CHAPTER 1 THE ACCOUNTANT’S ROLE IN THE ORGANIZATION 1-1
Management accounting measures, analyzes and reports financial and nonfinancial information that helps managers make decisions to fulfill the goals of an organization. It focuses on internal reporting and is not restricted by generally accepted accounting principles (GAAP). Financial accounting focuses on reporting to external parties such as inestors, goernment agenci agencies, es, and banks. banks. It measur measures es and record recordss bus busine iness ss transa transacti ction onss and proid proides es financ financial ial statements that are based on generally accepted accounting principles (GAAP). !ther differences include (") management accounting emphasizes the future (not the past), and (#) management accounting influences the behaior of managers and other employees (rather than primarily reporting economic eents).
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$inancial accounting is constrained by generally accepted accounting principles. %anagement accounting is not restricted to these principles. &he result is that management accounting allo's managers to charge interest on o'ners capital to help udge a diisions performance, een though such a charge is not allo'ed under GAAP, management management accounting accounting can include include assets or liabiliti liabilities es (such (such as *brand *brand names+ names+ deeloped deeloped internally) not recognized under GAAP, and management accounting can use asset or liability measurement rules (such as present alues or resale prices) not permitted under GAAP.
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&he business functions in the alue chain are generating and experimenting 'ith ideas related to ne' Research Research and devel!"en# devel!"en# generating products, serices, or processes. processes. $es%&n $es%&n ' !rd(c#s) !rd(c#s) serv%ces) serv%ces) and !rcesses !rcesses the detailed planning and engineering of products, serices, or processes. processes. Prd(c#%n ac-uiring, coordinating, and assembling resources to produce a product or delier a serice. *ar+e#%n& promoting and selling products or serices to customers or prospectie customers. products or serices to customers. customers. $%s#r%,(#%n deliering products aftersale support to customers. customers. C(s#"er serv%ce proiding aftersale
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describes the flo' of goods, serices, serices, and information information from the initial initial sources of Supply chain describes materials and serices to the deliery of products to consumers, regardless of 'hether those actiities occur in the same organization or in other organizations. /ost management management is most effectie effectie 'hen it integrates integrates and coordinates coordinates actiities actiities across all compan companies ies in the sup suppl ply y chain chain as 'ell 'ell as across across each bus busine iness ss functi function on in an indii indiidua duall companys alue chain. Attempts are made to restructure all cost areas to be more costeffectie.
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&he fiestep decisionmaking process is (") identify the problem and uncertainties (#) obtain information (0) make predictions about the future (1) make decisions by choosing among alternaties and (2) implement the decision, ealuate performance and learn.
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Agree Agree.. A succ succes essf sful ul mana manage geme ment nt acco accoun unta tant nt re-u re-uir ires es gene genera rall busi busine ness ss skil skills ls (suc (such h as understanding the strategy of an organization) and people skills (such as motiating other team members) as 'ell as technical skills (such as computer kno'ledge, calculating costs of products, and supporting planning and control decisions).
1-12 (a) (a)
(b) (b)
(c) (c) • •
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(d)
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&he ne' controller could reply in one or more of the follo'ing 'ays3 4emo 4emons nstr trat atee to the the plan plantt mana manage gerr ho' ho' he or she she coul could d make make bett better er deci decisi sion onss if the the plan plantt controller 'as ie'ed as a resource rather than a dead'eight. In a related 'ay, the plant controller could sho' ho' the plant managers time and resources could be saed by ie'ing the ne' plant controller as a team member. 4emo 4emons nstr trat atee to the plan plantt manag manager er a good good kno'l kno'led edge ge of the the techn technic ical al aspe aspect ctss of the plan plant. t. &his &his approach may inole doing background reading. It certainly 'ill inole spending much time on the plant floor speaking to plant personnel. 5ho' 5ho' the the plant plant manage managerr examp example less of the ne' ne' plant plant cont contro roll ller ers s past past succ succes esse sess in 'orki 'orking ng 'ith 'ith line managers in other plants. 6xamples could include assistance in preparing the budget, assistan assistance ce in analyzing analyzing problem situation situationss and ealuating ealuating financial financial and nonfinanci nonfinancial al aspects of different alternaties, and assistance in submitting capital budget re-uests. 5eek 5eek assis assistan tance ce from from the the corpor corporate ate con contro trolle llerr to high highlig light ht to to the the plant plant mana manager ger the the impo importa rtance nce of of many tasks undertaken by the ne' plant controller. &his approach is a last resort but may be necessary in some cases. 0al(e 0al(e cha% cha%n n and clas class%' s%'%ca %ca#% #%n n ' cs# cs#s) s) c"!( c"!(#er #er c"! c"!an an Cs# Cs# I#e" I#e" a. b. c. d. e. f.
g. h. 1-25 1-25
0al( 0al(ee Cha Cha%n %n 3( 3(s% s%ne ness ss (nc (nc#% #%n n Production 4istribution 4esign of products, serices or processes 7esearch and 4eelopment /ustomer 5erice or %arketing 4esign of products, serices or processes (or 7esearch and 4eelopment) %arketing Production
Plan Plann% n%n& n& and and cn cn#r #rl l dec dec%s %s% %ns ns Ac#%n a. b. c. d. e.
$ec%s%n Planning /ontrol /ontrol Planning Planning
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Pr'ess%nal e#h%cs and end-'-ear ac#%ns
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&he &he poss possib ible le moti motia ati tion onss for for the the snac snack k food foodss dii diisi sion on 'ant 'antin ing g to take take endo endof fye year ar actio actions ns include3 %ana %anage gemen mentt incen incenti tie es. s. Gour Gourme mett $oods $oods may may hae hae a dii diisi sion on bonu bonuss schem schemee based based on one oneye year ar reported diision earnings. 6fforts to frontend reenue into the current year or transfer costs into the next year can increase this bonus. Promot Promotion ion oppo opportu rtuni nitie tiess and and ob ob secur security ity.. &op manage managemen mentt of Gour Gourmet met $ood $oodss likely likely 'ill 'ill ie' ie' those those diisi diision on manage managers rs that that delie delierr high high report reported ed earnin earnings gs gro'th gro'th rates as being being the the best best
(a) (a)
(b)
(c) (c)
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prospects for promotion. 4iision managers 'ho delier *un'elcome surprises+ may be ie'ed as less capable. 7eta 7etain in dii diisi sion on auto autono nomy my.. If top mana manage geme ment nt of Gour Gourme mett $oods $oods adop adopts ts a *mana *manage geme ment nt by exception+ approach, diisions that report sharp reductions in their earnings gro'th rates may attract a sizable increase in top management superision. &he &he *5ta *5tand ndar ards ds of 6th 6thic ical al /ond /onduc uctt . . . + rere-ui uire re man manag agem emen entt acco accoun unta tant ntss to to Perform Perform profession professional al duties duties in accordance accordance 'ith releant releant la's, la's, regulatio regulations, ns, and technical technical standards. 7efrain from engaging in any conduct that 'ould preudice carrying out duties ethically. /ommunicate information fairly and obectiely.
5eeral of the *endofyear actions+ clearly are in conflict 'ith these re-uirements and should be ie'ed as unacceptable by &aylor. (b) &he fisc fiscal al year yearen end d shoul should d be clos closed ed on midnig midnight ht of of 4ecemb 4ecember er 0". 0". *6xten *6xtendin ding+ g+ the the close close fals falsely ely reports next years sales as this years sales. (c) (c) Alte Alteri ring ng shi shipp ppin ing g date datess is fals falsif ific icat atio ion n of the the acco accoun unti ting ng rep repor orts ts.. (f) Ader Adertis tiseme ements nts run in 4ece 4ecembe mberr shoul should d be be charg charged ed to to the the curren currentt year. year. &he adert adertisi ising ng agen agency cy is is facilitating falsification of the accounting records. &he other *endofyear actions+ occur in many organizations and fall into the *gray+ to *acceptable+ area. 8o'eer, much depends on the circumstances surrounding each one, such as the follo'ing3 (a) If the the indep independ endent ent contra contracto ctorr does does not not do main mainten tenanc ancee 'ork 'ork in in 4ecem 4ecember ber,, there there is is no tran transac sactio tion n regarding maintenance maintenance to record. &he responsibility responsibility for ensuring ensuring that packaging packaging e-uipment is 'ell maintained is that of the plant manager. &he diision controller probably can do little more than obsere the absence of a 4ecember maintenance charge. (d) In many many orga organiz nizati ations ons,, sales sales are are heai heaily ly conce concent ntrat rated ed in in the the final final 'eek 'eekss of the the fisca fiscall year yearend end.. If the double bonus is approed by the diision marketing manager, the diision controller can do little more than obsere the extra bonus paid in 4ecember. (e) If &9 &9 spots spots are redu reduced ced in 4ece 4ecembe mber, r, the the ader adertis tising ing cost cost in 4ece 4ecembe mberr 'ill 'ill be be reduce reduced. d. &her &heree is no record falsification here. (g) %uch depend dependss on the the means of *persuad *persuading+ ing+ carrie carriers rs to accept accept the merchand merchandise. ise. $or $or example, example, if if an underthetable payment is inoled, or if carriers are pressured to accept merchandise, it is clearly unethical. If, ho'eer, the carrier receies no extra consideration and 'illingly agrees to accept the assignment because it sees potential sales opportunities in 4ecember, the transaction appears ethical. 6ach of the (a), (d), (e), and (g) *endofyear actions+ may 'ell disadantage Gourmet $oods in the long run. $or example, lack of routine maintenance may lead to subse-uent e-uipment failure. &he diisional controller is 'ell adised to raise such issues in meetings 'ith the diision president. 8o'eer, if Gourmet $oods has a rigid set of line:staff distinctions, the diision president is the one 'ho bears primary responsibility for ustifying diision actions to senior corporate officers. 0.
If &ayl &aylor or bel belie iee ess that that 7yan 7yan 'ant 'antss her her to enga engage ge in in unet unethi hica call beha behai ior or,, she sho shoul uld d firs firstt direc directl tly y raise her concerns 'ith 7yan. If 7yan is un'illing to change his re-uest, &aylor should discuss her concer concerns ns 'ith 'ith the /orpo /orporat ratee /ontro /ontroll ller er of Gourme Gourmett $oods $oods.. 5he could could also also initia initiate te a confident confidential ial discussion discussion 'ith an I%A 6thics /ounselor, /ounselor, other other impartial impartial adiser, adiser, or her o'n attorney. &aylor also may 'ell ask for a transfer from the snack foods diision if she perceies 7yan is un'illing to listen to pressure brought by the /orporate /ontroller, /$!, or een President of Gourmet $oods. $oods. In the extreme, she may 'ant 'ant to resign if the corporate corporate culture of Gourmet $oods is to re'ard diision managers 'ho take *endofyear actions+ that &aylor ie's
as unethical and possibly illegal. It 'as precisely actions along the lines of (b), (c), and (f) that caused ;etty 9inson, an accountant at
A cost object is anything for 'hich a separate measurement of costs is desired. 6xamples include a product, a serice, a proect, a customer, a brand category, an actiity, and a department.
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%anagers beliee that direct costs that are traced to a particular cost obect are more accurately assigned to that cost obect than are indirect allocated costs.
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A cost driver is is a ariable, such as the leel of actiity or olume, that causally affects total costs oer a gien time span. A change in the cost drier results in a change in the leel of total costs. $or example, the number of ehicles assembled is a drier of the costs of steering 'heels on a motorehicle assembly line.
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%anufacturing companies typically hae one or more of the follo'ing three types of inentory3 Direct materials inventory . 4irect materials in stock and a'aiting use in the manufacturing process. partially 'orked on but not not yet completed. completed. Also called work Work-in-process inventory . Goods partially in progress Finished goods inventory . Goods completed but not yet sold.
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A product cost is the sum of the costs assigned assigned to a product for a specific purpose. Purposes for computing a product cost include pricing and product product mix decisions, contracting 'ith goernment agencies, and preparing financial statements for external reporting under generally accepted accounting principles. Class% Class%'%c '%ca#% a#%n n ' cs#s) cs#s) "an('a "an('ac#( c#(r%n r%n& & sec#r sec#r
/ost obect3 &ype of car assembled (/orolla or Geo Prism) /ost ariability3
$ r I 4 I 4 4 4 I 4 I
0 r 9 $ $ $ 9 9 9 $
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l8 l8 ' Inve Inven# n#r r%a %a,l ,lee Cs Cs#s #s
(All numbers belo' are in millions). ". 4irect materials inentory =:":#>>= 4irect materials purchased 4irect materials aailable for production 4irect materials used 4irect materials inentory =:0":#>>=
?
?
@> 0> 12> 0B2 B2
#. &otal manufacturing oerhead costs 5ubtract3 9ariable manufacturing oerhead costs $ixed manufacturing oerhead costs for August
?
0. &otal manufacturing costs 5ubtract3 4irect materials used (from re-uirement ") &otal manufacturing oerhead costs 4irect manufacturing labor costs for August
? ",>> (0B2) (1=>) ? B12
?
1.
>= &otal manufacturing costs >=
?
#>> ",>> ",=>> (",2>) ? "2>
2. $inished goods inentory =:":#>>= /ost of goods manufactured (moed from
?
"#2 ",2> ? ",BB2
. $inished goods aailable for sale in August (from re-uirement 2) 5ubtract3 /ost of goods sold $inished goods inentory =:0":#>>= 2-71 2-71
Cs# Cs# ' &d &dss "an( "an('a 'ac# c#(r (red ed
".
Cansec C"!an Sched(le ' Cs# ' Gds *an('ac#(red 9ear Ended $ece",er 71) 2556 :%n #h(sands;
4irect materials3 ;eginning inentory, Canuary ", #>>@ Purchases of direct materials
1=> (#2>) #0>
? ##,>>> B2,>>>
? ",BB2 (",B>>) ? B2
/ost of direct materials aailable for use 6nding inentory, 4ecember 0", #>>@ 4irect materials used 4irect manufacturing labor Indirect manufacturing costs3 Indirect manufacturing labor Plant insurance 4epreciationplant building D e-uipment 7epairs and maintenanceplant &otal indirect manufacturing costs %anufacturing costs incurred during #>>@ Add beginning 'orkinprocess inentory, Canuary ", #>>@ &otal manufacturing costs to account for 4educt ending 'orkinprocess inentory, 4ecember 0", #>>@ /ost of goods manufactured (to Income 5tatement)
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? B",>>> #2,>>> "2,>>> @,>>> "",>>> 1,>>> 0@,>>> "02,>>> #",>>> "2,>>> #>,>>> ?"0,>>>
Cansec C"!an Inc"e S#a#e"en# 9ear Ended $ece",er 71) 2556 :%n #h(sands;
7eenues /ost of goods sold3 ;eginning finished goods, Canuary ", #>>@ /ost of goods manufactured /ost of goods aailable for sale 6nding finished goods, 4ecember 0", #>>@ /ost of goods sold Gross margin !perating costs3 %ark %arket etin ing, g, dist distri ribu buti tion on,, and and cust custom omer ers ser eri ice ce cost costss General and administratie costs &otal operating costs !perating income 2-7/
@B,>>> #,>>>
?0>>,>>> ? "= "=,>>> "0,>>> "21,>>> #0,>>> "0",>>> "@,>>> @0,> @0,>>> >> #@,>>> "##,>>> ? 1B,>>>
La,r cs#) ver#%"e and %dle #%"e
".(a) &otal cost cost of hours 'orked 'orked at regular rates rates 1# hours E "# per hour
? 2>1.>>
1# hours E "# per hour
2>1.>>
10 hours E "# per hour 1> hours E "# per hour
2".>>
1=>.>> #,>>1.>>
%inus idle time time (2.# hours E ?"# per hour) 4irect manufacturing labor costs
#.1>
?",@1".>
(b) Idle time F 2.# hours E "# per hour F (c) !ertime and and holiday holiday premium. ) hours E Premium, ? per hour
?#.1> ? "#.>>
) hours EPremium, ? per hour
"#.>>
) hours E Premium, ? per hour
"=.>>
@.>>
&otal oertime and holiday premium
(d) &otal earnings in %ay 4irect manufacturing labor costs
?"0=.>>
?",@1".>
Idle time
#.1>
!ertime and holiday premium &otal earnings #.
"0=.>>
?#,"1#.>>
Idle time caused caused by e-uipment e-uipment breakdo' breakdo'ns ns and and schedu scheduling ling mixups mixups is is an indirect indirect cost of the the ob ob because it is not related related to a specific ob. !ertime premium caused by the heay oerall olume of 'ork is also an indirect cost because because it is not related to a particular particular ob that happened happened to be 'orked on during the oertime oertime hours. hours. If, ho'eer, the oertime is the result of a demanding *rush ob,+ the oertime premium is a direct cost of that ob.
CHAPTER 7 COST-0OLU*E-PROIT ANAL9SIS
!&A&I! H564 I /8AP&67 /8AP&67 0 5!H&I!5 5P3 9/H3 /%H3 $/3 &!I3
5elling price 9ariable cost per unit /ontribution margin per unit $ixed costs &arget operating income
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&he assumptions underlying the /9P analysis outlined in /hapter 0 are /han /hange gess in the the leel leel of re reen enue uess and and costs costs aris arisee only only beca becaus usee of chan change gess in the the numbe numberr of product (or serice) units units sold. &ota &otall cost costss can can be sep separ arat ated ed int into o a fixe fixed d comp compon onen entt that that doe doess not not ary ary 'it 'ith h the the unit unitss sold sold and and a component that is ariable 'ith respect to the units sold.
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&hree methods to express /9P relationships are the e-uation method, the contribution margin method, and the graph method. &he first t'o methods are most useful for analyzing operating income at a fe' specific leels of sales. &he graph method is useful for isualizing the effect of sales on operating income oer a 'ide range of -uantities sold.
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;reakeen analysis denotes the study of the breakeen point, 'hich is often only an incidental part of the relationship bet'een cost, olume, and profit. /ostolumeprofit /ostolumeprofit relationship is a more comprehensie term than breakeen analysis.
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/9P analysis is al'ays conducted for a specified time horizon. !ne extreme is a ery shorttime horizon. $or example, some acation cruises offer deep price discounts for people 'ho offer to take any cruise cruise on a days notice. notice. !ne day prior to a cruise, cruise, most costs costs are fixed. &he other other extreme is seeral years. 8ere, a much higher percentage of total costs typically is ariable. /9P itself is not made any less releant 'hen the time horizon lengthens.
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C0P c" c"!(#a#%ns
"a.
5ales (?0> per unit E #>>,>>> units) 9ariable costs (?#2 per unit E #>>,>>> units) /ontribution margin
?,>>>,>>> 2,>>>,>>> ?",>>>,>>>
"b.
/ontribution margin (from aboe) $ixed costs !perating income
?",>>>,>>> =>>,>>> ? #>>,>>>
#a.
5ales (from aboe) 9ariable costs (?" per unit E #>>,>>> units) /ontribution margin
?,>>>,>>> 0,#>>,>>> ?#,=>>,>>>
#b.
/ontribution margin $ixed costs !perating income
?#,=>>,>>> #,1>>,>>> ? 1>>,>>>
0. !perating !perating income income is expected expected to increase increase by ?#>>,>>> ?#>>,>>> if %s. 5choenen 5choenens s proposal proposal is accepted. accepted. &he management 'ould consider other factors before making the final decision. It is likely that product -uality 'ould improe as a result of using state of the art e-uipment. 4ue to increased automation, probably many 'orkers 'ill hae to be laid off. Patels management 'ill hae to consider the impact of such an action on employee morale. In addition, the proposal increases the companys fixed costs dramatically. &his 'ill increase the companys operating leerage and risk. 7-75 7-75
Cn#r Cn#r%, %,(#% (#%n n "ar "ar&% &%n) n) dec dec%s %s% %n n "a+% "a+%n& n&
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7eenues 4educt ariable costs3
?2>>,>>>
/ost of goods sold 5ales commissions !ther operating costs /ontribution margin #. /ontri /ontribut bution ion margin margin percen percentag tagee F 0.
?#>>,>>> 2>,>>> 1>,>>>
?#">,>>> ?2>>,>>>
#@>,>>> ?#">,>>>
F 1#J
Incr Increm emen enta tall re reen enu ue (#> (#>J J E ?2 ?2>>,> >>,>> >>) F ?" ?">>,> >>,>>> >> Incremental contribution margin (1#J E ?">>,>>>) Incremental fixed costs (adertising) Incremental operating income
?1#,>>> ">,>>> ?0#,>>>
If %r. 5chmidt spends ?">,>>> more on adertising, the operating income 'ill increase by ?0#,>>>, conerting an operating loss of ?">,>>> to an operating income of ?##,>>>.
Proof (!ptional)3 7eenues ("#>J E ?2>>,>>>) /ost of goods sold (1>J of sales) Gross margin
?>>,>>> #1>,>>> 0>,>>>
!perating costs3 5alaries and 'ages 5ales commissions (">J of sales) 4epreciat 4epreciation ion of e-uipment e-uipment and fixtures fixtures 5tore rent Adertising !ther operating costs3 9ariable (
?"2>,>>> >,>>> "#,>>> "#,>>> 1=,>>> ">,>>>
?1>,>>> E ?>>,>>>) ?2>>,>>>
1=,>>>
$ixed !perating income
">,>>>
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C0P C0P ana anal ls% s%s) s) serv serv%c %cee '%r '%r" ".
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7eenue per package 9ariable cost per package /ontribution margin per package
00=,>>> ? ##,>>>
?1,>>> 0,>> ? 1>>
;reakeen (units) (units) F $ixed costs K /ontribution margin per package F
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/ontribution ma margin ra ratio F
?1=>,>>> ?1>> per package
F ",#>> tour packages
/ontribution margin per package package
7eenue to achiee target income
5elling price
F
?1>> ?1,>>>
F ">J
F ($ixed costs L target target !I) K /ontribution margin ratio
F
?1=>,>>> + ?">>,>>> >.">
Gumber of tour package packagess to earn ?">>,>>> ?">>,>>> operating income3 income3 =
F ?2,=>>,>>>, or
?1=> ?1=>,>> ,>>> > + ?">>,>>> ,>>> =",12> tour tour packages packages ?1>>
7eenues to earn ?">>,>>> !I F ",12> tour packages E ?1,>>> F ?2,=>>,>>>. 0.
$ix $ixed cost costss F ?1=> ?1=>,> ,>> >> L ?#1,> #1,>> >> F ?2>1 2>1,>>> ,>>> ;reakeen (units) F
$ixed costs /ontribution margin per unit
/ontribution margin per unit
$ixed costs
F
;reakeen (units) ?2>1,>>> F F ?1#> per tour package ",#>> tour packages packages
4esired ariable cost per tour package F ?1,>>> M ?1#> F ?0,2=> ;ecause the current ariable cost per unit is ?0,>>, the unit ariable cost 'ill need to be reduced by ?#> to achiee the breakeen point calculated in re-uirement ". Alternate Alternate %ethod3 %ethod3 If fixed cost increases increases by ?#1,>>>, ?#1,>>>, then total ariable ariable costs must be reduced by ?#1,>>> to keep the breakeen point of ",#>> tour packages. &herefore, the ariable cost per unit reduction F ?#1,>>> K ",#>> F ?#> per tour package
7-4. 7-4.
E#h% E#h%cs cs)) C0 C0P ana anal lss%s %s
".
/ontribution mar margin percentage
F F F
;reakeen reenues
F F
#.
7eenues ?2,>>>,>>> −?0,>>>,>>> ?2,>>>,>>> ?#,>>>,>>> F 1>J ?2,>>>,>>> $ixed costs /ontribution margin percentage percentage ?#,"A>,>>>
F ?2,1>>,>>>
>.1>
If ariab ariable le costs costs are 2#J of reenu reenues, es, contri contribut bution ion margin margin percen percentag tagee e-ua e-uals ls 1=J (">>J (">>J − 2#J) ;reakeen reenues
F F
0.
7eenues − 9ariable costs
7eenues 9ariable costs (>.2# × ?2 ?2,>>>,>>>)
$ixed costs /ontribution margin percentage percentage
?#,"A>,>>> >.1=
F ?1,2>>,>>>
?2,>>>,>>> #,>>,>>>
$ixed costs !perating income 1.
#,">,>>> ? #1>,>>>
Incorr Incorrect ect report reporting ing of eni eniron ronmen mental tal costs costs 'ith 'ith the goal goal of of conti continu nuing ing opera operatio tions ns is unet unethic hical. al. In assessing the situation, the specific *5tandards of 6thical /onduct for %anagement Accountants+ (described in 6xhibit "B) that the management accountant should consider are listed belo'.
Competence /lear reports using releant and reliable information should be prepared. Preparing reports on the basis of incorrect enironmental costs to make the companys performance look better than it is iolates competence standards. It is unethical for ;ush not to report enironmental costs to make the plants performance look look good. Integrity &he management accountant has a responsibility to aoid actual or apparent conflicts of interest and adise all appropriate parties of any potential conflict. ;ush may be tempted to report lo'er enironmental costs to please emond and
;ush should indicate to emond that estimates of enironmental costs and liabilities should be included in the analysis. If emond still insists on modifying the numbers and reporting lo'er enironmental costs, ;ush should raise the matter 'ith one of emonds superiors. If after taking all these steps, steps, there is continued continued pressure pressure to understat understatee enironmen enironmental tal costs, costs, ;ush should consider resigning from the company and not engage in unethical behaior.
CHAPTER 15 $ETER*INING HO= COSTS 3EHA0E 15-7
A linear cost function is a cost function 'here, 'ithin the releant range, the graph of total costs ersus the leel of a single actiity related to that cost is a straight line. An example of a linear cost function is a cost function for use of a telephone line 'here the terms are a fixed charge of ?">,>>> per year plus a ?# per minute charge for phone use. A nonlinear cost function is a cost function 'here, 'ithin the releant range, the graph of total costs ersus the leel of a single actii actiity ty relate related d to that that cost cost is not not a straig straight ht line. line. 6xampl 6xamples es includ includee econom economies ies of scale scale in adertising 'here an agency can double the number of adertisements for less than t'ice the costs, stepcost functions, and learningcurebased learningcurebased costs.
15- ". #. 0. 1.
$our approaches to estimating a cost function are Industrial en engineering me method. /onference method. Account an analysis me method. Nuan Nuanti tita tati tie e anal analys ysis is of curr curren entt or or past past cost cost rela relati tion onsh ship ips. s.
&he six steps are 15-. ". /hoose /hoose the depend dependent ent ariab ariable le (the (the ari ariabl ablee to to be be pred predict icted, ed, 'hich 'hich is some some type type of of cost cost). ). #. Iden Identi tify fy the the inde indepe pend nden entt ari ariab able le or cost cost dri drier er.. 0. /oll /ollec ectt dat dataa on on the the depe depend nden entt ar aria iabl blee and and the the cos costt dri drie er. r. 1. Plot the data. 2. 6stimate the cost function. . 6al 6alua uate te the the ccos ostt dri dri er of the the eest stim imat ated ed cost cost func functi tion on.. 5tep 0 typically is the most difficult for a cost analyst.
15-25 Acc(n# anals%s "e#hd
".
9ariable costs3 /ar 'ash labor labo r ?#>,>> ?#> ,>>> > 5oap, cloth, and supplies 1#,>>> >> 6lectric po'er to moe coneyor belt B#,>>> &otal ariable costs ?1"#,>>> $ixed costs3 4epreciation ? 1,>>> 5alaries 5alarie s 1,>>> &otal fixed costs ?"">,>>> 5ome costs are classified as ariable because the total costs costs in these categories change in proportion to the number of cars 'ashed in orenzos operation. 5ome costs are classified as fixed because the costs in these categories do not ary 'ith the number of cars 'ashed. If the coneyor belt total costs moes regardless of the number of cars on it, the electricity costs to po'er the coneyor belt 'ould be a fixed cost.
#.
9ari ariable able costs sts p per er car car F
?1"#,>>>
F ?2."2 per car =>,>>> &otal costs estimated for @>,>>> cars F ?"">,>>> L (?2."2 E @>,>>>) F ?2B0,2>>
15-22 Acc(n# anals%s "e#hd
".
%anufacturing cost classification for #>>@3
Acc(n#
T#al Cs#s :1;
> ' T#al Cs#s Tha# %s 0ar%a,le %@ed 9ariable Cs#s Cs#s :2; :7; ? :1; × :2; :4; ? :1; :7;
0ar%a,le Cs# !er Un%# :; ? :7; B <)555
4irect materials 4irect manufacturing labor Po'er 5uperision labor %aterialshandling labor %aintenance labor 4epreciation 7ent, property taxes, admin &otal
?0>>,>>> ##2,>>> 0B,2>> 2,#2> >,>>> B2,>>> @2,>>> ">>,> "> >,>>> >> ?@1=,B2>
">>J ">> ">> #> 2> 1> > >
?0>>,>>> ##2,>>> 0B,2>> "",#2> 0>,>>> 0>,>>> > > ?00,B2>
?
> > > 12,>>> 0>,>>> 12,>>> @2,>>> ">>, "> >,>>> >>> ?0"2,>>>
?1.>> 0.>> >.2> >."2 >.1> >.1> > > ?=.12
&otal manufacturing cost for #>>@ F ?@1=,B2>
9ariable costs in #>">3
Acc(n#
4irect materials 4irect manufacturing labor Po'er 5uperision labor %aterialshandling labor %aintenance labor 4epreciation 7ent, property taxes, admin. &otal
Un%# 0ar%a,le Cs# !er Un%# 'r > 2556 Increase :/; :<;
?1.>> 0.>> >.2> >."2 >.1> >.1> > > ?=.12
2J "> > > > > > >
Increase %n 0ar%a,le Cs# !er Un%# :.; ? :/; × :<;
?>.#> >.0> > > > > > > ?>.2>
0ar%a,le Cs# !er Un%# T#al 0ar%a,le C 'r 2515 'r 2515 :6; ? :/; :.; :15; ? :6; × .5)55
?1.#> 0.0> >.2> >."2 >.1> >.1> > > ?=.@2
?00,>>> #1,>>> 1>,>>> "#,>>> 0#,>>> 0#,>>> > > ?B",>>>
$ixed and total costs in #>">3
Acc(n#
$llar %@ed Increase %n %@ed Cs#s 0ar%a,le Cs#s Percen#a&e %@ed Cs#s 'r 2515 Cs#s 'r 'r 2556 Increase :17; ? :14; ? 2515 :11; :12; :1; :11; :12; :11; :17;
T#al Cs#s :1/; ? :14; :1;
4irect materials 4irect manufacturing labor Po'er 5uperision labor %aterialshandling labor %aintenance labor 4epreciation 7ent, property taxes, admin. &otal
?
> > > 12,>>> 0>,>>> 12,>>> @2,>>> ">>, " >>,>>> >>> ?0"2,>>>
>J > > > > > 2 B
?
> > > > > > 1,B2> B,>> B, >>> > ?"",B2>
?
> > > 12,>>> 0>,>>> 12,>>> @@,B2> ">B, "> B,>>> >>> ?0#,B2>
?00,>>> #1,>>> 1>,>>> "#,>>> 0#,>>> 0#,>>> > > ?B",>>>
? 00,>>> #1,>>> 1>,>>> 2B,>>> #,>>> BB,>>> @@,B2> ">B, "> B,>>> >>> ?",>1#,B2>
&otal manufacturing costs for #>"> F ?",>1#,B2> #.
&otal cost per unit, #>>@
F
&otal cost per unit, #>">
F
?@1=,B2> B2,>>> ?",>1#,B2> =>,>>>
F ?"#.2 F ?"0.>0
0.
/ost /ost class classif ific icat atio ion n into into aria ariabl blee and fixed fixed cost costss is based based on -uali -ualita tati tie e,, rather rather than than -uan -uanti tita tati tie e,, analysis. 8o' good the classifications are depends on the kno'ledge of indiidual managers 'ho classify the costs. Go'er may 'ant to undertake -uantitatie analysis of costs, using regression analys analysis is on times timeseri eries es or cross crossse secti ctiona onall data data to better better estima estimate te the fixed fixed and aria ariable ble components of costs. ;etter kno'ledge of fixed and ariable costs 'ill help Go'er to better price his products, to kno' 'hen he is getting a positie contribution margin, and to better manage costs.
15-27
Es#%"a#%n& a cs# '(nc#%n) h%&h-l8 "e#hd
".
&he &he key key poin pointt to to not notee is is tha thatt the the prob proble lem m pro proi ide dess hig high hlo lo' ' al alue uess of of (annual (annual round trips made by a helicopter) and ! ÷ (the operating operating cost per per round trip). trip).
8ighest obseration of cost drier o'est obseration of cost drier 4ifference
Cs# $r%verD Ann(al R(ndTr%!s : X ; :1; #,>>> ",>>> ",>>>
O!era#%n& Cs# !er R(nd-Tr%! :2; ?0>> ?02>
Ann(al O!era#%n& Cs# :Y ; :7; ? :1; × :2; ?>>,>>> ?02>,>>> ?#2>,>>>
5lope coefficient F ?#2>,>>> ÷ ",>>> F ?#2> per roundtrip /onstant F ?>>,>>> M (?#2> × #,>>>) F ?">>,>>> &he estimated relationship is ! F F ?">>,>>> L ?#2> O 'here ! is is the annual operating cost of a helicopter and represents represents the number of round trips it makes annually. #.
&he co constant a (estimated as ?">>,>>>) represents the fixed costs of operating a helicopter, irrespectie of the number of round trips it makes. &his 'ould include items such as insurance, registration, depreciation on the aircraft, and any fixed component of pilot and cre' salaries. &he coefficient b (estimated as ?#2> per roundtrip) represents the ariable cost of each round trip costs that are incurred only 'hen a helicopter actually flies a round trip. &he coefficient b may
include costs such as landing fees, fuel, refreshments, baggage handling, and any regulatory fees paid on a perflight basis. basis. 0.
If each each heli helico copt pter er is, is, on aer aerag age, e, expe expect cted ed to mak makee ",#>> ",#>> rou round nd trip tripss a year year,, 'e can use use the the estimated relationship to calculate the expected annual operating cost per helicopter3
F ?">>,>>> L ?#2> ! F F ",#>> F F ?">>,>>> L ?#2> × ",#>> F ?">>,>>> L ?0>>,>>> F ?1>>,>>> ! F helicopters in its fleet, 7eisens estimated operating budget is "> × ?1>>,>>> F ?1,>>>,>>>.
CHAPTER 4 O3 COSTING 4-2
In a job-costing system" costs are assigned to a distinct unit, batch, or lot of a product or serice. In a process-costing system" the cost of a product or serice is obtained by using broad aerages to assign costs to masses of identical or similar units.
4-4
&he seen steps in ob costing are3 (") identify the ob that that is the chosen cost obect, (#) identify the direct costs of the ob, (0) select the costallocation bases to use for allocating indirect costs to the ob, (1) identify the indirect costs associated 'ith each costallocation base, (2) compute the rate per unit of each costallocation base used to allocate indirect costs to the ob, () compute the indirect costs allocated to the ob, and (B) compute the total cost of the ob by adding all direct and indirect costs assigned to the ob.
4-. a. b.
&'o reasons for using an annual budget period are &he num numera erator tor reason reasonMM MMthe the longe longerr the the time time period period,, the the less less the the infl influen uence ce of of seas seasona onall patte patterns rns,, and and &he denominator reasonMMthe longer the time period, the less the effect of ariations in output leels on the allocation of fixed costs.
&he statement is false. In a normal costing system, the %anufacturing !erhead /ontrol account 'ill not, in general, e-ual the amounts in the %anufacturing !erhead Allocated account. &he %anufacturing !erhead /ontrol account aggregates the actual oerhead costs incurred 'hile %anufacturing !erhead Allocated allocates oerhead costs to obs on the basis of a budgeted rate times the actual -uantity of the costallocation base. Hnderallocation or oerallocation of indirect (oerhead) costs can arise because of (a) the umerator reason reasonMMt MMthe he actual actual oerh oerhead ead costs costs differ differ from from the bud budget geted ed oerhe oerhead ad costs, costs, and (b) the 4enominator reasonMMthe actual -uantity used of the allocation base differs from the budgeted -uantity.
4-11
4-16 4-16
3(d&e# 3(d &e#ed ed "an('a "an('ac#( c#(r%n r%n& & verhe verhead ad ra#e) ra#e) allc allca#e a#ed d "an('a "an('ac#( c#(r%n r%n& & verhead
". ;udgeted manufacturing oerhead rate
F
F
;udgeted manufacturing oerhead ;udgeted machine hours ?1,>>>,>>> #>>,>>> machinehours
F ?#> per machinehour
#.
%anufacturing oerhead allocated F Actual machinehours E ;udgeted manufacturing oerhead rate F "@2,>>> E ?#> F ?0,@>>,>>> 0.
5ince 5ince manu manufac factur turing ing oerhe oerhead ad alloca allocated ted is greate greaterr than than the the actual actual manufa manufactu cturin ring g oer oerhea head d cost costs, s,
%anufacturing oerhead allocated Actual manufacturing oerhead costs !erallocated manufacturing oerhead
4-22 4-22
?0,@>>,>>> 0,=>,>>> ? 1>,>>>
Serv%c Ser v%cee %nd(s#r %nd(s#r) ) #%"e #%"e !er% !er%d d (sed (sed # c"!( c"!(#e #e %nd%r %nd%rec# ec# cs# cs# ra#e ra#es s
". 4irect labor costs 9ariable oerhead costs as a percentage of direct labor costs 9ariable oerhead costs (Percentage × direct labor costs) $ixe $ixed d oer oerhe head ad cost costss &otal oerhead costs &otal oerhead costs as a percentage of direct labor costs
an*arch ?1>>,>>>
A!r%l(ne ?#=>,>>>
@>J
>J
?0>,>>> 0>>, 0>>,>> >>> > ?>,>>>
"2J
, 772 4irect materials 4irect labor costs !erhead allocated (ariable L fixed) ("2JO "=>JO "B>J of ?,>>>) $ull cost of Cob 00#
?"=,>>> 0>>, 0>>,>> >>> > ?1=,>>>
"BJ
(lSe!# ?#2>,>>>
>J
?"2>,>>> 0>>, 0>>,>> >>> > ?12>,>>>
"=>J
Oc#$ec ?#B>,>>>
T#al ?",#>>,>>>
>J
?"#,>>> 0>>, 0>>,>> >>> > ?1#,>>>
? =1>,>>> ",#> ",#>>, >,>> >>> > ?#,>1>,>>>
"B"J
"B>J
3(d&e#ed Overhead Ra#e Used an*arch (lSe!# Avera&e Ra#e Ra#e 9earl Ra#e ?">,>>> ?">,>>> ?">,>>> ,>>> ,>>> ,>>>
@,@>> ?#2,@>>
">,=>> ?#,=>>
">,#>> ?#,#>>
(a)
&he full cost of Cob Cob 00#, 00#, using using the the budget budgeted ed oerhea oerhead d rate rate of of "2J "2J for for Canua CanuaryM%a ryM%arch, rch, is ?#2,@>>.
(b)
&he full cost of Cob Cob 00#, 00#, using the budgeted budgeted oerhead oerhead rate rate of of "=>J "=>J for for CulyM5 CulyM5eptem eptember, ber, is ?#,=>>.
(c)
&he full cost of Cob 00#, using the annual budgeted oerhead rate of "B>J, is ?#,#>>.
#. ;udgeted fixed oerhead rate based on annual fixed oerhead costs and annual direct labor costs F ?",#>>,>>> ÷ ?",#>>,>>> F ">>J
, 772
4irect materials 4irect labor costs 9ariable oerhead allocated (@>JO >JO of ?,>>>) $ixed oerhead allocated (">>J of ?,>>>) $ull cost of Cob 00#
3(d&e#ed 0ar%a,le Overhead Ra#e Used an(ar*arch (lSe!# ra#e ra#e ?">,>>> ?">,>>> ,>>> ,>>> 2, 2,1>> 0,>>
,>> , >>> >
,>> , >>> >
?#B,1>>
?#2,>>
(a)
&he full cost of Cob 00#, using using the the budge budgeted ted ariable ariable oerhead oerhead rate of @>J for CanuaryM%a CanuaryM%arch rch and an annual fixed oerhead rate of ">>J, is ?#B,1>>.
(b)
&he full cost of Cob 00#, using the budgeted ariable oerhead rate of >J for CulyM5eptember and an annual fixed oerhead rate of ">>J, is ?#2,>>.
0.
If Prin Printe ters rs,, Inc. Inc. sets sets price pricess at a mark markup up of of costs costs,, then then price pricess based based on cos costs ts calc calcul ulat ated ed as in 7e-uirement # (rather than as in 7e-uirement ") 'ould be more effectie in deterring clients from sending in lastminute, congestioncausing orders in the CanuaryM%arch time frame. In this calculation, more ariable manufacturing oerhead costs are allocated to obs in the first -uarter, reflecting the larger costs of that -uarter caused by higher oertime and facility and machine maintenance. &his method better captures the cost of congestion during the first -uarter.
4-71
, cs#%n&) acc(n#%n& 'r "an('ac#(r%n& verhead) ,(d&e#ed ra#es
".
An oer oer ie' ie' of the the ob obcos costting ing sys system tem is3 INDIRECT COST POOL
}
}
COST ALLOCATION BASE
Machining Department Manufacturing Overhead
Finishing Department Manufacturing Overhead
Machine-Hours in Machining Dept.
Direct Manufacturing Labor Costs in Finishing Dept.
}
Indirect Costs
COST OBJECT: COST OBJECT: PRODUCT
}
DIRECT COST
Direct Costs
Direct Materials
Direct Manufacturing Labor
#.
;udg ;udget eted ed man manuf ufac actu turi ring ng oe oerh rhea ead d dii diide ded d by all alloc ocat atio ion n base base33
a.
%achining 4e 4epartment3
?">,>>>,>>> #>>,>>> b.
F ?2> per machinehour machinehour
$inishing 4epartment3 4epartment3
?=,>>>,>>> ?1,>>>,>>>
F #>>J of direct manufacturing labor labor costs
0.
1.
%achining 4e 4epartm rtment oerhead, ?2 ?2> × "0 "0> hours $inishing 4epartment oerhead, #>>J of ?",#2> &otal manufacturing oerhead allocated &otal costs of Cob 10"3 4irect costs3 4irect materialsMM%achining 4epartment MM$inishing 4epartment 4epartment 4irect manufacturing labor %achining 4epartment $inishing 4epartment Indirect costs3 %achining 4epartment oerhead, ?2> × "0 "0> $inishing 4epartment oerhead, #>>J of ?",#2> &otal costs
?,2>> #,2>> ?@,>>>
?"1,>>> 0,>>> >> ",#2> ?,2>> #,2>>
?"=,=2>
@,>>> ?#B,=2>
&he perunit product cost of Cob 10" is ?#B,=2> K #>> units F ?"0@.#2 per unit &he point of this part is (a) to get the definitions straight and (b) to underscore that oerhead is allocated by multiplying the the actual amount of the allocation allocation base by the budgeted budgeted rate. 2. *ach%n%n& %n%sh%n& %anufacturing oerhead incurred (actual) ?"",#>>,>>> ?B,@>>,>>> %anufacturing oerhead allocated ##>,>>> hours × ?2> "",>>>,>>> #>>J of ?1,">>,>>> =,#>>,>>> Hnderallocated manufacturing oerhead ? #>>,>>> !erallocated manufacturing oerhead ? 0>>,>>> &otal oerallocated oerhead F ?0>>,>>> M ?#>>,>>> F ?">>,>>> .
A homoge homogene neou ouss cost cost pool pool is one 'here 'here all all costs costs hae hae the the same same or a simil similar ar cause causea and nde eff ffec ectt or benefitsreceied relationship 'ith the costallocation base. 5olomon likely assumes that all its manufacturing oerhead cost items are not homogeneous. 5pecifically, those in the %achining 4epartment hae a causeandeffect relationship 'ith machinehours, 'hile those in the $inishing 4epartment hae a causeandeffect relationship 'ith direct manufacturing labor costs. 5olomon beliees that the benefits of using t'o cost pools (more accurate product costs and better ability to manage costs) exceeds the costs of implementing a more complex system.
4-41 , cs#%n&-serv%ce %nd(s#r.
".
&ours in Process (&IP) Cune 0>, #>>@
#.
*a#er%als La,r 3and :1; :2; (s I )ay Dieing ?#2> ?1>> 02> #>> (sk Me )ater &otal ?>> ?>> /ost /ost of /om omp plet leted &ours ours (//& (//&)) in Cun Cune #>>@ >>@
3and #runge $%press Di&&erent Strokes Strokes Maybe 'omorrow &otal
*a#er%als :1; ? 1>> 1B2 #B2 ?","2>
Overhead :7; ? 15> F :2; ?>> 0>> ?@>>
La,r :2; ? B>> B>> 1>> ?",=>>
T#al :4; ?",#2> =2> ?#,">>
Overhead :7; ? 15> F :2; ?",>2> ",>2> >> ?#,B>>
T#al :4; ?#,"2> #,##2 ", ",#B2 ?2,2>
0. !erhead allocated F ".2> F ",1>>a F ?#,">> Hnderallocated oerhead oerhead F Actual oerhead M Allocated Allocated oerhead F ?#,2>> M #,">> F ?1>> underallocated a
&otal labor in Cune F ?">>L?0>>L?1>>L?#>>L?1>> ?">>L?0>>L?1>>L?#>>L?1>> F ?",1>>
1a. Hnderallocated oerhead is 'ritten off to //& /IP inentory remains unchanged.
Acc(n#
/IP //&
(ne 75) 2556 3alance :3e're Prra#%n; :1; ?#,">> 2,2> ?B ?B,B2>
Prra#%n ' 455 Underallca#ed Overhead :2; ? > 1>> ?1>>
Hnde Hndera rall lloc ocat ated ed oe oerh rhea ead d pror prorat ated ed bas based ed on on endi ending ng bal balan ance cess (ne 75) 2556 3alance :3e're 3alance as a Prra#%n; Percen# ' T#al Acc(n# :1; :2; ? :1; B <)<5 &IP ?#,">> >.#B" //& 2,2> >.B#@ ?B ?B,B2> ".>>>
(ne 75) 2556 3alance :A'#er Prra#%n; :7; ? :1; L :2; ?#,">> ,>2> ?=,"2>
1b. 1b.
1c.
Prra#%n ' 455 Underallca#ed Overhead :7; ? :2; × 455 >.#B" × ?1>> F?">= >.B#@ × ?1>> F #@# ?1>>
Hnder Hnderall alloca ocated ted oerhe oerhead ad prorat prorated ed base based d on Cun Cunee oer oerhea head d in in endi ending ng bala balance ncess
(ne 75) 2556 3alance :A'#er Prra#%n; :4; ? :1; L :7; ?#,#>= 2,@1# ?=,"2>
Acc(n# &IP //&
(ne 75) 2556 3alance :3e're Prra#%n; :1; ?#,">> 2,2> ?B ?B,B2>
Overhead allca#ed %n (ne Incl(ded %n (ne 75) 2556 3alance :2; ? @>>a ",#>> b ?#,">>
Overhead allca#ed %n (ne Incl(ded %n (ne 75) 2556 as a Percen# ' T#al :7; ? :2; B 2)155 >.10 >.2B ".>>
Prra#%n ' 455 Underallca#ed Overhead :4; ? :7; × 455 >.10 × ?1>> F?"B# >.2B × ?1>> F ##= ?1>>
(ne 75) 2556 3alance :A'#er Prra#%n; :; ? :1; L :4; ?#,#B# 2,=B= ?=,"2>
a
Cune labor for As I ay 4ieing and Ask %e ater E "2>J F (?1>> L ?#>>) E "2>J F ?>> E "2>J F ?@>>
b
Cune labor for Grunge 6xpress, 4ifferent 5trokes and %aybe &omorro' E "2>J F (?">> L ?0>> L ?1>>) E "2>J F ?=>> E ?"2> F ?",#>>
2.
I 'oul 'ould d choos choosee the the metho method d in 1c 1c becau because se this this met metho hod d resul results ts in in accou account nt bal balan ance cess base based d on actu actual al oerhead allocation rates. rates. &he account balances before before proration in &IP and //& are significant significant and underalloca underallocated ted oerhead oerhead is material. material. $urthermor $urthermore, e, the ratio of ending balances balances in &IP and //& is different from the ratio r atio of oerhead allocated to each of these accounts in Cune.
CHAPTER ACTI0IT9-3ASE$ COSTING AN$ ACTI0IT9-3ASE$ *ANAGE*ENT
-2
!ercosting may result in competitors entering a market and taking market share for products that a company erroneously beliees are lo'margin or een unprofitable. Hndercosting may result in companies selling products on 'hich they are in fact losing money, 'hen they erroneously beliee them to be profitable.
-4
An actiitybased approach refines a costing system by focusing on indiidual actiities as the fundamental cost obects. It uses the cost of these actiities as the basis for assigning costs to other cost obects such as products or serices.
-<
An A;/ approach focuses on actiities as the fundamental cost obects. &he costs of these actiities are built up to compute the costs of products, and serices, and so on. 5imple costing systems hae one or a fe' indirect cost pools, irrespectie of the heterogeneity in the facility 'hile A;/ systems hae multiple indirect cost pools. An A;/ approach attempts to use cost driers as the allocation base for indirect costs, 'hereas a simple costing system generally does not. &he A;/ approach classifies as many indirect costs as direct costs as possible. A simple costing system has more indirect costs.
-11
&he main main costs costs and limita limitatio tions ns of A;/ are the measur measureme ements nts necess necessary ary to implem implement ent the systems. 6en basic A;/ systems re-uire many calculations to determine costs of products and serices. Actiitycost rates often need to be updated regularly. 9ery detailed A;/ systems are costly to operate and difficult to understand. 5ometimes the allocations necessary to calculate actiity costs often result in actiitycost pools and -uantities of costallocation bases being measur measured ed 'ith 'ith error. error.
-1
&he controller faces a difficult challenge. &he benefits of a better accounting system sho' up in improed decisions by managers. It is important that the controller hae the support of these managers managers 'hen seeking increased increased inestmen inestments ts in accounting accounting systems. systems. 5tatements 5tatements by these these managers sho'ing ho' their decisions 'ill be improed by a better accounting system are the controllers best arguments 'hen seeking increased funding. $or example, the ne' system 'ill result in more accurate product costs 'hich 'ill influence pricing and product mix decisions. &he ne' system can also be used to reduce product costs 'hich 'ill lo'er selling prices. As a result, the customer 'ill benefit from the ne' system.
-16 Plan#8%de) de!ar#"en# and A3C %nd%rec# cs# ra#es ". Actual plant'ide ariable %!8 rate based on machine hours, ?0>=,>> ÷ 1,>>> ?BB."2 per machine hour
9ariable manufacturing oerhead, allocated based on machine hours (?BB."2 × "#>O ?BB."2 × #,=>>O ?BB."2 × ",>=>)
Un%#ed *#rs
Hlden *#rs
Leland 0eh%cle
T#al
?@,#2=
?#",>#>
?=0,0##
?0>=,>>
#. $e!ar#"en# 4esign
0ar%a,le *OH %n 255< ?0@,>>>
T#al $r%ver Un%#s 0@>
Ra#e ?">>
Production 6ngineering
#@,>> #1>,>>>
0B> 1,>>>
? => ? > Un%#ed *#rs
4esignrelated oerhead, oerhead, allocated on /A4design /A4design hours (""> × ?">>O #>> × ?">>O => × ?">>) Productionrelated oerhead, allocated on engineering hours (B> × ?=>O > × ?=>O #1> × ?=>) 6ngineeringrelated oerhead, allocated on machine hours ("#> × ?>O #,=>> × ?>O ",>=> × ?>) &otal
per /A4design hour per engineering hour hour per machine hour Hlden *#rs
Leland 0eh%cle
?"",>> >
? #>,>>>
? =,>>>
2,>>
1,=>>
"@,#>>
B,#> B, #> > ?#0,=> >
"=, " =,>> >> > ?"@#,=> >
1,= 1 ,=> > > ?@#,>> >
0. Un%#ed *#rs
a. 4epartment rates (7e-uirement #) b. Plant'ide rate (7e-uirement ") 7atio of (a) K (b)
Hlden *#rs
Leland 0eh%cle
?#0,=>>
?"@#,=>>
?@#,>>>
? @,#2= #.2B
?#",>#> >.=@
?=0,0## ".">
T#al
? 0@,>>>
#@,>>
#1>, #1 >,>>> >>> ?0>=,>>
&he ariable manufacturing oerhead allocated to Hnited %otors increases by "2BJ under the department rates, the oerhead allocated to 8olden decreases by about ""J and the oerhead allocated to eland increases by about ">J. &he three contracts differ sizably in the 'ay they use the resources of the three departments. &he percentage of total drier units in each department used by the companies is3 Cs# Un%#ed Hlden Leland $r%ver *#rs *#rs 0eh%cle $e!ar#"en# 4esign /A4design hours #=J 2"J #"J 6ngineering 6ngineering hours "@ " 2 Production %achine hours 0 B> #B &he Hnited %otors contract uses only 0J of total machines hours in #>>1, yet uses #=J of /A4 designhours and "@J of engineering hours. &he result is that the plant'ide rate, based on machine hours, 'ill greatly underestimate the cost of resources used on the Hnited %otors contract. &his explains the "2BJ increase in indirect costs assigned to the Hnited %otors contract 'hen department rates are used. In contrast, the 8olden %otors contract uses less of design (2"J) and engineering ("J) than of machinehours (B>J). 8ence, the use of department rates 'ill report lo'er indirect costs for 8olden %otors than does a plant'ide rate. 8olden %otors 'as probably complaining under the use of the simple system because its contract 'as being oercosted relatie to its consumption of %!8 resources. Hnited, on the other hand 'as haing its contract undercosted and underpriced by the simple system. Assuming that AP is an effici efficient ent and compet competiti itie e sup suppl plier ier,, if the ne' depart departmen mentb tbase ased d rates rates are used used to price price contracts contracts,, Hnited Hnited 'ill be unhappy. AP shou should ld explain to Hnited Hnited ho' the calculati calculation on 'as done, and point out Hniteds high use of design and engineering resources relatie to production machine hours. 4iscuss 'ays of reducing the consumption of those resources, if possible, and sho' 'illingn 'illingness ess to partner partner 'ith them to do so. If the price rise is going going to be steep, perhaps perhaps offer to phase in the ne' prices.
1.
!ther !ther than than for pricing, pricing, AP can also use the informatio information n from the department departmentbase based d system system to examine and streamline its o'n operations so that there is maximum alueadded from all indirect resources. It might set targets oer time to reduce both the consumption of each indirect resou resource rce and the unit unit costs costs of the resour resources ces.. &he depart departmen mentb tbase ased d sys system tem gies gies AP more more opportunities for targeted cost management.
2.
It 'ould not be 'orth'hile to further refine the cost system into an A;/ system if there 'asnt much ariation among contracts in the consumption of actiities 'ithin a department. If, for example, most actiities 'ithin the design department 'ere, in fact, drien by /A4design hours, then the more refined system 'ould be more costly and no more accurate than the department based cost system. 6en if there 'as sufficient ariation, considering the relatie sizes of the 0 department cost pools, it may only be costeffectie to further analyze the engineering cost pool, 'hich consumes B=J (?#1>,>>> ÷ ?0>=,>>) of the manufacturing oerhead.
-7< Un(sed ca!ac%#) ac#%v%#-,ased ac#%v%#-,ased cs#%n&) cs#%n&) ac#%v%#-,ased "ana&e"en# "ana&e"en# .
". 3as+e#,alls
umber of batches %achinehours
0lle,alls
0>> "",>>>
5etup cost per batch F ?"10,2>> ?"10,2>> K B>> B>> batches batches F ?#>2 ?#>2 per batch. batch.
1>> "#,2>>
T#al
B>> #0,2>>
6-uipment and maintenance F ?">@,@>> K #0,2>> machinehours F ?1.B per machinehour. ease rent, rent, insurance, utilities F ?#",>>> ?#",>>> K "#,>>> s-. ft. of capacity F ?"= per s-. ft. #. Hnuse Hnused d capa capacit city y = &otal &otal capa capaci city ty −
/apacity used for /apacity used for − basketb basketball all producti production on olley olleybal balll produc production tion
>>> − 0, 0 0> − 2, >1 >1> = 0, > >> s-. ft. = "#, >> /os /ost of of un unused used cap capaci acity F ?"= ?"= pe per ss-. ft ft E 0,>> ,>> s-. ft. ft. F ? ?1,=>> ,=>> 0. 3as+e#,alls 0lle,alls 4irect materials ?#>@,B2> ?02=,#@> 4irect manufacturing labor ">B,000 ">#,@@ 5etup (?#>2 E 0>>O 1>>) ",2>> =#,>>> 6-uipment and maintenance (?1.B E "",>>>O "#,2>>) 2",11# 2=,12= ease rent, etc. (?"= E 0,0>O 2,>1>) >,1=> @>,B#> ?1@>,2>2 ;udgeted total costs ?@#,10B K ,>>> , >>> K umber of units K">>,>>> ? B.10 ;udgeted cost per unit ? .@#
T#al ? 2=,>1> #">,0>#
"10,2>> ">@,@>> "2",#>> ?","=#,@1#
1. /urrently, iag only utilizes B>J of its aailable aailable capacity. %anagers should consider consider 'hether the excess capacity is sufficient sufficient to produce footballs. footballs. !ther issues to consider consider include demand for the proposed product, product, the competition, capital capital inestment needed to start start and support this this product line, and the aailability of skilled and unskilled labor needed to manufacture footballs. -7. -7.
Ac#%v% Ac#%v%##-,as ,ased ed , cs#% cs#%n&) n&) (n%#-c (n%#-cs# s# c"!a c"!ar%s r%sns ns
An oerie' of the productcosting system is3
INDIRECT COST POOL
}
}
COST ALLOCATION BASE
Materials Handling
Lathe Work
Milling
Number of Parts
Number of Turns
Number of Machine-Hours
} }
Number of Parts
Indirect Costs
COST OBJECT: COMPONENTS
DIRECT COST
Grinding
Direct Costs
Direct Materials
Direct Manufacturing Labor
Testing
Number of Units Tested
". Cob !rder 1"> 4irect manufacturing cost 4irect materials 4irect manufacturing labor ?0> × #2O ?0> × 0B2 Indirect manufacturing cost ?""2 × #2O ?""2 × 0B2 &otal manufacturing cost umber of units %anufacturing cost per unit
, Order 411
?@,B>>
?2@,@>>
B B2 2>
?">,12>
" ", ",#2>
#,=B2 ?"0,0#2 K "> ? ",00 ", 00# #.2> .2 >
#.
, Order 415
4irect manufacturing cost 4irect materials 4irect manufacturing labor ?0> × #2O ?0> × 0B2 Indirect manufacturing cost %aterials handling ?>.1> × 2>>O ?>.1> × #,>>> athe 'ork ?>.#> × #>,>>>O ?>.#> × >,>>> %illing ?#>.>> × "2>O ?#>.>> × ",>2> Grinding ?>.=> × 2>>O ?>.=> × #,>>> &esting ?"2.>> × ">O ?"2.>> × #>> &otal manufacturing cost umber of units %anufacturing cost per unit
0. umber of units in ob /osts per unit 'ith prior costing system /osts per unit 'ith actiitybased costing
?@,B>>
B2 B 2>
? B" B","2> 10,"#2 ?""1,#B2 K #> # >> ? 2B" 2B ".0B2 0B 2
, Order 411
?2@,@>> ?">,12>
"" " ",#2>
#>>
=>>
1,>>>
"#,>>>
0,>>>
#",>>>
1>>
",>>
"2 "2>
B,B2> ?"=,#>> K "> ? ",=#>
, O Orrder 415 "> ?",00#.2> ",=#>.>>
0,>>>
? B","2>
0=,1>> ?">@,22> K #>> ? 21B 21 B.B2
, Order 411 #>> ?2B".0B2 21B.B2>
Cob order 1"> has an increase in reported unit cost of 0.J (?",=#> M ?",00#.2>) K ?",00#.2>Q, 'hile ob order 1"" has a decrease in reported unit cost of 1."J (?21B.B2 M ?2B".0B2) K ?2B".0B2Q. A common finding 'hen actiitybased costing is implemented is that lo'olume products hae increases in their reported costs 'hile higholume higholume products hae decreases in their reported cost. &his result result is also found in re-uiremen re-uirements ts " and # of this problem. problem. /osts such such as materials materials handling handling costs ary 'ith the number number of parts handled handled (a function function of batches batches and complexit complexity y of products) rather than 'ith direct manufacturing laborhours, an outputunit leel cost drier, 'hich 'as the only cost drier in the preious obcosting system. system. &he product cost figures computed in re-uirements " and # differ because
a. b.
the the ob ob orde orders rs dif diffe ferr in in the the 'ay 'ay the they y use use each each of fie fie acti actii ity ty area areas, s, and and the actiity areas differ in their indirect cost allocation bases (specifically, each area does not use the direct manufacturing laborhours indirect cost allocation base).
&he follo'ing table documents ho' the t'o ob orders differ in the 'ay they use each of the fie actiity areas included in indirect manufacturing costs3 Usa&e 3ased n Anals%s ' Usa&e Ass("ed 8%#h $%rec# *an(' Ac#%v%# Area Cs# $r%vers La,r-H(rs as A!!l%ca#%n 3ase , Order , Order , Order 415 , Order Ac#%v%# Area 415 411 411 %aterials handling #>.>J =>.>J .#2J @0.B2J athe 'ork #2.> B2.> .#2 @0.B2 %illing "#.2 =B.2 .#2 @0.B2 Grinding #>.> =>.> .#2 @0.B2 &esting 1.= @2.# .#2 @0.B2 &he differences in product cost figures might be important to &racy /orporation for product pricing and product emphasis decisions. &he actiitybased accounting approach indicates that ob order 1"> is being undercosted 'hile ob order 1"" is being oercosted. &racy /orporation may erroneously push ob order 1"> and deemphasize ob order 1"". %oreoer, by its actions, &racy /orporation may encourage a competitor to enter the market for ob order 1"" and take market share a'ay from it.
1. a.
b.
c.
Inform Informati ation on from from the the A;/ A;/ syste system m can can also also help help &rac &racy y mana manage ge its bus busine iness ss bett better er in in ssee eeral ral 'ays. 'ays. *roduct design. Product designers at &racy /orporation likely 'ill find the numbers in the actiitybased costing costing approach more belieable belieable and credible than those those in the simple system. In a machinepaced manufacturing enironment, it is unlikely that direct laborhours 'ould be the maor cost drier. Actiitybased costing proides more credible signals to product designers about the 'ays the costs of a product can be reducedMMfor example, use fe'er parts, re-uire fe'er turns on the lathe, and reduce the number of machinehours in the milling area. Cost management . &racy can reduce the cost of obs both by making process improements that reduce the actiities that need to be done to complete obs and by reducing the costs of doing the actiities. Cost planning+ A;/ proides a more refined model to forecast costs and to explain 'hy actual costs differ from budgeted costs.
CHAPTER 1< PROCESS COSTING
1<-2
Process costing systems separate costs into cost categories according to the timing of 'hen costs are introd introduce uced d into into the proces process. s. !ften, !ften, only only t'o cost cost classi classific ficati ation ons, s, direc directt materi materials als and conersion costs, are necessary. 4irect materials are fre-uently added at one point in time, often the start or the end of the process, and all conersion costs are added at about the same time, but in a pattern different from direct materials costs.
1<- 5tep "3 5tep #3 5tep 03 5tep 13 5tep 23
&he fie key steps in process costing follo'3 5ummarize 5ummarize the flo' flo' of physical physical units units of output. output. /ompute output output in terms of e-uialent units. 5ummarize 5ummarize total total costs costs to account account for. /ompute /ompute cost per per e-uialent e-uialent unit. unit. Assign total total costs to units units completed and to units units in ending 'ork in process. process.
1<-/
&hree inentory methods associated 'ith process costing are3
• •
$irstin, firstout.
•
5tandard costing.
1<-1
%aterials are only one cost item. !ther items (often included in a conersion costs pool) include labor, energy, and maintenance. If the costs of these items ary oer time, this ariability can cause a difference in cost of goods sold and inentory amounts 'hen the 'eightedaerage or $I$! methods are used. A second factor is the amount of inentory on hand at the beginning or end of an accounting period. &he smaller the amount of production held in beginning or ending inentory relatie to the total number of units transferred out, the smaller the effect on operating income, cost of goods sold, or inentory amounts from the use of 'eightedaerage or $I$! methods.
1<-1/ E(%valen# (n%#s) Jer Jer ,e&%nn%n& %nven#r
".
4irect materials cost per unit (?B2>,>>> K ">,>>>) /onersion cost per unit (?B@=,>>> K ">,>>>) Assembly 4epartment cost per unit
? B2.>> B@.=> ?"21.=>
#a.
5olution 5olution 6xhibi 6xhibitt "B"A "B"A calculat calculates es the e-ui e-uialent alent units units of of direct direct materials materials and and conersi conersion on costs costs in the Assembly 4epartment of ihon, Inc. in $ebruary #>>@. 5olution 6xhibit "B"; computes e-uialent unit costs.
#b. 4irect materials cost per unit /onersion cost per unit Assembly 4epartment cost per unit 0.
? B2 =1 ?"2@
&he diff differe erence nce in in the Asse Assembl mbly y 4epart 4epartmen mentt cost cost per unit unit calcu calculat lated ed in re-u re-uire iremen ments ts " and # aris arises es because the costs incurred in Canuary and $ebruary are the same but fe'er e-uialent units of 'ork are done in $ebruary relatie to Canuary. In Canuary, all ">,>>> units introduced are fully completed resulting in ">,>>> e-uialent units of 'ork done 'ith respect to direct materials and conersion costs. In $ebruary, of the ">,>>> units introduced, ">,>>> e-uialent units of 'ork is done 'ith respect to direct materials but only @,2>> e-uialent units of 'ork is done 'ith respect to conersion costs. &he Assembly 4epartment cost per unit is, therefore, higher.
5!H&I! 6R8I;I& "B"A 5teps " and #3 5ummarize !utput in Physical Hnits and /ompute /ompute !utput in 6-uialent HnitsO HnitsO Assembly 4epartment of ihon, Inc. for $ebruary #>>@.
l8 ' Prd(c#%n >> × ">>JO ",>>> × 2> 2 >J Accounted for
:S#e! 1; Phs%cal Un%#s > ">,>>> ">,>>>
@,>>> ",>>>
:S#e! 2; E(%valen# Un%#s $%rec# Cnvers%n *a#er%als Cs#s
@,>>>
@,>>>
",>>>
2>>
">,>>>
@,2>>
">,>>>
S4egree of completion in this department3 direct materials, ">>JO conersion costs, 2>J. 5!H&I! 6R8I;I& "B"; /ompute /ost per 6-uialent Hnit, Assembly 4epartment of ihon, Inc. for $ebruary #>>@.
(S#e! 7) /osts added during $ebruary 4iide by e-uialent units of 'ork done in current period (5olution 6xhibit "BlA) /ost per e-uialent unit
T#al Prd(c#%n Cs#s ?",21=,>>>
$%rec# *a#er%als ?B2>,>>>
">,>>> ? B2 ÷
/onersion Cs#s ?B@=,>>> ÷
?
@,2>> =1
1<26 1<26 S#anda S#andardrd-cs cs#%n #%n& & "e#hd "e#hd
".
5ince there there 'as 'as no additi additional onal 'ork 'ork needed needed on on the beginn beginning ing inento inentory ry 'ith 'ith respect respect to materi materials, als, the the initial mulch must hae hae been ">>J complete 'ith 'ith respect to materials. $or conersion costs, costs, the 'ork done done to complete complete the opening opening inentory inentory 'as 101,#2> 101,#2> K @2,>>> F 12J. &herefore, &herefore, the unfinished mulch in opening inentory must hae been 22J complete 'ith respect to conersion costs.
#.
It is clear clear that that the ending ending >J ">>J comple complete te 'ith 'ith respect respect to direc directt materia materials ls (",="B (",="B,>> ,>>> >K ",="B,>>>), and it is >J (F ",>@>,#>> K ",="B,>>>) complete 'ith regard to conersion costs.
0.
>>, =12,>>>, and a total cost cost of ?,B"B,B2> ?,B"B,B2> is attached to them. them. &he per unit standard cost is is therefore (?,B"B,B2> (?,B"B,B2> K =12,>>>) F ?B.@2. If x and y represent represent the per unit cost for direct materials and conersion costs, respectiely, 'e therefore kno' that3 x L y F B.@2
#,>B> B> and contai contains ns ",="B ",="B,>> ,>>> > e-uia e-uialen lentt units units of materi materials als and ",>@> ",>@>,#> ,#>> > e-uia e-uialen lentt units units of coner conersio sion n costs. costs. &his &his proides a second e-uation3 e-uation3 ",="B,>>> x L ",>@>,#>> y F "#,"@#,>B>. 5oling these e-uations e-uations reeals reeals that the direct materials cost cost per unit, x, is ?1.=2, ?1.=2, 'hile conersion cost per unit, y, is ?0.">. 1.
the
$inally, $inally, the the opening opening > @2,>>> > e-uiale e-uialent nt units units of material materialss and (@2,>> (@2,>>>101 >101,#2>) ,#2>) F 20>,B2> e-uialent units units of conersion costs. costs. Applying the standard standard costs computed in step step (0), the cost of the opening inentory must hae been3 @2,>>> E ?1.=2 L 20>,B2> E ?0."> F ?,0#2,2B2. ?,0#2,2B2.
1<-75
".
5inc 5incee direc directt mate materi rial alss are adde added d at the begi beginn nnin ing g of the the asse assemb mbly ly proc proces ess, s, the the units units in this this department must be ">>J complete 'ith respect to direct materials. 5olution 6xhibit "B0>A sho's e-uialent units of 'ork done to date3
4irect materials /onersion costs
#2,>>> e-uialent units #1,#2> e-uialent units
#. D 0. 5olution 5olution 6xhibit 6xhibit "B0>; "B0>; summarizes summarizes the total Assembly Assembly 4epartmen 4epartmentt costs costs for !ctober #>>@, calcul calculate atess cost cost per e-uiale e-uialent nt unit unit of 'ork 'ork don donee to date, date, and assigns assigns these these costs costs to units units completed (and transferred out) and to units in ending 'ork in process using the 'eighted aerage method. 5!H&I! 6R8I;I& "B0>A 5teps " and #3 5ummarize !utput in Physical Hnits and /ompute !utput in 6-uialent HnitsO >@. :S#e! 1;
:S#e! 2; E(%valen# Un%#s Cnvers%n *a#er%als Cs#s
Phs%cal $%rec# l8 ' Prd(c#%n Un%#s >> 5tarted during current period (gien) #>, > >>> &o account for #2, > >>> /ompleted and transferred out during current period ##,2>> ##,2>> ##,2>> > #,2>> × ">>JO #,2>> × B>J #,2>> ",B2> Accounted for #2, > >>> >> #1,# 1, #2> S4egree of completion in this department3 direct materials, ">>JO conersion costs, B>J.
5!H&I! 6R8I;I& "B0>; 5teps 0, 1, and 23 5ummarize &otal /osts to Account $or, /ompute /ost per 6-uialent Hnit, and Assign &otal /osts to Hnits /ompleted and to Hnits in 6nding >@.
T#al Prd(c#%n Cs#s ?",2#,B2> ,=0 ,=0B, B,2 2>> ?=,1@>,#2>
(S#e! 4) /osts incurred to date 4iide by e-uialent units of 'ork done to date (5olution 6xhibit "B0>A) /ost per e-uialent unit of 'ork done to date
$%rec# *a#er%als ?",#2>,>>> 1,2 1,2>>,> >>,>>> >> ?2,B2>,>>>
Cnvers%n Cs#s ? 1>#,B2> #,00 #,00B B,2>> ?#,B1>,#2>
?2,B2>,>>>
?#,B1>,#2>
÷
?
#2,> #2,>>> #0>
÷
?
#1,#2> ""0
(S#e! ) Assignment of costs3 /ompleted /ompleted and and transfer transferred red out out (##,2>> (##,2>> units) units) ?B,B"B,2> ?B,B"B,2>> > > units) &otal costs accounted for
(##,2>>S × ?#0>) ?#0>) L (##,2>>S × ?""0) BB#,B2> ( #,2>> T × ?#0> ?#0>)) L (",B ", B2> T × ?""0) ?=,1@>,#2> ?,"2>,>>> L ?#,"@,>>>
S
6-uialent units completed and transferred out from 5olution 6xhibit "B0>A, 5tep #. 6-uialent units in 'ork in process, ending from 5olution 6xhibit "B0>A, 5tep #.
T
1<-7 1<-7
=e%& =e %&h# h#ed ed-a -ave vera ra&e &e "e#hd "e#hd
5olution 6xhibit "B02A sho's e-uialent units units of 'ork done to date of3 4irect materials /onersion costs
#2 e-uialent units 2#2 e-uialent units
ote that direct materials are added 'hen the Assembly 4epartment process is ">J complete. ;oth the beginning and ending 'ork in process are more than ">J complete and hence are ">>J complete 'ith respect to direct materials. 5olution 6xhibit "B02; summarizes the total Assembly 4epartment costs for April #>>@, calculates cost per e-uialent unit of 'ork done to date for direct materials and conersion costs, and assigns these costs to units completed (and transferred out), and to units in ending 'ork in process using the 'eightedaerage method.
5!H&I! 6R8I;I& "B02A 5teps " and #3 5ummarize !utput in Physical Hnits and /ompute /ompute !utput in 6-uialent HnitsO HnitsO >@. :S#e! 1;
:S#e! 2;
Phs%cal l8 ' Prd(c#%n >JO "#2 × #>J Accounted for
6-uialent Hnits $%rec# Un%#s B2 22> #2
Cnvers%n *a#er%als
2>> "#2
Cs#s
2>>
2>>
"#2
#2
#2
2#2
#2
S
4egree of completion in this department3 direct materials, ">>JO conersion costs, #>J.
5!H&I! 6R8I;I& "B02; 5teps 0, 1, and 23 5ummarize &otal /osts to Account $or, /ompute /ost per 6-uialent Hnit, and Assign &otal /osts to Hnits /ompleted and to Hnits in 6nding >@.
:S#e! 7)
/osts added in current period (gien) &otal costs to account for
(S#e! 4)
T#al Prd(c#%n Cs#s ? ",@">
$%rec# *a#er%als ? ",BB2
Cnvers%n Cs#s ? "02
#=,1@>
"B,>>
">,=@>
?0>,1>>
?"@,0B2
?"",>#2
?"@,0B2
?"",>#2
/osts incurred to date
4iide by e-uialent units of 'ork done to date (5olution 6xhibit "B02A) /ost per e-uialent unit of 'ork done to date
(S#e! ) Assignment of costs3 /ompleted and transferred out (2>> units)
÷
?
#2 0"
?
2#2 #"
?#,>>> (2>>S × ?0") L (2>> S × ?#") 1,1>> ("#2T × ?0 ?0") L (#2T × ?#") ?# ") ?0>,1>>
?"@,0B2
6-uialent units completed and transferred out from 5olution 6xhibit "B02A, 5tep #. 6-uialent units in ending 'ork in process from 5olution 6xhibit "B02A, 5tep #.
T
÷
L ?"",>#2
CHAPTER 1. SPOILAGE) RE=ORK) AN$ SCRAP
1.-2
5poilageunits of production that do not meet the standards re-uired by customers for good units and that are discarded or sold at reduced prices. 7e'orkunits of production that do not meet the specifications re-uired by customers but 'hich are subse-uently repaired and sold as good finished units. 5crapresidual material that results from manufacturing a product. It has lo' total sales alue compared to the total sales alue of the product.
1.-15 o. If abnormal spoilage is detected at a different point in the production cycle than normal spoilage, then unit costs 'ould differ. If, ho'eer normal and abnormal spoilage are detected at the same point in the production cycle, their unit costs 'ould be the same. 1.-11 o. 5poilage may be considered a normal characteristic of a gien production cycle. &he costs of normal spoilage caused by a random malfunction of a machine 'ould be charged as a part of the manufacturing oerhead allocated to all obs. ormal spoilage attributable to a specific ob is charged to that ob. 1.-12 o. Hnless there are special reasons for charging normal re'ork to obs that contained the bad units, the costs of extra materials, labor, and so on are usually charged to manufacturing oerhead and allocated to all obs. 1.-14
A company is ustified in inentorying scrap 'hen its estimated net realizable alue is significant and the time bet'een storing it and selling or reusing it is -uite long.
1.-24 1.-24 =e%&h# =e%&h#eded-ave avera& ra&ee "e#hd "e#hd)) s!%la s!%la&e &e ". 5olu 5oluti tion on 6xh 6xhib ibit it "= "=#1 #1,, Panel Panel A, A, calcu calcula late tess the the e-ui e-uia ale lent nt uni units ts of of 'ork 'ork done done to to date date for for each each cost category in 5eptember #>>=. #. 5olu 5oluti tion on 6xhi 6xhibi bitt "=#1 "=#1,, Panel Panel ;, summa summari rize zess tota totall costs costs to acco accoun untt for, for, calcu calcula late tess the the costs costs per per e-uialent unit for each cost category, and assigns total costs to units completed (including normal normal spoilage spoilage), ), to abnorm abnormal al spo spoila ilage, ge, and to units units in ending ending 'ork in proces processs using using the 'eightedaerage method.
5!H&I! 6R8I;I& "=#1 >=. PA6 A3 5teps " and #5ummarize #5ummarize !utput in in Physical Hnits Hnits and /ompute !utput in 6-uialent Hnits :S#e! 1;
l8 ' Prd(c#%n >JO 0"2 × ">>J Abnormal spoilage T #=2 × ">>JO #=2 × ">>J × ">>JO 12> × 1>J Accounted for
Phs%cal Un%#s >> #,22> 0,"2 >
#,">> 0"2
:S#e! 2; E(%valen# Un%#s $%rec# Cnvers%n *a#er%als Cs#s
#,">>
#,">>
0"2
0"2
#=2
#=2
12>
"=>
0,"2 >
#,== >
#=2 12> 0,"2 >
Sormal spoilage is "2J "2J of good units transferred transferred out3 "2J #,">> F 0"2 0"2 units. 4egree of completion completion of normal spoilage in this department3 direct materials, ">>JO conersion costs, costs, ">>J. T &otal spoilage F >> L #,22> M #,">> M 12> F >> unitsO Abnormal spoilage F &otal spoilage − ormal spoilage F >> − 0"2 F #=2 units. 4egree of completion of abnormal abnormal spoilage in this this department3 direct materials, ">>JO conersion costs, ">>J. U 4egree of completion in this department3 direct materials, ">>JO conersion conersion costs, 1>J.
5!H&I! 6R8I;I& "=#1 PANEL PANEL 3D S#e S#e!s !s 7) 4) and S(""a S(""ar%J r%Je e T#al Cs#s Cs#s # Acc(n Acc(n## r) C"!(#e C"!(#e Cs# !er E(%valen# Un%#) and Ass%&n T#al Cs#s # Un%#s C"!le#ed) # S!%led Un%#s) and # Un%#s %n End%n& =r+ %n Prcess
:S#e! 7;
:S#e! 4;
/osts incurred to date 4iided by e-uialent units of 'ork done to date /ost per e-uialent unit
:S#e! ;
Assignment of costs Good units completed and transferred out (#,">>
units) /osts before adding normal spoilage ormal spoilage (0"2 units) units) (A) &otal cost of good units completed and transferred out (;) Abnormal spoilage (#=2 units) (/) units)
T#al Prd(c#%n Cs#s ?""",0>> B@B, @B ,1>> ? @>=,B >>
?#","2 @0,"B @0, "B0 0 B"1,0#@ =1,0>> "">, "" >,>B" >B"
$%rec# *a#er%als ? @,>>> 2B,>>> >> > ? 0 ,>>>
Cnvers%n Cs#s ? "2,0>> #0>,1>> ? #12,B >>
?0,>>> 0,"2> 0,"2> ÷ ?#" ?# ">.1B 1B
?#12,B>> #,==> #,==> ÷ ?=2 .0"#2 0" #2
(#,">>V×?#">.1B) L (#,">>V×?=2.0"#2) (0"2V × ?#">.1B) L (0"2V × ?=2.0"#2)
(#=2V × ?#">.1B) L (#=2V × ?=2.0"#2) ( 12 12 >V × ?# ?#">. "> .1B) B ) L ("=>V × ?=2.0"#2) (A)L(;)L(/) &otal costs accounted for ?@>=,B>> ?0,>>> ?#12,B>> V 6-uialent units of direct materials and conersion costs calculated in 5tep # in Panel A. 1.-2 1.-2< <
".
S!% S!%la la&e &e and and , , cs# cs#%n %n& &
/ash oss from Abnormal 5poilage > × #>>) M ?#>> F ?",>>>
#>> ",>>> ",#>>
7emaining cases cost F ?.>> per case. &he cost of these cases is unaffected by the loss from abnormal spoilage.
#.
a. /ash
1>> 1>>
&he cost of the remaining good cases F (?.>> × #,2>>) M ?1>>Q F ?"1,>> &he unit cost of a good case no' becomes ?"1,>> ÷ #,0>> F ?.01B= b./ash b. /ash %anufacturing 4epartment !erhead /ontrol
1>> => > ",#>>
&he unit cost of a good case remains at ?.>>. c.
0.
&he &he unit unit cos costs ts in in #a and and #b #b are are diff differ eren entt beca becaus usee in #a #a the the norm normal al spo spoil ilag agee cost cost is is charg charged ed as as a cost of the ob 'hich 'hich has exacting ob ob specifications. In #b ho'eer, normal spoilage spoilage is due to the production process, not the particular attributes of this specific ob. &hese costs are, therefore, charged as part of manufacturing oerhead and the manufacturing oerhead cost of ?" per case already includes a proision for normal spoilage. a.
#>> #>>
&he cost of the good cases F (?.>> × #,2>>) L ?#>>Q F ?"2,#>> &he unit cost of a good case is ?"2,#>> ÷ #,2>> F ?.>= b.%anufacturing b. %anufacturing 4epartment 4epartment !erhead /ontrol %aterials /ontrol, > per case c.
#>> #>>
&he unit unit cost costss in in 0a 0a and and 0b 0b are are diff differe erent nt becaus becausee in 0a the the normal normal re'ork re'ork cost cost is is char charged ged as a cost cost of the ob 'hich has exacting ob specifications. In 0b ho'eer, normal re'ork is due to the production process, not the particular attributes of this specific ob. &hese costs are, therefore, charged as part of manufacturing oerhead and the manufacturing oerhead cost of ?" per case already includes a proision for this normal re'ork.
1.-72 =e%&h#ed-avera&e "e#hd) Pac+a&%n& $e!ar#"en# :cn#%n(a#%n :cn#%n(a#%n ' ' 1.-75; 1.-75;
$or the Packaging 4epartment, 5olution 6xhibit "=0# summarizes total costs to account for, calculates the e-uialent units of 'ork done to date for each cost category, and assigns costs to units completed (including normal spoilage), to abnormal spoilage, and to units in ending 'ork in process using the 'eightedaerage 'eightedaerage method.
5!H&I! 6R8I;I& "=0#
l8 ' Prd(c#%n × ">>JO B2> × ">>JO B2> × ">>J Abnormal spoilage T #2> × ">>JO #2> ×">>J, #2> × ">>J ,>>> ×">>JO ">,>>> ×>JO ">,>>>×#2J Accounted for
:S#e! 2; E(%valen# Un%#s Trans'erred$%rec# Cnvers%n %n Cs#s *a#er%als Cs#s
Phs%cal Un%#s B,2>> "=,2 >> #,> >>
"2,>>> B2>
"2,>>>
"2,>>>
"2,>>>
B2>
B2>
B2>
#2>
#2>
#2>
#2> ">,>>> ">,>>> #,> >> #,> >>
> WWWWWW ",> >>
#,2>> WWWWW "=,2 >>
Sormal spoilage is 2J of good units transferred transferred out3 2J "2,>>> F B2> units. 4egree of completion completion of normal spoilage in this department3 transferredin costs, ">>JO direct materials, ">>JO conersion costs, ">>J. T &otal spoilage FB,2>> L "=,2>> M "2,>>> M ">,>>> F ",>>> units. Abnormal spoilage F ",>>> M B2> F #2> units. 4egree of completion completion of abnormal spoilage in this department3 department3 transferredin costs, costs, ">>JO direct materials, ">>JO conersion costs, ">>J. U 4egree of completion in this department3 transferredin costs, ">>JO direct direct materials, >JO conersion costs, #2J.
5!H&I! 6R8I;I& "=0# PANEL PANEL 3D S#e S#e!s !s 7) 4) and S(""a S(""ar%J r%Je e T#al Cs#s Cs#s # Acc(n Acc(n## r) C"!(#e C"!(#e Cs# !er E(%valen# Un%#) and Ass%&n T#al Cs#s # Un%#s C"!le#ed) # S!%led Un%#s) and # Un%#s %n End%n& =r+ %n Prcess T#al Prd(c#% Trans'erred$%rec# Cnvers%n n %n cs#s *a#er%als Cs#s Cs#s ? > ?##,#2> ?","#2 ",>> ? ,"#2 :S#e! 7; ,B>>S ?",> > "#,0 "#,0B2 B2 &otal costs to account for ?B,@# , @#2 2 ?2,= ?2 ,=#2 #2 ?"=, ?" =,2 2>> ",>> /osts incurred to date 2,=#2 "=,2>> :S#e! 4; ÷ ",> >> 4iided by e-uialent units of 'ork done to #,>>> "=,2>> ÷#,>>> ÷"=,2>> ? >."> date ?#."=2 =2 ? " /ost per e-uialent unit
Assignment of costs Good units completed and transferred out ("2,>>> units) /osts before adding normal spoilage ?1@,#=1 "2,>>>V × (?#."=2 L ?>."> L ?") ormal spoilage (B2> units) units) #,1 #, 11 1 B2>V × (?#."=2 L ?>."> L ?") (A) &otal cost of good units completed and transferred out 2",B1= (;) Abnormal spoilage (#2> units) =#" #2>V × (?#."=2 L ?>."> L ?") (/) ,>>> units) #1,0 #1,02 2 (">,>>>V × ?#." ?# ."=2 =2) ) L(> L( >V × ?>.">)L(#,2>>V × (A)L(;)L(/)&otal costs accounted for ?B,@# , @#2 2 ?") ?2, ?2 ,=# =#2 2 L ?", ?" ,> >> L ?"=, ?" =,2 2>> :S#e! ;
S&otal costs of good units completed and transferred out in Panel ; (5tep 2) of 5olution 6xhibit "=0>. 6-uialent units of direct materials and conersion costs calculated in 5tep # in Panel A aboe.
V
CHAPTER / *ASTER 3U$GET AN$ RESPONSI3ILIT9 ACCOUNTING
/-1
&he budgeting cycle includes the follo'ing elements3
a.
Plann Planning ing the perfor performan mance ce of the the compan company y as as a 'hole 'hole as 'ell 'ell as plan planni ning ng the the perf perform ormanc ancee of of its its subunits. %anagement agrees on 'hat is expected. Proiding a frame of reference, a set of specific expectations against 'hich actual results can be compared. Inest Inestiga igatin ting g ari ariati ations ons from from plan plans. s. If nece necessa ssary, ry, correc correcti tiee acti action on follo' follo'ss ine inesti stigat gation ion.. Plan Planni ning ng agai again, n, in ligh lightt of feed feedba back ck and and cha chang nged ed cond condit itio ions ns..
b. c. d.
/-4
/-
Produc Productio tion n and market marketing ing tradit tradition ionall ally y hae hae operat operated ed as relati relatiel ely y indepe independe ndent nt bus busine iness ss functions. ;udgets can assist in reducing conflicts bet'een these t'o functions in t'o 'ays. /onsider a beerage company such as /oca/ola or Pepsi/ola3 /ommunication. %arketing could share information about seasonal demand 'ith production. /oordination. Production could ensure that output is sufficient to meet, for example, high seasonal demand in the summer.
•
•
/. ". #. 0. 1. 2. . B. =. @.
&he steps in preparing an operating budget are as follo's3 Prep Prepar aree the the ree reenu nues es bud budge gett Prepar Preparee the produ producti ction on budge budgett (in units units)) Prepare Prepare the direct direct material material usage usage budget budget and direct direct material material purchas purchases es budget budget Prepare Prepare the the direct direct manufa manufacturi cturing ng labor labor budge budgett Prepar Preparee the manufa manufactu cturin ring g oerhea oerhead d budget budget Prepar Preparee the end ending ing ine inento ntorie riess budget budget Prepar Preparee the cost cost of good goodss sold sold budge budgett Prepar Preparee the nonman nonmanufa ufactu cturin ring g costs costs budget budget Prepar Preparee the bud budget geted ed incom incomee state statemen mentt
/-17
&he choice of the type of responsibility center determines 'hat the manager is accountable for and thereby affects the managers behaior. $or example, if a reenue center is chosen, the manager 'ill focus on reenues, not on costs or inestments. &he choice of a responsibility center type guides the ariables to be included in the budgeting exercise.
/-22 /-22
Reve Reven( n(es es)) !rd( !rd(c# c#% %n) n) and and !(rch !(rchas ases es ,(d& ,(d&e# e#
".
@>>,>>> motorcycles × 1>>,>>> yen F 0>,>>>,>>>,>>> yen
#.
;udgeted sales (motorcycles) Add target ending finished goods inentory &otal re-uirements 4educt beginning finished goods inentory Hnits to be produced
0.
4irec irectt mat mateerial rialss to to be be us used in pro product ductio ion n, ==>,>>> E # ('heels) Add target ending direct materials inentory &otal re-uirements
@>>,>>> =>,>>> @=>,>>> ">>,>>> ==>,>>>
",B>,>>> >,>>> ",=#>,>>>
4educt beginning direct materials inentory 4irect materials to be purchased ('heels) /ost per 'heel in yen 4irect materials purchase cost in yen
2>,>>> ",BB>,>>> ",>>> #=,0#>,>>>,>>>
ote the relatiely small inentory of 'heels. In Capan, suppliers tend to be located ery close to the maor manufacturer. Inentories are controlled by ustintime and similar systems. Indeed, some direct materials inentories are almost nonexistent.
/-77
C"!rehens%ve !r,le" 8%#h A3C cs#%n&
". Reven(e 3(d&e# r #he *n#h ' A!r%l
/atallac 4ogeriffic &otal
Un%#s Sell%n& Pr%ce 2>> ?"> 0>> #2>
T#al #al Reven(es ? =>,>>> B2,>>> ?"22,>>>
#. Prd(c#%n 3(d&e# r #he *n#h ' A!r%l
;udgeted unit sales Add target ending finished goods inentory &otal re-uired units 4educt beginning finished goods inentory Hnits of finished goods to be produced
Prd(c# Ca#-allac $&-er%''%c 2>> 0>>
02 202 "2 2#>
"2 0"2 0> #=2
0a. $%rec# *a#er%al Usa&e 3(d&e# %n M(an#%# and $llars r #he *n#h ' A!r%l *a#er%al Plas#%c *e#al Phs%cal Un%#s 3(d&e# 4irect materials re-uired for /atallac (2#> units E 1 lbs. and >.2 lb.) 4ogerrific (#=2 units E lbs. and " lb.) &otal -uantity of direct material to be used Cs# 3(d&e# Aailable from beginning direct materials inentory (under a $I$! costflo' assumption)
#,>=> lbs. ",B"> lbs. 0,B@> lbs.
#> lbs. #=2 lbs. 212 lbs.
T#al
Plastic3 #2> lbs. E ?0.=> per lb. %etal3 > lbs. E ?0 per lb. &o be purchased this period Plastic3 (0,B@> M #2>) lbs. × ?1 per lb. %etal3 (212 M >) lbs. × ?0 per lb. 4irect materials to be used this period
?
@2 @ 2> ? "=>
. "1,"> WW WWWW ?"2,"">
",122 ? ",02
?",B12
$%rec# *a#er%al P(rchases 3(d&e# r #he *n#h ' A!r%l *a#er%al Plas#%c *e#al Phs%cal Un%#s 3(d&e# &o be used in production (re-uirement 0) Add target ending inentory &otal re-uirements 4educt beginning inentory Purchases to be made
0,B@> lbs. 0=> lbs. 1,"B> lbs. #2> lbs. 0,@#> lbs.
212 lbs. 22 lbs. >> lbs. > lbs. 21> lbs.
?"2,=> WWWWWW ?"2,=>
? ",#> ? ",#>
Cs# 3(d&e# Plastic3 0,@#> lbs. × ?1 ? 1 %etal3 21> lbs. × ?0 Purchases
T#al
? "B,0>>
1. $%rec# *an('ac#(r%n& La,r Cs#s 3(d&e# r #he *n#h ' A!r%l
/atallac 4ogerrific &otal
O(#!(# Un%#s Prd(ced :re(%re"en# 2; 2#> #=2
$*LH !er Un%# 0 2
T#al H(rs ",2> ",1#2
H(rl =a&e Ra#e ?"> ">
T#al ?"2,>> "1,#2> ?#@,=2>
2. *ach%ne Se#(! Overhead Hnits to be produced Hnits per batch umber of batches 5etup time per batch &otal setup time ;udgeted machine setup costs
Prcess%n& Overhead ;udgeted machinehours (%8)
;udgeted processing costs
Ins!ec#%n Overhead ;udgeted inspectionhours inspectionhours
;udgeted inspection costs
Ca#-allac 2#> K #> # × ".2 hrs. 0@ hr hrs.
$&-err%'%c #=2 K"2 "@ × ".B2 hrs. 00.#2 hrs.
T#al
B#.#2 hrs.
F ?">> per setup hour × B#.#2 hours F ?B,##2
F ("> %8 per unit E 2#> units) L ("= %8 per unit E #=2 units) F 2,#>> %8 L 2,"0> %8 F ">,00> %8 F ?2 per %8 E ">,00> %8 F ?2",2>
F (>.2 × # batches) L (>. × "@ batches) F "0 L "".1 F #1.1 inspection hrs. F ?" per inspection hr. × #1.1 inspection hours F ?0@>.1>
*an('ac#(r%n& Overhead 3(d&e# r #he *n#h ' A!r%l %achine setup costs ? B,##2 Processing costs 2",2> Inspection costs 0@> &otal costs ?2@,#2
. Un%# Cs#s ' End%n& %n%shed Gds Inven#r A!r%l 75) 25@@ Prd(c# Ca#-allac $&-err%'%c Cs# Cs# !er !er In!( In!(## !er !er In!( In!(## !er !er Un%# ' Un%# ' In!(# O(#!(# T#al Un%# ' O(#!(# T#al Plastic ? 1 1 lbs. ? ".>> lbs. ? #1.>> %etal 0 >.2 lbs. ".2> " lb. 0.>> 4irect manufacturing labor "> 0 hrs. 0>.>> 2 hrs. 2>.>> %achine setup ">> >.> >.>B B2 hrs. " B.2> >.""B hr hr " "".B Processing 2 "> %8 2>.>> "= %8 @>.>> # # Inspection " >.>#2 hr >.1> >.1 > >.>1 hr. >.1 &otal ?">2.1> ?"[email protected]" " #
0@ setuphours K 2#> units F >.>B2 hours per unitO 00.#2 setuphours K #=2 units F >.""B hours per unit "0 inspection hours K 2#> units F >.>#2 hours per unitO "".1 inspection hours K #=2 units F >.>1 hours per unit End%n& Inven#r%es 3(d&e# A!r%l 75) 25@@ M(an#%#
4irect %aterials Plastic %etals $inished goods /atallac 4ogerrific &otal ending inentory
Cs# !er (n%#
T#al
0=> 22
?1 0
?",2#> "2
02 "2
?">2.1> "[email protected]"
?0,=@ #,@>
?",=2
,0B@ ?=,>1
B. Cs# ' Gds Sld 3(d&e# r #he *n#h ' A!r%l) 25@@ ;eginning finished goods inentory, April, " (?",2>> L ?2,2=>) 4irect materials used (re-uirement 0) 4irect manufacturing labor (re-uirement 1) %anufacturing oerhead (re-uirement 2) /ost of goods manufactured /ost of goods aailable for sale 4educt3 6nding finished goods inentory, April 0> (re-mt. )
?
B,>=>
?",B12 #@,=2> 2@,#2 ">2,=> ""#,@1> ,0B@
/ost of goods sold
?">,2"
=. Nn"an('ac#(r%n& Cs#s 3(d&e# r #he *n#h ' A!r%l) 25@@ 5alaries (?0,>>> K # × ".>2) !ther fixed costs (?0,>>> K #) 5ales commissions (?"22,>>> × "J) &otal nonmanufacturing costs
?"=,@>> "=,>>> ",22> ?0=,12>
@. 3(d&e#ed Inc"e S#a#e"en# r #he *n#h ' A!r%l) 25@@
7eenues /ost of goods sold Gross margin !perating (nonmanufacturing) costs !perating income
?"22,>>> ">,2" 1=,10@ 0=,12> ? @,@=@
/-76 3(d&e#%n& and e#h%cs
". &he standards proposed by > units F #@2 lbs. 4 "@.# min. × ">> units F ",@#> min K > F 0# hrs. %& @.@ min. × ">> units F @@> min. K > F ".2 hrs. #.
CHAPTER < LEI3LE 3U$GETS) $IRECT-COST 0ARIANCES) AN$ *ANAGE*ENT CONTROL
<2
&'o sources of information about budgeted amounts are (a) past amounts and (b) detailed engineering studies.
<-< (i) (ii) (iii (iii)) (i) (i)
$our reasons for using standard costs are3 cost management, pricing decisions, budg budget etar ary y pla plann nnin ing g and and cont contro rol, l, and and fina financ ncia iall stat statem emen entt prep prepar arat atio ion. n.
<-11
9ariance analysis, by proiding information about actual performance relatie to standards, can form the basis of continuous operational improement. &he underlying causes of unfaorable ariances are identified, and correctie action taken 'here possible. $aorable ariances can also proide information if the organization can identify 'hy a faorable ariance occurred. occurred. 5teps can often be taken to replicate those conditions more often. As the easier changes are made, and perhaps some standards tightened, tightened, the harder issues 'ill be reealed for the organization organization to act on this is continuous continuous improement.
<17
6idence on the costs of other companies is one input managers can use in setting the performance measure for next year. 8o'eer, caution should be taken before choosing such an amount amount as next yearXs performance performance measure. It is important to understan understand d 'hy cost differences differences across across companies companies exist and 'hether these differences differences can be eliminate eliminated. d. It is also important important to examine 'hen planned changes (in, say, technology) next year make een the current lo'cost producer not a demanding enough enough hurdle.
<-21 <-21
Pr%c Pr%cee and and e''% e''%c% c%en enc c var var%a %anc nces es
".
&he key information items are3 Ac#(al >,=>> ",>>> ? >.=#
!utput units (scones) Input units (pounds of pumpkin) /ost per input unit
3(d&e#ed >,>>> "2,>>> ? >.=@
Peterson budgets to obtain 1 pumpkin scones from each pound of pumpkin. &he flexiblebudget ariance is ?1>= $.
Pumpkin costs a
Ac#(al Res(l#s :1; ?"0,"#> a
le@%,le3(d&e# 0ar%ance :2; ? :1; :7; ?1>= $
",>>> E ?>.=# F ?"0,"#> >,=>> E >.#2 E ?>.=@ ?>.=@ F ?"0,2#= c >,>>> E >.#2 E ?>.=@ ?>.=@ F ?"0,02> ?"0,02>
b
le@%,le 3(d&e# :7; ?"0,2#= b
Sales-0l("e 0ar%ance :4; ? :7; :; ?"B= H
S#a#%c 3(d&e# :; ?"0,02>c
#. Ac#(al Cs#s Inc(rred :Ac#(al In!(# M# F Ac#(al Pr%ce; ?"0,"#>a
?","#> $ Price aria riance ?1>= $
Ac#(al In!(# M# F 3(d&e#ed Pr%ce ?"1,#1> b
le@%,le 3(d&e# :3(d&e#ed In!(# M# All8ed 'r Ac#(al O(#!(# F 3(d&e#ed Pr%ce; ?"0,2#=c
?B"# H 6fficiency ariance
$lexiblebudget ariance a
",>>> E ?>.=# F ?"0,"#> ",>>> E ?>.=@ F ?"1,#1> c >,=>> E >.#2 E ?>.=@ F ?"0,2#=
b
0. (a)
&he &he fao faora rabl blee flex flexib ible leb bud udge gett ari arian ance ce of of ?1>= ?1>= has has t'o t'o offs offset etti ting ng com compo pone nent nts3 s3 faora faorable ble pric pricee arian ariance ce of ?"," ?","#>M #>MMre Mrefle flects cts the the ?>.=# ?>.=# actu actual al purch purchase ase cost cost bein being g lo'er lo'er than than the the ?>.=@ budgeted purchase cost per pound. unfao unfaorab rable le effic efficien iency cy aria ariance nce of of ?B"#MM ?B"#MMrefl reflect ectss the the actual actual mate materia rials ls yield yield of of 0.=> 0.=> scones scones per per pound of pumpkin (>,=>> (>,=>> K ",>>> F 0.=>) being less than the budgeted budgeted yield of 1.>> (>,>>> K "2,>>> F 1.>>). &he company used more pumpkins (materials) to make the scones than 'as budgeted.
(b)
!ne explanation may be that Peterson purchased lo'er -uality pumpkins at a lo'er cost per pound. <-22
*a#er%als and "an('ac#(r%n& la,r var%ances
Ac#(al Cs#s Inc(rred :Ac#(al In!(# M# F Ac#(al Pr%ce;
Ac#(al In!(# M# F 3(d&e#ed Pr%ce
le@%,le 3(d&e# :3(d&e#ed In!(# M# All8ed 'r Ac#(al O(#!(# F 3(d&e#ed Pr%ce;
?#>>,>>>
?#"1,>>>
?##2,>>>
4irect %aterials
?"1,>>> $ Price ariance
4irect %fg. abor Price ariance
?"",>>> $ 6fficiency ariance ?#2,>>> $ $lexiblebudget ariance ?@>,>>>
?=,>>>
?1,>>> H ?,>>> H 6fficiency ariance ?">,>>> H $lexiblebudget ariance
?=>,>>>
<-74 <-74 ".
*a#er% *a#er%al al cs# cs# var%anc var%ances) es) (se (se ' var%anc var%ances es 'r !er' !er'r"a r"ance nce eval( eval(a#% a#%n n %aterials 9ariances Ac#(al Cs#s Inc(rred :Ac#(al In!(# M# E Ac#(al Pr%ce;
4irect %aterials
(,>>> E ?"= a) ?">=,>>>
?"#,>>> $ Price ariance
Ac#(al In!(# M# E 3(d&e#ed Pr%ce Purcha Pur chase sess Hsage Hsa ge (,>>> E ?#>) (2,>>> E ?#>) ?"#>,>>> ?">>,>>>
le@%,le 3(d&e# :3(d&e#ed In!(# M# All8ed 'r Ac#(al O(#!(# E 3(d&e#ed Pr%ce;
(2>> E = E ?#>) (1,>>> E ?#>) ?=>,>>>
?#>,>>> H 6fficiency ariance
a
?">=,>>> K ,>>> F ?"=
#.
&he faora faorable ble price price ari arianc ancee is due to the the ?# ?# diffe differen rence ce (?#> (?#> ?"=) ?"=) bet'ee bet'een n the the stan standar dard d pric pricee based on the preious suppliers and the actual actual price paid through the online marketplace. &he &he unfaorable efficiency ariance could be due to seeral factors f actors including inexperienced 'orkers and machine malfunctions. ;ut the likely cause here is that the lo'erpriced titanium 'as lo'er -uality or less refined, 'hich led to more 'aste. &he labor efficiency ariance could could be affected if the lo'er -uality titanium caused the 'orkers to use more time.
0.
5'itch 5'itching ing sup suppl plier ierss 'as 'as not a good good idea. idea. &he &he ?"# ?"#,>> ,>>> > sa saing ingss in in the the cost cost of of tita titaniu nium m 'as 'as out'eighed by the ?#>,>>> extra material usage. In addition, the ?#>,>>>H efficiency ariance does not recognize the total impact of the lo'er -uality titanium because, of the ,>>> pounds purchased, only 2,>>> pounds pounds 'ere used. If the -uantity of materials materials used in production production is relatiely the same, ;etter ;ikes could expect the remaining ",>>> lbs to produce ">> more units. At standard, ">> more units should take ">> E = F =>> lbs. &here could be an additional unfaorable efficiency ariance of (">>> × ?# ?#>) ?#>,>>>
(">> E = E ?#>) ?",>>> ?1,>>>H
1.
&he &he purc purcha hasi sing ng mana manage ger rss perf perfor orma manc ncee eal ealua uati tion on shou should ld not not be base based d sole solely ly on the pric pricee ariance. &he shortrun reduction in purchase costs 'as more than offset by higher usage rates. 8is ealuation should be based on the total costs of the company as a 'hole. In addition, the production managers performance ealuation should not be based solely on the efficiency ariances. In this case, the production manager 'as not responsible for the purchase of the lo'er -uality titanium, 'hich led to the unfaorable efficiency scores. In general, it is important for 5tanley to understand that not all faorable material price ariances are *good ne's,+ because of the negatie effects that can arise in the production process from the purchase of inferior inputs. &hey can lead to unfaorable efficiency ariances for both materials and labor. 5tanley should also that understand efficiency ariances may arise for many different reasons and she needs to kno' these reasons before ealuating performance.
2.
9arian 9ariances ces sho should uld be used used to help help ;etter ;etter ;ikes ;ikes unde underst rstand and 'hat 'hat led led to the the curre current nt set set of of finan financia ciall results, as 'ell as ho' to perform better in the future. &hey are a 'ay to facilitate the continuous improement efforts of the company. 7ather than focusing solely on the price of titanium, 5cott can balance price and -uality in future purchase decisions.
.
$uture $uture proble problems ms can arise arise in the the supp supply ly chain. chain. 5cott 5cott may need need to to go go back back to the preio preious us suppliers. ;ut ;etter ;ikes relationship 'ith them may hae been damaged and they may no' be selling all their aailable aailable titanium to other manufacturers. o'er -uality -uality bicycles could could also affect ;etter ;ikes reputation 'ith the distributors, the bike shops and customers, leading to higher 'arranty claims and customer dissatisfaction, and decreased sales in the future.
<-7/ <-7/
$%rec# $%rec# "a#er "a#er%a %als ls and "an('a "an('ac#( c#(r%n r%n& & la,r la,r var%anc var%ances) es) slv% slv%n& n& (n+n8n (n+n8ns s
All gien items are designated by an asterisk.
4irect %anufacturing abor
Ac#(al Cs#s Inc(rred :Ac#(al In!(# M# E Ac#(al Pr%ce;
Ac#(al In!(# M# E 3(d&e#ed Pr%ce
le@%,le 3(d&e# :3(d&e#ed In!(# M# All8ed 'r Ac#(al O(#!(# E 3(d&e#ed Pr%ce;
(",@>> E ?#") ?0@,@>>
(",@>> E ?#>S) ?0=,>>>
(1,>>>S E >.2S E ?#>S) ?1>,>>>
?",@>> HS Price ariance Purcha Pur chase sess 4irect ("0,>>> E ?2.#2) %aterials ?=,#2>S
?#,>>> $S 6fficiency ariance Hsage Hsa ge ("0,>>> E ?2S) ?2,>>>
?0,#2> HS
("#,2>> E ?2S) ?#,2>>
(1,>>>S E 0S E ?2S) ?>,>>>
?#,2>> HS Price ariance
6fficiency ariance
". 1,>>> units E >.2 hours:unit F #,>>> hours #. $lex $lexib ible le budg budget et M 6ff 6ffic icie ienc ncy y ar aria ianc ncee F ?1>, ?1>,>> >>> > M ?#,> ?#,>>> >> F ?0= ?0=,> ,>>> >> Actual dir. manuf. labor hours F ?0=,>>> K ;udgeted price of ?#>:hour F ",@>> hours 0. ?0=, ?0=,>> >>> > L Pric Pricee ari arian ance ce,, ?",@ ?",@>> >> F ?0@ ?0@,@ ,@>> >>,, the the actu actual al dir direc ectt manu manuf. f. lab labor or cos costt Actual rate F Actual cost K Actual hours F ?0@,>>> K ",@>> hours F ?#":hour (rounded) 1.
5tan 5tanda dard rd -ty -ty.. of dir direc ectt mate materi rial alss F 1,> 1,>>> >> uni units ts E 0 poun pounds ds:u :uni nitt F "#,> "#,>>> >> pou pound ndss
2. $lex $lexib ible le budg budget et L 4ir 4ir.. mat matls ls.. effc effcy. y. ar. ar. F ?> ?>,> ,>>> >> L ?#, ?#,2> 2>> > F ?#, ?#,2> 2>> > Actual -uantity of dir. matls. used F ?#,2>> K ;udgeted price per lb F ?#,2>> K ?2:lb F "#,2>> lbs
. Actu Actual al cost cost of dir direc ectt mate materi rial als, s, ?= ?=,# ,#2> 2> M Pric Pricee ar aria ianc nce, e, ?0, ?0,#2 #2> > F ?2 ?2,> ,>>> >> Actual -ty. of direct materials purchased F ?2,>>> K ;udgeted price, ?2:lb F "0,>>> lbs. B. Actual Actual direct direct materials materials price price F ?=,#2 ?=,#2> > K "0,>>> "0,>>> lbs F ?2.#2 ?2.#2 per lb. lb. <-47
Pr%ce and e''%c%enc e''%c%enc var%ances) var%ances) !r,le"s !r,le"s %n s#andard-s s#andard-se##%n e##%n&) &) ,ench" ,ench"ar+%n ar+%n& &
". ;udgeted ;udgeted direct direct materials materials input input per per shirt F >> rolls rolls K ,>>> shirts shirtsF F >."> roll roll of cloth ;udgeted direct manufacturing. laborhours per shirt (",2>> hours K ,>>> shirts) F >.#2 hours ;udgeted direct materials cost (?0>,>>> K >>) F ?2> per roll ;udgeted direct manufacturing labor cost per hour (?#B,>>> K ",2>>) F ?"= per hour Actual output achieed F ,B0# shirts le@%,le 3(d&e# Ac#(al Cs#s :3(d&e#ed In!(# Inc(rred M# All8ed 'r :Ac#(al In!(# M# Ac#(al In!(# M# Ac#(al O(#!(# F Ac#(al Pr%ce; F 3(d&e#ed Pr%ce F 3(d&e#ed Pr%ce; 4irect ("# E ?2>) (,B0# E >."> E ?2>) %aterials ?0>,#@1 ?0>,>> ?00,> ?0> $ Price ariance 4irect %anufacturing abor
?#B,@0 ?"20 H Price ariance
?0,>> $ 6fficiency ariance
(",20> E ?"=) ?#B,21>
(,B0# E >.#2 E ?"=) ?0>,#@1
?#,B21 $ 6fficiency ariance
#. Acti Action onss emplo employe yees es may may hae hae taken taken inc inclu lude de33 (a) Adding Adding steps steps that that are not not necessa necessary ry in 'orkin 'orking g on a shirt shirt.. (b) (b) &aki &aking ng mo more re time time on each each step step than than is nece necess ssar ary. y. (c) /reati /reating ng prob problem lem situa situatio tions ns so so that that the the budg budgete eted d amoun amountt of aerag aeragee do'nt do'ntime ime 'ill 'ill be oerstated. (d) (d) /rea /reati ting ng defect defectss in shirt shirtss so that that the the budg budget eted ed amount amount of aer aerag agee re'o re'ork rk 'ill 'ill be oerstated. 6mployees may take these actions for seeral possible reasons. (a) &hey may be paid on a piecerate basis 'ith incenties for production leels aboe budget. (b) &hey &hey may 'ant 'ant to create create a relaxe relaxed d 'ork atmosph atmosphere ere,, and a less less demandin demanding g standard standard can reduce reduce stress. (c) &hey hae hae a *them *them s. us+ us+ mentality mentality rather rather than than a partners partnership hip perspec perspectie tie.. (d) &hey may 'ant 'ant to gain all the benefit benefitss that ensue from from superior superior performance performance (ob (ob security, security, 'age rate rate increases) 'ithout putting in the extra effort re-uired. &his behaior is unethical if it is deliberately designed to undermine the credibility of the standards used at e' $ashions.
0.
If Corgen Corgenson son does does nothin nothing g about about standa standard rd costs costs,, his his behai behaior or 'ill 'ill iolat iolatee the the *5tand *5tandard ardss of 6thical /onduct for Practitioners of %anagement Accounting.+ In particular, particular, he 'ould iolate the (a) (a) stan standa dard rdss of comp compet eten ence ce,, by not not perfo perform rmin ing g prof profes essi sion onal al duti duties es in acco accord rdan ance ce 'ith 'ith rele relea ant nt standardsO (b) stand standard ardss of integ integrit rity, y, by passi passiely ely subert suberting ing the attain attainmen mentt of the organiza organizatio tion nss obect obectie ie to control costsO and (c) standards standards of credibili credibility, ty, by not communica communicating ting informatio information n fairly and not not disclosing disclosing all relean releantt cost information. 1.
Corgenson should discuss the situation 'ith $enton and point out that the standards are lax and that this practice is unethical. If $enton does not agree to change, Corgenson should escalate the issue issue up the hierarc hierarchy hy in order order to effect effect change change.. If organi organizat zation ional al change change is not forthcomin forthcoming, g, Corgen Corgenson son shou should ld be prepared prepared to resign resign rathe ratherr than than compromise compromise his professio professional nal ethics.
2. %ain %ain pros pros of using using ;enchm ;enchmark arking ing /leari /learing ng 8ouse 8ouse infor informat mation ion to comput computee ari arian ances ces are3 are3 (a) 8ighlights to e' $ashions in a direct 'ay ho' it may or may not be costcompetitie. (b) Proid Proides es a *rea *reali lity ty check check++ to many many intern internal al posi positio tions ns abou aboutt effic efficien iency cy or or effect effectie ienes ness. s. %ain cons are3 (a) e' $ashio $ashions ns may not be be comparable comparable to companie companiess in the the databas database. e. (b) /ost data about other other companies companies may not not be reliable. reliable. (c) /ost /ost of ;enchma ;enchmarki rking ng /leari /learing ng 8ouse 8ouse repor reports. ts.
CHAPTER . LEI3LE 3U$GETS) O0ERHEA$ COST 0ARIANCES) AN$ *ANAGE*ENT CONTROL
.-4 ". #. 3. 4.
5teps in deeloping a budgeted ariableoerhead cost rate are3 /hoo /hoosse th the pe perio riod to be us used for for the budg udget, et, 5ele 5elect ct the the cost costa all lloc ocat atio ion n base basess to use use in allo alloca cati ting ng ari ariab able le oer oerhe head ad cost costss to the the outp output ut produced, Identify the ariable oerhead costs associated 'ith each costallocation base, and /ompute the rate per unit of each costallocation base used to allocate ariable oerhead costs to output produced.
.-<
A direct materials efficiency ariance indicates 'hether more or less direct materials 'ere used than 'as budgeted for the actual output achieed. A ariable manufacturing oerhead efficiency ariance indicates 'hether more or less of the chosen allocation base 'as used than 'as budgeted for the actual output achieed.
.-. ". #. 0. 1.
5teps in deeloping a budgeted fixedoerhead rate are /hoose the period to use for the budget, 5ele 5elect ct the the ccos ost tal allo loca cati tion on base base to use use in in all alloc ocat atin ing g fix fixed ed oer oerhe head ad cost costss to to out outpu putt pro produ duce ced, d, Iden Identi tify fy the the fixe fixed do oer erhe head ad cost costss asso associ ciat ated ed 'ith 'ith each each cost costa all lloc ocat atio ion n base base,, and and /omp /omput utee the the rate rate per per uni unitt of of eac each h cos cost tal allo loca cati tion on base base used used to allo alloca cate te fixe fixed d oe oerh rhea ead d cos costs ts to output produced.
.-12
A strong case can be made for 'riting off an unfaorable productionolume ariance to cost of goods sold. &he alternatie is prorating it among inentories and cost of goods sold, but this 'ould *penalize+ the units produced (and in inentory) for the cost of unused capacity, i.e., for the units not produced. produced. ;ut, if 'e take the ie' that the denominator leel is a *soft+ number i.e., it is only an estimate, and it is neer expected to be reached exactly, then it makes more sense to prorate the production olume ariance'hether faorable or notamong the inentory stock and cost of goods sold. Prorating a faorable ariance is also more conseratie3 it results in a lo'er operating income than if the faorable ariance had all been 'ritten off to cost of goods sold. $inally, prorating also also dampens the efficacy of any steps steps taken by company management management to manage operating income through manipulation of the production olume ariance. In sum, a productionolume productionolume ariance need not al'ays be 'ritten off to cost of of goods sold.
&he four ariances are3 .-17 9ariable manufacturing oerhead costs • spending ariance − efficiency ariance − $ixed manufacturing oerhead costs • spending ariance − productionolume ariance ariance − .-22
".
S#ra%&h#'r8ard 4-var%ance verhead anals%s
&he budg budget et for for fixed fixed manufa manufactu cturin ring g oerhe oerhead ad is 1,>>> 1,>>> uni units ts E machine machineho hours urs E ?"2 ?"2 machi machine ne hours:unit F ?0>,>>>.
An oerie' of the 1ariance analysis is3 4-0ar%ance Anals%s 9ariable %anufacturing !erhead
$ixed %anufacturing !erhead
S!end%n& 0ar%ance
E''%c%enc 0ar%ance
Prd(c#%n0l("e 0ar%ance
?"B,=>> H
?",>>> H
eer a 9ariance
?"0,>>> H
eer a 9ariance
?0,>>> $
5olution 6xhibit =## has details of these ariances. A detailed comparison of actual and flexible budgeted amounts is3
!utput units (auto parts) Allocation base (machinehours) Allocation base per output unit 9ariable %!8 9ariable %!8 per hour $ixed %!8 $ixed %!8 per hour
Ac#(al 1,1>> #=,1>> .12 b ?#12,>>> ?=.0d ?0B0,>>> ?"0."0f
le@%,le 3(d&e# 1,1>> #,1>> a .>> ?#"",#>> c ?=.>> ?0>,>>> e M
a
1,1>> units E .>> machinehours:unit F #,1>> machinehours #=,1>> K 1,1>> F .12 machinehours per unit c 1,1>> units E .>> machinehours per unit E ?=.>> per machinehour F ?#"",#>> d ?#12,>>> K #=,1>> F ?=.0 e 1,>>> units E .>> machinehours per unit E ?"2 per machinehour F ?0>,>>> f ?0B0,>>> K #=,1>> F ?"0."0
b
#.
9ariable %anufacturing !erhead /ontrol Accounts Payable /ontrol and other accounts
#12,>>>
#"",#>>
9ariable %anufacturing !erhead Allocated 9ariable %anufacturing !erhead 5pending 9ariance 9ariable %anufacturing !erhead 6fficiency 9ariance 9ariable %anufacturing !erhead /ontrol
#"",#>> "B,=>> ",>>>
$ixed %anufacturing !erhead /ontrol
0B0,>>>
0@,>>>
$ixed %anufacturing !erhead Allocated $ixed %anufacturing !erhead 5pending 9ariance $ixed %anufacturing !erhead Production9olume 9ariance $ixed %anufacturing !erhead /ontrol
0@,>>> "0,>>>
#12,>>>
#"",#>>
#12,>>>
0B0,>>>
0@,>>>
0,>>> 0B0,>>>
0.
Indii Indiidua duall fixed fixed manufa manufactu cturin ring g oerh oerhead ead items items are are not not usua usually lly affect affected ed ery ery much much by by dayt daytod oday ay control. control. Instead, Instead, they are controlle controlled d periodica periodically lly through through planning planning decisions decisions and budgeting budgeting procedures that may sometimes hae horizons coering six months or a year (for example, management salaries) and sometimes coering many years (for example, longterm leases and depreciation on plant and e-uipment).
1.
&he fixed oerhead spending ariance is caused by the actual realization of fixed costs differing from from the budgete budgeted d amount amounts. s. 5ome 5ome fixed fixed costs costs are kno'n kno'n becaus becausee they they are contrac contractua tually lly specified, such as rent or insurance, although if the rental or insurance contract expires during the year, year, the fixed fixed amount amount can change. change. !ther !ther fixed costs costs are estima estimated ted,, such such as the cost of manage manageria riall salari salaries es 'hich 'hich may depend depend on bon bonuse usess and other paymen payments ts not kno'n at the the beginning of the period. In this example, the spending ariance is unfaorable, so actual $!8 is greater than the budgeted amount of $!8. &he fixed oerhead production olume ariance is caused by production production being oer or or under expected capacity. capacity. You may be under capacity capacity 'hen demand drops from expected leels, or if there are problems problems 'ith production. production. !er capacity is usually drien by by faorable demand shocks shocks or a desire to increase increase inentories. &he fact that there there is a faorable olume ariance indicates that production exceeded the expected leel of output (1,1>> units actual relatie to a denominator leel of 1,>>> output units).
SOLUTION EHI3IT .-22
Ac#(al Cs#s Inc(rred :1;
9ariable %!8
?#12,>>>
Ac#(al In!(# F 3(d&e#ed Ra#e :2; (#=,1>> E ?=) ?##B,#>>
$17,800 U
le@%,le 3(d&e#D 3(d&e#ed In!(# All8ed 'r Ac#(al O(#!(# F 3(d&e#ed Ra#e :7; (1,1>> E E ?=) ?#"",#>>
Allca#edD 3(d&e#ed In!(# All8ed 'r Ac#(al O(#!(# E 3(d&e#ed Ra#e :4; (1,1>> E E ?=) ?#"",#>>
$16,000 U
Spending variance Efficiency variance variance Never a variance $33,800 U Flexible-budge variance $33,800 U Underall!caed Underall!caed variable !ver"ead
Ac#(al Cs#s Inc(rred :1;
$ixed %!8
?0B0,>>>
5ame ;udgeted ump 5um :as %n S#a#%c 3(d&e#; Re&ardless ' O(#!(# Level :2; (1,>>> E E ?"2) ?0>,>>>
$13,000 U
le@%,le 3(d&e#D 5ame ;udgeted ump 5um :as %n S#a#%c 3(d&e#; Re&ardless ' O(#!(# Level :7; (1,>>> E E ?"2) ?0>,>>>
Allca#edD 3(d&e#ed In!(# All8ed 'r Ac#(al O(#!(# F 3(d&e#ed Ra#e :4; (1,1>> E E ?"2) ?0@,>>>
$36,000 F Never a variance Productionolume ariance $13,000 U $36,000 F Productionolume ariance $&3,000 FProductionolume
-
'verall!caed fixed !ver"ead
.-26 .-26
C"! C"!re rehe hens ns%v %vee var% var%an ance ce anal anals s%s %s
".
;udg ;udget eted ed numb number er of mach machin ine eho hour urss plann planned ed can can be calcu calcula late ted d by multi multipl plyi ying ng the the numbe numberr of units units planne planned d (budge (budgeted ted)) by the num numbe berr of machin machineh ehour ourss alloca allocated ted per unit3 unit3 === units × # machinehours per unit F ",BB machinehours.
#.
;udget ;udgeted ed fixed fixed %!8 costs costs per machin machineh ehour our can be compu computed ted by diid diiding ing the the flexib flexible le bud budget get amount for fixed %!8 ('hich is the same as the static budget) by the number of machinehours planned (calculated in (a.))3 ?01=,>@ K ",BB machinehours F ?"@.>> per machinehour
0.
;udget ;udgeted ed ariab ariable le %!8 costs costs per machin machineh ehour our are calcul calculate ated d as bud budget geted ed ariab ariable le costs diided by the budgeted number of machinehours planned3
%!8
?B",>1> K ",BB machinehours F ?1>.>> per machinehour. ".
;udget ;udgeted ed num number ber of machin machineh ehour ourss allo'e allo'ed d for for actual actual outpu outputt ach achie ieed ed can be calcu calculat lated ed by diiding the flexiblebudget amount for ariable %!8 by budgeted ariable %!8 costs per machinehour3 ?B,=>> K ?1>.>> per machinehourF ",@#> machinehours allo'ed
#.
&he &he actua actuall numb number er of outp output ut unit unitss is the the budge budgete ted d numbe numberr of mach machin ine eho hour urss allo' allo'ed ed for for actu actual al output achieed diided by the planned allocation rate of machine hours per unit3 ",@#> machinehours K # machinehours per unit F @> units.
0.
&he &he actua actuall numb number er of mac machi hine neh hou ours rs use used d per out outpu putt unit unit is is the the actu actual al num numbe berr of mach machin inee hour hourss used (gien) diided by the actual number of units manufactured3 ",=#1 machinehours K @> units F ".@ machinehours used per output unit.
.-7/ .-7/
Ac#%v% Ac#%v%##-,as ,ased ed cs#% cs#%n&) n&) ,a#c ,a#ch-l h-leve evell var%a var%ance nce anal anals% s%ss
".
5tat 5tatic ic bud budge gett numb number er of of crat crates es F ;ud ;udge gete ted d pair pairss ship shippe ped d : ;ud ;udge gete ted d pair pairss per per crat cratee F #1>,>>>:"# F #>,>>> crates
#.
$lex $lexib ible le bud budge gett numb number er of of crat crates es F Act Actua uall pair pairss ship shippe ped d : ;udg ;udget eted ed pai pairs rs per per cra crate te F "=>,>>>:"# F "2,>>> crates
0.
Actu Actual al num numbe berr of crat crates es ship shippe ped d F Act Actua uall pai pairs rs ship shippe ped d : Act Actua uall pai pairs rs per per box box F "=>,>>>:"> F "=,>>> crates
1.
5tatic 5tatic bud budget get num number ber of hou hours rs F 5tat 5tatic ic budg budget et numb number er of crates crates E budg budgete eted d hour hourss per per box F #>,>>> E ".# F #1,>>> hours $ixed oerhead rate F 5tatic budget fixed oerhead : static budget number of hours F >,>>>:#1,>>> F ?#.2> per hour
2.
9ari 9ariab able le !er !erhe head ad 9ari 9arian ance ce Anal Analys ysis is for for 7ic 7ica ass $le $leet et $eet $eet Inc Inc.. for for #>>= #>>= Ac#(al 0ar% 0ar%a, a,le le Over Overhe head ad ("=,>>> E "." E ?#") ?1"2,=>>
Ac#(al h(rs @ 3( 3(d& d&e# e#ed ed ra#e ra#e ("=,>>> E "." E ?#>) ?0@,>>>
?"@,=>> H S!end%n& var%ance
.
?>,>>>
?2,>>> $ S!end%n& var%ance
?,#2>,>>> budgeted amount #,2>>,>>> budgeted machinehours
#2,>>>,>>> ? ,#2>,>>>
F ?#.2> per machinehour
F ?,#2>,>>> L ?",2>>,>>> F ?B,B2>,>>>
Pro Product ductiion ono olume lume ar arianc iancee F ;udgeted fixed oerhead
F F
?0",#2>,>>>
%@e %@ed d ve verh rhea ead d s!e s!end nd%n %n& & var var%a %anc ncee ? Ac#( Ac#(al al cs# cs#ss %nc %nc(r (rre red d 3( 3(d& d&e# e#ed ed a"( a"(n# n# 3ec 3eca( a(se se '%@ed verhead s!end%n& var%ance %s (n'avra,le) #he a"(n# ' ac#(al cs#s %s h%&her #han #he ,(d&e#ed a"(n#
Actual cost
F
?"2,>>> H Prd(c#%n vl("e var%ance
a. &otal budgeted oerhead ;udgeted ariable oerhead (?"> budgeted rate per machinehour E #,2>>,>>> budgeted machinehours) machinehours) ;udgeted fixed oerhead
;udgeted fixed !8 rate
c.
3(d&e#ed h(rs all8ed 'r Ac#(al Ac#(al (#!(# (#!(# F 3(d 3(d&e# &e#ed ed Ra#e Ra#e ("2,>>> E ".# E?#.2) ?12,>>>
Over Overhe head ad var% var%an ance ces) s) e#h% e#h%cs cs
= ,
E''%c%enc var%ance
S#a#%c 3(d&e# %@ed %@ed Overhe Overhead ad
?22,>>>
".
?0,>>> H
$ixe $ixed d !e !erh rhea ead d 9ar 9aria ianc ncee Ana Analy lysi siss for for 7ica 7icas s $lee $leett $ee $eett Inc Inc.. for for #>>= #>>= Ac#(al %@ed %@ed Overhe Overhead ad
.-47 .-47
3(d&e#ed h(rs all8ed 'r Ac#( Ac#(al al (#! (#!(# (# @ 3( 3(d& d&e# e#ed ed ra#e ra#e ("2,>>> E ".# E ?#>) ?0>,>>>
M
?,#2>,>>> M (?#.2> per machinehour E # machinehours per unit S E ",#12,>>> units) ?,#2>,>>> M ?,##2,>>> ?#2,>>> H
S
;udgeted ariable oerhead per unit F ?#> ;udgeted ariable oerhead rate F ?"> per machinehour machinehour &herefore, budgeted machine machine hours allo'ed per unit F ?#>:?"> F # machinehours machinehours
#. 9ariable oerhead spending ariance3
Actual ariable oerhead cost M per unit of cost allocation base
;udgeted ariable oerhead cost per unit unit of of costallocation costallocation base
E
Actual -uantity of ariable oerhead costallocation base used for actual output
?#2,#>>,>>> budget amount machine ehour hour × #,1>> #, 1>>,, >>> machin machineh ehour ourss = − ?"> per machin #,1>>,>>> actual machinehours F F
(?">.2> M ?">) E #,1>>,>>> ?",#>>,>>> H
9ariable oerhead efficiency ariance3
Ac Actual units of ariable oerhead costallocation base used for actual output
M
;udgeted units of ariable oerhead costallocation base allo'ed for actual output
E
;udgeted ariable oerhead rate
F F F
(#,1>>,>>> M (# E ",#12,>>>)) E ?"> (#,1>>,>>> M #,1@>,>>>) E ?"> ?@>>,>>> $
0.
;y mani manipul pulati ating ng,, 7emic 7emich h has has crea created ted a siza sizable ble unfao unfaorab rable le fixed fixed oer oerhea head d spen spendin ding g aria ariance nce or, at least, has increased its magnitude. Cack 7emichs action is clearly unethical. 9ariances dra' attention to the areas that need management attention. If the top management relies on 7emich, due to his expertise, to interpret and explain the reasons for the unfaorable ariance, it is likely that his report 'ill be biased and misleading to the top management. &he top management may erroneously conclude that %onroe is not able to manage his fixed oerhead costs effectiely. Another probable aderse outcome of 7emichs actions 'ill be that %onroe 'ill hae een less confid confidenc encee in the useful usefulnes nesss of accoun accountin ting g report reports. s. &his, &his, of course course,, defeat defeatss the purpos purposee of preparing the reports. In summary, 7emichs unethical actions 'ill 'aste top managements time and may lead to 'rong decisions
