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# Accounting

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EXERCISE 2-10 Varying Predetermined Overhead Rates (LO3, LO5)
Javadi Company makes a composting bin that is subject to wide seasonal variations in demand. Unit Product costs are computed on a quarterly basis by dividing each quarter¡¦s manufacturing costs ( materials, labor, and overhead) by the quarter¡¦s production in units. The company estimated costs, by quarter, for the coming year are given below:

__________________Quarter_____________________
First Second Third Fourth
Direct Materials \$240,000 \$120,000 \$60,000 \$180,000
Direct labor 96,000 48,000 24,000 72,000
Manufacturing costs 228,000 204,000 192,000 216,000
Total manufacturing costs \$564,000 \$372,000 \$276,000 \$468,000

Number of units to be produced 80,000 40,000 20,000 60,000
Estimated unit product cost \$7.05 \$9.30 \$13.80 \$7.80

Management finds the variation in the unit product costs to be confusing and difficult to work with. It has been suggested that the problem lies with manufacturing overhead, since it is the largest element of cost. Accordingly, you have been asked to find more appropriate way of assigning manufacturing overhead cost to units of product. After some analysis, you have determined that the company¡¦s overhead costs are mostly fixed and therefore show little sensitivity to changes in the level of production.

Required:
1. The company uses a job ¡V order costing system. How would you recommend that manufacturing overhead cost be assigned to production? Be specific, and show computations.
2. Recompute the company¡¦s unit costs in accordance with your recommendations in (1) above.

EXERCISE 3-9 Assigning Overhead to Products in ABC (LO3)
Refer to the data in Exercise 3-8 for Sultan Company. The activities during the year were distributed across the company¡¦s four products as follows:

Actual Product Product Product Product
Activity Cost Pool Activity A B C D
Labor related 25,000 DLHs 6,000 10,000 4,000 5,000
Purchase orders 200 orders 60 30 20 90
Parts management 110 parts type 30 25 40 15
Board etching 1,800 boards 500 900 400 0
General Factory 22,000 MHs 3,000 8,000 5,000 6,000

With limited information regarding the business type of Sultan Company given in Exercise 3-8, I have made my best assumption to solve the problem. First, we determine that labor related is regarded as direct labor cost while board etching is regarded as direct materials. Therefore, the remaining activities are regarded as the overhead cost, whereby we need to multiply each activity with the cost assigned. However, you might need to look back for the information in Exercise 3-8.

PROBLEM 4-17 Comprehensive Process Costing Problem ¡V Weighted ¡VAverage
Method (LO1, LO2, LO3, LO4, LO5)

Techno Co. produces a special kind of tool that is widely used by construction. The tool is produced in two processes: bending and drilling. Raw materials are introduced at various points in the Bending Department; labor and overhead costs are incurred evenly through the bending operation. The bent output is then transferred to the Drilling Department.
The following incomplete Work in Process account has been provided for the Bending Department for May:

Work in Process ¡V Bending Department
May 1 inventory (12,000 units; materials 80%
complete) 45,369
Raw materials (270,000 units) 394,210
Direct labor 638,144

? Completed and transferred
To drilling ( ? Units)
May 31 inventory (9,000; materials
90% complete; labor

The May 1 work in process inventory in the Bending Department consists of the following cost elements: raw materials, \$13,385; direct labor, \$18,880; and overhead, \$13,104. Costs incurred during May in the Drilling Department were: materials used, \$100,800; direct labor, \$250,600; and overhead cost applied to production, \$189,000.
The company accounts for units and costs using the weighted¡Vaverage method.

Required:
1. Prepare journal entries to record the costs incurred in both the Bending Department and the Drilling Department during May. Key your entries to the items (a) through (g) below.
a. Raw materials were issued for use in production.
b. Direct labor costs were incurred.
c. Manufacturing overhead costs for the entire factory were incurred, \$685,000. (Credit Accounts Payable.)
d. Manufacturing overhead cost was applied to production using a predetermined overhead rate.
e. Units that were complete as to processing in the Bending Department were transferred to the Drilling Department, \$1,536,990.
f. Units that were complete as to processing in the Drilling Department were transferred to Finished Good, \$1,650,000.
g. Completed units were sold on account, \$2,700,000. the Cost of Goods Sold was \$1,600,000.
2. Post the journal entries from (1) above T-accounts. The following account balances existed at the beginning of May. (the beginning balance in the Bending Department¡¦s Work in Process account is given above.)

Raw Materials \$500,000
Work in Process-Drilling Department \$10,000
Finished Goods \$110,000
After posting the entries to the T-accounts, find the ending balance in the inventory accounts and the manufacturing overhead accounts.

3. Prepare a production report for the Bending Department for May.

ETHICS CASE (LO2, LO4, LO5)
Thad Kostowski and Carol Lee are production managers in the Appliance Division of Mesger Corporation, which has several dozen plants scattered in locations throughout the world. Carol manages the plant located in Kansas City, Missouri, while Thad manages the plant in Roseville, Oregon. Production managers are paid a salary and get an additional bonus equal to 10% of their base salary if the entire division meets or exceeds its target profits for the year. The bonus is determined in March after the company¡¦s annual report has been prepared and issued to stockholders.
Late in February, Carol received a phone call from Thad that went like this:

Carol: Fine, Thad. How¡¦s it going with you?
Thad: Great! I just got the preliminary profit figures for the division for last year and we are within \$62,500.00 of making the year¡¦s target profits. All we have to do is to pull a few strings, and we¡¦ll be over the top!
Carol: What do you mean?
Thad: Well, one thing that would be easy to change is your estimate of the percentage completion of your ending working process inventories.
Carol: I don¡¦t know if I should do that, Thad. Those percentage completion numbers are supplied by Jean Jackson, my lead supervisor. I have always trusted her to provide us with good estimates. Besides, I have already sent in the percentage completion figures to the corporate headquarters.
Thad: You can always tell them there was a mistake. Think about it, Carol. All of us managers are doing as much as we can to pull this bonus out of a hat. You may not want the bonus check, but the rest of us sure could use it.

The final processing department in Carol¡¦s production facility began the year with no work in process inventories. During the year, 270,000 units were transferred in form the prior processing department and 250,000 units were completed and sold. Costs transferred in form the prior department totaled \$49,221,000. No materials are added in the final processing department. A total of \$16,320,000 of conversion cost was incurred in the final processing department during the year.

Required:
1. Jean Jackson estimated that the units in ending inventory in the final processing department were 25% complete with respect to the conversion costs of the final processing department. If this estimate of the percentage completion is used, what would be the Cost of Goods Sold for the year?

2. Does Thad Kostowski want the estimated percentage completion to be increased or decreased? Explain why.

3. What percentage completion figure would result in increasing the reported net operating income by \$62,500 over the net operating income that would be reported in the 25% figure we used?

4. Do you think Carol lee should go along with the request to alter estimates of the percentage completion? Why or why not?

#### Solution Preview

2. The T accounts are s follows:
Dr. BENDING DEPARTMENT Cr.
PARTICULARS AMOUNT(\$) PARTICULARS AMOUNT(\$)
May 1 inventory (12,000 units; materials 80%
complete)
Raw materials (270,000 units)
Direct labor

45369

394210
638144
493584 Transferred to Drilling Department
(259500 complete units)
May 31 inventory
(9,000; materials
90% complete; labor
1536990

34317

Dr. DRILLING DEPARTMENT Cr.
PARTICULARS AMOUNT(\$) PARTICULARS AMOUNT(\$)
May 1 inventory 10000 Finished goods 1650000
Bending department 1536990
Material
Labor
100800
250600
189000 May 31 inventory 437390

Dr. FINISHED GOODS Cr.
PARTICULARS AMOUNT(\$) PARTICULARS AMOUNT(\$)
May 1 inventory 110000 Cost of sales 1600000
Drilling department 1650000 May 31 inventory 160000

Dr. RAW MATERIAL Cr.
PARTICULARS AMOUNT(\$) PARTICULARS AMOUNT(\$)
May 1 inventory
Purchased: 500000 Issued:
Bending department
Drilling department
394210
100800
Bending department
Drilling department 394210
100800 May 31 inventory 500000

PARTICULARS AMOUNT(\$) PARTICULARS AMOUNT(\$)
Account payable 685000 Bending department 493584
Drilling department 189000
Balance c/f 2416

3. The production report for the bending department for the month of May
The department had 12000 incomplete units at the beginning of the month, in which 20% material, 40% of labor and overhead were added to make it complete for transfer to the drilling department. Also, the department processed 259500 complete units for transfer to the next department. At the end of the month, the department was left with 9000 units which were processed up to 90% material, 60% labor and overhead.

Chapter 2
EXERCISE 2-10 Varying Predetermined Overhead Rates (LO3, LO5)
Javadi Company makes a composting bin that is subject to wide seasonal variations in demand. Unit Product costs are computed on a quarterly basis by dividing each quarter¡¦s manufacturing costs ( materials, labor, and overhead) by the quarter¡¦s production in units. The company estimated costs, by quarter, for the coming year are given below:

__________________Quarter_____________________
First Second Third Fourth
Direct Materials \$240,000 \$120,000 \$60,000 \$180,000
Direct labor 96,000 48,000 24,000 72,000
Manufacturing costs 228,000 204,000 192,000 216,000
Total manufacturing costs \$564,000 \$372,000 \$276,000 \$468,000

Number of units to be produced 80,000 40,000 20,000 60,000
Estimated unit product cost \$7.05 \$9.30 \$13.80 \$7.80

Management finds the variation in the unit product costs to be confusing and difficult to work with. It has been suggested that the problem lies with manufacturing overhead, since it is the largest element of cost. Accordingly, you have been asked to find more appropriate way of assigning manufacturing overhead cost to units of product. After some analysis, you have determined that the company¡¦s overhead costs are mostly fixed and therefore show little sensitivity to changes in the level of production.

Required:
1. The company uses a job ¡V order costing system. How would you recommend that manufacturing overhead cost be assigned to production? Be specific, and show computations.
2. Recompute the company¡¦s unit costs in accordance with your recommendations in (1) above.

Solution:
1. To determine the factory overhead applied, we use a predetermined overhead rate whereby at the ...

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