CHAPTER 3

Product Costing and Cost Accumulation in a

Batch Production Environment

ANSWERS TO REVIEW QUESTIONS

3-1 (a) Use in financial accounting: In financial accounting, product costs are needed to
determine the value of inventory on the balance sheet and to compute the cost-of-
goods-sold expense on the income statement.
(b) Use in managerial accounting: In managerial accounting, product costs are
needed for planning, for cost control, and for decision making.
(c) Use in cost management: In order to manage, control, or reduce the costs of
manufacturing products or providing services, management needs a clear idea of
what those costs are.
(d) Use in reporting to interested organizations: Product cost information is used in
reporting on relationships between firms and various outside organizations. For
example, public utilities such as electric and gas companies record product costs
to justify rate increases that must be approved by state regulatory agencies.
3-2 In a job-order costing system, costs are assigned to batches or job orders of
production. Job-order costing systems are used by firms that produce relatively small
numbers of dissimilar products. In a process-costing system, production costs are
averaged over a large number of product units. Process-costing systems are used by
firms that produce large numbers of nearly identical products.
3-3 Concepts of product costing are applied in service industry firms to inform
management of the costs of producing services. For example, banks record the costs
of producing financial services for the purposes of planning, cost control, and
decision making.
3-4 a. Material requisition form: A document upon which the production department
supervisor requests the release of raw materials for production.
b. Labor time record: A document upon which employees record the time they spend
working on each production job or batch.

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Managerial Accounting, 7/e 3-1
 c. Job-cost record: A document on which the costs of direct material, direct labor,
and manufacturing overhead are recorded for a particular production job or batch.
The job-cost sheet is a subsidiary ledger account for the Work-in-Process
Inventory account in the general ledger.
3-5 Although manufacturing-overhead costs are not directly traceable to products,
manufacturing operations cannot take place without incurring overhead costs.
Consequently, overhead costs are applied to products for the purpose of making
pricing decisions, in order to ensure that product prices cover all of the costs of
production.
3-6 The primary benefit of using a predetermined overhead rate instead of an actual
overhead rate is to provide timely information for decision making, planning, and
control.
3-7 An advantage of prorating overapplied or underapplied overhead is that it results in
the adjustment of all the accounts affected by misestimating the overhead rate. These
accounts include the Work-in-Process Inventory account, the Finished-Goods
Inventory account, and the Cost of Goods Sold account. The resulting balances in
these accounts are more accurate when proration is used than when overapplied or
underapplied overhead is closed directly into Cost of Goods Sold. The primary
disadvantage of prorating overapplied or underapplied overhead is that it is more
complicated and time-consuming than the simpler alternative of closing overapplied
or underapplied overhead directly into Cost of Goods Sold.
3-8 An important cost-benefit issue involving accuracy versus timeliness in accounting
for overhead involves the use of a predetermined overhead rate or an actual overhead
rate. Since an actual overhead rate is computed after costs have been incurred and
activity has been recorded, it is more accurate than a predetermined rate. However, a
predetermined overhead rate is more timely than an actual rate, since the
predetermined rate is computed earlier and in time to be used for making decisions,
planning, and controlling operations.
3-9 The difference between actual and normal costing systems involves the procedure for
applying manufacturing overhead to Work-in-Process Inventory. Under actual costing,
applied overhead is the product of the actual overhead rate (computed at the end of
the period) and the actual amount of the cost driver used. Under normal costing,
applied overhead is the product of the predetermined overhead rate (computed at the
beginning of the period) and the actual amount of the cost driver used.

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3-2 Solutions Manual
3-10 When a single volume-based cost driver is used to apply manufacturing overhead, the
managerial accountant's primary objective is to select a cost driver that varies in a
pattern similar to the pattern in which manufacturing overhead varies. Moreover, if a
single cost driver is used, it should be some productive input that is common to all of
the firm's products.
3-11 The benefit of using multiple overhead rates is that the resulting product-costing
information is more accurate and more useful for decision making than is the
information that results from using a single overhead rate. However, the use of
multiple cost drivers and overhead rates is more complicated and more costly.
3-12 The development of departmental overhead rates involves a two-stage process. In
stage one, overhead costs are assigned to the firm's production departments. First,
overhead costs are distributed to all departments, including both service and
production departments. Second, costs are allocated from the service departments to
the production departments. At the end of stage one, all overhead costs have been
assigned to the production departments.
In stage two, the costs that have been accumulated in the production departments
are applied to the production jobs that pass through the departments.
3-13 a. Overhead cost distribution: Assignment of all manufacturing-overhead costs to
department overhead centers.
b. Service department cost allocation: Allocation of service department costs to
production departments on the basis of the relative proportion of each service
department's output that is used by the various production departments.
c. Overhead application (or overhead absorption): The assignment of all
manufacturing overhead costs accumulated in a production department to the jobs
that the department has worked on.
These three processes are used in developing departmental overhead rates.
3-14 Job-order costing concepts are used in professional service firms. However, rather
than referring to production “jobs,” such organizations use terminology that reflects
their operations. For example, hospitals and law firms assign costs to “cases,” and
governmental agencies often refer to “programs” or “missions.” It is important in such
organizations to accumulate the costs of providing the services associated with a
case, project, contract, or program. Such cost information is used for planning, cost
control, and pricing, among other purposes.

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Managerial Accounting, 7/e 3-3
3-15 A cost driver is a characteristic of an event or activity that results in the incurrence of
costs by that event or activity. A volume-based cost driver is one that is closely
associated with production activity, such as the number of units produced, direct-
labor hours, or machine hours.
3-16 When direct material, direct labor, and manufacturing-overhead costs are incurred,
they are applied to Work-in-Process Inventory by debiting the account. When goods
are finished, the costs are removed from that account with a credit, and they are
transferred to Finished-Goods Inventory by debiting that account. Subsequently,
when the goods are sold, Finished-Goods Inventory is credited, and the costs are
added to Cost of Goods Sold with a debit.
3-17 Hospitals use job-order costing concepts to accumulate the costs associated with
each case treated in the hospital. For example, the costs of treating a heart patient
would be assigned to that patient's case. These costs would include the hospital room,
food and beverages, medications, and specialized services such as diagnostic testing
and X rays.
3-18 Some manufacturing firms are switching from direct-labor hours to machine hours or
throughput time as the basis for overhead application as a result of increased
automation in their factories. With increased automation comes a reduction in the
amount of direct labor used in the production process. In such cases, direct labor may
cease to be a cost driver that varies in a pattern similar to the way in which
manufacturing-overhead costs are incurred.
3-19 Overapplied or underapplied overhead is caused by errors in estimating the
predetermined overhead rate. These errors can occur in the numerator (budgeted
manufacturing overhead), or in the denominator (budgeted level of the cost driver).
3-20 Overapplied or underapplied overhead can be closed directly into Cost of Goods Sold,
or it can be prorated among Work-in-Process Inventory, Finished-Goods Inventory,
and Cost of Goods Sold.
3-21 A large retailer could use EDI to exchange such documents as purchase orders,
shipping and receiving notices, and invoices electronically with its suppliers.
Electronic data interchange (EDI) is the direct exchange of data via a computer-to-
computer interface.
3-22 An engineer could use bar code technology to record how she spends her time. Bar
codes would be assigned to her and to each of her activities. Each time she arrived at
work, left work, or changed activity at work, the engineer would scan her personal bar
code and the bar code of the appropriate action or activity. Examples of activities are
designing, redesigning, or testing a product; change orders; visiting the factory floor;
constructing a prototype; and being trained.

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3-4 Solutions Manual
SOLUTIONS TO EXERCISES
EXERCISE 3-23 (10 MINUTES)

1. Process
2. Job-order
3. Job-order (contracts or projects)
4. Process
5. Process
6. Job-order
7. Process
8. Job-order (contracts or projects)
9. Process
10. Job-order

EXERCISE 3-24 (15 MINUTES)

budgeted overhead
1. Predetermined overhead rate 
budgeted production volume

(a) At 200,000 chicken volume:

$100,000  ($.10)(200,000)
Overhead rate   $.60 per chicken
200,000

(b) At 300,000 chicken volume:

$100,000  ($.10)(300,000)
Overhead rate   $.43 per chicken (rounded)
300,000

(c) At 400,000 chicken volume:

$100,000  ($.10)(400,000)
Overhead rate   $.35 per chicken
400,000

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Managerial Accounting, 7/e 3-5
EXERCISE 3-24 (CONTINUED)

2. The predetermined overhead rate does not change in proportion to the change in
production volume. As production volume increases, the $100,000 of fixed overhead
is allocated across a larger activity base. When volume rises by 50%, from 200,000 to
300,000 chickens, the decline in the overhead rate is 28.33% [(.60 – .43)/.60]. When
volume rises by 33.33%, from 300,000 to 400,000 chickens, the decline in the overhead
rate is 18.6% [(.43 – .35)/.43].

EXERCISE 3-25 (5 MINUTES)

Work-in-Process Inventory .................................................... 5,480

Raw-Material Inventory ................................................ 4,600
Wages Payable ............................................................. 680
Manufacturing Overhead ............................................. 200

Finished-Goods Inventory ..................................................... 5,480

Work-in-Process Inventory .......................................... 5,480

EXERCISE 3-26 (30 MINUTES)

Job-order costing is the appropriate product-costing system for feature film production,
because a film is a unique production. The production process for each film would use labor,
material and support activities (i.e., overhead) in different ways. This would be true of or any
type of film (e.g., filming on location, filming in the studio, or using animation).

EXERCISE 3-27 (20 MINUTES)

1. Raw-material inventory, January 1 ................................................................. $134,000

Add: Raw-material purchases ......................................................................... 191,000
Raw material available for use ........................................................................ $325,000
Deduct: Raw-material inventory, January 31 ................................................. 124,000
Raw material used in January ......................................................................... $201,000
Direct labor ....................................................................................................... 300,000
Total prime costs incurred in January............................................................ $501,000

2. Total prime cost incurred in January.............................................................. $501,000

Applied manufacturing overhead (60%  $300,000) ...................................... 180,000
Total manufacturing cost for January ............................................................ $681,000

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3-6 Solutions Manual
EXERCISE 3-27 (CONTINUED)

3. Total manufacturing cost for January ............................................................ $681,000

Add: Work-in-process inventory, January 1 .................................................. 235,000
Subtotal ............................................................................................................. $916,000
Deduct: Work-in-process inventory, January 31 ........................................... 251,000
Cost of goods manufactured........................................................................... $665,000

4. Finished-goods inventory, January 1 ............................................................. $125,000

Add: Cost of goods manufactured ................................................................. 665,000
Cost of goods available for sale ..................................................................... $790,000
Deduct: Finished-goods inventory, January 31 ............................................. 117,000
Cost of goods sold ........................................................................................... $673,000

Since the company accumulates overapplied or underapplied overhead until the end of
the year, no adjustment is made to cost of goods sold until December 31.

5. Applied manufacturing overhead for January ............................................... $180,000

Actual manufacturing overhead incurred in January .................................... 175,000
Overapplied overhead as of January 31 ......................................................... $ 5,000

The balance in the Manufacturing Overhead account on January 31 is a $5,000 credit

balance.

NOTE: Actual selling and administrative expense, although given in the exercise, is
irrelevant to the solution.

EXERCISE 3-28 (15 MINUTES)

1. Applied manufacturing overhead = total manufacturing costs  30%

= $2,500,000  30%
= $750,000

Applied manufacturing overhead = direct-labor cost  80%

Direct-labor cost = applied manufacturing overhead  80%

= $750,000  .8
= $937,500

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Managerial Accounting, 7/e 3-7
EXERCISE 3-28 (CONTINUED)

2. Direct-material cost = total manufacturing cost

– direct labor cost
– applied manufacturing overhead
= $2,500,000 – $937,500 – $750,000
= $812,500

3. Let X denote work-in-process inventory on December 31.

Total work-in-process work-in-process cost of

manufacturing + inventory, – inventory, = goods
cost Jan.1 Dec. 31 manufactured

$2,500,000 + .75X – X = $2,425,000

.25X = $2,500,000 – $2,425,000
X = $300,000

Work-in-process inventory on December 31 amounted to $300,000.

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3-8 Solutions Manual
EXERCISE 3-29 (25 MINUTES)

JOB-COST RECORD

Job Number TB78 Description teddy bears

Date Started 4/1 Date Completed 4/15

Number of Units Completed 1,000

Direct Material
Date Requisition Number Quantity Unit Price Cost
4/1 101 400 $.80 $320
4/5 108 500 .30 150

Direct Labor
Date Time Card Number Hours Rate Cost
4/1 – 4/8 Various time cards 500 $12 $6,000

Manufacturing Overhead
Date Activity Base Quantity Application Rate Cost
4/15 Direct-labor hours 500 $2 $1,000

Cost Summary
Cost Item Amount
Total Direct Material $ 470
Total Direct Labor 6,000
Total Manufacturing Overhead 1,000
Total Cost $7,470
Unit Cost $ 7.47

Shipping Summary
Units Remaining
Date Units Shipped In Inventory Cost Balance
4/30 700 300 $2,241*

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

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Managerial Accounting, 7/e 3-9
EXERCISE 3-30 (30 MINUTES)

1. CRUNCHEM CEREAL COMPANY

SCHEDULE OF COST OF GOODS MANUFACTURED
FOR THE YEAR ENDED DECEMBER 31, 20X1
Direct material:
Raw-material inventory, January 1 ............................... $ 30,000
Add: Purchases of raw material .................................... 278,000
Raw material available for use ...................................... $308,000
Deduct: Raw-material inventory, December 31 ........... 33,000
Raw material used.......................................................... $275,000
Direct labor .............................................................................. 120,000
Manufacturing overhead 252,000 *
Total manufacturing costs ..................................................... $647,000
Add: Work-in-process inventory, January 1 ......................... 39,000
Subtotal ................................................................................... $686,000
Deduct: Work-in-process inventory, December 31 .............. 42,900
Cost of goods manufactured ................................................. $643,100

*Applied manufacturing overhead is $252,000 ($120,000210%). Actual manufacturing

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

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

Add: Cost of goods manufactured ................................................................ 643,100
Cost of goods available for sale .................................................................... $685,100
Deduct: Finished-goods inventory, December 31 ........................................ 46,200
Cost of goods sold ......................................................................................... $638,900

3. Spreadsheet is shown on this chapter’s solutions manual opening screen.

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3-10 Solutions Manual
 EXERCISE 3-31 (20 MINUTES)

1. Raw-Material Inventory Work-in-Process Inventory

227,000 18,000
174,000 DM 174,000
53,000 DL 324,000
MOH 180,000
Wages Payable 120,000
324,000 576,000

Manufacturing Overhead Finished-Goods Inventory

180,000 30,000
120,000
Sales Revenue 132,000
195,000 18,000

Accounts Receivable Cost of Goods Sold

195,000 132,000

2. REIMEL FURNITURE COMPANY, INC.

PARTIAL BALANCE SHEET
AS OF DECEMBER 31, 20X2

Current assets
Cash ....................................................................................................... XXX
Accounts receivable ............................................................................. XXX
Inventory
Raw material ..................................................................................... $ 53,000
Work in process ............................................................................... 576,000
Finished goods ................................................................................ 18,000

REIMEL FURNITURE COMPANY, INC.

PARTIAL INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 20X2

Sales $195,000
revenue
....................................................................................................................
....................................................................................................................
Less: Cost of goods sold .......................................................................... 132,000

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Managerial Accounting, 7/e 3-11
 Gross $ 63,000
margin
....................................................................................................................
....................................................................................................................

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3-12 Solutions Manual
EXERCISE 3-32 (20 MINUTES)

1. Raw material:

Beginning $ 71,000
inventory
Add: ?
Purchases
Deduct: Raw material 326,000
used
Ending $ 81,000
inventory

Therefore, purchases for the year $336,000

were

2. Direct labor:

Total manufacturing $686,000

cost
Deduct: Direct 326,000
material
Direct labor and manufacturing 360,000
overhead

Direct labor + manufacturing overhead = $360,000

Direct labor + (60%) (direct labor) = $360,000
(160%) (direct labor) = $360,000

Direct labor = $360,000

1.6

Direct labor = $225,000

3. Cost of goods manufactured:

Work in process, beginning inventory ................................................. $ 80,000

Add: Total manufacturing costs ........................................................... 686,000
Deduct: Cost of goods manufactured .................................................. ?
Work in process, ending inventory ...................................................... $ 30,000

Therefore, cost of goods manufactured was ....................................... $736,000

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Managerial Accounting, 7/e 3-13
EXERCISE 3-32 (CONTINUED)

4. Cost of goods sold:

Finished goods, beginning $ 90,000

inventory
.................................................................................................................
Add: Cost of goods 736,000
manufactured
.................................................................................................................
Cost of goods available for sale……………………………………………. $826,000
Deduct: Cost of goods ?
sold
.................................................................................................................
Finished goods, ending inventory…………………………………………. $110,000

Therefore, cost of goods sold $716,000

was
.................................................................................................................

EXERCISE 3-33 (20 MINUTES)

Calculation of proration amounts:

Calculation of
Account Amount Percentage Percentage
Work in $ 35,250 25% 35,250  $141,000
Process
....................................................
Finished 49,350 35% 49,350  $141,000
Goods
....................................................
Cost of Goods 56,400 40% 56,400  $141,000
Sold
....................................................
Total $141,000 100%
....................................................

Underapplied Amount Added

Account Overhead x Percentage to Account

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3-14 Solutions Manual
 Work in $16,000* x 25% $4,000
Process
.....................................................
Finished 16,000 x 35% 5,600
Goods
.....................................................
Cost of Goods 16,000 x 40% 6,400
Sold
.....................................................

*Underapplied overhead = actual overhead – applied overhead

$16,000 = $157,000 – $141,000

Journal entry:

Work-in-Process 4,000
Inventory
...................................................................................
Finished-Goods 5,600
Inventory
...................................................................................
Cost of Goods 6,400
Sold
...................................................................................
Manufacturing 16,000
Overhead
..........................................................................

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Managerial Accounting, 7/e 3-15
EXERCISE 3-34 (15 MINUTES)

NOTE: Actual selling and administrative expense, although given in the exercise, is irrelevant
to the solution.

$997,500
1. Predetermined overhead rate   $13.30 per hour
75,000 hours

2. To compute actual manufacturing overhead:

Depreciation $ 231,000
.................................................................................................
Property 21,000
taxes
.................................................................................................
Indirect 82,000
labor
.................................................................................................
Supervisory 200,000
salaries
.................................................................................................
Utilities 59,000
.................................................................................................
Insurance 30,000
.................................................................................................
Rental of 300,000
space
.................................................................................................
Indirect material:
Beginning inventory, January 1 ..................................... $ 48,000
Add: Purchases ............................................................... 94,000
Indirect material available for use .................................. $142,000
Deduct: Ending inventory, December 31 ....................... 63,000
Indirect material used...................................................... 79,000
Actual manufacturing overhead ............................................ $1,002,000

actual applied
Overapplied = manufacturing – manufacturing
overhead overhead overhead

= $1,002,000 – ($13.3080,000*) = $62,000

*Actual direct-labor hours.

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3-16 Solutions Manual
 3. Manufacturing Overhead...................................................... 62,000
Cost of Goods Sold .................................................... 62,000

4. Spreadsheet is shown on this chapter’s solutions manual opening screen.

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Managerial Accounting, 7/e 3-17
EXERCISE 3-35 (20 MINUTES)

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

budgeted manufacturing overhead

1. Predetermined overhead rate =
budgeted level of cost driver
$364,000
(a) = $36.40 per machine hour
10,000 machine hours
$364,000
(b) = $18.20 per direct-labor hour
20,000 direct-labor hours
$364,000 $1.30 per direct-labor dollar or 130%
(c) =
$280,000* of direct-labor cost

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

2. Actual applied overapplied or

manufacturing – manufacturing = underapplied
overhead overhead overhead

(a) $340,000 – (11,000)($36.40) = $60,400 overapplied overhead

(b) $340,000 – (18,000)($18.20) = $12,400 underapplied overhead

(c) $340,000 – ($270,000†)(130%) = $11,000 overapplied overhead

†Actual direct-labor cost = 18,000$15

EXERCISE 3-36 (5 MINUTES)

1. Work-in-Process Inventory ...................................................... 340,000

Manufacturing Overhead ............................................... 340,000

2. Work-in-Process Inventory ...................................................... 400,400

Manufacturing Overhead ............................................... 400,400

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3-18 Solutions Manual
EXERCISE 3-37 (10 MINUTES)

Budgeted overhead rate = budgeted overhead / budgeted direct professional labor

160% = 400,000 euros / 250,000 euros

Contract to redecorate mayor’s offices:

Direct material ................................................................................................... 3,500 euros

Direct professional labor .................................................................................. 6,000 euros
Overhead (160%  6,000 euros) ....................................................................... 9,600 euros
Total contract cost ............................................................................................ 19,100 euros

EXERCISE 3-38 (15 MINUTES)

1. Memorandum

Date: Today

To: President

From: I.M. Student

Subject: Cost driver for overhead application

I recommend direct-labor hours as the best volume-based cost driver upon which to base
the application of manufacturing overhead. Since our products are made by hand, direct
labor is a very significant production input. Moreover, the incurrence of manufacturing
overhead cost appears to be related to the use of direct labor.

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Managerial Accounting, 7/e 3-19
EXERCISE 3-38 (CONTINUED)

2. Memorandum

Date: Today

To: President

From: I.M. Student

Subject: Cost driver for overhead application

I recommend either machine hours or units of production as the most appropriate cost
driver for the application of manufacturing overhead. Since our production process is
highly automated, machine hours are the most significant production input. Also, our
chips are nearly identical, so the amount of overhead incurred in their production does
not vary much across product lines. The incurrence of manufacturing overhead cost
appears to be related closely both to machine time and units of production.

EXERCISE 3-39 (15 MINUTES)

Work-in-Process Inventory: Tanning 6,000a

Department

Manufacturing 6,000
Overhead

a $6,000  100 sq. ft. per set  20 sets  $3 per sq. ft.

Work-in-Process Inventory: Assembly 540b

Department

Manufacturing 540
Overhead

b $540  3 machine hours  20 sets  $9 per machine hour.

Work-in-Process Inventory: Saddle 3,200c

Department

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3-20 Solutions Manual
 Manufacturing 3,200
Overhead

c $3,200  40 direct -labor hours 20 sets  $4 per direct -labor hour.

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Managerial Accounting, 7/e 3-21
EXERCISE 3-40 (10 MINUTES)

Overhead distribution: Allocation of the hospital's building maintenance and custodial costs
to all of the hospital's departments.

Service-department cost allocation: Allocation of the hospital's Personnel Department costs

to the direct-patient-care departments in the hospital.

Overhead application: Assignment of the overhead costs in the maternity ward to each
patient-day of care provided to new mothers.

EXERCISE 3-41 (20 MINUTES)

There are many key activities that can be suggested for each business. Some possibilities
are listed below. After each activity, a suggested cost driver is given in parentheses.

(1) airline: (a) reservations (reservations booked)

(b) baggage handling (pieces of baggage handled)
(c) flight crew operations (air miles flown)
(d) aircraft operations (air miles flown)
(e) in-flight service (number of passengers)

(2) restaurant (a) purchasing (pounds or cost of food purchased)

(b) kitchen operations (meals prepared)
(c) table service (meals served)
(d) table clearing (meals served)
(e) dish washing (dishes washed)

(3) fitness club: (a) front desk operations (number of patrons)

(b) membership records (number of records)
(c) personnel (number of employees)
(d) equipment maintenance (maintenance hours)
(e) fitness consultation (hours of service)

(4) bank: (a) teller window operations (number of customers)

(b) loan processing (loan applications)
(c) check processing (checks processed)
(d) personnel (number of employees)
(e) security (number of customers)

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3-22 Solutions Manual
EXERCISE 3-41 (CONTINUED)

(5) hotel: (a) front desk operations (number of guests)

(b) bell service (pieces of luggage handled)
(c) housekeeping service (number of guest-days)
(d) room service (meals delivered)
(e) telephone service (phone calls made)

(6) hospital: (a) admissions (patients admitted)

(b) diagnostic lab (tests performed)
(c) nursing (nursing hours)
(d) surgery (hours in operating room)
(e) general patient care (patient-days of care)

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Managerial Accounting, 7/e 3-23
SOLUTIONS TO PROBLEMS
PROBLEM 3-42 (45 MINUTES)

NOTE: The 12/31/x1 balances for cash and accounts receivable, although given in the
problem, are irrelevant to the solution.

1. TWISTO PRETZEL COMPANY

SCHEDULE OF COST OF GOODS MANUFACTURED
FOR THE YEAR ENDED DECEMBER 31, 20X1

Direct material:
Raw-material inventory, 12/31/x0 ................................... $10,100
Add: Purchases of raw material ..................................... 39,000
Raw material available for use ....................................... $49,100
Deduct: Raw-material inventory, 12/31/x1 ..................... 11,000
Raw material used ........................................................... $38,100
Direct labor ............................................................................. 79,000
Manufacturing overhead:
Indirect material ............................................................... $ 4,900
Indirect labor .................................................................... 29,000
Depreciation on factory building .................................... 3,800
Depreciation on factory equipment................................ 2,100
Utilities ............................................................................. 6,000
Property taxes ................................................................. 2,400
Insurance ......................................................................... 3,600
Rental of warehouse space ............................................ 3,100
Total actual manufacturing overhead ....................... $54,900
Add: Overapplied overhead* ...................................... 3,100
Overhead applied to work in process ............................ 58,000
Total manufacturing costs ..................................................... $175,100
Add: Work-in-process inventory, 12/31/x0 ........................... 8,100
Subtotal ................................................................................... $183,200
Deduct: Work-in-process inventory, 12/31/x1 ...................... 8,300
Cost of goods manufactured ................................................. $174,900

*The Schedule of Cost of Goods Manufactured lists the manufacturing costs applied to work
in process. Therefore, the overapplied overhead, $3,100, must be added to total actual
overhead to arrive at the amount of overhead applied to work in process. If there had been
underapplied overhead, the balance would have been deducted from total actual
manufacturing overhead. The amount of overapplied overhead is found by subtracting actual
overhead, $54,900 (as computed above), from applied overhead, $58,000 (given).

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3-24 Solutions Manual
PROBLEM 3-42 (CONTINUED)

2. TWISTO PRETZEL COMPANY

SCHEDULE OF COST OF GOODS SOLD
FOR THE YEAR ENDED DECEMBER 31, 20X1

Finished-goods inventory, 12/31/x0 .............................................................. $ 14,000

Add: Cost of goods manufactured* .............................................................. 174,900
Cost of goods available for sale .................................................................... $188,900
Deduct: Finished-goods inventory, 12/31/x1 ................................................ 15,400
Cost of goods sold ......................................................................................... $173,500
Deduct: Overapplied overhead† .................................................................... 3,100
Cost of goods sold (adjusted for overapplied overhead) ............................ $170,400

*The cost of goods manufactured is obtained from the Schedule of Cost of Goods
Manufactured.

†The company closes underapplied or overapplied overhead into cost of goods sold. Hence,
the balance in overapplied overhead is deducted from cost of goods sold for the month.

3. TWISTO PRETZEL COMPANY

INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 20X1

Sales revenue ............................................................. $205,800

Less: Cost of goods sold ........................................... 170,400
Gross margin .............................................................. $ 35,400
Selling and administrative expenses:
Salaries................................................................. $13,800
Utilities ................................................................. 2,500
Depreciation ......................................................... 1,200
Rental of office space.......................................... 1,700
Other expenses.................................................... 4,000
Total ...................................................................... 23,200
Income before taxes ................................................... $12,200
Income tax expense ................................................... 5,100
Net income .................................................................. $ 7,100

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Managerial Accounting, 7/e 3-25
PROBLEM 3-43 (20 MINUTES)

1. budgeted manufacturing overhead

Predetermined overhead rate 
budgeted direct-labor hours
$240,000
  $12 per hour
(2,000) (10)

2. Journal entries:

(a) Raw-Material Inventory ............................................... 33,000

Accounts Payable ............................................. 33,000

(b) Work-in-Process Inventory ......................................... 460

Raw-Material Inventory ..................................... 460

(c) Manufacturing Overhead ............................................ 100

Manufacturing-Supplies Inventory .................. 100

(d) Manufacturing Overhead ............................................ 8,000

Accumulated Depreciation: Building............... 8,000

(e) Manufacturing Overhead ............................................ 400

Cash ................................................................... 400

(f) Work-in-Process Inventory ......................................... 34,000

Wages Payable .................................................. 34,000

To record direct-labor cost [(1,000 + 700) x $20].

Work-in-Process Inventory ......................................... 20,400

Manufacturing Overhead .................................. 20,400

To apply manufacturing overhead to work in process ($20,400 = 1,700$12 per hour).

(g) Manufacturing Overhead ............................................ 910

Property Taxes Payable .................................... 910

(h) Manufacturing Overhead ............................................ 2,500

Wages Payable .................................................. 2,500

(i) Finished-Goods Inventory .......................................... 14,400

Work-in-Process Inventory............................... 14,400

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3-26 Solutions Manual
PROBLEM 3-43 (CONTINUED)

(j) Accounts Receivable .................................................. 13,500

Sales Revenue ................................................... 13,500

Cost of Goods Sold ..................................................... 10,800*

Finished-Goods Inventory ................................ 10,800

*$10,800 = (9/12)($14,400)

PROBLEM 3-44 (25 MINUTES)

The completed T-accounts are shown below. (Missing amounts in problem are italicized.)

Raw-Material Inventory Accounts Payable

Bal. 1/1 21,000 2,500 Bal. 1/1
135,000 120,000 136,500 135,000
Bal. 12/31 36,000 1,000 Bal. 12/31

Work-in-Process Inventory Finished-Goods Inventory

Bal. 1/1 17,000 Bal. 1/1 12,000
Direct 718,000 710,000
material 120,000 Bal. 12/31 20,000
Direct
labor 150,000 718,000
Mfg.
overhead 450,000
Bal. 12/31 19,000 Cost of Goods Sold
710,000
Manufacturing Overhead
452,500 450,000 Sales Revenue
810,000
Wages Payable
2,000 Bal. 1/1 Accounts Receivable
147,000 150,000 Bal. 1/1 11,000
5,000 Bal. 12/31 810,000 806,000
Bal. 12/31 15,000

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Managerial Accounting, 7/e 3-27
PROBLEM 3-45 (35 MINUTES)

1. Predetermined overhead rate = budgeted overhead ÷ budgeted machine hours

= $840,000 ÷ 16,000 = $52.50 per machine hour

2. (a) Work-in-Process Inventory .................................................. 80,000*

Raw-Material Inventory ............................................. 80,000

Work-in-Process Inventory .................................................. 130,800**

Wages Payable .......................................................... 130,800

* $21,000 + $44,000 + $15,000 = $80,000

** $35,000 + $22,000 + $65,000 + $8,800 = $130,800

(b) Manufacturing Overhead ...................................................... 238,500

Accumulated Depreciation ....................................... 34,000
Wages Payable .......................................................... 60,000
Manufacturing Supplies Inventory .......................... 5,000
Miscellaneous Accounts .......................................... 139,500

(c) Work-in-Process Inventory .................................................. 231,000*

Manufacturing Overhead .......................................... 231,000

* (1,200 + 700 + 2,000 + 500) x $52.50 = $231,000

(d) Finished-Goods Inventory ................................................... 315,250*

Work-in-Process Inventory ...................................... 315,250

* Job 64: $84,000 + $21,000 + $35,000 + (1,200 x $52.50) = $203,000

Job 65: $53,500 + $22,000 + (700 x $52.50) = $112,250
$315,250 = $203,000 + $112,250

(e) Accounts Receivable…………………………………………… 146,950*

Sales Revenue .......................................................... 146,950

* $112,250 + $34,700 = $146,950

Cost of Goods Sold .............................................................. 112,250

Finished-Goods Inventory ....................................... 112,250

3. Job no. 66 and no. 67 are in production as of March 31:

Job 66: $44,000 + $65,000 + (2,000 x $52.50) ......................$214,000
Job 67: $15,000 + $8,800 + (500 x $52.50) ........................... 50,050
Total ...........................................................................$264,050

McGraw-Hill/Irwin  2008 The McGraw-Hill Companies, Inc.

3-28 Solutions Manual
PROBLEM 3-45 (CONTINUED)

4. Finished-goods inventory increased by $203,000 ($315,250 - $112,250).

5. The company’s actual overhead amounted to $238,500, whereas applied overhead

totaled $231,000. Thus, overhead was underapplied by $7,500.

PROBLEM 3-46 (35 MINUTES)

1. Predetermined overhead rate = budgeted overhead ÷ budgeted direct-labor cost

= $5,460,000 ÷ $4,200,000 = 130% of direct labor cost

2. Additions (debits) total $15,605,000 [$5,600,000 + $4,350,000 + ($4,350,000 x 130%)].

3. The finished-goods inventory consisted of job no. 2143, which cost $351,500 [$156,000
+ $85,000 + ($85,000 x 130%)].

4. Since there is no work in process at year-end, all amounts in the Work-in-Process

account must be transferred to Finished-Goods Inventory. Thus:

Finished-Goods Inventory .......................................15,761,800*

Work-in-Process Inventory .......................... 15,761,800

*Beginning balance in Work-in-Process Inventory + additions to the account:

$156,800 + $15,605,000 = $15,761,800

5. Finlon’s applied overhead totals 130% of direct-labor cost, or $5,655,000 ($4,350,000 x

130%). Actual overhead was $5,554,000, itemized as follows, resulting in overapplied
overhead of $101,000.

Indirect materials $ 65,000

used
................................................................................
Indirect 2,860,000
labor
................................................................................
Factory 1,740,000
depreciation
................................................................................
Factory 59,000
insurance
................................................................................

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Managerial Accounting, 7/e 3-29
 Factory 830,000
utilities
................................................................................
Total $5,554,000
................................................................................

Manufacturing Overhead .......................................... 101,000

Cost of Goods Sold ...................................... 101,000

McGraw-Hill/Irwin  2008 The McGraw-Hill Companies, Inc.

3-30 Solutions Manual
PROBLEM 3-46 (CONTINUED)

6. The company’s cost of goods sold totals $15,309,300:

Finished-goods inventory, Jan. 1……………. $ 0

Add: Cost of goods manufactured………….. 15,761,800
Cost of goods available for sale……………... $15,761,800
Less: Finished-goods inventory, Dec. 31….. 351,500
Unadjusted cost of goods sold………………. $15,410,300
Less: Overapplied overhead…………………. 101,000
Cost of goods sold……………………………... $15,309,300

7. No, selling and administrative expenses are operating expenses of the firm and are
treated as period costs rather than product costs. Such costs are unrelated to
manufacturing overhead and cost of goods sold.

PROBLEM 3-47 (30 MINUTES)

1. Traceable costs total $2,500,000, computed as follows:

Percent Traceable
Total Cost Traceable Cost

Professional staff salaries……… $2,500,000 80% $2,000,000

Administrative support staff…… 300,000 60 180,000
Travel………………………………. 250,000 90 225,000
Photocopying…………………….. 50,000 90 45,000
Other operating costs…………… 100,000 50 50,000
Total……………………………. $3,200,000 $2,500,000

JLR’s overhead (i.e., the nontraceable costs) total $700,000 ($3,200,000 - $2,500,000).

2. Predetermined overhead rate = budgeted overhead ÷ traceable costs

= $700,000 ÷ $2,500,000 = 28% of traceable costs

3. Target profit percentage = target profit ÷ total cost

= $640,000 ÷ $3,200,000 = 20% of cost

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Managerial Accounting, 7/e 3-31
PROBLEM 3-47 (CONTINUED)

4. The total cost of the Martin Manufacturing project is $64,000, and the billing is $76,800,
as follows:

Professional staff salaries… ……… $41,000

Administrative support staff……… 2,600
Travel………………………………….. 4,500
Photocopying………………………… 500
Other operating costs………………. 1,400
Subtotal…………………………… $50,000
Overhead ($50,000 x 28%)…………. 14,000
Total cost…………………………. $64,000
Markup ($64,000 x 20%)……………. 12,800
Billing to Martin……………………… $76,800

5. Possible nontraceable costs include utilities, rent, depreciation, advertising, top

management salaries, and insurance.

6. Professional staff members are compensated for attending training sessions and firm-
wide planning meetings, paid vacations, and completion of general, non-client-related
paperwork and reports. These activities benefit multiple clients, the consultant, and/or
the overall firm, making traceability to specific clients difficult if not impossible.

PROBLEM 3-48 (30 MINUTES)

NOTE: Actual selling and administrative expense, although given in the exercise, is irrelevant
to the solution.

1. Machining Dept. overhead rate = budgeted overhead ÷ budgeted machine hours

= $4,000,000 ÷ 400,000 = $10 per machine hour

Assembly Dept. overhead rate = budgeted overhead ÷ budgeted direct-labor cost

= $3,080,000 ÷ $5,600,000 = 55% of direct-labor cost

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3-32 Solutions Manual
PROBLEM 3-48 (CONTINUED)

2. The ending work-in-process inventory is carried at a cost of $153,530, computed as

follows:

Machining Department:
Direct material…………………………………… $24,500
Direct labor………………………………………. 27,900
Manufacturing overhead (360 x $10)………… 3,600 $ 56,000
Assembly Department:
Direct material…………………………………… $ 6,700
Direct labor………………………………………. 58,600
Manufacturing overhead ($58,600 x 55%)….. 32,230 97,530
Total cost……………………………………………... $153,530

3. Actual overhead in the Machining Department amounted to $4,260,000, whereas

applied overhead totaled $4,250,000 (425,000 hours x $10). Thus, overhead was
underapplied by $10,000 during the year.

4. Actual overhead in the Assembly Department amounted to $3,050,000, whereas

applied overhead totaled $3,179,000 ($5,780,000 x 55%). Thus, overhead was
overapplied by $129,000.

5. The company’s manufacturing overhead was overapplied by $119,000 ($129,000 -

$10,000). As a result, excessive overhead flowed from Work-in-Process Inventory, to
Finished-Goods Inventory, to Cost of Goods Sold, meaning that the Cost of Goods
Sold account must be decreased at year-end.

6. The Work-in-Process account is charged with applied overhead, or $7,429,000

($4,250,000 + $3,179,000).

7. The firm’s selection of cost drivers (or application bases) seems appropriate. There
should be a strong correlation between the cost driver and the amount of overhead
incurred. In the Machining Department, much of the overhead is probably related to
the operation of machines. Similarly, in the Assembly Department, a considerable
portion of the overhead incurred is related to manual assembly (i.e., labor) operations.

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Managerial Accounting, 7/e 3-33
PROBLEM 3-49 (25 MINUTES)

budgeted manufacturing overhead

1. Predetermined overhead rate 
budgeted machine hours
$1,464,000
  $20 per machine hour
73,200

2. Journal entries:

(a) Raw-Material Inventory...................................... 7,850

Accounts Payable .................................... 7,850

(b) Work-in-Process Inventory ............................... 180

Raw-Material Inventory ........................... 180

(c) Manufacturing Overhead................................... 30

Manufacturing-Supplies Inventory ......... 30

(d) Manufacturing Overhead................................... 800

Cash.......................................................... 800

(e) Work-in-Process Inventory ............................... 75,000

Wages Payable ........................................ 75,000

(f) Selling and Administrative Expense ................ 1,800

Prepaid Insurance ................................... 1,800

(g) Raw-Material Inventory...................................... 3,000

Accounts Payable .................................... 3,000

(h) Accounts Payable .............................................. 1,700

Cash.......................................................... 1,700

(i) Manufacturing Overhead................................... 21,000

Wages Payable ........................................ 21,000

(j) Manufacturing Overhead................................... 7,000

Accumulated Depreciation: Equipment . 7,000

(k) Finished-Goods Inventory ................................. 1,100

Work-in-Process Inventory ..................... 1,100

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3-34 Solutions Manual
PROBLEM 3-49 (CONTINUED)

(l) Work-in-Process Inventory ................................ 140,000*

Manufacturing Overhead ......................... 140,000

*Applied manufacturing overhead = 7,000 machine hours$20 per hour.

(m) Accounts Receivable ......................................... 176,000

Sales Revenue.......................................... 176,000

Cost of Goods Sold ............................................ 139,000

Finished-Goods Inventory....................... 139,000

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Managerial Accounting, 7/e 3-35
PROBLEM 3-50 (45 MINUTES)

1. HURON CORPORATION
SCHEDULE OF COST OF GOODS MANUFACTURED
FOR THE YEAR ENDED DECEMBER 31, 20X2

Direct material:
Raw material inventory, 12/31/x1........................ $ 89,000
Add: Purchases of raw material ........................... 731,000
Raw material available for use ............................. $820,000
Deduct: Raw-material inventory, 12/31/x2 ........... 59,000
Raw material used ................................................. $761,000
Direct labor ................................................................... 474,000
Manufacturing overhead:
Indirect material ..................................................... $ 45,000
Indirect labor .......................................................... 150,000
Depreciation on factory building .......................... 125,000
Depreciation on factory equipment...................... 60,000
Utilities ................................................................... 70,000
Property taxes........................................................ 90,000
Insurance ............................................................... 40,000
Total actual manufacturing overhead ............ $580,000
Deduct: Underapplied overhead* ................... 2,500
Overhead applied to work in process .................. 577,500
Total manufacturing costs ........................................... $1,812,500
Add: Work-in-process inventory, 12/31/x1 ................. -0-
Subtotal ......................................................................... $1,812,500
Deduct: Work-in-process inventory, 12/31/x2 ............ 40,000
Cost of goods manufactured ....................................... $1,772,500

*The Schedule of Cost of Goods Manufactured lists the manufacturing costs applied to work
in process. Therefore, the underapplied overhead, $2,500, must be deducted from total actual
overhead to arrive at the amount of overhead applied to work in process. If there had been
overapplied overhead, the balance would have been added to total manufacturing overhead.
The amount of underapplied overhead is found by subtracting the applied
manufacturing overhead, $577,500, from the total actual manufacturing overhead, $580,000.

McGraw-Hill/Irwin  2008 The McGraw-Hill Companies, Inc.

3-36 Solutions Manual
PROBLEM 3-50 (CONTINUED)

2. HURON CORPORATION
SCHEDULE OF COST OF GOODS SOLD
FOR THE YEAR ENDED DECEMBER 31, 20X2

Finished-goods inventory, 12/31/x1 ....................................................... $ 35,000

Add: cost of goods manufactured ......................................................... 1,772,500
Cost of goods available for sale ............................................................. $1,807,500
Deduct: Finished-goods inventory, 12/31/x2 ......................................... 40,000
Cost of goods sold .................................................................................. $1,767,500
Add: Underapplied overhead* ................................................................ 2,500
Cost of goods sold (adjusted for underapplied overhead) .................. $1,770,000

*The company closes underapplied or overapplied overhead into cost of goods sold. Hence
the $2,500 balance in underapplied overhead is added to cost of goods sold for the month.

3. HURON CORPORATION
INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 20X2

Sales revenue........................................................................................... $2,105,000

Less: Cost of goods sold ........................................................................ 1,770,000
Gross margin ........................................................................................... $ 335,000
Selling and administrative expenses ..................................................... 269,000
Income before taxes ................................................................................ $ 66,000
Income tax expense ................................................................................. 25,000
Net income ............................................................................................... $ 41,000

4. Spreadsheet is shown on this chapter’s solutions manual opening screen.

PROBLEM 3-51 (15 MINUTES)

1. $40,000. Since there was no work-in-process inventory at the beginning of 20x2, all of the
costs in the year-end work-in-process inventory were incurred during 20x2.
2. The direct-material cost would have been larger, probably by roughly 20 percent,
because direct material is a variable cost.
3. Depreciation is a fixed cost, so it would not have been any larger if the firm's volume
had increased.

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Managerial Accounting, 7/e 3-37
PROBLEM 3-51 (CONTINUED)

4. Only the $30,000 of equipment depreciation would have been included in

manufacturing overhead on the Schedule of Cost of Goods Manufactured. The $30,000
of depreciation related to selling and administrative equipment would have been
treated as a period cost and expensed during 20x2.

PROBLEM 3-52 (30 MINUTES)

1. MARCO POLO MAP COMPANY

SCHEDULE OF COST OF GOODS MANUFACTURED
FOR THE MONTH OF MARCH

Direct material:
Raw-material inventory, March 1 ............................ $ 17,000
Add: March purchases of raw material .................. 113,000
Raw material available for use ................................ $130,000
Deduct: Raw-material inventory, March 31 ............ 26,000
Raw materials used.................................................. $104,000
Direct labor .................................................................... 160,000 *
Manufacturing overhead applied (50% of direct labor) 80,000
Total manufacturing costs ............................................ $344,000
Add: Work-in-process inventory, March 1 ................... 40,000
Subtotal .......................................................................... $384,000
Deduct: Work-in-process inventory,
March 31 (90%$40,000) ....................................... 36,000
Cost of goods manufactured ........................................ $348,000 †

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

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

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

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3-38 Solutions Manual
PROBLEM 3-52 (CONTINUED)

2. MARCO POLO MAP COMPANY

SCHEDULE OF PRIME COSTS
FOR THE MONTH OF MARCH

Raw material:
Beginning inventory .................................................................. $ 17,000
Add: Purchases .......................................................................... 113,000
Raw material available for use .................................................. $130,000
Deduct: Ending inventory ......................................................... 26,000
Raw material used .............................................................................. $104,000
Direct labor .......................................................................................... 160,000
Total prime costs ................................................................................ $264,000

3. MARCO POLO MAP COMPANY

SCHEDULE OF CONVERSION COSTS
FOR THE MONTH OF MARCH

Direct labor ............................................................................................ $160,000

Manufacturing overhead applied (50% of direct labor) ...................... 80,000
Total conversion cost ........................................................................... $240,000

PROBLEM 3-53 (30 MINUTES)

budgeted manufacturing overhead

1. Predetermined overhead rate 
budgeted machine hours
$235,000
  $5 per machine hour
47,000
2. Calculation of applied manufacturing overhead:

Applied manufacturing overhead = machine hrs. used x predetermined overhead rate

$20,000 = 4,000 hrs. x $5 per hr.

3. Underapplied overhead = actual overhead – applied overhead

$6,000 = $26,000 – $20,000

4. Cost of Goods Sold .......................................................... 6,000

Manufacturing Overhead ....................................... 6,000

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Managerial Accounting, 7/e 3-39
PROBLEM 3-53 (CONTINUED)

5. (a) Calculation of proration amounts:

Calculation
Account Explanation Amount* Percentage of Percentage
Work in Process Job P82 only $ 2,500 12.5% 2,500  20,000
Finished Goods Job N08 only 12,500 62.5% 12,500  20,000
Cost of Goods
Sold Job A79 only 5,000 25.0% 5,000  20,000
Total $20,000 100.0%

*Machine hours used on jobpredetermined overhead rate.

Underapplied Amount Added

Account Overhead  Percentage to Account
Work in Process $6,000  12.5% $ 750
Finished Goods 6,000  62.5% 3,750
Cost of Goods Sold 6,000  25.0% 1,500
Total $6,000

(b) Journal entry:

Work-in-Process Inventory ................................................. 750

Finished-Goods Inventory .................................................. 3,750
Cost of Goods Sold ............................................................. 1,500
Manufacturing Overhead .......................................... 6,000

PROBLEM 3-54 (40 MINUTES)

1. In accordance with the IMA Statement of Ethical Professional Practice, the

appropriateness of Marc Jackson’s three alternative courses of action is described as
follows:
(a) Follow Brown's directive and do nothing further. This action is inappropriate as
Jackson has ethical responsibilities to take further action in accordance with the
following standards of ethical conduct.

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3-40 Solutions Manual
PROBLEM 3-54 (CONTINUED)

Competence:

 Maintain an appropriate level of professional expertise by continually developing

knowledge and skills.
 Perform professional duties in accordance with relevant laws, regulations, and
technical standards.
 Provide decision support information and recommendations that are accurate,
clear, concise, and timely.
 Recognize and communicate professional limitations or other constraints that
would preclude responsible judgment or successful performance of an activity.

Integrity:

 Mitigate actual conflicts of interest. Regularly communicate with business

associates to avoid apparent conflicts of interest. Advise all parties of any
potential conflicts.
 Refrain from engaging in any conduct that would prejudice carrying out duties
ethically.
 Abstain from engaging in or supporting any activity that might discredit the
profession.

Credibility:

 Communicate information fairly and objectively.

 Disclose all relevant information that could reasonably be expected to influence
an intended user’s understanding of the reports, analyses, or recommendations.
 Disclose delays or deficiencies in information, timeliness, processing, or internal
controls in conformance with organization policy and/or applicable law.

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Managerial Accounting, 7/e 3-41
 (b) Attempt to convince Brown to make the proper adjustments and to advise the
external auditors of her actions. This action is appropriate as Jackson has taken
the ethical conflict to his immediate superior for resolution. Unless Jackson
suspects that his superior is involved, this alternative is the first step for the
resolution of an ethical conflict.

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3-42 Solutions Manual
PROBLEM 3-54 (CONTINUED)
(c) Tell the Audit Committee of the Board of Directors about the problem and give them
the appropriate accounting data. This action is not appropriate as a first step since
the resolution of ethical conflicts requires Jackson to first discuss the matter with
his immediate superior.
2. The next step that Jackson should take in resolving this conflict is to inform Brown
that he is planning to discuss the conflict with the next higher managerial level.
Jackson should pursue discussions with successively higher levels of management,
including the Audit Committee and the Board of Directors, until the matter is
satisfactorily resolved. At the same time, Jackson should “clarify relevant concepts
by confidential discussion with an objective advisor to obtain an understanding of
possible courses of action.” If the ethical conflict still exists after exhausting all levels
of internal review, Jackson may have no course other than to resign from the
organization.

McGraw-Hill/Irwin  2008 The McGraw-Hill Companies, Inc.

Managerial Accounting, 7/e 3-43
PROBLEM 3-55 (25 MINUTES)

1.
Predetermined
Quarter Overhead Rate Calculations
1st ................................................................. $4 per hour $100,000/25,000
2nd................................................................. 5 per hour $80,000/16,000
3rd ................................................................. 4 per hour $50,000/12,500
4th ................................................................. 5 per hour $70,000/14,000

2.
January April
Direct material ............................................. $100 $100
Direct labor .................................................. 300 300
Manufacturing overhead:
20 hrs$4 per hr ................................ 80
20 hrs$5 per hr ................................ ____ 100
Total cost ..................................................... $480 $500

3.
January April
Total cost ..................................................... $480 $500
Markup (10%) .............................................. 48 50
Price ............................................................. $528 $550

annual budgeted manufacturing overhead

4. Predetermined rate 
annual budgeted direct-labor hours

$300,000
  $4.44 per hour (rounded)
67,500
5.
January April
Direct material .............................................. $100.00 $100.00
Direct labor ................................................... 300.00 300.00
Manufacturing overhead (20 hrs  $4.44) .. 88.80 88.80
Total cost ...................................................... $488.80 $488.80

McGraw-Hill/Irwin  2008 The McGraw-Hill Companies, Inc.

3-44 Solutions Manual
PROBLEM 3-55 (CONTINUED)

6. Total cost ...................................................... $488.80

Markup (10%) ............................................... 48.88
Price .............................................................. $537.68

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

PROBLEM 3-56 (45 MINUTES)

1. Predetermined overhead rate:

Budgeted manufacturing overhead $606,000*


Budgeted direct-labor hours 120,000
 $5.05 per direct-labor hour

*Budgeted manufacturing overhead = variable overhead + fixed overhead

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

2. Cost of job 77:

Cost in beginning work-in-process inventory .................................... $ 54,000

Direct material ....................................................................................... 45,000
Direct labor (3,500 hours$24.00 per hour)* .................................... 84,000
Applied manufacturing overhead
(3,500 hours$5.05 per hour) ....................................................... 17,675
Total cost ............................................................................................... $200,675

direct-labor wages $204,000

*Direct-labor rate    $24.00 per hour
direct-labor hours 8,500

3. Manufacturing overhead applied to job 79:

Direct-labor hourspredetermined overhead rate  2,000 hours$5.05 per hour

 $10,100

McGraw-Hill/Irwin  2008 The McGraw-Hill Companies, Inc.

Managerial Accounting, 7/e 3-45
PROBLEM 3-56 (CONTINUED)

4. Total manufacturing overhead applied during November:

Total direct-labor hourspredetermined overhead rate  8,500 hours$5.05

 $42,925

5. Actual manufacturing overhead incurred during November:

Indirect material (supplies) ........................................................................ $12,000

Indirect-labor wages................................................................................... 15,000
Supervisory salaries .................................................................................. 6,000
Building occupancy costs, factory facilities ............................................ 6,400
Production equipment costs ..................................................................... 8,100
Total ............................................................................................................. $47,500

6. Underapplied overhead for November:

Actual manufacturing overhead – applied manufacturing overhead

 $47,500 – $42,925
 $4,575 underapplied

McGraw-Hill/Irwin  2008 The McGraw-Hill Companies, Inc.

3-46 Solutions Manual
PROBLEM 3-57 (75 MINUTES)

budgeted manufacturing overhead

1. Predetermined overhead rate 
budgeted direct - labor hours
$426,300
  $21 per direct - labor hour
20,300

2. Journal entries:

(a) Raw-Material Inventory...................................... 5,000

Accounts Payable .................................... 5,000

(b) Raw-Material Inventory...................................... 4,000

Accounts Payable .................................... 4,000

(c) Work-in-Process Inventory ............................... 11,250*

Raw-Material Inventory ........................... 11,250

*(250 sq. ft.$5 per sq. ft.) + (1,000 lbs.$10 per lb.)

Manufacturing Overhead** ................................ 100

Manufacturing-Supplies Inventory ......... 100

**Valve lubricant is an indirect material, so it is considered an overhead cost.

(d) Work-in-Process Inventory ............................... 34,000

Manufacturing Overhead................................... 13,000
Wages Payable ........................................ 47,000

Work-in-Process Inventory ............................... 35,700*

Manufacturing Overhead ........................ 35,700

*Applied manufacturing overhead = 1,700 direct-labor hours$21 per hour.

(e) Manufacturing Overhead................................... 12,000

Accumulated Depreciation: Building and
Equipment ............................................. 12,000

(f) Manufacturing Overhead................................... 1,200

Cash.......................................................... 1,200

McGraw-Hill/Irwin  2008 The McGraw-Hill Companies, Inc.

Managerial Accounting, 7/e 3-47
PROBLEM 3-57 (CONTINUED)

(g) Manufacturing Overhead................................... 2,100

Accounts Payable .................................... 2,100

(h) Manufacturing Overhead................................... 2,400

Cash.......................................................... 2,400

(i) Manufacturing Overhead................................... 3,100

Prepaid Insurance ................................... 3,100

(j) Selling and Administrative Expenses .............. 8,000

Cash.......................................................... 8,000

(k) Selling and Administrative Expenses .............. 4,000

Accumulated Depreciation: Buildings and
Equipment ............................................. 4,000

(l) Selling and Administrative Expenses .............. 1,000

Cash.......................................................... 1,000

(m) Finished-Goods Inventory ............................... 34,050*

Work-in-Process Inventory .................... 34,050

*Cost of Job T81:

Direct material (250$5) ..................... $ 1,250

Direct labor (800$20) ........................ 16,000
Manufacturing overhead (800$21) .. 16,800
Total cost ............................................... $34,050

(n) Accounts Receivable ........................................ 26,600*

Sales Revenue .......................................... 26,600

*(76  2)$700 per trombone .

Cost of Goods Sold .......................................... 17,025**

Finished-Goods Inventory .......................
17,025
**17,025 = $34,050  2

McGraw-Hill/Irwin  2008 The McGraw-Hill Companies, Inc.

3-48 Solutions Manual
PROBLEM 3-57 (CONTINUED)

3. T-accounts and posting of journal entries:

Cash Accounts Payable

Bal 10,000 13,000 Bal
1,200 (f) 5,000 (a)
2,400 (h) 4,000 (b)
8,000 (j) 2,100 (g)
1,000 (l)

Accounts Receivable Wages Payable

Bal. 21,000 8,000 Bal.
(n) 26,600 47,000 (d)

Accumulated Depreciation:
Prepaid Insurance Buildings and Equipment
Bal. 5,000 102,000 Bal.
3,100 (i) 12,000 (e)
4,000 (k)

Manufacturing-Supplies Inventory Manufacturing Overhead

Bal. 500 (c) 100 35,700 (d)
100 (c) (d) 13,000
(e) 12,000
(f) 1,200
(g) 2,100
(h) 2,400
(i) 3,100

Raw-Material Inventory Cost of Goods Sold

Bal. 149,000 (n) 17,025
(a) 5,000 11,250 (c)
(b) 4,000

Selling and Administrative

Work-in-Process Inventory Expenses
Bal. 91,000 (j) 8,000
(c) 11,250 34,050 (m) (k) 4,000
(d) 34,000 (l) 1,000
(d) 35,700
McGraw-Hill/Irwin  2008 The McGraw-Hill Companies, Inc.
Managerial Accounting, 7/e 3-49
PROBLEM 3-57 (CONTINUED)

Finished-Goods Inventory Sales Revenue

Bal. 220,000 26,600 (n)
(m) 34,050 17,025 (n)

4. (a) Calculation of actual overhead:

Indirect material (valve lubricant) .......................................... $ 100

Indirect labor ........................................................................... 13,000
Depreciation: factory building and equipment ..................... 12,000
Rent: warehouse ..................................................................... 1,200
Utilities ..................................................................................... 2,100
Property taxes ......................................................................... 2,400
Insurance ................................................................................. 3,100
Total actual overhead ............................................................. $33,900

(b)  actual manufacturing   applied manufacturing 

Overapplied overhead =     
 overhead   overhead 
= $33,900 – $35,700*
= $1,800 overapplied

*$35,700 = 1,700 direct-labor hours$21 per hour.

(c) Manufacturing Overhead ......................................... 1,800

Cost of Goods Sold ....................................... 1,800

McGraw-Hill/Irwin  2008 The McGraw-Hill Companies, Inc.

3-50 Solutions Manual
PROBLEM 3-57 (CONTINUED)

5. SCHOLASTIC BRASS CORPORATION

SCHEDULE OF COST OF GOODS MANUFACTURED
FOR THE MONTH OF MARCH

Direct material:
Raw-material inventory, March 1 ............................. $149,000
Add: March purchases of raw material ................... 9,000
Raw material available for use ................................ $158,000
Deduct: Raw-material inventory, March 31............. 146,750
Raw material used .................................................... $ 11,250
Direct labor ....................................................................... 34,000
Manufacturing overhead:
Indirect material ........................................................ $ 100
Indirect labor ............................................................. 13,000
Depreciation on factory building and equipment .. 12,000
Rent: Warehouse ...................................................... 1,200
Utilities ...................................................................... 2,100
Property taxes........................................................... 2,400
Insurance .................................................................. 3,100
Total actual manufacturing overhead ............... $33,900
Add: overapplied overhead* .............................. 1,800
Overhead applied to work in process ..................... 35,700
Total manufacturing costs .............................................. $ 80,950
Add: Work-in-process inventory, March 1 ..................... 91,000
Subtotal ............................................................................ $171,950
Deduct: Work-in-process inventory, March 31 .............. 137,900
Cost of goods manufactured† ......................................... $ 34,050

*The Schedule of Cost of Goods Manufactured lists the manufacturing costs applied to work
in process. Therefore, the overapplied overhead, $1,800, must be added to actual overhead
to arrive at the amount of overhead applied to work in process during March.

†Cost of Job T81, which was completed during March.

McGraw-Hill/Irwin  2008 The McGraw-Hill Companies, Inc.

Managerial Accounting, 7/e 3-51
PROBLEM 3-57 (CONTINUED)

6. SCHOLASTIC BRASS CORPORATION

SCHEDULE OF COST OF GOODS SOLD
FOR THE MONTH OF MARCH

Finished-goods inventory, March 1 ......................................................... $220,000

Add: Cost of goods manufactured .......................................................... 34,050
Cost of goods available for sale .............................................................. $254,050
Deduct: Finished-goods inventory, March 31 ........................................ 237,025
Cost of goods sold ................................................................................... $ 17,025
Deduct: Overapplied overhead*............................................................... 1,800
Cost of goods sold (adjusted for overapplied overhead) ...................... $ 15,225

*The company closes underapplied or overapplied overhead into cost of goods sold. Hence
the balance in overapplied overhead is deducted from cost of goods sold for the month.

7. SCHOLASTIC BRASS CORPORATION

INCOME STATEMENT
FOR THE MONTH OF MARCH

Sales revenue ........................................................................................... $26,600

Less: Cost of goods sold ......................................................................... 15,225
Gross margin ............................................................................................ $11,375
Selling and administrative expenses ...................................................... 13,000
Income (loss) ............................................................................................ $ (1,625)

McGraw-Hill/Irwin  2008 The McGraw-Hill Companies, Inc.

3-52 Solutions Manual
PROBLEM 3-58 (20 MINUTES)

JOB-COST RECORD

Job Number T81 Description Trombones

Date Started March 5 Date Completed March 20
Number of Units Completed 76

Direct Material
Date Requisition Number Quantity Unit Price Cost
3/5 112 250 $5.00 $1,250

Direct Labor
Date Time Card Number Hours Rate Cost
3/8 to 3-08 through 3-12 800 $20 $16,000
3/12

Manufacturing Overhead
Date Activity Base Quantity Application Rate Cost
3/8 to Direct-labor hours 800 $21 $16,800
3/12

Cost Summary
Cost Item Amount
Total direct material $ 1,250
Total direct labor 16,000
Total manufacturing overhead 16,800
Total cost $34,050
Unit cost $448.03*

Shipping Summary
Units Remaining
Date Units Shipped In Inventory Cost Balance
March 38 38 $17,025†

*Rounded
†$17,025 = $34,050 ÷ 2

McGraw-Hill/Irwin  2008 The McGraw-Hill Companies, Inc.

Managerial Accounting, 7/e 3-53
PROBLEM 3-59 (55 MINUTES)

The answers to the questions are as follows:

1. $216,000 6. $60,000
2. $19,000 7. $150,000
3. $70,000 8. $40,000
4. $38,000 9. $15,000
5. $80,000 10. Zero

The completed T accounts, along with supporting calculations, follow.

Raw-Material Inventory Accounts Payable

Bal. 10/31 15,000 12,000 Bal. 10/31
70,000 40,000 81,000 70,000
Bal. 11/30 45,000 1,000 Bal. 11/30

Work-in-Process Inventory Finished-Goods Inventory

Bal. 10/31 8,000 Bal. 10/31 35,000
Direct 150,000 150,000 180,000
material 40,000 Bal. 11/30 5,000
Direct
labor 80,000 Cost of Goods Sold
Overhead 60,000 180,000
Bal. 11/30 38,000

Manufacturing Overhead Sales Revenue

60,000 60,000 216,000

Wages Payable Accounts Receivable

1,000 Bal. 10/31 Bal. 10/31 8,000
79,500 80,000 216,000 205,000
1,500 Bal. 11/30 Bal. 11/30 19,000

Supporting Calculations:

1. Sales revenue = cost of goods sold120%

= $180,000120%
= $216,000

McGraw-Hill/Irwin  2008 The McGraw-Hill Companies, Inc.

3-54 Solutions Manual
PROBLEM 3-59 (CONTINUED)

2. Ending balance in accounts receivable = beginning balance + sales revenue

– collections
= $8,000 + $216,000 – $205,000
= $19,000

3. Purchases of raw material = addition to accounts payable

Addition to accounts payable = ending balance + payments

– beginning balance
= $1,000 + $81,000 – $12,000
= $70,000

4. November 30 balance in work- = direct + direct + manufacturing

in-process inventory material labor overhead
= $20,500 + (500)($20) + (500)($15*)
= $38,000
budgeted overhead
*Predetermined overhead rate =
†
budgeted direct-labor hours
$720,000
=
48,000
= $15 per direct-labor hour

budgeted direct-labor cost $960,000

†Budgeted direct-labor hours =   48,000
direct-labor rate $20

5. Addition to work in process November credit to

for direct labor = wages payable
November credit to
wages payable = ending balance + payments – beginning balance
= $1,500 + $79,500 – $1,000
= $80,000

McGraw-Hill/Irwin  2008 The McGraw-Hill Companies, Inc.

Managerial Accounting, 7/e 3-55
PROBLEM 3-59 (CONTINUED)

6. November applied overhead = direct labor hourspredetermined overhead rate

= 4,000*$15
= $60,000

addition to work in process for direct labor

Direct labor hours =
direct-labor rate

$80,000
=  4,000 hours
$20

beginning ending
7. Cost of goods completed balance in additions balance in
= + during –
during November work in work in
process November process

= $8,000 + ($40,000 + $80,000 + $60,000) – $38,000

= $150,000

8. Raw material used in November credit to raw-

November = material inventory = $40,000 (given)

9. October 31 balance in November 30 direct

raw-material inventory = balance in raw- + material – purchases
material inventory used
= $45,000 + $40,000 – $70,000
= $15,000

10. Overapplied or underapplied overhead = actual overhead – applied overhead

= $60,000 – $60,000
= 0

McGraw-Hill/Irwin  2008 The McGraw-Hill Companies, Inc.

3-56 Solutions Manual
PROBLEM 3-60 (50 MINUTES)

1. Schedule of budgeted overhead costs:

Department A Department B
Variable overhead
A 20,000$16 ....................................................... $320,000
B 20,000$4 ........................................................ $ 80,000
Fixed overhead ............................................................. 200,000 200,000
Total overhead .............................................................. $520,000 $280,000

Grand total of budgeted overhead (A + B): $800,000

total budgeted overhead rate

Predetermined overhead rate 
total budgeted direct-labor hours
$800,000
  $20 per hour
40,000

2. Product prices:

Basic Advanced
System System
Total cost .................................................................... $1,100 $1,500
Markup, 10% of cost ................................................... 110 150
Price ............................................................................ $1,210 $1,650

3. Departmental overhead rates:

Department A Department B
Budgeted overhead
(from requirement 1) .............................................. $520,000 $280,000
Budgeted direct-labor hours ..................................... 20,000 20,000

Predetermined overhead rates .................................. $520,000 $280,000

20,000 20,000

$26 per $14 per

direct-labor direct-labor
hour hour

McGraw-Hill/Irwin  2008 The McGraw-Hill Companies, Inc.

Managerial Accounting, 7/e 3-57
PROBLEM 3-60 (CONTINUED)

4. New product costs:

Basic Advanced
System System
Direct material ............................................................ $ 400 $ 800
Direct labor ................................................................. 300 300
Manufacturing overhead:
Department A:
Basic system 5$26 ....................................... 130
Advanced system 15$26.............................. 390
Department B:
Basic system 15$14 ..................................... 210
Advanced system 5$14................................ _ ____ 70
Total $1,040 $1,560

5. New product prices:

Basic Advanced
System System
Total cost .................................................................... $1,040 $1,560
Markup, 10% of cost ................................................... 104 156
Price ........................................................................... $1,144 $1,716

McGraw-Hill/Irwin  2008 The McGraw-Hill Companies, Inc.

3-58 Solutions Manual
PROBLEM 3-60 (CONTINUED)

6. TELETECH CORPORATION

Memorandum

Date: Today

To: President, TeleTech Corporation

From: I. M. Student

Subject: Departmental overhead rates

Until now the company has used a single, plantwide overhead rate in computing product
costs. This approach resulted in a product cost of $1,100 for the basic system and a cost of
$1,500 for the advanced system. Under the company's pricing policy of adding a 10 percent
markup, this yielded prices of $1,210 for the basic system and $1,650 for the advanced
system.

When departmental overhead rates are computed, it is apparent that the two
production departments have very different cost structures. Department A is a relatively
expensive department to operate, while Department B is less costly. It is important to
recognize the different rates of cost incurrence in the two departments, because our two
products require different amounts of time in the two departments. The basic system spends
most of its time in Department B, the inexpensive department. The advanced system spends
most of its time in Department A, the more expensive department. Thus, using departmental
overhead rates shows that the basic system costs less than we had previously realized; the
advanced system costs more. The revised product costs are $1,040 and $1,560 for the basic
and advanced systems, respectively. With a 10 percent markup, these revised product costs
yield prices of $1,144 for the basic system and $1,716 for the advanced system. We have been
overpricing the basic system and underpricing the advanced system.

I recommend that the company switch to a product costing system that incorporates
departmental overhead rates.

McGraw-Hill/Irwin  2008 The McGraw-Hill Companies, Inc.

Managerial Accounting, 7/e 3-59
PROBLEM 3-61 (30 MINUTES)

1. Cost rates per unit of each cost driver.

(a) (b) (c) (b)  (c)

Activity Quantity of Cost Rate per Unit
Activity Cost Pool Cost Driver of Cost Driver
Machine setup ......... $100,000 200 setups $500 per setup
Material
receiving ............... 60,000 80,000 lbs. $.75 per lb.
Inspection ................ 80,000 1,600 inspections $50 per inspection
Machinery-related ... 420,000 60,000 machine hrs. $7 per machine hr.
Engineering ............. 140,000 7,000 engineering hrs. $20 per engineering hr
Total overhead ........ $800,000

2. Overhead assigned to each product line:

Overhead Assigned to Overhead Assigned to

Activity Basic System Line Advanced System Line
Machine setup ....... $ 25,000 (50 setups$500) $ 75,000 (150 setups$500)
Material receiving .. 22,500 (30,000 lbs$.75) 37,500 (50,000 lbs$.75)
Inspection .............. 35,000 (700 inspections$50) 45,000 (900 inspections
$50)
Machinery-related . 140,000 (20,000 machine hrs. 280,000 (40,000 machine hrs.
 $7) $7)
Engineering ........... 60,000 (3,000 eng. hrs.$20) 80,000 (4,000 eng hrs.$20)
Total overhead ...... $282,500 $517,500

3. Overhead assigned per unit of each type of fax machine:

Basic system .......................................................... $282.50 ($282,500  1,000 units)

Advanced system ................................................... $517.50 ($517,500  1,000 units)

McGraw-Hill/Irwin  2008 The McGraw-Hill Companies, Inc.

3-60 Solutions Manual
PROBLEM 3-61 (CONTINUED)

4. Comparison of total product cost assigned to each type of fax machine under three
alternative product costing systems:

Basic Advanced
System System
Plantwide overhead rate* ...................................... $1,100.00 $1,500.00
Departmental overhead rate** ............................... 1,040.00 1,560.00
Activity-based costing† ......................................... 982.50 1,617.50

*From the data given in the preceding problem.

**From the solution to the preceding problem.

†The assigned overhead as calculated in requirement (3) above, plus the direct material
and direct-labor costs given in the data for the preceding problem:

Basic system ....................................................... $982.50 = $700.00 + $282.50

Advanced system ................................................ $1,617.50 = $1,100.00 + $517.50

McGraw-Hill/Irwin  2008 The McGraw-Hill Companies, Inc.

Managerial Accounting, 7/e 3-61
SOLUTIONS TO CASES
CASE 3-62 (45 MINUTES)

1. A job-order costing system is appropriate in any environment where costs can be readily
identified with specific products, batches, contracts, or projects. This situation typically
occurs in a manufacturing setting when relatively small numbers of heterogeneous
products are produced.

2. The only job remaining in CompuFurn’s work-in-process inventory on December 31 is

job PS812. The cost of job PS812 can be calculated as follows:

Job PS812 balance, 11/30 ........................................ ……… $250,000

December additions:
Direct material ........................................................... $124,000
Purchased parts ........................................................ 87,000
Direct labor ................................................................ 200,500
Manufacturing overhead (19,500 machine hrs$5*) 97,500 509,000
Work-in-process inventory, 12/31 ..................................... $759,000

$4,500,000
* Manufacturing overhead rate   $5 per machine hour
900,000 hours

3. The cost of the chairs remaining in CompuFurn’s finished-goods inventory on December

31 is $455,600, calculated as follows:

 Units of chairs in finished-goods inventory on December 31:

Chair Units
Finished-goods inventory, 11/30 .............................................. 19,400
Add: Units completed in December .......................................... 15,000
Units available ............................................................................ 34,400
Deduct: Units shipped in December ......................................... 21,000
Finished-goods inventory, 12/31 .............................................. 13,400

McGraw-Hill/Irwin  2008 The McGraw-Hill Companies, Inc.

3-62 Solutions Manual
CASE 3-62 (CONTINUED)

Since CompuFurn uses the first-in, first-out (FIFO) inventory method, all units
remaining in finished- goods inventory were completed in December.

 Unit cost of chairs completed in December:

Work in process inventory, 11/30............................ $431,000

December additions:
Direct material .................................................... $ 3,000
Purchased parts ................................................. 10,800
Direct labor ......................................................... 43,200
Manufacturing overhead (4,400 machine hrs$5) 22,000 79,000
Total cost .................................................................. $510,000

total cost $510,000

Unit cost = = = $34 per unit
units completed 15,000

 Cost of finished-goods inventory = unit cost  quantity

= $34  13,400
= $455,600

4. Overapplied overhead is $7,500, calculated as follows:

Machine hours used:

January through November................................................................. 830,000

December .............................................................................................. 49,900
Total ............................................................................................... 879,900

Applied manufacturing overhead = 879,900 machine hours  $5 = $4,399,500

Actual manufacturing overhead:

January through November................................................................. $4,140,000

December .............................................................................................. 252,000
Total ............................................................................................... $4,392,000

Overapplied overhead = applied overhead  actual overhead

= $4,399,500  $4,392,000
= $7,500

McGraw-Hill/Irwin  2008 The McGraw-Hill Companies, Inc.

Managerial Accounting, 7/e 3-63
CASE 3-62 (CONTINUED)

5. If the amount of overapplied or underapplied overhead is not significant, the amount

is generally treated as a period cost and closed to Cost of Goods Sold. If the amount
is significant, the amount is sometimes prorated over the relevant accounts, i.e.,
Work-in-Process Inventory, Finished-Goods Inventory, and Cost of Goods Sold.

CASE 3-63 (50 MINUTES)

1. Manufacturers use predetermined overhead rates to allocate to production jobs the

production costs that are not directly traceable to specific jobs. As a result,
management will have timely, accurate job-cost information. Predetermined overhead
rates are easy to apply and avoid fluctuations in job costs caused by changes in
production volume or overhead costs throughout the year.

2. The manufacturing overhead applied through November 30 is calculated as follows:

Machine hourspredetermined overhead rate = overhead applied

73,000$15 = $1,095,000

3. The manufacturing overhead applied in December is calculated as follows:

Machine hourspredetermined overhead rate = overhead applied

6,000$15 = $90,000

4. Underapplied manufacturing overhead through December 31 is calculated as follows:

Actual overhead ($1,100,000 + $96,000) ..................................................... $1,196,000

Applied overhead ($1,095,000 + $90,000) ................................................... (1,185,000)
Underapplied overhead ............................................................................... $ 11,000

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CASE 3-63 (CONTINUED)

5. The balance the Finished-Goods Inventory account on December 31 is comprised only

of Job No. N11-013 and is calculated as follows:

November 30 balance for Job No. N11-013............................................... $55,000

December direct material ........................................................................... 4,000
December direct labor ................................................................................ 12,000
December overhead (1,000$15) ............................................................. 15,000
Total finished-goods inventory .......................................................... $86,000

6. FiberCom’s Schedule of Cost of Goods Manufactured for the year just completed is
constructed as follows:

FIBERCOM COMPANY
SCHEDULE OF COST OF GOODS MANUFACTURED
FOR THE YEAR ENDED DECEMBER 31
Direct material:
Raw-material inventory, 1/1 ........................................... $ 105,000
Raw-material purchases ($965,000 + $98,000) ............. 1,063,000
Raw material available for use ...................................... $1,168,000
Deduct: Indirect material used ($125,000 + $9,000) .... $134,000
Raw-material inventory 12/31 ......................... 85,000 219,000
Raw material used .......................................................... $ 949,000
Direct labor ($845,000 + $80,000) ...................................... 925,000
Manufacturing overhead:
Indirect material ($125,000 + $9,000) ............................. $134,000
Indirect labor ($345,000 + $30,000) ................................ 375,000
Utilities ($245,000 + $22,000) ......................................... 267,000
Depreciation ($385,000 + $35,000) ................................. 420,000
Total actual manufacturing overhead ........................... 1,196,000
Deduct: Underapplied overhead.................................... 11,000
Overhead applied to work in process ............................... $1,185,000
Total manufacturing costs ................................................. $3,059,000
Add: Work-in-process inventory, 1/1 ................................ 60,000
Subtotal ............................................................................... $3,119,000
Deduct: Work-in-process inventory, 12/31* ...................... 150,200
Cost of goods manufactured ............................................. $2,968,800

*Supporting calculations follow.

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CASE 3-63 (CONTINUED)

*Supporting calculations for work in process 12/31:

D12-002 D12-003 Total

Direct material .................... $37,900 $26,000 $ 63,900
Direct labor ......................... 20,000 16,800 36,800
Applied overhead:
2,500 hrs.$15 .............. 37,500 37,500
800 hrs.$15 ................. ______ $12,000 12,000
Total ......................... $95,400 $54,800 $150,200

FOCUS ON ETHICS (See page 109 in the text.)

Did Boeing exploit accounting rules to conceal cost overruns and production snafus?

According to the circumstances alleged in the Business Week article cited in the text
(page 105), Boeing did not handle its cost overruns, production problems, and the merger
with McDonnell-Douglas in a transparent manner. Boeing allegedly acted to conceal its
worsening operational problems through “earnings management” to ensure that the
merger would be approved by the stockholders of both companies. While the method of
“program accounting” is common in the aircraft industry, in this rather extreme case that
accounting method did not result in a fair portrayal of the company’s financial and
operational situation. As a result, the merger was approved on the basis of alleged
misleading information, and it is the investors who will bear the brunt of this action.
The company’s top executives and their accountants must share the responsibility for
these actions, the former for providing the data and the latter for approving it for public
release. No accounting system should be used as a tool to cover up operational problems
and mislead shareholders. One wonders also what the auditors were doing to assess the
accuracy of the accounting information.

McGraw-Hill/Irwin  2008 The McGraw-Hill Companies, Inc.

3-66 Solutions Manual