225,OOO pretar profit =

$313.60 CM per package

$1,932,390 = 6, i62 packagessi!13.60

6,162 packages r 2 units of 82 = 121324 units of 929,162 packages x 3 units of 84 = 18,486 units of 84

Clpptcr fr

- , P2Gg

(l) The 2OA sales mir in units is l:2 (7O,OOO tape recorders; 14O,OOO elec-- tronic calculators).Lat r = Number of tape recorders to break oven

2t = Number ol elastronlc calculators to break evenAt break ovon:

Salec = Variable cost + Frred cost$tsx + 2 gt22.5or) = $8r + 2 gi9.5o$ + $l,32o,ooor

$15r + $,45x = $8r + $l9r + $1,32O,0O0$8Or = $27r+$1'32O'OOO$33r = $1,32O,OOO

r = 40,OOO tape-recorders2r = SOTOOO electronic calculators

r Fired costs;Factoryovgrhgad.o.,...,..r.............r I 2gOrOOOMarkeUngandadminlstrailvo...... ITO4OTOOO

Tota1...........,.....................,......, gl!92o,ggg

:

53'

,Q Chaptorfr

t2o€ (Contlnuedl

2l The followtng lormula can bc used to calculatc the galcs dollars requiredto carn an aftertar proflt ol 9oh on ralec, using 2OB estimates:

s = vc(sl+FC+ #]}Where: S = NecessarY sales dottars

VC = Variable cost stated :ur a pencentage of sales dollars (SlFC = Fixed costr

p = Desired profit stated as a pencentage of sales dollars (S)T = Income tar rato

. s = .4esr+$1r3??rqoo2*-'O9(Sl-' (1 -.551

s = .465 + $1r377rOOO + .2S.34S = Sl'377'OOO

S = S4'O5O'OOO

'lVariable cost rate for tape recordels and electronic calculators:Tape Electronic

Recorders CalculatorsPer PerU n i l % U n i t % _

Sates price...,.......... .,.........'...... 91!.OO l00oh$?g{q lOO.O%Variabfe costs:

Matgrials . . . . . . . . . . r r , . . r . . . . , ! . . . . . . . . . . . . . . ' . . r . . . ' . $ 3.60 $ 3.60

Direct labor 2.2O 3.3OFactory overhead............,. 2.OO 2-OO

TOtal vafiable COSI...............,.,......... $ 7.8O 52c/o $ 8,9O 44.5oh

Composito variable cost rate per dollar of sales: s

(.2O r Tapo recorder variabte cost rate| + (.80 x Calculator variable costrate| = .2O (.52) + .8O (.445) = .l04 + .356 = .46

zFired costs:Fagtory ovgrhgad .............,.,...............,..,...r....,,. ' .. ' . ......, ' . $ 2SOrOOOMarkeUng and administrative I 'O4O'OOOooi:u,:::.:::::::.].].::..:::.::::::::::::::::::::::::::::::::.:::.:::.::::#,-

Contributlon margi11............r.......t........... $f-.n & qU.lo W

Chagter2O

P?IO-A.(Goncluded)

(31 Let x = Number of tape recorders to break even3r = Number of electronic calculators to break even

At break even:Sales = Variable cost + Fixed cost

$lSr + 3($20xl = $7.80x + 3(g8.9oxl + $t,37Z,OoO9l5x + $6Or = 7.gox + $26.ZOx + $trgZT,OOO

$75x = $34.5Or + $1 ,377,OOA$4o.sor = $1r3z7rooo

r = 34,OO0 tape recorders3x = 102,O0O electronic calculators

= 5OO unlts

533

P2A-9

(11 (al In order to break even' Almo must sell 5oo units determined as fol-lows:E $100,000O(BE} =

P - C 3 4 0 0 _ s 2 0 0

where F = fixed cost, p = safes price per unit, and c = variable costper unit.

(bl To achieve an afteptax profit of $24o,ooo, Almo must sell 2,5oounits determined as foltows:

a = F*" _ $1OO,OO0+(S24O,oOo+( l - .eo))

_ $ iOo,ooo+$4oo,ooo S5oo,ooop-c $4oo_s2oo =F=-66_-

= 2,500 units

wfierE R F, and c are defined the same as in (lxa), and n is theafter-tar profit objective.

534 Chapter 20

P2O-g (Conctuded|

l2l Almo Gompany should choose alternaUve (a! because it will result in thelargest aftertar Profit.

Attematlvc (al:

Revenuc = G34OO unlt ralct prlcr x 350 unltrl + ((3{OO - 3lO prlcc rcductlon} r 2,7oO unlta} * \

= !14O'OOO + $972'000= t l r l laOOO v \

Varfablc Coct = 32OO por unlt x (350 unltr rold + 2r7OO unltr to bc roldl= i810,000

Atter-tar Prcflt= (Rcvcnuo - Varlablo C5gt - Fhod CorQ r (l - Tar Batel -= Gtl,l12,ooo - 3o1o'o00 - 31OO'Ooo) r (l - "t)= 3{O2,OOO r.6= t241,2OO -

Alternattvc (bl:

Revenuc = Gi4OO unlt asler prlcr r 350 unlts) + ((9400 - 3SO prlce reductlon) r 2,2OO unitg)= 3140rOoo + $814'Ooo= 3954rOOO

Varlirblc Coct = {320O per unlt r 35O unttr} + ($2OO - t25 coat reducUon) r 2,2OO units)= 37O,OOO + 3385,0OO= $4.f5,OOO

Atter-tar Proflt= (Revenuc - Varlable Coct - Fked CosQ r (1 - Tar Rate)= S1954,000 - $455,000 - 3100'oo0) r (1 -.4)

= 3399,000 r .6= $230,400

Alternattvc (c):

Rwenuc = CI4OO unlt rabt prlco r 350 unltrl + $4O0 r 11 - 5% prbo reductim) r ?rOOO units)

= 314O'O0O + 370OI0OO= 39O0,00O

vartablo Cost = izoo per unlt r {35o unltr aold + 2,ooo unltr to bs aold}= 9470,00O

After-tax Prollt= (Revonuc - Vartablo Coct - Fhed Coge r (l - Tax Rate)= ($9oo,ooo - S47o,ooo - Gl l0o,ooo - 31o,00o cost reducUon)) x (1 - .4)= S34OTOOO r.O= $2O4,00O

Clppter fr

P20-70

(1) Egtimated brpak-even point based on pro forma incomc statement

3819t ttttt"""............tr.........................r................................ $l orooorooO

Varlablc costs:costof goods80ld...-....r-...........t.'....,..... $6roooroooCommlssions paid to agents................... ZTOOOTOOO 8TOOOTOOO

Contribution margill.....'.............r....................o.o.....r......,.... $ ar"ttrt*

Gontribution margin ratio - $. ?'oo0'ooo = 2oo/o CIM$t0r0oo,0oo

$loorooo fired cost , '

zortffi = $5o0,o0o break-even point

(21 Estimated break-even point with the company employing its own safes-pen;ons:

Variable cost railos:gost ol goods sold to sales (g6rOOOrOOO + gIO,OOOTOOO)........Commissions on salgs.......r.-......r......r.........r............D...........r..

Totaf variablg cost ratio...r...'..r....,..r..or...r...,................r..,...

contribution margin ratio = 1 - 6soh variable cost ratio = 3soh

Fired costs:Administrat ive". . ' .o. . . r . . . . . . . . . . ' . . ' . . . r . . . . . . . . . . . . r . . . . . . r . . . ! r . . . . . r . r . . I

!af es manager " t . . . . . . . . . r . . . r . . . . . . . . . . r . . . . . . . . r . . . .o.r . . . . . , . . . .o. , . , . ro. .

Salaries of satespersons (3 x $30,ooo) ....::::::::.....,.........Total f ixgd costs.'.................. ' .........,...,..r...r.,..r..,.,r.....

S35O,OOO fixed costgsoh CIM

= SI,OOO,OOO break-even point

600h5%

65%

$1OO,0OO160,000go,ooo

_$3sg,oog

536 Chapter 2O

P2O-10 (Concluded|

(31 Estimated sales volume to yield net Income proiected In pro formalncome statement with Independent sales agents receiving 25oh commis-sion:

Total Income bgforg Income t3I ..........'r..r..!r.....'.........r.....r.t Sl T9OOTOOOFired cogt lOO,OOO

_Eooo,ooo _Total lixed cost and pJEfit...,.............................

Variable cost ratios:Cost of goods sold to sa1gs.................o....,....,..Gommissions on salgs ....... ' ...,..............r.....

Total variablg cost ratio .,..,r,....o..r..,.,.,.... g50hw

600/o *

250h

Gontribution margin ratio = 1 - 85% variable cost raUo = 15oh

S2,OOO,0OO fixed cost and profit = S13,333,333 safes15% CtM

(41 Estimated sales volume to yield an identical income regardless ofwhether the company employs its own salespenions or continues withindependent sales agents and pays them a 25oh commission: . v

Total cost with agonts = Total cost with companybreceiving 25oh commission own sales force -

(85% variablo cost r sales| = (95% variable cost x salesl+ $100,00O fired cost + $350,0O0 fired cost -

29ohxsales = s250,000

sales = $1,25o,Ooo

Chapterfr

c20- l '

537

(ll Becausa star Gompany useg absorption costing, Income from opera$onsla Influcnced by both sales v_otume and productfl; volume. sales volumewag Incrcased In the tlovember 3o forecast, and at standard gross profitratag this would incroasc Income- from operafion" lv SSri-oo. XorrLJ"i---during this same period, production volume uras belo* it e January Iforecast causrng an unprannad votume va;anc; ;i $;ffi. Tho vorumevariance and the increased marketing erpenses (due to the lo%Increase in sales) overshadowed ttre aoaid pronL trom ""1"", as folours:

CASES

InCrgaSgd 881O8...............r...............r.......r...Increased cost of goods cold at 8tandard...Increased gross profit at standa1d.,............Less:

Volumg variancg ...rr....o..........r.........r......lncrgasgd marketing erpenso.,.....,........,

Decrease in income from operations,.,....,..

s26,80027',2OO

$ 5,goo

$6,OOO1r34O 7.340

$ (1,7401-

t

5g Chapter 20

STAR COMPAMTForecasts of Operatinq Results for 20-

Foracasts as otJanuarv I November 3O

.,....,......,... $268'000 $294r8OO

C2A-1 (Goncluded!

l2l Star Company coutd adopt dlrect costing. Under direst cosUng, fixedmanufastirrin-g costs would be treated as period costs and woul.d not beasJigneO to pfoductlon, Gonsequently, earnings would not be affected byproA-ucUon votums, but only by sales Yolume. Statements prepared on adirect-costlng basis ars as follows:

Sal e3.... . . . .o... . .

Variable costs:Manufacturing .t . . . . . t . . . . t . . t . . . to"to""""o'ot"r"t t '

Markgtin$ .. . . . t . . . . . . . .r . t t . . . . . . t . . . . . . ."""o"tt"t t t t t t t

Total var iabl g CoSt . . . . . . . . . t t . ' . ' . """"""" ' r" '

COntf ibUtiOn mafgi f t , . . . . . . . . . . . . . r , . . . . . . . . . . . . . " . 'o. . . ' . .

Fired costssManufacturin g .......t............o.ir.o.....""tttrt"r"

Administrativg o... . t . . . . . . . . . . . . . . . . . . . . . . . ."" 'r"t"""

Total f i xed cost ' . . . . ' . . . . . . . .r. . . . . .r. . . . .-. . . . . . . .-. . '

$182,OOO $2OO,2OO'l3,4OO 14r74O

sl95,400 s214,940

S 72,600

$ 3O,OOb28,80O

I 79,860

$ 3O,OOO26,80O

$ 56,800 I 56,800

Income from operations '......".......r.....r...r..,..... $ 15r8OO 9-23'960-'S182,000 x l looh = S200'20O

Reconciliation of differences in incoms from operations:January l: No difference In absorption vs. direct costing because$3O,OOO fixed factory overhead was expensed in both cases.

November 30:

DifeCt COSting.r . . . . . . . . . . r . . r . . . . . . . . . . . . . . . . . . . . , . . . . . . . . . . . . . . . . . . . . . . . . . . . . rAbSOfpt iOn COSting . , . . . . , , . . . . . . . . . . . . . . . . . . . . . ' . . . . . . ' . . . . . . '

D i f f g r g n c g . . . . . . . . . . . . . . . . r . . . . . . . r . . . . . . . r . . . . . r . . ' . . . . . . t " r " t " " t t t t t t " t t " '

Fixed factory overhead included in cost of goods sold atNovember 3O lorecast (S3O,0OO in January 1 forecast

+ lQoh sates volume increase) . . . . : - . . . . . . . .January 1 forecast. . . . . . . . . . . ' . . . , . ' , . . . - . . . .

Und erapplied fixed factory overhead

lncome fromOoerations

$23,o6014,060

s 9,ooostandard:

s33,OOO3O,OOO

s 3,ooo6,OOO

Diff grgncg.. . . . . . . . . . . . . . . . .1 ' . . . . . . . . . . . . . . . . ' . . . . . . . . . . . r . . . . . . . . . . . . . . . r . . t . ' . . S gtOOO

Clppter fr

c20-2

539

(rl In absorpuon costiDgr Bts curently omployed by RGB Corporation, firedfactory overhead is considered a product cost rather than a period cost.Firad tadory overhead is appfied to production based on a normalcapacity of I'ooo,ooo units. Thu3, the fixed factory overhead is appliedto products in the samo manner as variable costs, even though it doesnot vary with production. In addition, lf production ano sai.s are notequal during the year, fired factory oveihead is deferred as part of inven-tory costs-(when production erceeds sales) or releas"o ,pon sales of theInventory (when sales erceed producUon)-

During 2oA, production exceeded sales, rcsulting in a portion of thefired factory overhead being Inventoried in finisheigooo-s-rather thanbeing expensed in 2oA. This resulted in 2oA operatin! income being tar-ger than lt woufd have been ll all fired factory overhead had beencharged against 20A sales revenue. Then in 2oB, sales exceeded produc-tlon, resulting In more fired factory overhead being ctrargeo against 2oBsales nevenuo than was incurred ii 2oB. First, RniJtreo gioos were sotdout of inventory which meant lhaf th9 part of fired factiry overtread thatwas incurred in 2oA and inventoried in 2oA was charged against 2oBsales revenue. Second, fired factory overhead ,^r"" uid"raiptied in 2oBbecause only 85o,ooo units lvere produced (isorooo units less than nor-mal capacity used in determining itre tactory overhead iaie). This result-cd In an unfavorable votume variance that was charged to the cost ofgoods sold in 2oB. Both of these occurences increased the cost ofgoods sold and resulted in a reduction of gnoss profit and operatingi n c o m e i n 2 O B .

5

ffi

C2O-2 (ConUnuedf

l2l (rt

Chapterfr

ROB CORPORATIOIIOpcnUng lncomo 9tatamcnt

For the Years Ended November 30, 20A and 20B(h thourend$

Vrrlrbb cst of goodr rold:g0OrOOO unltr et 35,00---IOOTOOO unltr rt 35.OO-*-TOOTOOO unltr et 3550**-

@ntrlbuUon nrrgln *...*,.-s-.Fh.d.pcntc$

Fllcd frctory ovcrlrced D...s.'. 33'000

20A, ?OB

30,ooo

.3r500

tr'5oo

311,2OO

3p5O 5,350

t4,5OO t 5,850

33'3oo8cllhg rnd rdmlnlttntlv. -.* 1.500 .f'5OO f "5OO 4"800

OpcnUng Incomr ....'.-......o'o...ts

tr) RccmclllaUon:

OpcnUng lncomc-rbrorpUon corUn g .,.-.....--.{

OperaUng Incomo-d lrcct coaUn9,...........-.,.......,.

3 900

Dlfferrncr 3 9oo

Dtffsroncr eccounted for rrfollowr:hvcntory changr undcrrbrorpUon cocUng:

Endlng Invcntory:30O,0OO unltr rt 38,00..., tZragg150,000 unltr rt 38'80,...

BcAlnnlng Invcntory:..-....... 0 32r4oO

SOO,0O0 unltr rt 38.00....

hvrntory changr under dlrcctcoaUng:Endlng lnvcntory:

3OO,OO0 unltr at $S.0O.... t1"500150,ooo unltr at 35.50.. . .

Baglnnlng Inventorp O 1,5OO

3OO,O0O unltr at 35.OO... .

o 1,050

r ro*r

31,320

2,1OO 3 (1,080)

$ 825

1,5OO (s75)

t eoo 3 {4o5)

0

204

3 lro5o

208

3 o 4 l t . u

Dlflcroncr

Clpptrfr

Cz.G.? (Goncluded)

(3) The advantages of direct costing for internal reporting include the follow-lng:(al Direct costing aids In lorccasting and in erraluaung reported income

for internal management decision-making purposes, because fixedcosts alt not arbitrarily allocated between accounting periods (oramong different products, eafes territories, operating dlvisions,etc.!.

(bl Fired costs ars raported at Incurred vatueg (and not absorbed val-ues|' Increasing opportunity for mono effective controt of thesecosts.

(cl Profits vary directly with sales volume and are unaffected bychanges in inventory levefs.

(dl Analysis of the cost-volume-profit ralaUonship is facilitated, andmanagement is able to determine the brsak-oven point and total :profit for a given volume of prcduction and sales.

The dlsadvantages of direct costing for Internal reporting inctude the fol-lowing:(al Management may fail to consider properly the fired cost element in

long-range pricing decisions.(bl Direct costing lacks acceptabitity for external financial raporting or

as a basis for computing tarable income. As a consequonce, addi-tional record-keeping costs must be incured to use direct costing.(c) The separation of costs into fixed and variable elements is a costi-ypnocess. In addition, the distinction between fixed and variabte coitis not precise and not reliabte at alt lEvels of activity.

541

c20€

(11

(21

Daly would determine the number of units of Product y that it wouldhave to sell to attain a 2oo/o profit on sales, by dividing total fixed costsplus desired profit (t.e.r 2ooh of sales price-per unlt multiplied by theunfts to attain a !o% profit) by unit contribution margin {i.o., sales priceper unit less variable cost per unit).lf variable cost per unit increases as a pencentage of the sales price,Daly would have to sell mone units of Product Y io break even. Becausethe unit contribution margin 0.o., sales price per unit less variable costper unit) would be lower, Daly woutd have to selt mora units to cover thefired cost in order to brreak euen.

it-r

t12

C2O-3 (Goncludedl

Chapterfr

(31 The llmitatlons of brpak-eyen and coat-volume-profit analysis ln manage-rlal declslon maklng follow:(al The snalyslg lg fundamentalfy a gtaUc enalysis' and, In most casor'

changeo can be determlned only by recomputlng ltsults. lf a break-oyen chart la used, changes can be shown only by drawing a n€Yvchart or geries of charts.The amount of fired and yariable cost as well as the slope of thoeales llns, ls meanlngful ln a defined riange of acUvity and must beredefined for actlvity outside the relevant range.The analysis ls hlghly dependent upon a meaningful geparation ofllred and varlable costs, whlch may be dlfficult to obtain In actualpracUco.The analysla is based on a slngle mir of producta. lf the mlx lserpected to change, the rpsults must be rpcomputed.The analysls assumes that production technology (i,e., labor produc-Uvity, level of automation, and product specificaUons| will beunchanged. ll changes In production technology are erpectpd tooccur, the analyst must consider tho expected effects on costs.The analysis assumes that selling prices, input prices' and othermarket conditions will not change. Erpected changes must beIncorporated Into the analysis. lf a rango of possfble changes canoccur, e different rasult must be determined for each possible corl-binaUon.

(bl

(cl

(dl

(el

(0

@1-1. Dillcrential6t b thr ditference h the cct ofallrrnative choicoc. Thc cconqrrist calb ruchcdb marginal, and the engineer calls themircnrncntal.

A21-Z Marginal cosl (or ditlerential cost) is the costircunod by increasing thc present outptrt Thecoeil, lhenfore, would nol have been hcuned illhr

-addi t ional uni t r had not been made .

Marginal cosling (or diract costing), on theo,trer hand, is a cclhg approach h wtridr crlyvariablc rnanulacluring cost! are charged to' prcducls, and thur to invenlory, while fixedmanufacluring coelt ar. lreated ar periodcoslr and are charged olf withourt becomingpsrl of hventory cools.

@1€. Incremcntal coslr are important in decisionrnakhg, bccausc the least cosily or most prof-

. itablo allemative cannol be determined unlessincremental costs are known. lncremenlalcoslr are lhe costs that musl be incurred inorder to cornplete sn €ctivity that is being con-riicred. These co3tt must bc known h oderlo onrpare each arrailable Eliernative.

O21-{. Differential cets do nol clrrespond to any pe.eibb accounting calegory, because they areoriented loward the future rather than the pastand lhey treat producl costs on a differentialrather than a total cost basis. Furlhernroro, cor.tain costs relevant for ditferential cost analysis(o.9., opporlunity cost and imputed cost) arenol recordod h lhe accounls. Conversely, cer-tain costs recorded h the rccounts (e.g., fixedcosls thal will remain urchanged) are inelevanlfor dilferential cost analysis. The diflerentialcod corrcept is a corcept for cosl analysis andnol cosl accumulatbn purposes.

O2t-5. The flexible budget b uselul h differenlial cetanalyses, because lhe incrementg belweeneach ditferent tevel ol ouiput represent tho cclthal must be incurred il additisral business isundertaken. As bog ar lired costs rernah con_rtant under all rates o{ oulpul, variable costsare alwala the ditferontial costs. lf fixed costgchange in the flexible budget, differential costswill include the incremenlal element of f ixedcogl rellected in the llexible budgel

O21€. Historical costs are usually irrelevant becausethey have been created by a past decisbn lhatcannot bc changed by a lu ture decis ion.Historical costr obtained frorn accounling rec.ords oflen include arbitrari ly allocated fixedcosl thal rnay not be relevant to dilferential coetanalysis.

CHAPTEN 27DISCUSSION QUESTIONS

@,1-7. Variablc corl ir important bccauso it canalways be idantif ied as a differential cost.However, dillerentbl ccls msy also includraddltiqtal fixed cctr.

O21€. Sunh coeils are incccrerable ccts that ar notrelevanl b futuro decisisrs.

O2t-9. A fixed corl would bc relevant in decidingbctwecn altcmstiver il the lhed erpenditun iran oul-of-pockot cost required in ordor toundertake an allemative (e.g., the cet d rcnt-ing eguipment needed lo provido sulficienlcapacity in deciding whelher or not to acceplan offer); or if a fired erponcfture can bt avciied by undertakhg an altemalive (e.g., supervi.eory ralaries that will be discontinued in theevenl of a plant cbeing).

Q21-10. Oppoatnrty coctr are the measurablo value olan opporlunity blgassed by rejecling an alter-nalive use ol resources.

021-1 1. Appendir Lhear prograrnming b a rnathemati-ca l lechnique decigned lo arg ia ldecision makers in detcrmining thcallocalbn of resources that would bereguired to mEximize or mhimize theobjeclive lunctim; i.e., it b a tool thatcan be used by business ,nenagerlllo determine the mix of inpuis hecer-sary lo maxirnize contributbn rnarginor minimize cost. Linear program-ming is an algorithm that maximizesor minimizes a function ol severalvariables subject lo one or,Tpre con.s l ra ints . The funct ion being opt i -m ized and the cons l ra in t l s roagsumed to be linear wilh respect toproduclion activity.

Q21-12. Appendix The unit costs usod in linear pro_gramming problems are the lracc-able variable costs. Costs murl betraceable lo the prcduct and variablcwith respect to prcducticr quantily inorder to affect changes in total po-

. duclion cost and total contributionmargin when changes in productbnquantity and mix occur.

O21-13. Appendix(a)The area bounded by the tineeAB, BC, CD, and DA b calfed thrsohrlbn space because il repre-senls thooe quantilies and cqnbi.nalions ol standard and doluromodels lhal can be produccd,given the available caprity o{ thcgrinding and polishing mrhiner.

g3

I!

544

(b) Trlangle BCF represenls lhosecomblnat ions of s landard anddolura models that could bc PtDduced by thc poltshing maclrlneshJt mt by the gdnding rnaciinee.Trlanglc CDE reposonte $c lovolol productlon that tho gtindlngnracfrhcs could atlain, bul nol th.poliahfng macfilnor.

(c) Polnt C denoles thc oPtimumsolutbn bocause anY olher levelof snalnablc prodwtbn will resultln a srnaller total contdbulion mar-gin. ll can bc identilied bY com'putlng lhe lolal conttibulion mar-gin available lrom thc productbnand sale of thc combinatlon ofstandErd and delure models-dcnotcd by cach corncr point-and chooslng thc cornor poinlwilh thc largosl total conltibutionmargin. Altematively, a series olCM l ines can bc construclod,which havc a slopc cgual lo -lmultipliad by lhc unit conlributionmargin available lrom lha produd

Ct@ter 2t

identified by thc horizontal eris,divided by thc unit contribulionmargin availablo trorn Utc prodrclidontified by tn verticsl 8xb. Thcptofit lino farthest frorn lhc ori$n.poinl A, rcPtts.nb lht gtcalosltotel contrlbullon margin. and Inthb casc, il Passas thtottgh Poinlc.

021.14. AppendixThc simplex msthod i3 an ilsrativcptoaas tul finds lhc oPtimum so|trtion to a llnoar pmgramming Protslem. Thc simplex method, which isbased on malril algobta, is a sys-lematic way ol cvaluating sacfi cor-

- nor point in the teasiblo araa. Thaprooass begins at thc zero level ofprodrclion and systematically rnoveslrorn onc comct poht to anothcr untiltho optimal soluuon is found. Eachmovc provitJes lhc lsrgosl por unllimprovement in the objeclivo func'tion. Th€ ptocess continuss until lheobjsdivc fundion can no longer beimprovod.

Clnpter 2l

F27-7

E)GRCISES

Saleg ($1.90 r 5 0OO kg).............r....,...........r........Gost to manufactut€:

Dlrcct materlalr ($.eO + $.0i| r 5 OOo kg).._...

545

$9,ooo

Dircct labor (3,50 r 5 O0O kg)..,..Factory overhead:

Indirect labor ($.2O r 5 000 kg) ...........,.......Power ($0OO + 3O'OO0) x 5 0OO kg).,.r.........Supplies S1.02 x 5 OOO kff)...............r...........Maintanance and repair ($.027 r 5 000 kg)Deprcciation (i3r00o + 24 months),..........-j..lnsurancg ($,OOZ r 5 oOO kg)......,.....,......,,.rPayroll targ!.......oo.......r......r........rrr....o.....o..r

Gost of goods produced and so|d,......,.................Gross profit contributiGtll ..,............rD....................rAdministrativg gxpenso......D....ro...,.................,.....

Profit contribution from accepting new business

E21-2

(1) Estimated cost of the additional loo,ooo units:Mater iats (($150,OOO /1SO,OO0 uni ts) x iOO'0OO uni ts)Direct labor ((${f z,5oo / 15o,oo0 uni ts) x loo,ooo uni ts) . . . .Variable factory overhead

( ($75,0OO / 15O,OO,uni ts) x 10O,0OO uni ts) or($125,o0o at loo% capicity - bzs,ooo:Jt dol% capacity)Fixed factory overhead

(9125'o0o at 1 ooo/o capacity - $f oo,oo0 at 6o% capacity)Total differential cost of manufacturing the additional

10o,o0o units ' . . . . . . . . .o. . . . . . . ' . . . . . . . . . . . . . . . , . . . . . .o. . . , . rr . . . . . r . . . . . . . . . . . . r

Total cost of producing 250,O00 units in Janua4n

s3,O502,5OO

I,OO0100' too13572535

1 6 0

{2}

Budgct for15O^0OO Unitr

$150,OOO112,500

75,00010o,ooo

$437,5OO

Diffcrcntial Costfor lOO.OOO Unitg

$too,ooo75,OOO

5O,OOO25,OOO

$2gg,ooo

. 7 .205s1 ,795

1 5 0

s1.64s

slOO,OO075,OOO

5O,OOO

25,OOO

$25O,OO0

Total Cort for25O.O0O Unltgs25O,OOO

187,50O

125,o00t25,OOO

J68Z@

Materials .. . . . . . . .D,Direct |abor... . , . . . . .r. . . . . . . . . .Factory overhead:

Variabfe. ....,...Fixed

Total cost

lr \

546 Chagter 2l

E21-2 (Concluded)

(31 Saler price rcguirsd to achiev e a 2Ooh mark up on production cost:

Production cogt per unlt ($6871500 + 25O'O0O units)..,....r...........r $2.75Plus 2Oo/c mark up on cogt ($2.75 r 2O%l .55Safer price reguired to achfeve 2Ooh mark up on cost............o..... $3,3O

E21-3

Revenue from ttre rpecial cale (15,0OO units x $12,5O each).. $1BZ,5OOLesr differontial costs:

Direct materialr ($2O,OOO + lO'O0O units) x15,000 unftsl $3o,ooo

52r5OODirect labor (($3S,OOO + 1Or00O units) x

l5rOOO units|.......Additional overtime premium on apecial order l0r0OOVariable factory overhead (($1Or00O + 1O'0OO

units) x 15rO0O units).......................,,.ro. 15,000

7,OOOAdditional fired overhead from equipment

t€nta1 ......Variable marketing oxpen3es (($201000 +

t0rO00units)x l51000uni ts) . . . . . . . .o. . r . . . . . . .^ . . . , 3OTOOO i44.5ooAdditlon to annual company profit resulting from

special 3a1e...........,.....,.......

q

:!

|-

!

I

S

Chapbr2l

F214

e3-5

547

l

No, Hunungrton should not accept Lufkinb offer because it would be$5'OOO cheaper to make the part.

Gost lf purchased from Lufkin (1O,OOO r ttf S)Cost lf manufactured by HunUngrton:

s180,O00

Direct materiab...Direct labor....,o.rvariable factory overhgad ............-.o.......,......r..Rent from thlrd party forgone lf part

manufactllF9d........r...........r..t......r...ro...r.r..... 15rOOOAdditional fired factory overhead eliminated lf

part purchased from Lufkin (1O,OOO x $3)..,. 3O.OOO 165.000Savings lf part manufactured by Huntin!fto11...,.... $ ,|5.ooo

This solution assumes that a mono profitable use of the fucilities doesnot exist than that derived frcm the saving of $is,ooo. oth;;;, ir woufdbe preferable to buy Part M-l from Lufkiriand'use Huntington's facilitiesfor the mono profitable activity.

s2O,OO055,OOO45,000

\-

The company ehculd purchase the pistons from the outside supplierbecause lt woufd cost $6,oo0 less than manufacturing them at theTlcson plant.

The differential cost of manufacturing pistons at the Ttrcson prant:Dircct matgria|s.r.....r...........r........,......t..r...r..... $i 6OrOOO'Dirgct |abor. . . . . . . . . r . . . . r . . . . . . . .oo.. . . . . . . . r . . . r . . . . . . . r . , . . . . . SOTOOOVariable factoly overhead (2Oo/c r S24O,OOOi.... 48,OOOIncrpmsntar fixed cost for machinery r6ttri.... gorooolncremental fired cost for additionai

supervisol ..........,..r.o................ 4O,OOOTotal differential cost to manufacturr

80ro00 pistons..........o..r...r.r....,.,.......,....... $3SgrOooGost to purchase g0,OOO pistons lrom WichitaMachine Works (ge.CO per piston x SO,OOOpistons)...r..,......,.,,..,............r...........

352roooCost savings available from purchasing thepistons from the wchita Machine w-orks rather

than manufacturing them at the TUcson plant. $ 6,O0O

I

-

548 Chapter 2l

E21-6

(ll Yes, the sales managert pnoposal to drop Tift from the product line andincrease the produetlon of Mift should be accepted because it willIncrease the companyb income by $4,OOO, determined as follows:

Contribution margin from sale of Tift:Revenue from sale of Tift (So r T,OOO units)...,. $czroooLess variable cost of manufacturing Tifts

Materials ($Z x T'OOO units|....... $14'OOOLabor stl x 7r0OO units)............. 7r0OOVariable factory overhead

($f x T'OOO units!.......o.....,.... T'OOO 28'OOOGross contribution margin from sale of Tift ..,.. S14,OOOLess variable markeUng erpense from sale of

Tift ($1 r 7rO0O units|..................r..........,...,.. 7ro0o $ 7ro0o

Contribution margin from sale ol4,0OO additional units of Mift:

Revenue from.sale of additional Mift{$lOr4rOOO units}.......,..r.....r....,..,......,........ 9{OTOOO

Less variable cost of manufacturing additional Mift:

Materials ($2 x 4r00O units)......, S 8r0O0Labor ($2 x 41000 units|..,.......... 8r0OOVariable factory overhead

($1 r 4'OOO units1o.................r 4'OOO 2OTOOOGross contribution margin frpm

salo of additional Mift..................r..........., 92or00OLess yariable marketing oxpense from sale of -

addiUonal Mift ($f r 4,OoO'units|.....,....,r....o. 4'OOO 16,000Additional contribuUon margin from converting capacity to

to production of 4'OOO additional units of Mift...,......,......... $ I 'OOOAdditional advertising expense required to sell 4,000

additional units of Mift ..r............................,.......r..........,..... 5r0OO

Additional income from dropping Tift from product l ine andconverting capacity to production of 4,000 additional unitsof Mi f t . . . . . . . . . . . . . . . r . . . . ' . ' . . r . . . . . . . . .o . . ' . . . . ' . r . . . . . . . . . ' . . . r . . . . . . . . $ 4,ooo

\

Clppter2l

E2l-e (Goncluded)

(21 Montreal should consider whether dropping Tift from the product line willresult in decrcassd sales of Mift and Lift in the long run. For erampte, ifthe three products ara complementary, customers may prefer to maintainonly those Eouncs3 of supply from which the full product line is available.The present ability to sell moro Mift by dropping Tift may be a short-runcondition. lf this is a concern, the cost of resuming Tift production at alater date should also be considerad.


E21-7Silver Polish

per Jar

Sales price..,... ,.r,,............,............. $a.oo

E21-8

(1) Direct tabor hours (DLH) = 1,000,000 doses to be packagedrequired for the job I,OOO doses per DLH

= 1,000 DLH

Direct labor ($S x I 'OOO hours) ......,..,,,........r.Variable factory overhead ($2 x l,OOO DLH)....,..Administrative expenseTotal traceabl e out-of-poc ket costs.............

Minimum price per dose = Total traceable out-of-pocket costs1 ,

= .sPlo9?= = $.ooel rOwr.r rvuu

$ .4o2.50

.30

s3.20Contribution margin . . . . . . . r . . . r . . . . . . r . . . . . . . r . $ .80Opportunity cost from further processing rather than

sefling Grit 332 (7/D4 r ($2.0O - Sl.60)).r,....,.......,...,........ . loNgt contribution margin per unitr.................................,,.... !_ ,tg

$5,600 avoidable fixed cost + $.7O = 8,OOO, the minimum number of jarsof silver polish that must be sold to justify further processing of Grit g37.

s5,OOO2,OO01,OO0

_gg,ogg

1 - -

; \

sfl

E21-e (Concluded)

l2l Marimum allowable =return belore tarog

Marimum rsturn after tares

Chwter2l

$ g,ooo5rOOO

$13,O0O1,95O

(l - Tax Ratel

'Og !! 'O9 = -t5 or 15o/o= F Z o i = s o _ =

r r o i r

Total traceable out-of-pocket costs (from requirement (1ll--r-....FiXgd laCtOry OVgrhgad ($5 f I rOOO DLFI r.........o.r.....'..'..r...........

TOtal lUll COStrr....................o.............r...........t..............t....r....t....

MaffmUm allOWable f6tgfn 115% f $1 3rOO0),...,........r.............o'..

(3)

TOtal bid pr iCe.. . . . . . . . . . . . . . r . . . . . . . . . . . . . . . . r . . . . . . r . . . . . . . r . r . .o. . . . . . . . . . t . . . . . . . . . t . . . S14t95O:

Bid price per doso =

sl4.950 = s.o1495= iFociFoo

The factors that Hall Company should consider before deciding whetheror not to submit a bid at the maximum allowable price include whetherHall has orcass capacity, whether there aro available iobs on which oarrl-ings might be greater, whether the marimum bid of $.O15 contributestoward covering the frxed costs, and whether this iob could lead to moFoprofitable business with Wyant in the future.The competitive environment of the industry should have been consid'ered by Wyant Memorial Hospital to determine whether or not a lowerprice could be obtained through competitive bidding. The hospital shouldalso have considered that cost-plus pricing is not usually viewed uni'formly by prospestive bidders, is difficult to compute lor products pro-duced in smass' quantity, and is better suited lor products that areunique and high priced.

(4)

Total bid priceITO0O,OOO doses

Chapter2l

v3-0

Franchlse fee collections per dayAverage gllss rovenuag per tnanchise per dEl|............,..........Numbgr of franchiSOS............'..................o........o...o..r..............

Total gnoss rBvenu8.......r.....o......'..............r'............orr.......r.r... s2lO,OOOx .25Franchisg fgo .............

Avgragg daify franchise tge collgctiofls ..........,.,o.......,..r......... _$ 52r5qg

First proposal (i.o., use local messonger service to collest and mait checksonly):

s 52,500x2sl05,OOOx 15%

s 15,7502O,OOO

55',t

$ soor 42O

Average daily franchise fge coflegtions ,.....,..........,...............oDays savgd.,...r,..Total float saved.,,,,.Beforg-tar opportunity cost.'..o...."..........,r.......ot.r..........r..,..r.Avgragg annual savings.... . ' .r . .o.r.. . . . . . . . . . . . . . . . . . , . . . . . . . . . . . . . . , .r. t , . . .r. .Lgss cost of mgssenger sg| ' icg... . . . . . . . . .r. . .o... . . . .r. . . , .r.r, . . . . , . . .r. . .Annual reduction in income if pmposal implemented.............

Second proposal (i.o., use local massonger.service with a lock-box arrange-ment):

a a a a a a a a . r a a a a a a

_s (4,2sO)

s 52,5OOx5$262,5O0x 15o/o

$ ss,375

22,25O

Average daily franchise fee colteetions ....,....,r...........,.,.......D.Days saved. . . . . . . . . . . . . r . . . . . . . . . . . . . . . . . . . . . . . . r . . r . r . . . . . r . r . . . . . . . . . . i . . r . . . . . . . . . . r ,

Total f loat savgd r.. . . ' . . . . . . . . . . . . . . . . . . . . . . . ' . . . . . . .r. . . . . . . . . . . , . . . . . .Before-tar opportunity cost .. ! , , . . . . . . . . .Average annual savings.... .r. . . . . . . . . .r. . . . . . . . .r, , , . ,r. . . . . . . . . .-. . . . . . . . . . . . . . .Less costs:

Messenger service $2o,ooo2,25OGompensating balance ($iS,OOO r i5yo)...,......

Annual increase in income i f proposal implemented... . , , . , . . . . . . $ l?Jr5

I

-

' H

552

Ezl-10

Silk-gcreen method:Prepare tcraon 17 1/2 hours r 2O'OOO circuit

bOafdA f $6.5O).........r.................................r...r.Scrsen patterns (1/3 hour r 2O'OOO circuit

bOafdC I $0.501......r.........................r................

TOtal cO8t.................rr.........

AZ-17 pnocess:Labor (1t2hour x 2O'OOO circuit boards x $6.50)Monthly cost for materials and equipment

rental gnd operation ($41000 r 12|.............--....TOtal GC)3t.. . . . . . . . . ' . . r . . . . . .r .r . . .r . . . . . . . . . . . . . .o.. . . . . . . . . . . . . . . . . t .

Annual savings from changing from silk-screen methodtO thO ngW AZ-l 7 prOCes3.......... '....r.........r.r.....t..

$l95,OOO

#t,333

$ 65,000

48,OOO

Chagter2l

$238,333

113,OOO

$125,333

Chapter2l

E27-11 APPENDIX

553

Let Mr = marking board as.semblod in automated assembly departmentMl = marking board assembled in labor assembty depirtmentTe = tack board assembled in automated assem6ly departmentTr. = tack board assembled in labor assembly oepirtmlnt

Me Mr- Tr.TrSalgs price per unit........o.................. $60.OO $60.00 S4s.oo $4s.ooLess yariable costs:

Direct materials:BaSg ...........r..... $ o.oo s 6,00

14.50 14.508.25 8.25

2.OO 2.OO.60 3.OO

2.45 2.453.30 2.253.OO 3.OO

6.00 S 6.007.75 7.7s4.25 a.25

2.OO 2.OO.60 3.OO

2.45 2.453.30 2.253.OO 3.OO

CoveringFrame .r.................r....................

Direct labonCutting Departmeftt.....,...........,.Assembly Departmellt ...............

Variabla factory overhead:Gutting DepartmeDt.....,.......,.r.,.Assembly Departmellt ...........,...

Variable marketing expens€s ......,.Total variable costs per unit....r.,...

Contribution margin per 1111it.............$40,1o s41.45 s33.35$19.90 $18 .55 $11 .65

@$10.30

Objective function:

Maximize CM = $f g.gO Ml + $i8.55 Mr- + $t t.OS Te + $iO.3O Tr-

Subject to:.2O M^.05 M^.15 MÔ M ^

.O5 M^1 M ^0 M ^

+ 2 0+ .25+ .15+ .O2+ O+ 1+ 0

Ml +Ml +Ml +

M ! +

Ml +Ml +

M t +

.2O Tr + .2O Tr. < 3O,OOO DLH In Cutting

.05 Tr + 35 TL S 4O,OOO DLH In Aesembly

.15 Te + .i5 TL s 25,OOO MH In CuttingO Te + .02 Tr s 1,5OO MH In LaborAssembly

.05 Tr + O Tr. S 5,OOO MH In Automated AssemblyO Tr + O 7r, ) 3O,OOO unlts eales contract1 Tr + 1 Tr- > 3O,OOO untts salee contract

. 5r1

E21.12 APPENDX'

O U

504 E

40

30

20

1 0

ABcD

Let L = the number of legal padsR = the number of rcgular pads

Objective function:

Maximize CM = $f 8L + $12R

Subject to:2OL+ lORs9OO

Chaptor zt

9 0 R

= S O C M= $a1o CM= S9OO CM <- Maxlmum CM= S72O CM

minutes labor(2 people x 7.5 hour r 60 minuteslboxes daily marimum demand(3O0 boxes per week + 5 work daysl

L+ Rs 60

0 ' r0 20 30 40

= ( L = 0 , R = O ) == ( L = 4 1 1 , R = 0 ) == ( L = 3 0 , R = 3 O l == ( L = O , R = 6 0 ) =

50 60

(S18Xo) +(318x4tt) +(318X3o1 +(S18Xo) +

70 80

(312X0)(312X0)(812X3o)(sl2xso)

L + R ( 60 boxes dai ly ' demand

10R s 900 minutes ol labcr


Qppter 2l

E21-13 APPENDIX

Graphic method:

555

Objective functlon: Marimize CM = 4 a + 3 bConstraints: Za + b

a+ba

When: a = Ob = 11000 Timeb = gOO LeatherNo b Buckles

I 'OOO Time8OO Leather4OO Buckles

When: b = O:a=5OOe=gOOa=4O0

s

't200

1 ' t 501 1001 0501 000950900850800750700 -

650500550500450 -

400' l(n

300 -

250200150100

4 n

Time Constra int

,Bocxle

Constraint

Leather Const ra in t

A- l l l_1 "s0 I 1s0 l zso l sso l aso l sso l oso i zso i aso l gso l r oso l l l so r l 25o r100 200 300 4oo 5oo 600 7oo Boo 900 1o0o .1100 1200 1so0

Tlying values at each of the corner points,A=(a=o , b=o); 4(o) + 3(61 =g OCMB = (a = o--, b= Boo); aioi + giabot = $2,aoo cMc = (a = 299, p = 600); cizbol + sioooi = Sz,ooo cM <_D = (a = 499, p = 2oo); cicooi + sieooi = Szizoo ciiE = (a - 4o0, b = o); nicooi + 3iot

-' = Sr,ooo cii

Optimum combination woutd be 2OO a and 600 b2OO (4) + Goo (3) = $2,6OOCM

:

sffi

E21-14 APPENDX

Graphic method:

cost function is: Minimize C = $3x + $4y

Subiect to constraints: 4r + 8Y7r+2y

1.51 + 5Y

3 . 5 (1 , 3 . s )Product a Constraint

r . 5 *I

0

Possible solut ions:

q

,

Chapter 21

Uge 1 ton of xand 3.5 tonr of Y tora mlnimum totalcost of 317

,,',K%w

Points x v 3x 4y 3r + 4y

A o 7 o 2A $28B 1 3.5 3 14 t7c 5 1.5 15 6 21

D 10 o 30 o 30

-+ OpUmum golut lon:

Chapter2l

E21.15 APPENDIX

Subject to: x,gr.2x

557

+y+ .5y+ .5y

Let x = pounds of hardwood per batchy = pounds of softwood per batch

Minimize: C =.sOX +,4OY30.000

FEASIELEAREA

5.000

Gorner point B values:,2x + .5y= 6'000.9r + .5y= 12,OOO.ox = 6,000

Corner point C values:.2x +.5y = 6,000

x + y=24 ,OOO

I

]

x = lo,ooo Mult iply by 2z,4x + y = l2,oooSubst l tu te: - r+ v=?9.99o.2 (lo;oobJ+ .sy = 6,ooo '6r

= ff33,5y = 4,ooo Substitute:y = 8,O0O .2 (2O,OO0) + .5y = g,OO0

.5y = 2,OOOTryrng vatues at each of the corner points:

y = 4'oooA = (r = o. v = 24,ooo!; $.19!

-ol+ s.4o (z4,ooo)=$ g,soocB = {x=1o,ooo, y= sioooi i i . :q i ro,oooi * i .oo( s,ooo}=$ 8,200 c+c = (r =2o,ooo, y = e,oooi i $.soizo,oooi. i .co ( 4,ooo)=$1i,600c

optimal solut ion: 1o'ooo pounds of hardwood per batch and groo0pounds of softwood per batch resurts in a cost equar totho Sg,2oo standard-per batch

.2r . .5y>6.000

x . P o u n d s O t H a r d w o o d D e r B a l C h

5g Chagtar 2l

PROBLEMS

P21-1

(il The dlfferenUal cost analysls for the Glasgow Industries' order forI 20,O0O valves lollows:tncremental revenue ($18 per unit x 120'000 units) $2'160'000lncremental costs:

Variable costs:Dlrect materials ($5 per unlt r 120'0OO

unitsl $ 8OO,OO0

' 72O,OOO

36O,OOO

120,OOO

$1,8OO,OOO

48,000 1,848,O0O

aCCeptlng thg Offgr. . . . . . . . . . r . . . . . . . . . . . . r . . ' . ' . . . . . r . . . . . . . . . . . . r . ' . . . . . r ' . . $--XZ'99O

The mlnimum unit sales price that Sommers could accept without reduc'ing net income must cover all differential costs (i.e,, tho variable costsplus the out-of-pocket fixed costs). Therefore, the minimum sales priceper unit would be:Variable cost per unit:

Dirgctmatgria|s.. . . . . . . . . . . . , . . . . r . . . . . . . . . . . . . . . . . . . . . . . . . $ 5.ooDirect labor .. , . . . .r. . . . . i . . , . , . .r, O.OOVariable overhead ($6 per hour r 112

hour per unit)........r................................... 3.OOShipping grpgnse....o... . . . . . . . . .o... . . . . . . . , . . . .r. . . . . . . , 1.O0

Additional fixed cost per unit:Supervisory and clerical costs (S12,000

total cost + 3OTOOO units!.,........................

Direct labor (96 Per unit r 120'000U nltSl . . . . .o.. . . . . . . . . . .o.. . t . . t . . . . . . . . . . t t . . . . . . t . . . . .

Variable overhead (36 x 1/2 hour perunlt r l2OrOOO unlts).. . . .r. .".D.... . . i . .oo...

Shipping expense ($1 per unit rI 2OtO00 unitS) ..o...........................t.....

Total variabl g costs .....r.............r. ' ......Fixed costs:

Supervisory and clerical costs(12O,O0O + 3O'OO0 per month x$1 2r000 pgr month|...............r............

Incrsment to pretax profit as a result of

tzl

.40

L

Minimum uni tsales pr ice. . . . . . . . . . . . . . . . . . . , . . r . . . . . . . . r . . $15.40

Clnpls2l 559

P27-7,(Concluded)

(31 Sommers Company managament should conslder the following factorsbefore accepting the Glasgow Industries orden8' The effect of the apeclal order on Sommers'aales to other cus-

tomers at tfie rcgular sales price.b. The possibillty of establishing contactg in the internaUonal market-

place as a nesult of the sales to Glasgow Industries, which couldlead to market erpanslon.

c. The wear and tear on machinery that might increase maintenancoand rcpairs and result in a premature replacement of the machinery.

d. Possible retaliation by competitors who may learn of Sommens'deep price-cutting actlon, including risk of a price war that woulddisrupt rcgular selling prices;

P21-2

(tl lmpact on net income if APA accepts bid:Submittgd bid... . . . . . . .rr. . . . . . . . . . . . . . . . . . . . . . . . . . . . .r.o.., . , . . . . .rLgss salgs commissiofl . . . . . . , . . . , . . . . . . . . . . . . . . . , . . . ,rr. . . . .r.

Ngt sa1gs. . . . . . . . . . . . . . . . . . . . .o . . . . . . . . . . . . . . . . . . . . . . . . . t r r . r r . . . . . . . . .Variable costs:

Dirgct matgria|s......r.,,................r...........,......... 32gr2OODirgct 1abor. . . r . t . . . . . . . . . . . . . . . . . . . . r . r .o . . .D. . r . . . . . r . . .o . . . . . r 56rOOOVariable factory overhead (3O% of

dirgct labor)* . ' . .r . . . . . . ' . . . . . . . . . . , . . . . . . . . . . . . . . . . . .o... . . . l618OO

"J:*J";Tl',f,*:::::::::::::::::::::::::::::::::l02,ooo

$ 46,50018,600

$ 27,9OO'The lactory overhead rate is Sooh of direct labor dollars. Based on theerperience for the fiscal year snded September-3o, the rate due to the.variable factory overhead cost is gO% ($2,ZSO + $7,5O0).

(21 Framar would realize a positive contribution margin of $1z,goo beforeincome tax, increasing net income by $7,380, if the $l 27rooo counter-offer is accepted:

$t65,000| 6,5OO

s148,50O

$127,OOO12,7OO

sl l4,3oo102,OOO

$ 12,3OO4rg20

g__L389

ffi Chapter 2l

Pzl-2 (Concludedl

(31 The lowest price that Framar could quote on this machinery withoutreducing lts net lncome ls $1131333 ($IOZ'OOO + ,9f. This bid woufd coverexactly the sum of the variable manufacturing costs ($I OZ'OOO| and thel0oh sales commission, thereby resulting in no increase in contributionmargin and no income tax.

(41 lf Framar Inc. accepted all of its work at prices similar to the $127,OOocounteroffer, a loss situation could result. The analyses for requirements(11, (2), and (3f vvero short-nrn decisions In situations In which Framarhad ercess capacity. Consequently, the analyses concentrated or cover-ing only tha differential variable cost. However, wfien all orders ane con-sidered, Framar must cover both its variable and its fixed costs. A bid forall work similar to the one for $127r0OO would not cover Framarbfixed cost.

Galcufations restating the most recent entire fiscal year on the $127,000price/variable cost relationship aro as follows (00Os omitted!:Salgs ($l StZSO x 1.2451'. . . r . . . . . . . . . . . .or. . . . . . . r . . . . . . r . . . . . . . . . r ' . . . .o. . . . . ' r . . . $1 91609Lgss COmmiSSlOl l . . . . . r . . . . . . . . . . . . . r r . . . . . r . . . . . . . . . .o. . . r . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1r961

$17,648Expenses (per income statement for year ended 9/3O|:

Variable cost....... $15,750

$15,75O

Markup on variable costs = 9127'OOO - 7.245s102,OOO

Clppter2l

P27-3

56't

(1t An analysis comparing costs of each alternative:(al Sehedule overtime hours:

May

otrertime HourcReouircd

I 'OOO2rOOO2,OOO215OO2r50O2,OO0

l2,ooo600

_13€oo

JuneJuly

f n efficien cy fa ctor (25%r....r...,t..,Total hourc tequi1ed...,.....r.....

AUgUSt .r.............o... ' . ' . ...

Septemb91.,..................Octobgr ............r...r....,.,

In efficien q (5oh1....-.....Total overtime houns.....

Additionaf labor costs (72r8oo r $6 r f .5)...........,..r........rRglated fringe bgnelits ($l tgrcoo r .10f .........,.o.......,.r....Differential cost if overtime is scheduled ...D....,,.....,........

(b) Hire temporary workers:Ertra hours ttquiled ....

a a a a a a a a a a a a a a a ,

a a a a a t a t a a a l a t a a a a a a t

$t 13,40011,34O

$124,74O

12,OOO3r00o

15,000xSos 9O,OOO

Hourly rate for temp orary workgrc.....r....,.....t.....D.........D..Differential cost if temporary workerc hired.......,............There ano no fringe benefit costs with temporary worker€.

Y

, g

w

721-3 (Continued)

Clppter2l

(c) Erpand labor foree and rchedufe level productlon of IO,OOO unitsper monthl lf the labor force le expanded co that level productioncan be gcheduledr Valbec will produce lOrO0O dolt house unitr permonth, requiring 5'ooo dlroct labor houn. This meanr that 12,oooadditlonal regular dlreet labor houra will be roquired during zoawith no ccheduled overtime or need for temporary wortens, archown below:

RequlrementsMontfr

_Iggoo5,OOO4rOOO

_l'ooo

$72,0OO14,4OO

Annual

Diroct labor hours required

Regular time (12,O0O x $Ol

Forgcast production In units.o....o................

Former direct labor constraint in hour!......Addltlonal regular hours In zOa ..,...............

Direct labor costs:

Related fringe benefits ($72,OOO x .2O|...

AddiUonal inventory carrying costs (referto the achedule of lnventory levelr below):Average monthly inventory with

overtimg or temporary wortol'tl ..........Average monthly inventory with level

productiort .,r,................DiflerenceEsUmated annual cost of carrying

Inventory per unit ....r.............r...,........Differential costs if level production is

U S g d i . . . a . . . a . . . a . . . . . r a a a a . r . . . . . . r . . . . . r r . r . . . . . . . . . . . . . . .

13,846

16,231

l_?g,ooo6O,OOO48,OOO12,O0O

$86,4OO

21385

sqgn85

2,38,5

r31

drapter 2l

P21-3 (Concludod)

Lsrt Dayof MonthDocrmbcr.Jenurry 8.............Fcbnrery

Aprll'..-...........................May.........-rt..o...............!r

JUlf ....r....-r......r........r...rr

Scptcmbcr.........r.....,......Octobcr ....,............Novtmbcr.......................Dcccmbcr.

Avcngr pcr montficrcludlng Etotyrtock (divldo by t3)......

Salaty rtock ............,....,.

Schedule of Inventory Lsvels

5A?

Urc Ovcrtimcor Tcmporery

Workerr'I,OOOI,O0OI,OOO8,OOOIrOOO

1O,O0O12,OOO12,00013,00o13rOO0t2,oooI,O0OI,OOO

128,099

9,8494,O00

Lcvcl Produetion

Bcolnnlnar Prcductlon Salcr

qooot0,ooora(X)ol4'OOOl6,0ool8,ooot8,000f 8r0o0t4,oool l,ooo8,OOO6,OOO

to,ooolo,oootoroooto,ooolo,oootoroool0r0o0lO,OOOto,o0o1O,OOOIO,OOOlO,OOO

IrOOOI,OOOI,OOOIrOOO8,000

IO'OOO12,00012,OOOl3,ooot3,ooo12,OOO8,OOO

Endino'

8,OOOlo,ooot2,oool4rooo16,OOO18,OO0lg,ooo16,000t4,oo0t I ro0o

IrOOOo,oooI,OOO

159,000

12,2314,O00

Avcragc monthlyinvantory 13,848 unitr 16,231 unltr

'Ercludcr ralcty rtock of 4,OOO doil hougc unltr.

Alternative (c) affords the lowest estimated differential cost.(2', There ane several noncost factors, or factors that are difficult to cost,

that Valbec should consider in conjunctiorwith the cost analysis of tirethree alternative courses of action. Relevant factors include:(al Consider the degree to which Vatbec's negular tabor force is wilting

to work overtime.(b) The tabor force may plan on ovsrtime pay as part of their normal

work situation. lf wages should be reduced because overtime is notscheduled, due to the use of temporary worke6 or an expandedlabor folee, then the morale of the tabor force coutd deteriorate,laborers might seek wo$ elsewhere, laborers might seek base payinc*ases, or the tabor force might decr€ase its efficiency.(c) Overtime does provide a certain degree of flexibility, should salesvolume and patterns not occur according to the fo#casted plan.(d) lf the labor force is to be expanded, Valbec must be sure there is anadequate supply of skilled workers.

I

a iIl

i - lI

I

P274

Group I production costs: "Matgrials ($9.27 + 251 .....................i......"......t....o....o...........Labor (S19.48 t2.51 + 251........Variable factoly overhead ($eee x 150Total variable unit cost......o.....o.....r.,..o,.r

Total variable cost (S2.5Ol x (3 + 2l r 2'OOO1..........t.............Additional fixed factory overhead .......

Gmup ll productlon costs:

Chaptor 2t

.131,948

1.422

$ 2.501

$25,01O..........r.. 7 rO4O

Materlals (93.9O + 20)LabOr (($tZ.l6 X 2) + 2O!....r.r.....'.....r...r..........r.....................Variabfg factory ovgrhead ($t.ztO r 150%1................-.,......

Totaf variable cost (t03.22O x (2 + 2 + 4l x 2r0OO1..r.....,....,....Addit ional f ixgd factory ovgrhgad ,.r. . , . . ,r. . . . , . . .r. . . . . . . . . .ro... . . . . . .

Sales ($54 x 2,000)

Group I costs:Outside suppliers:

Dissection knives ($.f,ZO r 3 r 2,OOO)...,......,.Scalpels ($3.SO r 2 x2rOOOl oo,..........,.,.,.......r

Group I production costs (computed aboye|..,..

Group ll cosG:Outside suppliers:

s32,05O

Scissors ($g.OO r 2 r2,0O0l

$

TWegzgrs ($2.97 | 2 x 2rOOO)..........r..............Clamps (Sg.za r 4 r 2ro0o1........i.........,...o.....

Group ll production costs (computed above|....

$19,2oo13,2OO

q?2,40O

sl2,ooo11,88026'24o

s5O,120

957,520

s 32,O5O

,1801.2191,824

9__3.22O

951,52OIrOOO

s57,520

$116 .O00

i$ 32,05O

\l so. tzot '

/6rOOOI,OOO

12,OOO6,OOO

s l14 ,170

s 1 .830

Clppter2l

P214 (Goncluded)

Production of Group I compononts fc l_ess costly than purchasing fiom outsides.and purchaslng G-,u-p lt componenta lrom outsiders ls fess "o"tiv

i[;;;;;:'fng them. However, tho estimated operating profit contribution ls only marginaf-ly posluve ($1'830 or 1.60/o of the eifimated iares fi-gure) anJ"nv oecossaryaddiUonal marketing cost ralated to the dlssection Instrument sets would fun-tlrer reduce the erpected protit contrlbuUon.Present annual fired factoly overhoad ls ercluded from the differentialcost analYSls' because these costs wllf be Incurrad whether oinot the setsalt marketed.

Based on the information assombred by the study team, the proposar haslittle merll

II

-

ffi Chaptor 2l

P21-5

lll The lowest prlce Chemco should bld for a one-Ume speclal order of2STOOO pou;& (25 totsl would be $?4r75O, whlch is equal to the variable

costs ol the order, determined as follows:

Diroct materlals:on a one-tlme-only speclal order, chemlcals used In manu-facturing the firmb main product have a relevant cost oltheir expected future cost, repnesented by ttre currentmarket price per pound. chemicals not used In currentproduction have a relevant cost of their value to the firm.CW-3 (4OO pounds per lot r 25 lotsf = 1O'0OO pounds'

substitute cN-S on a one-foFone basis to its total of5,5OO pounds. The relevant cost iS the salvage valuo.. s

The remaining 4'5OO pounds would be CW-3 at therelevant cost of $.gO per poundr its expected futureC O s t a a a r a r a a a r a a a a a a a a a . a a a a . r a r r . r a a a . a a a o . a a a a a a a a a t o a . a a a a a a a a a . . a a a a a t t . a a a a a "

JX-6 (3OO pounds per lot x 25 lots r $6O per pound) """""'MZ-g (2OO pounds per lot x 25 lots x $1.60 per pound) .."""BE-7 (1OO pounds per lot r 25 lots r ($.eS cost per

pOUnd - $.lO handling pgf pOUnd|).. . . . . . . . . . ' .r . . . , . . . ' . . , . . ' . .r ' . . . .

TOtal d i fgCt matgfials COSI'.. . . .". . . . . . . . ! . . . . . . . . . . . . . . . . . t . . . . . . . . . . . . . . ."

Direct labon(60 DLH per lot r 25 lots) = l,5OO DLHBecause only 8OO DLH can be scheduled during regulartime this month, overtime would have to be used for theremaining 7OO hours; therefore, overtime is a relevantcost for this order.l r5OO DLH x S7.0O per DLH at regular time lilte."'.. '...""'r"'

7oo DLH r $?.50 overtime premium per DLH..""""""""."

TOtal d i fgCt labOf COSt, . . . . . . r . . . ' . . . . . . r . . . . . . . r . . ' . . . . . . . . . . . . r . . . ' . . r . . . . t . . . r

Factory overhead:This special order will not increase fired factory overheadcost, and it is not an order for a continuing proiect thatshoutd contribute to the Fecovery ol fired factory overhoad.Thereforo, the fixed factory overhead is not relevant, andthe retevant factory overhead charge is the variable factoryoverhead rate.1,5OO DLH x $2.25 variable factory overhead rate $ 3,375

Total differential cost ol manufacturing this special order andthe minimum bid price for the order....- g1/99

500

4r05O4,5OOIrOOO

1,375

sl8,425

s1o,5oo2,450

$12,950

Cluptx2l

P2t €'(Concludod)

l2l Calculation of the price for rccurring orders of 25,OOO pounds (25 lots)follours:Dirsct materials:

Because of the posslbillty of ftrtura orders, all raw materialsmust ba charged et thelr erpected future cost, reprasentedby the currrnt market price per pound.CW-3 (4OO pounds per lot r 25 lots r $.gO par pound|..,......,!t6 (3OO pounds per tot r 25 lots r $6O pgr pound|.,.........MZ-9.(2O0 pounds par lot r 25 lots r $l,gO por pound)........BE-7 (l OO pounds per lot r 25 lots r $,65 per pound).:.........Total dirggt matgrials cost .........-...........t......o........r..........D...,

Direct fabon$oo/c ol the production of a batch (goo DLt{) can be done onregular ume; the remaining 600 DtJl direcuy ciause oveFtime to be Incured and aru, thus, a retevani cost of thisnew prcducl1r50o DLH r $7.0o regular rate per DLH..........,.r,.................

600 DLH r $3.5O overtimg premium per DLH....D................Total direct labor cost

Factory overhead:All new prcducts should contribute to the racovery of firedfactory overhead as wert as cover ail variable costs. There-fore, the overhead charge woutd be thE full overhead rate.l t50o DLH r $8.0o per DLH..r.. . . . ' .r . . . . . . . . . . . . . . . . . . . . .r. . , . .r, . . , .r. . .r. .

Full manufacturing cost.. ' . . . . . . ' . . .r . . ! . . . .r. . . .r. . . . .r. . . . . . . . . . .r. . . . .r. . . . . . .r.Markup ol 4O"/o on cost ($44rZ2S x .4O)Fufl manufacturing cost plus 4oo/o rf.arkup........,...!....r,.,........,...

fi7

$ I,O0o4r500g,oo0IrE25

s23,125

$lo,5oo2rlOO

$t2,6OO

$ I,O0O

$c4,7ZS17.ggo

$62.6{s

5ffi

P27-6

Sales:5O,O0O r $1025,OOO x $lO

Variable erpenses:Direct materials:

5Ot0OO I $2..........r......rt..... '......25,OOO r ($2 x.94)5O,OOO x ($Z x.O6)

Chapter zl

Present AdditionalCaoacity Capacity Total

$5oor0oo$25O,OOO $75O,OOO

$loo,ooo$ 47,OOO

(6,0ool $l4t ,oooDirect labor (94 x'1.O51......Factory overh gad...r.....,...r.

$4.2oL30

JifJ"s,:ffi : . : : : : . : : : : : . s*

Total variablg gxpense,......o,o....

Contrib ution margifI.,........,.............o........

Fired expenses:Fa ct o ry ove rh ga d'........ r.......r....... tMarkgtf n g erp gnsg ................r.r....Increaso in advertising

(511 ,O0Ox.1Ox.251Additional plant depreciation:

3260,000 + 25 yrs. = $1O,40OS 84,OOO + 20 yrs. = 4r2OO

$14,600

S14,600 r .95 r =

Total fixed expense

$184,5OO

$113,O0O

I 72,5OO1 1 ,000

$ 15,oOO

275

13,870

$ 83.500 S 29.145

$_298O_q S 36.355

275,OOA

12,00o137,5OO

6,00o412,5OO

$ 87,5OO

11,275

13,870

s112.64s

$__85,955Operat ing incomg . . . . . . . . . . . . . . . , . . , . . , . . . . . . . . . . . . . .

'57o allocated to inventories.

The expected operating income from additional capacity ($36,355) should beevaluated as to whether or not it is a satisfactory return on the additional capi-tal investment of S344,OOO ($2OO,OOO + $84,OOO) (See Chapters 23 and 241.

I

U

Chapter 21

P21-7(1)

569

MAru( CORPORANONBoston Plant

Gomputation of Number of unlts of Xoff Requlred ro GoverFixed Factory orerhead and Frxed Regional promoilona! costs

Total fOOOs omitted) per UnltSa|9s....,..r....,...1 a a a a a a t a t a a a t a a a t a a a a a a a t a a a

Variable factory costs:Difgct matgrials ..ro..,r.....r.r........r.r........o..Di rgCt labOr ' . . . . . . . . . . . . . . . . r . . . . . . . . . r . r . . r . . .Dt . . . . . r .

Variable factory overhead.......r...............Total variablg cost ..............r......ts....t....o,

Contribution margi11,..................rr..r..r....,....

s2,200 s2o

Units required to cover fixed factory overhead and fixed regular promo-tional cosls:

$ sso $s660 g440

s1,8502rO2O1,390

s5,250s2,150

slsss

s 85O $t,0001,O2O tr,000

680 700

sl,g5oS sso

(21 MARX CORPORATIONschedule of Budgeted contribution Margin and operating Income

lf Boston Operations Are Expanded Under plan A(OOOs omlttedl

Total Boston Ghlcaqo$7,400 s3,4OO g4,OOO

l .

S3,4OO Boston satesff ixt t -

54,000 Chicago salesffi

s2,55OS Bso

s2,700$1,300

s1,600320

S 7oo220

$ 9oo100

$t ,920$ z3o

310

s s20 $t,ooos 300

168-$ (70)

142.s (8o) s(2121 $ 132

$31O Home office cost = $tAZ

x $3f O Home office cost = $f Og

r l' l- l

-

Chapter 2l570

P21-7 (Continuedl

MAR)( COBPORANONSchedule of Budgeted Contribstlon Margin and Operatlng Incomelf Boston Plant [s Closed and Ghlcago Operations Are Expanded

Under Plan BChicago Operations

(ooos omittall

S 3 l O E a . . . a a a a a a a a a a a a a . . . . a a . r a a . . . a . . . . . . r r . . . r o . . a . . a a a . . a . a . a a r a . . . .$8,2OO

Variable factory costs:Diroct matgria|S........i...r..r....... 'r....r..r.'...r.r Sl t55O

DirgCt labOr ..r...........o..r............................. 1t55O

Variabl g factory ovgrh gad............"""""""

Total variable factoly GoSt'.".........""""""

GOntf ibUtiOn mafgi l l . . . . . . . . . . , . , . . . . . . . r . . r . . . r . . . . . . . . . . . . . .

Fixed cosB:Fixgd factory overhgador......--.....'.....-..o.-... $ 95O

Regional promoUonal cost............,...r.r...... 200

Total fixgd CoSt ...............'.......................... Si t 1 50

Plant Opgfattng InCOmg ....r,........r........,....,.r...... $ 865Allocatgd homg office cost........r....................... 3lO

operating income...,.........r.".o............r.............- $ 555

I ,O85$4,185

Chapter2l

P21-7 (Concludedf

57'

schedure "r B"dsm"??ff ?iH:lI oo"ratins Incom elf Boston Plant rs ctosed_and Royarty Agre",n;;t rs contracted

Under Plan G

Revenues;Sal eS .. . . . .r . . ! . . . . . .rr . . .r . . . . .ROyalt ieS ... . . . . . . . .r. . . . . . . . . .r. . . . . . . . . , . . . . . .r. . . . . . . . .

Total rgvgnu gs .................r........t..r......r...Variable factory costs:

DirgCt matgrials r................,..rr......r......,..DirgCt lab or,....,.....r,..........o.......r.t,,r...o,...Variablg factory ovgrhead.....r..D............r.Total variable factory cost ...........,..o..,....

Contribution margirt...........................,.......rFixed costs:

fixe-d fa ctory ovgrh ga d ..........,.......r..o.....Regional promotionat cost,....,.......,........Total firgd cost .,.,......r..r...,....r.........o.r....

?llnt operating income and royafties.........Allocated home office cost..,..]...........,.....,.Operating income (toss) ..........,....

$4,O0o

$4,ooo

$t,oooITOOO.

700

$z,zoo$1,30o

$ eoor06

$t,ooo$ 3oo

310$ l ts $12s $ f lo t

. . (o0os omittedlTotal Boston Chiceoo

$4,ooo275

$4,275

$l,oooI rOOO

700

$2,7OO

$1,575

$ eso200

sl , t50$ 42s

310

$27s$27s

$27s

$so100

$rso$1 2s

5n Chaptor zt

P21-8

Source: lrhnagoment Aa unting @npus Rofr,tt(lttonNale, N.J.: lnstihrte of Managemonl Accountants (br'

,rrrV N"ri*al-Associsttn olAccoontants), Spring, 1987), pp.4-5. Gopyd0ht Spring, 19f3fl'W Inslihtlo of

Management Accountants (tcrmerly Natirnal Associatbn of Accountants). All rights reserved. Beprinted by

permisskrn.

Ler Gtass Gompany should imptement the pnoposod plan to punchase silica in

the dlscount quantitr rne annuat savings from implementauon of the plan

would be 9{8rl5O, determined as follouts:

Annual cost with quantity discount plan:

Interest orpense to flnance carrying Inventorp-

Average level of InventorY In tons:Ler Glassb roquirements.........' I OIOOORequirements ol other manufactuners

(3OOTOOO + 12 months + 2| average +(3O0'OOO + 12 months * 2)minimUm).'........."tt"""o""'t"' 25tOOO

PfiCe pgf tgn With d|SCOUBt.......o..'.................o.

TOtal ayefage COSI Of inVentOfy..... '. '..... '..r.......

Ratg of intgrgst to carry inventory..............,....

Gost of purchasing Inventory (42ofooo tons x $1'801.....""'o"' 756tooo

Additional costs to carry additional inventorp[ -abor. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . r . . . . . . . . . , . . . . . . . . . . . . . . . .o ' . . . . . $ZOTOOO

Administrative expenses................................. ' I OrOOOLost revenue from rental of warehouse

required to store additional inventory..,...."' 1O,OOO 4O'OOO

$799'150Less novonuo from the sale of silica to other

manUfaCtUfgfs (3OOTOOO tOnS X $2 pef tOn|... . . . . . . ' .r . . . . . . . . . . . . .

AlnUal COSI Of qUantity diSCOUnt p13fl. ' . . . . . .r. . ' . . . . . . . . . . . . . . . . . . . ' . . . . .

Annual cost without quantity discount plan:Interest expense to finance inventory':

35,OOOr $1.80$g3,ooox 5% $ 3,150

6OO,OOO

$199,150

1O,OOOx $2.OO$ 2o,ooo

rSoh

$ l ,OOO

24O,OOO 241,OOO

Average level of inventory in tons......... '.........rPrico per ton without discount"...................... ' .Total avgrage cost of inventory r.......,.....r.........Rate of Intgrgst to carry inventory '.....-............Interest oxpense ..............

Cost of purchasing silica (12O,OOO tons r 32) .'.".

Annuat cost savings available by implementing quantity discountp|an....... ............................ s (41,85O)

Ii

-

Chagter2l573

oor lo; ieNE9

8E : 5-5-;; 8 g8e ?- itS'E 8 rrnr q go 'o N EEB x rr c j i r :_o8g =Ea5_- :3ep x qXE6 g {D{r6riois xx[ E =

. = N l - r -

5; €S; i l o o

i i qg i i P s6 r/)E .g ; X

_6 E,5 F E IG E t r = o . Aa l

O _ Oo 9 0 0

AFB E 33Eir ;'*BItE t|l=s8; E;5qsF gsggii gi$x E. : x E. :

55s .. EEiE Hi5 s B?;[ €$g € glrg f;s; E fg8

3333331 3l 3llg ' c o N \ r l @ f - l l

v, 'o

l;l;ll

o lo to lo to lN I

- l

N I6t

3tlol

f;fl-glU

#Fl *3F3Fqflfl_s.ss.ag.al g.t ailr gR $$l Fl$llro | ,of ,o-lfs lol 6l l

o lo to ldlo lN IN Ie l

wolol+tlgtr.l

Hr $l :'F33lflFilssggssisisil,h

F '*l;l;il

Loct(9G

oootc

t-oEL(!GttEgoo

: o

- : o- yv ! oo

oo 5

d q ,-o

qtz

tCDc

!tcnt

aoEDnlU)oo

n

oooCD

c(L

gE

sFC.9ooo

o lo l0 lo lo lN IF lrhl

!.ui o

38? c Do.=I ' tE Eo bJ t lt r Co q tiEv, -cO O9o(t dl

.s bg( ! q 5 l

E89l

oI

N Ao.3

I

- \

-

Chapter 2l

P21-g (Concluded)

l2l Net revenue Potential:The cofored paper brochurg prcvides the most net revenue if it can bemailed at bulk mail rates; however, there is a risk of earning only thethird best revenus if it must be mailed first class. The glossy paper' ifIt can be mailed on time, produces tAe second largest amount of netngvsnue; however, the ranking slips to the fourth best net revenue if itis mailed late. The plain paper bulk mail brochure has a substantiallylower net levenue than any of the other alternatives'

lmage as a well-run organization:The image would be based upon comparison of two things related to

. the mail campaign-the quatity of the brochure (appearance| and thearrival of the brochure immediatety following the radio and televisioncoverage. The glossy brochure, if it arrives on time, would probablyconvey the best image; however, there is some risk that it would notarrive on a timely basis. The colored paper brochure would be the nextbest in terms of guality, but the bulk mail alternative raises some riskof a timety receipt of the brochures by the potential donors. The plainpaper brochure would be ths poorest quality, and because it is to besent bulk mail, it runs the additional risk of not being delivered on atimely basis.

lmage as a fiscally responsible organization:The image of fiscal responsibility will be based on a comparison ofpotential donorst perceptions regarding the cost of the brochure andcost of the mailing. The glossy brochure mailed first class may be per-ceived as an extravagance by the potential donors. At the otherextreme, the potential donorc may conclude that the plain paper bulkmail alternative is an indication that the organization is unwilling todevote adequate financial nesources to the fund-raising efforts.

The foundation staff must weigh the consequences of each of the alter-natives and the risks associated with them on the three criteria to selecta specilic alternative. The staff has good information on net revenuepotential, but needs to obtain information on the effects of the quality ofthe brochure, the timeliness of the mailing, and the type of mailing onpotential donorst opinions as to what is a well-run and fiscally responsi-ble organization.

Chapter 21

P2t-t o

(rl JUSTA CORPORATIONQuarterly Income Statement

575

Total LocalSalgS . . . . . . . . r . . . . . . . . . . r . . r . . . . . r . . . . . . . . . . . . . .

Variable expenses;Manufacturing (Schedule A1....Marketing (Schedule B).....,.....

Total variable expensg .....r..Contribution ma1gi11,....,..........r...Separable fixed marketing

expense

(3)

Local Saless4OO,O0O

300,000300,00o

a a a a a a a a a a a a a

(4)Local Variable

Exoenses (21x f3ls12 ,000

6,0006,000

824,0O0

(6)Regional VariableExoenses f2l r f5l

s3,ooo2,0002,O0o

37,ooo

$ 63O,OOO24rOOO

$ 654,000

I 346,000

Locals6O,OOO

24,OOO

_$36,oog

mTotal Variable

Exoenses f4l + l8l$15,000

9,0009,00o

a31,OOO

Reoionals45,O0o

7,O00

S3B,ooo

Netmarketcontr ibut ion. , . . . . . r . . , . . . $ 3TSrOOOGommon fixed expenses:

Manufacturing ($l,Of O,OOO -sg2orooo).............o.........,....

Admin istrative... . . . . . , .r. .r. . , . . . . . . . ,

Total common fixed expenseOperating incomg r..r. . . . . . . . . . . . . . . . . .r

(1)

ProductABc

(21

%322

(s)Regional

Sales

$100,000100,0001OO,0oo

Separable fired marketing erpense computation:Total marketing expense.............r..,..t.............,Less variable (schedule B),..................... i ........Fixed marketing expenss...,........

sl,3oo,ooo $I 'OOO,OOO

$ 82O,OOO3l ,ooo

$ 851,OOO

I 449,O0O

74,OOO

$ 19O,OOO52,OOO

$ 242,ooo

l_lg3,ooo

(r) el (3) l4t (sl (6) mLocal variabre Regionar Regionar variabre Totar varrabreProduct % Local Sales Exoenses f2l x f3l s-ales Exoenses l2l r (5) Exoenses l4l + {glA 60 $4oo'ooo $24o,OOO $100,o0o s 60,000 s3oo,oooB 70 3OO,OOO 210;OOO IOO,OOO 7O,OOO 28O,OOOc 80 3OO,OOO 180;OOO roo,ooo BO,OOO 24O,OOOTota1.........

9630,009 $ro,ooo S82o,ooo

36'000 38,OOO$ glo,ooo s 65,000

ReqionalS3OO,OOO

sl9O,OOO7,OOO

s197,OOO

sl 03,OOO

I

Y

576 Chapter 21

P21-10 (Goncluded)

l2l No. Ttre regional market should not be dropped. The regional marketsates are adequate to cover variable expense and separable fixederpenso of the regional market and contribute $65,000 toward the recov-

ety of the $242'OOO common fixed expense and operating income.

lf the regional market is dropped, the local market contribution marginmust absorb its own separable fixed marketing expense plus all common

fixed expense as shown below:'

Contribution margin o... . .r. . . .r.r. . . . . ."""" 'r S 346,000

Separable fixed marketing expense """ 36'000

NgtmarkgtcontributioJl........................ $ 31Or00OTotal common tixgd expgnsg.....o........." 242r0oo

Operating incomg.....,. '.....t........r..."" 9-994OO

Thus the corporation operating income declines from $133'OOO to56g,OOO. This $65,0O0 reduction is the amount of the contribution lossfrom the regional market.

JUSTA CORPORATIONQuarterly Income StalE!!en.!

(31

ProductA

ProductB

Productc

Variable expense:Manufacturing

(Schedule A)'..................Marketing

(Sch edu le Bl'.--.....1.-....

Total varlable expense ...

Gontributlon margin

Fixed erpen3es!Manufacturlng .......-,MarkeUngAdministrative ..........

Total fhed expense ......

Total

$1,30O,ooO sso0,ooo s4OO,oOO s4oo,ooo

s28O,OOo s24o,ooo$ 820, ooo

31,00o

3 851,000

$3oo,ooo

15,000 8,0oo 8,00o

i?15,ooo s288,ooo S248,OOOs152,oOO

(4)

3 449,000 3185,O0O s112,oOO

s loo,ooo74,00052,000

3 31O,ooOOperatlng Income..... _!._19t,009

iSchedules A & B are in tlre requirement (tl solution.

When the new product reptaces Product G, the minimum contributionmargin per guarter must be at least S162,000 (the present contributionmargin of Product C + SI O,OOO of new fixed expense) in order for JustaCorforation to be no worse off f inancially than it is currently. This contri-but ion margin wi l l s t i l l provide operat ing income of 3133'OOO.

Chapter 2l 577

, cAsEs

c27-1

(f ) $21 per unit, a total of 9210,000 for 10,000 units, is the lorpest price thecompany could accept without reducing budgeted income of tne comingquarter' At any lower price, the speciat order woutd add mono to costs than itadds to rcvenues, rcducing the coming quarte/s budgeted openating income.The price is calc-ulatod to equat ttre retevint costs of filling the special order.First' calcufate the following per-unit variabfe costs of $ubrunits:

Budgeted manufacturing costs for the quarter. . $5,400,000Less: Budgeted fixed co_st (3 mo. x $i,ioo,ooo; -i,zoo,ooo

Budgeted variabfe manufacturing costs . . $i,200,000Budgeted vo lume of regularbus iness. . . . . . . . . + 100,000 uni tsBudgeted variabte manuf. cost per regurarunit ffi

Budgeted selling & admin. costs for the quarter $3,200,000Less: Budgeted fixed cost (3 mo. x $900,000) 2.700.000Budgeted variable S & A gosts for the quarter $ S0O,0OOBudgeted vo lume of regularbus iness. . , . . . . . . + 100.000 uni tsBudgeted variabte S & A cost per regulatrunit $ S.0ORegufar sales commission (S/o of $9i pricel. . . . i.SOBudgeted s & A cost per unit, exct. commigsion i-,jEA

The case states how much to add to the regular direct materiat anddirect labor cost rwo other adjustments must be calculated: (1) The saw isneeded for onfy two months, At a rental of $S,S00 per month, its cost totafs$11'000 for the speciar order, or $1.i0 p"r *ir 1zy'v"ri"ot" oerrr"ad perspecial unit is tripte that of a regutar unit, and the case states that this appliesto total variabre overhead and to the variabfe overhead of the cut_offoperation. The totat variabte overhead cost of a regurar unit is 92.50, andvariable overhead-of the regular cut-off operation is a part of that total, so theentirc s2'50 is.tripled for th6 spec-iat oruer t.nJ no separate adjustment ieneeded specifically for the cut-off operation). il" sz.bo ig inctuoed already inthe budgeted costs of regufar rllF, so the adjusbnent needed to cost thespeciat order is an addttina, $s.00 p", ,nitJ6lSr.ro) _ $z.so1, or a totaladjustment of $50,000 for the special order.sufficient capacity must be availabte for the special order. (othenrise,accepung it wourd require cancering

"oru ,"gulr oroe4s), and anopportunity cost aqual to the tost contribuuoi margin on cancetfed orderswould be a rplevant cost of the special ord"r.i Crinoing-rn""t in"

""p""ity ielimited to 60,000

S.OuLar units per monilr, "o

ih" quarterrs capacity is 1g0,000regutar units, and the budgeted y9rlt" "r

roo,Job regurar units reavesavailablo capacity equivatent to 80,000 reguilunit". Each special-order unituses triple the grinding time of a regul"t ,init, "o-io,ooo

special units requirethe equivarent of 30,00b regurar uni6' gri"Jiig time, we[ within the 80,000regular units of avaifable cipacity.

t ', l

- lI

578

eI-1 (Concluded|

Cttptor2l

Special OrderRelevant Gogt Analvsig

Total oer unitUnits .... . _IO.0AARelevant costs of special order:Regular manufacturing costs. . . , $120,000 $12.00Regular selling & administrative', costs, excluding commission.. S,0OO .50Additional costs of special orden

Direct material. 20,000 2.OODirect laborVar iab leoverhead. , . . . . . . 50 ,000 S.00Saw rental (2 mo. x SS,S00) 11,000 1.10Metallurgisfs fee 4,000 .40

Relevant costs of special order. . SA0-A09 $Zl,qA

The relevant cost of $21 per special unit, although considerably higherthan that of a regular unit, is far below the regular selting price of $g0. This iabecauge the company's costs are predominately fixed costs, plrsumably dueto high levels of automation. The company will try to negotiate as high a-priceas possible, but the $21 figure should be regarded as an absolute minimum.

(21 Nonquantitative factors to consider include the foltowing:(a) Effects on regular sales

ls the customer who placed the special order a now customer? lf so, willthey become a regular customer provided the special order is successful?will that customer always demand large price discounts?Will (or does) the customer use a targe quantity of the regular product andpay the full regular price lor it?Will regular customer-s leam of the speciat, low price? lf so, will theydemand rarge price discounts on their future orders?Will this special, low price start a price war that can erpde regular prices?(b) Effects on empfoyeos and communityWill the special materiafs and equipment affect levelg of safety,environmentar poilution, and noise in the company,a prant?will emptoyees and managers gain valuable new ikills and knowledge byproducing the special order? (ihe case states that this ig the company,sfirst opportunity to produ-ce and gell thia particutar type of producl)Will the special orderrs affect on totat production volume enable thecompany to avoid laying off valued employeee in the coming quarter?(c) Strategic effects lmJrtet share, grou/thl innovation, etc.)Does the speciaf order product rapresont a new or fastgrowing market?Are there leaming-curve effects oi other advantag"" t" 6r g"in"a fromadding the new type of product sooner rather ttrair tatereAre prices and profit marg. ins on thig type of product expected to improve,or is it a mature product likely to decline goon?

Chapler2l

czl-2

579

flt continuing to obtain coverg from lts own Denver cover plant woufd aflowBlg-Auto to mafntain rtg cunpnt fever of coniroior", the quarity of thecoverE and the timing of therr delive-p,--Keep-i-ng the Denver coyer ptantopon atso alfour Brg-Auto mon. nexiuitityif,"n-pu*hasing tie ttve.inglrom outslde suppli-r* BIg:Auto coutd niore e"llty alteit"ne'l-oJ"ring",deslgn and change the quinuues pro.duc"+ ""p""iaily

if rong-term con_tracts are raqulred with outside suppliers.lilg-f,*r should also considerthe economic lmpact that closing denver coier will have on the Gomfnu-nlty and how this might affest ail-autot otrr"i op"rauons in the region.In addiuonr nolationgwith the woikforce at ;th"; plants could be affectedby nenvs of a ctoslng and layoffs at Denver C;;;;.(al The fofrorving recurrini annuar buogeteJto"t" can be avoided byclosing the Denver Gover plant(21

Matgria 1s.a.o.r........r.............-..r....................o.o......r r....,.Dirgct tabor.r......r...r.........o.r.......r

Indlrgct costs: ,-..,..r.r................... '..o....D....

supgrvisfot ....'...-...r......or....r......or.....r gSroooroooIndirAct labor .. .r. . . , . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4TOOOTOOODifferentiaf pension erpense

(S4'00orooo-$3r0o6rooo;.. . . . . . . . . . . . l rooorooo grooorooo

(b}Thefo l |owingn9cut7 ingannua|budgetedcosts" , 'no .#the decision to close the Denver Cover ptant:Depreciation--+quipment... .............. $ S,oooroooDepreciation-building .........r................,............,,...... 3,oooroooContinuing pension erpenses 3,OOO,OOOPlant manager and staff ......corporate a-rocation...*.....::::::::::::::.:::::_.._.::::.::::::.:: 3:333i3S

s*,r*pgqThe depreciation amounts are not retevant to the decision becausethey represent portions of sunk costs tnat are being written off dur-ing 2oA. Three-fourths of the annuar pension e)(pensa ($3,ooorooo,is not relevant because it wourd

"ontinr" wiettrer or not the ptant isclosed' The arnount for ptant manager and staff is not relevantbecause vosito and his it"n rrorrd continue with Big-Auto andadminister the three remaining ptants, ir,":"orporate arocation isnot relevant because this represents non-avoidabre costs, incurredoutside Denver cover, that a?e assigned to the prant.

sl2,ooo,ooo13,O0O,00o

II

- iI

- I

I

Chapter2lfio

C21-2 (Concludedl

(cl The following nonrecurring costs would arise due to the closing of

the Denver Gover Plant:Termination charges on cancelted material orders

($IZTOOOrOOO i157ofr..........,....,....r........................ $lrSOOtOOOgnipfoymgnt assistSl|C€..............'..o....'.r.................... 1 tOOOtOOO

$t'tt"Pgg

These two costs are relevant to the decision because they areincurred only if the Denver cover Ptant is closed. Gonsequently'they can be avoided if the plant is not closed'

(d) ltems not specifically mentioned in the case that should be consid-ered by Big-Auto before making a decision inc|ude:

(i) The disposal vatue or alternate uses of the plant(iii Any income tax implications; including the income tax ratesr ' '

appticaUle to gain or toss on the sales of plant and machinery'cost of losing-depreciation tax shields, any depreciation andinvestment tax credit recapture, etc'

(iiil Outside supplierb prices in future years'

fiui Gost to manufacture coverings at the Denver Cover Plant in

future years.

Chapter 2l

c21-3I

(1) Factors Calco shoutd consider, before entering the consumer productsmarket, follow:(al the productb contribution margin and break-even point(bl consumer demand for the proOua in the short nrn and long run(c) the companyb ability to produce the quantity needed in the short

and long run(dl the companyb lack of erperience in the consumer market and theneed for different marketing techniques for products sold in theconsumer markets(e) quality of the competition(n the impact of the decision on employees, and the effect of thediversion of calco management effo-rt on total business(21 Alteration ol linanciaf forecasts for use in deciding uetnreln the atterna-tives:

58t

(3)

Galcors

|ncomebeforeincometaI.. . . . . . . . . . . . . . . . t . . . . .W,ff iooAdd fired manutacturing cost:

lOOrOOGunit lgvgl . , . . . . . . . . . . . . . . . . . . . . . . . , . . . . . TSOTOOOl2Oroo0-unit lgvgt .. . , , . . . . . . . . . . . . . . , .o... . . . . . .

- ' - - - 9OOTOOOAdd share of current Marketing Depart_

ment,s management costs . . . . . . . . . , r . . . . . . . i OOTOOOoperat ing margin r. . . . . . . . . . . . . . . . , . . . , . . , . . . . , . . . . . r $1p?5poo $l proroooInstead of a difference of $35,000 in391ne FffitGalco, the new catcuration shows a $ts,ood operating margin(S-1'O75,O0O - $f 'o9o,Ooo) favoring Jasco. Ths financial difference isslight' adding significance to the reliability of the financial estimates aswell as to the rerevance of nonquantitative factors,9ng :rl only speculate about tire reliabitity oi ttre two proposars. Thefact that Jasco has experience in the conslmer market is significant inpredicting success or fairure of the proje"i;b; not necessariry for theestimates for the expected benefits of itre i""ii"ting program or theassociated costs. lt shoutd be remembered that the Jasco people recent-ly lost their jobs and pa.v be twing especiaily hard to rook good.similarly, Gatcob Marfeting'Department may be biased in its esti-mates in an effort to avoid eti-mination of existing emproyee positions.--L"nytTturing costs are the same because citco will manufacture theproduct' The sares price differs an_d an

"ipr"n"i[n of the s% ($5 per$t oo of saf es) differencl il il Jates

"orili"Joi ,ate is not given.calcob inclusion of assigned Marketing oepartm"nt management costsis perhaps an attempt to hedge i ts est imates.

I

Y

Chapter 2l

C21-g (Concluded)

(41 Significant nonguantitative factorg that Calco's management should GOrl-sider inctude:(al impact of the decision of Galcors present work force; 1.o., moralo

tosg of lamaining employees if layoffs happen versus the ability ofretained employees to work effectively in the new market'

(b) abiliUec and expectations of employees from Jasco, if Jasco isselected,

(c) the possible diversion of Calco top management effort from its reg'ular tine of business, if it does not hire experienced talent.

No single item may in itself be important enough to warrant selectionof one atternative ovsr anothea The information presented in the caso is.limited and does not give an indication that any one nonguantitative fac'tor is moro important than any other. However, any one of the factorccould be sufficiently significanl For instance, the impact of eliminatingCalcots Marketing Department positions, if Jasco is acquiredr ls perhapsthe biggest single nonquantitative tactor for consideratlon. Since ttresenew omployees displace existing Calco.employeesr the managementpnocess coutd be hampered by serious human relations problems.

c21-4(1) (a) The product-line income statement for Precision Gauge Corporation

is presented on a full costing basis and, consequently, is not suit-abte for analysis and decision making. The fact that tho statementdoes not distinguish between variable and fixed costs hinders anyanalysis of the impact of volume changes on profits. ln addition' thestatement does not distinguish between costs that are directlyrelated (traceablel to a product line from those that are sharedamong all products.An atternative income statement format that would be mone suitablefor analysis and decision making would incorporate the contributionapproach to costing, Expenses woutd be classified in terms of vari-ability and controllabitity; such as, variable manufacturing, variableselting and administrative, direct fixed controllable by segment (dis-cretionaryl, direct fixed controllable by otherc (committed)r andcommon fixed. The common fixed costs would not be assigned tothe product lines bscause such an allocation would be arbitrary. Thecontribution approach is mono suitable for analysis and decisionmaking because there is a meaningful segregation ol costs.

(b)

Chapter2l5&3

C27-4.lGonUnuedf

(21 (al The suggested discontinuance of the T-gauges would be cost effec-tive, but the suggestio;rs retating to Dgiuges and p-gauges wouldnot be cost effectivo. These conclusions ano based on ttre foilowingquarterly differential cost anallsis.

Unit salg8 prico......r...t.....,....D.r..,...P-gause @

$2oo $18o

D-gauge

seo

(b)

Unit varlable costs: -

Dirgct materials r.............,..o....... $f Z S gl S 50Dirgct 1abor..................r......r...... 20 40 60Variable factory overhead.....,..., gO 45 60Selling expenses.......r................ 4 .;O 10Total variable costs.................r.. $7f qF Slgo

Unit contribution matgin........,...,.,. $f g $ ?4 $ olncrcase (decrease| in units

suggested:D-gauge ($SOOTOOO sales +

_ $gO price| 1.5O....o..,.........,.... x (5rOOOIP-gauge ($l,600,00O sales _r

$2O0 price) I .15......,............. x lr2OOT-gauge ($soo,ooo sates * $tgo

pf iCef I ' l .O,, . . . . . . r . . , . . . . . r .o. . . . . . . . . X (5rOOOltncrease (decrease| in total

contribution margin ................... $ (95roool $ ggrgoO $ oDecrease (incrcase) in fired costs:D-gauge, $10o,oOO - $2O,00O.... Bo,oOoP-9auge.... . . . , . . . .r. . . . . , . . . , . . . . . . , . . . . . . . . (1 OOTOOOIT-gaUge ... . . . . . . . . . . . . . . . . . , , . . . . . . . . , . . .r. . , 4OTOOO

lncrease (decrease) in segmentcontributioD ..........o.,........,......... $ (ls,oool $ll1,2ogl _S 4o,oog

Yes. The president was correct in etiminating the T-gauges. The T-g?.ug€ sales price coverc only lts variabte cost and doeC not con-tribute anything to the .ecoviry of fired tactory overhead o,' p-ro-tion costs. Thus, the T-gauge tris a zeno contribution margin.

I

-

- rrt

Chapter2l

C21-4 (Concludedf -

(cl Yes. The president was corect in promoting the P-gauge line ratherthan the D-gauge line because the unit contribution margin and

' Econtribution margin per labor dollar is greater for the P-gauge linethan the D-gauge line, determined as follorlrs:

D-qauqe P-qauge b

Unitcontributionmargin(see(a)1......r............. $19,OO $74.OOContribution margin per labor dollan

$19 contribution margin * $2o labor..o..o.... .95 v974 contribution margin + $4o labor r.......o. 1.85

However, the presidentb decisions regarding promotion expense donot seem well conceived. The decreased promotion on the l)-gauge

' line and the increased promotion on the P-gauge line do not pro-duce sufficient contribution margin to offset the promotion costs.

(dl No. The proposed counse of action does not make effective use ofPrecision's capacity. The 15% increase in production volume on theP-gauge line will not require all of thE capacity that has beenreleased by discontinuing the T-gauge line and reducing the

u

D-gauge line by S0oh.

(31 Yes. The non-quantitative factors that Precision should consider before it ' -

decides whether to drop the T-gauge line include:(a) Customer relations-the sale of D-gauges and P-gauges may be

related to the sale of T-gauges (i.e., Precision may neLd a complete ' -

l ine of gauges desired by many customers in order to maintain salesdemand for D-gauges and P-gauges).

(bl Labor relations-reducing employment may create labor (personnel)problems.

nt

ClWter2l

C21-5 APPENDIX

(11 Let r = rolls of commarcial carpetV = rolls ol resldential carpet

Heavy duty fiber constraint 80r + 40y = 42,OOO lbs.Regular fiber constraint: 2Ar + 4Ay = 24,OOO lbs.Solving by slmultaneous equations:

80r+ 4Oy = 42,0002Ox+ 4oy = 24,OOO60r = 18,OOO

r = 3OO rolls of commercial carpet80 (300) + 4gy = 42,OOO24,OOO + 4ty = 42,OO0

4Oy = t I 'O0Oy = 45O rolls of residential carpet

Leastan cannot manufacture these quantities of commerciat and residen-tial carpeting, because the direet labor constraint will be erceeded:Labor constraint 15r + 15y = lO,5O0Using the requircment (lf solution:

r5(3001 + 15(450) = 17r25o, whlch exceeds the direct tabor hourconstraint of 1O,5OO by 75O hours.

Linear pnogramming is a mathematical model for solving two or moneunknowns in two or more equations. Linear pnogramming is used todetermine a mir of products that will marimize the contribution marginor minimize costs by identifying the inputs, outputs, and their relatedassumptions and limitations (constraints) and combining them in themodel. Linear programming can be used to alfocate limited facilit ies andresources among their many alternative uses in such a way that optimumbenefit is derived from their utitization.

585

t2l

(3)

I

II

ffi

C21 -5 APPENDIX (Gonclud edl

Chagter 2l -

(41 Commerclal ResidentialSalgs prlce per unit.......... '.,.o............r.............r.r $lrOOO $8Og '| +

Less variable cost Per unit:Hearry duty fibgr........................o.r.,...............r $ 24O $120RegUtar fib€1..'.........r'...... '............................. 40 80DirgCt labor... . . . ' . . . . . . . . . .o... . . . . . .o... . . . . . . . . . . . . . . . . . . . . . 1 50 I 50

Vafiablg faCtOfy Ovefhgad.......,r...,...........'..... 90 90

1.r . . . . . . . . .o . . . . r . . . . . . . . . . . . . . . . r r . . . . . r r . r . . . . . . . . . . . . . . . . . . . . . . $ Stro S44O

Contribution margin per unit................ '....o....... 9-199 -3360

Let x = rolls of commercial carpety = rolls of residential carPetc = pounds of scrap of heany duty fiberd = pounds of scrap of regular fiber

Objective function:Maximize CM = 480x + 36Oy + .25c + .25d

Constraints:8Or + 4Oy + c = 42r00O pounds of hearry duty fiber2Ox + 4Oy + d = 24rOOO pounds of regular fiber15x + 15y s 1O,5OO direct labor hours

Chapter 2l

C27.8 APPENDIX

fi7

The linear programming modol starts with an objecuve or goal to beachieved aubject to a set of limiting factors, calted constraints. The lin-oar pnogramming model allours the usor to optimize (marimize or mini-mlze| the objecUve function subject to tha constrainG. The cantralassumption ln all linear pnogramming models In linearity. The linearityassumption means that the objective function and the Constraints in lhemodel can be expressed in the form of linear equations. The constraintscan be in tha form of strict sgualities, upper bounds (less than or equalto constraints)r and lower bounds (greater tAan or equal to constraints|.Linear pnogramming methods are applied mainty to allocation problems,1.o., allocating scance nesourcos among atternativo usas according toaome objective. The scarco rosourcas for a business firm may includepersonnel, material, equipment, or capitat. The objective fun&ion maytake the form of profit marimization or soma other measuno of desiredbenefiL In this particular cass, linear pnogramming is appropriatebecause the firm of Miller, Lombardi, and york hasan o-uieciive in theform of profit maximization subject to restricted r.sou.cis, i.e., staffavailable in the short run is restricted in each area.The following data woutd be needed to develop the tinear programmingmodel for Miller, Lombardi, and york(a! Total management hours availabte in each category of service pro-

vided.(bl Total hours avaitable for each category of service provided by each

type of staff person, i.e., erperienced and without experience.(cl Number of microcomputers and hours avaitabte(dl Bill ing rates for management and staff.R. Oliva should consider the foltowing alternative objectives before mak-ing the staff allocations:(a) Maximize the computer hours available(b) Minimize total variablo costs consistent with maintaining a high

level of professional service.(c) NonquanUtative objectives such as the preferences of individuals in

management to be in specific areas of service.

(11

l2'l

(31

(4)

o2)-1. Effective phnnhg and control ol capital exP€n'dilureg are impodant because:(a) financbl risk is increased by long'lerm

conmiUnentr;

)22-2.

(b) lhe magniludc of capilal expendilures isaubstantial and the.penaltier for unwirdecbbnr arc us0ally severo;

(c) deciebnr mEde in this area provide thesupporting slruclure for operalhg activFlies of he firm.

Exampler ol opportunities ard templations lorunethbal behavbr in the caPilal budgeting areainclude:(a) prossuro applied to the cosUmanagerial

accountanl by superiors or associates toc i rcurnvent the capi la l expendi tureapproval process, in order lo gel a pelprojocl approved

(b) pressure to wrile olf or dovalue asselsbelow their lrue valur in order lo jusiilyreplocemenl;

(c) exaggerating the expecled economicbene l i t s o f a pe t p ro jec t i n o rde r l oi nc rease the l i ke l i hood o f ge t t i ng i tapproved.

The ccUnranagerigl accountant has an obliga-lion to the company to make sure thal the corn-pan/a legilimale polbies and procedures ar€not circumvented and lo make sure that thedata used in the evaluation of capilal expendi-lure proposals are as reliable and realistic aspossib le. l l an e lh ica l v io lat ion occurs, thecosVmanagerial accountant should f irst discussthe perceived problern with his or her immedi-ate supervisor (in order to clarify the signilFcance of the problem and idenl i fy possib lecounres of aclbn) and lhen with the individualor individuals hvotued. lf lhe individual involvedis the accounlanl's irnmediale supervisor, lhe.cosVmanagerial accountanl should consull thenext higher level of management. l l the prob.lem cannot be resolved through discussicn, thecosvmanageria! accountant is obligated to prq.vide a full disclosure ol all the details to theoxocu l i vos respons ib le l o r eva lua t i ng andapprovh g capilal expenditures.The econornic lile of a project ir the perird dur-rng tvhbh il produces eamings. lt need not, andprobably will nct, be equal to the physical lile c/the related asset(s). lts length depends primari-ly upon lhe obsolescence of the product ormanufaciuring procoss involved or the natureol the product itsell. Managers usually f ind itqutle diflicull to estirnate econornic life becauseil depends upon future evonts ov€r which theymay have little or no control.

1))-3.

CHAPTER 22

DISGUSSION AUESTIONSA22-5. Gash oulflows lhat might be expecled for a

capilal oxpondilure includo:(a) purchasc prbe of one or rnore assets (or

a down paymont il prcpe@ b purdrasedm irslalknont);

(b) conslruclbn pericd inlerest and taxes ilthe prcperty b behg concructcd;

(c) machinery and equipmenl letup cost,padiculady if mehhery behg evaluatedutil izeg a more advanced lechnologytfran that currently h use;

(d) cornPuter software development cost if acornpulgt aided design, cvnpuler auednranufacturing. or tully cornPutet integrat'ed manulacluring system is being pur-chased;

(e) increased annual maintenance and/orpower costs resulting frorn more canplFca ted o r t echno log i ca l l y advancedrnachhery or equiprnent

(0 lease paymenls, if some or all of theassets being acquired h the project areleased:

(g) increased working capital reguirements(inventory, cash on hand, receivables,payables, etc.) may hcrease as a resullof increased business generated by thecapital projecL

Q22-6. Cash inflows that might be expected fronr ecapilal expenditure include:(a) rov€nu€s lrorn additional business gen'

erated by the project;( b ) cos t sav ings c rea led by t he cap i l a l

expendilure that resull in a reduclion ofcash outl lows (8.9., maintenanco sav'ings, labor savings, reduced inventoryrequirements resul l ing t rom reducedsetup l imes, etc.);

(c) retention of market share that mighl havebeen losl il the capilal expendilure werenol made (par t icu lar ly in the case ofadvanced techno log ies t ha t imp roveproducl qual i ty , reduce costs, prov idemanufactur ing l lex ib i l i ty , € tc . that canprovide a competit ive advantage lo lhofirm wilh the techrology);

(d) salvage frorn the sale of the property atthe end of the economic lile c/ the capitalProlect.

A?2-7. Sorne nonquantil iable benefils lrom investingin advanced manulacturing technobgies, suchas ClM, FMS, and robotics, include:(a) improved producl qualily (abilily to meet

closer production lolerances and at thosame time reduce lhe variabil ity in pro-ducticn output);

)224.

588

fuptsP

(b) docmrod nrrchhr trtup and rhorlor, nrmufaclurhg aTcb tirnra (wt bh prot ido

lho company with tho ability to adjustoutpul quanlity end veririy guickly tomo. l rapid ly changing cur lomcrdornane).

A2,4. Tar &procbtion ie guito likoly to diffcr fronrboofc dcprcciatbn boceurc thc cool r.coverypodcrd ueod fc tex purpooor ir. uaually rhorfcithan tho oconornic lilr ol tho'assrt uted forfinarcial @unting purp6er. Abo, an ecccl.onled melhod of depnciation is tlpbaly usedfor tex purpo..r, whrrosr tfre iiraigirt-tinrmolhod ir npn c{trn trcod for bok purpoer.

Q2-5. Book dopreciatbn lhorrH not be cqrsiJored inulindhg tho friun c8!h tbr, lrrn a projoctbelurr bok deprcciatinn har no elbcl qrlho rnornt or linhg of cash tbm.^)2-1O. Tax deprccidbn stould bo conrbered in ostFmaling lho luturc cach llowr frorn a proioctbocaurc lax deprccialion reduces tarsbloircqno and, thereforo, tax liability. Tax depro-ciation rccult! h a tar ravhgs, i.j., a reductionoa tar liability that is a caqh outtbw. The timingof cssh flnn's lr affoctod by the tar d€p.scratbornothod and thc recovory period used-

@2-11. Fiunciel accotrnthg dora sro nol mtirely ruit.ablt for ucc h evaluathg capital expendilurepropocsb becauss:(a) Finenciel accounling uter lhc accrual

buir. Capilal oxponcftun docioicrr 9en-rrally rety on eslimales of cash flows,ra lher lhan r lvcnues and expenlre sdelermined sr the rccrual basis.

589

(b) Firancial accounting ir desiTrcd b rner-ruro prricdb oamings. Capilal rrpondi-turc eva.luatbn is cqrcomed with tho lileof a given prc,iecl, rrhiclr reldorn corro-rpqrds to urual accorrrting p.rkdr.

(c) F inancia l tccounl ing mcalunr thorccultr of oporati<xrr ol a ccrrpany or aaegmenl of a company. Although thirontity romelimrr corrorpondr with rcapital cxpenditun prciect, il b urualtycomposed of rnany interminglod capilaterpenditure prciedt.

(d) Fiuncial accorrrthg capitalizer .p.ndi-lurcr if lhr cxpenditure ir dermed tohavs a futuro rraluo or benefit to the csrrpany. Capitalization ir an attcmpt tomalch expendilurer with revcnue! g.n.traled by thoao rrprndiluroc. Whtnlulun nalue or boncfit cannd bo roliablyrneasured, financial accornthg treats thcexpendituro ar a porlad axpcnla rath.rthan ar an ascel acquisilbn.

o)2-12. Benefitr of folblving up prciect regulls irctude:(a) comparis.on ol actual with projected

resulls to hsure lhat a project b meethgexpecled performance, or taking cofiec.tive astbn or lermhathg a projecl that bnol achievhg expected pedormancc;

(b) evaluation of accuracy ol projcctionrtrorn diff erent depsrtrnerrtr;

(c) improvemcnt of futuro capital projccteslimdes;

(d) mot iva l ion of peraonnet ar i r ing l romknowledge that lolbw.up will occur.

59

E2t2-1

Year ln Unitr Price Cost Margin @SalggI t2,ooo $25 $15 $ro $l2o,ooo2 12,OOO 25 153 12,OOO 25 154 12,OOO 25 15

. 5 12,OOO 25 15

Total net pretar cash lnflowr from 36OO,OOOInltfal cash outflow (cost of asset}r....r........ $55or0ooLesr pretax estimated salvage y?hro.......... (i2s.ooo) 42s.oooExcegs of net pretax cash inflows over cost................. fl.75J9o

v2-2Estimated Unit Unit Unit Net PretaxDemand Sales Variable Contribution Cash lnflows

Year In Units Price Cost Margin f:g- S"l*1 o,ooo $12 $g $3 $ 18,OOO2 8,0OO 12 I 3 24,OOO3 IO,OOO 12 I 3 3O,OOO4 1O,0O0 12 I 3 3O,OOO5 10,0oo 12 I 3 30,0006 1O,OOO 12 9 3 30,0007 1O,0O0 12 I 3 3o,0oo8 8,000 12 I 3 24,OOOI 0,000 12 I 3 18,OO010 4,0oo 12 I 3 12,000Total net pretax cash inflows from sa|es.,....r........r...,.r $r46pOOInitial cash outtlow (cost of machine).....,... $15O,0OOLess pretar estimated salvage va1ue.,........ (15,000) 135'OOOE:<cess of net pretax cash inflows over cost.......,.....,.o. $1 I I rOO0

ChapterZ

E)GRCISES

Estimated Unit Unit Unit Net PretaxDemand Salec Variable Contribution Gash Inflowa

to 12o,0oo10 12O,OOO10 12O,OOO10 120,000

dtWtsz

Year

I23456

Year

EstimatedNet Pretar

Gash Inflowr

$f 5,oo020,OO02O,OO020,OO0l5,ooolO,OOO

8% AnnualPrice-levelloiu"t-g!t

( l +.06) l = 1.060( l+ .06)z=1 .124( l+ .06) r= l . l g i(1 + .O6) r=1 .282(1 + .O6)c=1338(1 + .06)c=1 .419

Price-levelAdiustod Netcast Elgfs 15,900

22,49023,92025,2&20,07014.190

59t

Total price-level adjusted net pretax cashInflows from operaUons

Plug cash inflow from salvagePrice-level adjustln g!|t.............

. $121,700$5,ooo

1.419 7.095

I234567II

10

Total price-level adjustednet pretax cash inflowa $128,795

75.000Larr Initial cash oufftow...,........r...Ercess of net pretax cash inflowr over

Initiat cash outflow,..,........,....r........o... Li3J95

E2249% AnnualPrice-levelAdjustment

(1 + .O9) t=1 .090(1 + .O9)z = 1 .188(1 + .09)a = 1 .295(1 + .09)a=1 ,412(1 + .Og ls=1 .539(1 + .0910=1.677(1 + .O9)z=1 .828(1 + .09)a=1 .993(1 + .09 ;e=2 .172(1 + .oo) to=2 .367

EstimatedNet Pretar

C"sn t"now"

$2o,ooo3O,OOO4O,00o80,o0o60,o0o6O,O0Ogor00o6O,O0o4O,OOO2O,O00

Price-levelAdjusted NetC""tr lnno*s

$ zr,8oo35,64051,goog41720921340

too,82o109,680| 19,58080,98o47r34O

Total price-levet adjusted net pretax cashInflows from operations...............r....o..

Plus cash inflow from salvage. $iO,OOOPrice-level adjustment............. 2.316l

$750,4o0

23,670Total price-tevel adjusted^ not pretax cash inflows ........Lesr Initial cash oufi|ow.....t......r....Ercess of net pretar cash inflows over

Initial cash outflow

$774,O7O25O,OOO

$524,O7O

Chagter22592

fil- !o loooooorool'EgE3lgrgffglFEil

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ClvpterZ

E22-8

YearI234567

(1)Estimatedlnflation-

Adjusted NetCash Inflowa

(21

TarDeprc-.ciation'

(3)TarableIncome(Loss)(tl - (2)

qlo,ooo)(24,OO0)t 1,60037,OOO47,OOO6g,40O6O,OOO

(4',1Tar UabilityWith 4OVoTar Ratea0% x (3)$ (4,OOO)

(9,6O014,64O

l4,goo18,8OO27,38,O24,OOO

59?

(5)Net

After.taxCash Inflows

$ 34,OOO49'6004{i,36045,2OO51,2OO52'04036,OOO

$.?14rOOO2OOTOOO

q!_u,o0o

$3O,O0O40,0005O,OOO6O,OOO7O,000go,0oo60,000

MA6pg S-yearrear Recovoty Rate

.200,320.192.115.1 15.058

DepreciableBasis

$2OO,O002OO,OO02OO,O0o2OOrOO02O0,0oo200,O00

TarDepreciation$ 4O,0o0

64,00o39,40o23,OOO23,O0O1 1,600

gegg,ogg

$40,00o64,0Oo38,4OO23,0OO23,00o11,600

oTotal net after'tar ca$h inflows.,,....t..................,........,.Lesr initiat cash outflow to purchase system,_.ro.,.t......Excess of net after-tax cash inflows over initial cash

outflow .......r..r..................i

t2345I

1.000

w

vJ2-7

Year

Chapter2

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$1O,OoO15,00o20,OOO25,OOO25,O0O25,0OO25,OOO20,OOOl5,0oolO,OOO

l2l

TarDepre-ciaiion'

(3)Taxablelncome(Loss)

(1) - (2)

$ (4,3ool(9,5ool2,5OO

12,50O16,1OO16,10o16,1OO15,5OOl5,ooo10,000

(4)Tax Uabilitywirh 40%Tax Rate

q1,72ol(3,800)I rOOOSrOOO

. 6,440g,UOgr44O

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(1) - (41

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I,O0O6rOOO

9154,OOO

6,OOO

$160,000l0o,0oo

$ oo,ooo

12345I78I10

$14,3OO24,50O17,5OO12,500

8,90O8,9OO8r9OO4,5OO

oo

Total ngt aftErt-tax cash inflows r........................,.........r.....Aftentar cash Inflow from salvage at end ol economic life:

Pretaxcash inflowfrom sa|vage........r......... $1Or0O0Lesr tax payable on sale at 49% tat rate.... 4,OOO

Total net aften tax cash inflowsLesr iniUal cash outflow to purchasg systemo...r..o........o...Erces8 of net after..tax cash inflowg oyer initial cash outflow

' MACRS 7-year Depreciable Tax

Year Recovery Rate Basis Depreciation

I2345678

.143

.245

.175

.725

.089

.089

.089

.045

$lOo,OOOlOO,OOO1O0,OOO1O0,O0O1O0,00olOO,OOO1O0,00o1O0,OOO

$ 14,30024$OO17,5OO12,5O08,90O8,90O8,90O4,50O

sl oo,ooo1.000

Chapter 22

P22-1

Year

595

PROBLEMS

$ 20,000?2,OOO24,OOO19,00015,OOO1O,0OO

(1+.08)(1+,0$)z(l+.08)g(l+.08).(1+.O8)r(1+.0$)c

(3tInlladopAdf usted

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lnflours(1) x (21

$ 21,60025,65230,24024,48,a22,O3515,970

s139,877

(1)

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Inflows

(21

I "r6Jrlce-Love I AdJ ustmentI23456

1.O901.1697.2601.3601.4991.597

Year

9lgg,ogg

(1)Depre-ciable

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$60,ooo60,00060,0Oo6O,O0o60,OO060,000

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Perrentage.200.320.792.115.115.058

(3)Tax

Depre-clatlon(1) r (2)

$12,Ooo19,20011,5206,9006,9003,490

$8O,OOO-

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cost of now mach|nettt.................r..r....r........rr...........o...r.......o,.........r...

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a r a a a a a t a a a a

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(11

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Rate

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Note that year 1 isactually the secondy6ar the old property isdepreciated. Therefore,the recovery rate forthe second year ls usedto compute the amountof depreciation on theold property in the firstyear of the capltalerpenditure proposal.

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.320

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(r)

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$ s,4oo5,44O312641r9551 ,955

986

$17,ooo

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(t l cost to purchage yar,ve gtem from outside supprior($2O per unlt r gOr0OO unitg per yearf .......:.....,..,

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Year1234

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(1) x (21$ 8g2,5oo

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$2,5OO,OOO-

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Year

1234567

$ 7,5OO7r2OO6,9OO6,6OO6,3OO6,OOO6,OOO

$46,90O

(t)Depre-ciable

Basis ofMachine

$4o,ooo40,0oo4O,OOO40,ooo4O,OOO4O,OOO

Ll oo1.2701.3317.4841.01 I7.7721,949

(t)

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(21

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(31Adjusted

Estlmate ofHet Gashlnflows

$ 8,25o8.r712911849,662

1O,14910,83211 ,694

$68,399

(1+.101 =(1+.1Olz =(1+.1Ols =(l+.10p =(1+.10;r =(1+.1O10 =(1+.lO)z =

RecoveryYear

(215-Year

PropertyRecovery

@[email protected]

(31Tax

Depre-ciation(11 x (21

$ 8,0oo12,80O

7,68O4r6004,6OO2r32O

$4o,099

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(t l (31Inflation-Adjusted

Unadfusted Annual 10% CashCash Price-Level Inflows

Year lnflows Adiustment (1) r (21

I $15,ooo ( l + .1o) = 1.1oo Stg,soo2 2O,OOO (1 +.1O)2 = 1.210 24,2OO3 25rO00 (1 +.10)o = 1.331 3312754 25rOO0 (1 +.1O)r = 1.464 36,6005 25,OOO (1 +.1Oll = 1.611 4Or2756 25 'OOO ( l + .1Olo = 1.772 44 '3007 25'OOO (1 +.1olz = 1.949 4B'7258 2O'O0O (1 +.1O)8 = 2.744 42,880I 15'OOO (1 +. lole = 2.358 35'37010 1O,O0O (1 + . l Olto = 2.594 25'940

(1) l2l (3)Tax 7-Year Tax

Basis of Property DepreciationDepreciable Recovery Available

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Contrlbutlon Arnual 696 Margin SavedMargln Saved InflaUon with GIM

Year with GIM Adlustment (1) r (21 '|U

I $20O,OOO (1 +.O6| = 1.060 $212'OOO2 2OOTOOO (1 +.O6!2 = 1.724 224,8OO3 2OO,O0O (1 +.O8)s = l, lgf 238r2OO4 2OO'OOO (1 +.06){ ; 1.292 252r4OO5 2OOTOOO (1 +.06)5 = 1.338 26716006 2OO,OOO (1 +.06)o = 1.419 283'8OO

Chwter2 6 1 1

. GASES

c22-1

Some of the factors that affest the decision of whether or not to delay theinvestment in new cleaning equipment are given below. Each factor can havetwo sides (1.e., delay versus no delay) depending upon the circumstancesinvolved.(al' " " r3l,?Hhiil:1i"J#l: fi:Hl "oT;: " oiu o ns i n s e n e ra r'

Business outlook deteriorating-delay.All of these factors affect the climate for business and should be consid-orgd.

(b) Difficulty associated with acquisition and installation of equipment andtraining of operators.

$f'?' J"#it',H;, I ot d e ra,'

The greater the lead time involved, the sooner the equipment should beacquired so that it is ready when needed.

(c) Extent of operating efficiency improvements.Great-do not delay.Little-delay.

The greater the efficiency, the less it should be delayed because costs

(d) il[ffH:,T:3"T;i3l"H1;T'i:""" not increase'Cost of equipment not expected to increase drastically-delay.Cost ol equipment erpected to inclease drasticalty-do not delay.

Company wants to minimize its initial cost outlay.(e) Dependabitity of present equipment and likelihood of breakdowns.

Dependability is good-delay.Dependability is not good-do not delay.

Company could defer, or have togo ahead with investment due to conCi-tion of present equipmenl

(0 Chance for technological advances in equipment.Good-delay.No chance-do not delay.

lf there is a chance that technotogical advances will develop in the designof the equipment, the company might want to take advantage of the new

, design.(gl Ability to obtain market advantage by providing better quatity service at

- Eame or lower price.Good-do not defay.Poor/neutraf-delay.

Better service means more customers or justifies higher rates.

I

612 Chaptor 22

C22-1(Conctuded)

(h) Gompetitors' plans for obtaining similar equipment and achieving marketadvantage.

High probabili$--do not delay.Low probability-delay.

Company wants to maintain competitive advantage or meet competition.(il Ability to predict timing and increased volume of demand fmm new or

edsting customens.Good-better quality of decision; could defer switch longer.Low,-less reliable criteria for dscision.

The better a company is able to predict new business, the more certain ilcan be of its decision and, possibly, the longer it can wait to make achange,

c22-2

Knight is probably corect in her assessment that the proposed capital invest-ment framework grants too much freedom to the divisions. Neoglobeb long-runperformance depends on its capital investments. While divisions must havesome responsibility for capital investments for the proposed organization stnrc-ture to be effective, corporate management must maintain adequate control todirect the future courss of the firm. Under the proposed frameworlg divisionmanagement controls a substantial portion of the capital budget, and in someyear:i' few funds would be available for investment by corporate management.The present proposal would reduce corporate managementb ability to diminisha product line, and it also would impair managementb ability to have adeguatefunds available for investment in new businesses.

Capital investment procedures should involve both division and corporatemanagements in such a way that division management stilt should be able toinfluence the future direction of the firm. Such procedures might include classi-fication of capital projects into groups, some of which could be approved bydivision management without corporate management study,

An alternative to the Neoglobe capitat investment program might have the fol-lowing features:(a) All proposed investment proiects would be classified according to their

natunHeplacemen! cost savings, erpansion.(b) Replacement and cost savings proiects could be adopted by division man-

agement alone, without approval of corporate management, provided anindividual project did not exceed a specified doltar timit and the totat ofsuch projects did not exceed another specified dollar timiL The doltar lim-its would reflect the nature and size of each divisionb operations.

(c) All oxpansion projects, or other projects that exceed the doltar limit,would be submitted to corporate management for evaluation andapproval.

ClppterZ

c22-3

6 1 3

The process of planning for and ovaluating long-terrn commltments of resourcesis normally relerred to as capital erpenditure planning, evaluating, and controt,or capital budgeting, The capital budget is distinct in that it focuses on thelong-term effect of lesources committed. lts primary objectives arc to providemanagement with (ll a formal process to chart its futura coutlsef (21 a means ofranking and selecUng among altornative nesounce commitments to maximizercturn on investment and (3) I pnogr:lm for ongoing evaluation of extantnesourco commitmsnts.

Any significant resource commitment is viewed as a projecl Hence, the capi-tal budget is composed of projects, some of which are in pnocess and some oiwhich are pr,oposed. Each project affocts significant periods of time in theongoing life of a company. A project often involves the evaluation of atternativesand the purchase of such assets as property, plant, and equipment. lt shouldalso consider, howevor, any proposal or pnogriam that reguires a signifieantresounco commitment over an extended period, such as the development of newproducts' opening now markets, and the design and development of major com-puter pnograms.

Onca nesources have been committed to a particular project, the projectreguires ongoing evaluation; i,e., are the projectb objeciives being meti lf not,it needs to be evaluated in terms of wtrether the project should UJ iutained asis, modified if possible, or abandoned.

McAngus can make significant use of capital expenditure planning, evaluat-ing, and control. At the division level, projects will need to be defined in termsof those elements of the plant, or operation of the division, over wtrich the man-ager has control. On the basis of the facts given, the division manager hasauthority to operate his or her plant essentialty as if it were an independentcompany. Hence, anything affecting operations, which has required or wiltrequire significant resource commitment over i significant period of time,should form an integral part of that divisionb capital budgel At the top manage-ment level, the president may view each division as a project, particutarly forevaluation purposes. The other described activities of top management (investi-gating and evaluating_such things as new markets, etc.) are projects in the capi-tal budgeting sense. These and othel new proposats may be defined, anafyzed,and evaluated using a variety of avairabre tectrnigues.

c22-4

(1 ) Ametfs revision of the first proposal described in the case can certaintybe considered a viotation of the Sfandards of Ethical Conducl Arnett dis-carded the reasonable proiections and estimates after being questionedand pressured by Earlg, and used figures ttrai frave only a remote chanceof occurring. By doing this, Amett viotated tha standard of objectivity(which requires that the management accountant communicate informa-tion fairfy and obiectivety and disctose fullyi"iur"nt information that

611 Chaoter 22

C22-4 (Concluded)

could noasonably be expscted to influenco an intended ussrb under-standing of the report pnesent€dl. By altering the analysis, Arnett alsoviolated the standard of integrity (which requires that the managementaccountant (fl refrain from engaging in an activity ttat would prciudicehig or her ability to carry out the rcquired duties ethically, and (2) com-municate unfavotable as well as favorable information, profes.sional iudg-ments, and opinions|. Arnett also violated the standard of competence(which reguires that the management accountant pnepano complete andclear ruports snd rccommendatlong efter appropriate analysis of relevantand reliable lnformation).

l2l Based on the facts in the case, Earle was certainly in violation of theStandafds of Ethical Conduct as a result of pressuring a subordinate to pre-paro a proposal with data that weno false and misleading. Earle has vio-latad the standards of competence (failed to perform professional dutiesin accordanco with ,.. technical standards; and failed to prepare com-plete and clear reports and reliable information!, integrity (engaged in anactivity that would prejudice his or her ability to carry out required dutiesethically, actively or passively subverted the attainment of tho organiza-tionb legitimate and ethical objectives, failed to communicate unfavor-able as well as favorable information and professional judgments or opin-ions, and supported activity that would discredit the profession), andobjectivity (failed to communicate information fairly and objectively anddid not disclose fully all relevant information that could reasonably beerpected to influenca an intended userb understanding of the reportpresented),

(3) The elements of the proiestion and estimation process that are compno-mised because of a predetermined, misleading outcome include:(al the quality of the base data,(b) the quality of the assumptions used,(cl the probability of the projection occurring, and(d) the credibility of the people submitting the projection.

{4} The internal controls Fore Corporation could implement to preventunethical behavior include:(a) approval of all formal capital expenditure proposals by the controtter

and./or the board of directors,tb) designating I non-accounUng/financo manager to coordinate capital

erpenditune noguests and./or sogrogating duties during tho prepara-tion and approval of capital expenditure requests,

(c) requiring all capital orpenditurs prsposals bs roviowed by senioroperating managemen! which inctudes the controtler, belorc theproposals are submitted for approval, and

(d) requiring the internal audit staff to reviow all capital erpendituroproposals or contracting with external auditors to review the pro-posal if the corporation does not have sufficient personnel.

QydsZ 6t5

c122-6

(11 '

Referring to the specific standards in the IMA's Standards of Ethicat Conductfor Pnctitionerc of Management Accounting and Financial llanagement, theconduct of H. Dodge and G. Watson is unethical as discussed below:

(al H. Dodge! first rcvlsion of tlrc proposal for the warrhousc coDyor-eion was unethical becauso Dodgeb actiong violate the followingstandards:

Gomoetence. Although thc sstimates used in the analysis are basedon managementb judgment, Dodgeb action in changing reasonabfeestimatea to ramote assumptions ls unethlcal. Management accoun-tants havo the responslbility to propare complete and clear reportsand rucommandations after appropriate analyses of relevant andreliable information.

Inteoritv. Dodge has the rtsponslbili$ to avoid conflicts of interost,refrain from subverting the attainment of the organizationb legiti-mate and ethical objectives (profitability), and refrain from engagingin or supporting any activity that woutd discredit the profession.

Obiectivitv. Dodge has the rcsponsibility to communicate informa-Uon fairly and objectively and to disclose fully all relevant informa-uon that can influenco an intended userb underistanding.

(b) G. Watsonb conduet in giving H. Dodge specific instructions onpreparing the second revision of the proposal is unethical becauseWatsonb conduct violates the lotlowing specific standards:Gomoetenee. Watson has the responsibility to perform his profes-sional duties in accordanco with relevant technical standards, suchas using conservatism and realistic estimates in the net presentvalue analysis. Management accountants should prepano compteteand clear rspons and recommendations after appropriate anaiysesof relevant and reliable information.confidentialitv' Watson should refrain from using or appearing touse confidential information acquired ln the courso of his work torunethical advantage for personal gain (saving on commuting timeand costs).

Intearitv. Watson has the responsibility to advise all partios of anypotenUal conflict of interesl Watson shoutd refuse any favor (thowarshouse rcducing his commuting time| that woutd appear to influ-cnco his actions. Watson should communicate unfavorable as weilas favorable lnformation and professional Judgments and opinions.obiectivitv. Watson has the responsibility to disclose fuly alt rolo-vant information that can influence an intended userb understand-ing of the analysis.

I

6rO ChaPtor 22

C22-S (Concluded)

l2l Steps recommended by the Sfaadards of Ethical Conduct for Pnctitioners of*lanagement Accounting and Financial *lanagement that H. Dodge shouldfollow in attempting to resolve this situation are as follows:(al Dodge should first investigata and see if Evans Company has an

estabflshed pollcy for resolving confllct, and lf such a polict erists'Dodge should lollow lL

(bl Since it sppears tAat G. \f,/atson, Dodgeb superior, is involved, thereis no need to confront Watson or discuss this lssue with Watson anyfurther. Dodge should present the sltuaUon to the nert higher level,the vice president of finance, tor rpsolution.

(c) lf Dodge does not receivo any saUsfacUon, Dodge should continueto successively higher levels, including the audit committee and theboard of directors, if nscessary.

(d) Dodge should clarify the concepts of the issus at hand in a confi-denUal discussion with an obiective advisor, i,o., a peor.

(el lf the situation is still unlesolved after erlrausting all levels of inter-nal revieq Dodge will have no nocourse but to resign and submit aninformativo memorandum to an appropriate representative of theorganization.

(0 Unless legally bound (which does not appear to be the case in thissituation), it is inappropriate to communicate this situation toauthorities or individuals outside the organization,

(g) Dodge may consult with personal legal counsel.c22-6

(1) By referring to the IMA's Sfandards of Ethicat Conduct and taking intoconsideration the specific standards of competence, corfidentiality,integrity, and objectivity, L. Forrest should evaluate B, Rolland's directivesas follows:Comoetence. Forrest has a responsibitity to present complete and clearreports and recommendations after appropriate analysis of relevant andreliable information. Rolland does not wish the report to bs comptete orclear, and has provided some information that is not totatly reliabte.confidentiatitv. Forrsst should not disctose confidentiat information out-side of the organization; but it also appears that Rolland wants to refrainfrom disctosing information to the board of directors that it should knowabouL

Inteqritv. Roltand is engaging in acUviUes that could prejudice him fromcarrying out his duties ethicatty. In evaluating RoltanOt Airective as itaffects Forres! Forrest has an obligation to communicate unlavorablo aswell as favorable information and professional judgments or opinions.

ChapterZ

C22-8,(Concluded)

Obiectiviw. Tho responsibility to communicate information fairly andobjectivety, as welt as to disclosa fully all relevant informaUon that couldrrasonably be erpected to influsnco reports and rtcommendations pre-sented, is being hampered. The board of directors will not have the fullscope of information they should have when they ars pnesented with theanallsis.

l2l By refening to the Slandards of Ethical Conduct, L Forrest should takethe following steps to resolve this sifuation:(a) Forrest should first investigate and see if lDl has an established pol-

icy for resolution of ethical conflicts and, if so, follow thoseprocedures.

(bl lf this policy does not resolve the ethical conflict, the next stepwould be for Forrest to discuss the situation with his supervisor,Rolland, and see if he can obtain resolution. Ons possible solutionmay be to present a "base casst' and sensitivity analysis of theinvestmenL Forrest should make it clear to Rolland that he has aproblem and is seeking guidance.

(c) lf Forrest cannot obtain a satisfactory resolution with Rolland,Forrest could take the situation up to the next layer of management,and inform Rolland that is being done. lf this is not satisfactoryForrest should pnogress to the next level, and eventually to all high-er levels of management until the issue is resolved (i.e., the presi-dent, audit committee, or board of directors).

(dl Since Rolland has instructed him not to discuss the situation withanyono else at lDl, Forest may want to have a confidential discus-sion with an objective advisor to clarify relevant concepts andobtain an understanding of possible courses of action. Forrest maywant to talk to a close professional friend or the IMA "EthicsHotline" lor this purpose.

(e) lf Forrest cannot satisfactority resolve the situation within the orga-nization, he may resign from the company and submit an informa-tive memo to an appropriate person in lDl (i.e., the president, auditcommittee, or board of directors).

(f) Forrest may consult with personal legal counset.

6 1 7

CHAPTER 23

DtscusstoN ouEsnoNsO2&1. The weighted average cost of caphal is com-

putd by lhe lolbwing steps:(a) Calcrlale ech componenl of caFital as a

p€rconlage of total capital.(b) Calctlale the after-tax cost of each indi-

vidual capital componenl(c) For each capilal componont. multiply (a)

by (b) and sum lhe resulls.Q23-Z Using the cosl of a specific source of funds

may lead to laully decisions. For example,when debl is used, low.return projects wouldbe acceptable while better investments nrruldhave to be ruled out in a following period, when@mmon stock shares are soH lo obtain tunrjs.

023-3. There are two problem areas associated witheslimating the firm's weiThted av€rage cost olcapital-the proportions of each source olfunds and lhe cost ol each souroe of funds.The proportions that are expected over theinvestment hor izon should be used. Sincethese amounls are typically unknown, the pro-portions desired by management in the longrun aro usually used. With fesp€ct lo costs, themarket prices of each source of lunds shouldbe used. Since the market price varies overlime as creditor and investor expectationschange, curr€nl market prices adjusted forchanges expected by managem€nt ar€ Com-monly used.CGA-Canada (adapted). Reprint with permis-sion.

Q23-4. The payback (or payout) period method mea-sures the length of time required by a project lorecoVer the inilial investment outlay.

023-5. In computing the accounting rale ol relum onor ig inal inveslmonl , the denominator is theorrgina.l investmenl, whereas in computing theaccounling rale of relurn on avaraoe invesl-monl, lho denominalor is the average invest-menl-

023-6. The presenl vatus concepl states that a dollarrecetved today is worth more than a dollar tobs receivsd al a fulure date because of theearnings the 1oday. dollar can generate in theinter im. l t is importanr in capi ra l budger ingbecause ol the relativeV long perircds belweenlhe investment of tunds and ihe return ol thosefunds as eamings (i.e.. dollars ,eturnod a longItme in the tuture aro wlrth considerably lesithan lhoso invested today).

Q23-7. The basic d i f lerence between the paybackmethod and the nel presont value method con.ca rns l hs recogn i t i on o f t he t ime va lue o lmonoy. The payback method, which ignoreslhe t ime value o l money and a l l cash l lowsbeyond the payback pericd for the project, is

the measure od the time it will take lo recoverthe inilial cadtal inveslmenl in nct cash infbws.

The net present value method does consiierlhe lime value d mon€y. This method involvescomparing the present velue d all future cashinflols and outflows of a given project, usingsome minimum desired rate ol return A posi-l ive resuh implies that the project,s rale ofrelurn erceeds lhis minimum ralg, whereas anegative resull indicales that the projed,s rateol retum is less than thb minimurn rate.

O23€. ln the net present value method, the discountrate is known; whereas, in the intemal rate olrelurn melhod, the discount rate is not known.ln the internal rate of return melhod, the dis-counl rate is the one that wil l resuh in a netprgsenl value ol zero.

023-9. The net pr€sent value method assumes thatearnings are reinvesled at a rale of relurnequal lo the tirm's cost of capitat, whereas theintsrnal rate of return method assumes lhalearnings are reinvesled at the rate o'f relum ofthe parlicular project being considered. Thefirm's cost of capilal rate is more realistic. ll aninves tmen t p roposa l i s p red i c ted to beerlremely profitable (e.9., having an internalrale ol return of 50%), it is unlikely that similarproposals are avai lable. Holvever , a f i rmshould ord inar i ly have several investmenlopportunilies al or near the ralo of its cost olcapilal.CGA-Canada (adapted). Reprinr wilh permis-sion.

023 -10 . Ss t l i ng t he d i scoun t ra te a t some th ing i nexcoss of the cost of capital in order lo com.pensate for risk and uncerlainty associaled*;16 3 r.qpilal expenditure proposal is conceplual ly unsound, because the re investmontpolenlial of cash llows is overstated. Cashreceived in early periods has more value thancash received in later periods, because onlythe cash received in the early periods can bereinveslsd. As a consequence, the use of arat€ in ercoss ol the reinvestment rate in thenol presonl value method wil l result in an over-statement of the value of cash recsived earty inthe life of the capital erpendilure project. A bet-ler approacfi would be to clmpute lhe terminalvalue of the cash lbws using lho reinvestmentrate (i.e., compute the value of all cash flows atthe end ol the l i le of the projecl), and then dis.counl tho total to pres€nl value at a risk-ad,iust-ed discount rate. An even bener approach is toexplici l ly consider unc€rtainty by using proba-bility analysis, as discussed in Chapter 24.

6 1 8

E23-1

Funds-SounceBondg ll0% r (l - 45o/o tar rate)) .,....,....Prcferrtd gtOCk ......................r.r.'....!......Common stock and retained earnings...

QrWtsA

Capital Component8ond3. . . . . . .o . . . . . . . r . . . . r . . . . . . .

Prgferrgd gtock....,..,....rCommon gtock and

rstained earnings...

Capital ComponentLease.r.........,..Bonds..................r.........Preferred stock.............Common stock and

retained oarnings...

gERCtSES

Proportionof Funds

390h20o/o5,00h

1000h

Percent Pretaxof Totaf Cost

6r9

' l12o/o r $l OO par value for prafered stockl * $96 market value* ($TS,OOO + 5O,O0O shares of common stock) .F $f O markst price per

gharo

E23-2

Weighted averago cost of capital before bond retirement and sale-leasebacktransaction:

(r) et (31 (s)Weighted

Gost(21 r (a)2.40h.s%

5.Ooh9.30h

Amount

Weighted avarage cost of capitat after bond retirement and sale-leasebacktransaction:

$ 5,ooo,ooo1,000,0o0

4,0oo,ooo_91_qogo,ogg

(r)

Amount$ 1,o00,ooo

4,O0O,OOO1,00o,ooo

4,O0OrOOO

s!g,ogg,oog

50%10%

400h1000h

(21

Percentof Total

100h400hlooh

400h1000h

8.Oo/o9.Oo/o

72.50h

(31

PretarGost10.oohg.oohg.ooh

12.50h

(41

After.tarCost4.8o/o9.O%

12.5Vo

(4t

AfteptaxGost6.Aoh4.gohg.ooh

12.5o/o

AfteptarGost5.5oh

l2.5%o '15.O7o *f

WeightedCost

1.65o/o2.500h7.50oh

11.0,50h

(slWeighted

Cost(21 r (al

.600h1.920h

.gooh

5.OOo/o

_8.42%

"-\

w

F,.3-3

tl) Annual cash inflow before fncome t3r.....,..,....,....r,....Less depreciation (the samo for financial accounUng

and Income tar purposes (94O,OOO cost +8 years)f .,......o...

Annual tarable income ......,....o.....Annuaf Income t* ($f or0oO taxable income r AOohl..Annual income after tares

E23-4

$15,OOO

SrOOOslo,ooo

4,OOO$ 6,000

Chapter23

sl5,ooo

4,OOO

$l1,ooo

t1l

Annual aftgrttax cash inflow.,.....,...,.........o.,r,.....r,.,..r.

$4O, O0O Initial cash outflow = 3.636 years to payback$11, OOO annual cash inf low

tzl S6,0OO averago annual Incomo _ .15 or 15oh rate of returnon original investment$40, OoO original investment

$34,OOO init ial cash outf low

SlO, OOO annuaf cash inflow= 3.4 years to payback

Present value of annual cash inftows for six years($1O,OOO annual cash inflow r 3.284).,...o.......,

Less init ial cash outftow to acquire investmsnt.,.......Net present value of investment,.......r..........r..

cash dgsirgd at gnd of six yeani .....D.....,.....r...r,.,..or........r...r...Present value of $i co-pounded annually at l ioh,................lnvgstm gnt required ....,................,.,,........,....r.

Net present value of investment

Presentvalue inder

= $6,520 ne t p resent va lue

E23-5tl) Present value of annuar cash inftows for io years

(S20rooO annual cash infl ow r 5.2i6).....,...,...............,.,..Present value of satvago value at end of i o-year life

(Sl O,ooO cash inftow from salvage r .2701..............Present value of alt cash inf|ows.....r..r....,.r.......,.....,.Less initial cash outflow to purchase pness

tzl

t3)

$37,84O34 .000

___3'940

534,O00x .432

fl_4$sq

s 104,320

2.700$107,O2O(1OO.5OO)

L__ j.52q

tzl$ 1 O O , 5 O O i n i t i a l i n v e s t m e n t

= .O65 or 6 .5"h

ClapbrA

E23-8

tr)

MACRSFrcoYory

Brio

t2l

Stnlghl-UnoRrtr

f3l

Co.lRocovrry

UndrMlg35

r)Stnlght-

UlrrDrPr-chUon

I lo,ooo2OrO002O,00020,ooo20100010,000

3100,000

(5)

Dlffononc4l

t3l - l.)slo,ooo

12,OOO(8o0)

(8,5OOl(8,500)(4,200)

o

{01

lncomrTer

Srvingr( ! l x .o%

9fr0oo4l8OO

(320)

[3/4OOl(3/4oO)(1,6801

______9

c4

PrreontValrr of

t t 0 ta%

o.477o.7E0o.6750,592o.519o.456

el

t8)PrurntVrfri ol

TrrSrvingn(olr f7l

t3,5083,691(2r0)

(2,O13)(1,785)

cr88)_93'499

123a5c

0.200o.3200.192o.115o. t t5o.o58

o.tooo3000300o^200o-200o.to0

s 2o,ooo32,OOO19"20011"500t I r5oo5r800

_$!oo,goo

E23-7

(11

YearUnadiusted Estimate

of Cash InflowsInflation

Adiustment1.1oooorl .2 looo1.33iOO1.464101.61051

Inflation-Adjusted Estimate

of Cash Inflows$22,OOO.OO

2l,78O.0O21,296.0014,641,OO1 6 ,1O5.1O

12345

s2O,OOO18,O0016,O00l O,OOOt o,ooo

$74,ooot ( l +.1O)n where n = number of per iods

(21 PV ofAdjusted

Gash Flowss(58,OOO)

19r14016,46614 ,013813758,004

$_z9eg

UnadjustedYear Gash Flours

o $(s8,ooo)I 2O,OOO2 18,0OO3 16,0004 I O,OOO5 l O,OOO

AdjustedCash Flowss(s8,ooo)

22,OOO21,78O21129614,64116 ,105

PV of $1Q 15o/ol .OOO

.970

.756

.658

.572

.497Net present value of investment.........

s95,822.1O

PV ofUnadjustedCash Flowss(s8,oo0)

17,4OOl3,6Og1O,528

5,7204r97O

$ (s.7741

I

* \

e^

E23-8

( t l

TarBasis

Of New

$5OO,OOO5OO,OOO50o,ooo500,oooSOO,OOO5OO,OOO5OO,OOO5OO,OOO

o.143o.245o.1750.125o.089o.o89o.o89o.045

$ 71,5OO122r5OO87,50O62,5OO44,5OO44,5OO44,5OO22,5OO

$goo,ogg

Chapter23

PrrrntVrltr of

(31Tax

7-Year DepreciationProperty on NewRecovery Airplane

Rate (11 r (21

l2l

YearI2345678

(11 (4 (31 (4t Ft {ot m (8tlncnar

(DocnerIAnnrrrl Trr In

lnclrrr{Oocrosrl

In Aftenter Pnronl Aft*terPr.trr Drpn- Tereblo lrcorrrr Incorrrr c.dr vrluo cuhc..h clrtlon tncomo Ter Ter Inflowr of $1 lnflowr

Yrar lnflowr Dodugtlon (tl - (4 Rrtr (3) r {r} (t} - {51 e 7gy. (ol r ftl1 313o'ooo t 7r"50o t 58,500 |;o'h 923'4oo $1oo,ooo o.87o t 92,7422 13o'ooo 12!2'5go 7r5oo 4o'h 3,ooo 127'ooo 0.756 96,0123 l3OrOOO g7.5OO 12,50,0 lO'h 17,OOO llSrOOO 0.658 74,39{ 13o'o0o 02'500 67'500 4och 27 'goo 1o3,ooo 0.572 58'9165 130'000 4ar500 8tt"5oo looA {}2oo 95'8oo 0.497 47'0136 130'000 a4r500 8!t'5oo 4o',A u,2oo 95'8oo o.{t2 41,3867 13o'o0o 44'500 8tt'5oo 1o'h 34'2oo 95'8oo o.37o 36,0218 13o,ooo 2!2,5oo 1o7r5oo 4oV. #l'ooo 87'ooo 0.327 28,'#}e9 130'000 o 130'ooo 40% 32,ooo 78'ooo o.2g 22,152

10 130,0OO 0 13O,OOO 40ch 52,OOO 78,OOO 0.247 1g,2$oPrercnt valuc of pcrfodlc after-tar caah Inflows 35'l O,911Plur prercnt valuc of cftar-lax ralvagc Gtloo,ooo r 11 - 4o%l | .24n...... "14,8i20Prcrcnt valuc of carh lntlorvr ovcr urcful ttfc of new a1rp1rnc............... 3s31r73itoq Inlttal caeh ouulow (cost of new arrprane),.. 5oo,oooNet prcrent valuc of Invettment-.----.- t 31,?31

Alrplane

CtppterTS

F23-0

GOSI Of neW maChine....,.. ' ..r......... ' .............. ' .....r. ' ......... ' ............., ' .... ' . . 'Tt'adg-in allOWanCe fOf Old maChlJtO ............'......'.................'................

Net cash outllow at beginning of proiectTar basis of old machino traded in

Tal! baSiS Ot nOW maChine .'.....r..r..... '...rr.r..rt... '........r........

6?3

90o,ooo34,OOO

$38,0O0l8,o0o

s2O,OOO16,000

_999'oo9

AnnualAnnual

COSI Ot Opefating Old maChit1O...........o.."........................or.'.......

COSI Ot Opgfating neW maChiltt8 r...............r..... '........................ 'r

Year

Year

12345

$20,OOO2O,OOO2O,OOO2OTOOO2O,O0O

(1 )Original

TarBasis

Of NewMachine

_ (21


Rate0,320 '0 .192o.1150.1 150.058

l2l

S-YearPropertyRecovery

Rate0.2000.3200 .1920 .115o.1 15o,058

(31Tar

Depreciationon Old

Machino(r) x (21

$ 6,4003,8402r3OO2r3OOI , i 60

sl6,ooo

(3)Tax

Depreciationon NewMachine(11 x (2)

$ 7,2oo1 l ,52O

6r9124r1404J402,OBf,

$36,OOO

'Note that year I is actually the second year the old property is depreciated.

Therefore, the necovery rate for the second year is used to compute theamount of depreciation on the old property in the first year of the capitalerpenditure proposal.

123456

s36,OOO36,OOO36,OOO36,OOO36,OOO36,OOO

Annual cost savings with ngw machine........'........."r'......'...'.'r'.'r.r.'..... -$ 6rOOO

(1)Original

TarBasisot old

Machine

' t

e1

E23-9 (Concluded)

(tf t4 t3lAddiUonel

TarEbPn-

Allowablo Tar Doproclauon *tfitflHow Old Machlnr

Machlnr Machlno (11- (21

s 7,2OO 36,400 3 8OO

(41

AnnualCort

SavingrwthHcw

Machlno

FI

Incrrar(Docnarcf

lnTrHbbIncomo(4) - (31

S 5,200(1,E8ol1,3994r lE03,0203,912

IncomoTaxRrto

mInctrrlo

(Dccruarc)ln

IncomrTar

(51r (o l

S2,o801fJ721555

1,8O4' l ,208

1,565

Chapter 23

(E

HctCarh

Inflow(4 ) -m

s 3,9206,6725,44!i4,3i104,7924,435

(0,

12315o

11,52O6,0121,140

3p4O 7,8802,300 +A122,300 1,940

so,0o00,00o6,0006r0000,0000,ooo

400h

400h

400h

400h

400h400h

(4)

PresentValueof sl

@ 14o/o

4r14O lr l8o 2rggo2,089 o 2,Ogg

Total Increagc In periodlc cash inftowLesg InlUal cash ouUay for new machine,..lncrease In cash lntlours over Initial cash ouuay for new machine..,.

(11

NetAfteptax

CashInflow

(Outflowl$(2O,0O0)

3rg2O916725,4454,336417924,435

(21

PresentValueof sl

@ 120h

1.OOOo.8934.797o .712o.6360.567o.507

(3)PresentValue

of CashFlows@ 12%(1) r (21

$(2O,OOO)3,5O15,3193,8772,7582,7172,249

!_139

s420

l .OOOo.877o.769o.6750.5920 .5190.456

s29,6oO20,o0o

l_g'809_

(5)PresentValue

of CashFlows@ 14%(11x (al

s(2o,oool3,4385 ,1 313,6752r5672$872,O22

s (680)

YearoI23456

Internal rate of returnS42O + $680

Recommendat ion: The investment may be acceptable because the internal rateof return exceeds the companyrs cost of capitat; howeyer, the internal rate ofreturn on.this project shouid bt compared with the internal rate of return forother proiects to determine if this is the best use of avaitable funds.

- lzoh . (z"n ,( ) )= t z .76oh

Chaptor23

E23-10

(rl Proiect A

Year

Yearo5

Cash Inflow(Outflow)

Gash Inflow(Outflowlql5,0001

35r0OO

PV of $1@ 75o/o

PV of $1o 150h

PV ofCash Flow9(t5,OOOI

16,760

_g_l-i60

PV ofGash Flow9(1s,000)

17r395$ 2,395

PV of 31@ 200h

l .OOO2.991

PV of $1@ 20o/o

1 ,OOO.402

e5

o $(ts,oool l.oool-5 5,000 3.352

Ngt presgnt va|u9..,..............r..,.........r....

Pmiect B

Net present va|ug........................ ' .........!

Proiect A

Cash Inflow(Outflow)$(15,OOO)

5,OOO

PV of $1@ 18%

1.0003.127

PV ol $1@ 18%

1 .OOO.437

1.OO0.497

PV ofcgghllgw$(1s,ooo)

15,635s 63s

PV ofcegb_Eow$(15,OOO)

15,295s 2es

(21

Yearo

1-5

PV ofGashFlow

ql5,oOOl14,955

g__l4s)

19.g70hlnternaf rate . / / S635 \ \ . ,

oir" trrn - - 18oh +

lzv" t( f f i*

)) - r9oh + (zw r.s34) -

s295S295 + S93O

(3) Using the internal rate of return method, Project A is superior to ProjectB. Using the net present value method, Project B is more attractive thanA. The decision hinges on assumptions made about reinvestment of'cashinflow. Theory suggests resorting to the net present vatue methodbecause the cost of capital reinvestment assumption implicit in thismethod is considered more realistic than the internal rate of returnmethod, where a reinvestment at the project's internal rate is assumed.

PV ofCashFlow

s(t5,ooo)14,070

$__19991

- 18 .48%

Project B

Cash lnflowYear (Outflowl

o $tls,ooo)5 35,OOO

lnte-rnaf rate - fioh * (Z"n ,(o f re tu rn D |

\ \

\ \

I l - laoh+(2" t "x .241)

!

e6

P23-1

(rlAlternative

Plan(al

Source ofFinancingDebt

PBOBLEMS

Aftertax CostPortion ol

Total Required$lo,ooo,ooo$l0,ooo,oo0$ 5,ooo,ooo$lOrO0O,OOO$ 5.OOO,OOO

$IOrOOO,OOO

$lo,ooo,ooo$'lo,ooo,ooo

Portion ofCurent Totalszo,ooo,ooos9O,OOO,0OO

slo,ooo,ooo

Chagter 23

WeightedAverage

Cost7.200h

3.60%

4.6goh

_9.2e%

11.o9%

WeightedAverage

Gost1.330h

l .OOoh

7.OOo/o

9.330h

(b)

12oh r (1 - 40% tax rate)

Debt 12"@tel

Preferedstock

goh

(1 - 4% issue cost)

Common S2.1O earnings per sharestock ($2O x (1 - S% issue cost)l

After.tax CostlOoh r (1 - 40% tar rate)

goh

(c)

(21Source ofFinancingDebt

Preferred stock

Common stock

sgo,ooo,ooo

. $2,10 earnings per share 560,000,OOo *$2o market price per share Sgo,o0o,ooo

3,ooo,ooo shares outstanding x s2o market price per share

Chapter?3

P23-1 (Concluded)

(3)AlternaUve

Plan(al

Source ofFinancingMarginal cost

(from part (1)) .......o....Current cost

(from part (2)) ......r....tTotal cost .........,.....r,.r.

Marginal cost(from part {1)} .,..........

Current cost(from part (2)l .,...,.....,

Total cost ............,.o...,,

(b)

After.tar Cost7.200h

9.33o/o

8.29o/o

9.33o/o

Portion ofTotal Reguired

$loo,ooo,ooo$ 9O,OOO,OOOsloo,ooo,ooo

$ lo,ooo,ooosloo,ooo,ooo$ 9O,OOO,OOO

$lOO,OOO,OOO

&7

WeightedAverage

Gost.720h

9.400h

_sJ2%.

.83%

8.4oo/o

9.23o/o

(c) Marginal cost 11.O5oh $ IO,OOO,0OO 1.11oh(from part (1)1 ....,....... $IOO,OOO,OOO

Current cost 9.3370 $ 9O,O0OTOOO 8.4O%(from part (2)) ..,.....,... $1OOÔOOÔOO

Total cost,......r-'rirororr _g€l_%

\I

t s - tIi

r - l

e8

P23-2

Appraised value of the pnopertyr excluding storage tank andwatgr lY€ l l t t t t t t t " " " " " " 'aa .a . . . . r .o . . . .aa . .a . . . .a r . . . . . .a r . . .o . . . . . . . . . . .a . . . . r .a . . . . . . .oo .

Replacement cost of storage tank .....,.,,..r......::::.................r.......r.....

Differential cost of water resulting from ross of wefr:Water from Glty

of Grant Welf

Chapter 23

$19O,OOO250.ooo

$44q.ooo

WaterfromCity reof Darnett At g% tenance present

at 8o/o Annuaf Annuaf and ValuE of presentYear Increts-e- -!"".eas" Repair Difference Sili r o"z, value2oA $ zz,7zo $ 35,2oo s gzreo .9p- ttffid208 79,539 3g1016 40-,522 ,g26 ggr477zoc g4,g?! 4r',os7 49,264 .Tsl sz,s6.zoD 91,999 qqisaz 4z',264 .683 s2,2s1zOE 98,?1? ez,aag $zo,ooo 31,046 .627 1g,28OzoF 106'850 s1'r72o zo,ooo 35,r 30 .564 r 9,8r 3zoc 1is,398 ssieig zoiooo 39,540 .5i3 2o,2s4zoH tro,g-?Z - 60;322 ggry 44',so2 .aoz 2o,6geSzzgllgz s324,4o9 Jqqpoo Eqlr,oru- s212,7s1ertir"t"a-1"ffir"..ffi....-..:

s€EZJelThe city of Grant must also consider the offsetting increase in property andsafes tares arising from the onioing economit heatth of this part of the totatbusiness activity that occuo t^ritrrin-the city, nri"

"onrideration may cause thenegotiated land price to be reduced. of course,-$r, irncertainty of the variousestimates must be recognized.

P23-3

(1 )

YearPV of Sl

@12%1.OOO

.893

.797

.712

.636

.s67

Projoct 1Aftertax

Cash Ffows$(120,OOo)

l O,OOO2O,OOO3O,OOO6O,OOOgo,ooo

PV olProject 1

Cash Flows$(12O,OOOl

B,g3o15,94O21,36039 ,16051 ,O3O

s 15,420-

Project 2Aftertax

Cash Flowss{12O,OOO}

5O,OOO45,OOO35,OOO25,OOO2O,OOO

oI2345

PV ofProject 2

Cash Ffowss( l2O,OOO)

44,65035 ,96524,92015 ,9OO11 ,34O

l__u,szgNet present value

Q9Chaptor?3

P23-3, (Continued)

l2l Project 1Afteptax

Year Casn Flowso q12O,OO0I1 1O,O0O2 2O,OOO3 3O,OOO4 60,0005 90,0oo

Project I internalrate of return

Proiect 2After-tax

Year Casn flowso $(120,00011 50,OOO2 45,0003 35,O0O4 25,OOO5 20,OOO

PV of 91@ 140h1.000.tt77.769.675.592.519

PV olCash Flowsql2O,OOO}

8177O15,38020r25O35r52O46t71O

-9--9193o

PV ofGash Flowsql2O,OOO}

8162014,86019,23033rl20

PV ofCash Flows

PV ol $1o 160h

l .OOO,862.743,641,552.476

Net preSent va|u9.........r........t." '

- 14oh . ( r* ,($0, oso + $t ,33o ))

- r s, , ,zoh$6,630

PV of PV of $1Cash Flows @ 18oh

PV ot $1o 160h

1.000.f362.743.641.552.476

9(12O,ooo)43,10033,43522,43513,800

9,520$ 2,290

$(l20,ooo)42,35032,31O21,31512,90O

9,7 40$ (2,385)

l .ooo.B,47.718.609.516.437

Pro iec t 2 in te rna l _ . ,6oh +( "o /o ,rate of return l. )

- t 6 .s 'oh$2 ,29O($2, zso + s2, 3Bs )

42,840

Chapter Zg

P2g-g (Concludedt

(31 The net present value of Project I ls greater than the net present vatueof Project 2 ($15r42o compared to $12,6751; however, the internal rate ofrsturn lor Proiect t ls less than the fnternal rate ol return for proiect 2ll5.A7%o comparod to I e.9B%ol. As a tosult, lt ls not altogether clearwhich profect ls the moro profitabte. The difference In rankings occur:;because of the dlffersnce In the pattern of cash flows; 1.e., the cashInflor,Ys for ProJect 1 are smaller ln early yearc and targer in later yearsthan those of Profect 2. The Internal rate of return for Proiect 2 ii sub-stanUally larger than the companyrs weighted averago cost of capital. ltmay not be possible for the cash flours roceived in early yea6 to be rein-vested at a rate of return equal to the internal rate of return of project 2;consequently' cash florrvs rcceived from Project 2 may not be as vaiuableto the firm as indicated by tha internat rate of return. On the other hand,the weighted avorago cost of capital is a realistic earnings rate erpectedby the company ovor the Investment horizon. Assuming that there is nodifference ln the riskiness of the expected cash flor,ns ior the two pro-jects' lt may be safer to raly on the net present value ranking than theintemal rate of return. This woutd mean that Project I shoutO Ue setect-ed.

P23-4

(1 )

Year123456

After..tarCash lnflow$3OO,OOO35O,0oo4OO,O0O45O,OOOSOO,OOO55O,OOO

Needed$2,2OO,OOO1,g0o,ooo1,550,00o1,150,o0o

700,o0020o,ooo

Balance$1,9oO,OOO

1,550,0O0lr t5o,0oo

70o,oo0200,00o

o

Payback YearsRequired

1 .OO1.001 .001 .001 .OO.36

Recovery offnitial Outlay

(21

Total payback in years......,,..,....r.....,........,.....,..,...r,...

Net income over economic l ife of asset...,......

_9.39s5,25O,OOO

2r2OO|OOO$3,05O,OOO

AccounUng rate of roturn (on originat investment

= t i * Original investment

* $2 ,2oo, ooo = 13 ,9oh= (

Net incomeEconomic l i fe

s3, O5O, OOO10 years

Chapter?3

P234 {Goncluded}

{3} Accounting rato of return = (on averiage Investment \ )

*,ar"oge investment

63t

Net incomeEconomic life

PV of $1o 140h

PV ofCash Flow

(41

Year

(51

Year

lnternalrate ofreturn

Cashlnflow

(Outflowl

PV of $1Q 160h

/33, o5o, ooo.) * f 32,2oo, ooo )= 2T.toh=( ro-l-t 2 )

o $(2,200,0001I 30O,OO02 35O,OOO3 4OO,O0O4 45O,OOO5 50O,0OO6 55O,OOO7 600,000I 650,000I TOO,OOO

10 75O,OOONet present valug . . . . . . . . . . .o. . . . . . . . . r . . , r , . . . . . . . . . . . . . . r r . . . . .

- 1 .000.877.769.675.592.519.456.400,351,308.270

$(2,2OO,OO0)263,10O269rl5O27O,OO0266,4OO259,5OO25O,80O24O,OOO2281150215,60O2A2,5,OO

$ zos,zoo

CashInflow

(Outflow)q2,2oO,OOO}

3O0,OOO35O,OOO4OO,OOO450,OOO5OO,OOO55O,OOO6OO,OOOo50,oooTOO,OOO75O,OOO

PV ofCash Flow

PV of $1o lgoh

PV ofCash Flow

o1234567II

10

1.OO0 $(2,2OO,OOO).862 259,600.743 260,050.641 256,400.552 248r4OO.476 239,000.47O 225,5OO.354 212,4OO.3O5 1gBr25O.263 184,100,227 17O,25O

E-- jlr999

$(2,2OO,OOOl25417OO251,300243,60O232r2OO218,500203,5OO188,40O172,gOO157,50O143,250

g_(134lggl

x .278 )=16 ,6%

1.OOO.947.718.609.516.437.370.314.296.225.191

=16oh . ( " * ,sst ,95O )

, )

=160h + (2'h$134,75O($s l ,95o +

I

\ - iI

6p

l

P23-6

(1) Machlnc I

Chaptcr 23

Total paybackIn years

Mach ine 2

InlUal outlay s500,0ooUnltonn cash lnftows 3125,0OO

- 4 years

Recovery ofln l t laf OuUay

AftentarYear Cash Inflow

1 $ 60,0002 75,OOO3 1OO,0OO4 i25 ,OOO5 15O,0OOI 2OO,OOOTotal payback In years

Machlnc I

Needad BaleneePayback Yoars

Rcquired1.OO1.OO1.001.OO1.00

.505.50

S6OO,OOO65O,OOO475,0OO375,OOO25O,0OO1O0,OOO

355O,OOO475rOOO376,OOO25O,OOOlOO,OOO

o

(21

Net after*tar cash Inl lows .... . . . . . . . . . . . . . . . . . . . . , . . . . . . , . . Sl,ooo,oooLess depreclailolt ........ soo;oooNet Incomo ovor economlc i l fe of Machins 1. . . . . . . . . . . . Fsoo,ooo

Account ing ratc of roturn i Net income \ _on or ig inal Invegtm.i t

- lE"onorni" r i r " J+

or io inal investment

/ Ssoo poo \ .- l - - - t+ SSOOpOO - 12.5%\ 8 years )

Mach ine 2

Net aftentar cash lnflowsLess depreclat lon . . . . . . . . . . . . . . . , . . . . . . . .Net Income ovsr economlc l i fe of Machlne 2

s' l ,4oo,0ooSOO,OOO

s SOO,OOO

Accoun'ng ratc of return - r $goo poo ) . seoo Foo - 1s.7.hon original Investmont -

l.T yoan, ) '

Clnpter I

P23-6 (Continued)

(31 Machine I

Machine 2

(4t

Accounting rate of roturnon average investment

Machine {

YearCash lnflow

(Outflowl$(5OO,0Ool

125,OOO

t 'gsoo'ooo ) /Ssoo,ooo )=[ffiJ-[.:f)="u*

633

Accounting rate of return _ (on average investment

- \ )

* ar"r"ge investmentNet incomeEconomic life

o1-8

[$soo, ooo )I I y"""s J

PV of $1a 150hl .ooo4.4g7 '

Net present value of Machino 1rPresent value of $.| received annually for 8 yearc from Table 23-2 of thetext.

Machine 2

PV ofCash Flows${50o,oool

56O,875

__9_99,87s

PV ofCash Flows$t6oo,ooo)

43r5OO56r7OO65r8OO,71r5OO74r55O86,40O

112,8OO130,80O

E_lefsoNet presont value

@$oorBzs = .122$soo,ooo

- "

$42, O5O. : - r - =

$600 , OOO

o1234567I

Cash lnflow(Outflow)$(600,000)

5O,OOO75,00O

10oro00125,OOO15O,O0020orooo30O,OOO4OO,OOO

PV of $1o 150h1.OOO

.fJ70,756.658,572.497.432.376.327

Net present value of Machine 2,,.........,..r.,......r.].

Net present value index for Machine 1

Net present yalue index for Machine 2 . o70

I

P23-S (Concludedl

(51 tt4aqlilel

Cash Inflow(Outflowl

$(5OO,OOO}l25,OOO

Machine 2

PV of $lCl 18o/o

LOOO4.O79

PV of Sl@ 160h

PV ofGash Flows

PV of $1O 20o/ol .ooo3.837

Chapter 23

PV ofCashFlows

Yearo

1-8

Year

$(5OO,OOO)5Og,75O

srtlg

$9,75O

PV ofCashFlonrs

$(soo,oool479,625

_9_eo'gzgl

fnternal rate l1oh + ("n ,(ofreturn -

\ \ ) )$9,75O + $2O ,375

- 18oh + (zW x .324) - 18 ,67o

Cash Inflow(Outflowl

$(6OO,OOOl5O,OOO75,0O0

100,o0o125,OOO150,OOO20O,0OO3OO,OOO400,00o

PV ofGash Flows

PV of $1@ 78o/o

o12345678

l.OOO.862.7 43.841.552.476.410.354.305

l .OOO.847.7lfj.609.516.437.370.314.266

$(600,O00143,10O55,72564,lOO69,OOO71,40O82,OOO

1O6,2OO122,OOO

$ 131525

$(6OO,OOOl42135O53,8506O,9OO64,5OO65,55O7 4,OOO94,2OO

106,4OOs (38,2501

Internal rateof return

/ s13525 \\Y l : r r

\ $l 3,s2s + S38 pso //

x .261)- to.SZo

-16oh,.(r*

-16oh +12%

ChapterB

P23-6

(1)

635

f8)

Attcr-taxCtsflFlow

(4) - {'t}3 g,ooo

l2,oo015rOOOl8'OOOl8,o0o15rOOO13,500

sloo,5oo

3,OOO3104,1O0

(5)

TarEleprc-.claUon-

StoBoo17r28,O1Or3O88}21O4,21O3r132

o

(s)

Taxablclncomo(Loas)

K)- (5)t (3,OOO)

(8,8O0)7r72O

19rO5O19,85019178022,5OO

(71

Tarcr(61r 40%

3(1'200)(3,52O13,O887r80O7,89071912

0,000

(4)

TotalCaahFlow

(21+ (3)

t TBoo81480

18rO88u'Sao25,88022re1222,3OO

12315o7

{2) (3}Gash

Savinga Cash Flowlrom trom

Reduced lncreascdMalntenancc Capaclty

$1,500 I O,3OO1,2OO 7,,80

000 17,188oo0 25,2AO3Oo 25,560

o 2219120 22,5OO

After.taxYear Cash lnflow

1 $ 9,ooo2 12,OOO3 15,OOO4 l g,ooo

Caah Inflow trom aalvagc at snd of economlc lifc' net of tar

Gt6'000 aalYage x (1 -.,fO tax rate)).

Total after-tax caeh lnflowr

rThc tax depreciaUon lr determlned by mulUplylng the depreclable basla of 354,O0O 0.e., thocash purchaeo prlcc plur the tar baclc of zero) by the MACRS percentagea provlded In Exhlblt224 of thc text for the five-year property class.

Recovery ofInitial Outlay

(1 )

Needed BalancePayback Years

Reguireds54,OOO45,OOO33,OOO1B,OOO

$45,OOO33,OOOl B,OOO

o

I11I

_tTotal payback in years.r.. . . . , . , . . . . . , . , . . . . . . , , . . . . , .r.

(21 Netafter-tax cash inflows (excluding salvage),...,.............Less financial accounting depreciation

(:ts4,ooo cash + g4,0oo book value - 56,000 salvage)..

Less tax on salvage ($6,000 salvage x .4O tax rate)Net income over the life of the property.

$1OO,5oo

52,OOO$ 48,5OO

2r4OO$ 46,1OO

!

'-lttI

P2g-6 (Concluded)

Accounting rate of returnon original investment

Accounting rate of returnon average lnvestment

/ Net income \I -:;F 1 + Original investment\ ECOnOmTC i lre /

- f g-) * ssa,ooo - ir. ssoh\ 7 years /

- / Net income- )

* aretage investment\ Economic lifr

/ $ lo,1oo \ |- l?ye*s / * | . + $6,O00 \2 ) '

958,ooo +

Chapter2S

20.580h

(3) Cash lnflow(Outflow)${54,OO01

9r0ool2 'OOO15,00o18,00o18,OOO15,00o17,1OO '

PV of $l@ 120hl .OOO

.893

.797

.712

.636

.567

.507

.452

PV ofCash FlowsYear

Net present valug .............,...r.....,..,............,........*$13,500 cash inflow in year 7 plus $3,6O0 aftentar salvage.

Net present value inder - s l l ,269 - . 2O9s54,OOO

o1234567

$(54,OOO)9,0379,564

10,68O'111448

10,2067,6057 1729

___9_!!399

(4)

YearPV of $1@ 16%

PV ofCash Flows

s(54,OOOl7 17588 ,9169 ,6159 ,9368,5686 ,1506,053

gl€99

PV of $1@ 18%

PV ofCash Flows$(s4,oool

716238,616I ,135gr28g7,8665,55O5,369

$ (s531

o1234567

Cashlnflow

(Outflowls(54,OOOl

9,00012,00O15,00O1g,oool8,ooo15,OOO17,10O

*

tS13,5Oo cash

l .OOO.862.743.641.5s2.476.410.354

l .OOO.847.718.609.516.437.370.314

inflow in year 7 plus 53,600 aftentax salvage.

$2 ,996fnternaf rato of return - 16oh + lZ"t" r($z,sso + $s53 ))

- t z.oaao/o

ChapterB

P23-7

Year

(1)

PeriodicNet Cashlnflows

(2',1

Annual7ohPrice-LevelAdiustment

(3)Adjusted

EsUmate ofNet Cashlnflorus(r) x (21

$ 21,4OO28.162536,75O39,33042,OgO45,03O4Or1503413602Tr5TO191670

$334,975

87

I2345678I

10

$ 2o,ooo25rOOO

. 3O,OOO30,o0o30,ooo3OrO0O2510OO2O,OOOl5'OOOl O,OOO

_$239,ooq

(11

DepreciableBasis ofMachine

$1OO,OOO1OO,O0Ol OO,OOOl OO,OOOl OO,OOOlOO,OOO1OO,O0O1OO,O0O

( l +.Oil = l .O7O( l + .o f l2 = l '145(1 +.Oflo = 7.225(1 + .Ofa = 1 .311(l +.Ofls = 1.403(1 +.04o = 1.501(1 +.07}2 = 1.606( l + .Of lo = 1.718(1 +.O7)e = 1.838(1 +.o71to = 1.967

RecoveryYear

I234567I

(217-Year

PropertyRecovery

@!egeo.143o.245o.175o.125o.o89o.oggo.o89o,o45

t3l

T:axDepraciation

(11x (2)$ 14,3OO

24,5OO17r5OO12r5OA8,9OO8,9OO8,9OO4,5OO

_9!_oo,ogg

,- ' l

v

ChWter236g

P23-7 (Continuedf

9 27,57010 19,870

Estimate of Tar lncome State Payment GashNet Cash Deptu- (Lossl Income (Reductionl Inflows

Year lnflours clatlon (11- (21 Tar Rate (31 r (4) (11 - (5)

1 $21,4OO $l4,3OO $ Z, iOO 40% I2,840 $ 18,5602 281625 24,500 41125 40% 1,650 26,9753 361750 17r5OO 19r25O 4goh 7r7OO 29,O5O4 39'330 12'500 26'830 4oo/o 7Or732 28'5985 42rO9O 8r9OO 33rl9o 4ooh 731276 28.,8146 45,O3O 8,900 36,130 4goh 141452 30,5787 4Or15O 8r9OO 31,250 4ooh 12,5OO 27rg5o8 34,360 4,500 29,860 4A% 11,944 221416

(11 @ (31 (41 (51 (61Federal tncome Net

Adjusted Taxable and Tax Afteptar

0 27,570 40% 11rO28 16,542o 19 ,670 40% 7,868 11 ,802

Total inflation-adiusted aften tar cash inf!ows....r................,............. S24Or985:(f ) Payback period:

Recovery ofInitial Cash $!!ey_

Net Aftentax Years RequiredYear Cash lnflow Needed Balance Until Payback

1 $18,560 $100,OO0 $81,440 l .O2 26,975 81,440 54,465 1.O3 29,O5O 54,465 25A15 . 1.O4 28,598 251415 o o.9Totaf payback period in yeats.,..,.........,,,........,......,.... 3.9

(21 Accounting rate of return on original investment:

Total inflation-adjusted afteptax cash inf|ow.................,, $24o,985Less financial accounting depreciation ..................!......... 1OO'OOoNet income over economic l ife of project..,..........,.....,..... l1.!g999

Average

"r,n.rJl - -Nellqqgrng- - S14o'985 - sr4.oes

return Economic l ife 1O years - - - ' -

Accounting rate ofreturn on or ig inal Average annual return $14,099 _ 1410 or 14 . looh

inves tment -

o r ig ina t ' rn "es tme" t -

S loo"ooo - r r '

- t -

Chapter 23

P23-T (Continued)

(3) Accounting rate of return on average investment:

Average annual return

639

.2820 or 2A.200h

Accounting rateof return

on averageinvestment

Year

$14 ,O99$5O,OOOOriginal investment + 2

(41 Net present value and net present value index:

o1234567II

10Net

1234567Total

(1)Net

After-taxGash

(Outflow)Inflow

(21

PresentValueof $1

@ 150h

(3)PresentValue ofNet Cash

Flow(11x (21

$ (1OO,OOOI1611472O,3931 9 ,1 1516,35814,32113 ,21O1O,396

7,33O4,6982 ,915

e__31€99

$(1OO,OOO)18,56026197529,05028,59828,8143O,57827,65022,41616,54211,8O2

1 .OOOo.870o.7560.658o.572o.497o.4320.376o.327o.284o.247

present value

Net presentvalue index

Present value

Net present value $24,883Required investment Sl OO,OOO

payback in years:

- . 249

(s)

Year

PresentValue ofAfter-tax

Cash Inflow$16,147

2O,39319 ,11516,35914,32113,21Ot o ,396

Recovery ofIni t ial Cash Outlay

YearsRequired

for PresentValue Payback

1 .OO1.OO1.OO1.OO1,OO1.OOo.046.04

Needed Balance$l oo,ooo

83,85363,46O44,34527,98713 ,666

456

$83,85363,46044134527 198713 ,666

456o

payback per iod in years

l lt -

640

P23-7 (Concludedl

(61 lnternal rate of return:

Chapter 23

Year lnflow

(t)

NetAftertar

Cash(Outflowl

s(roo,oool18,56026r97629,05O28r5982818143O,57827 165022,4181615421 l ,8O2

(21

PresentValueof $l

€r 20%

(31PresentValue of

Gash FlowDiscounted

o 200h(rl r {2}

s(1oo,oool15,46018!72116,82013r7841 1 ,5831O,2447,7145,2233,2O91,912

-I--!'670

(41

PresentValueof $l

Gl 22o/o

(51PresentValua of

Gash FlowDiscounted

o 220h(r) r (4)

s(1OO,OOOl15 ,21918r12716,OO712,8981O,661

9,2656,8854r5732,7631 ,617

$ (1,98s)

o12345678I10

l .OOOo.833o.694o.579o.482o.402o.335o.279o.233o.194o.162

S4,670S4,670 + $1 ,985

LOOOo.8204.672o.551o.451o.3700,303a.249o.204o.167o.137

.2140 or 21.40h

(ol

AdditlonalMalntonanco

Cort wlthCIM SFtom

325,ooo25,O0O25,OAOz'rO0O25,OOO25,OOO

Internalrate ofreturn

P23-8

(1 )

= Zooh. [t* " (

) ) =

Ycar

123456

( t )

Roduco'dLrborCort

315,O0O25rOO030,0OO30,O0o30,O003O,0oo

' l2l

RoducrdMachlno

Sotup Tlmo

34O,0oO50TOOO

oor0oo60,OOO

oo,ooooo,0oo

t3)

BoducodInvrntorTCarrylng

Cort

325,0003:t,ooo40,0OO40,OOO40,0OO40,0oo

(41

LortContributlon

MrrglnAvoldcd

320O,0O03{)o,ooo40O,OOO

50O,OOO

ooo,oooTOO,OOO

(51Total

PoriodlcSrvlngt fromCIM Syrtcm

('l)+{2}+{3)+(ll'3280,00O

4lo,o0oa3o,o0oGto,ooo73O,OOOSilo,ooo

c4Nct Pcriodic

Savingrwith CIMSyrtom(5) - (6)

3255,000385,0OO

5O5,00o

605,OOO

7O5,00o

BO5,0OO

N.tPorlodlc&vlngr

Ycar wlth CIM

Chaptor2S

P23-f3,(Continued)

rr) {81

TarDcprc-

(0) (1ol (r 1) 112l

PrriodicNet

Trr AltontrrUablllty Carh(Botundl lnflowr(e) r (1ol ft)-(1rl

a l

lr4)lnflatlon-AdjurtrdPrriodis

Nrt Aftor-tlr C.fhlnllorr

(121r l13l

3 3ri5,32o580,498595,470640,560780,039840,'158

s3,798,051

95,22O

93,893,2712,2OOrOOO

s1,093,271

c4Total TarAmortl-

:atlon andElcprcciatlon

(31+ (0)

$ 440,ooo880,000424,0OO2TO|OOO27O,OOO118,000

clatlonrnd

Amorll-ratlon'.

( t3 l

lndcx forAntlcl-prtrd

8% Ratrol

Inllation

1 3255,000 344O,OOO $(185,000) lOcA 3 rt4,Ooo) 3329,000 1.0802 38ti,O0O 88O,OOO (295,OO0) 40% (118,000) 503,0.00 1.1603 5051000 424|OOO gl,OOO lgoh 32,400 472,OOO 1.2604 605,000 2TOrOOO 335,OOO 4Oo/. 134,OOO 471,OOO 1.3605 7O5,0OO 2TOrOOO 43{irOOO 4Ach 174,000 531,000 1.489o 805,000 110,000 889,000 40% 275,gOO 52g,4OO 1.587

Total annual InflaUon-adJusted sfter-tar saulngc lrom Investment In CIM systemCagh Inflow from salvage of egulpment and machinery(S1OO,O0O salvage x 1.587 adJ. x 11 - 40% tax rate))

Total Inflation adJusted atter-tar cash lnflowl trom Investrnent In CtM system....Less lnlual Investment (S2,ooo,ooo In equipment ptus S2oo,ooo In software)......Ercegs of cost of clM system over inflation-adjusted after-tax eavings

t

(1 t

RoeovcryProporty

Y="r_ Tar Earlr

1 82,000,0002 21000,000

3 2 ,000 ,0004 2r0oo,0005 2,000,000

o 2,00o,00o

Tarablolncomo Effcetlvo[.ou) Trr

fD - (81 Bato

s2OO,ooO200,o00200,00o200,000200,000200,0oo

(5)(4)(3)l2l

0.2000.2000.2000.2000.2000.000

(ol

TaxAmoRl-:ation(al x (3)

$ 4O,OOO

4O,0OO

4O,00o4O,0OO4O,0OO

o

Bato for TarMACRS Dcprc-3-ycar claUon

_&gFrty (1) r (2)

o.20o $ 400,0000.320 640,0000.192 384,0000.115 230,0000.115 230,0000.058 116,000

$2,OOO,OO0

5_ycarStralght-l lno

Softwaro AmortiraUonTar Barlr Fatc

s20o,ooo $2,20o,o0o

I

Chapter 23

P2g-8 (Concluded|

l2l Inflatlon-Adlusted

Periodic Net PaYbackAfter.tar Years

Year @[!1.1[gl Needed Balance Requiredr $55,320 $2,200,O0O $l,844,O8O 1.OO2 5861498 1,844,680 112581182 1.OO3 595,476 1,258.J82 862,700 1.OO4 640,560 662,706 221746 1.OO5 78O,O39 221146 O O.O3Total paybaCk in yearS.......r..r..........r... '..r.............o...rr 4.o3

lnflation-Adiusted Present Present

Periodic Net ValueAfteptar of $1

Year Cash lnflorrs @ 14% Inflowso s(2,2oo,oool 1.OO0 S(2,2OO,OOO)

(31

Valueof Gash

1234

355,32O588,498595,47664O,580

o.877o.7690.675o.592

311,61645 t ,O17401,946379,212

5 78O,O39 . 0.519 4O4r84O6 935,378' 0.456 4261532 _

Net present value of investment.............r.......r.... 9--IZgrI-qg

t --S84Orl58 aftentax cash inflow for year 6 plus $95,220 after-tar salvage value at L

the end of year 6.

Chaptor23

P23-9,

Purchase alternative:

{1) (4 (3)

mACAt lrrconreD.prool. Ter

C..h rlon Drprocl-Yoar lnllon Hatr aUon'

1 SAOO'0Oo2 600,0003 60010001 O0Or00o5 g0o,o0o

0 0oo,00o7 600,000I 600,000I 800,000

10 800,ooo11 600,00012 600,00013 600,00014 600,00015 O0o,o00

.1*l $286,0002# 490,000.175 350,000.1Ai 250,000.080 178,000.089 178,000.080 178,000.o4{t 90,000.000 0.ooo o.o00 0.000 0.ooo o.ooo o.000 0

&B

l0) mX.l

Incnoo Altrntexln Incomo C.dl

Tar Inflowrlal r (51 (tl - (ol

tl25,OOO44,OOO

lOO,OOO14Or0OO1O8,8OO1e8,80016a,8OO2O4,OOO24O,OOO24O,O0O24O,OOO24O,OOO24O,OOO24O,OOO24O,OOO

$ 471r4OO556,OOO5OO,0O04EO,O00431}2004il1,2OO431,2O0396,0O036OrO0O360,OOO360,00036O,OOO360,OOO360,OOO360,OOO

EE,2OO,OOOl2O'OOO "

s6,32OrOOO2,OOO,OOO

(41

lncngrln Tenblo

lncomr11) - f3l

$314,00011O,OOO25OrOOO3ti0,0o0aa2,ooo422rOOO122,OOO510,OOO000r000800,0o0000r0oo600,000g00ro0o

600r0ooo00,000

{q

lncomrTrrFrto

40AOAOAOAO.40AOAO,40AO.40AOAO.40AO

Aftsr-l-r cagh lnftow from ratvago at ond of cconomlc |ife........Total after-ter cagh hflbw frorn the purchacc attarnaUvsl-eca ln1g"1 cagh ouUtow -........,...Total after-tar cash Inflow over aconomic tifc of project 90,32O,0OO

'Tho deprectatlon b determlned by muttlptylng the depreclabte basle of g2,ooorooo by thorilAcRg cost recovery percantageg provldod ln E$lbit 212.4 of the text for aeven-yosr proporty.

-P" ealvage rscslvod at tho end of tho economlc llfe ol the asset would bo fuily tarablobecause the tar baslr of tho property would be zero. The aftor-trr cash Inflow would bo3120'000, l-e., (s2oorooo rorvago vuiuo r (1 - .,{o tar rate)).

644

P23-9 (Concluded)

Year

NetAftertax

Gash Flow

Chapter 23

PV ofGash Flow

oI234567II

101112131415

Net present valug ...r. . . . . . . . . . . . . . . . . . . . . . .r. . . . . . . .r. . . . ' . . . . . . .

Lease alternative:

Annual cash inflow before lease payment. $OOO,O0OAnnual lease payment ....,.....,... . 32O,OOOAnnual pretar cash inflow and increase in tarable income $28O,OOOAnnual increase in income tax expense ($2BO,O00 r 4o%l i 12,OoOAnnual af tentar cash inf low from lease a| ternat ivo. , . . . . . . . . . . . . , . . , . . , . . . , . . S168,O0O

PV of $1@ 14%

$(2,OOO,OOO)474,4OO556,OOO5OO,OOO46O,000431,200431,20O431,2OO396,OOO36O,OOO36O,OOO36O,OOO36O,O0O36O,O0O36O,OOO36O,OOO

s(2,O0O,OOOl416,049427 )564337r5OO272,3202231793196,627772,48O138,9961 1O,88O

97,2OO95,32O74,98O65,52O57,60O5O,4OO

$ 727,129

l .OOO.f377.769.675.592.519.456.400.351.309.270.237.208.182.160.140

Cashlnflow

PV ofAnnuity

s l @ 14%

PV ofCashFlows

1 -15 $168 ,OOO 6.142 s1,031 ,856

The lease al ternat ive appear to be preferable because the net present value ofthe estimated aftentax cash flows is greater than for the purchase alternative(s1,031,856 versus $727,1 29).

ChaplerA

P23-1oI

(1) Gencral-RrrpoacEqulpment

Leasc Purchasc

ils

Selt-Constructod

EqulpmentRecurring cash flows from operiations:

Estimated sales volume in units.,....Unit contribution maryin..................Estimated total contribution margin

Less fixed costs:SupervisioJl ........................'..o..r......rPropefi tares and insuranco....,,.,.,MaintenaflCO .......................rrr.........r

Total fixgd COSt .r'................r.r......."'

4O,0OO 4OTOOO 4O,OOO$ l.ss s 1.55 $ 1.90$62,000 S62,000 $76,000

$16,O0Ooo

$1o,ooo

$16,000 $17,OOO3,O0O 5,O0O3,OOO 2'OOO

s22,OOO $24,OOOAnnual cash inflovrrs before tax...,.,,...,.,.. 946'O0O $4O'OOO $S2'OO0

Lease equipment altemative;Annual gash inflow bgforg tax.,..,.........o......,..r..,..r..,.....r..o...,r..r.Annual lgasg paymgnt. . . . . . . . . .o. . . . r . . . . . . . . . . . . . . . r . . .o. . . . . r . r . . . . . . r . r . i r . . . . . . . .

Annual incrgasg in taxablg income... ..,..o.........,,......-.r.Annual increasg in incomg tar ($6rOOO x 4Oo/o1.,..,e.......r..........,..Annual aftgrtax cash inf!ow....,.r...........o....r.,..........r.........,r.....,.rPV of $1 rgcgived annually for G years O 14oh.........o........,.......,Net present yalue of lease altemative.................,........ sl4,ooo

$46,OoO40rooo

s 6,0002r4OO

$ 3,600x 3.889

646

1

P23-1O (Continuedl

Purchase equlpment alternative:

ChWtor23

Yrar

123456

l l l

ProtlrC.rh

Inflowr

(4

lncomrTrr

Dcprrcl-rllon'

l3l

TaHblolnconrr(rl - (2t

$15,OoOo

10,00025,0.2525)82572,750

({)lncomr

Trrat lO%

Tar Fatol3l r 40%

3 E,oooo

8,40010,25010,25029,100

(5tNrt

Allrr-t'rC.rh

lnflowrtlt - Ft

$3l,ooo40,00033,80029173029,7505O,9OO

t0l

P{l of ilo 71%

$lo,ooo4O,OOO40,0004O,O0O4O,OOOgorooo r'

$25,OoO40,00024,000141375

141375

7r25O

mPll of NetAftrntrr

C.ehlnflowrl3l x (01

$ 29 ,81830,78022,f,8O17,fJ1215,44O23,21O

s139,520 "125,00O

.aT7

.780

.975

.592,519.456

Preaant valuc of net cagh lntlow!L"ecr InlUal caeh outflow

Net preaent value of purchase alternaUve s 14,520'Tar

depreclaUon le determlned by multiptying the depreclable basir of the equipment underthe purchaae alternattuo (Si2s,oo0) by tho tylACBS depreclaUon nlter provlded ln Exhibit 22-4of the terL

-tncludea aalvagc vatue of S4OrOoo, all ol whlch woutd be tarabler Blnce the equlpment would

be tully depreclatad for Incomo rtr purpo3es at thc end of the ahth year. Thc total after-tarcagh flow from opcratlonr of S5OrgOO chown tn column (5) b compoaed of after-tax cashInllow trom operaUons of S20,goo (9co,ooo - ((S4o,ooo - Sz,2so) r ,40 tax rate)) and the after-ta: cash flow from aalvagc of $24,0oo (S4o,Ooo r (l - .40 tar rate)).

Chagter 23

P23-1O (Gontinued)

Self-constructed eguipment alternative:(31

TrnHolnconrrIr) - (21

31g,ooo(5,800)

17r/UO31,30031,30071,580

647

123156

(t)

ProtlrCrdl

lnflowr

352,0oO52rOOO5210oo52,00052,00og2rooo "

H

lncomrTer

Doprocl-rtlon'

$3O,OOO5716OO

341560

20r7OO

2017OO

10r44O

t4)lncomr

Trrd 40%

Trr BetrFl r ao%

3 o,4ool2,240l6197A

12152072,320281624

(51N.t

Allor-trrC..h

lnflowr( r l - t l

3o5,ooo54.'2.4O4!iro243er48O39/{80st,37E

{0)

Ptl of tlo 1a.h

mFV ol ifotAftor-trr

C..fllnflowr{5} r lol

3 3e,99141171130r39123137220,49O

, 24,3:t9

s180,294lE5 'OOO' -

,a77.769.875.5925 1 0,4.58

Prccent valuc of net ca3h lntlow!Lclr Inltlal crsh outtlow

Net preaent valuc of purchagc alternativc 3 15,294

'Tar depreciation b determined by muttlplying the depreciabte basls of the equipment

undsr tho self-construction alternaUve ($180,000, whlch ls the full construction costIncluding allocated fired cost) by the IJIACRS depreciaUon rates provided In Erhibit 224 olthc text.

" tncludes aalvage valuo of 530,000, all of whlch woutd be tarable, lince the equipmentwould be fully depreclated for Incomc rrr purpogeo at the end of tha rlxth year. Thc totalattor-tar cash flow from operaUons of 353,376 ahown ln column (51 b composed of aftcr-tar cash Inflow from operatlons ot 335,376 (352,000 - (|3SZ,OOO - 31O,44O) x ,4O tar rate))and thc after-tar cash flow from talvagc ol 318,000 (S30r00O x (1 - .4O tar ratel).

-' Because Egelston Corporation ls operaUng at normal capaclty and the construcUon of thenew equipment will not Interfere with regular acUviUes, the company ahould not incur anyaddlUonal flxed tactory overhead. Therctore, the 815,OOO of fixed factory overhead ls notIncluded In the differential cost of the sett-constnrcted asseL The initial caeh outlay woutdbo $180'000 tut l cost less $15,00O of al tocated f i red factory overhead, or 31O5,OOO.

Chapter2S

P2g-1O (Concludedl

(21 Egelston Gorporation should consider sny proposal that is erpected tohave an.earnings rate In ercess ol the firmrs cost of capital. lf a proposalhas a positive net present value, that proposalb erpected earnings willyield a rate of return that erceeds the firmb cost of capital. In this caso,the purchase of general-purpose equlpment, the constnrctlon of special-purpose equipment, and the lEase ol general-purposa equipment are allacceptable to Egelston CorporaUon, because the net present value of allthree proposals is positive,

Egelston Corporation should attempt to marimize the earnings thatcan be obtalned from the funds available for capital Investments. Whencomparing a set ol mutually erclusive alternatives, the atternative withthe largest net present value will result in a marimization of stockholderwealth. Accordin gly, constnr ctio n of special-p urpose eq ui pm ent ap p earsto be the most attrastive alternative. Howeve4 the net present valueshould be related to any required investment by calculating a net presentvalue index as follours:

Construction of special-purpose equipm enb

Net present value Sl5,294 = .4927Required investment $165 ,OOO

Purchase of special-purpose equipment:

Net present value Sl4,52O = .1162Required investment $125,O0O

Purchase of general-purpose equipment promises a larger net presentvalue indsr and would be preferable, provided that the investment differ-enco of $4O,00O ($t65,000 - S125,OOO| can be used to earn a net presentvalue greater than S774 ($1S,eg4 - $14,5201.

\

Chapter?3 &9

CASES

c23-1

(11 (al The payback method measures the number of years required for theaftertax cash inflows to fully nocover the initial cash investment in aproject. The payback method emphasizes an organizationb financialliquidity and the riskiness of the capital project in terms of invest-ment recovery. Since long-term forecasts contain mone uncertaintythan short-term forecasts (i.e., it is easier to predict what will hap-pen next year than what will happen lO years from now), the leastrisky projects will have the shortest payback period.

(bl The net present value method recognizes the time value of moneyby discounting the after-tax cash flows for a proiect over its life totime zero using the firmb weighted average cost of capital. The netpresent value is the difference between the present value of the ,after*tax cash inflows, measured over the life of the capital project,and the cash outflow required to undertake the capital project.Projects that have a positive net present value are acceptable, whilethose that have a negative net present value are unacceptable.

(c) The internal rate of return method (also called the discounted cashflow rate of return method) incorporates the time value of money bydetermining the compound interest rate for a capital project thatwould result in a net present value of zero. A proposal would beacceptable if the internal rate of return erceeds the weighted aver-age cost of capital, and unacceptable if it is less.

(21 ln order to maximize the value of the company, Caledonia Division shoutduse the net present value method or the internal rate of return method todecide which capital projects should be inctuded in the capital budgetsubmitted to Quible Industries. Both of these methods would identifyProiects A, B, D, E, and F as acceptable (each has a positive net presentvalue and an internal rate of return in excess of the companyb hurdlerate)r and Project C as unacceptable (the net present value is negativeand the internal rate of return is less than the company's hurdte rate).However, Proiects A and D are mutually exctusive (meaning that ultimate-ly only one of the two can be pursued). The selection between the twodepends upon the criteria used to rank the proiecB, i.e., the capital"expenditure evaluation method employed in the selection process. tf thenet present value method is used, Galedonia would select Proiect Dbecause it has a higher net present value than project A (s24,g74 for Dcompared to 3691683 for A!. On the other hand, if the internal rate ofreturn method is used, Caledonia would select Project A because it has ahigher internal rate of return than Project D (gsoh for A compare d to 22ohlor D).

6fl Chapter 23

C2g-l (Concluded|

(31 In order to maximize the value of the company in this capital rationinggituation' the net present value should be used to select the projects tobe included In the capital budget because the cash inflows aro assumedto be ruinvested at the hurdle rate (the company has a demonstratedearning rate equal to lts weighted averiago cost of capita!|, The intirnalrate of return should not be used, because it violates the rsinvestmentrate assumpUon and may be unrellable as a basis for maxlmizing thevalue of the company in a capital rationing situation. Using the net pre-sent value method, the most profitable combination ol proiests withinthe $45O'00O budget constraint would be to include Projects & B, and Fbecause this combinatlon yields the greatest total net present value (netprssent vafue of $l621929 for an initial investment of $4sorooo). (Notethat the combination of & D, and F is not possible because A and D aremutually exclusive proiects, and that the combination of B, D, and F isnot possible because it would require a combined investment in ercessof $45O,OOO.|

c23-2

(1) The 18.2o/o rate of return on the investment differs from tha 24oh internalrate of return because the methods used to measure the returns are dif-ferent

Tha return on investment (18.2Vo1calculation is based on accrualaccounting concepts. lf the reduced operating expenses-legs deprecia-tion-remain constant as planned, the numerator in the ROI fraction willnot change over the life of the investmenL The denominator in the frac-tion, the investment base, decreases each year by the amount of theannual depreciation. Gonsequently, the rate of return calcutated willincrease each year oyer the life of the investmenl

The internal rate of return calculation PA%l is based on discountedcash flow concepts. The cash flows erpected to be received over the lifeof the investment discounted to the acquisition date aL 24Vo, eracttyequaled the initial cost of the machine. This measuns of return on invest-ment provides a percentage that is constant for each year of lifE of theinvestmenl This rate can be computed for each yearb actual operatingresults if the annual savings in operating erpenses ane constant and thenew equipment is depreciated using the effective interest method basedon an interest rato of 24o/o. The method would be essentially the same asthat emptoyed in amortizing leaseholds and bonds. Tho depreciationcharge each year would have to be such that the numerator and thedenominator of the ROt computation would change at the same rate inorder to keep the annual return on investment ratio constant.

Cllagter23 65t

C23-2,(Concludedf

l2l Recap Corporation can restructure the data from the cash flow analysisto make lt consistent with ths accounUng reports (which containstraight-line depreciationf received by the department manager. Oncethe investment ls accepted on the basis of its internal rate of return, thedata can be converted into the lormat consistent with the accounUngbasis used for reporting. Annual contribution from the new investmentwould be calculated by subtracting the straight-line depreciation fromthe net cash operating savings. The accounfing book value for each ofthe years of the investment lifo would also be calculated. The annualcontribution would be divided by the investment base (book value| foreach year to obtain the rates of return. This would then present the man-sger with the different rates of return for each of the yeans of the invest-mentb life. Thus, the rates would be more comparable with the actualreturn on investment rates experienced each year.

Alternatively, rather than computing an annual rate of return, it maybe more expedient to comparo actual net cash operating savings eachyear with those forecast in the capital expenditure analysis, lf actualperiodic savings equal those forecast, tho internal rate of return woutdbe equal to the 24% budgeted.

I!

S

I

CHAPTER 4


'I

O4-1. The five Parts arc:(a) Direct nraterblg reqtbn(b) Direct lsbor ceclbn(c) Frlory ovefiead(O Work h Pr@oer hventories(c) Fhbhed grood hvmtorbr

*2. iho bahnc" rhoet ir t 3tal.ment ct finsncblpcrttbt; the hcqrr ctBternont b a dalement of

sttYity. The incqne lbtement is ccnplementaryto thc babnce sheet, munthg in padicubr fortho ctrange in hr prcprietary equrty Bs a resullof operatims during the year. In |hat respecl' theincornc atatemenl ir eeaentially nothing morethan a major rection of the retained eamingsaccounl. Thereforc, tht rsvenue and expenseaccounls in the income 3talemont have beenlcrmed'cxplanatoqf ac@unl3, explaining thecbb and lkrw of r.YcnueE and cxpensee lhatbod to thc new hcqno (or bce) and to the newrrtahed camhgs balancc h the balance sheet.

O4-3. Thr ordinary babncr rhecl and incqne slate-menl aro htended to ptwkJe hlormalist as lofinancial peilion and resulb of operation of aburinesl, in sctordancc wilh several assump'liqs that arc made h preparhg |he stalements.Frqn the standpoinl cil the criticisms rnade, themost important cil these assumptions are lhalcocl lost appropdale arnortization of cost mea'rurca unelgired cct, and that a business meybo a$umod lo bc gohg to conlinue operatbnsindclinilely into lhe future. Accounting state-mcntg sre usually prepared on lhe heory lhal acale or gome other definite event is essenlialbcfore revenur is recognized. Basically, theaseot sUe of a balancc aheet coctaha a preson-tstbn o{ the anrounts cl cost incurred, which canbc presumed lo bencf i t f u ture per iods. 'Anincornc slalement presents the srnounl of rov-cnue recognized as having been realized duringthc period, less the podioo cl all cosls incunedthsl doe3 not appear to be lairly delerrable loftnurc perinds.

Thc ircome staternonl is prirrnrity a m€asurecd what lres been camcd, and not a measure of'camhg power.' For plant assots, the balancerheot b pdnarily a rnasure cl accountability forcxp.nditureE, rhowing acguisit ion cosls leescodr sllocalod to past operatbns. This rneasureof accounlability may br quile diflerent from1rur velue.'

To hcreese ilg usefuhess as one elemerd injudChC eaming porver, the ircsne stalement ispicparcd with a dietinclion between operatingand nonoperaling items. For the samo roason,c.rtain iterns may be climinoled frorn the incorne

slstomenl and shown in the statemont o lnrtained eemings. However, the effec-t of nmre'

curring and nonoperaling transaclions is notentirelY eliminated.

lnfonnalion revoaled by a serios of income3tatcments b morc rignilinnt in iudghg eamingpower than informatbn revcaled by ane hcqncstatcmstl. The incqne of a bushess rnay folbwor .Yen exaggetat€ the ups and downs ol thebueinesg cyclo and, therefore, lhe inccne of anycrc year will ncl represent eaming powor.

Changes in law or local zoning ordinancesmay result in a marked change in lhe eamingpower ol a bushess. Ukewise, changes in public

taste, devebpment of new prodtrts' apPgaranceol new conrpetilion, acquisition ol subsiJiaries'changes in management and lhe like, all maychange earning power and yet not be clearlyrellecled, il reflected at all, ir one incorne stale'menl.

The accounting use of historical. rather lhancurront, dollars in measuring depreciation andcost of goods sold may resull in distoding anyview of earning power obtained frorn a singleincorne statemenl.

ln regnrd to plant ass€ls, il can be said lhattheir value to a going concetn is usually depen'dent uPon the eaming power of the business.Such s value is not necessarily the same as lQ'uidation value, cost, cost legs amortization.repbcement value, or any other kind of value'The phrase .true value'has no definile connota'tion.

O4-4. Actusl describes the way cosls are measured.i.e., at actual historical arnounts; /ull absaptiondescribos which elemenis of cost are allocaledto hvenlory accounls, i,e., all elements of rnanu-lacluring cost are fully allocated to hventories;p/ootss describes how cqsl infonnation is accu'mubted, i.e., costs are accumulated for eachprocoss or deparlment in the laclory.

O4-5. Prime costing systems albcate only lhe primecosts, direct material and direcl bbor, lo hvento-ry accounts. Direct costing syst€ms, abo calledvariable costing syslems, albcale the variablemanulacluring ccts, direcl materbl, direci labor,and variable factory overhead lo lhe inventoryaccounts. Absorpticn costing systems albcate loIlvenlories parl or all of tixed frtory overhead,in addilioo to all varlrble manufacluring costs.

04€. Actual costing m€asuros product costs at actualhislorical arnounts, while standard ceting mea-sures product costs by ueing predeterminedarnounts ol resourceg to be coosurrned and pre-determined prices o{ those resources.

62

Q,4-7. Preess costing aicumulates costs fot oachpt@olts or department in the ladory end rnah'

tains detailcd recordr and calculationr of the

cotl of *ork h preest. Job order cting accu-

mulales cotr lor oach irb, lc', balcfi' or contrasl

and mEhtains detBilsd records and calculalbngod tho cost! of tork in prceas. BacHlush €st'ing accumulal.r coltr by working backwardsthrough ihc availablc inlormatiqr afler produc-

ticn is cornpleted (i.e., at the end of the accounl'hg pori<rd) and rnahtahr no detailed records ol

lhe costs cl ttPrk ir Prcesr.O.4€. Actual cosihg il more cornmon lhan standard

coothg in defense'rebted industries, while stan'dard cosiing ic adnewhat more cornmon else'where.

O4-9. Super'full absorpfbn or suPer absorption refersto tho income lax requiremenl thal some pur'

chasing and storage costs be allocated to inven'tory ac@unts.

O4-lO. Job order costing would be colrlmon in repairshops. buiHhg cotslructicr, and prhting; and in

servicc bushesse€ guclr as medical, legal' archi-leclurat, corutrucliqr engineering, accounling'and consulling lirms, as mentioned in the lexl'Other examples include shipbuilding. bridgebuilding, tool and die manufacturing, arl andantique resloratirn, and contracl rossarch'

o4-1 1. As mentixred h tho text, Pr66!ts costing wouldbe common in thc mill ing, brewing, chemical'and textile industries; in sirnple assembly oP€ra-tions: and in seryice businesseg serving largenumbers o( cuglorners simultanrcusly, ruch asairlhes. Other erampleg include petroleum refin-ing, basic food preessing, and manufacture of

ChaPter 4

low*ost @nsumor products such as toys, dis'posable Pens, na:ronr' and lighters.

04-12. Aspecls cqrtrnon lo icb order and prccess cost-ing are:(a) They can be used by rervice organiza'

tbns.(b) They requin cqrsiderablo detail to calcu'

late tho cost ol *ork h Procells.(c) The wprk h process accotnl in the gener'

a l lcdgcr i r lupported by subsid iaryt€cordg.

O4-1 3. A blended cthg method uee irb order cctinglo accumulate soflrc clement(s) ol cost andprcces3 ccthg to accumulale ofien-

O4-14. Flcxible manufacluring 3yslems consisl of anintegrated collection ol automated productionpnocesges, autornated rnaterials rpvemonl, and

cornputerized systetn csttrob lo utilize facilitiesln etticiently rnanulacturing a highly flerible vari-

ety cl Products.Q4-15. The adnantages of a llexble nranufacturing sys'

le.n over the cther systems include shorl (near-

zero) setuP limes, lhe absence of a learning

curve, lflet lead times to chipmont' lower diresllabor cost per unil, lower direct labor cost in

total, and bwer work in prccess invenlories.O4-16. Thc hilial cost of creathg a flerible rnanufactur'

ing system is much higher than lhat of olher

rngnuf asturing systoms.O4-17. l,lanufacturing setthg suiied for bacHlush cosl'

ing are distinguished by very fasl processing

speeds, which rernoves both the incentive and

the opportunily to track the detailed costs of

work in Pr@ess'

63

l-

It

LI\-

Ib

Ib

IS

Ib

IS

I

b

I

b

Chaptor I

. EXERCISES


TOtal manUfaCtUfing COSt ........... ' ................r.r.....tAdd work in process inventory beginning """""

Less work in process inventory ending.r..........".

Cost of goods manufacturgd r.......o.r.-........ ' ....r.. ' .,Add finished goods inventory beginning ........!....

GOSI Of gOOdS ayaitablg fOf Sa|g.. . . . . . . . . .o. . . . . .oo.. . . . . .Less finished goods inventory, ending ...o...... ' ......

Cost of goods sotd ..... ' . .-,.................... ' ..


DirgCt matgrials used.....................r...,...r,... ' ........DifgCt 1abOf . . . . . . . . . . . . . . . . . . . . . . . ' . r . . . . . . . . . . . . . . . . . . . . r . . . . . . . . . . .FaCtOfy Ovgfh gad .o.. . ' . . r . . . . . . . . . . r . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total manufaCtUring COSt . . . . . . . . r . . . . . . . . . . . . . .o. . . . . . . . . . . . .Add work in process inventory beginning ........ ' ..

Less work in process inventory, endingGost of goods manufactured.. . . . . .Add f in ished goods inventory beginning . . . . . . . . ' . . . .

Gos to fgoodsava i |ab te fo rsa |e . . . . . . . . . . . . . . � � � � � � � � � � � � �Less finished goods inventory ending..............,..

Gost of goods sold .......o............. ..t...... ' ..

s l 1080

$1eo90

$t oo1 5 0

$25060

$.11D

$230250

$480210

$27o'340

$61027fJ

s340

$ s o6080

i

I

Clpptcrl

E44 (Goncluded)

(21 Gost of goods manufactured:

Stores, April 30....... '. '........r.,.. .....--..----.PUfChaSgS. . . . . . . . . . . . . . . . . r r . . . . . . . . . . . . . r r . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . r . . . . .

LoSS: StOrtSt May 3t ro....rr...........r.................r....o......r..o....or....

Dirgct matgr ials COnSUmgd ' . . . . . . " . . . . . . . . . . . . r r . . . . . . . . t . . r . . . .o. . . . . . . . . . . r .Dirgct tabor used (4r25O x5221..r,.....,.........o.,............r.,...o......FaCtOfy OYefhead . . . . . . . r . . . . . r . . . . . . . . . . .o . . . . . . . . . . r . . . . . . . . . . . ' . . . . . r . . . . . . . ' . . . . .

Total manufacturing costAdd work in process, beginning inventory

Loss wgrk in process, ending inventory................r.....,...........COSI Of gOOdS manUfaCtUngd .... '..... '.........r...................... '.......

Ending balance of finished goods:

Finished Cost of Finishedgoods, + goods goods, =

April 30 manufactured May 31

S 4 5 , 6 0 2 + $ 2 8 2 r O g O X =

X =

Therefore, the finished goods ending balances is $47,662.

E4€ (al *",i135";;;;;il..:::.::::::.::::::::::::::-:::::: 35,ooo

(b) Work in Process............ t...........r.... 33'OOOFactory olrgrhead Gontro| ..o............r...,........ 21000

Matgr ia ls .or . . r . . . . . ' r . r . . . . . . . . . . . . . . . . . . . . . . r . r . . . . . .o .

(c) Payroll 4O,OOOAccrugd Payro11.....,....,.r,.r..,.....r....,...r...,

Accrugd Payroll .r................,......,...,.............. 4OTOOOCaSh . . . . r r . . . . . . . . r . . . . . . . . o . r . . . r . . . . . . . . . r . . . . . . . . . o r . . . .

Work in Procgss ... . . . . . . . . . . . . . .r. . . .o,.. . , . , . .r. . . . . . . . . . g2rOOOFactory Overhead control,.. S'OOO

Payroll . . . . . . . . . .

(0 Factory gverhead Control 4,OOO

65

(31

s 1O,25O105,OOO

s l15,25012r7AO

sl 02,55093,50077.390

5273r4/,O61.420

s334,86O52,80O

s282,O60

Cost ofgoodssold

s28O,OOO

$ 47,662

35 ,OOO

35,OOO

4O,OOO

4O,OOO

4O,OOO

4,OOO

(d,

(el

Cash

ffi

E4-S (Concluded)

(g) Factory Overhead Control .."""'r"""""""""Accounts Payable . . . . . . . . . . . , . . . . . . . . . . . . . .""""

Factory Overhead Gontrol .....-................. '."'Accumulated Depreciat ion.. . . . . . . . . . . . . . . . . . ' .Prepaid Expenses .. . .r , . . . . , - . . . . . . . . . . . - . . . . . . . . . .Accrued Property Taxes .,..,........r........"'

WOfk in PfOCeSS .. . . . . . . . . . . . . . . . . . . . . . . r . . . . . . . . . . . . . . . . . .Factory Overhead Control

Finishgd GOOdS.. . . . . . . , . . . . . . , . . . . . . . . . . . . . . . . . . . . . . . . . . , . .Work in Process.. . . . . . . . . . . . . . . . . . . . . . . . .

Accounts Rgceivabl€ . . . . . . . . . . . . . . , . . . . . . . . . . . . . . . . . . . "Sales . . . . . . . . . . . . . .

Gash . . . . . . . . . . . r . . . . . . . . . . . . . . . .Accounts Recgivabl€. . . . . . . . . . . . . . . . . . . . . . . . . . . . "

Cost of Goods So1d.. . . . . . . . . . . . . . . . . . . . . . . ! . . . . . . . . """

E4-6 (al

Work in Procgss ...................... ' ...............,..,.Factory Ovgrhead Control .r....r..,r. ' .............,.Marketing Expenses Control ........-...............Administrative Expenses Control

Payrol l . . . . . . . . . . . , . .

Factory Overhead ControlCash.. . . . . . . . . . . . .

Factory Overhead ControlAccounts PaYable

Work in Process . . . . . - . - . . - .Factory Overhead Gontrol

Finished Goods.. ' .Work in Process """"""

Chapter 4

l8 ,ooo _18,OOO

4 , 1 3 02 , 1 O O

78011254

36,1303 6 , 1 3 0

92,OOO92,OOO

8O,OOO8O,O0O

4O,OOO4O,OoO

60,000 :

1 7 , 5 O O' 1 7 , 5 O O

1 , 8 0 01,800

27,OOO

17,0OO2,0005,0003,000

27,OOO

2r5OB :2,5O8

8,5OOB,5OO

1 4 , 8 O 81 4 , B O B

6 0 , 1 O O6 0 , 1 O O

(hl

(il

o

(k)

Finished Goods . . r . . . . . . . . . . . . . . . . ' . . . , . . . , . , """" 6Ot000

13,50OAccounts Payable 13'5oo

(bl

(c)

(d)Accrued Payroll .....,. ' ...... 27 |OOO

(e)

(0

(gl

(h)

Chaptor I

E4-O (poncluded)

O Accounts R9cgivab18.............o...............oo'....

Cost of Goods Sold'Finished Goods'sl5,ooo + $oo,roo -$1s,roo = $8o,ooo

67

Sa8O,OOO

6O,OOO

8O,OOO

60,o00

E4-7 WALLACE INDUSTRIESCost of Goods Manufactured Statement

For May( in thousands of dol lars)

Direct materials:Direct materials, April 30, 20A.........oPurchases ......,...,.Freight i l l . . . . . . . . . . . r . . . . . . . . . . . . r . . . . . r . . . . r . r . . . t . .

Direct materials available for use.....t.Less direct materials, May. 31r 2OA...

Dirgct materials consumed ..........DirgCt tabOr.........roo........ i ..r.......o.,Factory overhead:

Indirect factory labor ..............,...r.......Utilities ($f gs r go o/o).............,..,...o..r..Propefi t?,if, ..........r.....,.............r.........lnsuran co ($2O x gO%1..r...,...............r.Depreciation Sl2O + $3O).....

Total factory ovgrhgad,r...r..r.r.......Total manufacturing coSt..........o....r............

Add work in process, April 30, 2OA,...

Less work in process, May 31, 20A.,.Cost of goods manufactured

s5f ot 5

$ zs ,

525

sss323

$ e o1 0 8601 250

s s30260

320

$ t , t 1o150

$1,28O210

$ { . 0 5 0:

Chaptor Iffi

E+8 cll{l{ABAR 69ffiplMfStatement of Cost of Goods SoldFor Year Ended December 31

Raw materials:Purchase3 .........'."

Less dlgcounts on rawmaterials Punchagod .""

Lesg raw materials on handtDgcgmbgr 3{ e 2OA.........""t

Cost of raw materials consumodDirgct labor ...........o."""""""""""r'Factory overheads

Factory mainte na!1co"...............Factory suppllgs used ....""'t""'Powgr and hgat-factofl ......'...'lnsuranco erpense-factorY

building and equiPrllollt...."Dep reciation-factory bullding

and eqUipmgnt .."""""""""Factory superintendence ..........tndirgct factory |abor.........."""'

Total factory overhead ........

Total manufacturing costs-,....--.....-.-.Add work in Process, January 1r 2OA

Less work in Process, December 31t204

Cost of goods manufacturgd....-........Add finished goods,Jbnuary 1r2OA.

Cost of goods available for sale o....-..Less finished goodsr December 3l'

2OA' . . . . . . . . . . . . . . . . . . . . .o . . . . . t . . . . . . " t " " "

Cost of goods sold ....................o.......

$40o,ooo

4,2OO $ggs,goo

24,0O0s371'8OO

lEo,ooo

s?8,4OO22t4AO19,400

4,8OO

l7,5OO1O0,00020,OO0

222,5AO

$774,3OO. 84,OOO

$858,30O

3O,OOO

$828,3OO37,5OO

s865,80o

. 7O.OQ0

szggJsq

CGA-Canada (adaptedl. Reprint with permission'

Chaptor I

PROBLEMS

P4-1

(rl BRTDGEWELL COMPANYGost of Goods Sold Statement

For Month Ended July 31(in thousands)

Direct materials consumed,...,....... .....r......r...,.D i r g C t 1 a b O f . . . . . . . . r . r . r . . . . . . . . . . . . . . . . . r . . . . . . . . . . r . . . . . . . . . . . . . . . . . . . r . . r r . r . o . . . . ' r . . r . . r

FactOry ovgrhgad ................ ' ..................................... ' .....r............Total manufacturing cost (a)...............................rr..,....,............Add work in process inventory July 1.......,......,.....,............,........

s7sLgss work in process inventory, July 3'l ..........,.......................,... 25Cost of goods manufacturgd r.....,........r..,r....r...,........o..........,....... 55OAdd finished goods invgntory, July I (b) .............r....................... 20Cost of goods availablg for salg r........r............,.,..........,.....o......... S?OLgss finishgd goods inventory, July 31(G) ................_.-.-.u.r.......... 15Cost of goods sotd ........,......... ' ......r.r....................,..,.....,...r......,.. GCalculat ions:

(a) Costofgoodsmanufactured... . . . . , . . . . . . . . . . . . . , . .Add work in process, ending

Less work in process, beginning.. . . . , . . . . . . . - . , . . .Equals total manufactur ing cost. . . . . . . . . . . . . . . . . .

(b)

69

s 1 62420

s601 5

$5025

s75l 5

_999

(c)

Cost of goods available for sa|e.,.,......,..r...o. $ZOLess cost of goods manufactured.. . , . , . . . . . . , . . . 50Equals f in ished goods, beginning . . . . . . , . . . . , , , . . 14

Gost of goods avai lable for safe. . . . . . . . . . . . . . . . . . . $ZOLess cost of goods so|d. . . . . . . . 55Equals finished goods, ending gg

' 70

(b) Work In Process a a a a a a a a a a a a a a a a a a a a a l a

a a a a a a a t a a a a a a a a a a a a a a '

Chapter 4

25,OOO

16,OOO2,OOO

29,OOO

24rOOO5,O00

25,OOO

29'0oo

5O,OOO5O,OOO

105,O00105,0OO

55,OOO55rO0o

P4-1 (Concluded)

l2l (al Matefia1S.o..r.. . . . . . . . . . . . . . . . . . . . . . . . .o... . . . . . . .o... . . . . . . . .AccountsPayable. . . . . . . . . . . . . . . . . . . . . t . | . . . . . . . . . .

Factory Ovgrhgad Gontrol ....."""""""""""'Matgrials . . . . . . . . . . . . . . . r ' . . . . . . . .""""""""""" '

(cl Payrolt ($ZCrOoO +$5'OOO)"""""""""""t""'Accru gd Payro11 """"""""tr"""""D"""'r '

(dl work in Procgss ..............r....r..................... ' .Factory Ovgrhgad Gontrol r""""""""""t"o"

PayrOl l t . . . . . . . " t " " " " " " " t " t " " r t " " " " " " " t "

(e) Finished Goods

18 ,OOO

29,OOO

Work in ProcesS """t"""""""""""""""

(0 Accounts Rgceivabte""""""""""""""""""Sales ($60'000 + (75o/o of $6O10O0)) """'

cost of Goods so1d............................,..o.......Finishgd Goods """"""""""""" ' r"""""

Chapten4

P4-2(11 SCOTTSBURG COMPANY

Cost of Goods Sold StatementFor Month Ended June 3O

(in thousands)Direct materials:

Materials inventory June 1 ........................Purchases........................., ..........Materials avai lable for use.. . . . . . . . . .Less: Indirect materials used.................... S 1

s ls33

s48

Materials inventory June 30... . . . . . . . . 19 ZO

Total manufacturing cost (b)........Add work in process inventory June 1.. . . . . . . . . . . . . . . . .

Less work in process inventory June 30...............Cost of goods manufactured ......Add f inished goods inventory June 1 (c). . . . . . . . . . . . , .Cost of goods available for sale.,Less finished goods inventory, June 30 (d)..........:.Cost of goods so|d. . . . . . .Ga lcu la t ions :

(a) indirect labor + direct labor = $4gindirect labor + (indirect labor x 6) = $49i n d i r e c t l a b o r x T = 9 4 9indirect labor = 37d i r e c t l a b o r = 6 x $ 7 = 9 4 2

(b) Costo fgoodsmanufac tured . . , . . . . . . . . . . . . . . . , . . . . . $120Add work in process, ending gO

sl 50Less work in process, beginning.. . . . . . . . 40Equals total manufactur ing cost. Sl iO

(c ) Cos t o f goods ava i lab le fo r sa le S19OLess cost of goods manufactured . . . . . . . 12OEqua ls f in ished goods, beg inn ing S ?O

s ,t,

$ 17

1 72

1 3 4

s l 14

s1s3

s l27

s l 93

s l s

72

P4-2 (Concluded)

(d) Cost of goods available for sale r...... '..""""'Lgss cost of goods so1d......................,......,..Equals finished goods, ending ..............."""

Chapter 4

33 ,OOO

29,0OO

49,OOO

49,OOO

120,OOO

210,OOO

155,OOO

l2l (al

(b)

(c)

(d)

(e)

n

Matgf ials . . . . . . . . . . . . . . r . . . . . . . . r . . . . . . . . . . . r . . . , . . . . . . . . . , . . . .Accounts Payable ...,......r.....,.........o..,....

Work in Procgss . . . . . . . . . t r . . . . t t 'o t r " " " " " " " " t ' r " '

Factory Ovgrhgad Gontrol ............................Matgrials . . . . . . . . t . . . . . . . . ' t """"""""" t"" t"" '

Pay ro l l . . . . o . . . . . . . . . . . . . . . . " " " " t t t t " t " t " " t t " " " " " t "

Accru gd Payro11...t..r..""""""""""""""'

WOfk in PfOCgSS . . . , . . . . . . . . . . . . . . r . . . . . ' . . . . . r . ,o . . r . . . . . .

Factory Ovgrhgad Control ....t..r......"""""""Payroll ...............""""""""""""""""""'

Fin ishgd GOOdS.. . . , r r , . . . . . . . r . . . . , . . . , . . . . . . .o . . r . . . . . . . . .

Work in ProcgsS.... . . ' . . . . .""r"""o"""""" '

Accounts Rgcgivabl€... . . . . .". . . . . . . ."""""tt"""Sales ($14o,ooo + (50% ot $14o'o00))...

Cost of Goods So1d...................,....,..ro..........F inishgd Goods . . . ' . . . . . . . . . . """"""""""" '

$1 90{ 5 5

s 3 5

33,O0O

28,OOOI ,OOO

49,OOO

42rOOO7,OOO

12O,OOO

21O,O0O

{55,OOO

- ChaPtar I

P4-3 ,

(11

73

MADEIRA COMPANYSchedule of Cost of Goods Manufactured

For Month Ended March 31

work in process, March I .............r.......r,.......Production costs:

Dirgct matgriats.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $lo4rooo tr

r Direct labor....r.-....." """""""" l6otooo ttt

Factory overhead ..............,......""""""" 8or999 *tt -344t009

Lgss work in procgss, March 31 ............."""'

Cost of goods manufacturgd..-.'....,............... '

r Cost of goods sold ($345,O0O) + ending finished goods inventory($tos,ooo) - beginning finished goods inventory (slo2,ooo) = s348r000.

'rpurchases of materials during March ($l tO,OOO) + beginning materialsinventory (S2O,OOO) - ending materials inventory ($26'000) = SlO4'OOO.

r.' production costs for March ($gCC,OOO) - direct materials ($t Oe 'OOO1 =direct labor and factory overhead ($24O'0Oo).

Letx = d i rect labor1.5r = S24O,OOO

x = $l60'000 direct labor.5x = $8O,OOO factory overhead

(21 Prime cost:Direct materials (requirement (1)) .........,..r.o........, SlO4r0gODirgct labor (requiremgnt (1))....:....,..................... l6OIOOO

_9261poo

(31 Conversion cost:Direct tabor (requirement (1)) ' . . . . . . r . . . . . , . . . . . . . . . . . . . . . . . $160rO0OFactoryoverhead(requirement(1)1.. . . . . . . . . . . . , . . . . . , . . 80'0OO

_9240,999

s 4o,o0o

s384,00036,000

$ a 8 , @ '

P4-4

CompanY A:Salgs " " " " t " " " " " t " t t " " t t t " t t " " t " " " t t t " " " " " t "

Cost ol goods sold:Finished goods inventory Janualy i """Gost of goods manutactlli9d"""""""""

Gost of goods availablo lor sa|e""""""'Finished goods Inventory December 3l

. Cost of goods Sold tt""t'o""t""""t"""t"'

Gross profit l2oo/o Of Sales).o......'..............r.....

GompanY B:' ctst of goods availablg tor 3a1o.,..r.........,......Less finished goods ending inventory""""""

COSI Of gOods Sold "t t"" t""""""""""r""""" '

CompanY C:Sal eS . . . " " " t " ' r t " t " 'o t " " t " " " " " " "o" t1" " " " " " t "

Cost of goods sold:Cost ol goods manufacttlrl9d"""""""""Add bsginning finished goods inventory

Cost of goods availablo lor 8a1e""""""'Less ending finished goods inventory""

Cost of goods Sold """"'o"""""""""""'

Gross profit """"t""""'r""""""""""""""""'

P4-5

S 600,0003,80O,OOO

$4,4oO,ooolr2OO'OOO

51,5{O,OOO_ 2'l o.oooslJggJoo

$ 34O,OOO45,OOO

$ 385,OOO52,OOO

Work in Process

Chaptor 4

s4,oo0,ooo

3,20O,OOO

s Soo,ooo

S 429,ooo

333,OOO

$ 96,000

346,OOO

13 ,OOO55,OOO

2OO,OOO268,N

End.9,Ooo

Finished Goods

Beg.(41

34,0OO348r00O

38Ct,o(toEnd.3O,W

2O,OOO65,OOO

85,O@

End.7S,OOQ

35O,OO0

2O,OOO5O,OOO

70,O@

7,0oo5O,OOO

20O,OOOloo,0oo

357,WEnd.17,@

Beg.ML(2)FOH

Materials and Supplies Accnred PaYroll

(8)(11

259,OOO Beg.

75Chapter 4

P4-5 (Concluded)

Accounts Receivable

54,0005OO,OOO

554,OOOEnd.22,OOO

,Factory Overhead Gontrol

Accounts Payable

77,OOO Beg.(7) (6) 18 ,OOO65,OOO

83,OOO

End.6,00O

2O,00055,00010,00o

2,OOO13,OOOlOO,AOO

(3)

532,OOO

lOO,OOO

55,0002OO,OOO

255,OAO

Payroll Cost of Goods Sold

350,OOO55,00O20O,OOO

255,OOO

(5)

(11l2l(3)(41(51(61rtl(81

Materials issued to production' 55O'OOODirect labor, $2OO,000Total factory overhead' $1OO'0OOGost of goods manufactured, $346'OOOCost of goods sold, S35O,OOOPayment of accounts payable' 577'0OOCol lect ion of accounts receivable, 5532,OOOPayment of Payroll ' S259'0OO

GGA-Ganada (adapted).Reprint with Permission.

Sales

t

1 ,<

76

P4-6

Work in ProcessMaterial8...

Cost ol gOodg SOld ttt"tt""t"""""t""tt""

Add finished goods inventoq/ incl€ase"

Cost of goods manufactllhod..'...'...r..""'Add work in process inventory increase

Total manufagturing cost -....--.-...........o"Less : Factory overhead.t..... $35'OOO

Dirgct t:lbor.......,....o... 4OTOOO

Materials used in manufacturing .,.r,......

Mate r i a l s . . . . . . . . . . t . . . . . t . . . t " " " t " " " t t t t t " t " t t " t t t t "

Accounts Payablg .....'.."""""""""""""

Materials ussd in manufacturing(from above| .........o...."r""""""'rt"""'

Add materials inventory increase ....'.....

Matgrials punchasgd ".........""""'r""""'

Payroll ..... ' . ' . ......

l a a a a t a

Chapter 4

84,OOO84,OOO

91 ,OOO9l ,ooo

40,ooo4O,OOO

4O,OOO4O,OOO

35,OOO35,OOO

35,0OO35,OOO

t57,0oot57,OOO

l40,oool4o,ooo

$14o,oool7,ooo

s157,OOO2,OOO

s159,OOO

75rOOO

l_84,OOO

$ 84,OOO7,OOO

$ er,ooo

a a t a - a a a a a a a

Accnrgd Paytoll.......'.........""""""""to"'

Work in ProcgsS . . . . . . . . . . . . . . . . . . . . . . . . t t " " t " " " t t t r t '

Payro l l . . . . . . . . . r . . . . . . . . . . " " t " " t " " " " " " " " " t '

Factory Overhgad Gontrcl ......r'.r.t,,.....""""'Va ri o u s C rgd its.'........ "' t " " "" " " "r'r t " " "'

Work in Procgs3 . . . . . . . . . . . . . . ' . t " " t 'o " t " t " t t t " r " ' t r

Factory Ovgrhgad Control o..r........ro""""

Finished Goods (12'OOO + 84'OOO + 4O'OOO +35tOOO - 1 4tOOO) ... . . . . . . . . . ."""""""""t

Work in ProcgsS .............'...r"""""r""""

Cost of Goods Sold (28'000 + 157'O0O -45tOOOl . . . . . . . . . . . . . . . . . . . . . . . . . ' . . " t " " t " t " " t " '

Finished Goods ..............


n

(c) Payroll... 86,000'' Accrued Payroll .............. 86,000

Work in Process....................r............................. 6Or5OOFactory Overhgad Contro|..........,.,....,...........,..... 1215OOMarketing Expenses Control ,..............t............., IrOOOAdministrative Expenses Gontrol 5,OOO

86,OOO

92,OOO

26,530

47,33O

188,OOO

241,150

185,5OO(hl Cash !........,r.........,......,.. ZOSrGO2

Sales Discounts,........... ...,...... 4r2igAccounts Receivable........... 212rg2}

(i) Marketing Expenses Control ...,............ 18,oooAdministrative F.xpenses Control 12,OOO

Accounts Payable 3O,OOO

0 Accounts Payable 1O4,OOO

rt

Cash 1O4,OOO

78

P4-7 (Gontinued)

88,25Ol04,o0o

't92,250

212,924

2,25O86,OOO

Materials

Machinery

Chapter 4

9O,8OO

15,5OO92,OOO26,53O3O,OOO,64\030

l / l Bal'(hl

Cash

20,O0O2O8,662

2i28,66236,412

Accounts Receivable

(c)0l

t7,2OO

l /1 Bal '(gl

25,O0O241,15O

26art50

(hl 1/1 Bal . 4O'OOO

53J,3O

Finished Goods

(g) 1B5,5oO

188,O0O

Accumulated DePreciation

111 Bal. 1O,OOO

Accounts Payable

1 t7(0

Bal.

t/ l Bal.(c)(dt(e)

9r5OOl88,OOO

,97,5OO

4,50O6O,5OO82,50O47,330(q4,>e3<t

Accrued Payroll

88,25O 111 Bal.(c)

Sales

104,OOO 1/l Bal .(a)(b)(i)

Retained Earnings

111 Bal. 21,25O

Cost of Goods Sold

(g) 185,5OO I

Payroll

(c)

111 Bal. 1o'ooo I (d)(a) 92,OOO

102,OOO

Work in Process

241,15O

Sales DiscountsI

86,0O0 | (c) 86,OOO

LLLI\

79Clppterl

P4-7 (Concluded)

(b)(cl(d)

(cl(i)

(cl(il

t_I!

I!

II!

b

Administrative Expenses Gontrol

5,O0O12,OOO

17,AOO


26,53Ol2r5OO

8r3OO47,33tO

(e) 47,330

Marketing Expenses Controf

810oo'l8,0oo2l,ooct

(31 HOPKINS & WHITE COMPANYThial BalanceJanuary 31

Common Stock

CSSh '........AcCOuntS RgCgivabl€...tr..............r............................r......Fin ished GOOdS.. . . . . r . . . . . . . . . . . r .o . . . . ' . . r . . r . . . . . . r . . . r ' . . . . . . . . . . r . . . . . . r .

WOrk ln PrOCgSS......... ' .o,.r.,.....,..r ' .......r. ' .... ' .rr. ' .....r........t

Materfals a a a a a a a r o a a a a a a a a a a t t a a a a a a a a a a a a

$ 36 ,41253,23O12,OOO

6,8301 1 r 2 O O4O,OOO

4,258185,5OO

26,OOOl7'OOO

s 60,030l O,OOO6O,0OO21r25O

241,15O

MachineAccounts Papble a a a a a a a a a a a a o a a a a a a a a t a a a a a a t t a a a l a a

Accumulatgd Depreciation....,...,......,,.,.....,....,................Common Stock..,. a t

Retained Earnin a a r a o t a a a a a a a a a a a t a a a a

SalesSalgs Discounts,...,..

1993,430 _$3e2,499

l

Ghapter 25

DfscusstoN QuEsTtoHsezs-1, Porcontago d gral'tl lo ralo b a nrasuro of

cun.nl operating activilirs. Fevenuo produc-liwr, coal incurrcnco, Ind corl control arlrnbodied in lhir ratio. Thr capitatrmploydlumovrr ratr ir ! moa3uro of lhc anrount ofagsol investment rehtivr to tho activhy lcvel clth. cornpany. This rato highlights the succcgso{ adrievirg ealeg vc{urnr with mirimum acsot

' hvcaUnont ard measurcr lhc salesaeneraliqractivity and overafl anscl menagemont.

e2s-2. Capitsl omployed cqrsbtr ol nqrcurrent a$ets( invrstmentr in bui ld ingr , machinrry, andoquipmrnt) ar wrll !r currrnl asrctr. Somtfinnr do ttcrt ur. cuncnt aerr1ts but p6fer rork-ing c-Fital; lhat is, lho nol balsnce of curnntegrtt ard currcnl linbililicr.

Q25-3. Tr+o major objectivet that managemonl mayhavc in mind when setting up a system formeatur ing lhe rc turn on d iv ia ional capi ta lcrngbyed an:(a) lo lecuro a summary msasurc of lho

profilability of operations, products, andlacililies connecled with each divbirn;

O) to obtain hforrnation as to the success oldivision manag.rr in conducting thcir

. portirrr of thc canrpant'c rtivilies.Q25-4. Dpfuncibnal astbnr that managemenl could

lak. lo irnprovc rhorl-term relum on caoitalornpbyed at the expsrse ol bng-run prolitabili-ty hclude:(a) Defer or reduce preventive mainlenarrce,

wh ich reduce l cu r ren l cxpenae bu lt ho r l en r l hc l i l o o f a re e l s , t he rebyircreaa irg I r.rtu rr cosi.

(b) Rcducr cxponditurr on research snddrvclopmcnt, which reduces curronlexpcnr. bul makor thr cornpany lesscanpelilivt h tho luturc.

(c) Rcduco or arrc*J rrnpbycr trainhg anddcvelopment , which reduces currentcxp.nlro bul makcc lhe company lesscqryctiiivo h thr future.

(d) Sell ard then nnt nreded assets, I,ltich9e!s lhcm ofl thc balancc sheet but maycosl the cornpsny rnorc h the bng run.

(o) Deler, reduce, or arcid nrodemizaticn offacil i t ies, rspocially rubstantial inyost-rncnb h eutornaled manulacluring frili-lior, wtrich kecpr asrol cosl on thr bal_anca sheot lotr bU rnalcs thc cornganylcss carpetitivo h tht futurc.

425-5. Uac od lhc rato-o{-rolum-ori-cspilal.emptoyoc,hag the folbwing livr claimod achranlaoes:(a) l l focuses menagemont's atte-nlion on

oaming thc bcst pro{it possible on thecapital (tolal assets) avaihblo.

(b) lt lies lognther the rnany phasos ot fiAan.\-cial phnning. sales cbjrlives, c6l st-trol, and the prolit gnal.

(c) l l aids in detecting the strengthl end.weaknesses wilh respect to lho usr ornonuse of hdivijual assob.

(O h serves as a yardstbk h measurirg por-,fonnance and proviCes a basis lor evalu- aating inprovem€nl ovo, time ard arrstgdivbi:ns.

{o) }t devebps a keener eenge of resoqtsi_. bility and leam eflort in divbisrol ,nan- -

agcrr by enablirg thcm to measurc and. tvaluale their orvn astivilies in he light c/

lhe brdget and with ,Dspecl to thr resuttrachieved by other divisisrsl rnanagors. r'

025-6. The five lrequently encountered limitatbos ofusing the rate-of.retum_on-capilal-employedfollow:(a) lt may not be reasonable to expcct thr v

aame rolum on capital employed lromeach division if the divisions selt thcirrespective products in rne*ets that difler _widely with respect to product develop-menl , compel i l ion, and conrumodrmand Lack ol egreernont on thr gti-mum rale ol rclurn might discourlg. \rrnarugen who believe lhe rate is ret atan unlair level.

(b) Valuatiqrs of assets cil different vintagerin ditferent divisions might givo rito to *comparison diff icuttieg and misundcr-atandings.

(c) Proper albcation ol conrrnon c€lc andassots requi rea dsta i led in format ion Faboul tho budgeted and actual uro ofcofilmon lacilities. Thc cost of kecpingtrack ol guch detaila rnay be higrh.

(d) For the sake of making itrr curiont pcri:a -

rale of relum on capitaf empbycd -lootgood,'managers may be influenced tomEke decisions that are not h thr best _bngl,run hlerests of the firm. Thir prob-l em i s espec ia l l y l i ke l y i l managc r t -expecl lo be in pcitbns for mly a rhorltime belore behg reassignod, thur, por- rvsona l l y avo id ing r cspona ib i l i t y f o r ,lmg-run corsequoncet.

(e) A single moasure of performanco, ruchas rotum on capilal employed, rnay nrult l-in a fixation on improving thc compo.ncnts of the one moasurc to thc neglectof needed at tenl ion lo othor dcai rabbactivilies. product research and dovclop- \trnent, managerial devebpmonl, progror-

. sivc personnel polbict, grood onployoe

688

Chapter 25l 1

moralo, and good custqncr and public

relolbnr arc juol ar irnportanl in oaminga grealcr prc/it and assprhg csltinuourgrowllt

Q25-7. Multiplc pcrformanco moaauro3 aro usod lo

oycrcorno tho limitetkrnl cl r rhgh financialrnasur.. Multpll prrlorrnam tnealut$ PttFvidc central rnanagerncnl with a nprc cornpt"'hensive pictutr ol divisimal prdormancr byconsidering a widcr rangr of managomenlrespansbililie3, nsllinamial activilies ar wellas fiuncbl performancl. Muhiple perfonnancrmcalurcr cen bo der igncd to prov ido anincenlivo to divisimal tnanagon to cnlngo hactivitieo that havo long'lerm bcnlfil lo lhrcompany but which may havo r n lgal ivrimpact on rhort-run protit. Ersmpler includrbaric roaearch, now producl drvrlopmrnl,guality improvcmrnt, produclion innovalion,emp loyee dev r l opmen l , . and new marke ldovelopmcnl. ln additiqr, mulliple moasutcsmiligalr tho problem cil trying to evalualc divFsional performincc on the bagis ol a singleprofil measuro that may be cornputed on diller'enl bsser in each divisicn.

Q25-8. Cornrnan forml of managsmenl incentive csn'pensatbn phnr irclude:

, (a) Co^rh bonuror, whbh erl urually paiJ ina lurrp rum rl thc ond of lhr pcrird andan basod qt a cornbirgtion of ccrpordeporlormancr, individual porformancr,and thr managernenl levol.

(b) Stock bcnusea, wtrbh arc delermined inessentially lho same way a! cash bqtus-ca.

(c) Delrrod canpmsalion, ufibh ir paid incash andor dock ttst do€s ncl vest urdila future perird. In tryno c8ses, tht rnan-agcr io rcguircd lo invrsl annually andthc oqrany rnatchcr lhc stlrbuli<n.

(d) Steh qlinr, whi*t givo thr tnatragor aright lo purcharr rtock al a rrt pricewilhin r rct pcrird Tho hccnlivo b tohclp thr cornpany insrcalr tho marketpricc ol itr clock s! much ar possiblewithh thr oplbo porird

(e) Stek appreciot'ur rigrts, wtri*r art sini-br lo ttck optbru crcopt that thc nran-agcr is not roquired to purchasc rtock,bul ircloed rccoiver an anpunt equal toils apprcciati:n at lho cnd ol a rel perFod.

(t) Prrlormencr rharer. which arc rtockawardl paid to lho rnsnagcr only allerrorrr long*un groal har boen schioved.

Cash and stock borru.r.t ara barrd on oneprri'cd rosultr ard thoroforo provi<Je a rhorl-tcrm irccntivr, ln csdrast,.ctek cptbn!. stock

689

appreciation righls, and pcrlormancc sharlgsro valuabb only if thc cqnpany imprwee htho bng+rn. Since adbns thal resull h shorl-tcrm ?nprovements catl have a negativc lmgrterm irrpact hng-lerm incentiver probabty arcnPrc oltrlivr.

Q2s9. Ttrc basb methods used h pticing irlrcqrpa'nY Itansil96 ar.:(a) trander prbhC basod cr ccl(b) rnatkel-bas€dtranslorPricing(c) cosiflus transfer Ptiing(d) negrctiated kansler pticing(e) arbilrarY transfer Prbhg

425-1o. A markot-baced lranster prico provides anincentive for divisional managemenl lo mini'mize cosir h qder to rnaximize dMsimal prof'

ilr. In csrtrast, e ccl?luc transler pricc pro-vkJcs no incontive tor divisioosl managcmonlto bo coot etlbiont. ln last il lhe ptdit rnartupir a percentago of cosl, there is gubslanlial

incentive to bc inelficienl h order to increasetotal divisicnd PrclfiL

a2s-1 1. (a) Negol'aled lransf er pticing:('t) Advanlage: The profit'center man'agots haYe conl ro l over lho l ranslerprices and can be held responsible lorheir resufting irnpact on profils.(2) Disadvantage: lndividual manageru,in heir endeavor to msximize profits ciltheir om divbbns, may rnekc decisirudelrimental lo thc overall prolil of thelirm.

(b) ArbitrarY lransfer Pricing:(l) Acfvantage: ll'rs Po.ssible for execu'tivo management to eet transfer priceathot will guide profilcenler managors lomake decisisrs that will maximiza totalfirm Profits.(2) Dioadvanlage: The prof i t 'centermanager! do not havc aulhorily in anaree aflecting the prcfil pedonnancr lorwhich they will be evalualed.

CGA-Canada (adapled). Fteprint wilh permis-

rbn.Q25-12. Under the dual lransfer pricing approach' lhe

produchg (selllng) division hcludes a profit hcarputhg itl revenue f rorn irdracornpany caleswh i l e t he consuming (buy ing ) d i v i g i on i rassigned only variablo costs of lhe produchgdivision, plus an equitablo porlion ol f ixedcosts. Thc producing division lhu+ uses- g

t rEngler pr ice thal bel tet measures prr for 'rnanc., whitc tho ccnsuming divisbn has avaiFablc a price more uselul for decisbn'makingpurposos. The producing divisbn's prolil wor.lldbr o l iminated in prepar ing company'widetinsrcbl stalemont3.

690

EXERCISES

SalesGapital employed

Profit s200,000Sales $1,600,000

${ ,6OO,OOO

s2,ooo,ooo

= .125

Percentage ofprofit to sales

Chapter 25

= .8

= . 8 x . 125 = . 1O

E25-l

(11 Capital-emPloYedturnover rato

,^r Percentage oft z t =

profit to sales

t3l Rate ol return on E Capital-employed

xcapftal empfoyed turnover rate

E25-2

(1) Total corporate assetsTotal corporate assets

DivisionRecreational Products....Household Products ..,,,..Comm grcial Too1s.,....,,.,.

TOtal rr. . . . .o.. . .or,. . . tr . . .

DivisionRecreational Products....Household Products ...,..Gommercial Too1s...,..,..,.Ove rall Corporation .,......

(1 )

Saless15,75O,OOO

20,16O,OOO15,435,OOO51r345,OOO

at beginning of the year. . . .o. . . . . , . , . , $ 6S'000'000at the end of the year,..o..,..........o. TOTOOO,O0O

$136,OO0,O00-r- 2

Average total eorporate assets employed during the year $ gg,ooo,oooAssets used by corporate headquarters 8nd not

allocatgd to operating divisions..........r..........o......,...Average assets used by operating divisions during

the year . .o . . . . . . r . . . . . r . . . . . ' . . . ' . r r . . . . . . . . . . . . . r . . . . . . . . r . . . ' . . ' . . . . .o . . . .

(11 (21Total Average Percentage

Assets Used By Used ByAll Divisions Division563,000,000 25eh

63,000,000 4063,000,000 35

j_oo%-

tzl

GapitalEmployed

sl5,75O,OOO25r2OO,OOO22,05O,OOO6g,ooo,ooo

oooo00

E_99p9s999i3)

GapitalEmployed(r) r (21

$15,75O,OOO25,2OO,OOO22r05O,O0O

_$63fOOr0OO

(31Gapital-Employed

Turnover Rate(l) +- (21l .OOO

.800

.700

.755

69ipter 25

E25-2 (Concluded)

l2l(21

(31

DlvlslonffiUonal Prodrrct8.,.,Ho usehold Produetr .......Commg rg!rl Tools........'..Overal I Corporadroll ........

DlvlelonRecreaUonSl Prodtrctl.-.H o usohold Produetr o...-.Commerclal Toob ..oo...-.Overall Co rporatlon .,...-.

or altomaUvoty

DlvislonFlecroadona I P ro.ductr-,H o usohold P roductr Do..6rCommorclal Tools..,-...-.Ovc rall Corporatlon ..,,...,

(11

Proflfs4,725,000

4,032,OO03,85817509,86O,0OO

(11Capltal-Employ.d

TlrmovcrRsta1.OOO,800.700.755

(1)

Pro,fft9f,725,OOO

4,032,0O03,858,76O9,860,O0O

Salcs315,75O,0OO

20, t 60,00015,4iNi,OO051r34lt,OOO

tr)Percontago

of Profitto Salor

,300.2002W.192

(21

CapltalEmploycd

sl5,75O,(XX)25,2OO,OOO22,O5O,OO068,OOO,OOO

(3)Percentago otPmflt to Sales

(11* (2).300-200250,192

(31Rsto of Rehrrn onCapltaf Empfoyed

(1) r (2),300.180.175.1+5

(3)Bato of Return onCapltal Employed

(rl + P),300.160.175.145

-l

(1)

692

825-3

(21 PresentSales (16,000 tons

l2O% x 8O,OOO tons) x $9.)Variable cost

(8OrO00 tons r $4.5O).......,..Fixgd cost. . . . . , . . . . . . , . r , , . , tD.. , , . . . , . r

Total . , , . . . , . . . . . . , r . r , . . . , . . . , . . . . . . . . .

rSales price - marketing costs

Proposed:

Sales (8O,OOO tons x $6)Variable costs:

Production... 53.00Marketing.,.. .50

Chapter 25

t

The company must seek to mlnlmlze total @st Since there Is no othermarket for the 64,000 lons, and since the variabfe cost of S4.5O per tonls less than the outside price of $5, the coke-producing profit centerrssupply should be used at least In the short run. In the long run, the S4.SOvarlable cost may change, and the flred cost must be covered whlfe real-lzlng a reasonable roturn on capltal employed. However, the 35 outsldeprice may also change when the contract ls ronegotiated. In determinlngthe transfer prlce for profit-center proflt computatlons, the blast furnacemarulger has a sound basis lor a renegotfation of the transfer price sothat lt ls competitive wlth the $5 external price that ls available.

Revenue Costs

$ 96,000

$ 96,000

$360,OOO40,OO0

s4OO,00O= 5(304,009)

$3,50 x 80,000 tons

Fixed costs:Present.,.,..r.,....... S4Or0O0Proposed......,....,. 60,OOO

Purchase of coke for blastfumace (641000 tons x S5)..Tota| . . . . . . . . . . . . . r . . . . . . . r

9480,000

s19999 -

$28O,OOo

1OO,O00

32O,O00$7OO'O00 = S(220'0OO)

By making the additional investment, the company woutd be better off byS84'o0o (S304,ooo - $22o,ooo), The cost of capital committed to thisinvestment should be considered by management in making a declsionon this proposal. (See Chapter 23.)

693

(1)

Ghapter 25

Ez'5'4

Outsidg supplier CoSt (S1.25 x 1Or00O units).... ' ,,. ' . .... ' ...o...............r. ' .Variable cost to manufacture by Blade Division....... ' . ' . .. ' . .. ' . .r.......... ' .Savings to Dana if the Lawn Products Division punchases from the

Blade Div is ion. . . . . . . r . . . . . r . . . . . . . r . . . r . . . . . . . . . . . . ' . . . . . . . " . . . r . r . . . . ' . . .D. . . . . t . . . . . . t . r

Ace Division should take on the new customer because its gross protit

would be increased by $6001000. Aceb cost to manufacture would be the

same por unit and in total whether they ars sold to Duece Division or to

ttro outside customer (since the quantity is the same)' Thereforer 3rYincrease In sates nevonue would immodiately be translated intoincreased protit for Aco Division-

Sales novenug from nsw customer ($75 r 20,OOO UIlitS! ...... $l '$OOIOOOSatgS noygnuO from DugCg Dlvision D'..r..'....'..........t...........'. 9OOIOOO

InCreaSe In feVenUe and inCOme ffOm OUtSide S319S........'... -$ 6OOtOOO

Initiat amount from new negotiated transfer price

Gl75 X 2OrO00 UnitSl... '.......oo.'o..."o...'..."r.... 'o....".t..... '..

Less manufacturing costs: Variabte cost...... 99OOTOOOFixed cost '... ' ..... 3OO'OOO

l2l

200.oooGroSS prgti t from tranSfer... . . . . . . . . . . , . . . . . ' . . ' . . ' . ' . . .r .o. ' . . , .o' . . . . . ' . . .r S 30OtOOO

LOSS aVOidgd On Ofiginal t fanSfef pfiCO... ' . . ' .o. ' . . . . . ' . . . . , . . ' . . . . t . . (3OOtOO0l

Additionat gross profit from proposed transfer prico........'.. l-qOO'Ogg

Initial Unit tfanSfef priCe .r..............,.. '..... '....... '... '... '......o...r. S75Less 112ot average addlUonal gross protit

1112 r (600T000 + 2OTOOO units)),. . . . . . . . . t . . . ' r . . .r.r""""""" l5

Actual transfer price after sptitting the additional grossprof i t , . r . . . . . . . . . . . . . . . . ' , . ' . . r . . ' . . . ' . . . . ' . . . . . . . ." -S69

E25-5

No, becauso making blades would savo Dana Gompany $2,5OO, determined asfollorvs:

$1,5OO,OOO

sl2,5oo1O,0OO

S 2,500

694

P25-1

(rl

PROBLEMS

TOtal COSI... ' ."r. ' . ' . .............o.....r 'r..o

lncome bgforg Incomg t3r..........,.r,.r,Capftal omployod: Variable .o..t.....r....

Fixgd ............r., '.r..

Total capital employgdro,.,........,,..r

Sa l € S . . . . r . . . . . r r . . . . . r . , . . . . . . r . . . t . r r r . r . . . r .

Variable cost3325,OOO units x S.90.........o...lOO'O0O unlts r $i .95.. . . . . . . . . .

Firgd cost... . . . . . . . . , ,r. . . . . . . . . . . . . . . ,o...TOta I COSt .......... r.t.D.........,..o..

Incomg bgfore incomg tar.........Gapital employed: Variable .......

Firg d.. . . . . . . .o. .Total capital emptoyed.,....o...

Springy Leapy Totals42O,OOO S292,5OO 37t2,5OO$252,O0O

Chapter 25

s202,5OO 3454,5O045,OOO 175,OOO

s247,5OO 3629,5O0

_L l!,opg s 8g,o0g$ 58,5OO $.t oo,5oo

91,5OO 239,5OOst5o,ooo s34O,OOO

s 45,OOO S gg,ooo$150,0oo s34O,0oo

300h 24.40h

SalesVariable cost 2gOrOOO units x $,9O.,

l5O,OOO units r $1.35Fixgd cost....., 13O,OOO

$382,OOO

s_38,o09$ 4z,ooo

148,OOO

_$leg,oog$ gg,ooo$19O,OOO

Rgturn on capltal emp|oyed.....,........ ZOoh

(21 (al lncrease springy producuon and increase Leapy price by $.r5 perunit:

Return on capital employed,.....

Springy Leapy$487,5OO $ZtO,OOO

s292,50O$135,OOO

4O,OOO$175,OOOs 35,OOOs 42,OOO

81 ,5OO

sr2g,sog$ 35,OOO$123,5OO

29.30h

t44 ,5OO$437,oooE50€gg$ 48,750

158,OOO

_S2o6,?so

$ 5O,5OO$2O6,75O

24.40h

Total$697,50O

s427,5OO184,5OO

$612,O0O$ 85,5OO

$ 9O,75O239,5OO

_$33q2sg

$ 85,5OO$33O,25O

25.9Vo

Ch-apter 25

, -5-1(Goncluded)

Springy$487,5OO

s292,5OO

_ 144,5OO$437,O0O

$ 48,750158,OOO

s206,750-

$ 5O,5OOs2o6,750

24.40h

Springys487,5O0

$292,50O

144Jtoos437,OOO

Leapysl95,0oo

$135,OOO31,OOO

$166,000g2ep99$ 39,0OO

8l ,5OO

_999€0o$ eg,ooo$12O,5OO

24.10h

Leapys2oo,ooo

$135,00032,5OO

695

Totals682,5OO

s427,5OO175,5OO

$603,OOO$ 79,5oo$ 87,750

239,5OO$n,25o

$ 79,5OOs327,25O

24.30h

TotalSoaz,soq

s427,50O177,OOO

(bl Increase Springy production and continue present Leapy price:

Return on. capital employed '.." '

(cl Increase Springy producuon and increase Leapy price by 3.o5 per

unit:

SaleVariable cost:

325rO0O units x 3'9O."--.',.....IOO'OOO units x 91 .35...'....,r.

Fixgd COSt... . . . . . .o.. . ' . .""t"t 'o"o"" '

Total COSI.............ot....".""""

lncome before incomg tax.... ' ....

Gapital employed: Variabls o......Fixgd..".. ' .....

Totat capital employed.... ' .., ' .

Sa I gS. . . . . t . . . . . ' . . . . . . . . r . . ' . . . . . ' . . ' r " " t t "

Variable cost:325rOOO units x S.90.. '....,. ' .,.lO0'OOO uni ts x $1'35., . . . . . . ' r .

Fixed cost.......Tota l CoSt ' . . . . . t . . . t . . . .o . . . . r . . t "o to t

tncorne before income tar. '... ' ..-

Capitat employed: VariableFiXed '..... ' . ' . . '

Total capital employed.... ' .....

$167,500- s6o4,5OOs 5o.5oo s 32,5OO $ 83,OOO

$ 48,750 s 4O,OOO s 88'750158,OOO 81,5OO 239'5OO

s2o6,75o s121,5OO 9328'250- - -

$ 83,ooo9sza,z:so

25.30h

Note: Ercluding nonatlocable data understates costs and capital employed, Asan alternate solution, the nonallocablo fixed cost (S28'OOO) and capitalemptoyed (S25,OOO) might bo included in the total f igures, thus highl ight-ing the nonadditive diff iculty that can arise when full allocation is notmade to segments.

$ 5O,5OO s 32,5OOs2O6,75O 9121,5OO

Return on capital employed '..... 24.4oh 26.7oh

-r

\

696

1

P25-2

(1) Contribution margin of sales increase(2,4oo r (3380 - $7o - S37 - S3o - S4s - $rB)1........,..........

Loss in contribution margin on original volume, arising fromdecrease in sales price (15'OOO x S2O).o.......r..,.

Estimated increase in contribution margin and in incomebefore incomo tar if sales price is reduced 5%

(21 Contribution margin frorn sales to WindAir(77 r4OO x ($SO - 9l O.5O - $g - $t O11 .,........,.....,....r,.......,....

Loss in contribution margin from loss of sales to outsiders:Total unit capaci 75,00oSa19stoVtlindAir.....................,..........D,.......-... iZr4OOBalance....,. 57,600

64,OOO

_9,499

Ghapter 25

s432,OOO

3OO,OOO

sl32,oog

s374,1OO

a a a a t a a a a t t a a a t a o a a t a a a a

(3)

Projected sales to outsiders...,.,.

(6,400 x ($f OO - $12 - $8 - $tO - $6)).,....,.,............,.......Estimated decrease in compressor Division contribution

margin and in income before income tax if windAirb needsarg Supp l ied . . . . r t ' . . . . . t . . r . . r . . r ' . . . . . . . . . . . . . .o . r . . . r . . . .o . . . ' . r . r . . . . r . . . r . . . . . .

4O9,6OO

s 35,500

The Gompressor Division would find it desirable, from its own viewpoint,to accept orders from WindAir above the 64rOoO-unit outside customerdemand level, up to its 7s,ooo-unit capacity, because there would be aposit ive contr ibut ion margin of $Zf .SO per unit .

Gost savings by using units from Compressor Division;Outside purchase price r..............................r..,.,...., S zo.ooGompressor Divisionb variable cost to produce

Gl1o.5o + $B + $10).....r.o... . r r r r a r a a a t a

Sav ings per un i t . . . . . . . . . . . . . . . r ' . .o . r . . . r . . . . . ' . ' , . . . . r . . . r . . . . r . . . . . . , . r . . . . . . . . r . . .Numbgr o f compressor : i . . . . . . . . . r , . . . . . . , . . . . r . . . . , . . . . . . . . . , . . . . r . . . , , , . . . . . , r . .

Total cost saviD$s' . . . . , . . r . . . . . . , r r ! . . ,D.. . . . . . . . . . . , . . . , . . . . . . . r . .Less Compressor Divisionb lost sales to outsiders

{614OO x $64 (see requirement 2})}.....,,.......,,,,.....,,......t......Increase in income before income tax for Nationat tndustries

The decision shoutd be based on what is best for the total f irm. lt wouldbe in the best interests of National Industries for the GompnessorDivision to sell the units to the WindAir Division. The net advantage toNational Industries is $312,5oo, as shown in the above cafcutations.Since each division is evaluated based on its profits and return on divi-s ion investment, the expectat ions for the two div is ions shoutd be adjust-ed because of tho ef fect of th is decis ion on indiv idual d iv is ionat perfbr-mance.

28.50s 41 ,50r 17 ,4OO$722,1OO

4O9,60O

_$312,5O0

Cr.qpter 25 699

> -5-4

(1) Based on variable manufacturing cost to produce the cushioned seat and

the Offics Division's opportunity cost, tho transler price is 911869 for a1OO-unit lot or $18.69 per seat, computed as follorvs:

Vafiabte COSt,....,.o.... '.... '.................... ' Slr329Opportunity cost"'or""""""o"""""""' 54O

Thansfgr price........"""'o"""""'o""'o"' 91t899'

This transfer price was derived as follows:

Variable Gost:Gushioned Material:'

Padding.... .r. . . . . . . . . . . . . , . . . . . .".- '- .-. .D.r. 'r 32.40Vinyl ' t . . . . . .o... . . . .r." ' ."""" 'o""""""" ' 4'0O

Tota lcushionmater ia l . . . . . - - - r . . . . , . ' . ' . . S6.40Cost increass l lO%r. . - . - . . . r . - . . ' . , " . . . . . x l '1O

Cost of cushiongd seat.,.................,.......,. '.... '. '.. I 7.04Cushion fabrication labor cost

[$7.5O r .5 DLH].., . . . . . . .r.r. ,r. , . . , . . . . . . . , . . . . . , , . , . . . . . . , . 3.75

Variable factory overhead'($5.0O per DLH x .5 DLH)............ '..........""""'

Total variable cost per cushioned seat.... '..-r...-..2.50

913.2es l ,329Total variable cost per 1O0-unit lot....

'Variable overhead for 3O0,OOO hours:SU p p l i eS . , . . . . . . . . . . . . . . . . . . . ' . r ' . rD . . . ' . . . . r ' . . r . . . , .o . . . . . . r . .

lnd i rgCt labOr . . . . r . . ' . . . ' . . r . . ' . ro . . . . . . ' . . ' . ' . . . ' . r . . . . . . . . ' . . . . . . . . .o . ' . .. P O W e f a a r a a a a . r a a a a i . a a a a . . r o a . a r r a . r a r o a r . . r a . . r a . . . . a . . t t t l . . t t . . . t . . . t t t . t t .

Employeo benefits:2Aoh of direct labor and indirect labor (excludingzooh of supemisors' salary which is a fixed cost)(S575rO0O - (2O% r $25Or000)) ........ '.... '...... '. 'r.......

Total variable overhead at 3OO'OO0 direct labor hours

42O,OOO375,OOO18O,OOO

525,OOO

slEoo,oooVariable overttead per DLH

($l15ooroo0 + 3o0rooo DLF4...,,...o.,.o,...,. '.... '..r... '. 35.oo per DLH

\1

700

P25-4 (Goncluded)

Opportunlty cost

7.504.00

s33.30 $25.76

Chapter 25

.8 hour

125 stools

EconomyOfficeStools41.60

s15.84x 125

Labor hour constraintLabor hours to make a 10O.unit lot of defuxe office

stools (1.5o DLH r 1(x) unlts)..... '. '..,........r..,.,.. 1so hoursLess labor hours to make a loo-unlt ]ot of

cushioned seats (,5 DLH x 100 unlts)......,.,,...., SO hoursLabor hours avallable for economy office stoor ,,, J66 ho,roLabor hours required to make one economy

of f icg stool . . r . r . . . r . . r . . . r . . . . . . . . . . . . . . r ' . r . . . . . . . . . . r . . . . . . r . . .

Use of extra labor devoted to economy office stoolproduction (100 hours + ,8 hour)....,.D...o.r.,.,,..o.

Selling price per unit......,......., ,...,.,....,...Less manufacturing costs:

ss8.50

Matgr ia ls ' . . . r . . . . " ' . . . . ' . . . . r t r . . . . . . . . . 'o. . . . . . . . . . . , . . , .o. . , . . $14.s5 S15.76Labon (S7.50x 1 '5 DLH), . ' . . . . .o. . . . . . . . . . . . . . . , , . . . . . . 11.2s

($z.so x .8 DLH) .....,.,..o...,..,,. 6.oeVariable factory overhead:

DeluxeOfficeStool

s2s.20x1OO

$2,520 -Sl,ggo

(21

Opportunlty cost of shifting production to theeconomy office stool ($Z,S2O - $t,gg0),...,...... t g4O

variable manufacturing cost plus opportunity cost woutd be the besttransfer price system to use because lt woufd allow the supptying divi-sion to be indifferent between selling the product internatly io anotherdivision or selting the product in thelxternal market This transfer pricemethod assures-that the supplying division's contribution to profit woutdbe the same under either alternative. The sum of fhe variable manufac-turing cost and the opportunlty cost repnesents the effort put forth bysupplying division to the overalt weil-being of the company.

appropriate transfer price must attempt to futfitf the companyobjectives of autonomy, Incentive, and goal congruence. while no onetransfer price can necessarity satisfy each of these objectives fully in atlsituations, the variable manufacturing cost ptus opportunity cost transferprice should be the most appropriate method for meeting these obfec-tives in most situations,

ChaPter 25

j-5

701

ln order to marimizd shod-run contribution margin' the cole Division

silouro sccopt the contract from wares company. This conclusion is sup'

ported by the following calculations:

Colo Division transfer to Diamond Division

ff i 'ooounitsr$1,5oooach}.. ' . ' . ... ' . .. ' . ....... $4'5OO,OOO

(rl

Variable cost:Purchaso from BaYrside Division- -fgrooo

units x $iloO oach) ......"""""' $l t8ootOooVariabte processing cost In Cole Division--(Crooo'unlts

x$sbo each)....."""""" l '5o0'oo9

Gole Division sales to Wales 9ompanyeach)o. . . . . . . . . . . . . . . ' . . . . . - . . t$4 '375 'ooo

Variable cost:Purchase from BaYside Division

(3,5OO units x $5OO each)..,..,...."""'Variabte processing cost in Gole Division

" (3r5oO units r $400 gachl ....""""""Contribution margiJl .."""""'o""""""""r $1,225,ooo

$1,20o,ooo1.225,OOO

$ 25,OOO

Gontribution margifl . ' ...............

3,3OOr0OOsl,20o,ooo

sl,75O,OOO

l,4oo,o0o 3r15O'OOO

Conclusion:contribution margin from transfer to Diamond DivisionContribution margin from sales to Wales Company """"Difference in favor of Wales Company contract"""""""

*{- \

t !i

702 Chapter 25

P25-S (Goncluded)

l2l Cole Divisionb decision to accopt the contract from Wales Company is inthe best Interest of Robert Products Inc. because the decision increasesthe overall corporationb contribution margin. This conclusion is support-od by the following cafculations:

RevenuEs and cost savings to Robert Products Inc.:Sales by Cole Division to Wales Gompany

(3r50O unlts r $1r25O 9ach1................o. 34r375rOOOSales by Bayslde Division to london

Company (3r0OO units r $COO oach)..... t ',2oO,OoOCost savings (variable costs avoided by not

accepting the Diamond Division order):Bayside Division's savings

(3r00O units r $30O each) .D.,..,.r... 9OOTOOOCole Divisionb savings

(3rO0O units r $50O each) .. .ro.,. .o,. i TSOO,OOO $7rg75,OOOErpenditures incurred by Roberts products Inc.:

Variable cost incured for the WafesCompany ordenCola Divislon (3r5OO units r $400 each) $i,4oo,oo0Bayside Division (3,500 units r $25O

OaCh) . . . t . . . . r r .o r . . . . . . r . . . . . . . .o . r . . . . . . r . . .D . . . . . ; 875rOOOVariable cost incurred for Diamond Division

purchase from London Company(3,OOO units r $ir5OO each).. . . . , . , . . . . . , . . . . 4,SOO,OOO

Variable cost incurred for London Companyorder from the Bayside Division(3'OOO units x $ZOO each)... . . . .o... .o. 'r jooo 600,000 7,375 ooo

PosiUve overall contribution margin for RobertProdugts 111G... . . . . . . ' . . . . r . . . . . ' . . . r . . . . r . rr , . . . . . . r . , . . r rr . . , . . . . r . . . . . . . . . . . . $ 6oOrOOO

703. ChaPter 25

CASES

c25,-1

(rl The return on capital employed has definite limitations for evaluating tho

performanco ol ths Dexter PlanL Too many fastors used to compute the

return are not within the control of plant managemenl A significant pon

Uon of the "return''gide of the measuno ls determined by the action of

higher tevel managament-+ales and allocated costs. The plant manage-

ment appsars to have effestive control ovor only a part of the costsincurred at the ptant levet, and the same Is true for tho asset baso.Corporate and dirislon assets are altocated to tho plant' In additionr it

appears that specific assets rnay be charged to the ptant qven though

tho decision was made at a higher level'

l2l The case states that recommendations lor promotions and salaryincreases for plant manageni are influenced by the cornparison of the

budgeted return on capital emptoyed to tho actuai return. lt appears that

this ptant manager is reacting in direct response to this measunementsyrstem. T\ro evJnts have occurred outside his control (the sales declineand extra tand charges|, which will reduce his return on capital employedmeasure. He has responded by influencing those components of themeasure that he controts and that will improve this measure. Thered uced costs-traini n g, maintenance, ne pair, and certain labsr-wo uldnot affect sales volume in the short run. lt is also likely that reduction of

inventory tevets will not inftuence the sales in the short run. Throughthese actions hs has improved his return for 2oA, but it may well be atthe erpense of 2oB, or later Yea|:i.

c25-2

(11 Tho shortcomings, or possible inconsistencies, of using rate of return oncapital employed as the sole criterion to evatuate divisional managementperformance include the following:i") Rate of return on capitat employed tends to emphasize short-run

performance at the expense of long-run profitability. In order toimprove short-run profits, managers may make decisions that arenot in the best interest of tho company over the long run.

(bl Rate of return on capital emptoyed is not consistent with cash llowmodels used lor capital oxpenditure analysis and, therefore, ffiaYnot be comparabto for divisions that uso different accounting meth-ods or that havo assets purchased in different periods.

(c) Rato of return on capital employed may not be controllable to thssame ertent by al l division managers, i ,e., the divisions may sel l indifferent markets with different degrees ol product development'compeUtion, and consumer demand.

t \

: Va

* - \

:

704 Chapter 25

C25-2 (Concluded)

(d) The use of a single measuro of performance, such as rate of returnon capital employed, may result in a firation on improving the com-ponents of the ono measure to the neglect of needed attention toother desirable acUviUes-research and development, employeedevelopment, and improvement ol market position.

l2l The advantages of using mulUple measures ii evaluating divisional man-sgement performance include the following:(al Multiple performanco measunes provide a mone comprehensive pic-

ture of performance by considering a wider range of managementresponsibilit ies.

(b) Multiple performance moasunes emphasize nonquantitative as wellas quantitative aspects of performance, thereby providing an incen-tive for divisional managers to engage in desirable activities, suchas, research and development, employee development, andimprovement of market position, as well as to seek profitability.

(c) Multiple performance measunes will mitigate the problem of tryingto compare divisional perforrnance with a single measune that maybe computed on different bases in each division.

(d) Multiple performancs measunes include long-term as welt as short-term incentives, thereby emphasizing total performance rather thanjust short-term profit maximization,

(3) The problems or disadvantages of impfementing a system of multipleperformance measures include the following:(al The measurement criteria are not all equally quantifiable and, there-

fore, it may be difficult to compare the overalt performance of onedivision with another.

(b) Central managernent may have difficutty applying the criteria on aconsistent basis. Some criteria may be subjectively more heavilyweighted than other criteria at different points in time, and somecriteria may be in conflict with other criteria.

[c] A multiple performance measurement system may be confusing todivision managen;, thereby resulting in diffusion of effort and insta-bility in performance.

705i cnapter zs

,3

(r) (al Avorage oporating assets omploved:Batance at 12131120F"""" """r"

Balance' at 12131 l2OE (512'600'000 / 1'05)" " """ 'r

Beginning Plus ending balances

Average batanco ($24'600'000 * 2l'

Rate ol return oncapital emPloYed

Ineome trom operations before taxes

@issetsemPloYed

$2,460,0OO

$12,goo,oooI2TOOO'OOO

$24r600,OOO

$t 2,3OO,OOO

$lZrgOo,ooo= 2ooh

(bl Income from operations bgfore taxgs o,..il.'D.."'r.rt'..'.

Minimum return:$12,30O,ooox 15oh

s 2,460,000

1r845,OOOAverage operating assets employodGharge for invested capital '..--...'...'..

(31

ReSidUal inCOme. . . r r r . .o r . . . r r . . . . r r . .o . . . . . . . . . . r .o . . . . . . . . ' . r . ' . . . . . $ 615,ooo#=:

Yes. Presserb management probably wOuld have accepted the invest'

ment lf residual income wenB used. The investment opportunity wouldhave lowered presser's 2OF rate of return on capital employed becausethe expected return (16%) was lower than the divisionls_ historical returns(f 9.3% to 22.1o/") as well as its actual2OF rale (2Ooh). Managementreiected the investment because bonuses ane based in part on the rate

of return performanso measure. lf residual incomo weno used as a per-

formance measuno (and as a basis for bonusesl' managemont wouldaccept any and all investments that wsuld incroase rssidual income (i.e.'

a doliar amount rather than a pencentagel, including the investmentopportunity i t had in 2OF'

presser must controt atl ltems related to protit (revenues and expenses)and investment if it is to be evatuated fairty as an investment center byeither the rate of return on capitat employed or the residual income per'formanco measunes. Presser must controt all elements of the businessexcept the cost of invested capital, which is controlled by LavvtonIndustries.

706

c25-4.

(r)

1

Chapter 25 i

: - \; f

Divisional plofi t . . . . . .-. . .r. . . . . . . . . . . . .orr.. . . .o... . . . . . . .

Add corporate headquarters allocatiolt ......

Residual incomo

($oOo omitted)Marine Airline Plastics

$ 5,1OO S1,O5O $ 9,3603,4sO lfsq s70

j_gg gr,r* $ r,roAdiusted divisional profit

Divisional capltal employed. s2O,4OO s5,0OO S36,OOODeduct corporate headquarteni allocaUon 970 252 941Adjusted divisional capltal employed .......,. _9!9,430 g!,?49 J35,999Adiusted dlvlslonal rate of return on capltal

employed _!:q"n_ _ 47% ____Ze%

_$ 8,550 $2,235 S 9,930Adjusted divisional proLess 20oh of adiusted divisional capital

employed (minimum level of income).. 9503,886

-gl'664

7,O12

t2l

(31

s l ,285 S 2 ,918

All three divisions have a reported rate of return on capital emptoyed inoxcess of the 2Oo/o target rate. However, Marine Division managementapparently turned down its Investment opportunity because tho invest-ment had a lower rate of return than the division (24oh for the investmentyersus 25oh for t:lls division|, which if accepted would havE lowered thedivisionb rate lor the year, thereby lowering the annual bonus. Similarly,Airline Division management appears to have avoided fleet replacementtor the samo neason (i.e., fleet replacement rEturn is 16% versus 21oh lorthe division for the year). Plastic Divisionb management has achievedthe marimum bonus allowable under the current bonus system andtherefore had no incentive to increase profit (which may have beenviewed as something that could simply increase next yearb budget). Thelevised liguras indicate that all three divisions are performlng welt; how-ever' Marine Division's residual income is greater than the other two divi-sions combined.

Airline Division ls making an adjusted profit of $2,235,OOO and residualincome ol $1'285'OOO. The adjusted rate of return on capital employed is47oh, which suggests that the target rate should be rovised in order toproperly evaluate it. Nevertheless, since the division is achieving monothan double the present target rate of 2Ooh and more than either of theother two divisions, it appears to be a very good investment. Howover,fleet replacement should be examined along with the computation ol anew adjusted rate of return on capital employed and residual incomg,Assuming that the $25,OOO,OOO capitat investment does not inctude anycorporate headquarters allocation and that the otd fixed assets have abook value equal to market value, tho recomputat ion fol lows:

n*^

707Chapter 25

(41

l

-4 (Concluded)

lnCfgm gntal diViSiOn pf0fit o........'........r......r..'...r'...."o""'

Add COfPOfato he adqUafte fS all OCaUO Jl'....',"""""""oo""

AdiU5tgd InCfgmental diViSiOn pnOfit r.'...r..............'......."

Ad-d adiustod divislonal profit without fleet replacemsnt

Adjusted divisional profit with fleet replacefllsllt'..i.....'..

DiViSiOn CUfnont aSSOt3...r '..-o.....r. ' ..t............t...t.......tttt"t

DiViSiOn llXed aSSOtS (tleet feplagemgnt COSI}""""""""'

Adtusted divislonal capital employed with fleetnOplaCOm€J1t..r. . . . . .- . . . . . . . .D... . .r .ro.oo..r. . . . . . . . . . . . . t t . . . . . . . . t . . . . .

Adiusted rato of noturn on capital employ€d"""""""'ro"

AdjUSted diVisiOnal pfOtit ' . . . . . . .r"..r.o'. . . . . ' . , ' .ro... .D.' . . . . . . . . . .dt

Less zlohof incrgmgntal capital gmploygd'.'.................

AdiUStgd InCfgmgntal fgsidUal inCOme.. ' . . ' . . . . . . ' . . . . . . .r.o..o..

$ 4,ooo,ooo135,OOO

$ 4r135,ooo2,235|OOO

$ 6,370,000$ 2r748,ooo

25,OOO,OOO

E?ulgfoo230h

$ 6,370,0005r549,600

s__82o49

(5)

Even when adjusted, the rate of return on capital omployed is abovethe corporate target level and the incremental residual income is posi-

tive. Furthermore, assuming that profits do not fall in the future' theroturn on assots employed should rise in the future because the amountof assets employed witi Oeclino due to depreciaUon. As a result' itappoans that from a quantitative perspective tho airline should not besoid. Nevertheless, the investment required to replace the fleet shouldbe evaluated using ono of the capital expenditure evaluation techniquesthat considers the time valuo of money (e.9., the net present valuemethod or the discounted cash flow rate of return method).

Frorn a qualitative perspective, factors such as spill-over businesstoffering a futl line to customers, ulUmato profitability vvhen the economyimprovls, possiblo advantags to a competitor from tho sate of the divi-sion, €tc,, may override quantitative analysis.

Tho bonus schemo should bo basod on nesidual incomo rather than rateof return on capital employed in order to avoid the problem of manageF;making suboptimal decisions from the corporationb overall perspective.

The divisional performance measures should be computed without allo'cations of corporate headquarters costs or assets, because such alloca-tions are arbitrary and divisional managers cannot control such costs orthe uss of such assets. Also, capital investments (such as the ones facedby the Marine Division and the Airtine Division) should be evaluated byusing the capital budgeting evaluation methods (such as the net presentvalue method or tho internal rate of return method)'

CGA-Canada (adapted). Reprint with pei-mission'

7

708 Chapter 25 i

c25-5, .

(l) Generaf crfteria that should be used in selecUng psrformance measunesto evaluate operatlng managors Includo tho following:(al The measunes should be controllable by the manager and reflect the

scfions and docisions made by the managor in the current period.(bl The measunes should be mutually agreed upon, clearly understood,

and accepted by all the parties Involved.(c) The measunos should (ll reward long-term performance; (2) tie

incentive compensation to achieving strateglc (nonfinancial) goals,such as target market share, productivity levels, improvement inproduct quallty, product development, and personnel developmengand (3) evaluate opsraUng profits before gains from financiaf trans-actions; before deductions for approved erpenditures on researchand development, quality fmprovements, and preventive mainte-nance; and before deductions for the ifcremental amount of accel-erated depreciation,

(21 A major expansion of Star Paperb plant was compfeted in April, 2oA.Thls erpansion included addiUons to the production-line machinery andthe replacement of obsolete and fully depreciated equipmenl As aresult, the value of the divisionb asset base increased considerably.Whlfe productivity undoubtedly increased during the first year in theerpanded plant, the increaso was not immediate nor sufficient to offsetthe Increase In the value of the capital employed,

(3) .Apparent weaknesses in the performance evaluation pnocess at Royal

Industries include the following:(al There was no mutual agreement on the use of return on capital

employed as the only measurement of perforrnance.(bl The feedback from Fortner was insufficient Fortner indicated that

Harris would receive feedback about the questions raised concern-ing the appropriateness of using the return on capital employed toevaluate performance, but feedback was not prtrvided.

(c) There is only one single measure of performance that may give adistorted picture of actual performance at Star Paper. A single rtoa-suro could oncourage division management to make decisions thatcould lmprove short-run return at the expense of long-nrn profits.Examples include deferring maintenance, avoiding plant moderniza-tion, eliminating employee training, discontinuing research anddevelopment, etc.

(4) Multiple performance evaluation criteria woutd be appropriate for theevaluation of the Star Paper Division. The criteria suggested by Harristake into account more of the results of the key decision being made bythe manager' ang not in conflict with each other, and emphasize the bat-anco of profits with the control of current assets. These thrse measunesare controllable by division managers and, in conjunction with return oncapital omployed, provido a mono complete picture of business success.

\*

.Chapter 25

,-('

(1)

709

The 2oB bonus pool available for the management teams of each divisionfollow:Meyera Service Company

Bonus Pool = l0oh r income belore income tar and bonuses= .1O I S417,OOO= S41r7OO

Wellington Products lnc.Bonus Pool = loh r (Revenue - Cost of Product|

= .01 I ($10,0001000 - $4,95010001= .Ol I $5r05Or0OO= S50'5OO

TVyo of the advantages and two of tho disadvantages to Renslen Inc. ofthe bonus pool incentive plan at Meyers Seruice Companl follow:Advantaoes(al The management team will bs moUvated by tho bonus plan because

they have the opportunity to earn addiUonal compensation lf theywork hard as a team and take some risks for the company.

(bl Because management sharos in the benefits of efficient operations,there is an incenUve to control all costs (product costs as well asoverhead costs) and to promote sales.

Disadvantaqes(al The plan may rnotivate management to increase tho rbottom line"

only and concentrate on the short run. The pfan may encouragemanagers to sacrifice quality or avoid new product development forthe sake of curent profits.

(b) Management may postpone necessary expenditunos such as main-tenance or nessarch and development in order to increase currsntnet Incomo.

TVvo of the advantages and two of the disadvantages to Renslon Inc. oftho bonus pool incentivo ptan at Wellingrton Products Inc. follovnAdvantages(al Tho management team will be motivated by the bonus plan because

each manager has the opportunity to earn additional compensationby working hard and taking some risks for the company.

(bl The managers wifl be encouraged to sell the most profitable mix ofproducts.

Disadvantages(al The plan omits accountability for all costs except lor production

costs. Therefore, manager:i may leel no obligation to control thecosts that aro shown below tho gross profit line.

(bl The ptan may cause managers to focus all energies to maximizingcurrsnt sales and production regardless of the impact this couldhave on the manufacturing planL There is a strong motivation todefer maintenance, employee training, quality improvement, etc.,because the incentive is to produco and sel l high volume.

(21

7lo

C25-G (Goncluded)

Chapter 25 :

(3) (a) Having two differont incontive plans lor the two operating divisionscoutd result In behavioral problems and may reduce teamwork/syn-

'

ergy between the two divisions if the managers of either divisionbelieve they are belng trsated untairly. '

Themanagement teamatMeyersServ icomaybe| ievethat theyhavo to work harder to achieve their bonusos because they areresponslble for all costs and must achieve overall efficient opera-tions to earn substantial bonuses.

The management team at Wellington Products may believe thatthey have less of an opportunlty to affect the size of the bonusesthey receive because onty changes in sales and/or product costswill increaso the gross ProfiL

These perceptions of Ineguity coul4lead to decreased motivationthat could'result in decreased divisional performanco,

(b) In order to justlfy having dlfferent IncenUve plans for the two divi-sions, Renslen management could argue the foflowing:(f l The goals and products of the two buslnesses are different(one is a servlce organization while the other is a manufacturingorganizationl and, therefore, should be measured on different crite'ria. For example, the control of manufacturing costs and improvedproductivity may be the most important factor in maintainingWellington Prcducts'competitiveness, while lt may be critical forMeyers Service to control all costs to maintain profitability.(21 The plans weno In place when the businesses were acquiredand had proved satisfactory previously.

\

Chapter 25

'>-7

(rl

7 f l

ln termg ol what is best for the total company in the long run, omar prob'

aUty gt,ould not supply Defco with Electrical Fitting X1726 for ths 55 Per

unii pri"". In this ;s;, I appears that Omar and Defco 6erve different

miriets and do not represent closely related operating units. Omar oper-

ates at capacity; Defco does not. No mention is made of any other inter-

divisionat business, In the long run, Gunnco Gorporation is probably bet-

ter served lf omar is permitted to continue dealing with its regular cus'

tomers at the market price. lf Delco is having difficulties, the solutionp-uiury doeg not lie with temporary help

"! !f" sxpenso of another divi'

iion, *ttos" gales to regular custorners could be lost' The purposed

courso of acuon should not be toltowed unless it will yield a greater long-

run pront for the total company (Gunnco) T"n will any o-ther alternative.

Gunnco would be $5.5o better oif, in the short run, if Omar supptied '

Defco Electrical Fitting 11726 tor $5 and sold the brake unit for 949'5O'Assuming that the $s ier unit for fixed factory overhead and administra-

Uve erpensos r"pr"r"nts an allocation of tho costs Delco incurs, regard-

less of the brake unit order, Gunnco would lose $2.50 in cash flow for

oach fitting sotd to Defco, but would gain $B from each brake unit sold

by Defco.ln tha short nrn, there ls an advantago to Gunnco of transferringEfectrical Fitting 11726 at the SS price and, thus, selling the brake unit

for $49.50. To ilafe this happen, Gunnco witt have to overrule the deci-

sion ol Omarb managomenl This action would be counter to the purpos-

es of decentralized decision making. lf such action wens necessary on a

regular basis, the decentralized decision making inherent in the division-aliied organization would be a sham. Then the organizational structure is

inappropriate for the situation.On the other hand, if this is an occurnence of relative infrequency' tha

intervention of corporate management will not indicate inadequate orga-nizational structuro. lt may, however, create problems with division man'agements, tn the case at hand, if Gunnco management requires thatElectrical Fitting 11726 be transferred at $5r the result will be toenhance Defcob operating resutts at the sxpense of Omar. This certainlyis not in keeping with the concept that a managerb performance shouldbe measured on tho results achieved by the decision he or she controls.Omar is operating at capacity and wouid lose S2.5O (S7'5O - 35) for each -titting sold to Defco. The management performance of Omar is measuredby reiurn on investment and doitar profits. Selling to Defco at 35 per unitwould adversely affect thoso performanco measures'

f

l2l

( l

7

r t a t t a a a a a a

=.,h

I

b

712

c25-8

(1)

Chapter 25

Thc Lorar Elegtric Company wlll earn higher profits lf the necessary int.gratod circutts $Cs) aro sold to the Systoms Division rather than to regu-lgr customors. Ttrel improved proftt will be $l.OO per clock system asrhown belor*

Contrlbutlon margln from clock gystem:Propoged galea prlcc $7.50

i

5.2s

Less varlablo ProducUon costs:Intcgrated clrcutts 1C378 (5 O S-f q ..-.-.-..-'Outsldc oompono11t8 "...."........."'o"""""""Clrcuh bOard otchlng.'...D.....D...'.......oD."'.."'Argemb$ tesUng, iackgglnlf "'.'.-..'F......--

ContrfbutJon margin por'unlt on clock systemContrlbution margin forgone In Devices Division:

Salgg price of lC 378..........',..r.',....o..'.......'D.D..Variabl g production costs..'.'r....D..'......-.'.'.,.....CorrtrlbuUon margin per clrcult...Dr.D.'..o..'...'.'..Unlts tor clOck Eystem....r.'F"...'.'......".o.'D.......Co ntrl b utl o n m a rg | !l I o9t..'. -....... r.. r....... o o.. r.'....

Net advantagc to Lorax Company lf clock systemle producgd by Sytstems Dlvlsion..r""..D,...r'....r

$ '752.75

,401,35

s2.25

$ .ao, 15 ' r - .

$ ,25r5

1,25

$l.OO/unit:

f2) lnteruention by cxccutivo msnagsment generally ls not advisable' oxceptIn unugual clrcumstances, becausc h takes ayt ay the delegated decisionpowor glven to dlvision management and influences the measunes usedto ludgc the pcrfornancc of dlvlsion managemenl h conflicts withI m portant objectivce of decentralizaUo n-division auton o my ovor o p erat-Ing declalons and doclslons made by those closest to the operatingrccnc. Such lnterfercncc cgn rcsult in lower moralc and poorer perfor-mancc by dlvlslon mansgement because they will be evaluated uslngmoaauncs that arc not substantlally within their control. However, a divi'clon should ns,t bo allowed to make a decislon that ls not in the bestInterest ol thc total compsny oyor tre long nrn.

Thc descrlbed policy would avoid the need lor lntervention by erecutivemsnsgsmont or an arbiffiion committee, Howeyer, the polisy is undesir'abfe becauac other unfavorable consequsnces outweigh this benelit.With thc described policy, there would be no analysis to determine themost profitable use of an ltem raquired to be transferred at variable cosLIn sddltion, e division manager would have less control over the divisionboperaUons, and there would be an "uncontrol lable' inf luenco on themanagerb porformanco moasure; this could result In lower moral tormsnagora.

a

; f3)i

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