Chapter 03 - Product Costing and Cost Accumulation in a Batch Production Environment

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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Chapter 03 - Product Costing and Cost Accumulation in a Batch Production Environment

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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Chapter 03 - Product Costing and Cost Accumulation in a Batch Production Environment

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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Chapter 03 - Product Costing and Cost Accumulation in a Batch Production Environment

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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 Chapter 03 - Product Costing and Cost Accumulation in a Batch Production Environment

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 (20 MINUTES)

1. Raw-material inventory, January 1............................................................................ $174,200

Add: Raw-material purchases................................................................................... 248,300
Raw material available for use.................................................................................. $422,500
Deduct: Raw-material inventory, January 31............................................................. 161,200
Raw material used in January................................................................................... $261,300
Direct labor................................................................................................................ 390,000
Total prime costs incurred in January....................................................................... $651,300

2. Total prime cost incurred in January......................................................................... $651,300

Applied manufacturing overhead (70%  $390,000)................................................. 273,000
Total manufacturing cost for January........................................................................ $924,300

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Chapter 03 - Product Costing and Cost Accumulation in a Batch Production Environment

EXERCISE 3-24 (CONTINUED)

3. Total manufacturing cost for January........................................................................$ 924,300

Add: Work-in-process inventory, January 1............................................................... 305,500
Subtotal.....................................................................................................................$1,229,800
Deduct: Work-in-process inventory, January 31........................................................ 326,300
Cost of goods manufactured.....................................................................................$ 903,500

4. Finished-goods inventory, January 1........................................................................$ 162,500

Add: Cost of goods manufactured............................................................................. 903,500
Cost of goods available for sale................................................................................$1,066,000
Deduct: Finished-goods inventory, January 31......................................................... 152,100
Cost of goods sold....................................................................................................$ 913,900

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............................................................ $273,000

Actual manufacturing overhead incurred in January................................................. 227,500
Overapplied overhead as of January 31................................................................... $ 45,500

The balance in the Manufacturing Overhead account on January 31 is a $45,500 credit

balance.

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

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Chapter 03 - Product Costing and Cost Accumulation in a Batch Production Environment

EXERCISE 3-25 (25 MINUTES)

JOB-COST RECORD

Job Number TB78 Description teddy bears

Date Started 8/11 Date Completed 8/20

Number of Units Completed 1,000

Direct Material
Date Requisition Number Quantity Unit Price Cost
8/11 201 500 $.90 $450
8/12 208 600  .40  240

Direct Labor
Date Time Card Number Hours Rate Cost
8/15 82 550 $14 $7,700

Manufacturing Overhead
Date Activity Base Quantity Application Rate Cost
8/15 direct-labor hours 550 $3 $1,650

Cost Summary
Cost Item Amount
Total Direct Material $   690
Total Direct Labor 7,700
Total Manufacturing Overhead 1,650
Total Cost $10,040
Unit Cost $ 10.04

Shipping Summary
Units Remaining
Date Units Shipped In Inventory Cost Balance
8/30 800 200 $2,008*

*200 units remaining in inventory$10.04 = $2,008

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Chapter 03 - Product Costing and Cost Accumulation in a Batch Production Environment

EXERCISE 3-26 (15 MINUTES)

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

= $1,250,000  30%
= $375,000

Applied manufacturing overhead = direct-labor cost  80%

Direct-labor cost = applied manufacturing overhead  80%

= $375,000  .8
= $468,750

2. Direct-material used = total manufacturing cost

– direct labor cost
– applied manufacturing overhead
= $1,250,000 – $468,750 – $375,000
= $406,250

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

$1,250,000 + .75X – X = $1,212,500

.25X = $1,250,000 – $1,212,500
X = $150,000

Work-in-process inventory on December 31 amounted to $150,000.

EXERCISE 3-27 (5 MINUTES)

Work-in-Process Inventory............................................................ 6,060

Raw-Material Inventory....................................................... 5,100
Wages Payable.................................................................. 720
Manufacturing Overhead.................................................... 240

Finished-Goods Inventory............................................................. 6,060

Work-in-Process Inventory................................................. 6,060

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Chapter 03 - Product Costing and Cost Accumulation in a Batch Production Environment

EXERCISE 3-28 (15 MINUTES)

budgeted overhead
1. Predetermi ned overhead rate 
budgeted production volume

(a) At 100,000 chicken volume:

$150,000  ($.15)(100,000)
Overhead rate   $1.65 per chicken
100,000

(b) At 200,000 chicken volume:

$150,000  ($.15)(200,000)
Overhead rate   $.90 per chicken
200,000

(c) At 300,000 chicken volume:

$150,000  ($.15)(300,000)
Overhead rate   $.65 per chicken
300,000

2. The predetermined overhead rate does not change in proportion to the change in production
volume. As production volume increases, the $150,000 of fixed overhead is allocated across a
larger activity base. When volume rises by 100%, from 100,000 to 200,000 chickens, the decline
in the overhead rate is 45.45% [($1.65 – $.90)/$1.65]. When volume rises by 50%, from 200,000
to 300,000 chickens, the decline in the overhead rate is 27.78% [($.90 – $.65)/$.90].

EXERCISE 3-29 (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 for any type of film (e.g.,
filming on location, filming in the studio, or using animation).

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Chapter 03 - Product Costing and Cost Accumulation in a Batch Production Environment

EXERCISE 3-30 (20 MINUTES)

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

295,100 23,400
226,200 226,200
68,900 421,200
234,000
Wages Payable 156,000
421,200 748,800

Manufacturing Overhead Finished-Goods Inventory

234,000 39,000
156,000
Sales Revenue 171,600
253,500 23,400

Accounts Receivable Cost of Goods Sold

253,500 171,600

2. JAY SPORTS EQUIPMENT COMPANY, INC.

PARTIAL BALANCE SHEET
AS OF DECEMBER 31, 20X2
Current assets
Cash....................................................................................................................... XXX
Accounts receivable................................................................................................ XXX
Inventory
Raw material......................................................................................................$ 68,900
Work in process................................................................................................. 748,800
Finished goods................................................................................................... 23,400

JAY SPORTS EQUIPMENT COMPANY, INC.

PARTIAL INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 20X2
Sales revenue........................................................................................................... $253,500
Less: Cost of goods sold........................................................................................... 171,600
Gross margin............................................................................................................ $ 81,900

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Chapter 03 - Product Costing and Cost Accumulation in a Batch Production Environment

EXERCISE 3-31 (20 MINUTES)

1. Raw material:

Beginning inventory...................................................................................... $142,000

Add: Purchases............................................................................................       ?
Deduct: Raw material used.......................................................................... 652,000
Ending inventory........................................................................................... $162,000

Therefore, purchases for the year were........................................................ $672,000

2. Direct labor:

Total manufacturing cost.............................................................................. $1,372,000

Deduct: Direct material.................................................................................  652,000
Direct labor and manufacturing overhead..................................................... $  720,000

Direct labor + manufacturing overhead = $720,000

Direct labor + (60%) (direct labor) = $720,000
(160%) (direct labor) = $720,000

Direct labor = $720,000

1.6   

Direct labor = $450,000

3. Cost of goods manufactured:

Work in process, beginning inventory....................................................... $ 160,000

Add: Total manufacturing costs................................................................ 1,372,000
Deduct: Cost of goods manufactured.......................................................    ?
Work in process, ending inventory............................................................ $ 60,000

Therefore, cost of goods manufactured was............................................. $1,472,000

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Chapter 03 - Product Costing and Cost Accumulation in a Batch Production Environment

EXERCISE 3-31 (CONTINUED)

4. Cost of goods sold:

Finished goods, beginning inventory............................................................ $ 180,000

Add: Cost of goods manufactured................................................................ 1,472,000
Deduct: Cost of goods sold..........................................................................    ?
Finished goods, ending inventory................................................................. $ 220,000

Therefore, cost of goods sold was................................................................ $1,432,000

EXERCISE 3-32 (30 MINUTES)

1. CRUNCHEM CEREAL COMPANY

SCHEDULE OF COST OF GOODS MANUFACTURED
FOR THE YEAR ENDED DECEMBER 31, 20X4
Direct material:
Raw-material inventory, January 1..............................................$ 45,000
Add: Purchases of raw material................................................... 417,000
Raw material available for use....................................................$462,000
Deduct: Raw-material inventory, December 31...........................  49,500
Raw material used....................................................................... $ 412,500  
Direct labor........................................................................................... 180,000  
Manufacturing overhead  378,000*
Total manufacturing costs.................................................................... $ 970,500  
Add: Work-in-process inventory, January 1..........................................   58,500  
Subtotal................................................................................................ $1,029,000  
Deduct: Work-in-process inventory, December 31...............................   64,350  
Cost of goods manufactured................................................................ $ 964,650  

*Applied manufacturing overhead is $378,000 ($180,000210%). Actual manufacturing overhead is

also $378,000, so there is no overapplied or underapplied overhead.

2. Finished-goods inventory, January 1........................................................................$ 63,000

Add: Cost of goods manufactured.............................................................................  964,650
Cost of goods available for sale................................................................................$1,027,650
Deduct: Finished-goods inventory, December 31.....................................................   69,300
Cost of goods sold....................................................................................................$ 958,350

3. In the electronic version of the solutions manual, press the CTRL key and click on the
following link: 10E - BUILD A SPREADSHEET 03-32.XLS
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Chapter 03 - Product Costing and Cost Accumulation in a Batch Production Environment

EXERCISE 3-33 (20 MINUTES)

NOTE: Budgeted sales revenue, although given in the exercise, is irrelevant to the solution.
budgeted manufactur ing overhead
1. Predetermined overhead rate = budgeted level of cost driver
$650,000
(a) 20,000 machine hours = $32.50 per machine hour
$650,000
(b) 25,000 direct - labor hours = $26.00 per direct-labor hour
$650,000 $2.00 per direct-labor dollar or 200%
(c) $325,000 * =
of direct-labor cost

*Budgeted direct-labor cost = 25,000$13

2. Actual applied overapplied or

manufacturing – manufacturing = underapplied
overhead overhead overhead

(a) $690,000 – (22,000)($32.50) = $25,000 overapplied overhead

(b) $690,000 – (26,000)($26.00) = $14,000 underapplied overhead

(c) $690,000 – ($364,000†)(200%) = $38,000 overapplied overhead

†
Actual direct-labor cost = 26,000$14

EXERCISE 3-34 (5 MINUTES)

1. Work-in-Process Inventory.......................................................... 690,000

Manufacturing Overhead.................................................. 690,000

2. Work-in-Process Inventory.......................................................... 715,000*

Manufacturing Overhead.................................................. 715,000

*Applied manufacturing overhead = $715,000

= 22,000 hours x $32.50 per machine hour

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Chapter 03 - Product Costing and Cost Accumulation in a Batch Production Environment

EXERCISE 3-35 (15 MINUTES)

1. Predetermined overhead rate = $993,300 / 77,000 hours = $12.90 per hour

2. To compute actual manufacturing overhead:

Depreciation................................................................................................. $225,000
Property taxes.............................................................................................. 19,000
Indirect labor................................................................................................. 79,000
Supervisory salaries..................................................................................... 210,000
Utilities.......................................................................................................... 58,000
Insurance...................................................................................................... 32,000
Rental of space............................................................................................ 295,000
Indirect material:
Beginning inventory, January 1............................................................. $ 46,000
Add: Purchases.....................................................................................  95,000
Indirect material available for use.......................................................... $141,000
Deduct: Ending inventory, December 31...............................................   62,000
Indirect material used............................................................................ 79,000
Actual manufacturing overhead.................................................................... $997,000

actual applied
Overapplied = manufacturing – manufacturing
overhead overhead overhead

= $997,000 – ($12.9079,000*) = $22,100

*Actual direct-labor hours.

3. Manufacturing Overhead.............................................................. 22,100

Cost of Goods Sold............................................................ 22,100

4. In the electronic version of the solutions manual, press the CTRL key and click on the
following link: 10E - BUILD A SPREADSHEET 03-35.XLS

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

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Chapter 03 - Product Costing and Cost Accumulation in a Batch Production Environment

EXERCISE 3-36 (20 MINUTES)

Calculation of proration amounts:

Calculation of
Account Amount Percentage Percentage
Work in Process........................................ $ 29,000  20% 29,000  $145,000
Finished Goods......................................... 50,750  35% 50,750  $145,000
Cost of Goods Sold................................... 65,250  45% 65,250  $145,000
Total..........................................................
$145,000 100%

Underapplied Amount Added

Account Overhead x Percentage to Account
Work in Process........................................$22,000* x 20% $4,400
Finished Goods......................................... 22,000 x 35%  7,700
Cost of Goods Sold................................... 22,000 x 45%  9,900

*Underapplied overhead = actual overhead – applied overhead

$22,000 = $167,000 – $145,000

Journal entry:

Work-in-Process Inventory............................................... 4,400

Finished-Goods Inventory................................................. 7,700
Cost of Goods Sold.......................................................... 9,900
Manufacturing Overhead.................................................. 22,000

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Chapter 03 - Product Costing and Cost Accumulation in a Batch Production Environment

EXERCISE 3-37 (10 MINUTES)

Budgeted overhead rate = budgeted overhead / budgeted direct professional labor

170% = 510,000 euros / 300,000 euros

Contract to redecorate mayor’s offices:

Direct material..............................................................................................................  4,100 euros

Direct professional labor............................................................................................... 7,000 euros
Overhead (170%  7,000 euros).................................................................................. 11,900 euros
Total contract cost........................................................................................................ 23,000 euros

EXERCISE 3-38 (15 MINUTES)

Work-in-Process Inventory: Tanning Department...........................................11,000a

Manufacturing Overhead...................................................................... 11,000
a
11,000 = 25 sets x 110 sq. ft. x $4 per sq. ft.

Work-in-Process Inventory: Assembly Department......................................... 1,100b

Manufacturing Overhead...................................................................... 1,100
b
$1,100 = 25 sets x 4 MH x $11 per MH

Work-in-Process Inventory: Saddle Department............................................. 5,625c

Manufacturing Overhead...................................................................... 5,625
c
$5,625 = 25 sets x 45 DLH x $5 per DLH

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Chapter 03 - Product Costing and Cost Accumulation in a Batch Production Environment

EXERCISE 3-39 (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.

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.

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Chapter 03 - Product Costing and Cost Accumulation in a Batch Production Environment

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 (15 MINUTES)

1. Total staff compensation = $280,000 + $420,000 = $700,000

2. Overhead rate = total budgeted overhead/total budgeted staff compensation

= $756,000/$700,000

= 108%

3. Applied overhead = 108% × total direct professional labor

= 108% × ($1,200 + $2,000)

= $3,456

4. Applied overhead using single cost driver = $3,456

Applied overhead using two cost drivers = $3,480 ($1,080 + $2,400)

See the illustration in the text.

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Chapter 03 - Product Costing and Cost Accumulation in a Batch Production Environment

SOLUTIONS TO PROBLEMS
PROBLEM 3-42 (20 MINUTES)

1. budgeted manufactur ing overhead

Predetermi ned overhead rate 
budgeted direct - labor hours
$260,000
  $13 per hour
(2,000) (10)

2. Journal entries:

(a) Raw-Material Inventory........................................................... 34,800

Accounts Payable......................................................... 34,800

(b) Work-in-Process Inventory...................................................... 540

Raw-Material Inventory................................................. 540

(c) Manufacturing Overhead........................................................ 125

Manufacturing-Supplies Inventory................................ 125

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

Accumulated Depreciation: Building............................. 7,000

(e) Manufacturing Overhead........................................................ 300

Cash............................................................................. 300

(f) Work-in-Process Inventory...................................................... 31,900

Wages Payable............................................................ 31,900

To record direct-labor cost.

Work-in-Process Inventory...................................................... 18,850

Manufacturing Overhead.................................... 18,850

To apply manufacturing overhead to work in process ($18,850 = 1,450 x $13 per hour).

(g) Manufacturing Overhead........................................................ 890

Property Taxes Payable............................................... 890

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

Wages Payable............................................................ 3,100

3-19
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Chapter 03 - Product Costing and Cost Accumulation in a Batch Production Environment

PROBLEM 3-42 (CONTINUED)

(i) Finished-Goods Inventory....................................................... 15,100

Work-in-Process Inventory........................................... 15,100

(j) Accounts Receivable.............................................................. 14,400

Sales Revenue............................................................. 14,400

Cost of Goods Sold................................................................. 11,325*

Finished-Goods Inventory............................................. 11,325

*$11,325 = (9/12)($15,100)

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Chapter 03 - Product Costing and Cost Accumulation in a Batch Production Environment

PROBLEM 3-43 (35 MINUTES)

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

= $2,730,000 ÷ $2,100,000 = 130% of direct labor cost

2. Additions (debits) total $7,802,500 [$2,800,000 + $2,175,000 + ($2,175,000 x 130%)].

3. The finished-goods inventory consisted of job no. 3154, which cost $175,750 [$78,000 +
$42,500 + ($42,500 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...........................................7,880,900*
Work-in-Process Inventory.............................. 7,880,900

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

$78,400 + $7,802,500 = $7,880,900

5. BBBC’s applied overhead totals 130% of direct-labor cost, or $2,827,500 ($2,175,000 x

130%). Actual overhead was $2,777,000, itemized as follows, resulting in overapplied
overhead of $50,500.

Indirect materials used.............................................. $ 32,500

Indirect labor............................................................. 1,430,000
Factory depreciation.................................................. 870,000
Factory insurance..................................................... 29,500
Factory utilities.......................................................... 415,000
Total.................................................................... $2,777,000

Manufacturing Overhead............................................ 50,500

Cost of Goods Sold......................................... 50,500

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Chapter 03 - Product Costing and Cost Accumulation in a Batch Production Environment

PROBLEM 3-43 (CONTINUED)

6. The company’s cost of goods sold totals $7,654,650:

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

Add: Cost of goods manufactured………….. 7,880,900
Cost of goods available for sale……………... $ 7,880,900
Less: Finished-goods inventory, Dec. 31….. 175,750
Unadjusted cost of goods sold………………. $ 7,705,150
Less: Overapplied overhead…………………. 50,500
Cost of goods sold……………………………... $ 7,654,650

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.

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Chapter 03 - Product Costing and Cost Accumulation in a Batch Production Environment

PROBLEM 3-44 (45 MINUTES)

NOTE: The 12/31/x4 balances for cash and accounts receivable, although given in the problem, are
irrelevant to the solution.

1. MISTER MUNCHIE, INC.

SCHEDULE OF COST OF GOODS MANUFACTURED
FOR THE YEAR ENDED DECEMBER 31, 20X4

Direct material:
Raw-material inventory, 12/31/x3................................................$ 30,300
Add: Purchases of raw material................................................... 117,000
Raw material available for use....................................................$147,300
Deduct: Raw-material inventory, 12/31/x4...................................  33,000
Raw material used....................................................................... $114,300
Direct labor......................................................................................... 237,000
Manufacturing overhead:
Indirect material...........................................................................$ 14,700
Indirect labor................................................................................ 87,000
Depreciation on factory building.................................................. 11,400
Depreciation on factory equipment.............................................. 6,300
Utilities......................................................................................... 18,000
Property taxes............................................................................. 7,200
Insurance.................................................................................... 10,800
Rental of warehouse space†........................................................   9,300
Total actual manufacturing overhead......................................$164,700
Add: Overapplied overhead*...................................................   9,300
Overhead applied to work in process..........................................  174,000
Total manufacturing costs.................................................................. $525,300
Add: Work-in-process inventory, 12/31/x3..........................................   24,300
Subtotal.............................................................................................. $549,600
Deduct: Work-in-process inventory, 12/31/x4.....................................   24,900
Cost of goods manufactured.............................................................. $524,700

*The Schedule of Cost of Goods Manufactured lists the manufacturing costs applied to work in
process. Therefore, the overapplied overhead, $9,300, 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, $164,700 (as computed
above), from applied overhead, $174,000 (given).
†
See next page.

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Chapter 03 - Product Costing and Cost Accumulation in a Batch Production Environment

PROBLEM 3-44 (CONTINUED)

†
In some companies, the cost of renting warehouse space to store raw material might be added to
raw-material cost. The most common treatment, however, is to include this cost in manufacturing
overhead as is done here.

2. MISTER MUNCHIE, INC.

SCHEDULE OF COST OF GOODS SOLD
FOR THE YEAR ENDED DECEMBER 31, 20X4

Finished-goods inventory, 12/31/x3....................................................................... $ 42,000

Add: Cost of goods manufactured*........................................................................  524,700
Cost of goods available for sale............................................................................. $566,700
Deduct: Finished-goods inventory, 12/31/x4..........................................................   46,200
Cost of goods sold................................................................................................. $520,500
Deduct: Overapplied overhead†.............................................................................   9,300
Cost of goods sold (adjusted for overapplied overhead)........................................ $511,200

*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. MISTER MUNCHIE, INC.

INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 20X4

Sales revenue............................................................... $617,400

Less: Cost of goods sold............................................... 511,200
Gross margin................................................................. $106,200
Selling and administrative expenses:
Salaries.................................................................. $41,400
Utilities.................................................................... 7,500
Depreciation........................................................... 3,600
Rental of office space............................................. 5,100
Other expenses......................................................  12,000
Total.......................................................................  69,600
Income before taxes...................................................... $36,600
Income tax expense......................................................  15,300
Net income.................................................................... $21,300

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Chapter 03 - Product Costing and Cost Accumulation in a Batch Production Environment

PROBLEM 3-45 (25 MINUTES)

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

Raw-Material Inventory Accounts Payable

Bal. 1/1 29,400 3,500 Bal. 1/1
189,000 168,000 191,100 189,000
Bal. 12/31 50,400 1,400 Bal. 12/31

Work-in-Process Inventory Finished-Goods Inventory

Bal. 1/1 23,800 Bal. 1/1 16,800
Direct 168,000 1,005,20 994,000
material Bal. 12/31 0
28,000
Direct 210,000 1,005,200
labor
Mfg. 630,000
overhead
Bal. 12/31 26,600 Cost of Goods Sold
994,000
Manufacturing Overhead
633,500 630,000 Sales Revenue
1,134,000
Wages Payable
2,800 Bal. 1/1 Accounts Receivable
205,800 210,000 Bal. 1/1 15,400
7,000 Bal. 12/31 1,134,00 1,128,400
0
Bal. 12/31 21,000

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Chapter 03 - Product Costing and Cost Accumulation in a Batch Production Environment

PROBLEM 3-46 (35 MINUTES)

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

= $1,680,000 ÷ 32,000 = $52.50 per machine hour

2. (a) Work-in-Process Inventory...................................................... 160,000*

Raw-Material Inventory............................................... 160,000

Work-in-Process Inventory...................................................... 261,600**

Wages Payable........................................................... 261,600

* $42,000 + $88,000 + $30,000 = $160,000

** $70,000 + $44,000 + $130,000 + $17,600 = $261,600

(b) Manufacturing Overhead........................................................ 477,000

Accumulated Depreciation.......................................... 68,000
Wages Payable........................................................... 120,000
Manufacturing Supplies Inventory............................... 10,000
Miscellaneous Accounts............................................. 279,000

(c) Work-in-Process Inventory...................................................... 462,000*

Manufacturing Overhead............................................ 462,000

* (2,400 + 1,400 + 4,000 + 1,000) x $52.50 = $462,000

(d) Finished-Goods Inventory....................................................... 630,500*

Work-in-Process Inventory.......................................... 630,500

* Job 101: $168,000 + $42,000 + $70,000 + (2,400 x $52.50) = $406,000

Job 102: $107,000 + $44,000 + (1,400 x $52.50) = $224,500
$630,500 = $406,000 + $224,500

(e) Accounts Receivable. ............................................................. 293,900*

Sales Revenue........................................................... 293,900

* $224,500 + $69,400 = $293,900

Cost of Goods Sold................................................................. 224,500

Finished-Goods Inventory........................................... 224,500

3. Job no. 103 and no. 104 are in production as of March 31:
Job 103: $88,000 + $130,000 + (4,000 x $52.50)...................$428,000
Job 104: $30,000 + $17,600 + (1,000 x $52.50)..................... 100,100
Total............................................................................$528,100

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Chapter 03 - Product Costing and Cost Accumulation in a Batch Production Environment

PROBLEM 3-46 (CONTINUED)

4. Finished-goods inventory increased by $406,000 ($630,500 - $224,500).

5. The company’s actual overhead amounted to $477,000, whereas applied overhead totaled
$462,000. Thus, overhead was underapplied by $15,000.

PROBLEM 3-47 (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

= $2,000,000 ÷ 200,000 = $10 per machine hour

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

= $1,540,000 ÷ $2,800,000 = 55% of direct-labor cost

2. The ending work-in-process inventory is carried at a cost of $76,765, computed as follows:

Machining Department:
Direct material…………………………………… $12,250
Direct labor………………………………………. 13,950
Manufacturing overhead (180 x $10)………… 1,800 $ 28,000
Assembly Department:
Direct material…………………………………… $ 3,350
Direct labor………………………………………. 29,300
Manufacturing overhead ($29,300 x 55%)….. 16,115 48,765
Total cost……………………………………………... $ 76,765

3. Actual overhead in the Machining Department amounted to $2,130,000, whereas applied

overhead totaled $2,125,000 (212,500 hours x $10). Thus, overhead was underapplied by
$5,000 during the year.

4. Actual overhead in the Assembly Department amounted to $1,525,000, whereas applied

overhead totaled $1,589,500 ($2,890,000 x 55%). Thus, overhead was overapplied by
$64,500.

5. The company’s manufacturing overhead was overapplied by $59,500 ($64,500 - $5,000). As

a result, excessive overhead flowed from Work-in-Process Inventory, to Finished-Goods

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Chapter 03 - Product Costing and Cost Accumulation in a Batch Production Environment

Inventory, to Cost of Goods Sold, meaning that the Cost of Goods Sold account must be
decreased at year-end.

PROBLEM 3-47 (CONTINUED)

6. The Work-in-Process account is charged with applied overhead, or $3,714,500 ($2,125,000 +

$1,589,500).

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.

PROBLEM 3-48 (30 MINUTES)

1. Traceable costs total $3,750,000, computed as follows:

Percent Traceable
Total Cost Traceable Cost

Professional staff salaries……… $3,750,000 80% $3,000,000

Administrative support staff…… 450,000 60 270,000
Photocopying…………………….. 75,000 90 67,500
Travel………………………………. 375,000 90 337,500
Other operating costs…………… 150,000 50 75,000
Total……………………………. $4,800,000 $3,750,000

Golden State Enterprises’ overhead (i.e., the nontraceable costs) total $1,050,000
($4,800,000 - $3,750,000).

2. Predetermined overhead rate = budgeted overhead ÷ traceable costs

= $1,050,000 ÷ $3,750,000 = 28% of traceable costs

3. Target profit percentage = target profit ÷ total cost

= $960,000 ÷ $4,800,000 = 20% of cost

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Chapter 03 - Product Costing and Cost Accumulation in a Batch Production Environment

PROBLEM 3-48 (CONTINUED)

4. The total cost of the Davis Manufacturing project is $96,000, and the billing is $115,200, as
follows:

Professional staff salaries… ……… $61,500

Administrative support staff……… 3,900
Photocopying………………………… 750
Travel………………………………….. 6,750
Other operating costs………………. 2,100
Subtotal…………………………… $75,000
Overhead ($75,000 x 28%)…………. 21,000
Total cost…………………………. $96,000
Markup ($96,000 x 20%)……………. 19,200
Billing to Davis……………………… $115,200

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.

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Chapter 03 - Product Costing and Cost Accumulation in a Batch Production Environment

PROBLEM 3-49 (45 MINUTES)

1. SUPERIOR METALS
SCHEDULE OF COST OF GOODS MANUFACTURED
FOR THE YEAR ENDED DECEMBER 31, 20X4

Direct material:
Raw material inventory, 12/31/x3.......................... $ 66,750
Add: Purchases of raw material...............................  548,250
Raw material available for use................................. $615,000
Deduct: Raw-material inventory, 12/31/x4...............   44,250
Raw material used................................................... $570,750
Direct labor..................................................................... 355,500
Manufacturing overhead:
Indirect material....................................................... $ 33,750
Indirect labor............................................................ 112,500
Depreciation on factory building............................... 93,750
Depreciation on factory equipment.......................... 45,000
Utilities..................................................................... 52,500
Property taxes.......................................................... 67,500
Insurance.................................................................   30,000
Total actual manufacturing overhead................. $435,000
Deduct: Underapplied overhead*.......................    1,875
Overhead applied to work in process.......................    433,125
Total manufacturing costs............................................... $1,359,375
Add: Work-in-process inventory, 12/31/x3......................        -0-
Subtotal.......................................................................... $1,359,375
Deduct: Work-in-process inventory, 12/31/x4.................     30,000
Cost of goods manufactured........................................... $1,329,375

*The Schedule of Cost of Goods Manufactured lists the manufacturing costs applied to work in
process. Therefore, the underapplied overhead, $1,875, 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, $433,125, from the total actual manufacturing overhead, $435,000.

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Chapter 03 - Product Costing and Cost Accumulation in a Batch Production Environment

PROBLEM 3-49 (CONTINUED)

2. SUPERIOR METALS
SCHEDULE OF COST OF GOODS SOLD
FOR THE YEAR ENDED DECEMBER 31, 20X4

Finished-goods inventory, 12/31/x3........................................................... $   26,250

Add: cost of goods manufactured..............................................................  1,329,375
Cost of goods available for sale................................................................. $1,355,625
Deduct: Finished-goods inventory, 12/31/x4..............................................     30,000
Cost of goods sold..................................................................................... $1,325,625
Add: Underapplied overhead*....................................................................      1,875
Cost of goods sold (adjusted for underapplied overhead).......................... $1,327,500

*The company closes underapplied or overapplied overhead into cost of goods sold. Hence the
$1,875 balance in underapplied overhead is added to cost of goods sold for the month.

3. SUPERIOR METALS
INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 20X4

Sales revenue............................................................................................ $1,578,750

Less: Cost of goods sold............................................................................ 1,327,500
Gross margin............................................................................................. $ 251,250
Selling and administrative expenses.......................................................... 201,750
Income before taxes................................................................................... $  49,500
Income tax expense...................................................................................    18,750
Net income................................................................................................. $  30,750

4. In the electronic version of the solutions manual, press the CTRL key and click on the
following link: 10E - BUILD A SPREADSHEET 03-49.XLS

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Chapter 03 - Product Costing and Cost Accumulation in a Batch Production Environment

PROBLEM 3-50 (15 MINUTES)

1. $30,000. Since there was no work-in-process inventory at the beginning of 20x4, all of the costs
in the year-end work-in-process inventory were incurred during 20x4.

2. The direct-material cost would have been larger, probably by roughly 30 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.

4. Only the $22,500 of equipment depreciation would have been included in manufacturing
overhead on the Schedule of Cost of Goods Manufactured. The $22,500 of depreciation
related to selling and administrative equipment would have been treated as a period cost and
expensed during 20x4.

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Chapter 03 - Product Costing and Cost Accumulation in a Batch Production Environment

PROBLEM 3-51 (25 MINUTES)

budgeted manufactur ing overhead
1. Predetermi ned overhead rate 
budgeted machine hours
$1,520,200
  $22 per machine hou r
69,100

2. Journal entries:

(a) Raw-Material Inventory......................................... 8,240

Accounts Payable....................................... 8,240

(b) Work-in-Process Inventory................................... 196

Raw-Material Inventory.............................. 196

(c) Manufacturing Overhead...................................... 32

Manufacturing-Supplies Inventory.............. 32

(d) Manufacturing Overhead...................................... 900

Cash........................................................... 900

(e) Work-in-Process Inventory................................... 73,500

Wages Payable.......................................... 73,500

(f) Selling and Administrative Expense...................... 2,100

Prepaid Insurance...................................... 2,100

(g) Raw-Material Inventory......................................... 2,800

Accounts Payable....................................... 2,800

(h) Accounts Payable................................................. 1,850

Cash........................................................... 1,850

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Chapter 03 - Product Costing and Cost Accumulation in a Batch Production Environment

PROBLEM 3-51 (CONTINUED)

(i) Manufacturing Overhead...................................... 19,000

Wages Payable.......................................... 19,000

(j) Manufacturing Overhead...................................... 8,500

Accumulated Depreciation: Equipment....... 8,500

(k) Finished-Goods Inventory..................................... 1,200

Work-in-Process Inventory......................... 1,200

(l) Work-in-Process Inventory................................... 143,000*

Manufacturing Overhead............................ 143,000

*Applied manufacturing overhead = 6,500 machine hours$22 per hour.

(m) Accounts Receivable............................................ 181,000

Sales Revenue........................................... 181,000

Cost of Goods Sold.............................................. 142,500

Finished-Goods Inventory.......................... 142,500

PROBLEM 3-52 (40 MINUTES)

1. In accordance with the Standards of Ethical Conduct for Management Accountants, the
appropriateness of Joey Dulwich’s three alternative courses of action is described as follows:

 Follow Brown's directive and do nothing further. This action is inappropriate as Dulwich
has ethical responsibilities to take further action in accordance with the following
standards of ethical conduct.

Competence. Management accountants have a responsibility to perform their

professional duties in accordance with relevant laws, regulations, and technical
standards.

Integrity. Management accountants should (1) refrain from either actively or passively
subverting the attainment of the organization's legitimate and ethical objectives, (2)
communicate favorable as well as unfavorable information, and (3) refrain from engaging
in or supporting any activity that would discredit the profession.

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Chapter 03 - Product Costing and Cost Accumulation in a Batch Production Environment

PROBLEM 3-52 (CONTINUED)

Credibility. Management accountants have a responsibility to communicate information

fairly and objectively, and to disclose fully all relevant information that could reasonably
be expected to influence an intended user's understanding of the reports presented.

 Attempt to convince Brown to make the proper adjustments and to advise the external
auditors of her actions. This action is appropriate as Dulwich has taken the ethical conflict
to his immediate superior for resolution. Unless Dulwich suspects that his superior is
involved, this alternative is the first step for the resolution of an ethical conflict.

 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 Dulwich to first discuss the matter with his
immediate superior.

2. The next step that Dulwich should take in resolving this conflict is to inform Brown that he is
planning to discuss the conflict with the next higher managerial level. Dulwich 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,
Dulwich 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, Dulwich may have no course other than to resign from
the organization.

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Chapter 03 - Product Costing and Cost Accumulation in a Batch Production Environment

PROBLEM 3-53 (30 MINUTES)

1. MARVELOUS MARSHMALLOW COMPANY

SCHEDULE OF COST OF GOODS MANUFACTURED
FOR THE MONTH OF JANUARY

Direct material:
Raw-material inventory, January 1.............................. $ 34,000
Add: January purchases of raw material.....................  226,000
Raw material available for use.................................... $260,000
Deduct: Raw-material inventory, January 31..............   52,000
Raw materials used.................................................... $208,000  
Direct labor....................................................................... 320,000*
Manufacturing overhead applied (50% of direct labor)  160,000  
Total manufacturing costs................................................ $688,000  
Add: Work-in-process inventory, January 1......................   80,000  
Subtotal............................................................................ $768,000  
Deduct: Work-in-process inventory,
January 31 (90%$80,000)......................................   72,000  
Cost of goods manufactured............................................ $696,000†

*Work upward from the bottom of the statement, using the information available. Direct labor +
manufacturing overhead = total manufacturing costs – direct material cost = $688,000
– $208,000 = $480,000. Since manufacturing overhead = 50% of direct labor, then manufacturing
overhead = $160,000 and direct labor = $320,000.
†
Cost of goods manufactured = cost of goods sold + increase in finished-goods inventory
= $690,000 + $6,000 = $696,000.

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Chapter 03 - Product Costing and Cost Accumulation in a Batch Production Environment

PROBLEM 3-53 (CONTINUED)

2. MARVELOUS MARSHMALLOW COMPANY

SCHEDULE OF PRIME COSTS
FOR THE MONTH OF JANUARY

Raw material:
Beginning inventory...................................................................... $ 34,000
Add: Purchases............................................................................  226,000
Raw material available for use...................................................... $260,000
Deduct: Ending inventory..............................................................   52,000
Raw material used................................................................................. $208,000
Direct labor............................................................................................  320,000
Total prime costs................................................................................... $528,000

3. MARVELOUS MARSHMALLOW COMPANY

SCHEDULE OF CONVERSION COSTS
FOR THE MONTH OF JANUARY

Direct labor.............................................................................................. $320,000

Manufacturing overhead applied (50% of direct labor)............................  160,000
Total conversion cost.............................................................................. $480,000

PROBLEM 3-54 (30 MINUTES)

budgeted manufactur ing overhead
1. Predetermi ned overhead rate 
budgeted machine hours
$306,000
  $6 per machine hour
51,000
2. Calculation of applied manufacturing overhead:

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

$36,000 = 6,000 hrs. x $6 per hr.

3. Underapplied overhead = actual overhead – applied overhead

$2,000 = $38,000 – $36,000

4. Cost of Goods Sold............................................................. 2,000

Manufacturing Overhead.......................................... 2,000

3-37
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Chapter 03 - Product Costing and Cost Accumulation in a Batch Production Environment

PROBLEM 3-54 (CONTINUED)

5. (a) Calculation of proration amounts:

Calculation
Account Explanation Amount* Percentage of Percentage
Work in Process Job B19 only $10,800 30% 10,800  36,000
Finished Goods Job T28 only 18,000 50% 18,000  36,000
Cost of Goods
Sold Job M07 only   7,200  20%  7,200  36,000
Total $36,000 100%

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

Underapplied Amount Added

Account Overhead  Percentage to Account
Work in Process $2,000  30% $  600
Finished Goods  2,000  50%  1,000
Cost of Goods Sold  2,000  20%   400
Total $2,000

(b) Journal entry:

Work-in-Process Inventory..................................................... 600

Finished-Goods Inventory...................................................... 1,000
Cost of Goods Sold................................................................ 400
Manufacturing Overhead............................................. 2,000

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Chapter 03 - Product Costing and Cost Accumulation in a Batch Production Environment

PROBLEM 3-55 (45 MINUTES)

1. Predetermined overhead rate:

Budgeted manufactur ing overhead $575,000


Budgeted direct - labor hours 115,000

 $5.00 per direct-labor hour

*$575,000 = $345,000 + $230,000

2. Cost of Job 57:

Cost in beginning work-in-process inventory........................................... $108,000

Direct material......................................................................................... 90,000
Direct labor (7,000 hours$24.00 per hour)*........................................ 168,000
Applied manufacturing overhead
(7,000 hours$5.00 per hour).........................................................   35,000
Total cost................................................................................................ $401,000

direct - labor wages $408,000

*Direct -labor rate    $24.00 per hour
direct - labor hours 17,000

3. Manufacturing overhead applied to Job 59:

Direct-labor hourspredetermined overhead rate  4,000 hours$5.00 per hour

 $20,000

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Chapter 03 - Product Costing and Cost Accumulation in a Batch Production Environment

PROBLEM 3-55 (CONTINUED)

4. Total manufacturing overhead applied during November:

Total direct-labor hourspredetermined overhead rate  17,000 hours$5.00

 $85,000
5. Actual manufacturing overhead incurred during November:

Indirect material (supplies)............................................................................ $24,000

Indirect-labor wages..................................................................................... 30,000
Supervisory salaries..................................................................................... 12,000
Building occupancy costs, factory facilities................................................... 12,800
Production equipment costs..........................................................................  16,200
Total.............................................................................................................. $95,000

6. Underapplied overhead for November:

Actual manufacturing overhead – applied manufacturing overhead

 $95,000 – $85,000
 $10,000 underapplied

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Chapter 03 - Product Costing and Cost Accumulation in a Batch Production Environment

PROBLEM 3-56 (25 MINUTES)

1.
Predetermined
Quarter Overhead Rate Calculations
1st.................................................................. $8 per hour   $400,000/50,000
2nd................................................................. 10 per hour $320,000/32,000
3rd.................................................................. 8 per hour $200,000/25,000
4th.................................................................. 10 per hour $280,000/28,000

2.
February May
Direct material............................................... $600 $600
Direct labor....................................................  340  340
Manufacturing overhead:
20 hrs$8 per hr.................................. 160
20 hrs$10 per hr................................ 200
Total cost...................................................... $1,100 $1,140

3.
February May
Total cost...................................................... $1,100 $1,140
Markup (10%)............................................... 110  114
Price.............................................................. $1,210 $1,254

annual budgeted manufactur ing overhead

4. Predetermi ned rate 
annual budgeted direct -labor hours

$1,200,000
  $8.89 per hour (rounded)
135,000
5.
February May
Direct material................................................ $ 600.00 $ 600.00
Direct labor.....................................................  340.00  340.00
Manufacturing overhead (20 hrs  $8.89)......  177.80  177.80
Total cost........................................................ $1,117.80 $1,117.80

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Chapter 03 - Product Costing and Cost Accumulation in a Batch Production Environment

PROBLEM 3-56 (CONTINUED)

6. Total cost........................................................ $1,117.80

Markup (10%).................................................   111.78
Price............................................................... $1,229.58

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

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Chapter 03 - Product Costing and Cost Accumulation in a Batch Production Environment

PROBLEM 3-57 (55 MINUTES)

The answers to the questions are as follows:

1. $648,000 6. $180,000
2. $57,000 7. $450,000
3. $210,000 8. $120,000
4. $114,000 9. $45,000
5. $240,000 10. Zero

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

Raw-Material Inventory Accounts Payable

Bal. 8/31 45,000 36,000 Bal. 8/31
210,000 120,000 243,000 210,000
Bal. 9/30 135,000   3,000 Bal. 9/30

Work-in-Process Inventory Finished-Goods Inventory

Bal. 8/31 24,000 Bal. 8/31 105,000
Direct 450,000 450,000 540,000
material 120,000 Bal. 9/30 15,000
Direct
labor 240,000 Cost of Goods Sold
Overhead 180,000 540,000
Bal. 9/30 114,000

Manufacturing Overhead Sales Revenue

180,000 180,000 648,000

Wages Payable Accounts Receivable

  3,000 Bal. 8/31 Bal. 8/31 24,000
238,500 240,000 648,000 615,000
  4,500 Bal. 9/30 Bal. 9/30 57,000

Supporting Calculations:

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

= $540,000120% = $648,000

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Chapter 03 - Product Costing and Cost Accumulation in a Batch Production Environment

PROBLEM 3-57 (CONTINUED)

2. Ending balance in accounts receivable = beginning balance + sales revenue
– collections
= $24,000 + $648,000 – $615,000
= $57,000

3. Purchases of raw material = addition to accounts payable

Addition to accounts payable = ending balance + payments

– beginning balance
= $3,000 + $243,000 – $36,000
= $210,000

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

in-process inventory material labor overhead
= $61,500 + (1,500)($20) + (1,500)($15*)
= $114,000
budgeted overhead
*Predetermined overhead rate = †
budgeted direct -labor hours

$2,160,000
= 144,000
= $15 per direct-labor hour

†
Budgeted direct-labor hours =
budgeted direct -labor cost
direct -labor rate

$2,880,000
 144,000
$20

5. Addition to work in process September credit to

for direct labor = wages payable
September credit to
wages payable = ending balance + payments – beginning balance
= $4,500 + $238,500  $3,000 = $240,000

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Chapter 03 - Product Costing and Cost Accumulation in a Batch Production Environment

PROBLEM 3-57 (CONTINUED)

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

= 12,000*$15
= $180,000

addition to work in process for direct labor

*Direct labor hours =
direct -labor rate

$240,000
=  12,000 hours
$20

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

= $24,000 + ($120,000 + $240,000 + $180,000) – $114,000

= $450,000

8. Raw material used in September September credit to raw-

= material inventory = $120,000 (given)

9. August 31 balance in September 30 direct

raw-material inventory = balance in raw- + material – purchases
material inventory used
= $135,000 + $120,000 – $210,000
= $45,000

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

= $180,000 – $180,000 = 0

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Chapter 03 - Product Costing and Cost Accumulation in a Batch Production Environment

PROBLEM 3-58 (75 MINUTES)

budgeted manufactur ing overhead
1. Predetermi ned overhead rate 
budgeted direct - labor hours
$462,000
  $22 per direct - labor hour
21,000

2. Journal entries:

(a) Raw-Material Inventory......................................... 6,000

Accounts Payable....................................... 6,000

(b) Raw-Material Inventory......................................... 5,200

Accounts Payable....................................... 5,200

(c) Work-in-Process Inventory................................... 11,330*

Raw-Material Inventory.............................. 11,330

*(260 sq. ft.$5.50 per sq. ft.) + (1,100 lbs.$9 per lb.)

Manufacturing Overhead**................................... 120  

Manufacturing-Supplies Inventory.............. 120

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

(d) Work-in-Process Inventory................................... 36,000  

Manufacturing Overhead...................................... 14,100  
Wages Payable.......................................... 50,100

Work-in-Process Inventory................................... 39,600*

Manufacturing Overhead............................ 39,600

*Applied manufacturing overhead = 1,800 direct-labor hours$22 per hour.

(e) Manufacturing Overhead...................................... 13,000

Accumulated Depreciation: Building and
Equipment............................................... 13,000

(f) Manufacturing Overhead...................................... 1,340

Cash........................................................... 1,340

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Chapter 03 - Product Costing and Cost Accumulation in a Batch Production Environment

PROBLEM 3-58 (CONTINUED)

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

Accounts Payable....................................... 2,400

(h) Manufacturing Overhead...................................... 2,370

Cash........................................................... 2,370

(i) Manufacturing Overhead...................................... 2,900

Prepaid Insurance...................................... 2,900

(j) Selling and Administrative Expenses.................... 7,500

Cash........................................................... 7,500

(k) Selling and Administrative Expenses.................... 4,500

Accumulated Depreciation: Buildings and
Equipment............................................... 4,500

(l) Selling and Administrative Expenses.................... 1,150

Cash........................................................... 1,150

(m) Finished-Goods Inventory................................... 37,130*

Work-in-Process Inventory........................ 37,130

*Cost of Job T79:

Direct material (260$5.50).................. $ 1,430

Direct labor (850$20).......................... 17,000
Manufacturing overhead (850$22)......  18,700
Total cost................................................ $37,130

(n) Accounts Receivable........................................... 27,360*

Sales Revenue........................................... 27,360

*(76  2)$720 per trombone .

Cost of Goods Sold............................................. 18,565**

Finished-Goods Inventory..........................
18,565
**18,565 = $37,130  2.

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Chapter 03 - Product Costing and Cost Accumulation in a Batch Production Environment

PROBLEM 3-58 (CONTINUED)

3. T-accounts and posting of journal entries:

Cash Accounts Payable

Bal 11,000 14,500 Bal
1,340 (f) 6,000 (a)
2,370 (h) 5,200 (b)
7,500 (j) 2,400 (g)
1,150 (l)

Accounts Receivable Wages Payable

Bal. 20,000 8,500 Bal.
(n) 27,360 50,100 (d)

Accumulated Depreciation:
Prepaid Insurance Buildings and Equipment
Bal. 6,000 99,000 Bal.
2,900 (i) 13,000 (e)
4,500 (k)

Manufacturing-Supplies Inventory Manufacturing Overhead

Bal. 600 (c) 120 39,600 (d)
120 (c) (d) 14,100
(e) 13,000
(f) 1,340
(g) 2,400
(h) 2,370
(i) 2,900

Raw-Material Inventory Cost of Goods Sold

Bal. 150,000 (n) 18,565
(a) 6,000 11,330 (c)
(b) 5,200

Selling and Administrative

Work-in-Process Inventory Expenses
Bal. 89,000 (j) 7,500
(c) 11,330 37,130 (m) (k) 4,500
(d) 36,000 (l) 1,150
(d) 39,600
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Chapter 03 - Product Costing and Cost Accumulation in a Batch Production Environment

PROBLEM 3-58 (CONTINUED)

Finished-Goods Inventory Sales Revenue

Bal. 223,000 27,360 (n)
(m) 37,130 18,565 (n)

4. (a) Calculation of actual overhead:

Indirect material (valve lubricant)............................................... $   120

Indirect labor.............................................................................. 14,100
Depreciation: factory building and equipment............................ 13,000
Rent: warehouse........................................................................ 1,340
Utilities....................................................................................... 2,400
Property taxes............................................................................ 2,370
Insurance...................................................................................   2,900
Total actual overhead................................................................ $36,230

 actual manufactur ing   applied manufactur ing 

  
(b) Overapplied overhead =  overhead  
  overhead 
= $36,230 – $39,600*
= $3,370 overapplied

*$39,600 = 1,800 direct-labor hours$22 per hour.

(c) Manufacturing Overhead...........................................................3,370

Cost of Goods Sold......................................................... 3,370

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Chapter 03 - Product Costing and Cost Accumulation in a Batch Production Environment

PROBLEM 3-58 (CONTINUED)

5. BANDWAY COMPANY
SCHEDULE OF COST OF GOODS MANUFACTURED
FOR THE MONTH OF OCTOBER

Direct material:
Raw-material inventory, October 1.............................. $150,000
Add: October purchases of raw material.....................   11,200
Raw material available for use.................................... $161,200
Deduct: Raw-material inventory, October 31..............  149,870
Raw material used...................................................... $ 11,330  
Direct labor......................................................................... 36,000  
Manufacturing overhead:
Indirect material.......................................................... $    120  
Indirect labor............................................................... 14,100  
Depreciation on factory building and equipment......... 13,000  
Rent: warehouse......................................................... 1,340  
Utilities........................................................................ 2,400  
Property taxes............................................................. 2,370  
Insurance....................................................................   2,900  
Total actual manufacturing overhead.................... $36,230  
Add: overapplied overhead...................................   3,370*
Overhead applied to work in process..........................   39,600  
Total manufacturing costs.................................................. $ 86,930  
Add: Work-in-process inventory, October 1........................   89,000  
Subtotal $175,930  
Deduct: Work-in-process inventory, October 31.................  138,800  
Cost of goods manufactured.............................................. $  37,130†

*The Schedule of Cost of Goods Manufactured lists the manufacturing costs applied to work in
process. Therefore, the overapplied overhead, $3,370, must be added to actual overhead to arrive at
the amount of overhead applied to work in process during October.
†
Cost of Job T79, which was completed during October.

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Chapter 03 - Product Costing and Cost Accumulation in a Batch Production Environment

PROBLEM 3-58 (CONTINUED)

6. BANDWAY COMPANY
SCHEDULE OF COST OF GOODS SOLD
FOR THE MONTH OF OCTOBER

Finished-goods inventory, October 1........................................................... $223,000

Add: Cost of goods manufactured...............................................................   37,130
Cost of goods available for sale................................................................... $260,130
Deduct: Finished-goods inventory, October 31............................................  241,565
Cost of goods sold....................................................................................... $ 18,565
Deduct: Overapplied overhead*...................................................................    3,370
Cost of goods sold (adjusted for overapplied overhead).............................. $ 15,195

*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. BANDWAY COMPANY
INCOME STATEMENT
FOR THE MONTH OF OCTOBER

Sales revenue............................................................................................. $27,360

Less: Cost of goods sold.............................................................................  15,195
Gross margin............................................................................................... $12,165
Selling and administrative expenses...........................................................  13,150
Income (loss)............................................................................................... $ (985)

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Chapter 03 - Product Costing and Cost Accumulation in a Batch Production Environment

PROBLEM 3-59 (20 MINUTES)

JOB-COST RECORD

Job Number T79 Description Trombones

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

Direct Material
Date Requisition Number Quantity Unit Price Cost
10/5 112 260 $5.50 $1,430

Direct Labor
Date Time Card Number Hours Rate Cost
10/8 to 10-08 through 10-12 850 $20 $17,000
10/12

Manufacturing Overhead
Date Cost Driver (Activity Base) Quantity Application Rate Cost
10/8 to Direct-labor hours 850 $22 $18,700
10/12

Cost Summary
Cost Item Amount
Total direct material $ 1,430
Total direct labor 17,000
Total manufacturing overhead 18,700
Total cost $37,130
Unit cost $488.55*

Shipping Summary
Units Remaining
Date Units Shipped In Inventory Cost Balance
October 38 38 $18,565†

*Rounded
†
$18,565 = $37,130 ÷ 2

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Chapter 03 - Product Costing and Cost Accumulation in a Batch Production Environment

PROBLEM 3-60 (50 MINUTES)

1. Schedule of budgeted overhead costs:

Department A Department B
Variable overhead
A  21,000$17........................................................ $357,000
B  21,000$5......................................................... $105,000
Fixed overhead...............................................................  210,000  210,000
Total overhead................................................................ $567,000 $315,000

Grand total of budgeted overhead (A + B): $882,000

total budgeted overhead rate

Predetermi ned overhead rate 
total budgeted direct - labor hours
$882,000
  $21 per hour
42,000

2. Product prices:

Basic Advanced
System System
Total cost...................................................................... $1,190 $1,640
Markup, 10% of cost......................................................    119    164
Price.............................................................................. $1,309 $1,804

3. Departmental overhead rates:

Department A Department B
Budgeted overhead
(from requirement 1).................................................. $567,000 $315,000
Budgeted direct-labor hours..........................................   21,000   21,000

Predetermined overhead rates...................................... $567,000 $315,000

  21,000   21,000

$27 per $15 per

direct-labor direct-labor
hour hour

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Chapter 03 - Product Costing and Cost Accumulation in a Batch Production Environment

PROBLEM 3-60 (CONTINUED)

4. Revised product costs:

Basic Advanced
System System
Direct material............................................................... $ 450 $ 900
Direct labor....................................................................   320   320
Manufacturing overhead:
Department A:
Basic system 5$27..........................................  135
Advanced system 15$27.................................  405
Department B:
Basic system 15$15........................................  225
Advanced system 5$15................................... _ ____    75
Total $1,130 $1,700

5. Revised product prices:

Basic Advanced
System System
Total cost...................................................................... $1,130 $1,700
Markup, 10% of cost......................................................    113    170
Price ............................................................................ $1,243 $1,870

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Chapter 03 - Product Costing and Cost Accumulation in a Batch Production Environment

PROBLEM 3-60 (CONTINUED)

6. COLORTECH CORPORATION

Memorandum

Date: Today

To: President, ColorTech 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 $1,190 for the basic system and a cost of $1,640 for the
advanced system. Under the company's pricing policy of adding a 10 percent markup, this yielded
prices of $1,309 for the basic system and $1,804 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 $1,130
and $1,700 for the basic and advanced systems, respectively. With a 10 percent markup, these
revised product costs yield prices of $1,243 for the basic system and $1,870 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.

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Chapter 03 - Product Costing and Cost Accumulation in a Batch Production Environment

SOLUTIONS TO CASES
CASE 3-61 (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.

2. The only job remaining in KidCo's Work-in-Process Inventory on December 31 is DRS114.

The dollar value of DRS114 is calculated as follows:

DRS114 balance, 11/30........................................................ $250,000

December additions:
Direct material used..................................................... $124,000
Purchased parts........................................................... 87,000
Direct labor................................................................... 200,500
Manufacturing overhead (19,500 hours$7.50*)........  146,250  557,750
Work-in-process inventory, 12/31.......................................... $807,750

$4,500,000
* Manufactur ing overhead rate 
600,000 hours
 $7.50 per hour

3. The dollar value of the playpens remaining in KidCo's finished-goods inventory on December
31 is $455,600, calculated as follows:

Playpen Units
Finished-goods inventory, 11/30................................................................ 19,400
Units completed in December.................................................................... 15,000
Units available for sale............................................................................... 34,400
Units shipped in December........................................................................ 21,000
Finished-goods inventory, 12/31................................................................ 13,400

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Chapter 03 - Product Costing and Cost Accumulation in a Batch Production Environment

CASE 3-61 (CONTINUED)

Since KidCo uses the FIFO inventory method, all units remaining in finished- goods inventory
were completed in December.

Unit cost of playpens completed in December:

Work in process inventory, 11/30........................................ $420,000

December additions:
Direct material used....................................................... $ 3,000
Purchased parts............................................................. 10,800
Direct labor.................................................................... 43,200
Manufacturing overhead (4,400 hours$7.50).............  33,000   90,000
Total cost............................................................................ $510,000

total cost
Unit cost = units completed
$510,000
= 15,000
= $34 per unit

Value of finished-goods
inventory on 12/31 = Unit costquantity
= $3413,400
= $455,600

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Chapter 03 - Product Costing and Cost Accumulation in a Batch Production Environment

CASE 3-62 (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 and reasonably 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$30 = $2,190,000

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

Machine hourspredetermined overhead rate = overhead applied

6,000$30 = $180,000

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

Actual overhead ($2,200,000 + $192,000)...................................................... $2,392,000

Applied overhead ($2,190,000 + $180,000).................................................... (2,370,000)
Underapplied overhead.................................................................................. $   22,000

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Chapter 03 - Product Costing and Cost Accumulation in a Batch Production Environment

CASE 3-62 (CONTINUED)

5. The balance in 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.................................................. $110,000

December direct material.............................................................................. 8,000
December direct labor................................................................................... 24,000
December overhead (1,000$30)...............................................................  30,000
Total finished-goods inventory............................................................... $172,000

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

OPTICOM, INC.
SCHEDULE OF COST OF GOODS MANUFACTURED
FOR THE YEAR ENDED DECEMBER 31
Direct material:
Raw-material inventory, 1/1.............................................. $  210,000
Raw-material purchases ($1,930,000 + $196,000)...........  2,126,000
Raw material available for use.......................................... $2,336,000
Deduct: Indirect material used ($250,000 + $18,000)...... $268,000
Raw-material inventory 12/31............................  170,000   438,000
Raw material used............................................................ $1,898,000
Direct labor ($1,690,000 + $160,000)................................... 1,850,000
Manufacturing overhead:
Indirect material ($250,000 + $18,000)............................. $268,000
Indirect labor ($690,000 + $60,000).................................. 750,000
Utilities ($490,000 + $44,000)........................................... 534,000
Depreciation ($770,000 + $70,000)...................................  840,000
Total actual manufacturing overhead................................ 2,392,000
Deduct: Underapplied overhead.......................................    22,000
Overhead applied to work in process.................................... $2,370,000
Total manufacturing costs..................................................... $6,118,000
Add: Work-in-process inventory, 1/1.....................................   120,000
Subtotal................................................................................ $6,238,000
Deduct: Work-in-process inventory, 12/31*...........................   300,400
Cost of goods manufactured................................................. $5,937,600

*Supporting calculations follow.

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Chapter 03 - Product Costing and Cost Accumulation in a Batch Production Environment

CASE 3-62 (CONTINUED)

*Supporting calculations for work in process 12/31:

D12-002 D12-003 Total

Direct material....................... $ 75,800 $ 52,000 $127,800
Direct labor...........................   40,000   33,600   73,600
Applied overhead:
2,500 hrs.$30...............   75,000   75,000
800 hrs.$30.................. ______ 24,000   24,000
Total.......................... $190,800 $109,600 $300,400

FOCUS ON ETHICS (See page 107 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 107),
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.

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