Solution Correction For Suggested Problems Exercises

Correction / Solution for AC202
PROBLEM 1-30 (45 MINUTES)

1.
Allen's considerations are determined largely by her position as an accountant,

with responsibilities to Stereo Technology, Inc. others in the company, and
herself. Allen's job involves collecting, analyzing, and reporting operating
information. Although not responsible for product quality, Allen should exercise
initiative and good judgment in providing management with information having a
potentially adverse economic impact.
Allen should determine whether the controller's request violates her
professional or personal standards or the company's code of ethics, should the
company have such a code. As Allen decides how to proceed, she should protect
proprietary information and should not violate the chain of command by
discussing this matter with the controller's superiors.
2.
a. The controller has reporting responsibilities and should protect the overall
company interests by encouraging further study of the problem by those in
his or her department, by informing superiors in this matter, and by working
with others in the company to find solutions.
b. The quality control engineer has responsibilities for product quality and
should protect overall company interests by continuing to study the quality of
reworked rejects, by informing the plant manager and his staff in this matter,
and by working with others in the company to find solutions.
c. The plant manager and his or her staff have responsibilities for product
quality and cost and should protect overall company interests by exercising
the stewardship expected of them. Plant management should be sure that
products meet quality standards. Absentee owners need information from
management, and the plant management staff has a responsibility to inform
the companys board of directors of any problems that could affect the wellbeing of the firm.
3.
Allen needs to protect the interests of the company, others in the company, and
herself. Allen is vulnerable if she conceals the problem and it eventually surfaces.
Allen must take some action to reduce her vulnerability. One possible action
would be to obey the controller and prepare the advance material for the board
without mentioning or highlighting the probable failure of reworks. Because this
approach differs from the long-standing practice of highlighting information with
potentially adverse economic impact, Allen should write a report to the controller
detailing the probable failure of reworks, the analysis made by her and the quality
control engineer, and the controller's instructions in this matter.

1.
The balanced scorecard is a business model that helps to assess a firms

competitive position and ensures that the firm is progressing toward long-term
survival. Although balanced scorecards differ from one firm to the next, most
have a combination of financial measures, customer-satisfaction measures,
internal operating measures, and measures of innovation and learning.
2.
Functional areas for the airline include marketing, finance, operations (e.g.,
maintenance, reservations, customer service, and scheduling), human resources,
purchasing, accounting, planning, and information systems/technology. Each of
these areas could be represented on the committee.
3.
Financial measures:
Net income
mile
Earnings per share
Passenger revenue per seat mile
Operating expenses per seat

Cost per meal served
Revenue growth
Customer-satisfaction measures:
Load factors
Number of passenger complaints
Average wait time when calling
reservations center
Number of bags lost

Market share
Response time for resolving
customer problems
Internal operating measures:

Percentage of on-time arrivals
Number of cities/new cities
served
Percentage of on-time departures
Average trip length (in miles)
Number of aircraft in fleet

Average age of aircraft
in fleet
between
Percentage of tickets sold through

Aircraft
travel agents, reservation
agents, and the Internet
Innovation/learning measures:
Enhancements to product line
(new class of service)
New unique features of frequent-flier
club
turnaround
time
flights
Employee turnover
Employee satisfaction scores
Employee training programs
4.
Yes. By focusing on only one factor, other important facets of the business are ignored,
which could lead to long-run problems. For example, paying too much attention to load factors may
result in a decrease in profitability (e.g., the sale of too many inexpensive seats). A significant focus
on profitability could result in the airline providing marginal service to its customers (poor meals;
long wait times when calling reservations centers; a large number of lost bags by a small, poorlytrained crew, and so forth).
EXERCISE 2-28 (25 MINUTES)

1.
ALHAMBRA ALUMINUM COMPANY

SCHEDULE OF COST OF GOODS MANUFACTURED
FOR THE YEAR ENDED DECEMBER 31, 20X1
Direct material:
Raw-material inventory, January 1.........................................
Add: Purchases of raw material.............................................
Raw material available for use................................................
Deduct: Raw-material inventory, December 31.....................
Raw material used...................................................................
Direct labor....................................................................................
Manufacturing overhead:
Indirect material.......................................................................
Indirect labor............................................................................
Depreciation on plant and equipment....................................
Utilities......................................................................................
Other.........................................................................................
Total manufacturing overhead................................................
Total manufacturing costs............................................................
Add: Work-in-process inventory, January 1................................
Subtotal..........................................................................................
Deduct: Work-in-process inventory, December 31.....................
Cost of goods manufactured........................................................
2.
$ 70,000
380,000
$450,000
90,000
$ 23,000
35,000
132,000
30,000
40,000
260,000
$1,160,000
210,000
$1,370,000
240,000
$1,130,000

SCHEDULE OF COST OF GOODS SOLD
Finished-goods inventory, January 1............................................................
Add: Cost of goods manufactured................................................................
Cost of goods available for sale....................................................................
Deduct: Finished-goods inventory, December 31........................................
Cost of goods sold..........................................................................................
3.
$360,000
540,000
$ 190,000
1,130,000
$1,320,000
200,000
$1,120,,000

INCOME STATEMENT
Sales revenue..................................................................................................
Less: Cost of goods sold...............................................................................
Gross margin...................................................................................................
Selling and administrative expenses.............................................................
$1,950,000
1,120,000
$830,000
190,000
Income before taxes........................................................................................

Income tax expense (at 35%)..........................................................................
Net income.......................................................................................................
$640,000
224,000
$ 416,000

1.
a.
Total prime costs:

Direct material...................................................................................
Direct labor:
Wages.............................................................................................
Fringe benefits..............................................................................
Total prime costs...............................................................................
b.
$ 360,000
293,000
$ 653,000
Total product costs:

Direct material...................................................................................
Direct labor........................................................................................
Manufacturing overhead...................................................................
Total product costs...........................................................................
e.
$ 61,000
80,000
30,000
40,000
20,000
5,000
35,000
22,000
$ 293,000
Total conversion costs:

Direct labor ($310,000 + $50,000).....................................................
Manufacturing overhead...................................................................
Total conversion costs.....................................................................
d.
310,000
50,000
$ 1,310,000
Total manufacturing overhead:

Depreciation on factory building.....................................................
Indirect labor: wages........................................................................
Production supervisor's salary........................................................
Service department costs.................................................................
Indirect labor: fringe benefits...........................................................
Fringe benefits for production supervisor......................................
Total overtime premiums paid..........................................................
Cost of idle time: production employees........................................
Total manufacturing overhead.........................................................
c.
$ 950,000
$ 950,000
360,000
293,000
$1,603,000
Total period costs:

Advertising expense.........................................................................
Administrative costs.........................................................................
Rental of office space for sales personnel......................................
Sales commissions...........................................................................
$ 43,000
81,000
8,000
3,000
Product promotion costs..................................................................

Total period costs.............................................................................
2.
7,000
$142,000
The $8,000 in rental cost for sales office space is an opportunity cost. It measures
the opportunity cost of using the former sales office space for raw-material
storage.

1.
LAREDO LUGGAGE COMPANY

Direct material:
Raw-material inventory, January 1............................................
Add: Purchases of raw material................................................
Raw material available for use...................................................
Deduct: Raw-material inventory, December 31........................
Raw material used......................................................................
Direct labor......................................................................................
Indirect material..........................................................................
Indirect labor...............................................................................
Utilities: plant..............................................................................
Depreciation: plant and equipment...........................................
Other............................................................................................
Total manufacturing overhead...................................................
Total manufacturing costs.............................................................
Add: Work-in-process inventory, January 1.................................
Subtotal...........................................................................................
Deduct: Work-in-process inventory, December 31......................
Cost of goods manufactured.........................................................
2.
$ 30,000
110,000
$140,000
15,000
$ 8,000
9,000
22,000
35,000
50,000
$125,000
120,000
124,000
$369,000
30,000
$399,000
22,000
$377,000

Finished goods inventory, January 1............................................................
Add: Cost of goods manufactured................................................................
Cost of goods available for sale....................................................................
Deduct: Finished-goods inventory, December 31........................................
Cost of goods sold..........................................................................................
$ 15,000
377,000
$392,000
22,000
$370,000

1.
a, c, i, j, l
2.
3.
a, c, i, j, l
4.
5.
b, d, k, m
6.
a, c, i, j, m
7.
b, c, i, j, l
8.
a, c, i, j, l
9.
b, c, g, j, l
10.
b, c, i, j, l
11.
b, c, i, j, l
12.
b, c, g, h, j, m
13.
a, c, i, j, l
14.
b, d, i, j, m
15.
a, d, i, j, l

1.
Opportunity cost
5.
Average cost
2.
Differential cost
6.
Marginal cost
3.
Out-of-pocket cost
7.
Sunk cost
4.
Marginal cost

1.
Raw-material inventory, January 1........................................................................

Add: Raw-material purchases................................................................................
Raw material available for use...............................................................................
Deduct: Raw-material inventory, January 31........................................................
Raw material used in January................................................................................
Direct labor..............................................................................................................
Total prime costs incurred in January...................................................................
$185,500
273,400
$458,900
173,600
$285,300
410,000
$695,300
2.
Total prime cost incurred in January..................................................................... $695,300

Applied manufacturing overhead (70% $410,000)............................................ 287,000
Total manufacturing cost for January................................................................... $982,300
3.
Total manufacturing cost for January...................................................................$ 982,300

Add: Work-in-process inventory, January 1......................................................... 321,700
Subtotal...................................................................................................................$1,304,000
Deduct: Work-in-process inventory, January 31.................................................. 342,500
Cost of goods manufactured.................................................................................$ 961,500
4.
Finished-goods inventory, January 1....................................................................$ 184,900

Add: Cost of goods manufactured........................................................................ 961,500
Cost of goods available for sale............................................................................$1,146,400
Deduct: Finished-goods inventory, January 31.................................................... 160,400
Cost of goods sold..................................................................................................$ 986,000
Since the company accumulates overapplied or underapplied overhead until the end of
the year, no adjustment is made to cost of goods sold until December 31.
5.
Applied manufacturing overhead for January...................................................... $287,000

Actual manufacturing overhead incurred in January.......................................... 242,500
Overapplied overhead as of January 31................................................................ $ 44,500
The balance in the Manufacturing Overhead account on January 31 is a $44,500 credit
balance.
NOTE: Actual selling and administrative expense, although given in the exercise, is
irrelevant to the solution.
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
manufacturing
cost
$1,250,000
work-in-process
+
inventory,
Jan. 1
+
.75X
work-in-process
inventory,
Dec. 31
X
cost of
goods
manufactured
= $1,212,500
.25X = $1,250,000 $1,212,500
X = $150,000
Work-in-process inventory on December 31 amounted to $150,000.

The completed T-accounts are shown below. (Missing amounts in problem are italicized.)
Raw-Material Inventory
Bal. 1/1
29,400
189,000 168,000
Bal. 12/31
50,400
Work-in-Process Inventory
Bal. 1/1
23,800
Direct
168,000
material
Direct
labor
Mfg.
overhead
Bal. 12/31
Accounts Payable
3,500 Bal. 1/1
191,100
189,000
1,400 Bal. 12/31
Finished-Goods Inventory
Bal. 1/1
16,800
1,005,20 994,000
Bal. 12/31
0
28,000
210,000 1,005,200
630,000
26,600
Manufacturing Overhead
633,500 630,000
Wages Payable
2,800 Bal. 1/1
205,800 210,000
7,000 Bal. 12/31
Cost of Goods Sold

994,000
Sales Revenue
1,134,000
Accounts Receivable
Bal. 1/1
15,400
1,134,00 1,128,400
0
Bal. 12/31
21,000
3.

INCOME STATEMENT
Sales revenue..................................................................................................
Less: Cost of goods sold...............................................................................
Gross margin...................................................................................................
Selling and administrative expenses.............................................................
Income before taxes........................................................................................
Income tax expense........................................................................................
Net income.......................................................................................................
$580,000
370,000
$210,000
80,000
$130,000
55,000
$ 75,000

NOTE: Actual selling and administrative expense, although given in the exercise, is
irrelevant to the solution.
1.
Machining Dept. overhead rate = budgeted overhead budgeted machine hours

= $4,500,000 300,000 = $15 per machine hour
Assembly Dept. overhead rate = budgeted overhead budgeted direct-labor cost
= $1,920,000 $3,200,000 = 60% of direct-labor cost
2.
The ending work-in-process inventory is carried at a cost of $90,030, computed

as follows:
Machining Department:
Direct material $14,500
Direct labor. 15,800
Manufacturing overhead (200 x $15)
3,000
Assembly Department:
Direct material $ 4,250
Direct labor. 32,800
Manufacturing overhead ($32,800 x 60%).. 19,680
Total cost...
$ 33,300
56,730
$ 90,030
3.
Actual overhead in the Machining Department amounted to $3,308,000, whereas

applied overhead totaled $3,300,000 (220,000 hours x $15). Thus, overhead was
underapplied by $8,000 during the year.
4.
Actual overhead in the Assembly Department amounted to $1,730,000, whereas

applied overhead totaled $1,770,000 ($2,950,000 x 60%). Thus, overhead was
overapplied by $40,000.
5.
The companys manufacturing overhead was overapplied by $32,000 ($40,000 $8,000). As a result, excessive overhead flowed from Work-in-Process Inventory,
to Finished-Goods Inventory, to Cost of Goods Sold, meaning that the Cost of
Goods Sold account must be decreased at year-end.
6.
The Work-in-Process account is charged with applied overhead, or $5,070,000

($3,300,000 + $1,770,000).
7.
The firms 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.

1.
SUPERIOR METALS
Direct material:
Raw material inventory, 12/31/x3........................
Add: Purchases of raw material...........................
Raw material available for use..............................
Deduct: Raw-material inventory, 12/31/x4............
Raw material used.................................................
Direct labor....................................................................
Indirect material.....................................................
Indirect labor..........................................................
Depreciation on factory building..........................
Depreciation on factory equipment......................
Utilities....................................................................
Property taxes........................................................
Insurance................................................................
Total actual manufacturing overhead.............
Deduct: Underapplied overhead*...................
Overhead applied to work in process..................
Total manufacturing costs...........................................
Add: Work-in-process inventory, 12/31/x3..................
Subtotal.........................................................................
Deduct: Work-in-process inventory, 12/31/x4.............
Cost of goods manufactured.......................................
$66,750
548,250
$615,000
44,250
$33,750
112,500
93,750
45,000
52,500
67,500
30,000
$435,000
1,875
$570,750
355,500
433,125
$1,359,375
-0$1,359,375
30,000
$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.
2.
SUPERIOR METALS
Finished-goods inventory, 12/31/x3.......................................................
Add: cost of goods manufactured..........................................................
Cost of goods available for sale.............................................................
Deduct: Finished-goods inventory, 12/31/x4.........................................
Cost of goods sold..................................................................................
Add: Underapplied overhead*................................................................
Cost of goods sold (adjusted for underapplied overhead)..................
$ 26,250
1,329,375
$1,355,625
30,000
$1,325,625
1,875
$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
Sales revenue...........................................................................................
Less: Cost of goods sold........................................................................
Gross margin............................................................................................
Selling and administrative expenses.....................................................
Income before taxes................................................................................
Income tax expense.................................................................................
Net income................................................................................................
$1,578,750
1,327,500
$ 251,250
201,750
$49,500
18,750
$30,750

1.
Physical flow of units:

Work in process, June 1...........................................................................
Units started during June.........................................................................
Total units to account for..........................................................................
Physical
Units
40,000
190,000
230,000
Units completed and transferred out during June..................................

Work in process, June 30.........................................................................
Total units accounted for..........................................................................
2.
Equivalent units:
Work in process, June 1...........

Units started during June.........
Total units to account for.........
Units completed and transferred
out during June....................
Work in process, June 30.........
Total units accounted for.........
Total equivalent units...............
3.
180,000
50,000
230,000
Percentage
of
Completion
with
Physical Respect to
Units
Conversion
40,000
38%
190,000
230,000
180,000
50,000
230,000
100%
55%
Equivalent Units
Direct
Material Conversion
180,000
50,000
180,000
27,500
230,000
207,500
Costs per equivalent unit:

Work in process, June 1................
Costs incurred during June..........
Total costs to account for.............
Equivalent units.............................
Costs per equivalent unit..............
Direct
Material
$110,500
430,000
$540,500
230,000
$2.35
Conversion
$ 22,375
320,000
$342,375
207,500
$1.65
Total
$132,875
750,000
$882,875
$4.00
4.
Cost of goods completed and transferred out during June:

number of units total cost per

........................
transferred out equivalent unit
180,000$4.00
$720,000
50,000$2.35
$117,500
27,500$1.65
45,375
Cost remaining in June 30 work-in-process inventory:

Direct material:
number of

equivalent

units of

direct material
cost per
equivalent
..........................
unit of
direct material
Conversion:
number of

equivalent

units of

conversion
cost per
equivalent
......................................
unit of
conversion
Total cost of June 30 work in process........................................................
$162,875
Check: Cost of goods completed and transferred out..............................

Cost of June 30 work-in-process inventory...................................
Total costs accounted for................................................................
$720,000
162,875
$882,875

1.
Physical flow of units:

Work in process, April 1............................................................................
Units started during April..........................................................................
Total units to account for..........................................................................
Physical
Units
12,000
118,000
130,000
Units completed and transferred out during April..................................

Work in process, April 30..........................................................................
90,000
40,000
Total units accounted for..................................................................................... 130,000

2.
Equivalent units:
Physical
Units
Work in process, April 1...................12,000
Units started during April.................
118,000
Total units to account for.................
130,000
Units completed and
transferred out during April.........90,000
Work in process, April 30
40,000
Total units accounted for.................
130,000
Total equivalent units.......................
3.
Percentage
of
Completion
with
Respect to
Conversion
30%
100%
40%
Equivalent Units
Direct
Material Conversion
90,000
40,000
______
130,000
90,000
16,000
_____
106,000
Cost per equivalent unit:

Direct
Material
Work in process, April 1.....................................
$54,000
Costs incurred during April...............................
284,000
Total costs to account for..................................
$338,000
Equivalent units..................................................
130,000
Costs per equivalent unit...................................$2.60*
Conversion
Total
$24,400 $78,400
192,900 476,900
$217,300 $555,300
106,000
$2.05
$4.65
*$2.60 = $338,000 130,000
$2.02 = $217,300 106,000

4.
Cost of goods completed and transferred out during April:

number of units
total cost per

...................................
90,000$4.65
transferred out
equivalent unit
Cost remaining in April 30 work-in-process inventory:

Direct material:
$418,500
number of
cost per
equivalent
equivalent
40,000$2.60
units of
unit of
.................................
direct
material
direct
material
$104,000
Conversion:
number of
cost per
equivalent
equivalent
16,000$2.05
units of
unit of
...........................................
conversion
conversion
32,800
Total cost of April 30 work-in-process....................................................
$136,800
Check: Cost of goods completed and transferred out........................

Cost of April 30 work-in-process inventory............................
Total costs accounted for.........................................................
$418,500
136,800
$555,300

1.
Direct material cost was $1,390,000:
JR1163................................
JY1065................................
DC0766...............................
Total..............................
$ 251,000
806,000
623,000
$1,680,000
Texarkana Corporations total direct-labor payroll amounted to $165,000 for 6,600

hours of work ($165,000 $25 per hour). Thus, conversion cost was $640,200:
Direct labor... $165,000
Overhead applied (6,600 hours x $72)..
475,200
Total.. $640,200
2.
Goods completed during April cost $2,550,000 (30,000 units x $85) as the
following calculations show:
Physical
Units
Percentage
Of
Completion
Equivalent Units
With
Respect to Direct
Conversion Material Conversion
Work in process, April 1.

Units started during April..
Total units to account for..
4,000
31,000
35,000
70%

out during April..
Work in process, April 30..
Total units accounted for...
Total equivalent units..
30,000
5,000
35,000
100%
40%
Work in process, April 1

Costs incurred during April.
Total costs to account for.
Equivalent units...
Cost per equivalent unit
30,000
5,000
30,000
2,000
35,000
32,000
Direct
Material
Conversion
Total
$ 420,000
1,680,000
$2,100,000
35,000
$60a
$159,800
640,200
$800,000
32,000
$25b
$ 579,800
2,320,200
$2,900,000
$85c
$2,100,000 35,000 = $60

$800,000 32,000 = $25
c
$60 + $25 = $85
b
3.
The cost of the ending work-in-process inventory is $350,000:

Direct material (5,000 x $60).. $300,000
Conversion cost (2,000 x $25)..
50,000
Total. $350,000
4.
5.
(a)
No material would be added during May. All material is introduced at the

start of the manufacturing process, and these units were begun in April.
(b)
Since the work-in-process inventory is 40% complete at the end of April,

60% of the conversion would be done in May.
Given that the ending work-in-process inventory is at the 40% stage of

completion, these units would not have reached the 70% point in April where
TH55 is added. Therefore, there would be zero equivalent units with respect to
part TH55 in the ending work-in-process inventory.

The missing amounts are shown below. A completed production report follows.
Work in process, October 1 (in units)..................................................................

Units completed and transferred out during October.........................................
Total equivalent units: conversion.......................................................................
10,000
75,000
78,500
Work in process, October 1: conversion.............................................................

Costs incurred during October: direct material..................................................
Cost per equivalent unit: conversion...................................................................
Cost of goods completed and transferred out during October..........................
Cost remaining in ending work-in-process inventory: direct material..............
$30,225
600,000
11.85
1,556,250
44,500
PRODUCTION REPORT: FANTASIA FLOUR MILLING COMPANY

Weighted-Average Method
Percentage
of
Completion
with
Equivalent Units
Physical
Respect to
Direct
Units
Conversion
Material
Conversion
Work in process, October 1..........
10,000
15%
Units started during October........
70,000
Total units to account for..............
80,000
out during October..............
Work in process, October 31........
Total units accounted for..............
Total equivalent units....................
Work in process, October 1..........

Costs incurred during October.....
Total costs to account for.............
Equivalent units.............................
Costs per equivalent unit..............
75,000
5,000
80,000
100%
70%
Direct
Material
$112,000
600,000
$712,000
80,000
$8.90*
*$8.90 = $712,000 80,000
$11.85 = $930,225 78,500

**$20.75 = $8.90 + $11.85
Cost of goods completed and transferred out during October:
75,000
5,000
_____
80,000
75,000
3,500
_____
78,500
Conversion
$30,225
900,000
$930,225
78,500
$11.85
Total
$142,225
1,500,000
$1,642,225
$20.75**
number of units
total cost per

............................... 75,000$20.75
equivalent unit
transferred out
$1,556,250
Cost remaining in October 31 work-in-process inventory:

Direct material:
number of
cost per
equivalent
equivalent
units of
unit of
.................................
direct
material
direct
material
5,000$8.90
$44,500
3,500$11.85
41,475
Total cost of October 31 work-in-process.........................................................
$85,975
Conversion:
number of
cost per
equivalent
equivalent
units of
unit of
...........................................
conversion
conversion
Check: Cost of goods completed and transferred out......

Cost of October 31 work-in-process inventory.....
Total costs accounted for.......................................
$1,556,250
85,975
$1,642,225

There is no single correct answer to this exercise. There are many reasonable solutions.
Cost pool 1:
Raw materials and components...................................................................... 2,760,000 yen
Inspection ......................................................................................................... 28,000 yen
Total................................................................................................................... 2,788,000 yen
Cost driver: raw-material cost
Cost pool 2:
Depreciation, machinery.................................................................................. 1,210,000 yen
Electricity, machinery.......................................................................................
123,000 yen
Equipment maintenance, wages......................................................................

178,000 yen
Equipment maintenance, parts........................................................................ 31,000 yen
Total................................................................................................................... 1,542,000 yen
Cost driver: number of units produced.
Cost pool 3:
Setup wages......................................................................................................
Total...................................................................................................................
43,000 yen
43,000 yen
Cost driver: number of production runs.

Cost pool 4:
Engineering design...........................................................................................
Total...................................................................................................................
687,000 yen
687,000 yen
Cost driver: number of parts in a product.

Cost pool 5:
Depreciation, plant............................................................................................
835,000 yen
Insurance, plant................................................................................................
712,000 yen
Electricity, light..................................................................................................
69,000 yen
Custodial wages, plant.....................................................................................
42,000 yen
Property taxes...................................................................................................
141,000 yen
Natural gas, heating.......................................................................................... 32,000 yen
Total................................................................................................................... 1,831,000 yen
Cost driver: for costs allocated to support departments, square footage; for costs
assigned to products, number of units produced.
Memorandum
Date:
Today
To:
President, Windy City Design Company
From:
I. M. Student, Controller, Windy City Design Company
Subject:
Customer-Profitability Analysis
The customer-profitability analysis ranks customers on the basis of operating income.

As the graph shows, customers 5 and 6 are not profitable for Windy City Design
Company. There are several possible courses of action, including the following four:
Drop customers 5 and 6.
Raise the prices for customers 5 and 6.
Cut the costs of serving customers 5 and 6 by cutting back on services.
Try to increase higher-margin services to customers 5 and 6 in order to make these
customer relationships profitable.

1.
The predetermined overhead rate is calculated as follows:

Predetermined overhead rate = Budgeted manufacturing overhead/budgeted
direct-labor hours = $1,224,000/102,000* = $12 per hour
*Direct labor, budgeted hours:
REG: 5,000 units 9 hours.....................................
ADV: 4,000 units 11 hours....................................
SPE: 1,000 units 13 hours....................................
Total direct-labor hours........................................................
45,000 hours
44,000 hours
13,000 hours
102,000 hours
2. Activity-based-costing analysis:
Activity
Activity
Cost Pool
Cost
Driver
Machin
e
Hours
Cost
Driver
Quantity
Pool
Rate
$
115,000 2.70
Machine
Related
$310,500
Material
Hand.
52,500
Prod.
Runs
100 525.00
Purch.
75,000
Purch.
Orders
300 250.00
Setup
85,000
Prod.
Runs
100 850.00
Inspect.
27,500
Inspect.
Hours
1,100
25.00
Ship.
66,000
Ship.
1,100
60.00
Eng.
32,500
Eng.
Hours
650
50.00
Fac.
575,000
115,000
5.00
Grand
Total
$1,224,000
Machin
e
Hours
Product
Line
Cost
Driver
Quantity
for
Product
Line
Activity
Cost for
Product
Line
REG
ADV
GMT
Total
REG
ADV
GMT
Total
REG
ADV
GMT
Total
REG
ADV
GMT
Total
REG
ADV
GMT
Total
REG
ADV
GMT
Total
REG
ADV
GMT
Total
50,000
48,000
17,000
115,000
40
40
20
100
100
96
104
300
40
40
20
100
400
400
300
1,100
500
400
200
1,100
250
200
200
650
$135,000
129,600
45,900
$310,500
$ 21,000
21,000
10,500
$ 52,500
$ 25,000
24,000
26,000
$ 75,000
$ 34,000
34,000
17,000
$ 85,000
$ 10,000
10,000
7,500
$ 27,500
$ 30,000
24,000
12,000
$ 66,000
$ 12,500
10,000
10,000
$ 32,500
REG
ADV
GMT
Total
Grand
Total
50,000
48,000
17,000
115,000
$250,000
240,000
85,000
$575,000
$1,224,000
Product
Line
Prod.
Volume
Activity
Cost per
Unit of
Product
$27.00
5,000
4,000 32.40
1,000 45.90
5,000 4.20
4,000 5.25
1,000 10.50
5,000 5.00
4,000 6.00
1,000 26.00
5,000 6.80
4,000 8.50
1,000 17.00
5,000
4,000
1,000
2.00
2.50
7.50
5,000 6.00
4,000 6.00
1,000 12.00
5,000 2.50
4,000 2.50
1,000 10.00
50.00
5,000
4,000 60.00
1,000 85.00
AC202:
3.
Solution to suggested problem for 201

review 5
Calculation of new product costs under ABC.
Direct material.................................
Direct labor (not including
set-up time).................................
Total direct costs per unit...............
REG
$129.00
ADV
$151.00
GMT
$203.00
171.00 (9 hr. @ $19)

$300.00
209.00 (11 hr. @ $19)

$360.00
247.00 (13 hr. @ $19)

$450.00
$ 32.40
5.25
6.00
8.50
2.50
6.00
2.50
60.00
$ 45.90
10.50
26.00
17.00
7.50
12.00
10.00
85.00
$123.15
$483.15
$213.90
$663.90
Manufacturing overhead (based on ABC):

Machine-related..........................
$ 27.00
Material handling.......................
4.20
Purchasing..................................
5.00
Setup...........................................
6.80
Inspection...................................
2.00
Packing/shipping.......................
6.00
Engineering design....................
2.50
Facility.........................................
50.00
Total ABC overhead
cost per unit................................
$103.50
Total product cost per unit.............
$403.50
4.
Page | 22
Comparison of costs and target prices under two alternative product-costing

systems:
Reported unit overhead cost:

Traditional, volume-based costing system
...................................................................................
Activity-based costing system
...................................................................................
Reported unit product cost (direct material, direct
labor and overhead):
...................................................................................
...................................................................................
Sales price data:
Original target price (130% of product cost based
on traditional, volume-based costing system)
...................................................................................
New target price (130% of product cost based
activity-based costing system)
...................................................................................
Actual current selling price..........................................
REG
ADV
GMT
$108.00
$132.00
$156.00
103.50
123.15
213.90
408.00
492.00
606.00
403.50
483.15
663.90
530.40
639.60
787.80
524.55
628.10
863.07
525.00
628.00
800.00
AC202:

review 5
5.
The REG and ADV products were overcosted by the traditional system, and the
GMT product was undercosted by the traditional system
Reported unit product cost:
$408.00
$492.00
$606.00 Page | 23
...................................................................................
403.50
483.15
663.90
...................................................................................
Cost distortion:
REG and ADV overcosted by traditional system
$ 4.50
$ 8.85
...................................................................................
GMT undercosted by traditional system................
($ 57.90)
1.
Overhead to be assigned to chemical order:

Activity Cost
Pool
Machine setups
Material handling
Hazardous waste control
Quality control
Other overhead costs
Pool
Rate
$5,000 per setup
$5 per pound
$12 per pound
$200 per inspection
$25 per machine
hour
Level of
Cost Driver
8 setups
10,000 pounds
3,000 pounds
10 inspections
600 machine hours
Total
Assigned
Overhead
Cost
$40,000
50,000
36,000
2,000
15,000
$143,000
2.
Overhead cost per

box of chemicals
$143,000
= $71.50 per box
2,000 boxes
3.
Predetermined
overhead rate
total budgeted overhead cost $3,894,000

=
total budgeted machine hours
50,000
= $77.88 per machine hr.
4.
Overhead to be assigned to chemical order, given a single predetermined overhead

rate:
a.
Total overhead assigned
= $77.88 per machine hr. 600 machine hr.

= $46,728
b.
Overhead cost per

box of chemicals
$46,728
= $23.364 per box
2,000 boxes
AC202:
5.

review 5
These chemicals entail a relatively large number of machine setups, a large amount of
hazardous materials, and several inspections. Thus, they are quite costly in terms of
Page | 24
driving overhead costs. Use of a single predetermined overhead rate obscures this
characteristic of the production job. Underestimating the overhead cost per box could
have adverse consequences for Rapid City Technology, Inc. For example, it could lead
to poor decisions about product pricing. The activity-based costing system will serve
management much better than the system based on a single, predetermined overhead
rate.

1.
Activity Cost Pool

I:
Machine-related costs
II: Setup and inspection
III: Engineering
IV: Plant-related costs
2.
Calculation of pool rates:
Type of Activity
Unit-level
Batch-level
Product-sustaining-level
Facility-level
I: Machine-related costs:
$1,800,000
18,000 machine hrs.
= $100 per machine hr.
II. Setup and inspection:

$720,000
80 runs
= $9,000 per run
III. Engineering:
$360,000
200 change orders
= $1,800 per change order
IV. Plant-related costs:

$384,000
3,840 sq. ft.
= $100 per sq. ft.
AC202:
3.

review 5
Unit costs for odds and ends:

Page | 25
I: Machine-related costs:
Odds: $100 per machine hr.8 machine hr. per unit
= $800 per unit
Ends: $100 per machine hr.2 machine hr. per unit
= $200 per unit
II: Setup and inspection:

Odds: $9,000 per run 25 units per run
= $360 per unit
Ends: $9,000 per run 125 units per run
= $72 per unit
III: Engineering:
Odds:
$1,800 per change order 200 change orders 75%

1,000 units
$270,000
= $270 per unit
1,000 units
$1,800 per change order 200 change orders 25%
5,000 units
=
Ends:
$90,000
= $18 per unit
5,000 units
IV. Plant-related costs:

Odds:
$100 per sq. ft. 3,840 sq. ft. 80%

1,000 units
$307,200 = $307.20 per unit
1,000 units
$100 per sq. ft. 3,840 sq. ft. 20%
5,000 units
=
Ends:
4.
$76,800 = $15.36 per unit

5,000 units
New product cost per unit using the ABC system:

Odds
Ends
AC202:

review 5
Direct material......................................................................
$ 160.00
Direct labor...........................................................................
120.00
Machine-related.............................................................
800.00
Setup and inspection....................................................
360.00
Engineering...................................................................
270.00
Plant-related..................................................................
307.20
Total cost per unit................................................................
$2,017.20
5.
$240.00
180.00
200.00
72.00
18.00
15.36
$725.36
New target prices:

Odds
New product cost (ABC)......................................................
$2,017.20
Pricing policy........................................................................
120%
New target price...................................................................
$2,420.64
6.
Page | 26
Ends
$725.36
120%
$870.43 (rounded)
Full assignment of overhead costs:

Odds
Ends
Manufacturing overhead costs:

Machine-related.............................................................
$ 800.00 $ 200.00
Setup and inspection....................................................
360.00
72.00
Engineering....................................................................
270.00
18.00
Plant-related...................................................................
307.20
15.36
Total overhead cost per unit................................................
$1,737.20 $ 305.36
Production volume...........................................................
1,000 5,000
Total overhead assigned......................................................
$1,737,200 $1,526,800
Total = $3,264,000
7.
Cost distortion:
Odds
Traditional volume-based costing system:
reported product cost...................................................
Activity-based costing system:
reported product cost...................................................
Amount of cost distortion per unit......................................
Ends
664.00
$996.00
2,017.20
$(1,353.20)
725.36
$270.64
Traditional
system
undercosts
Traditional
system
overcosts
AC202:

review 5
odds by
$1,353.20
per unit
Production volume............................................................... 1,000

Total amount of cost distortion for entire
product line.................................................................... $(1,353,200)
ends by
$270.64
per unit
Page | 27
5,000
$1,353,200
Sum of these two

amounts is zero.

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Correction / Solution for AC202

PROBLEM 1-30 (45 MINUTES)

Allen's considerations are determined largely by her position as an accountant,

Correction / Solution for AC202

PROBLEM 1-31 (25 MINUTES)

The balanced scorecard is a business model that helps to assess a firms

Operating expenses per seat

Number of bags lost

Internal operating measures:

Number of cities/new cities

Number of aircraft in fleet

Percentage of tickets sold through

Correction / Solution for AC202

EXERCISE 2-28 (25 MINUTES)

ALHAMBRA ALUMINUM COMPANY

ALHAMBRA ALUMINUM COMPANY

ALHAMBRA ALUMINUM COMPANY

Correction / Solution for AC202

Income before taxes........................................................................................

PROBLEM 2-37 (25 MINUTES)

Total prime costs:

Total product costs:

Total conversion costs:

Total manufacturing overhead:

Total period costs:

Correction / Solution for AC202

Product promotion costs..................................................................

PROBLEM 2-43 (35 MINUTES)

LAREDO LUGGAGE COMPANY

LAREDO LUGGAGE COMPANY

Correction / Solution for AC202

PROBLEM 2-52 (25 MINUTES)

PROBLEM 2-56 (15 MINUTES)

EXERCISE 3-24 (20 MINUTES)

Raw-material inventory, January 1........................................................................

Total prime cost incurred in January..................................................................... $695,300

Correction / Solution for AC202

Total manufacturing cost for January...................................................................$ 982,300

Finished-goods inventory, January 1....................................................................$ 184,900

Applied manufacturing overhead for January...................................................... $287,000

Applied manufacturing overhead

= total manufacturing costs 30%

Applied manufacturing overhead

= direct-labor cost 80%

Direct-labor cost = applied manufacturing overhead 80%

Direct-material used = total manufacturing cost

Correction / Solution for AC202

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

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

Cost of Goods Sold

Correction / Solution for AC202

LAREDO LUGGAGE COMPANY

PROBLEM 3-47 (30 MINUTES)

Machining Dept. overhead rate = budgeted overhead budgeted machine hours

The ending work-in-process inventory is carried at a cost of $90,030, computed

Actual overhead in the Machining Department amounted to $3,308,000, whereas

Actual overhead in the Assembly Department amounted to $1,730,000, whereas

Correction / Solution for AC202

The Work-in-Process account is charged with applied overhead, or $5,070,000

PROBLEM 3-49 (45 MINUTES)

Correction / Solution for AC202

PROBLEM 4-25 (45 MINUTES)

Physical flow of units: