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Tnblgof Conrerur Part l-Costs: ConceptsandObjectives
t. 2. 3.
Management, theController, andCostAccounting CostConcepts lnformation System andthe Costaccounting CostBehavior Analysis
l3 25
Partl-Cost Accumulation 4. 5. 6. 7. 8.
CostSystems andCostAccumulation .... JobOrderCosting Process Costing TheCostof QualityandAccounting Losses forProduction Costing By-Products andJointProducts
6| 80 102 145 178
Part3-PlanningandControlof Costs Ma te ri a C l s:o n tro l l i nCgo,sti ng, ... andPlanning Just-in-Time andBackflushing . Labor: Controlling andAccounting forCosts. Factory Overhead: Planned, Actual,andApplied Factory Departmentalization Overhead: ActivityAccounting: Activity-Based Costing a n d A c t i v i t y - B a s e d M a n a.g. .e m e n t
... . '
203 Dg )45 )7 | 288 319
Part4-BudgetingandStandard Costs 15. Budgeting: Profits, Sales, Costs,andExpenses 16. Budgeting: Research and Capital Expenditures, Development Expenditures, andCash:PERT/Cost t 7 . ResponsibilityAccounting andReporting... 1 8 . Standard .... Variances Costing: Setting andAnalyzing Standards
t9.
Standard Costing:lncorporating Standards into theAccountingRecords
-lll-
340 385 410 443 488
Part 5-Analyris of Costsand Profits DirectCostingandCost-Volume-Profit Analysis DifferentialCostAnalysis
Planning for CapitalExpenditures ... Economic Evaluation of CapitalExpenditures .... Decision-Making underUncertainty ProfitPerformance Measurements and lntracompany TransferPricing
5t3 543 588
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CHAPTER 1 DtscusstoN OUESTIONS Plrnnhg ir hl drvobprnrnt of e cqrrirron rl by of eglbnr. taaoutc.tr md mer'ur'm'ntt cm b' of obi'cilivtt which thr lchirvrmrnt Pbnnhg trkor hto eccornl thr irtrr' a.r.$.d botwren thr orgrni:atkxr errd itr rnvi' Etitlt tqln nl ir whrt'l|r b b br donr' Cqrtrol ir thr preolr by which trlrnrg"r grutl lhrt rr6urcrr rta obtrir'd rnd urd in rn ollbbnt and .ttactiw ttlrnn.r !o crtty ot',l ttrt pbn rnd rccornglirh thl orgrnizeti'cri'! obi'c' 'tr{lut.. tivor. Cotrtrol inpliot thrt prrlocnrrc' tn.ntr rto rrvilwod to drt.rmin. if corrrctivo rtbn ir nquircd Canttol Plennirg rnd cantrol rn htrnrbt'd' plrnnhg ortlblirhrd thr wilhh out ir crrrird tnrnrworl elrd rrrrrr !o ovrludo enfqnrrrcr obieclivor rto b th. Phn rc ttrd o,Fnirrtisd rfiirwd. Of -2. Shod.rrrge plenr ucully d.d with r plrird of e qu.ttar or I y..1, while long[nga plmr ururlly covrr thr.. to livo yern. Shon'rrngr Pbnt |'' of e csn' d.tdl.d rnangh b prrmit pnprntin Pl.l. l.l of finrnchl rtrt.moritt u cf r lulun dd., tiilb bng'nngo plenr cubnindr h r wry turnrnrrizrd rt ol lrpoc{rd ruultr or t hw qurrditie
corlr: irturr cgrtrol taPortt; Ptaprt.t cort dudier tor plrnnhg end d*irbn tridhg; rnd coordinrt.t cott rnd budgrt drte wilh olhrr cr.trylnril. O1.7. F Pdrrct roorrdr rnd derign, thr rrrnufr' Urhg cbperirr|.ntr nord ortinrtd cl nrlrrirl. hbor, rnd rtrrdlirr PtE.3l] str; lor m.'ruting srd officirncy ol rchrduling. producing. rnd htP.siing pmductr, tho drprrtm.ntt n'od lo drprrr' bd |ha codt irun d. Thr plr:anrl r.1.3- Thr trs' tnlrt rrrpplba mpfoyror'wrg. n..dt rccounting, budg.lrlg. |Ury dfrytm-t rd nhtrd rlgo.tr h rhrduling culr roqur' tnatrtl. Tho rnrrtothg dlgertmrnl n.'dt cott h riting prE.t. Tho ptblic rrblitu irlsnrtirr qr Ptc... r'F'. dagrtltn-n nreir'hfornrtbn infotm thl puts to h sdrr PtoaL, end divUrndr Ia Tha Lgal'dapstrnrnt noods st hfo'mrtbn rrny dteirs ol thr snpany h can' br frqirg b.mfy wlh lhr lrw. h csrrnunrcatlcnt giv. th' Ol€. ltodrm trctlrluor contrdbr end rntf lh. m.ant to tnnttnil hfor' mdin in thr torrn cl cruttr. sutye.t. end foo' crtto in r wry ntvrr bdorr poriblr' Profit o P P o r t u n i t i a ro r c o n l r o l . c l i o n t h l v o b o l n drbyrd or misrd rntiroly bxaurr ttn'ly hfot' tilli*1 thrt mi!fit frrvr imprw.d lh' cosl 'nd prolit poitbn of thr cornpeny w.s poorty cdtl' mr,'rEsiad. Ol-9. Thr budgot ir rn oclonlbt colt plennrng tool brcaser it (r) lupplilr hfonnation and lrrvrl rl e rtrlderd of prrlormarc. lor c€t cdtttol by thr luprrviroc rciponriOto lor cg (b) ptwitor Jr ..tt mrthod for enticipeting prolitr rt rn $ticiPlt.d nlor'bvol; (c) hrlpr in foncarling trbl, cotl3. rrponra3. and pro{ils lor t pricd of orc Yorr or rrlr. h rdYs'tc.. Ol-tO. Thlr dendudr rill not nocr*arily bo rbb lo ftrud' but th'y do give pt.vonl rilntg.m.nt guilanct on how lo scnr inttnrrl accounbtrtt preerd il thry rncountar ! qu'stiaublr prr' ticr. or 01-ll. CASB rtandard$ (l) rnuncialr a principlr pnrriy'rl lo b. lollow.'{ (b) Glablbh Prtdictt is 5rj rpptiod; (c) rpcfy crilrrie to br ornpbyrd lrqrr allrnretivr principbr rnd prl:' h rlcthg rccutnubtng, end rcporrr'g in orlinrting t!.! cgltrrst cosb. Th. tttndatds at' btcktd tsf lho lutt torc. trld .l{.ct ol thr tew.
Chapter 1
. Ei-1
EXERCISES
The exerciserequiresturo examplesof the inseparabilityof planningand contnol.Thrce are listed here, and the third one gives two illustrations: The most obviouserample of the inseparabilityof planningand controt is found in the definition of control: managementbslrstematic effort to achieve objectives by comparing performanceto plans and taking appropriateagtion to correct important differences.The definition shows that the specific results of planning anean essential input to the control phenoinenon;there cannot be any such thing as a control effort without reference to some set of plans. A second examplaof the inseparabilityof planningand control results from the fact that they are simultaneous'In practice, the implementation of the first steps of a plan, and any control action needed in those steps, are begun before all parts of planningare complete.Early results and the early findings of control activity can then be used in finalizing later parts of the same plan. An exampleis that a single annual budget is usuallynot completelyfinalizedbeforecustomer orders begin to be receivedlor that year, and considerationof the number of these actual customer orders may point to trends that need to be considered in of the early weeks and finalizing the budget. Even actual financial results'establistring months of the year can provide a basis for better the budget for the later portion of the year. The most elegantexampleof the inseparabilityof planningand control results fronr'the fact that both planningand control are complex humanactivities,and almost all complexhumanactivitiesare planned activitiesand also controlledactivities.In other words, planningcan be so compler that the planningeffort is itself controlled(and planned),and control can be so compler that control activities are themselves planned illustrations of this are provided as follows: {and controlled}.T\,rro (t) A case in which planningis itself plannedand controlledis when a complieatedbudget (plan)is to be prepared.To facilitate the creation of the budget,a detailedweeklyschedule(anotherplan)is first agreed upon, showing which steps in the preparationof the budget are to be carried out during each week. Because it is desired that the creation of the budget not be allowed to fall far behind schedule,the responsiblemanagerwill exercise control by making comparisonsbetween (a)the actual progress made on the budget each week and (b) the schedule.The managerwill also take some correctiveaction if the differencebetweenthe scheduleand the actual progressis consideredirnportant. (21 A case in which control is itself plannedis when a managerdecides what kinds of control reports will be usedto compareactuat resutts with plons in each future period of businessoperations.That decision, any efforts made to acquirea supplyof preprintedreport forms to be filled in each period, and any changes in the design of
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ChaPter t
El-1 (Concluded) the cost accountingsystemto captureand compilethe neededinformation about actuat results representevidencethat the future.controlactivlty is being Planned. El-2 (11 (21
B A
(41
A
(3)
(51 iOi .
E1-3 (11
(21
c c
B - although the time frame involved in this kind of plan may be extremely long, there is nothing strategic about this kind of plan or decision. ln flcti the plan and obligation to pay off the bonds when they come due is so routine that management would not consciously aPProach it as a decision. paragraph (bl comes closest to describing the kind of control used in maniging a business, atthough it is described in a nonbusiness setting. There is I plan lormutated in advance, there is a measure of actual resutts, there is a decision maker who compares actual results with plans, ihere is a selection of a corrective action to bring results closer in periodic conline with tae plan, and there is a foreshadowing of repeated trol activities (the remaining quizzes)' The fact ifrat ilre measures of ptanning and actual performance ane nonfinancial measures is not the governing consideration. Much planned and actual information used in controtling a business is non-financial' including some cost accounting infor:mationsuch as the number of units produced, the percentage of units that were defective, and the percentage of available machine time that was utilized' R-ragraph (a) is a perfect example of an engineering control' rather than the kind of control managers use in business. The simple device described, which is founi in any home bathroom, is the kind of control to device deiigned to monitor a physical condition, and so it is analogous "industrial of controls." or any of a varieiy of devices called ; th;r;;;Jt course, devices of tnis kind art used in manufacturing and other busithe nesses, but they do not possess the essential attributes of control in a sense used in business and in cost accounting. The device achieves continuous monitoring of the results, rather than a periodic comparison of results with plans, ihere is no human decision maker who selects a corrective action to be taken. A human decision maker is probably-the salient attribute of control in managing a business that is missing in paragraph (al.
Chaoter
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E1-3 ( G o n c l u d e d ) Paragraph(c}couldbeinterpretedasanexa m p | e othe f p | aword n n i n"cong,butit though
"ontiolGven tackssom! essentiarinntfris'ot rn"-te is no periodic comparisonof -moairyins senili""i. tast its in the treatment trol,,is used provisioi ioi actuarresuttswith plan" ;;;';; "r-".ple, the contractrequiresfive treatare basedon periodicresuttsleor are visible' The actions taken ments each year, even it no;";dt
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appriesto porice to the conceptof controrthat phvsicallvdeter-
ot being abteto prevent work and mititaryscienc;: ti;;;sts tocaiion-and being able to mine each event ttrat ocJu; il iot" pot""li"i use of coetcive fotee' which rn" certain events from o""rJring. kind of alwayspreient in achievingthis is very ctear in paragraprrrot, i, no inOi""tion tft"t resutts weneperiodicontrol. ln paragraph(d),ti;;'r" i" cattycompanedwithprans.lru|ethatsays.'obtaintheobiectiveatany cost"issometimesassociatedwiththeseactivities' -
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Chater t
CASES. cl-1 ( 1 } Y e s , W i | | i a m s h a s a-itanaards n e t h i c a | r e s p o n s i b i l i t y t o t states a k e a cthat t i o nmanase. of Ethicat Conducl d;'nilis to these standards nor ment accountantst'shall not commit acts contrary others within their shall they condonethe commissionof such acts by organizations.tt which standardshave been violated' but' ask ,l2l - ' r a t hffhe e r r wrequirement h i c h o n e s adoes p p l ynot toW lliams'situation')
(31
Managementaccountantshaveanesponsibilityto: cori-"i"n"": perform their professionalduties in accordancewith (Dumpingtoxic relevant 6n s, tegulations; and technical-standards' of law.) violation a generally wastes in a residential landfill is Confidentiatitv:Refrain from disclosing confidential information ""quffieoftheirworkexceptwhenauthorize.d.,u.n|ess tegitly obtigatedto do so (Williamsm€y be legallyobligatedto take action and make certain disclosures'! fnteqritv:Refrain from either actively or passivelysubverting the \ attainmeffi the organizationb legitimate and ethical objectives' (Williams,avoidancJot the issue woutd passivelysubvert attainmentof ethical obiectives.) unfavorableas well as favorable information and proComm-unicate fessionatjudgmentsor opinions.(Williamsis obligatedto report his unfavorable tindings to appropriatepersons') Retr?il tion, engagingin or supporting any activity that would discredit the professionl(lflitlia1ns'sitence would provide support to the activity and, ihus, could discredit the profession') dumping 'Obiectivitvi Disclose fully all relevant information that could reasonto influ"ncJan intended usefs understandingof the aory G eilffid reportS,comments,and recommendationspresented'(Witliamsshould disclose his lindings to the'appropriatepersons') Atternative(a|,to seek ttre adiice of his immediate superior, is appropriate. This is itri first step he is reguiredto take, unless the superior is involved. Atternative(bl, communicationof confidential information to peraons outsidethe company,such as the local newspaper,is inappropriate unlessthere is a legai obiigationto do so. lf reguiredby laq Williams should contactthe proper authorities. Alternative(c), contacting a member of the board of directors, would be inappropriateat this time. Williamsshould report the problemto successiveiytrigherlevels within the companyand turn to the board of directorsonly if the problemis not resolvedat lower levels.
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C1-1 (Concluded) (4)
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Wliams should follow the company'sestablishedpoliciesfor resolving such issues,if such policieserist. lf the issue is not resolvedthrough eristing policies,he shoutd reportthe problemto successivelyhigher levels within the company until it is resolved.ffilliams is not required to report this action to his superior if his superior appeani to be involved in the conflict. He is not to disclosethe matter to persons outside the organization,untess required by taw.)During these steps' Wlliams may clarify relevantconcepts by confidential discussionwith an obiective advisor to obtain an understandingof possiblecourses of action. lf tfie conflict is not resolvedafter erhausting all these coursiesof action' VWlliamsmay have no other recoursethan to resignand submit an informativememorandum to an appropriate representativeof the olganization. Consultation with one's personalattorneyis also appropriate.
c1-2 (i ) 61herequirement does not ask which standards have been violated' but' rather,which ones apply to the CFO'Sbehavior.) Management accountants have a' nesponsibilityto: ' CompLtgnce:Perform their professionalduties.in accordance with relevanttawC,regulations,and technical standards. ffhe CFO has asked Deerlingto account for informatlonin a way that is not in accordance with generatlllacceptedaccountingprinciples.) Preparecomptete and clear reports and recommendationsafter appropriateanalysesof relevantand reliable informatlon. [The CFob restrictions on disclosure will resutt in incomplete reports.) Confidentialitv:Refrain lrom using or appearingto use confidential informationacquired in the course of their work for unethlcal or illegal advantage,either personallyor through third parties. (The CFO is attemptingto use confidential informationto protect the fob security and bonusesof top management.| Inteqriw; Avoid astual or apparent conflicts of intercst and advise atl appropriateparties of any potential conflict. fThe CFO has failed to avoid a conflict of interest and has not informed the stockholders of the conflict.) Refuseany gift, favor, or hospitalitythat would influence or would appearto influencetheir actions.[TheGFO'sbonus appearsto be an influenceon his actions.) Refrainfrom either activelyor passivelysubvertingthe attainment of the organization'slegitimateand ethical objectives.(The CFOhas subverted the attainment of the organization'slegitimate objective, profit for stockholders,by pursuing,instead,the job security and bonusesof top management.) Communicateunfavorableas well as favorableinformationand professionaliudgmentsor opinions.fl'he CFOis attemptingto restrict disclosureof informationaboutthe acquisition.|
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C1-2 (Continued)
(21
Refrainfrom engagingin or supportingany activity that would discredit the profession.fihe CFO'sactions could discreditthe profession.) Obiectivitv: Communicateinformation fairly and obiectively. ffhe CFO is attetnpting to unfairly control the information reported, resulting in a rePort that is not obiective.) Disclose futty all relevant information that could reasonably be expectedto inftuencean intendeduserb understandingof the reports' comments,and recommendationspresented.ffhe CFO is attempting to restrist disclosure of relevant information.l fthe requirementdoes not ask which standardshave been violated' but' r:rther,which ones apply to Deerling'ssituation.) to: Managementaccountantshave a nesponsibility accordancewith in professional duties their Perform Comoltence: (Deerling is being relevantlaws, regulations,and technicalstandards. asked to violate generaltyacceptedaccountingprinciples.) Preparecomplete and clear reports and recommendationsafter appropriate analysesof relevantand reliable information. (Deerling is being asked to piepare an incomplete report.i ggg1iEe$bt6i Refrain from using or appearing to use confidential information acquireOin the course of their work for unethical or illegal advantageeither personallyor through third parties.(Deerlingmust not use the confidentialinformationabout the possibletakeoverto his own advantageor to that of the person(s)mounting the takeover attempt.) lnteqriw: Refuseany gift, favor,or hospitalitythat would influence or woutd appearto influencetheir actions.fihe last sentence of the case suggeststhat Deerlingis considereda memberof the top management gnouprso he may be eligiblefor a bonus.) Refrain from either actively or passivelysubverting the attainment of the organization'slegitimateand ethical objectives.(Deerlingis being asked to subvert the attainment of the organization'slegitimate obiective, profit for stockholders,by pursuing instead the iob security and bonusesof top management.) Gommunicateunfavorableas well as favorableinformationand professionaljudgmentsor opinions.(Deerlingis being asked to restrict disclosure of information about the acquisition.) Refrainfrom engagingin or supportingany activitythat would discredit the profession.(Deerlingis being askedto take actions that could discredit the profession.) Obiectivitv:Communicateinformationfairly and objectively. (Deerlingis being askedto preparea report that is not obiective.) Disclosefutly atl relevantinformationthat could reasonablybe expectedto influencean intendeduser's understandingof the reports' presented.(Deerlingis being askedto comments,and recommendations restrict disclosureof relevantinformation.)
Chaoter 1
C1-2 (Concluded) (31
(4)
tf the company has esta-blishedpolicies for dealing with such issues, Deerlingshouia first follow tAese policies.lf such policiesdo not erist' or if they aneunsuccessfulin resolvingthe problem,Deerlingshould present the problemto the chairmanof the board.Deerlingb immediate superioris involved,so he need not be informed of this action. lf the matter remainsunnesolved,Deerlingshould report to the audit committee, the board of directors, and finally the maiority owners. During these steps, Deerling may ctarify retevant concepts by confidential discussion with an objective advisor to obtain an understandingof possible courses of action. lf the conftict is not resolvedafter erhausting all these counses of action, Deerling may have no other necoursethan to rcsign and'submit an informative memoriandumto an appnrpriate repnesentativeof the organization.Consultationwith one's personalattomeyis also appropriate. The primary nesponsibilitytho company must tulfill betore taking defensive actions is its fiduciary nesponsibilityto stockholdens. Other responsibilities inctude the effects that the takeover and defensiveactions 3 would have on creditors, bondholders,empfoyees,customers' and the community.The company also has a nesponsibilityto inform its external auditorsand legal counselto avoid putting them in a compromisingposition.
c1-3 (f l ffhe requirementdoes not ask which standardshave been violated' but' rather, which ones apply to Dixon's behavior.) Managementaccountantshave a responsibilityto: Comoetence:Maintainan appropriatelevel of professionalcompetence by ongoingdevelopmentof their knowledgeand skills. (By systematically rejecting all minority applicants, Dixon is ieopardizingthe level of competenceamong the staff.) Performtheir professionalduties in accordancewith relevant laws, regulations,and technical standards. (Equafopportunity in employment is required by law.) Inteqritv:Avoid actual or apparent conflicts of interest and advise all appropriateparties of any potential conflict. (Dixon'spreiudice is in conflict with the company's legat obligatibn to provide equal opportunity employment,and with the companyfsneed for the most competentstaff regardlessof race.) Refrainfrom either activelyor passivelysubvertingthe attainment of the organizationblegitimateand ethical objectives.ffhe company's obiectiveof equal opportunityemploymentis being subveded by Dixon's prejudice.!
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would disRefrainfrom engagingin or supportingany activity that in hircredit the profession.(Such peristent, systematic discrimination ing coutddiscreditthe profession') have been violated' but ff[e requirementdoes not ask which standards Because management iather, which on"" apply to Foxworthtssituation.) accountantsmay noi condone the commission of unethical acts by the ;ihd *ig,in ttreir organizations,all of the responsibilitieslisted in solutionto requirement(1) also applyto Foxworth'ssituation. In addition,the followingaPPIY: Managementaccountants have a responsibi|ityto: ConfiJentialitv:Refrain from disclosing confidential information acquiredin the couor of their work exceptwhen authorizedrunless legallyobligatedto do so. (Foxworth'ssuspicionsabout Dixon'sbehavior should not be disclosedinappropriately'See requirement(3)). gbiectivitv: Communicateinformation fairly and objectively' (poxworttris oOtigatedto make obiective hiring recommendationsto biron, in spite oitris belief that Dixonwill be prejudicedin acting on them.) Alternative(a),discussionwith the director of personnel, who is one of Dixonb peets, is inappropriateat this time. lf, however,Foxworth betievesthe directoi bt personnel is an obiective pafty, Foxworth may discuss the matter with the director, confidentialln to clarify the relevant conceptsand to obtain an understandingof possiblecoursesof action. Alternative(b), informal discussionwith a group of MAD senior management accountants,is inappropriate. Alternative(cl, piivate discussionwith the CFO,Dixon's superior, is appropriate.BecauseFoxworthhas atreadyapproachedhis immediate superior,Dixon,who is invotvedin the conflict, it is not necessaryfor Foxworthto inform him of this action. Fonarorthshouldfollow the company'sestablishedpoliciesfor dealing with this type of conflict, if such policies exist. lf policies do not exist' or if they are-unsuccessfutin resolvingthe conflict, Foxworth should discuss ihe issue with the CFO.tf the matter remains unresolved,discussions with successivelyhigher levels of management,includingthe audit committee and the board of directors, should follow. During these steps' Foxurorthmay discuss the matter confidentiallywith an obiective advisor to clarifythe relevantconceptsand to obtain an understandingof possible coursesof action. lf the matter remainsunresolvedafter exhausting all of these steps, Foxworthmay have no recourseother than to resign and submit an informativememorandumto an appropriaterepresentative of the company.Consultationwith one's personalattomeyis also appropriate.
Chagter 1
t0
c1-4 {1)
12)
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ffhe requirement does not ask lor a list of responsibllities Rodriguezhas viotated, merely which of the fifteen responsibilitiesapply to his situation.) Managementaccountants have a nesponsibilityto : Comoetence:Perform their professionalduties in accordance with relevant laws, regulations,and technical standards. ffhe figures Hodriguel is being asked to preparemight amount to fraud in the loan application.) Preparecomplete and clear reports and recommendationsafter appropriateanalysesof relevant and reliable information. flhe reliability of the information is in doubt, and the fact that certain sales figures are or are not sufficient to justify the bank loan are not relevant to preparation of the budget) lnteoritv: Refrain from either actively or passively subverting the attainment of the organization'slegitimate and ethical objectives. (There is a push to subvert legitimate objectives to the immediate need for a bank loan.) Recognizeand communicate professionallimitations or other constraints that would preclude responsiblejudgement or successful performance of an activity. (Rodriguezhas not expressedto Czeistathe conflict between his desire to be a team player and his ethical responsibilities.) Communicateunfavorableas well as favorable information and professional judgements or opinions. (Rodriguezis being asked to report information that reflects so favorably on the company that lt may not be justifiable.) Refrain from engaging in or supporting any activity that woutd discredit the profession.(Preparinga deliberately misleading budget as ' part of a loan application could amount to obtaining mon-y by iraud.) Obiectivitv: Communicate information fairly and objecfivety. (Rodriguezfeels pnessunedto abandon his objectivity in preparing the budget.) Disclosefully all relevant information that could reasonablybe expected to influence an intended user's understandingof the reports, commentsrand recommendationspresented. (A comparison of the new targeted sales figure with the actual sales of tlre coresponding periods of past years would be likely to influence the bank's understanding of just how large an increase in sares is being portrayed.) Rodriguezcoutd have clearly stated his concerns to Czeisla at each stage of the budget's creation and revision. He could have consulted with the marketingmanagerand productionmanager.i "r.ry stage, rather than only upon receivingthe initial budget olata.He coutd present the budget, or a summa ry of it, in a comparative form to highlight the differences between each guarterts budget and the actual resutts of the coresponding quarter of the preceding year, and he could even
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C1-4 (Concluded) calcutate the percentage increase being budgeted and compare it with actual perceniage increases that were achievedannually in the past. He could have conJulted with his staff superior at the headquartersof Norttrwestern(the parent company)- Gzeislais his line superior' according to the second sentence of the case' In addition to his ethical responsibiliUesto CD, Rodriquezhas ethical responsibiliUesto: (a) The banks (b) The managementaccounting profession ffhe requirement does not ask for a list of responsibilitiesJones has vioiated, merely which of the flfteen responslbilitiesapply to his situation.) Managementaccountants have a responsibi||tyto: ConfiJentialitv: Refrain from disclosingconfidentlal information acquirEAin the counseof their work except when authorized, unless legally obligated to do so. (lf Jones accepts the consulting engagement with Crimson, lt is tikely she will be asked to disclose confidential SMI information about the desired computer system')' Refrain from using or appearingto use confidential information acquired in the counseof their work for unethical or illegal advantage either personalty or through third parties, [The size of the consulting fee suggests Grimson is seeking to buy confidential information to help win the job.)lnteqritv: Avoid actual or apparent conflicts of interest and advise all approptiate parties of any potentiat conflict. (The consulting iob would constitute an apparent conflict of interest and probablyan actual one' because Jones has been named to the SMI committee that will evaluate and rank all the proposats,inctuding Crimson'sproposal,which she would have helped to write.) Refrain from engaging in any activity that would preiudice their ability to carry out their duUes ethically. (The consulting iob with Crimson would preiudice Jones'ability to evaluateand rank the proposalsfor SMl, because one of the proposatswould be Jones' own work.) Refuse any gift, favor, or hospitalitythat would influence or would appear to influence their actlons. (Regardlessof wbether the size of the consulting fee is construed as being a gift or favor, lt Is likely that other gifts, favors, or hospitality will be extendedto Jones by Grimson during the counseof the consulting engagement) Refrain from either actively or passivelysubvertingthe attainment of the organization'slegitimate and ethical objectives.(SMl'slegitimate obiective of obtaining the best computer system at the best price would be subvertedto Jones' personatneed for money,as a result of Jones' disctosingcrucial informationfor Crimsonto include in its proposal, especialty if Crimson might not deliver a system with the crucial attributes.)
chaDrcrt 12
C1-5 (Concluded)
(21 (3)
(41
or other conRecognizeand communicate professionallimitations or sucoessful perforstraints that would precluJ" *=ponsible iudgmen-twould preclude mance of an activity. (Accepting-tfieconsutungiob proposalsfor SMI; on the responsibteiudgment in .rlfu"ting and ranking at SMI would the otheirr-anu,Lthicatllmitations-of Jones' employment for preclude successful performance of the consulting engagement lnformaleveal crucial Crimson,Liplcially li Crimson does expect her to prevent her from tion to fr"lp Lin ttre ioU-her ethical duty to SMI would delivering what Crimson is paying for)' disRefiin from engagin! in or supporting any activity-that would to a vendor credit ttre profession.(Sellingconfidential SMI information would be a discreditable act) (Jones Obiectivitv:Gommunicaie information fairly and obiectively. proposals lf would Ue unliLely to communicate obiective evaluationsof she had tretpeawrite one of ttrem') Disclosefully all relevant information that could reasonably be expected to influence an intended useCs understandingof the reports' the comments, and recommendaUonspresented. (JoneslPtt ln writing evalof her use Crimson pioposat would be relevant information in SMlts uations oi pioPosals.) or Jones might have disclosed, either orally or on her personal vita sheet SMI task force and iob application,the extent of her involvementon the the committee. Jones could have first investigatedall her caneeropportunities with firms that presented no potential conflict of interest of this kind, but for the sake of the arE,ument,it is reasonableto assume she did exactly that belore applyin! for a position at Crimson. Knowing that Crimson ls a supplier of computer systems, Jones might have revised her personal vita sheet and the wording of her application for this one iob interview to lessen the chances of Grimsonisbeing tempted to pursue an unethical plan. (Of course, her invotvementin SMt's upcoming purchase might have become known to Grimson anryay, or it might have been known to Grimsonfrom other sources before her interview or even before her application for the position.) In addition to her ethical responsibilitiesto SMI (and her financial responsibitityto the hospltal that provides treatment for her child)' Jones has ethical responsibilitiesto: (a) her family (b) the managementaccountingprofession (c) Crimson
I
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CHAPTER 2
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DrscussloN ouEsTloNs shouH preferably be avoided rr'hon rnak' hg relcrmce to Productbn coss(a) Orgattizatirr ccls arc tlnse cqsts that benefil the lirm for its entire perird ol exs' tcncs and aro most approprbtely classi' fiod ss a rsrcurcnt asset. When lherc is hilbl evijence that a firm's life is limiled' thc orgranizatbncosts Crould be allocalcd ovor the firm's lile a! an expeneo ot should bc amortized as a losg whrn a going conccm foresees terminalion. In praclice, however, orgranizalbn costs are oftcn writlen ofl in the early years of a firm's eristence. (5) Spoiled gods reaulling from normal menulacluring preessing shoub be lreal' cd as a cost of the prodwr rnanulastured. Whcn thc Producl is sold' tho cosl becomes an expongs. SPoiled goods rcrulling from an abnormal occurrenco shouldbe clrssilied as a kr-ss. a2-2. Cost objrts are unils for wlrich atr arrangement is mede lo accumulate and measure cosl. They are imporlant because ol thc need lor multiple dimensians ct dats (c.9., by produci' csltrasl" or departtnent) to accornplishthe varbus PutPoses of cost accounling, including cosl fhding' pbn' ning, ard contrcl. 02-3. (a) To ctassily costs as direst or indirct. the colt accounlanl musl lirst know lhe -Directly traced answensto lhe questlcns identified wilh and'lndirectly to what?' what?' Olherwise, there is no way lo assess the direct or indirect nature ol a cost. lt is the choice ol a cost obiecl lhat answers lhose lwo qugstbns. (b) For erample, lhe cost of a department's manager's salary cannot be cbssified as direct or indirecl without lelecting the cosl object first. lf the cost obiect is a prcduct unit produced in the manager's deparl' ment, thon the sabry is indirect. ll the cct object ir the departmonl, lhe salary is direcl. (a) The product unil, batch, or b is tho cost Q24. obiect. (8e careful about the lack cl cbrily of the term the product' when it is nol known whether il is intended to meen (a) a single unil, batch. or lol ol a Ptoducl. Bs oppced lo (b) any large number ol benti' cal unils. lt couH easily bc laken to meatr. say, Product 1321, as oPPosedto somo other item in the cornpany's catalog' ancl that could suggost the grand total ol ali identical pieces ol t321 produced during
CGt it lha curnnt nrnetary Yaluoc' @' nqnic tatou.cet givon uP or to bo givcn up in obtaining goodr and !'rvices' Ecgrqnb toloulE.! tnay bo given up by trandening cash or othcr propcrty, bsuitg capital stoih prrloming rrvbe, or ircurring liabilttbt. Coclc rrc classifird er unexpirod or at. aslet! and expired. Uncxpired sl! apply to tho produclict cl fulure r.venues. Erarnplet of uncrpired @sts at. invenlorira, prepaH exPent.E, plant and equip' ment. and invcstmcnts. Expircd corls' s'hi$ ngl costl bosnc eventually, are thosc that er. not applbable to tho pro' dus{bn ol luturr rcvonuos and are dodudrd lrom curtanl tevonues or charged agohst retahrd oamings. E:grncr in its broadesl gense hcludes expired catr; i.r., costl $'hich do not all havc any polential futurc cqlofiiic benelil A mar prrcire ddinition linits thc use cil the tcrm'axpcnlc'!o lhe et9ired cosls ariring from uring or con3uming goods and srrviccr in tho preesa ol oblaining rcvenuss: o.g.. co3l of goods sold and markelhg and adrninistrativeexpenses. (t) Cost of 9oo& soH is an cxpired cosl and may bc rclorred to ss atr erpensc in tho broad t.n!o of thc tcrm. On the incqnr stal.m.nt. it b most sften Uenti' ficd ar e co!|. lnvrnlory held lor sale which is destroyed by an abnotmal casual' ty strould be dssitied as a loss. (2) Urnollectble accounts exp€nse is usu' ally classilied as an exPenso. Howevcr, some aulhorilicr belicvc thal it is more desirablc to clasrify uncolleclibleaccounls as a direct reductiqr of sales revenuc (an oflset to rrvcnue). An uncollectible accounl whi:h was nct proviJod for in the annual adiustmcnt, such as bankruptcy of a maior drbtor, may be classified as a bes. (3) Dcprccialion .xpen!c lor planl rnachhcry is a corrpooent o{ factory overhead ard r.presrnts thc rectassifbationof a portlcn od thc mEdrinory cqsl to product cct (hventory). Whcn the producl ir sold, lho doprcciation bccomes a part of lho co$ ol gods rold which is an oxponso. Deprccbtian cl pbnt m*hinery durhg an unplannedatd unptoductive perir:dcl iClencss, suctr as during a slriko, should be classified as a lcs. The torm 'expense'
13
Chapter 2
14 lhc onliro product lilc eycb. Thr rignili' csnc. o{ lhb dbthstion it thal sstr. cGls. eucn s! product dceign' Ptotoqping, 8nd hilial worker trahhg' arc dincl codr with rosPccl to th. tolal of all unitc tvct ptoducod, bul ero indirccl with tocPesl to e eingle uil, bdch' or bl') (b) A diaaggrcaatkrnof ovcrhcad would be uselul for lny ltudy of lpw to brttlr rnan' l'o b' age cost!. or ol what cau!'s €tl incurrrd. Rolalivrly lrw ol lho coele incurrod.,ina factory arc causld by lhe rqrthe proargin ol ale npre unit of qte producl. (c) (l) A bstch of Henlical vnits' (2) Th. rum o{ all Uenlical unils cver poduced. (3) An activity or proco3s carried out in prroduclicr. (4) A gtoup or 'ccll' ol machinos and workerc wilhin a d.Parimont(5) A departmcnt in which production GUnS. (6) A plant or clher produclion facility. (7) A etratcgic Aoal ol lhe firm (1.9.' inprovod qualny). O2-5. A cost system ir a combinalim of prcedures and rccordc dnignrd to providc the various types of informEtiqr reguired in thr conducl o{ the enterprise;includingcosl lhdhg, planning, and cqllrol. 02€. A gnod hformatinn rystem_reguires lhe crtab' lighment of (a) long.rangr obicclivcr; (b) an organizationphn rhoing dclegated rreponsibil' itier in dotail; (c) ddailcd phns for luture opera' tbna, botr bng and rhod-lem; 8nd (d) preedures for implomcnlingand controllinglhese plans. A2-7. A charl of accountr ia ncccraary to clarrify accounthg data, ro that thr data may bc uni-' formly rccordrd in irumals and posted to lhe ledger accountr. 02€. Advantagcr of tho rlectronic data processing lyllem for rccord keeping are: spced. larger !torag., ringb rntry ol mulliplo transaclions. aulomalic conlrol flaturel, and f lexibility in r.port lonrlats. O2-9. Thc ldbrrhg poceived weaknessos wore monlined h lh. text (a) Tnditionel m.rrur.r ettompl to rcrvc rniny purp€rg, arrd ar a rcault lhey arc not univorrslly rcanrdcd ar srrving any qt. purp6. iJcally. ( b ) T r e d i t i o n a lm e a . u r . l a r o r l l e c t c d b y accannting ctroicor that arc rrl ahrayr rolcvant to lh. purpo.. al hard; cramples od thrsr clrobcs aro c6l flow agsumptisrs and arbhraryfircd et allocatixrs. (c) Traditionalmeesuro! arr calculated by sy3lcns lhat aro ueually sbw to rospond to cfnn ging srditiorrs.
Tndhbnal m.lrurot of plenl uliliz'atton c8n t .m lo ancourago orrrrutilizatbn of caPritY' (e) Traditional m.ltuto! of officirncy err cilton rcPorted b bl.. ato t@ 899m9ai.4 lrd rt. .rry b mbhlrrPrct02-10. Nqtthancbt pcrlonnerrr rn aaur.t rr. basod an rinplr count! or clh.r phyrical date rathor dala. thry !n uncqltun dlocat.d eunlhg nocird to tho grnrral fhrrcial rccounlirg rystrn, and thoy en cfrorn to rrflcl me sPecifb alp-t ol Prdorrnrncr. O2-11. Four rrampbr ol nonlinancial prrlormancc mcasunrs givcn h tho lort and the a.rpects of portonnancr hry mi1t'tl b. ustd lo nsrits, an (a) rcrap woighl .s r p.tc.nlag. of lolel shppcd wcigfiB lo rnslitot cffbiency of a pariicr.rlarlycllbioncy of matcrial prs.s, u8a€l (b) proccring limo er r p.rc.ntaP of total timc; to nsrita qade etlicicnry or inv.nte rY vclcitY (c) dbtancc rrcvcd by a unil while insUc thr plant to nutitc rinplifbalbn of a prarrs (d) ruggcrlicnr P.r y.rt P.r cmployoe: lo rrr itor rnPryea ilotvrmrnl O2-12- Tht cfiallcngr poscd by lhr ircrrasod inlcrcrl h ' nqrfinanciel pldornam maarBurcsir to defho broadly cnough lo rob thc cost accountanl't irctude rEr. rnasuror that arr nol preceded by dolhr signs and thst at ncl thi lo the financial eccqlnting !)rrlsn. Q2-13. Cctr an most co,lutbnly claroified borrd st lhcir rcbtictshP to (a) thc produci (a ahgb bstch' lctt' or unit of tho gmdorrrubo); (b) thc Yolurnr od Elivity; (c) tho manulacturing dcparlmcnts, Ptsca!.t. o6t c||ltoili s othcr aubdivbixts: (d) thc accounthg Pctii; (e) a Propecd decbirr, Elitn, or cvalualbn. O2-t4. lrdircct rnstedab an thco rnslorials nroded for tho csnplotion of lhc product bul whorc con' aumptict is eithcr so amall or rc cornplex that thcir trestment ar dirccl nralorialr would no( bc foasible. For eramplo, nailr uerd lo mako the product arc irdirccl malorialr. 02.15. lndirrt labor. in csltrasl to direct labor, b labor rrponded lhat doo not efbc{ thr cqrrtrustiqt of tho lhirhrd Produc.t.For or thr snpoilion orarnple. thc labor of custodians ie indirct labor. 02-16. (a) A cervicr dcpartmont ir onc that ir not diroc'tly cngngod in production, brtrlrrndrra a partbular t!rp. of rrybo for the bonolit od otrcr drpartmcntr. Erarmhr cf rorvbo dopartmonl! aro rrceiving, ltor.rooms, mainlenancc, timekeeping,payroll, and calelcria(b) Produchg dcparimentr clauify thcir aharo of rorvice departmrnl .xpcnr.t ar indirccl ovorhoadcp.nac8. (d)
:
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Cluptar 2
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t5 Cepital expcndilunr are irdended lo beno. lil nprt Oran ql. accounting pcricd. Thr oxprndiluru rhould lhoroforr br rccordrd by e cfrargr to an ac!.t ac@snt for dls' tin !o thc periodt bcncfiled. Fbvrnuo cxprnditurcr brncfil thr oporationc of |hr cunrnt perird mly. Thry rhould bo rocordrd by chargrr lo thr appmprialr ctp.ilta accounts. It e ccpilal elgcndituro ir irnproperty clar' rifird ar .n axpantc' 8tlelr, rrtainrd oamings, and hcsnr for thl perird will bo undrrstEted. In future pcrids, hqnr will br overstaled by any arnount thst would havr bcen arrpdiecd had thc epcndiluro born proprrly capitalizrd. Anrtr and rrtained eamings will bo undersialod st tulurc balanc. !h..13 by ruccoraivrly rrnaller amounts unlil the erct ha! becn fulty countebalrnced. lf a rovenuo elgonditurc ie improprrty capilali:ed, asset!. rclained earninS' and incqno for lhc period will br overstaled. lrsnc will bo underslated in subrcquent periodr as the impropedy c.Fitalized ilerrt b cfiarged to thr goratbns of thoc peri' ods. Agsets and retained earnings will cqrlinuc to be ov.rstatod in subscqucnt balance sheots by succesrively smaller
arnounlr until thc improperty capilalized ilom has bocn canplelely writlcn ofl. (c) Tho basic critrrkxt for classifying eutbys er rovonu. or capital cxpondituros is the prriod of brncfit. Thr amount ot detail n.cossary lo mairnah subsUiary rccotds. tfu rratcriality of lho ctgrnditurcs, and thc canrirtrncy wilh which vari
Chaotar 2
t6
gERCISES
E,.-l (rl 38 + 33 = 39 Prime cost convet:ion cost l2l Sg .31 = 94 variable cost (3) S * Si . ir = $io variable manufacturing (4) ii,oob fired + (Slo r 5oo)= $6'0oo co'st E2-2 ',({} $1o + $15 + 38 = $?1 convorcion izi $32 + $t o = $42 Primc cost i - i 3 3 2 + i . i o * i r s i $ 3 = $ 6+$5) 0 v axr 12'ooo) iab|ecost ioi (($sz+ ${o +g{5 + $6 i 1ssx 8,ooo)= $8{6'000+ $ 24'ooo.
= $84O'OOOtotal cost incurred with 12'OOO units Produced and 8,OOOunits sold
E2-3 First Method: Sa|es(tilg'95o'ooox85o/o|...............x.........
s16,957,500
Lcsr: variablecosts(irrrizr,o00 x 85chl"'$9'q1?'1?o 17r458,350 7t623tOOO COSTS...""tr"tt""t"t""t!t"t""tt"t' FiXgd OperaUngloss.-...
s
(5OO,85O)
SecondMethod: l st S ta p :
Variable costs s l 1 , 5 7 l ,O o o = .59 variable cost ratio l 9 A sales s l 9 , 9 5 O , O O O
2nd Step: $16 ,957,500 Salgg (tlt9r95orooo I 857o)..'........o""""""" L.ass: variable costs (sl6195715OOr .58).'... s9r835'350 17 14581350 Firgd costs .............,.............,.............!1623 |AOO OpgraUng
E24
1 2 3 4 5 g 7. 8.
. . . . . .
d b b 4 t c c I
loSs """"t""t"'o"""t'tor"""""""o"
s
(500,8501 -
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is sloo'ooo' E2i5 The cost of direct labor Par computer
calculated as follows:
'
Givgn)
$6ootooo -"t--l'rina aac:l---cost"""'o""""""""'"""' Total manufacturing 3OOtOOo(giVen) L,gssprimocost.....r...............o........."""" EquaIsovorheadGoSt....................t.........$3oo'o09
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COnVgfSiOn COSt..............................."""" Less overtlgad cost..,'...................o....."" EqUatS difgCt 1abOf ,..,....-o........-...............
b
l
$4OOtOOO (giVgn) 3OOtooo (calculated abovel SIOOtOOO
b
E24 :
calculated as folis Ttre amount of factory overhead cost per blade 93O0, lows: Total manufacturing cost'.'.""""t"""""" Lgss convgrsion cost"""'o"""""""'o"""' Equals dirgct matgrial cost.""""""""""'
b
b
Lee
Direst labor cost = 116of direet material cost = 1t6 x 3600 = $1OO Convgrsion
1
3l,OOO ( givenf 4OO (givenl
costtt"tttt"t""""tttt"ttttt"ott""
Lgss dirggt labor C(13t"""""""""r"o"""" Equatrsove.fieadcost..............................
s400 (givenl l o o (calculatedabove|
sitoo
as follows: E2-7 The direct labor cost per system is S200' calculated Total manufagturing costs """""""""""' Lgss
prime
Cost """""t""t"t"tt""""tt""t'
Equals overfi gad GoSt""""""""""""""" !
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ConYgrsion cost.........t"""'i"to"t"""t"t"" Lgss overhgad cost o'..""'r"'o'o"""""'o""' Equals dirgct tabor cosl..'.......r...""""""
S1,00O (givenl 8oO (givenl s 200 gAoO (given| 2OO (calculatedabovel
Szoo
Chaoter 2
t8
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Ez-g The ampunt of faetory oyerheadcost per machino is $1'5OO'calculated as follows: Total manuf-acturing c95t......,....r....'.......r Lgss conversion cost..,.......r.......,.,.......... Equatsdircctmatgrialcost......-.-'.".........
S3TOOO (given) 2,.OOO(given)
L
SITOOO
Direst lalor Gost = 112 oI direet material cost = 1 1 2r $ l '0O0 = 95OO .... $2'OOO (given) 5OO (calculated above| Lgss dirgct labor cost.............................. E q u a l so vg rh g a d co S t.........i.......r ............ Sl15OO
Conversioncost..
E2-9 (1)
The.rclevantcost obiects are: (a) An item of mErchandise. (bl The use of a bank credit catd'
(21
lt implies that cash-payingcustomers are paying a part of the cost of the banks'fees for processingcredit card transactionsrbscause these fees are paid by the merchant who then necover€them in the form of slightly higher prices for all melchandise,
(3)
The competitive implications anathat the prices paid by cash customens are too high to be competitive with the prices chargad by merchants who deal only in cash, and the prices paid by customensusing bank credit cards arp too low to reflect all the costs of a credit sala.
(4)
The raason lor not reducing all prices and charging extra for the use of a credit card is because of the psychological effect of an extra charge. To customsrs, lt sounds like a penalty,as If the merchant wants to discourage the use of bank credit cards. A discount for cash customers has a positive connotation,even if prices marked on menchandiseare higher to begin with. Raisingall prices and offering a cash discount yields the aame net rsvenue as leaving prices alone and charging extra for using a bank credlt card, but the former method feels better to the customer than the latter.
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Thc rolovant cost obfecta arr: (al A repalr. (b) A PlckuPand daflvery JTRSb r€palr pricor Include an sllocaUonof thc cost of picking up and dallvering traAors, ln addlUonto thc cost of thc rtpainl' administraUvo coata, markeUng costs, end profll CompeUtont rcpair prices raflect only tic cost of the llpalrs, adminlgtrstlve snd marko$ng costs' and profit. GompeUtort 8hould bc ablc to prlcc thclr rcpalr rcrvlces lower, because tSey do not have to reflect plckup and dellvery costs in repair prices.
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OVgfh gad...............o......o....o.o..ro.........o............."r
Gonvemioncogt.. (21
s
Dlrect lebor Variable factory overh ead
$11
aaaaaoaaataa
sl2
Dlrect matoriaf 0umberf DirOgt
2
1abOf...o..r...o......r..r.......rrr.r......r..o.........o.o.....ot.......t..to..t
Prime GOSI...............r..............
a aa laaaoal
a a
sl2
(3)
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Dlrect material 0umberl ...'.........o'....... Dlroct labor Variablg factory ovgrfieSd .........o.........r.............'..........oo.......'.
Variablemarkoting Total variable cost.
aaataaaaaaa
2 5 1
s20
Chaoter2
20 E2-11 (Goncluded) (5)
Total cost
= total variable manufacturing cost
+total variable marketing cost + total fixed cost
2,OOOr($12+32+$51 +lrgOOr$1 + 2,OOO'x ($4 + $3.50) = $ 3 8 ,OOo+ $ l '9Oo + ${ 5' 0oo = 55419OO
r The volume used here to catculatetotal fixed cost is the 2'OOo-unitvotume levol that was used originallyto calculate the amounts of fixed costs per unit, as stated in the data given in the exercise.The 2'OOOunit tevel of production stated in requirement (5) is not the reasonthat is used here to calculate total fixed cost' 2,OOO (6)
The data indicatethe bookcasesare made of lumber,and some examples of the indirect materials used in making wooden bookcaseswould be glue, sandpaperrand nails.
rr)
An estimate of costs referred to in the answer to requirement(6! would be inctudedin the variablefactory overheadof 55 per unit.
E2-12 Factory overhead = Total manufacturing cost
113 x prime cost, so:
=
prime cost + factory overhead
=
prime cost + (113x Prime cost)
=
4i:3 r prime cosl;
muftiplyingboth sides by 314gives: Total 314 x manufacturing = cost 3 l 4 xS 2 O,OOO = $ 1 5 ,OOO =
314x 413x prime cost 1 x pr ime cost pr im e cost.
Prime cost ..................... Less direct material cost....... Diroct labor cost.......
s15,OOO 12,OOO(given)
s 3,ooo
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Ctuotar2
CASES
c2-1 (11
follows: The percentage profit margin will be 82.5oh,calculated as s€!.o0 t
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Rgvenugs (92 r 4)..............,,o........................ Cost of iuice (S2o r 4| .....'....""""t"'r""""" Cost of ong de|ivery """""""""x""""""t"" Profit
s.80 .60
1.40
s6.60
...............ro....,......................o.......r.......
= 8.2'5oh' Percentage profit margin = 36'60 profit divided by SB revenue
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(21
The percentage profit margin will be 6ooh,calculated as follows:
Revenues(S2r 1!
I
!
Cost of iuice (S.2or 1) .....'....-............'o""o"' Gost of ono dglivery ..'...""'o""""o"""'o"""o'
L
PrOfi t ..o................."'o""'r""""""""""t"'e""'
s2.o0 s.20 .60
.80
sl.20
= 609/o' Percentago profit margin = $1.2Oprofit divided by s2 revenue
!
(3)
The manageris treating the menu item as the cost obiect, for erample' one glass of orangeiuice.
L
(41
the The rpfinement of the definition of cost obiect that would result in the obiect' ptanned profit margin is the use of two different kinds of cost Item and the detivJry,which can be priced separatelyat S.8Oand $2'4O' respectively.
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Chaoter2
z C2-l (Concluded)
(5)
profit margin For an order consistingof four gtassesof orangeiuice, the will be 75e/otcalculatedas follows: +
(92.4O
2 .40 $5.60
X 1)..tt"tt""""'i""""t"t"""t""t"'o"'
Cost of iuicg ($.2OI 4) ."""""""""""t""""' Gost of ong dglivgry .........--....-..........o...o.r."' PrOfit
s3.20
($.8OX 4).........'...
Revenues:
9.80 .60
...t....aaa......a....a.t""t""""t"t""""t"o""t'
1.40 9{.20
Percentage profit margin = 90.2o profit divided by $5.oo nevenue = 75oh. For an order consisting of one glass of orange iuice, the profit margin will afso be 75oh,calculated as follows: RgVgnUgS:
($.8O X'l)............r............r.o....................ot'
+ ($2.4O X 1) ..............................................t..
$ .80 2.40
$3.20 COSt Of !uice ........................t...........o.."o""tt'
Cost of ong delivery .............................o......' PrOfit ........o....t........
9.20 .60
.80
s2.40
Percentage profit margin = $2.4O profit divided by $3.2o nevenue = 75oh. (6)
The food seryice managerb plan allocates the delivery costs over an arbitrarily selected number of items (two). This plan would result in highor-than-planned pnofit margin pencentageson noom servico orders that contain more than two items, as demonstrated in the answer to requirement (t). Prices on these olde6 would be higher than those of a Gompetitor wlro traces costs mone carefully to cost obiects and sets prices sccordingty. The plan would also result in lower-than-planned profit margins on room service orders containinE only one item, as demonstrated in the answer to requirement (21.Prices on these orders would be lower than what is needed to achieve the target profitability.
I
L
l
tI
I
Clppter2
I
c2-2,
23
l-
(il
The cost objectstor which somo amountof cost is identified in the case, and tho amountof cost idenUliedlor each' ate: (al A new productvariationr Zsggo (whichmeans all units of Zeggo ever to be producodl'S25O'OOO. (bl A batch of Zeggo'S1'OOO. (cl A unlt of Zeggo,$5 + $1O= $15. (Notlcethe $1o indirect cost amountIncludesall Indireetproductioncostsr so it must include the , $1 amountstated in the problem,alongwith an allocation or averaging of the $1r0Oo-perbatchsetup costs,a shar€ of the S25O,OOO cost amount,and a sharo of any other indirect manufacturingcosts. It would be double-counUngto add the $1 and arrive at a total of $16 per unil|
(21
The other items mentionedin the caso that could serve as cost obiects, and a purposoeach one could sorv€rano: (al CCNCompany,which is the relevantcost obiect when external financial statements are prepared. (bl The assemblyline on which Zeggoand other products are to be produced.This cost object would be relevantin a decision on whether to discontinueproductionof all the products producedon the particular line, or a decisionto shut down the line and shift its production to other lines due to a redustionin customer orders.
(31
The totat "o.t erpected to result from producingthe first batch of 3oo unlts of Zeggois:
l b
L I
! l b
L
L I L
t
L I
Cost accounted for as direct cost of a unit....,..... Cost treated as indirect by the CCN s1ctem........
E
I
$
5 1
S
o
x 3OO units
l-
s1,8OO Add: setup cost \,
I
Total
Co*.....r........r...................r.........o....r.....rr.rr.
1 tOOO
s2,8oo
(41
The cost erpected to result from producing ono mone unit of Zeggo is 35 +$1=36.
(5)
For the first batch of 3OOunits, the CCN cost accounting system will report a cost of: (35 direct cost + $1o indirect cost allocation)x 3oO units = S15 r 3OO= s4,5OO
b
I
...r..o.r.......r..tr.......
i
t-
L CHAPTER 3
I L
iL L I
I
!
L
L I
b
t I
v I
L
I S
I
!
I t b
DISCUSSIONQUESTIONS The total dollar amount of a fixed cost is constant at difrerentlevels of acttvity within the relevant range, but fixed cosl per unit ot activity varies. In confasl the total amount of a variable cost varies al differeil levels ol acwity, but the variable cost p€r unit remains consEnt wilhin lhe relevant range. A semivariablecost contains both frxedand variableelements.Consequently, both total semivariablecost and semivariable cost per unil vary with changes in activity. Q3-2. The relevant range is the range of activity over which a fixed cost remainsconstantin tolal or a variablecost remainsconstantper unit of activity. The underlyingassumptionsabout the relationshipof the activityand lhe incunenceot cosl change oulside the relevanl range of activity. Consequently,the amount of fixed cost or the variable cost rate musl be recomputedfor aclivity above or below the relevant range. O3-3. The fixed and variable componenlsol a semivariable cost should be segregatedin order to plan, analyze, control, measure. and evaluate costs at difterent levels of actMty. Separationol the fixed and variable componenlsof semivariablecost is necessarylo: (a) compute precleterminedtactory overhead ratesand analyzevariances: (b) prepareflexiblebudgetsand anatyzevariances; (c) analyze direct cost and lhe contribution margin; (d) determinelhe break-evenooint and analyze the etfect ot volume on cost and profrt; (e) compule differentialcost and make comparative cost analyses; (f) ma(imize short-run protits and minimize short-rundosts; (S) budget capital expenditures; (h) analyze marketing profitabilityby terrilones. proclusts,and customers. O3-4. The obvious advanlage to using managerial iudgement lo separato fixed and variable costs is expediency,i.e., il requires less time and is, theretore. less cos0y than the use of any of the three computational methods. The disadvantage is that the use of managerialjudgementto sepl_ rate fixed and variable cosls otlen results in unreliableestimatG qt cost. Cost behavior is nol always readily apparenl lrom casual observatron.As a conseguence,managersotlen err in determiningwhelher a cost is fixeclor variable and frequenily ignore the possibilitythat some costs are semivariable. O3-5. The three computationalmethods availablelor separattngthe ftxed and variable componentsof O3-l .
25
03€.
03-7.
o3-8.
O3-9.
semivariablecosts are: (1) the high and low points melhort: (2) lhe statistacalscanergraph method; and (3) the method of least sguares. The high and low points method has the advanlage ol being simple to compute, but it has the disadvantageol using only two data points in O|e computation, thereby resulting in a signilicant potential lor bias and inaccuracy in cosl estimates. The scanergraphhas the aclvantageot using all of the availabledata. but it has the disadvantage of determiningthe fixed and vanable componentson the basis of a line drawn by vGu. al inspection tirough a plot ot the data, thereby resulting in bias and inaccuracy in cost eslimales. The method of leasl squares has the a d v a n t a g e o l a c c u r a t e l yd e s c r i b i n ga l i n e through all the availabledata, thereby resulting in unbiased estimatesof the fixed and variable elements ol cost. but il has the increased disadvantage of computationalcomplexity. The $2OOin.lhe equation,referred to as the y inlercept, is an estimateol the tixed portion of indirect supplies cost. The $4 in the equation, referreclto as the slope of the regression equation, is an estimateol the variablecost a:isociated with a unit change in machine hours. These estimates may not be perlectly accurate because they were derived lrom a sample ol data that may not be entirely representativeof the universe population,and because activities n o t i n c l u d e di n t h e r e g r e s s i o ne q u a t i o nm a y have some influenceon the cost being predicted. The coefficienlol correlation,denoted r, is a measure of the extentto which two variables are related linearly. lt is a measure of lhe covariation of the dependentand indepenctentvariables. and its sign indicates whether the independent variable has a posiliveor negative relaUorshipto the dependent variable.The coeffcient ot dstermination is the square of the coeffici€nt of correlation and is denoted F. fne coefficientof d6termination is a more easity interpretsd measure ot the covariation than b the coefficient of conelalion, because il represents the percentago of variation in the dependent variable explained by the independentvariable. The standard enor of ihe estimate is defined as the standard deviationabout the regression line. tt is essentially a measure ol the variability of the aclual observationsof the dependenl varaable from the points predictedon the regression line. A small value lor the standard eror ol the estimate indicates a good fit. A standatd errcr ol zero would indicate a pertect ft, i.e., afi sctual observationswould be on the regressionline.
Chapter 3
26 03.10. Hotuoscodssttcitymcrn:i t|d tha distibulbn ol observationsaroundthc rogrcrsionlinc is not unilormlor dl valuesof thc indcpcndonlvariable. tf hetaroscedasticityb prcocnt. thc denrlard eror of tp Blimde and confdcnct intlr' val catitnd63,btsed on thc Etmdsrd 3fior, lre unreliabhtnolsuros. 03-11. Serialconeladonmourt thd rdtcr tlun bcing random,the obsenralionsarcundthc rcgresion line are conelatedn'l$ onc ltlcfficr. ll ecrid col' relationb prssctlt thc stlrrtttd cnor of t|c 6ti'
O$12.
malt tnd coflfidcncc intervai cstimltes. blsed on thc Etandlrd olrotr atc unrcliabb molsuros. Muldcollinaarity moatrs f|at two or moro of tho
Indcpendent veriables in a mutliple regrassion andFb aro conohed witfi one anodtor. When thc degrcc of multicollinearityis high. the rela. lionship bctlloon onc or moro of tho corrol8led indcpcndont vadables and the depondonl vati ablc may be obscured. However, this circum' clt lcc would normdly not aflecl the astimate of cost
I
I L
I
t-
L
L
Clppter 3
z/
I
E)GRCISES E3-1
L L
High ........
Cost
s]ivitvlgv"l aata
aaraa
a taaa
aaaaa
a
s1,3OO
21600 hours 2,1OO _5Og
hours
1, 1 O O
9__399
variable nate:s2oo -r 5o0 machine hours = $.40 per machine hour
!
L TOtal COSI.........................
Variablecost: $.4o x a6o0 hours ....,....,.....
I
L
High
Low
$1,30O
sl,1OO
I,O4O
$.40 x 2rl O0 houns ...............r.........r.............
L
Fixgd
cost...'.......r..........r.'..rr.......r.r'...r'........r.......
840
s 260
s 260
E3-2
L
$lroo0 s900
IL
Saoo F
o
3700
(,
3000
o
i
t
o
lrf J
i L
G g 3
o
3500 $400 3300 !3200
I
l-
$100 30 800
I
l-
I
$757.s0
l-
350.O0 $407.50 S4O7.5O average totat variable cost
5,87s total direct tauorffi
= 5.6936 variable cost p", direct labor hour
Chapter 3
28
E3-3
r - x ( x r x ) ( v r Y ) _ 8 7 , o o o_ s 6 o
g
-
-
1'450
x(xr - r)2
a - 9 - b, - $1o,ooo- (Soox 125) - $z,5oo Travef and entertainment expense tor 2OOaales calls would be: + b x r - $ 2 , 5 0 0 + ( $ 6 0 x 2 O O c a l l s -) S 1 4 ' 5 O O !i'-a E3-4
(5) (4) (3) (x -i)2 x F-A v Machlne ActMty Gost Electriclty Deviation Hourc Devlatlon (!l-squared Gost 36,1O0 190 ?,790 tg0 Janu3fl..'... $ 1 , 6 0 0 6,4OO 80 2,68O to 1r510 February....
(21
(1)
MSFCh'........ April ...'....o.. M?!.......r.... Jllll€...........
v-n
1 ,5 O0 1 ,4 5 0 11460 1r52O 1 r5 7 O 1r53O 1,48O 1r47O 1 ,4 5 0 1 ,4 6 0
JUI!............ A u g u s t . ..,... September. October.,'... N o v e m b e r.. D e c e m b e r.. T(ltal ....." _sl8,oo9
o Fo)
(40) 20 70 30 (20) (30) (50) (40)
o
2160O
2,50O 2F1O 2161O 2r750 2,7OO 2,53O 2r52O 2r49O 2r52O 31.200
,
- 2 y + n - $ 1 8 r o o o* 1 2 - $ 1 r 5 0 o
,
- X x + n - 3 1 r 2 O O* 1 2 - 2 , 6 0 O
Variable rate (b) -
:(x - rXY - t) r(x - i)2
o (1oo) (e0) 10 150
too rfo)
IO'OOO 8,10O 100 22r5OO
to,ooo
(801 0
!e3.0oo
(1ro)
Column 5 total
= $1,5OO- (S.44X2'6OO) = *t56
o
4r9OO 6,4OO 12r1OO 6,4OO
(80)
c o t u m no t o t a t
F i x e d c o st (a \ - y - b x
.
(6)
a -nv-n (a)x (21 19,OOO 800
o
5,OOO 3,6OO 200 1O,5OO 3,OOO I,4OO 2r4OO 515OO 3r2OO s,600
54'600 - g.4.4 123' OOO
29
Ctwpter3
E3-s
x(rr -x)(vr -y)
f -
1,5ff_
'-ffi-'92
J(sso)(s'ooo;
ffi-y)' r2 -(.g2)z -.8464
E3-6 (11
ly-n
v ailpplng Erpcmc
Month
Jenuary-. Fcbnnry -
I 600 OOO COO 680 570 6ltO 600 OIO GsO G2O 6il0 640
Mtl.rch -..... Aprll...-....., Mry.*......., Juoa---.. July..--.-... Augurt --Scptcmbcr. Ogtobor--.. Novcmbcr.. Elccambor.. Totel --..
373OO
j'-Iyi
l2l
Expcnrc Dcvlrtlonr (40)
o o (201 (301 (60) (r0) to 50 20 30 .lo
o
(31 x Sdcr Bcvcntr 3 201600 3O,OOO
(4)
F -a
(51
I -712
(81 -tl -AV V
ct) tv -r12
(a) x F)
(2lSquared
I4O,OOO
l1600
ActtvttY Dcrvlrttonr (4}Squrrsd (3rEOO)
20rooo 2qooo (aooo) (lrOOO)
12i2j,O,OOO
o o 40,ooo 4,oo0rooo ITOOO,0OO
27,OOO 25,^5OO 30,OOO 33r0OO 35,OOO
(3,OOO) 0,OO0,oO0 0o,ooo (+5OO) 2O'25O,OOO ?'2SrOOO 0 SrOOO I,OO0TOOO 3OTOOO
3aooo
4TOOOTOOO
30,5OO glr50O
5,OOO IOOO 500 3,500
o
8t]60.ooo
Z,,OOOTOOO 25O,OOO 4OTOOO
2!lgr@0 l5,ooo laOrOOO 12,25,O,O0O 07.ooo.ooo 97o,ooo
+ f t - $ 7 r 2 O O+ 1 2 - $ 6 O O
- xx + n - $3601000 + 12 - $3o,ooo 97O,OOO
J:(r t - i)'z(y, - Y)' rz - (.9 3 9 )2 - .8 8 2
Xl lrooo) [9?"ooo,ooo
-.939
o o 400 900
2,5o,o,
roo loo 2,50O 4(,0 000 1,OOO
t 1.o(x)
Clpoter 3
30
E3-7
(11
l
>(rr - i)(v t - y l
t
2,1OO
.',/( e,zsoX I,ooo)
x ( r r - ; ) z z ( vt
=.96
rz=(.98Y=.9216
l2l b -
(3)
|
x ( r r- i X v r - 9 ) x(rr - i)'
-\r1+tl
i'XXl
+Jl
2r4OO 6,250
tt,384 varlable malntenance cost per machlno hour
- t35Or0OO* | o - $5 'O0O - 4 O ' O 0 0+ 1 O - 4'OOOhouru
Slnce 9 - a + bi, then: a-g_bX a - $5rO00 ($.sar)(4,ooo ) a - tl5rooO $ 1 ,5 3 6 a - $31464
E3-8 (1)
For elsctrlclty cost and dlrost labor hours:
I(xr -r)(vr -y) f t
(rt -i)'z(yr
5,7OO
. |oH -.e4e7
7,OOO
- +f33-.88o5
-y)'
ra = (.9497F =.9O19
(21
For electrlclty cost and machlne hours: l t
x(rr -i)(vt -v) x(:r - i)'z(yt - v)'
)(r,264) J(so,o0o
ra=(.880512=.7753 (3)
ln ttrlr e88€, dlrest labor hours shoutd be chosen as the approprlate acthrtty meaauno to be used In predletlng electrlclty cost because the cocfilclent of determlnatlon (ts = .9O19)lc hlgher than that for machlne hours pa = .77531.
31
Cluptor3
E3-8 (Goncluded) (4)
>(r, -x)(vt -y)
b'
x(:r - X)'
_
variable electriclty 5r7OO - $.2O cost rate 28,5OO
Slnce I - a + bi and 7 - ZYr + n and f - X x t + n r t h e n : a ' ( z f t * n ) - D ( x rt * n )
+ 2o) s - (42,ooo+ zo) - (.zo)(rao,ooo
a - 2t1O0- (.ZOx9,OOO ) ? - 2tlOO - 1,8OO- $300 flxed electriclty cost
E3-9
(rl
l2l
It Astual .Labor tltlllty Month Cost Hourc January .........r........ 2,65O $ 3,600 X1
February ..r.............t
4rOOO 3rOOO 4,OOO 2r9OO 3r8OO 2,8OO May.. 3r7OO 2r7OO JUng ......r.r.......r...... 2,55O . 3r5OO JUI!...............r..r..r... 3,OOO 3r9OO AUgu8t ......r............. 3r3OO 4,1OO SeptembrBl...,.......... 3r5OO 4,5OO OctObor ............r..... 3r2OO 4r2OO l{ovombgl ..r............ 3r05O 4r30O Docgmbg1............,.. 3r35O 4,40O TOtal ....r.........r...! 36,OOO $4g,OOO March ..........r.......r.. AFd1........................
"'-
{
>(y,-y',)' n-2
(3) lyi=a+bx) Predicted UUllty Cost $ 3,650 4rOOO 3,9OO 3,8OO 3r70O 3,55O 4rOOO 413OO
4,5OO 4r2OO 4,05O 4,35O $48,OOO
Column 5 total
(4)
th- vil
Predlctlon Error (2) - (3)
(sol o
(s) lh - til2 (4) Squared $ 2,5OO
o
100
l O,OOO
(1oo) (2oo)
215OO 1O,OOO 4O,OOO
o o (so) o o
250 50
o
o o
o o
62,500 2,500 $13O,OOO
/$l30,ooo - G 5 11 4 . O 1 8 11 10
Chapter:
32 E3rlO 6 t -
il(v r - y'r)' n -2
The g0 percent conlldencelntervalestimate at the 1'SOo-hourlevel of activlty would be:
.;-
r
Y t - t m X S r i l + :n
I
( x r- , ) ' >(x,-i)t
(t'uotlu;#?oo )' . . ssoo=(t.tztXsoz ){, # S5oo- (1.771X$ez)ffi 35oO; (1.771X$62 ) X1.1547 $ 5 O Or $ 1 2 6 . 7 9
'.
33
Ctvptar3
PROBLEMS
lb
P3-l
(r)
Coefllclent of corrtation and co€fnclent of determlnation between: {a) TFaveloxpsnses 8nd lho numb€r of calls made:
L
Travcl Erpcnro
3 3rOOO Jrnutty---. 3'2OO Fobnlry.-.... 2'8OO Hfrch-F€-. 3rOO Apdl*---. qtOO il!f-qzOO Juno -July...-....--. agOO 3F3OO Arilu.t.*-. 3'5OO Scptrmbor.-. 3r.fOO C)GtoboJ---. Nolrrnbor..-.. 3'2OO 3r4OO Dccamber...... Tltll
......--
l -
x
V-n
v ilonth
(31
l2l
ll)
({) F -a
Aemty Dcvlrdonr ({l Squarcd (A)r (21 €l-Squt-d aO,OOO 6,000 (301 900 410
Cellr Erponro DevlaUonr iladc
12oo) o (.too) (1oo) o (3ool loo 300 200
o o
(60) 20
lro) 10 (50) 30 & 60
:6.280
x(xr-x)(vt -r) x ( x r - , ) ' z t yt
:
400 3rOOO 400 100 100
d5;7u
fz - .8957
-.9464
o
tOOTOOO 40 OOO IO'UOO
o
o 0orooo lorooo
12,OOO
9O,OOO
o
l0,ooo o
40,ooo o
20
.loo
4,OOO
4OTOOO
0
_l-g,4oo
: 79.OOO :
a5oo 900 l1600 2r5OO
520,OOO
6 total Column 5 total )(Cotumn 7 total ) 79' OOO
J(tg,4oox52o,ooo) i6'968'OOO'OOO 79.OOO
o
2{'OOO 4,OOO 1,O@
l5,ooo 3'OOO
o
aoo
200
E3&l!99
tm)
120 380 400 430 450 390 a70 .180 .l90 40
200
7 9 ,OOO
, '
(6) m -# -D -49 tu F
{5) g --rf
34
Chap@r 3
P3-1 (Concluded) (b)
Travel expenses and otderc neceived: (r) (31 (4) t2l v x F- i)
Tnavcl Erpensc
u-n
Erpsnsc Ordcrr Achrtty Deviations Rcceived Dcviatons
January...... 3 3,OOO February.... 3,eOO Marlh...-,.. aSOO April ...-.--. 3r4OO May....-..-. 3,1o0 June........... 3'2OO Ju|y..,......-. 2,gOO August....-. 3,3OO Septembcr. 3,SOO Octobcr...... 3,400 Xovembor.. 3eOO Dccember.. 3r4OO Total.-... g?8.40O
o (4ool 200
(ro0)
tt 53,OOO 65,OOO 48,OOO 73,OOO
oaooo
0 (3Oo) 100 300 200
67,OOO 60TOOO 76rOOO 82rOOO 6210OO 64rOOO 80,OOO
o 200
o
s7s2o99
x(xr- tXvr - y)
J:(',-;f;G:ry
l -
G
(200)
(s)
(6)
tx --xf
tr -rw -h
{4) Squarcd
ttl
tr --y*
(41x (2) (2)Squared
(t3,oool l69,OOO,OOO 2,600,000 4o,ooo (t,ooo) ITOOOTO0O 0 O (r8,o0ol 324'OOO'OOO7,2OO,OOOl60'000 TrOOO 4g,ooorooo 1,40O,(X)O 4O,OOO (4,OOO) I6,000'000 4OO,OOO lo,ooo I,OOO I,OOO,OOO O O (6,OO0l 30,oooro0o lrSoorooo go,ooo lO,OOO too,ooo,ooo I,OOO,OOO lO,OOO
torooo 2sETOOOTOOO 4,goo,ooo (4,O00) (2,OOO)
t4,ooo -9
9O,OOO t6,000,000 (goo,ooo) 4O,OOO 4,O0O,OOO o o tg6,ooo,qoo 2,8OO,OOO 40,OOO
1..'168,000.000 2t,2oo0gg
g3o,oog
6
Golumn 5 total)(Colurnn 7 total )
2Tr2OO|OOO
-
r /( l ,r6 8 ,OOO,OOO X 5 2 O,OOO ) 21,2OO,OOO
r--8GO2 24 16441675
r' (2'
)
- .7399
Perfect direct corretation would be evidenced by a of one' The coefficient of .94il neyealed in (lXa) coretation coefficient is closer to one than the coefficient of .8602 in (l)(b). This means trat the variabte portion of t'vel expense Yaries mone directly with mov.-"nt" in the number of calls made than with the value of orfoers received. To exptain this further, the relative coefficients of determination are obtained by squaring the coeffi_ cients of correration and expressing the ""=*.i.s a pencentage in each case. The coefficients of determinalion are ag,ii oh torcarts made and only 73'99o/o tor ordens received. This mea"= irt"t approximately goohot the movements in the variable portion of travel "tp"r=" are retated to fluctuations in the number of ca[s made, ,no itr" remaining 1o% of the moyements are related to other factors.
I
L
tIL
L L I L
L L L L
35
Clnpter 3
P3-2 (1)
(r) v Suppllcr Co.t
Month
January.-... 31r5O5 l'395 Fcbruary.... 1't65 Mrrth --.... tr5l5 Aprll --...-.; f Moy............ r45 tralS Junc..-....... 1rf65 July-.-..--. IFOS Arguet.--. Scp,tcmbcr. 1'576 11535 Octobcr...-. f i6OO NoYombcr -
Dcccmbcr.,__-!f99 Totel......9!8,rU
(21
v-n
Cost Dcvlrdonr
I
!
b
b
I
lI I I l-
(41
x
F-a
L-abor Houn
Acdvlty Dcvlatonr
0 {4o0}
(roo)
80
SrOOO 4r6OO Srtoo Srtoo 4'a30 41750 4r9OO 6,O80 5'2OO 61130 4r05O 513OO
o
6O,OOO
o
5
(ro5l olt t5
Fq (851 (351 5 75 35
o
180 100 (1701 (250) 80 200 130 (50) 300
(51 tr'itz {a} Squared 0 160,000 25rEO0
lo,ooo 28r9OO c2?5OO 1O,OOO
I/roo aorooo t61900 z'5,OO 0orooo 452.800
E - r W - n ly-rP (alr P) o 42,OOO 1O,4OO lrSoo 9r350 21',25O 3'5OO
.loo l5'OOO 4r550
o
l
t
ffi
12 - (.grz)z -.gss
131,950
J(*sz,BooX40,250)'
(2) Squarsd
23 111025 4r2i25 225 3,025 7,2J25 7,2i25 25 5,O25 1,2ir5
o
24,OOO
g,40o
131.950
40.250
- Xx + tr -601000 + 12 - 5r00O
i
cr)
{6)
y - 7.y + fr - $181000 * 12 - $11500
:(x-*)(v-l)
L
(3)
- .977
!.
I !
i I I
L
I
37
Ctnpter 3 P3-3
1
(1)
(1)
I
E
i
b
i
b
i
b
v-n
v
I
b
L
t2l
Cott ElcclrlclU Dcvirtiorr Cort 20 3 t'OOO
@
Jrnulty.'-.. Fcbrue4y.... Merch....,-. Aprll -...,..-. May---.-... Juna--....July.-.*.-.. Augurt...Soptcmbar. OctobGr..-.. NoYcmbcr.. Dcccmbcr..
(rol
1$7O I'ClO 1r35O t'530 1r.640 11620 f F3O 1'580 1'O5O 11660 IrO2O
30 (30) (501 (40)
(ool (60)
o 70 80 40 O
Total...... tl&OOO
(3) x
Lrbor
13oo 4,OOO 4,3OO 4,OOO
4,050 4,too 4,t60 +2n 4,tEO 4FOO
F-a
lt -rP
ActvttY Dovb0onr (a) Squercd 900 (30) 62r0(x) (230) tor0oo t3O 52r900 (2301 32,400 (r8ol lG'9OO (l3o) -(8Ol 6r4OO
20 l8o) tto 37O 17O
4,OOO 4/rOO
::50.700
(5)
{4}
:
0
.lOO
{6)
v -rtz
(4) x {2}
(2) Sguared
(600) 2,3OO 3,9OO 6,900 I,OO0 5r2O0 4r8OO (l'OOO)
28r9OO 424.800
o
o 4r9OO 6140O
orSoo 85.800
, - 2 y + rr - $ 1 8 1 9 6 0 + 12 - 31r 58o x - xx + n - 5 0 1 7 6 0 + 12 - 4,30
x(x-r)(v-r)
I ! I
L b
I I
b
I L
I
. / > ( t- r ) ' z ( v - 7 ) ' .
)
r- - (.826)- -.682
85,8OO
(-*za,soo X25,4oo)
4Oo too 9OO 9OO 2,500 11600 3,600 2,5OO
18,900 29,600
0t'fOO
710OO t3o,9oo
rt)
(x-7W -h
-.826
lrooo 25.400
u
Cllopter3
Pg-3 (Concludcd)
(r) v
el
u --n
Elcctrlctty Cort Co.t Dadrdonr
Hotr$ Jlurery-..Fobrurry.... Mlch..--. Aptl!-....-Hry--..,.-. Junr..-.-.Juty-.---Arrlturt..-Sopilcmbcr. Oc{ob.r,-. Novrmbcr.. Dcccmbcr-
E I'EOO f r57O lr6tO tr660 tF63O f rAfO f r52O f r.B3O f 1680 f rttO Ir0co IrC2O
Irol 30 (301 (to) (40) lcol t60l
o
70 80 40
2,goo 1760 244oo 2.2& 2r7CO 2J4o 1r80 1r7O 42fi 4&O 2W 2t4tj{)
o
Totrl....- Ig.gg9 y - 8
20
(5) (4) f3) -if x lx --rr2 F f,lrchlnc AEdYttt Hourt Dadedonc {!l_squrt*
o (r60) too
(c) -iw -h tr
(.) x 12) {21Squrrcd
.o
o
.lOO
z2,5AO
t'5oo t ooo tr8oo
D|00 900
lco) lr20) (tso) (401
IO'OOO 4N tgrcoo trc@ ta/aOO
TrOOO 11OO rr2!,O
ror0oo
c'aoo
no
aorooo
2& 160
67,600
(60)
(r.o)
27,COO
O
trl tv-tF
0
I'COO
zAEo{, 2rt.200
t+ooo r0'2oo c,ooo oa.aoo
too
asoo I'OOO SrOOO
z6,0o o 4190O 6"lOO I'GOO 25.aOO
+ f r - $ 1 8 1 9 6 0+ 1 2 - 3 1 r 5 8 O
i - Xr + tr - 271600 + 12 - 2r3OO
: ( r -- xrr(y ) ( v - yy)' ) e8,3oo -v)z (zt'l,2oo)(zs,4oo) x ( x - r)':( v -
-.93t1
r z - ( . g 3 3) 2 - . g l o (21
Slnce the coefllclent of determlnaUonfor electrlclty coat and machlno houneQe= .a7Q le grestor than the coetficlent of determlnaUonfor elcctrlclty cost and labor hourape =.682), machlnohours should be used as the barls for estlmaUngelectrlclty cost. Machlne hours explsln morp of the varlanco In electrlclty cost thsn do labor houlr,
(3)
Wtth machine houru a8 tfio bagls for predictlng elesffcltlr cost, the l|red cogt and Orevarlable cogt rato can be determlned by the method of least squanosae followrr:
iXY I Y) variabte r a r e ( t ,') - . x ( r : X (x - i ) '
Fired cost(a) t ilfi:
C o l u m n 6 t o t a l _ 6 8 , 3 0 0 -_ G $' 32339 G o f u m n5 t o t a r ' m
- ($'3233e ,.2'3oo)
I
I I L
I
39
Clwter 3 P34
(11
,
I t Hlgh
!
aa.ataaaaattttt"tt""tt""t"""rttt"""tt"tttt"t"tt"
LOsf ......
i
aa"
aaaaaoaataaaoat
Dlffelonce.'.
Machine
Malntenance Gost s2,290 aaaaaaa
2,OOO
2,OOO
"tt"t"l'
a aa aa aa aa"t
Hours 2r7OO
3 2s0
ttttt'
700
b
per machine hour Varfabfe rate = 3290 + 7OOhour:s = 3'4142857 Low Hlgh
I
b
Total cG,Et...........r.r.............................r.r......... Total variable crogt..,.r.'...........................r..'...' Average ffxgd c(tSt ............................'...'.......r
br
I
l2l
E
I !
I
b I I
!
ln-h
E25,920
40 (30)
(roo)
(101 00 130
2rOOO 2r4OO 211OO 2rOOO 2r*5O 2r55O 2,7o/0
(r0) 50
t0
(rrol oo
{o0l O
{4}
ui-a
Machlnc ActtvttY Houre Dcyilqgn! 100 2r5OO (50) a35O
(.o0) 0
13oo)
$2,OOO.OO 828.57
$ 1 . 1 7 1. 4 3
(6)
(5)
lou-# (4) Squercd
torooo 2r5OO lOO,OOO
o 9OTOOO
(4) r (2) 4rOOO 1,5OO
04,ooo
o st,ooo 12,OOO (5Oo) 13r5OO 39,(XX)
40,OOo
a45O 2rlOO 2,3OO
o
(roo)
o lorotx,
6,OOO
430.OOO
172.OOO
28.800
- I ; Y t + fl - $ 2 5 r9 2 O + 1 2 - $2J6O
,
- X x , + o - 2 8 r8 OO* 7 2 '
o
215OO 22'5,OO 90TOOO 2,5OO
rt} -
tot-lwt-h tu-vf
200 60 lEO 3{}0 50
,
b I
vt
Janualy'..-. I2'2OO 2r130 Fcbruary '... 2rOOO March -.--. Apfi1 ........... 117O 2,O50 Mry-....-.'.. 2,220 Juno-......... 2r750 Ju|y..,........' 2r25O Atgud....... 2r20O Soptcmbcr. Oclobcr...... &160 2'21O llovcmbcr.' 2rlOO Dccombcr..
b
I
l2l
Cott Malntcnancc DevlaUon Cod
Totrl.-.. I
{31 ';;
(1)
$2t290t00 l tl 18'57 $1 .1 71 .19
(5oo) o
Q93urrl! I'COO 000 25rOOO
too 12r'loo 3rOOO loo Irloo 16,9()0
l oo 15'OO
_g€99 76,200
2t4GO
I ( x - r ) ( v - i ) - Column 6 total - 172'ooo - 3.40 Yariabtecost rate 4it0,oo0 6lu;;;-5-GGf x(x - i)2
SlnceY -8+bXt a -yt-bt
then:
a - 3 2 ' 1 6 0 - ( $ . e o) ( 2 , 4 O O ) t12,160 s960 a a - $1'2O0
10
Chapter 3
P3-4 (Concluded)
(31
x(:-z)(v-9.)
l -
v:(x 1 - i)t:( yt - ilz 172,OOO
f t
Column 6 total
./(column5 total )potumn i totat I 172,OOO
_
@ - @ . . , 1 2 - '(.9585)-
- .91489
(r)
(41
t2l
X1
Machlntr Hourt 2r50O 2r3li0
Month Janualy...... Februaty....
2,ooo
M8hCh......... Aprll r.......... M8!.........r.. Jlllte..r.....'.. Jlll!....'....... AugU8t.......
2r4OO
2,1(x) 2,600
2r4EO 2,550 September. 2,7AO Octobor...... 2,45O llovembor.. 2,4AO Decgmbor.. 2,3OO Tot81....... 28,800 :
It Actual Malntonancc Cort $ 2,2OO 2r130 2rOOO 2rl7O 2,O50 2r2,2O 2rl60 2rzf',O 2CoO 2r150 2121O
2rtoo -^! Ety-Y
A^A
::
(31 lyi=a+br,
(4t lh - v'l
Prodlstcd Predlctlon Malntenence Errpr (21- (31 Cost $ 2,2OO 8 0 (ro) 2r140 2rO(X' o 2r160 lo 2t04o to (201 2r2tn (301 2r18f. 2r2i2o .30 2r2g0 to (30) 2rl80 2rt60 50 ztl20 t125,920
_e9) 9_e
Column 5 total -
8 t -
(5)
' 1 172,OOO W, - . 9a 5 6 5
12-2
!+ff
(s) Ut - t'12 (4) Sguarsd
$
o 10 0
o too 100 400 900 900 100 900 2r5OO 400 $6,4Ot)
- sz'.zs*22
The 95% confidenco tnterval for matntenancecost 8t the 2r5OOmachtno hour level of acdvlty lr
mn
Y ' * t p ; s x s ' . 1 1+ i +
!
\--'
-'f
:
x(r, -r)'
s.|,2oo*(s.eo)(e,soo)'(z.zz8X?5.2g822){'-+"-w 3 2 '2 OO = $ 5 9 .29
I !
I It
Ctnpter 3
I
P3-5
L
I
(1)
41
1
(a) The method of least sguanct:
!
(1 1 vt
I !
\
I
t
E
!
I
b
I
!
I I
tt I
' !
I !
I
!
I l-
I I E
tn-f,
\
Fl-it
(s)
Dtllcrcncc frorn Avrngc of
From Avcragn of
tToo
3F0o
K) Squared
{4}r (2} (OOOs
Orrcrt
OuGtt
(OOOI
Co.t
Drvladon
Dryr
Dryl
omtttcd)-
$ 4OO
g3OO)
I,OOO
(21600)
ar2,,,o
Fcbruery-.
5oo
(2o0)
1F0O
l2'Ooo)
March --Aprll--.-.., M{-..-.-... Juns--.-... Juty-..-.-... Au!tt3t..-... Scptcmbcr. Octobor.-Novcmbcr Dccambor..
600 7OO 600 8OO I'OOO 9OO gOO
(2OOl O (tOO) lOO 3OO 2go 2OO O
2,500 3,OOO 2'5OO
(trOOO) {5O0} (1'OOO)
aFoo o'5oo o,ooo
I,ooo 3,ooo 2r5oo
4rOOO I'OOO EO I'OOO lr0oo IrOOO G'25O
Total......
E8.4OO
lroo)
Slncef S T O Oa e -
6FOO 2,OO0 3,O0O l5o0l 21600 (1,000)
to o
3'5OO
O
42.OOO
:(tr -r)(v, -y) x(r, - i)'
ln-iF t2l
Jenuery.-..
b -
Ct)
tn-xr2 h-rui-h
Elcctrlclly
7OO 600 8OO
(6)
Dlllcrcncc
Ebc{rlclty
I I
(41
(3)
l2l
0
arooo 250 trooo o 34.000 .
omtttedl 3 750 400 200
o
Squarcd (oOOs omlttedl
seo 40 40
o to
100 100 900 500 400
lo 90 40 40
o
o
100
o
10 lo
lxl.450
gtao
Column 6 total - tl3'45o - 3.1015 variable rate 34,OOO Golumn 5 total
a+bil then: a+(tl.tOl5 x3'5OO) $7OO -$355 $345 llxed coat por month
Clupter 3
12
P3-5 (Contlnue{) (b)
The hlgh and low Points method:
Hlgh ..r..........
ataaaaaatlaaataa
aaaaaaaa
aa alaaa
aa aaaataaaa
aa aaaaa
Low... D1ffergnc18..r...r.....r.....................r...........'..'..t
Varlable nate - #=
5r5t)O
Electrictty Gost $1,OOo 400 $ 600
Guest Datrs 6r5O0 l,OOO 5,500
- $.1091 per guast day
Fired cost = $1,OOO- (61500x $.1091) = $1'OO0- $7Og = 3291 OR
Fixedcost = S400- (1,OO0x ll.1091l = 9{OO- StOg
= Szet
(c) A scattergraph wlth trend llne fltted by Inspectlon: s1,1OO
st,ooo tE lu o, F
o o o tl-
s900 :8800 3700
>2 =o
3600
IE F
3400
9E
o
ul
J
lll
r3500
3300 3200 8r00 $o
o
t,o o o
2,OOO
3,OOO
/3rOO0 S'OOO
crooo
7r00o
GUEST DAYS PER MONTH Fixed cost per month detormlnecl by I nspcctlort ............_SSSO Averago cc'61......,..,.. SZOO Less llrcd cost......... g5O variablo rGrolt......,.....G :
3s50 3r5OO avorlge guest days
$.1O variable cost per guest day
t_
t-
Clpoter 3
I
P3-5 (Continued)
S
(Zl t I !
43
The coefflclent of coretatlon (r) and tlre coefficlent of determination (rz)' uslng data from the requiromcnt (lXa) answen
x(r, - ,)(v, - Y)
-
I
l:(t
E
3r+50,O00 '
3r5g4 r44g r2 .9212
b
(3)
(11 X1
b
t
Month January...... Fobrualy ....
l I L
Ma1ch......... 4pr11.......,.r. M8!............
I
J ltJlo .........r. J lll! ......'.....
L
!
I b
! b
August .,,.... September, Octobor.,.... NoYember., Decembgr.. Total ....... 'roundlng eror
I I I
b
5'-
I
'9598
The standard error of the estlmate:
I I
I
-@
.l 72r92Or0OOrO0OrOOo
I
b
. ' / ( c o t u m n5 . t o t a l ) ( c o t u m n7 total )
- y)'
r - x)'>(v,
3'45o'ooo
L I I
c o t u m n6 t o t a l
-
Guest Days I 'OOO 1r5OO 2,5OO 3,O00 2,5O0 4,5OO 6,50O 6rOO0 5r5OO 3rOOO 2,50O 3150O 42.OOO
iZU t - y ' r ) ' n -2
(21 YI
Astual Electriclty Cost $ 4oo 500 500 700 600 800 I' OOO 900 900 700 600 800
sg.4oo j Golumn 5 total
1 2- 2
(3) Vi=e+Dx1) Predlcted Electrlctty Cost $ u 7 4f'7 599 650 599
ao2
1,OO5 9S 903 650 599 700 39.405'
(4)
(s)
th-vl
th-vF
Predlction Error (2) - (3t ' 9(47) 3
Predistion Error Squared (4) Squared g 2,209 I
(ee) 50 1
l2l (51
(sl
(3) 50 I 100
s (5)'
9r8O1
2,5OO I 4 25 2,916 I 2r5OO I 1O ,O00
s29,975
- v s2 ,gg7.5 - $54.75
chapter 3 1
r3-5 (Goncluded)
,
4)The9o%conffdence|nterua|fore|ectr|c}tycosilsat2'oooguestdays would be:
)) (sg{s+ ($.tor5X2,ooo t3548 3318
!
t
(t.atzX330.75 )f * #, (t,atzX3s4.zs )(r.ozz)
ooo - 3,5oo)2 * tz, 34,OOO,OOO
$106.35
P3-6 (1)
(a)
The hlgh and low polnts method:
Hlgh
aa..ta..""t"ttt"""""t"ttttttt'lt"tt"tttttt"t"ttt"t""'
LOW
aaaaaaa"lt"ttt"t""t""t"""tt""""""tt"lt"""ltt"l"
Dlfigrcnc9
.tttttttttttttt"""t"""tt'lt""t"t""ttr"t""'rt"
= Varlable rate = $f OO+ I;OOOBllletr $lO = 3260 Flred cost = $5Oo- Sl'1o r2r4OOBlllets) or = $260 Flxed cost = $4OO- (!l'lO x l,4OO Bllletr)
Cost :1500 400
4stlYttY 2r4OO l,4oo
Sloo
l.ooo
I
I b.
45
! !
I
ChsPwS
P3-6 (Qontinued)
a trend line fitted by insPection: A scattergraph wlth
(b) L
t500 Il b
:oo L
F
I
9300
E l-
o
ul $200 J lll
$too
30
trOOO
I
BILLETS = $260 Fixed cost detormlned by Inspection cogt + 12 months = $46O Average cogt = S5t52O total = 2'OOO total Blllets + 12 months Average aetlvtty = 24,OOO V a r|a b l e co a t=(g 4 6 0aver iagecost- s26ofixedcost) + 29oooave ftl ge agtlvl$ = $.1O Per Blllet
I I
g
I
Chapter 3
P3-6 (Continued) (5)
V-n
F-;l
lx-if
Cost DcviaUonr
llumbcr of Bllletr
Activity Devletionr
(a) Squrrcd
uonth
(4) r (21
Elccrriclty Cost
Jenurry,,.... Fcbrury.... Mrrch........ Aprf1....,.,.... 1fry............ Junc........... Ju1y........,... August....... Scptamber. Octobcr....,. ilovambcr.. Decomber..
O 4O'OOO t0'O0O 4O'O0O IO'OOO O . 3EO'OOO i0'OOO tlO'OOO 160'000 g0rOOO .3O,OOO
O 2'OOO 2'5OO 5,OOO I'OOO O 36'000 I'OOO 5'OOO iO'OOO 1O'5OO 2'OOO
25 tOO 625 625 lOO 2i25 3'8OO 'lOO
-999,099
gr.OOO
_8.950
f3)
l2l
y
(6)
(4)
x
(r)
(c)
(51
3455 450
2,OOO 1'8OO 1,900 2,2OO 2,1oO 2,OOO l,4OO l,9OO 1,8OO 2,4OO 2r3OO 2,2OO
ll0l (251 25 10 t5 (60) (f O)
{35 4S5 4?O 475 4OO 450 4:t5 5OO 495 47O
l25l 40 35 lO
Total...... 35.529
O (2OO) (l00l 2OO tOO O (8OOl (f O0l (2OO) .lOO 3OO 2OO
_?!.OOO ___9
_9
lx-rv-tl
rt)
lv-tr (21 Sguarcd
c,25 1'600 1r2i25 loo
f - zy + n - $5r52o + 12 - $460 i - L x + f t - 2 4 1 0 0 0 *1 2 - 2 rOO0
:(x - rXv.: f) - c o t u m n -6dd;66d'$'10125 variabte rate(b)Sq9 s tloFl o t a t il9 *7)' x(x
F i x e d c o s t (a ) - y - b i
-
($.rolzs Xz,ooo)
- $ 2 5 7 .5 0 (21
The coefficient of correlation (rl and the coofffclent of determlnation (F), using data from the answer in requlrement (lXcl tollow:
ftxr - x)ly, _ V) - l
-
- \ /
- \
V : ( xr - i ) ' z ( y , - y ) ' 1 2 - 1 . s s z ) 2- . 9 1 6
-
81'099--
J ( 8 o o ' o oXo8 ' e 5 o)
- .957
I I
L
I L
t
47
Ct8pr( 3
P3-O (Concluded)
!
(3)
(r) v
I
t
L
It L
Month
I
J8nuary.r.... Februaly....
L
M8J1Oh.r......'
Aprll r.......... i I
M8!.r.....r.r..
!
J1tJ|9........... Jlll!............
I
I I b
Au$ust....... September October...... NoYember.. Decamber.. Total..,..'. g' -
i \, I i !
I b
!
b
I
(21
Actual Electrlclty Gost $ 4{ts 4lto 4{ls 485 470 475 400 450 4it5 500 495 470 35.520
(3) ly'=a+Dx) Estimated Eleetriclty Cost $ 460 #o 4{to 480 470 460 399 450
x Number of Blllets 2,O00 1r 8OO 11900 2r2OO 2rlOO 2rO00 1r4O0 l r9OO 1r8O0 214OO 213O0 2r2AO 24,OOO
(4)
lv - v'l (1) - (3)
(s) 10
(1s) 5
o
lcolumn 5 total 12-2
(4) Squarsd 25 100 ?25 25
o
225 I
(5)
25 1 25 100
(r)
501 490 480 t15.520
U-vT
15 1
o
#o
(5)
5 '(10)
o
o
752
gt52 - $8.672 lo
The 9506 conlldsnce Interval level for electrlclty costs at the 2r2OO Blllets level of agttylty would O" 0","-a + D x * tesst"' .,/.t* * * "
Y
( t - f) ' =
>(r-i)'
$257.5o+ ($.rorzs)(z,zoo)' (2.?2s)($a.eze ) $48o.25 * (2.zza)($e,ozz)(t.oos) $48O .25 * $2O.58 or between a low of 3459.G7 and a high of SSOO.83,
Chapter 3
48
P3-7 (1)
Month 20A J!ll.'....... 3 Fcb....-... ll!1...-... APt- '..-... lhy--.., Juno.--. July --... Aug....-... Scp......... OcL........ NoY.-.-... Dcc...--.
(1) vi
t2l rl'.1-91
Dlffcroncr lrom Frctory Overhead Avcragc Coctr of 37,900 '{ 81600 gr9O0 81050 grOOO I'160 7'550 7,050 61450 6'900 7'5OO 7rl50 7'8OO
ooo 2r0oo 1,060 I rloo 25O
{3so) (8s0) (1/450) (t,0ool (4oo)
frso) (roo)
(3) xi
(4)
Fi-i)
8r7OO 9,3OO 9'.iOO 8,7OO 8,OOO 71650 61760 TrtOO 71350 Tr25,O TrtOO TpOO
800
lr4oo lr4OO 800 loo
(2rol (t,tgol (8ool (6s01 (cs0l (8ool (4ool
(6) lry rWi -h
rr) rq - vlz
Dlflcrencc
Dirrct lrbor Hourr
from Averagc (41 of 1'80O Squrrrd Hours
2rOOO 2,4O0 2r2OO 2,3OO 2rOOO lr0oo lr4OO I'OOO l'2oo lr7OO I'COO lr9OO
200 600 400 500 200
ro0 (4oo) (8oo) {600}
lro0) (2oo) 100
4p Jan.....,... Fcb.-...... Mrr......... Apa........ ifry,..--. June.....July........ Aug....--. Scp......... OcL........ !lov..,-... Dcc..-.-.
(61 lq -|12
2,1O0 2FOO 2.,.OO 2',,OO 2rOOO trSoo tr2oo tr3oo
r'5oo 'tr7oo rr5oo
lr8OO
300 500
aoo 4(}0 200
o (oo0l (5oo) (3oo) (ro0) f3oo) o
'(4)
r (2)
l2l Squarcd
360,000 4TOOOTOOO
4O,OOO S60'000
|2O,OOO l'2OO,OOO
t0orooo
{2oro0o
Irt02,5oo
2SO'OOO 4OTOOO IO'OOO
S5O'OOO 5O,OO0 f3SrOOOl
tr2lOrOOO 62,500 72i2,5OO
too,ooo
34o,ooo
72t2)5oo
640'000 360,000
lrl6OrOOO OOO,O0O
2tlO2rSOO ITOOO,OOO
to,ooo ao,ooo torooo
4o,ooo tSorooo (lorooo)
160,000 5o2,5oo to,ooo
84O,OOO 2/3O,O0O 90,ooo 250rO0O - TOOr0Oo I,060,000 1,060,000 680,000 t6o,ooo o4o,ooo S2orooo tSo,ooo IOTOOO 2OTOOO 4O,OOO c2r6oo 0 o C9OTOOO tr322,5OO 360,000 640,000 25O,OOO 4{tOrOOO 3o2"5oo l6li,ooo 0o,ooo 85,ooo 122,soo l0,ooo C4OTOOO 24O,OOo 9O,OOO
o
o
tbo,ooo
20c
_
Jrn......... Fcb...,..... Mer......... Apr....-... llty..-.... Juno....... July -...... Aug.-...... sop......... OsL........ Nov......... Dcc........
81600 g,3OO gr4OO 8r7OO SrtOO ?1600 Z'OOO 6,900 ?rloo Z,EOO Z,OOO Z,OOO
Total....... S2g4.4Oo
700 lraoo
2rOOO
1Foo
2r3OO 2,.OO 2,OOO
800 200
(3oo) (eoo)
2poo
t,8oo
lr3OO (1,OOO) 1,2O0 (8o0) lr3oo (4oo) 1,800 (ooo) 1,500 (3Oo) 1 , 9 O O o 64.800
200 500 600
.3O,OO0 25O,OOO 25O,OOO
!4O'OOO 7O0,OOO 75O,OOO
a9O'OOO 1,9OO,OOO 235O,OOO
t6o,ooo
320,ooo
c4o,ooo
200
4O,OOO
4O,OOO
4O,OOO
aoo o (5oo) (0oo) (5o0) o (3oo) 100
o
o 25O'OOO 360,000 25O,OOO
o
0
9o,ooo
45O,OOO 81O,OOO OOOTOOO ITOOO'OOO 4OO,OO0 84O,OOO
0
t8o,ooo
9O,OOO
27O,OO0
81O,OOO
l O,OOO
(3O,OO0)
9O,OOO
5.280,OO0 11,625.000
29.lA5.OOO
iL
I
L I
I lL
tI
P3-7 (Continued)
p -
z ( x t - x ) ( v t- l )
Column 6 total
x (x r - x ) '
Golumn 5 total
b
Slnce j
t
-
11'625'000 51280,0O0
- a + biand t ' I;yt * n and i
32.20 variable cost rate
' Xr 1 t rtt t h e n :
* 36) + 36) -, + ($z.zo)(o*'aoo (Sesa,4oo
I, \,
L
(9
qww3
tz ' eoo
,
: 3.tlfdT:.t
cost ovelhaad
The coefficlent of correlation and the coefficient of determination' using data from the regulnement(1) answen
(21
I i
x(r, - 7)(y, - Y)
b
c o t u m n6 t o t a t
I !
I
11r025,OO0
' @)
b
12 -(.ggzo)2 -..8280
I
b
I Lr
I
b
I
1 11625,O0O - . 9 3 7 0 11rA?S'@9: . v 1 5 3 , 9 3 8 , 4 O O , O O O , O O O 12r4O7 1191
chspttir3
fi
P3-7 (Continued) (3)
The standard omor of thc cstimate:
Month
(r) x1
Dlract Labor Houns
l2l lr
Actlsl Factory Overhead Gosts
(4) (3) luj= ?.+.brJ) Ui-vl
Predlcted Factory Overhead Costs
g JanualY...... FobruSrY'.'. M8FCh.r....... APrll ..........t M8! r........... J11JIo........... Jlll! .....'......
August....... September. OCtobOl......
November.. December..
ry
JanuatY...... Feblarary.... MdFGh,.....".
Aprll ........... M 8 ! . . . ' . . . . . , .. JUll€ '.......... Jlrl! '...........
August....... September. Ogtobor....,. November.. Decembgr.. 20c January...... February.... MihCh..'...... Aprll ...'..o.... M8!............ Jung..,........ Ju|y.,..........
A u g u s t . . . . . .. September. October...... N o v e m b e r .. December.. Total
2rO00
2'd,oo
2r2OO 2,3(X) 2,OOO 1,9O0 1,4(X) I,OOO
l,2oo
1 r7 O0 1 ,6 0 0 1 ,9 O0
8r5OO 9,9OO 8,95O I,OO0 8 rl 50 71550 7rO5O 6,45O 6,900 7,500 7 rl 50 7,80O
$
8,340 9]2i2O 8r780 I,OOO 8r34O 81120
7'p,zo 6rl40 6r58O 71680 7 1460 81120
lr3oo lrSoo l,7oo
7,650 6,75O 7 rl OO 7,3lio 7r?So
1,5OO 1,8O0
7,10o 7r5OO
8,5O0 I,OOO 8,78O 8r78O 8,34O 7,9OO 6,58O 6,8OO 7 t24O 7,680 71244 7r9OO
2,OOO 2,3OO 2,3OO 2,2OO 2,OOO 1 ,8 OO l r3 OO I,2 0 0 1 r3 O0 1,8O0 1,5OO l r9OO
8,60O 9r3OO 9,4O0 8,70O 8 ,1OO 7r60O 7,OOO 6,9OO 7,1OO 7,500 TrOOO 7,600
8,34O I,OO0 I,OOO 8,780 8,340 7r9Oo 6,8OO 6,580 6,8OO 7,9OO 7,24O 8,120
2r1O0 2,30O 2r2OO 2r2OO 2,OOO lr8OO 1 ,2 O0
ff,800
8,70o 9,3OO 9,300 8,7OO
8,0oo
s284.400
_ E284.4O9
(5)
tvi- vF
Prediction
Prudlction Error Emor Squared (21- (3) (Cl_Squarea It 160 680 170
o (1eo) (5701 30 3lo 320 (r 80) (31o) (320) 140 300 520 (80)
(34o) (250) 170 300 110 (43o) (r40)
(4oo) 260 300 400 (80) (240) (3o0) 200 320 300 (4o0) (240) (s20)
o
$
25,600 462,4OO 28,9OO
o
36,1OO 324,9OO 900 96,1O O
to2,40o
32,4OO 96,1O0 1O2,4O0 19,600 9O,OO0 27Or4OA 6,4OO I l5,600 62,5OO 28,9OO 9O,O0O 12,lO O 184,9OO l91600 l60,000 67,600 9O,OOo 16O,O(x) 6,4O0 571600
90rooo 40rooo
1O2|4AO 90,OOO 160,OOO 57,6OO 27O,4OO |x1.580.200
I
I iL
I I
Ps-T(concluded)
l_
= --
b
(4)
| r
I I
L
I
I b
* II
L
!t
) b
I
i
\
It-2
,
-s324
34
= zgsYoand the confi' Slncc a large sample ls usod In thls probtem, tgS% dcnce lnterval ls: Y't
i
l38, 78O t
tt
I
'\-6:z
zesyr9'
) (sspm * ($z.eo)(z,zoo )) t (t.eoo)($sze
t I
!
; $ i l , 5 6 o ' 2 o o- - [ r g a - z t 2
i > ( y , - y - ' , 1 2- , @ -
i
I I b
E
5t
chtPrer 3
!
$635
Cnsgter3 52
P3-8
(1) vt
(r)
(2)
ru-h
Maintenancc Coct Dovlrdon Cost Ug1!r (286) .lan, ZOe '.-.$'l'l05 (365) Feb.,2OA ,... l'110 Pf) fnar., 2OA ... tt39O F2) Oot., tOO.... l'449 t37 May, 2OA.'.' ItGtS U .tune,2OA .. lF?5 2Oo JulY, 2OA -.. 1'687 169 Arg.r 2OA ... I;OSO Sep., ZOI ... f 1595 o"t., ZOI .... 1t675 not.,2OA ... 1,405 o""., 2OA.." 1125.1
.,;;:;io" ..'
eso
ll/f 104 tt6) 1230)
(cgr)
;;;:, ro",.,.
I'175
(3oc)
"'
1/;?5
158)
"".,2O8
;;;:;ro'
"" r'5oo
""r, aOt "" .. ,;;,2o8 ,rit,'to" "" 2oB "' ;;;; ;;;.,2oB "' O",.r rO" "" *;".;2oB "' ;".: 2oB ..'
I'COB l'6s3 1'675 1'724 1'626 1]576 l'633 t,/tt'
Totsl.-..$$
(3) xi [.abor jloto 950 1rO24 1rlo0 'l,l€ 1r313 1,.C1 11552 11372 t,360 11455 tpl IrlSo 009 1)Oz2
25 127 172 tg4 243 145 04 172 (63)
J
1po r}283 r,&?9 r'260 lr44O
r}20o r1335 Irl64 1$73 11124 2,.JCO
tt) Vt-7Wr-h til-h" (6)
(5)
(4)
Fr-t)
ui-7f
(2) Squarsd
(4)
ActlvltY Dovlation (2e0) (210) (13r) (02) 73 21 312 132 128 216
Squarrd 82r94O 78,84O t1,921
84,1@ 46,656 l7,l6l 8,{d 61329
8,loo
43 00 lo 200 60 05
aoo 11849
eBOr loo 40,OOO
2"oo
ct6) 133
(1ro)
'
9rO25 51776 17,689 13,456 543.682
J
18,769 11936
921 c4..:72 22FOB r4,304 41r?to
68108t 471324
1zo)
I,O24
to,o0t
97rg 17,121 16}876 4,Sl?,l5 3C1
(24r) (2r8)
8128t
zo4
u1
(ro) (eo)
8i1796
133)225
12143'6
1t4/4 20'7OO 1271''71 06'708 Irl20 I1076 12$73 1'72O 38,8OO t2'150 t3r776
ct,t+0) 2i2,876 T,3S G51.300
<
2AF81 121996 37,636 6t776 52,90O 2811961 93r636 3r136 c,25 t3rt29 23F84 37,6;:!6 60,o49 21rO?5 8rgl6 zfF84 3r9O9
34€ee
-v 7
+24 - $11481 I y t + n - 335,54{ - !X,j *n - ?9,760+24'11240
x ( x r- t X v , - i ) f -
-r2 x ( x r- f ) " x ( v r - Y ) -
651,30o -J(ss3,682 06) Xt'o
r2 - (,ezotzs )z - .758162
eolum4 total ) ffitumn 5 total Column 7 651,300 . E59798,983 ' 092
651,3OO - fr|sfr
.8707 25
I b
t
53
I !
Cnagterg
l S
P3-B (Cohtinued)
I
I t
i
I
t !
I !
I
(2) ru-f,
(r) vt
I
b
Mtlnttnanct
ion
;;;:; too,,'. r'116 i'3eo ;;20A... ttas ior- ioo-.. mty, tO",...
I'018
]",r,'ro"-. ;;;.,20A...
1'087 t,6o
'
197
u
,;;;, 2oA.. t,EE
2Oo loe 1t4 194
Sep., 2OA... 1'595 l'675 oct.,2OA* Nov.,2OA'.. l'4O5 Dec., 2OA..' 1331 95o Jan.r 2oB '.' 1'175 Feb.,2OB.'. Mar., 2o8... 1,4?5
!
b
MaY,2OB ..' June, 2o8..
f'O) (23O) ($r) (306) FO)
25
127 172
I'OOB I'O53
t94
July,2oB'-. ,,izo Aug., 2O8... SeP., 2OB '.. Oct.r 2OB... Nov.,2oB'.. Dec.,2oB.-
28 145 94 172 (O3)
1t124 1'026 11675 1'653 1118
J
Totll..-.€5.!!!l , ,
Pl) t32)
(5)
trl -i)
v,-il'
ActivttY
ry!91!gn
Dcvladon *" ry Uontf,, . (2so) 8oo ,I',-r0o....31'195 7u (365)
Apr.,2OB...r.rfo
I
F) -.-:! Machlnc
({)
(2o0) (3:lr) (88) (88) ttt 70 214 163 tll 171
?tt e87 I'186
l'ltn
1391 1'2u, Itl86 t,l$ 997 841 60'2 73tl
rrsl t234.l (573) (342) 16
(4) Squrrod
1't* 1'174 :2*
1,.oA 13,23 133x) l'1S \A7 I'O35
51928 53,82O 304,203 1041652
641753 328r38 116,964
(s4ol lFOo
a25 3,ooo
121573 N,112 36'665
0r8Ol 29,l1 9,721 01r5O4 21tQ?s Irloo 26,44 l,600
00 171 189 28 '155
J
76,076 120,8t5 8roo8 21816 15.r2O7 3,a76 44,4S 27F17 12,A31 33,174
121521 2',3l1 oro84
00 l02 (10)
25'8oo
(4) r (2)
7oJ56 to9r50r 7r7U 7;t+4 12,321 a,|1 a8,650 23FOe
oo
1'O*
rD jf V- xW'rt v-(2) (6)
J.o35349
Souarcd 8rJe6 $332s 8,'81 1'o24 l8'769 11936 42,436 2,.FO1 12'996 37'Gi:l6 6J76 52'9OO 28t'0ol 93'636 3'136 . o,25 t0'129
z?.F84 37'336 59'o49 21,p25 8p3O 2aF84 3,S9
oo,,:0, n1476 8'4OO 27r8*
2F20 I,013.8?9
lol0'600
- $1,481 - x Y t + f t - s 3 s r $ & + 24 Iro75 f ' 2 5 r 8 O 0 * 24 -
-
-Y) 1ir(xt-x)'x(rr 1,O13,826
@,506) - .982430 r? - (.991126 )2
'
Columq z Cofumn 5 total (Golumn 1,o13,826
ffi46@366'o88
-ffi
tout )
-'ee1176
v
chaotar 3
54
- (Contlnued)' P3-B ' cxpcnee should be Th; activlty moa3uro us9-dto predlct-maintenanco i2l cstlmates: cost machlne h6urs, nrhlch wlll result In ttre following x ( : - t ) ( v - Y ) Cotumn 6 total - 1 ,O l 3 , 8 2 6 - 3 . 9 7 9 2 1 3 b variablerate mEim Column 5 total :(x-f)2 as follows: slnco y r a + bi rthen the estlmated fixed cost ls determlned t
--blx
j
r
r r s1,481- (3,e2e213 x1'O75) t - $l'481 -31'052.65 e r 3428.35
(r) x1
(3)
(41 (31 Ui= 1.+-bx! ln -vil Predleted Pmdlctlon
l2l rt
Actiral Malntenance Malntenance Machine Cogt Cogt ]lours
Months Jan., 2OA.... Feb.r 2OA ... Mar., 2O4... Apr., 2OA.... May, 2OA,.. June, 2OA ,. July,2OA,... Aug., 2O4... Sep., 2OA... Oct.r 20A,... Nov., 2O4... Dec., z0n.... Jan., 2O8... Feb., 2O8... Mar., 2O8... Apr., 208,... May, 2OB ... June, 2O8.. July, 2O8... Aug., 2O8.." Sep., 2.O8... Oct., 2O8.,. Nov.,2O8.., Dec., 20-Et...
809 7# 987 9,87 1,186 1r154 -11291 11238 11186 11246 997 841 . 502 733 I,O9 O I,135 1;174 11246 1126,. 1,323 1,23O 1,165 11237 I,O35
s I,195
3 1&21
I,l l6 1,39O lr4d.g 1,618
1r157 1,395 1,395 1r 59O 11558 1,693 11641 1,59O 11648 1,4O5 1r?52 920 Ir l46 11496 1r54O 11578 11648 1,666 11724 11633 1,569 1,ffO 1r 4f.2
Tot81.......
39.8gg
sss.5!{
1r5,?S 11687 1,650 1r5fi5 I,675
1,4o5 1r?J5',l 950 11175 1r4?S 1,506 1 ,6 0 8 1165!l 11675 1?724 11626 1 ,5 7 5 11653 I,418
'rounding error "'-
jt(" t - v')2 \
n - 2
\
24
(4r)
(s)
54 2A (33) (0) I 5 . 27
o
(r) 30 29 ('tl) (34) 30 5 I
o
rt)
6 i 3 '
lze'1 E-lg)'
€g€{z'
IColumn - 52 total -
Ertor (2) - (31 q26)
1317,817
\fr-
(5)
tq -viF (4) Squared 676 3 11681 25 2,916 7U IrO89 36 8t 25 729 .
o
1 900 841 5r041 I,156 900 25 81
o
49 36 169 576
sl zsr 7
, - S2B.4sBlo3
lF
I I
>
! I
55
Clqter 3
+ I
I!
P3-8 (Cgncluded)
r
(a)
b
costat the1'1oomachine lor maintenance ffirfflffi:;|;ffi,T:"t""' -tl t { {rr - xl I + Y r ' -* -t 'gc;vs' *-S ' . , i 1+
II b
\
n
t(r,
-x)'
i
r -__-^-. i 9028.3tt+ (s.ezezl3)(r,1oo)r (e.ozl)(ze.rcarm)! , * * -
II I
t
31,505.48 * $80.26 I
!
I tt
I I
!
I
!
!
b
\, 1 >
I
:
(trtoo-1,o75)2
r,agsff
Cnapter 3
56
CASES
c3-1
(r)
W
=a+bS
= 5.062 + (.023)(1'20O) = 5.062 + 27.6 = 32.662 or about 33 total workens
33 10 23 Number of temporaryworkers needed' Regression 2 appoars to be better than Regrcsslon 1 because: excluded' thereby nemov' i"i- O"t outside the rclevant r.tnge have been ing anYbias. (b) fhe standard error of the estimate (s') for Regrcssion 2Js smaller than the standard error of the estimate for Begression 1 (.432 com' pared to 2.012). (c) The coefficieni of determinatlon (r2) ls hlgher for Regrcsslon 2 tfian the coefficient of determinatlon for Regrcssion t (.998 compared to .962). Jim Locter can use the legression in his plannlngfor tempolary workers lf the foltowing condltlons exist: (a) The forecasted dally shlpments are greater than 3oo and do rrot deviate too much from the agtual shlpments. (b) The amount of work to be done is dependentonly on the number of shipmentsto be made and does not change from shipment to shlpment. (c) Worlier productlvlty is erpected to remain approximately the same as that experienced during the period used to develop the negnession. (d) A strong cause and effect relationship exists between the dependent variableand the Independentvariable. (e) The time frame for a forecast ls short'term' The regression could be improved by the following: (a) Redeveloplngthe regressionusing the number of hours worked as the dependentvariable. (b) Performlng another analysis ll rush orders or deviations of actual otderc fiom forecasts occur wlth any degree of ragularlty. (c) tnvestigating the historical data used as a basis for the regrcssion to determine lf there aFeany further unusual circumstances that should be temoved from the data set. td) Redoingthe regressionafter a period of tlme' such as four to slx months,to discover lf thens have been any changes In the relatlon-
Total workgl.s negdgd ....,.........rr...............................r. LeSS pgnnanent WOfkgllS......'......................t"""""""
tzl
(3)
(4)
shlp between the dependent and the Independent varlables.
l I I
t Clnpter3
c3-2
( 1 ) T h e | n c t o a s e | n y a s s owtti-J;ilin c i a t e d w l t haa6'O'unitln"t"t"e un|tJncneasein x l sx. 5O0) l . 2 , Tinh ye r e f o r 11'2 x tn Soo-untttn"r""i"
(2)
[:i"T,::riJ"i?,1P."rr.
rsspurious'rhe rfthecorrararon unreriable
' a s s u m p t i o n i s t t r a t 1 ; # i " " powgr ] o g i * rand . L i "dirsct i i " " s hlabor' ipbetweenoutput and the use of efee#c at the time of th "onattions ii" undsr Ji"ble b; (b) rrre equa$onmay studv,butfconOltiJns-tt'"ng"'theresultsmaybeunreliable' unlts. limitJ i" " l'ige of 5oO.2'ooo (c) D"tj;;;;;(d}rts-assumeatrratastralght-||neassumption|sva||d. good(e)rrrecoemcbntofcorrelat|onlg"'""",'"ofttreextenttowhich n i" t t"railve m€asuneof ,;;i;ttiearty. ars two varlables ln yi" ttpl"lned by ora rugrcssion ness of fit. More or iil"-""tiatlon than'ior elbctrfc Powenthat ls' the egua*onfor direct f,rl]o,nours ts a uJtt"r flt ttan the equatlonfor esuatlonfor dlrsct ffi;; iiouo elecilric Power' ( 0 T h e s t a n d a r d e r o r o f t h e e s t l m a t e . l "tlon" s a m e att" s u nnot-alty e o t v a r | adlstrlbuted t|onfrom
the regrcsstonltne.li il; ;;t tne sGndarderrcr can be lnterpretaboutthe regrc"",on.qu"ii*, The stsndard entr ls "t"no"tu-i-"'r"uon' " it r"y'", ed ln tllresame tft"n In trs caso of elestric f'o'u-o i"Uo' ;id;; case the In gruater power' wtttr permisslon GGA-canada(adapted).Reprint
(1)
variusing time-as an IndePendent that ls A Alternative of An advantage posslble factors il; ;;;;ideqtlon all abte is a conyenl""i*"V to take Juring each period of depeidtnfvartaUrc the lnfluencing be rclationthat may A rs that there ls no loglcal time. A disadvantageof Alternatire shlp between years and rental expense' this method ls loglcal because that b-ts Atternatf"e of advantage An and, thus, rsntal exPense as rovenu"" tnciase, the stgryi lnrr""r", 6 t" that an estimate of ruvof eliernatfv" lncreases. A di;-d';tage
.n""il"J#[l;
carcurationr c is thatthe mathematicar of Arternative disadvantag mc-thod ls easy to underctand' A are relailvely eaiy and the oversrmptfica*on .rr-r"9" rs an of arternativ,diJ.ffi il; arnrrm"t. rchilonship between varlables' that does ,rot *r"oi;;;';;t
OuPter 3
C3-3 (Concluded) ioglcal' the coefficient of .;;;;;b |2|MotorcoGor?orationshouldse|ectA|ternativeBbecau.sethere|ation,"nt"l " riJt} ls low' rhtp between neyan,r" tt"ndard eqor of the estimate rental corrslafion ls hlgh, rnaiii" es*matins for
(3)
i" "'n-"pp-priati-ieirtoa attto Parts'A statistical A "t"ti#;iirr[iiq* cxpensebetorpi[otorro-;;ft.d"iTi'il;[" "o'"iation betweentre variables
ttrt a tcchnigueattemptsto--"""r"nA ttftA rclatlonshlp'and such fral]IE"it to pnesumeO trat aru "ttuauon' of cout:e' Motorco ls con' "iriiiirti" to appea* relailonship in *re hrstorrcardata wttt tnat-.rr=t neratl-J"iiJs any lssumrng that mav-wantto adiust the Management to tlnue ln ttre ftrturewnnout-ln;ig"' *irr"t"iu6 and Motorcomay wish rr"ip*tt i;i chang". -oit'tt variabtesfor qJantltative variables' uc-e i ntroo
c3-4
(r)
l2l
(3)
,,-gle""ion provides a rclational statement nther than a The phraso analysls ls used to determine a reg;"ion that means statementn causal cause-and'etfect relationship' A spe' relationshlp, but not nt"""sarffyi not imply that the lndepenclftc value for a negnession cosfficlent does d e n t v a r | a b |e (s1 ca -u se sa ch a ngeinthedependentvar iab|e. basic formula for a tegression The meaning of each of the "VtJb;i" in tt i oquatlon follows: the dependent variable' y'r = estlmateJ value of the lth observation of a=they.axls|nterceptorconstantterm(9.9.,thefiredportionofa semivariable exPense)' to the Independent varib = the rcgrcsston coefficient corresponding ab|er(e.g.gthevariabtecostelementassociatedwithaoneunit change in actlvlty r). varlable. x1 = the tth ou""r""tibn-of the first Independent lndependent vari' the to c = the regrcsslon coefficlenl iott""ponding ab|ez(e.9.,thevariab|ecoste|ementassociatedw}thaoneun|t change ln activity:). variable. 21 = the lth observatibn of the second independent with the lth observation. d = the error term associated for goodness of flt Statistical factors used to test a negrcssion equation include: the portion of (a) The coefficient of determination,;2, which lndicates lndepenthe by the varian"" i" the dependent variable erplained approaching I lndident variabtes. A coefficieni of determination cates a good llt.
I
lv
I
L.
l b
59
I
Clapter3
lb
l
-
C3-4 (Concluded)
I |-
(b)
I
b
(4)
L t,
(a)
(b)
I !
(c)
L
(d)
(e) I I
!
The standard orror of the estimate which measures the dispersion of the observed points about the regressionline. A standard error of the estimate approaching zeno Indicates a good flt. The term "linearl$l wlthln a relevant ranget'means that in a specific sltuation, a straight-line relationshipbetween the dependent variable and the independentvariablescan be assumed only within the range of historically observedvalues. The term rconstant variance (homoscedasticltyl"means that the distrlbution of the observations about the regression line is unlform for all values ol the independentvarlableswithin the observed rrangeof values. The term "serial correlation" refensto the lack of independence in a geries of successlve observations oyer tlme. The deviation of a value from the regressionline should be unrelated to the deviation of any other point from this line. The term 'normality" means that the ioint probabllity disHbution of Ure variables ls normally distributed (multlvariate normal). The frequency of the observatlonsshould approximatea norrnal curve. The term smultlcolllnearlty' refers to tfie correlatlon of lndependent variables. When Independent variables are hlghly correlated wltfl each other, the relationshlp(s)between the Independentvzrlablee may obscure the relationshipbetween the lndependentvarlables(s) and the dependent variable.
l !
c3-5 l :
(1)
b
\ \ I I
:,
tzl
(a) D = (2.455+(.188X1,5OO,O0O 1 *O 0 1 O 0 0 ) )1xO , O O 0 u n l t s = (2.455 + 2,821x 1O,0OOunlts = 5.275 x 1O,OO0unlts = 82,750 unlts (bl D = (2,491 + (.441(12,OOO,OOO + 1,O0O1OO0)) r IO,OOOunlts = 12,491+ 5.28| x IO,OOOunlts = 7 ,7 7 1 r l O,OOOunlts = 77,71O unlts The 5o7o confidence interval for demand is calculated as follows: D = 104,160 unlts= {.59X,922x 10,OOOuntts) = 1 O4 r1 6 Ou n l ts * 6 ,361.8 unlts or between 97,798 unlts and 1 10,522 unlts.
Cl?€.pter3
&
c3-5 (Concluded) (3)
(4)
Eguation 4 ls the best The coefficient of correlatlon and the coefficient of determination arp the hlghest of ttre four equatlons. The coefficient of determination Indlcates that 70.3ohof the sample variance of automoblle sales ls explalned by the rcgrcssion. For predigtlve purposesr the standard arror gf the estlmate a|.922 is also tfie lowest of tfie four models' giving the tlghtest (smallestl phyrsicalconfidence Interval of any of the equatlons. Equation 3 assumes that factory rebates (R) are dependent on advertlsing funds (A).The rcsuJtsof the analysls show that factoly rcbates and advertlsing funds are almost totally independent andr ttrereforc' cannot be used to predict each othea The rcsults of Equatlon 3 lend credlblllty to the use of A and R ln Equatlon4. The Independenceof A and R leduces ttte posslble negative aspects of colllnearlty'
I !
S
CHAPTER 4 QUESTIONS DISCUSSION
I
'I
O4-1. The five Partsarc: (a) Direct nraterblg reqtbn (b) Direct lsbor ceclbn (c) Frlory ovefiead (O Work h Pr@oer hventories (c) Fhbhed grood hvmtorbr iho bahnc" rhoet ir t 3tal.ment ct finsncbl *2. pcrttbt; the hcqrr ctBternont b a dalement of sttYity. The incqne lbtement is ccnplementary in padicubr for to thc babnce sheet, munthg tho ctrange in hr prcprietary equrty Bs a resull of operatims during the year. In |hat respecl' the incornc atatemenl ir eeaentiallynothing more than a major rection of the retained eamings accounl. Thereforc, tht rsvenue and expense accounls in the income 3talemont have been lcrmed'cxplanatoqf ac@unl3, explainingthe cbb and lkrw of r.YcnueE and cxpensee lhat bod to thc new hcqno (or bce) and to the new rrtahed camhgs balancc h the balance sheet. O4-3. Thr ordinary babncr rhecl and incqne slatemenl aro htended to ptwkJe hlormalist as lo financial peilion and resulb of operation of a burinesl, in sctordancc wilh several assump' liqs that arc made h preparhg |he stalements. Frqn the standpoinl cil the criticisms rnade, the most important cil these assumptions are lhal cocl lost appropdale arnortization of cost mea' rurca unelgired cct, and that a business mey bo a$umod lo bc gohg to conlinue operatbns indclinilely into lhe future. Accountingstatemcntg sre usually prepared on lhe heory lhal a cale or gome other definite event is essenlial bcfore revenur is recognized.Basically,the aseot sUe of a balancc aheet coctaha a presontstbn o{ the anrounts cl cost incurred, which can b c p r e s u m e d l o b e n c fi t f u t u r e p e r i o d s . ' A n incornc slalement presents the srnounl of rovcnue recognizedas having been realized during thc period, less the podioo cl all cosls incuned thsl doe3 not appear to be lairly delerrablelo ftnurc perinds. Thc ircome staternonl is prirrnrity a m€asure cd what lres been camcd, and not a measure of 'camhg power.' For plant assots, the balance rheot b pdnarily a rnasure cl accountabilityfor cxp.nditureE,rhowing acguisitioncosls lees codr sllocalod to past operatbns. This rneasure of accounlability may br quile diflerent from 1rur velue.' To hcreese ilg usefuhess as one elemerd in judChC eaming porver, the ircsne stalement is picparcd with a dietinclion between operating and nonoperaling items. For the samo roason, c.rtain iterns may be climinoled frorn the incorne
slstomenl and shown in the statemont ol nrtained eemings. However, the effec-tof nmre' curring and nonoperaling transaclions is not entirelYeliminated. lnfonnalion revoaled by a serios of income 3tatcmentsb morc rignilinnt in iudghg eaming power than informatbn revcaled by ane hcqnc statcmstl. The incqne of a bushess rnay folbw or .Yen exaggetat€ the ups and downs ol the bueinesgcyclo and, therefore, lhe inccne of any crc year will ncl representeaming powor. Changes in law or local zoning ordinances may result in a marked change in lhe eaming powerol a bushess. Ukewise,changesin public taste, devebpment of new prodtrts' apPgarance ol new conrpetilion, acquisition ol subsiJiaries' changes in management and lhe like, all may change earning power and yet not be clearly rellecled, il reflected at all, ir one incorne stale' menl. The accounting use of historical. rather lhan curront, dollars in measuring depreciation and cost of goods sold may resull in distoding any view of earning power obtained frorn a single incorne statemenl. ln regnrd to plant ass€ls, il can be said lhat their value to a going concetn is usually depen' dent uPon the eaming power of the business. Such s value is not necessarilythe same as lQ' uidation value, cost, cost legs amortization. repbcement value, or any other kind of value' The phrase.true value'has no definileconnota' tion. O4-4. Actusldescribes the way cosls are measured. i.e., at actual historical arnounts; /ull absaption describos which elemenis of cost are allocaled to hvenlory accounls, i,e., all elements of rnanulacluring cost are fully allocated to hventories; p/ootss describes how cqsl infonnation is accu' mubted, i.e., costs are accumulatedfor each procossor deparlment in the laclory. O4-5. Prime costing systems albcate only lhe prime costs, direct material and direcl bbor, lo hventory accounts. Direct costing syst€ms, abo called variable costing syslems, albcale the variable manulacluringccts, direcl materbl, direci labor, and variable factory overhead lo lhe inventory accounts.Absorpticn costing systems albcate lo Ilvenlories parl or all of tixed frtory overhead, in addiliooto all varlrble manufacluringcosts. Actual costing m€asuros product costs at actual 04€. hislorical arnounts, while standard ceting measures product costs by ueing predetermined arnountsol resourceg to be coosurrnedand predeterminedpriceso{ those resources.
62 Q,4-7. Preess costing aicumulates costs fot oach pt@olts or department in the ladory end rnah' tains detailcd recordr and calculationr of the cotl of *ork h preest. Job order cting accumulales cotr lor oach irb, lc', balcfi' or contrasl and mEhtains detBilsd records and calculalbng od tho cost! of tork in prceas. BacHlush €st' ing accumulal.r coltr by working backwards through ihc availablc inlormatiqr afler producticn is cornpleted (i.e., at the end of the accounl' hg pori
ChaPter 4 low*ost @nsumor products such as toys, dis' posable Pens,na:ronr'and lighters. 04-12. Aspecls cqrtrnon lo icb order and prccess costing are: (a) They can be used by rervice organiza' tbns. (b) They requin cqrsiderablo detail to calcu' late tho cost ol *ork h Procells. (c) The wprk h process accotnl in the gener' al lcdgcr ir lupported by subsidiary t€cordg. O4-13. A blended cthg method uee irb order ccting lo accumulate soflrc clement(s) ol cost and prcces3 ccthg to accumulaleofienO4-14. Flcxible manufacluring 3yslems consisl of an integrated collection ol automated production pnocesges,autornatedrnaterialsrpvemonl, and cornputerizedsystetn csttrob lo utilize facilities ln etticientlyrnanulacturinga highly flerible variety cl Products. Q4-15. The adnantagesof a llexble nranufacturingsys' le.n over the cther systems include shorl (nearzero) setuPlimes, lhe absence of a learning curve, lflet lead times to chipmont' lower diresl labor cost per unil, lower direct labor cost in total, and bwer work in prccess invenlories. O4-16. Thc hilial cost of creathg a flerible rnanufactur' ing system is much higher than lhat of olher rngnufasturingsystoms. O4-17. l,lanufacturingsetthg suiied for bacHlush cosl' ing are distinguishedby very fasl processing speeds, which rernovesboth the incentiveand the opportunilyto track the detailed costs of work in Pr@ess'
l-
I
t
L I
.
\-
I
63
Chaptor I
EXERCISES
E4-1 Calculation of cost of goods sold (in thousands):
b
TOtal manUfaCtUfingCOSt...........'................r.r.....t Add work in process inventory beginning """""
I
sl 10 80
$1eo
b
I
S
$t oo
GOSI Of gOOdS ayaitablg fOf Sa|g...........o......oo.......
$250 60
Less finished goods inventory, ending ...o......'...... .-,....................'.. Cost of goods sotd .....'.
I
b
90
Less work in process inventory ending.r..........". Cost of goods manufacturgdr.......o.r.-........'....r..'., Add finished goods inventory beginning ........!....
150
$.11D
I S
E4-2 I b
Calculation of cost of goods sold (in thousands): DirgCt matgrials used.....................r...,...r,...'........ DifgCt 1abOf .......................'.r....................r........... FaCtOfy Ovgfh gad .o...'..r..........r.............................
60 80
COSt ........r..............o.............
$230 250
Total manufaCtUring
Add work in process inventory beginning ........'.. I
b
Less work in process inventory,ending G o st o f g o o d s ma n u fa c tur ed....... A d d fi n i sh e d g o o d s i n ventor y beginning........' .... Gostofgoodsavai|abteforsa|e.............. Less finished goods inventory ending..............,.. ..t......'.. Gost of goods sold .......o.............
i
I
$so
$480 210
$27o' 340 $610 27fJ
s340
65
Clpptcrl
E44 (Goncluded) (21 Gost of goods manufactured: Stores,April 30.......'.'........r.,..
s 1O,25O
.....--..----.
105,OOO
PUfChaSgS.................rr.............rr.......................................r.....
sl15,250 12r7AO
LoSS: StOrtSt May 3t ro....rr...........r.................r....o......r..o....or....
sl 02,550 93,500 (4r25O x5221..r,.....,.........o.,............r.,...o...... Dirgct tabor used 77.390 FaCtOfy OYefhead .......r.....r...........o..........r...........'.....r.......'..... Dirgct matgrials
COnSUmgd '......"............rr........t..r....o...........r.
5273r4/,O 61.420
Total manufacturingcost Add work in process, beginning inventory
s334,86O
Loss wgrk in process,endinginventory................r.....,...........52,80O s282,O60 COSIOf gOOdS ....'.....'.........r......................'....... manUfaCtUngd
(31
Endingbalanceof finishedgoods: Finished goods, April 30
+
Cost of goods manufactured
Finished goods, May 31
Cost of goods s ol d
=
S 4 5 , 6 0 2 + $ 2 8 2 r O g O X = s28O,OOO X
=
$ 47,662
Therefore,the finished goods ending balancesis $47,662.
E4€ (al *",i135";;;;;il..:::.::::::.::::::::::::::-:::::: 35,ooo 35,OOO
(b)
Work in Process............ t...........r.... Factory olrgrhead Gontro| ..o............r...,........ Matgrials
(c)
33'OOO 21000 35,OOO
.or..r.....'r.r......................r.r......o.
Payroll
4O,OOO
Accrugd Payro11.....,....,.r,.r..,.....r....,...r..., (d,
Accrugd Payroll .r................,......,...,..............
4O,OOO
4OTOOO 4O,OOO
CaSh....rr........r........o.r...r.........r.........or....
(el
(0
Work in Procgss .................r....o,...,.,..r.......... Factory Overhead control,.. Payroll ..........
Factory gverhead Control C a sh
g2rOOO S'OOO 4O,OOO
4,OOO 4,OOO
Chapter4
ffi
E4-S(Concluded) l8,ooo (g) FactoryOverheadControl.."""'r""""""""" AccountsPayable...........,..............""""
18,OOO
(hl
4,130 FactoryOverheadGontrol.....-.................'."' AccumulatedDepreciation...................'. PrepaidExpenses....r,....,-...........-.......... AccruedPropertyTaxes.,..,........r........"'
2,1OO 780 11254
(il
WOfk in PfOCeSS ........................r..................
36,130 36,130
Factory Overhead Control
o
92,OOO F i n i s h g d GOOd S ........,......,..........................,.. W o rk i n P ro ce ss..........................
92,OOO
(k)
A c c o un ts R g ce i va b l €..............,..................." 8 O , O O O .............. Sa l e s
8O,O0O
4O,OOO G a s h...........r................ Acco u n ts R e cg i va b l € ............................"
4O,OoO
C o s t of Go o d s S o 1 d ........................!........""" 60,000 Fi n i sh e dGo o d s ..r................' ...,...,.,"""" E4-6
(bl
17,5OO '
(c)
1,800
(d)
27,OOO
(h)
17,5OO 1,800 27 |OOO
Accrued Payroll.....,.'......
(gl
6Ot000 13' 5oo
Acco u n ts P a ya b l e
(0
:
13,50O
(al
(e)
_
Work in Procgss ......................'...............,..,. 1 7 , 0 O O 2,000 Factory Ovgrhead Control .r....r..,r.'.............,. 5,000 Marketing Expenses Control ........-............... 3,000 Administrative Expenses Control ...........,.. Pa yro l l 2r5OB Factory Overhead Control C a sh .............. 8,5OO Factory Overhead Control Accounts PaYable 14,8O8 W o r k i n P ro ce ss .....-.-..-. Factory Overhead Gontrol F i n i s h e d Go o d s..'. Wo rk i n P ro ce ss" " " " " "
27,OOO : 2,5O8 B,5OO 14,BOB
60,1OO 60,1OO
Chaptor I
67
E4-O(poncluded) Accounts R9cgivab18.............o...............oo'....
O
8O,OOO
Sa
8O,OOO
Cost of GoodsSold' FinishedGoods 'sl5,ooo
6O,OOO
60,o00
-$1s,roo= $8o,ooo + $oo,roo
E4-7
WALLACE INDUSTRIES Cost of Goods Manufactured Statement For M ay ( in thousands of dollar s)
Direct materials: Direct materials, April 30, 20A.........o Purchases......,...,. Freight
ill ...........r............r.....r....r.r...t..
Direct materials availablefor use.....t. Less direct materials,May.31r 2OA... Dirgct materials consumed.......... DirgCt
s5f o t5
$ zs, 525
sss3 23
s s30 260
tabOr.........roo........i..r.......o.,
Factory overhead: Indirect factory labor ..............,...r....... Utilities ($f gs r go o/o).............,..,...o..r.. Propefi t?,if,..........r.....,.............r......... lnsuranco ($2Ox gO%1..r...,...............r. Depreciation Sl2O + $3O)..... Total factory ovgrhgad,r...r..r.r....... Total manufacturing coSt..........o....r............ Add work in process, April 30, 2OA,... Less work in process, May 31, 20A.,.
Cost of goods manufactured
$eo 108 60 12 50 320
$t,t1o 150 $1,28O 210 $ { . 0 50 :
ChaptorI
ffi
cll{l{ABAR 69ffiplMf Statement of Cost of GoodsSold For Year Ended December 31
E+8
Raw materials: Purchase3 .........'."
$40o,ooo
Less dlgcounts on raw ."" materials Punchagod Lesg raw materials on handt Dgcgmbgr
3{ e 2OA.........""t
4,2OO $ggs,goo 24,0O0 s371'8OO
Cost of raw materials consumod Dirgct labor
lEo,ooo
...........o."""""""""""r'
Factory overheads Factory maintena!1co"............... Factory suppllgs used ....""'t""' Powgr and hgat-factofl ......'...' lnsuranco erpense-factorY buildingand equiPrllollt...." Depreciation-factory bullding and eqUipmgnt..""""""""" Factory superintendence.......... tndirgct factory |abor.........."""' Total factory overhead........ Total manufacturingcosts-,....--.....-.-. Add work in Process,January 1r 2OA Less work in Process,December31t 204 Cost of goods manufacturgd....-........ Add finishedgoods,Jbnuary1r2OA. Cost of goods availablefor sale o....-.. Less finished goodsrDecember3l' 2OA'.....................o.....t......"t"""
Cost of goods sold ....................o.......
s?8,4OO 22t4AO 19,400 4,8OO l7,5OO 1O0,000 20,OO0 222,5AO $774,3OO 84,OOO . $858,30O 3O,OOO $828,3OO 37,5OO
s865,80o . 7O.OQ0
szggJsq
CGA-Canada(adaptedl.Reprintwith permission'
ChaptorI
69
PROBLEMS P4-1 (rl
COMPANY BRTDGEWELL Gost of Goods Sold Statement For Month Ended July 31 (in thousands)
Direct materials consumed,...,.......
.....r......r...,.
s16
24 FactOryovgrhgad ................'.....................................'.....r............ 20 (a)...............................rr..,....,............ Total manufacturing cost s60 Add work in process inventory July 1.......,......,.....,............,........ 1 5 DirgCt
1abOf........r.r.r.................r..........r...................r..rr.r.o....'r..r..r
s7s
Lgss work in processinventory,July 3'l ..........,.......................,...25
Cost of goods manufacturgdr.....,........r..,r....r...,........o..........,....... 55O Add finished goods invgntory, July I (b) .............r....................... 20 Cost of goods availablg for salg r........r............,.,..........,.....o......... S?O Lgss finishgd goods inventory, July 31(G) ................_.-.-.u.r.......... 15 Cost of goods sotd ........,.........'......r.r....................,..,.....,...r......,.. G
Calculations: (a) Costofgoodsmanufactured.......,.............,.. $50 Add work in process,ending 25
s75
L e ss w o rk i n pr ocess, beginning.....,.......- .,... l 5 E q u a l sto ta l m anufactur ingcost.................. _999 (b)
(c)
Cost of goods available for sa|e.,.,......,..r...o. $ZO L e ss co st o f goods m anufactur ed...,.,......,... 50 E q u a l s fi n i shed goods, beginning......,....,,,.. 14 Go st o f g o o ds availablefor safe................... $ZO L e ss co st o f goods so|d........ 55 gg Equals finished goods, ending
Chapter4
'70
P4-1(Concluded) l2l
25,OOO
(al
Matefia1S.o..r..........................o..........o........... AccountsPayable.....................t.|..........
(b)
Work In Process FactoryOvgrhgadGontrol....."""""""""""' Matgrials...............r'........"""""""""""'
16,OOO 2,OOO
(cl
+$5'OOO)"""""""""""t""' Payrolt ($ZCrOoO gd """"""""tr"""""D"""'r' Payro11 Accru
29,OOO
(dl
work in Procgss ..............r....r.....................'. 24rOOO 5,O00 Factory Ovgrhgad Gontrol r""""""""""t"o"
a aa aa aa a aaaa a aa a aa aaal
PayrOll
a
25,OOO
18,OOO 29,OOO
t......."t"""""""t"t""rt"""""""t"
(e)
Finished Goods
(0
AccountsRgceivabte"""""""""""""""""" """' Sales ($60'000 + (75o/oof $6O10O0))
aaaaaaataaaaaaaaaaaaaa'
29'0oo
5O,OOO 5O,OOO
Work in ProcesS"""t""""""""""""""" 105,O00
55,OOO cost of Goodsso1d............................,..o....... FinishgdGoods"""""""""""""'r"""""
105,0OO 55r O0o
Chapten4
P4-2
(11
SCOTTSBURGCOMPANY Cost of Goods Sold Statement For Month Ended June 3O ( in thousands)
Direct materials: Materialsinventory June 1 ........................ Purchases........................., .......... Materialsavailablefor use... ........ Less: Indirectmaterialsused.................... MaterialsinventoryJune 30...........
sls 33
s48 S 1 19
ZO
s,
t,
$ 1 7 17 2 13
Totalmanufacturingcost (b)........ Add work in processinventoryJune 1..................
sl1
4
s1
Lesswork in processinventoryJune 30............... Cost of goodsmanufactured...... Add finishedgoodsinventoryJune 1 (c)............,.
3
sl2
7 sl9 3
Cost of goods available for sale., Less finished goods inventory,June 30 (d)..........:. C o st o f g o o d s so |d ....... Galculations: (a) indirect labor + direct labor = $4g indirect labor + (indirect labor x 6) = $49 indirectlaborxT=949 indirect labor = 37 directlabor=6x$7=942 (b)
(c)
4
sls
C o s t o f g o o d s m a n u f a c t u r e d . . , . . . . . . . . . . . . . . . , . . .$. .1 2 0 Add work in process, ending gO
sl 50
L e ss w o rk in pr ocess, beginning......... E q u a l sto tal m anufactur ingcost.
40 Sl iO
C o s t o f g o o d s a v a i l a b l ef o r s a l e L e ss co st of goods manufactur ed....... E q u a l sf i n i s h e dg o o d s ,b e g i n n i n g
S19O 12O S ?O
Chapter4
72
P4-2 (Concluded) (d)
l2l
(al
Cost of goodsavailablefor saler......'..""""' $ 1 9 0 Lgss cost of goodsso1d......................,......,..{ 5 5 Equalsfinishedgoods,ending...............""" s 3 5 Matgfials
33,O0O
..............r........r...........r...,.........,....
33,OOO
Accounts Payable ...,......r.....,.........o..,.... (b)
Work
in Procgss
.........tr....tt'otr""""""""t'r"'
Factory Ovgrhgad Gontrol ............................
28,OOO I,OOO 29,0OO
Matgrials ........t........'t"""""""""t""t""'
(c)
Payroll
....o................""""tttt"t"t""tt"""""t"
49,OOO 49,OOO
Accru gd Payro11...t..r..""""""""""""""' (d)
WOfk in PfOCgSS ...,..............r.....'.....r.,o..r......
Factory Ovgrhgad Control ....t..r......""""""" Payroll...............""""""""""""""""""' (e)
Finishgd
GOOdS....,rr,.......r....,...,.......o..r.........
42rOOO 7,OOO 49,OOO 12O,OOO 120,OOO
Work in ProcgsS......'.....""r"""o""""""'
n
Accounts Rgcgivabl€........"........"""""tt"""
21O,O0O
+ (50%ot $14o'o00))... Sales($14o,ooo
{55,OOO Cost of Goods So1d...................,....,..ro.......... Fi n i sh g d Go o d s ...'.........."""""""""""'
210,OOO 155,OOO
-
73
ChaPtarI
P4-3 ,
MADEIRACOMPANY Scheduleof Cost of GoodsManufactured For Month Ended March 31
(11
work in process,March I .............r.......r,....... Productioncosts: $lo4rooo tr Dirgctmatgriats..................................... ttt
r
"""""""" Direct labor....r.-....." ..............,......""""""" Factory overhead
l6otooo 8or999 *tt
s 4o,o0o
-344t009
s384,000 36,000 $a8,@'
Lgss work in procgss,March31 ............."""' Cost of goodsmanufacturgd..-.'....,...............'
r Cost of goods sold ($345,O0O) + endingfinished goods inventory ($tos,ooo)- beginningfinishedgoodsinventory(slo2,ooo)= s348r000. 'rpurchases of materialsduringMarch ($l tO,OOO) + beginningmaterials - endingmaterialsinventory($26'000)= SlO4'OOO. inventory(S2O,OOO) = - direct materials ($t Oe'OOO1 r.' production costs for March ($gCC,OOO) direct labor and factory overhead($24O'0Oo). Letx 1.5r x .5x (21
= = = =
directlabor S24O,OOO $l60'000 direct labor factory overhead $8O,OOO
Prime cost: SlO4r0gO Direct materials(requirement(1)).........,..r.o........, l6OIOOO (1))....:....,..................... Dirgct labor (requiremgnt
_9261poo (31
Conversioncost: (1))'......r.....,................. $160rO0O Directtabor(requirement 80'0OO Factoryoverhead(requirement(1)1.............,.....,..
_9240,999
Chaptor 4
P4-4 CompanYA:
s4,oo0,ooo
""""t"""""t"tt""ttt"tt""t"""ttt"""""t"
Salgs
Cost ol goods sold: Finishedgoods inventory Janualy i """ Gost of goods manutactlli9d""""""""" Gostof goodsavailablolor sa|e""""""' Finishedgoods Inventory December3l
S 600,000 3,80O,OOO
$4,4oO,ooo lr2OO'OOO 3,20O,OOO
Cost of goods Sold tt""t'o""t""""t"""t"'
.
s Soo,ooo
Gross profit l2oo/oOf Sales).o......'..............r.....
B: GompanY ' O,OOO ctst of goods availablgtor 3a1o.,..r.........,......5 1 , 5 {o.ooo 2'l _ Less finished goods ending inventory""""""
slJggJoo
COSI Of gOods Sold "tt""t""""""""""r"""""'
CompanYC: Sal
eS
S 429,ooo
..."""t"'rt"t"'ot""t"""""""o"t1""""""t"
Cost of goods sold: Cost ol goods manufacttlrl9d""""""""" Add bsginning finished goods inventory Cost of goods availablolor 8a1e""""""' Less ending finished goods inventory""
34O,OOO 45,OOO $ 385,OOO 52,OOO
$
333,OOO 96,000 $
Cost of goods Sold """"'o"""""""""""' Gross profit """"t""""'r""""""""""""""""' P4-5
Work in Process
FinishedGoods Beg.
(41
35O,OO0
34,0OO 348r00O 38Ct,o(to End.3O,W
Beg. M L(2) FOH
85,O@ End.7S,OOQ
5O,OOO 20O,OOO
loo,0oo 357,W End.17,@
Accnred PaYroll
Materialsand Supplies 2O,OOO 65,OOO
346,OOO
7,0oo
(11
2O,OOO 5O,OOO 70,O@
(8)
259,OOO Beg.
13,OOO 55,OOO 2OO,OOO 268,N
End.9,Ooo
75
Chapter 4
P4-5 (Concluded) Accounts Payable
Accounts Receivable 5 4 ,0 0 0 (7) 5OO,OOO
532,OOO
(6)
77,OOO Beg.
83,OOO
554,OOO End.22,OOO
End.6,00O
Sales
,Factory Overhead Gontrol 2 O,0 0 0 (3) 5 5 ,0 0 0 10,00o 2 ,OOO 13,OOO
18,OOO 65,OOO
lOO,OOO
lOO,AOO
Cost of Goods Sold
Payroll 5 5 ,0 0 O 2 0 O,OOO 255,OOO
(11 l2l
(3)
(41 (51 (61
rtl
(81
(5) 55,000 2OO,OOO
350,OOO
255,OAO
Materials issued to production' 55O'OOO Direct labor, $2OO,000 Total factory overhead' $1OO'0OO Gost of goods manufactured, $346'OOO Cost of goods sold, S35O,OOO Payment of accounts payable' 577'0OO C o l l e cti o n o f a cco u nts r eceivable,5532,OOO Payment of Payroll' S259'0OO GGA-Ganada(adapted).Reprint with Permission.
t
1
Chapter 4
76
P4-6 Work in Process
84,OOO
laaaata
84,OOO
Material8... Cost
ol gOodg
$14o,ooo
SOld ttt"tt""t"""""t""tt""
l7,ooo Add finished goods inventoq/ incl€ase" Cost of goods manufactllhod..'...'...r..""' s157,OOO 2,OOO Add work in process inventory increase Total manufagturing cost -....--.-...........o" s159,OOO Less : Factory overhead.t..... $35'OOO Dirgct t:lbor.......,....o... 4OTOOO 75rOOO Materials used in manufacturing .,.r,...... l_84,OOO Materials
91,OOO
..........t.....t...t"""t"""ttttt"t"tt"tttt"
9l,ooo
Accounts Payablg.....'..""""""""""""" Materials ussd in manufacturing (from above| .........o...."r""""""'rt"""'
Add materials inventoryincrease....'..... Matgrialspunchasgd".........""""'r""""' Payroll .....'.'.......
a ata-aaaa
aaa
$ 84,OOO 7,OOO
$ er,ooo 40,ooo 4O,OOO
Accnrgd Paytoll.......'.........""""""""to"' Work
in ProcgsS ........................tt""t"""tttrt' .........r..........""t""t"""""""""t' Payroll
Factory Overhgad Gontrcl ......r'.r.t,,.....""""' Vari o u s C rgd its.'........"' t " " "" " " "r'r t " " "' Work
in Procgs3
..............'.t""t'o"t"t"ttt"r"'tr
Factory Ovgrhgad Control o..r........ro"""" Finished Goods (12'OOO+ 84'OOO+ 4O'OOO+ 35tOOO- 1 4tOOO)............."""""""""t Work in ProcgsS .............'...r"""""r""""
Cost of GoodsSold (28'000+ 157'O0O45tOOOl .........................'.."t""t"t""t"'
Finished Goods
..............
4O,OOO 4O,OOO 35,OOO 35,OOO 35,0OO 35,OOO
t57,0oo t57,OOO
l40,ooo
l4o,ooo
GGA-Canada (adapted). Reprint with permission'
,<
n
92,OOO 26,530
(c) Payroll... '' Accrued Payroll
86,000 ..............
86,000
Work in Process....................r.............................6Or5OO Factory Overhgad Contro|..........,.,....,...........,..... 1215OO Marketing Expenses Control ,..............t............., IrOOO Administrative Expenses Gontrol 5,OOO 86,OOO
47,33O 188,OOO 241,150 185,5OO (hl Cash !........,r.........,......,.. Sales Discounts,........... Accounts Receivable........... (i) Marketing ExpensesControl Administrative F.xpensesControl Accounts Payable 0 A cco u n ts P a ya b l e Cash
rt
...,......
ZOSrGO2 4r2ig 212rg2}
...,............
18,ooo 12,OOO 3O,OOO 1O4,OOO 1O4,OOO
Chapter 4
78
P4-7 (Gontinued) Materials
Cash l/l
Bal'
(hl
20,O0O (c) 2O8,662 0l
2i28,662 36,412
88,25O
l04,o0o
111Bal. 1o'oooI (d)
(a)
't92,250
102,OOO t7,2OO
Machinery
Accounts Receivable l/ 1 B a l ' (gl
25,O0O (hl 241,15O
212,924
9O,8OO
92,OOO
1/1 Bal. 4O' OOO
26art50 53J,3O
Accumulated DePreciation
Finished Goods
1 t 7 Bal.
(0
9r5OO (g) l 8 8 , OOO
111 Bal.
1B5,5oO
1O,OOO
,97,5OO
AccountsPayable
Work in Process t/l Bal. (c)
(dt (e)
104,OOO 1/l Bal. (a) (b) (i)
1 8 8 ,O0 O
4,50O 6O,5OO 82,50O 47,330
15,5OO 92,OOO 26,53O 3O,OOO ,64\030
(q4,>e3
RetainedEarnings
Accrued Payroll 88,25O 111 Bal.
(c)
111 Bal.
2,25O 8 6 ,OOO
21,25O
Cost of GoodsSold
Sales 241,15O
(g)
1 8 5 , 5 OIO Payroll
Sales Discounts (c)
I
86,0O0 | (c)
86,OOO
LL L I\
t_
Clppterl
79
P4-7 (Concluded)
CommonStock
Factory Overhead Control
I
26,53O (e) l2r 5OO 8r3OO 47,33tO
(b)
(cl
!
(d)
I
47,330
!
Administrative ExpensesGontrol I I !
(cl (il
Marketing ExpensesControf
(cl
5,O0O 1 2 ,OOO
810oo 'l8,0oo
(i)
2l,ooct
17,AOO b
(31
HOPKINS& WHITECOMPANY ThialBalance January 31
$ 36,412 53,23O AcCOuntS RgCgivabl€...tr..............r............................r...... 12,OOO GOOdS......r...........r.o....'..r..r......r...r'..........r......r. Finished 6,830 WOrk ln PrOCgSS.........'.o,.r.,.....,..r'.......r.'....'.rr.'.....r........t 11r2OO Materfals 4O,OOO Machine CSSh '........
aaa aaa aroaaa
Accounts Papble
aaaaaaattaaaa
a aaaa aaa a aa aoaaaaaa
aa taaaaaatta
aa aaaa
aal
a a
aa
Accumulatgd Depreciation....,...,......,,.,.....,....,................ Common Stock..,. at
Retained Earnin Sales Salgs Discounts,...,..
a araotaaaaaaaaa
aataaa
a
s 60,030 l O,OOO 6O,0OO 21r25O 241,15O
4,258 185,5OO 26,OOO l7' OOO
1993,430 _$3e2,499
l
CHAPTER5 DISCUSSIONQUESTIONS O5-1. The cost attached to 8 Producl il an amount assigned by the costing melhods uled-an amounl controlled by the citcumstancer, assumptions' and limitations ol lha melhod under which il was ccrnfiled' Product cosb ato cornposiles ol historbal outlay thal have, per' haps, been modifki by estlnateo or slandards, by processer assigning or proratlng expendi' tures to periods, or by lracing the direct costs and allocating the indirect cosls lo particular producls so thal the total period outby b spread over the aggr€gatt or'ipli. Despile these shorlcomings, product costs aro uselul in cosling invenlories, cornpaling prices and tolal unit cost' measuringcurrent profil or loss, and indicating the rninimumcosl below which a sales price cannot go in the long run. Sorne confusion will result al times in usitlg cosl intonnatbn h mak' ing management decisions unless informatioo relevant only to the decisbo is used. O5-2. The primary obiectivc h irb order costing is lo determine the cost ol materiats,labor, and faclo' ry overhead used to produce a specific otder or conltact. Cost estimatss ato made when the order is taken, and the iob order praeduros ate d e s i g n e dl o r e v e a l c o s l s a s l h e o r d e r g o e s through prodrrction,thereby giving an opportuni' ty lo controlcosts. O5-3. The typ€ of cost accumulaiionmelhod used by a cotrlpany will be determinedby the tlpe ct man' ufacturingoperatbns pedormed.A rnanufactur' ing companyshoulduso Processc6l accumubtion lor product ccthg putpos€3when like units are continuoustynrass Produced;when cuslorn' rnade or unQue gpods are produced' icb order costing would be more aPProPriale.Process costing is otten used in industriessuch as chemicals, food processing,oil, mining, rubber, and electrical appliances. With a continuous mass produclianol like units,lhe cenler ol atlenllcn is the individualprocess (usuallya dopartmonl)'
'
The unit ccts by cost category as well as lotal unil cct lor each Ptocess (deparrment)are nec' e3sarylor product cosling PutPosss' O5-4. A icb order cost sheet is used: ("i to keep track of the direct rnaterials and direct labor used on a icb plus atl aPProPriateshare cl frtorY overhead; (b) to comPara actual cost3 to estimaled cqsts: (c) as a subsidiary ledger for the work in procoss accounl. O5-5. The work in procesr accounl is a conlrol account i n t h e g e n e r a l l e d g e r , r e f l e c t i n gl o l a l c o s l s assigned or applied to jobs. The individualiob cgst shoots lorm the work in process acco{'nt's subsidiary ledger, indicathg the direct malerbls' direct labor, and factory overhead charged to each irb. 05€. Job order cosl sheets serve a control funclion' Comparisonsare made between estimates ol pb cosrs and cosls actually accumulated lor lhe job. ln addition, cost control is enhanced by accumulatingdirecl materials and labor as well as factory overhead co3l3 by cost cenlers or departments,and by comparinglhe aclual cosls to cGt conterbudgets. O5-7. Actual lactory overhead consisls of the day'by' day cosls that ato actuatly experienced and incurred by the cornpany. Applied lactory overhead is the overhead charged to pbs based on the predelerminedfactory overhead rate. This rale is crealed by divirJingtotal €stirnated over' head by toial estimatednurnberol units (or any other appropriatebase). ThE dilference between aclual and applied factory overhead is lhe ovetor underaPPliedfaclory overhead, 05€. The characteristicof a service business lhal rnakes likelythe use ol job order costing is lhat all jobs are not alike and cost informationfor each iob is desired.
8l
Chapter5
s24,07O 221832 1OrO24
s56,926
S 4,420 2,600 2,OOO
s 9,o2o E5-3 (1)
T h e a mo u n t o f d i re ct labor in finished goods: Finishgd
gOOdS..,............o,...o..,....
.............tt..'.'...t'.....
s37,5OO
12,30O Ma te ri a l s i n ctu d e d i n finished goods { $15' 5OO- 93' 2OO} ........ s25,2OO Direct labor and lactory overhead in finished goods """"""" Factoryoverheadchargedto work in process Direct labor chargedto work in process
sl1,80O
= - =
sl4 ,75O
a
d
L e t X = d i re ct l a b o r in finished goods 1 .8 X = $ 2 5 ,2 OOd i rect labor and factor y over head in finished g oods X = 5 1 4 'o o o d i rect labor in finished goods
l2l
The amount of factory overhead in finished goods: X = $ 1 4 ,OOO .8X = .8 ($14,000) .8 X = $ 1 1 ,2 OOfa ctor y over headin finished goods
E5-4 (1)
D e ce mb e rma te ri a l sused: $ I,OOO Materials inventory, Decembei 1 .......................'. s84,OOO Ma te ri a l sp u rch a se d............ 1 , 5 O O 85,5O0 Freight-in $94,5OO Materials available 4,5OO Materials inventory,December 31 ....... $9O,OOO
Chapter5
82 E5-4 (Concluded) l2l
Work in Process, December 3l: Per Unit
Directmaterials.......r.. $2.4o .8O Dirgct tabor-.r.,-.......--. r 2,ooo units = $6,4OO , i?.2o Factoryoverhead.....'..32machine hrs' @$t OO= 312OO $9,6OO (31
Dscembercost ol goods manufactured: Materials used (direct)(requirement(1))"""""t""""""t""""' Dif|'Ct
1abOf ....rrrr............r.........r..'......Dr..................'t"""""""'
(}SlO0)"""'t""""tt""" Factory overhead (600 machine hours
TOtal manUfaCtUfing COSt..........or............'................t.""""""'
December1: Addwork in Process, = s7,2Oo DirectMaterial'S2.4ox 3'ooo = 2r4OO DirectLabor,$.8o r 3'ooo = 4,8OO hours $t0o r 48 machine Overhead,
Less work in process,December31 (requirement(2))""'r"""
(4)
F i n i s h e dg o o d s, D e ce mb e r 3 1 : DifgCt matgfialS.,.r..,....'..,................,.....,...........r...... DifgCt
tabOf
..........................r..r.....r......r..rr..........o..t..."r"""tt"
OO)""'r""""""""t'r' Factory overhead (60 machine hours CDSl
s 9O,O0O 3O,OOO 6O,0OO
sl80,OOO
l4,4OO
s194,40O 9'600 s184,8OO
s 5,ooo 3,OOO 6,OOO
$ 14,OOO
(sl
Decembercost of goods sold: Cost of goodsmanufactured(requirement(3))"""""""""""" Add finishedgoods,December1'-.............""""""""""""""' """"""""" Cost of goodsavailablefor sale'............' (4))""""""" (requirement 31 Less finishedgoods,December
s184,80O 12,00O s196,800 14,OOO
9l_93,8oo CGA-Canada (adapted). Reprint with permission.
83
Chapter5 E5-5
Materials: Beginning inventory
""""
$75 336 (1) ttttttttttt"""'o"""rt""""""""""""' PUrChaSgS $411 Materials avaitabte for usg """""""""""""' 85 LeSS ending inVentOry.....r..........r......r.......... Matgrials us€d..,r....r...........,..............r..........
Directlabor(($gaO- $s201'r 1'61""""o"""""""" Factoryoverhead(S225x '6)"""""""""""""""" 'i
TOtal manUtaCtUfing COSt.....................,...t"""""o Add work in process, beginning inventof """""'
Less work in process, ending inventory ""'r"""""' Gost of goods manufactured """"""' inventot] Add tinished goods, beginning cost of goods availablg for sa19........,.,..............o. Less finished goodsr ending inventory""""""""' C o st o f g o o d s so l d ..............' .....r .......' ."""' t"""t"
9geo 225 l2l 135
s586 80 s766 30 s736 (3) 90 s826 125 s701 (4)
E5-6
(rl
Materials
....'r""""
DifeCt 1abOf ....r..........,......,...r.....'.....'.........t...tt"""""""""""'
(21
s13,OOO 15,OOO
Factory overhead: DLH x $2.70)...' .......,....,""""""""""""" Mo l d i n g (1 ,OOO ($6,OOO x 35oh1............... Decorating -........-..........,.."""""""" Estimated cost to produce
2,7OO 2,1OO s32,8OO
Matgrials
$13,000 15,000
DifeCt
aa.......r..o..o...rr.r..r....r.............t.a..r....a....ar............ra.ro4ar 1abOf..r....r..r..........r.r..r..r.....r.........r.r.r.....o.......r.o.t.......j1
E s t i m a t g d p r i m e C O S t . . . . . . . . . . . . . . . . . . . . . , . . . . . . . r . . . . . . r . . . . . . . . . . . . . . . . " " " r "s28,009
(31
(4)
DireCt 1abOf.............,.........r.........r............r.o......'...r...........,."'t
s15,0oo
E sti ma te dco st to p roduce ( r equir ement( 1) ) ......' ,...... Markup ($32,8OOx 45'hl Bid price
S 32'8OO 14'760 S4?F6o
Factoryovgrhead($zrzoo+ $2rl ool...........'....o..............""""' 4,8O0 s19,8OO """""""""""' Estimatgdconvgrsioncost................'
Chaoter5
a I
E5-7
(r)
MACHINEWORKS WADSWOBTH Job Order Cost Sheet-.Job 9O9 Dlreet l,.abor
Dlrgct Materlalt
Datc lgsucd 9114 sl20 9122
gt(ryO t
OOO 331 200
Datc sl20 9126
Houn
Rata
Cogt
90 70
3s.20
3 558
7.30
511
sl20
s800 :
DifgCtmatgfia1S............,......o..............r....'.... DirgCt labOr ........r.r......'...r........'..............o..'. Appligd factory ovgrhead'.r..'..'.,.........""'D"'
S1tt31 I tO69
Total factory CoSt...'........t...t.."""""'o"'o"""'
Markup SOohof cost
s3,OOO 1,5OO
SalgS pfiCg.....................................!......o..'...
S4r500 :
Work in Process (35'OOO+ 45'OOO+54'OOO)........ Matgfials
(2)
s800
sales price of Job 9o9, contracteda markup of Soohof cost:
E5-8 (f )
s80
10
31,060
st,13l
(2)
Appllcd Factory Orerhead Datc Bate Cost (Weeko0 Houn
Debit 134,OOO 12O,O0O
l2o,oQo
........'..."""""tt'r""""tt"t""""t"t"""'
96,O0O
(3)
Work in Process (36'000 + 32,000 + 28'O0O)....1." Factory Ovgrhgad Control ..'o'......r........."""'
(4)
Finished Goods (156'000+ 132'O00)........'-'...-.o.,. 288,OOO WOrk in PfOCeSS ..............rr....r..r............'......
Credit 134,OOO
...........r......rrr.........or................tt....
Work in Process (45rOOO+ 4O'OOO+ 35r0OO)."...., Payroll
800
96,OOO 288,OO0
I I
E
I I
Chapter 5
I
E5-9, (a)
- ,
85
35,OOO 35,OOO
8,OOO 2,OOO
(b)
I b
10,000
(cl
I I
9,4OO
!
9,4OO 7,6OO 1,8OO
I b
9,4O0 (d)
1r2OO
L
1,2OO (e)
b
1r22O
1,22O 4,5OO
4,5O0
(0
1r25O
1,25O (g)
6,10O
6,10O 4,50O
4,5OO E5-10
Materials Inv. Purch.
1 O,0 OOwtP 138,O0O
Work in Process 11 O , O O O
,48,OOO
lnv. Materials I 1 O , O O O Factory overhead 90,000 18O,OOO Labor
3OO,OOO
41O,OOO 11O,OOO
:
F i n i sh e dGo o d s Inv.
wtP
5O,OOO CGS 3OO,OOO
Cost of Goods Sold 2OO,OOO
FG
2OO,OOO
35O,OOO
tSo,ooo GGA-Canada(adapted).Reprint with permission.
Chapter5
Es-tI (fl
WOfk in PrcC€ISS......'...'...........................o......r.t... Matgfials ............r.............................'........rr. PayfOll
1 9 , 11 2 . 5 O gr25O.OO 3r945.0O 5r gl7.5O
...........or....r...o....r...r......................t....
AppliedFactoryOverhead................"""""" (21
Finishgd GOOdS.r......................................r..r..r..... WOfk in PfOCBSS ...........................r...............
1 9 , 11 2 . 5 O 19,{ t 2.5O
I, I l>
87
Chapter 5
I
I b
I
:'
PROBLEM S
Ps-1 (1)
Total cost of work put into Process: MatgrialS.r..........o..r....................'......r.....'........
S 6OtOOO
Labon Grinding t8r00Ohrs. x S5.60l ...............,...o.......... Ma ch i n i n g( 4,600hr s. x $6) .................' .". Factory overhead: Grinding (8,ooo hrs. x $6) .........'..,... M achining( 4,60Ohr s. x S8) .............
\, I
b
441800 27'600 48'ooo 36 ,800
s31l,2oo (21
Cost of goodsmanufactured: Totalcost of work put into process(from requirement(1)l s217,2OO 15,OOO Workin Process,beginninginventory........ s232,2OO 17,600 Workin process,endinginventory......r,.....,
s21_1,699 (3)
Cost of goods sold: Cost of goods manufactured (from requirement (2))....... s 2 1 4 , 6 0 0 F i n i sh g dg o o d srb e ginninginvgntor y....,' .- ..,.' ............' .... 22rOOO
s236.600 F i n i sh e dg o o d s, e n ding inventor y
..,......r .......,.... 2 1 . 0 0 0
52{5.600 (4)
Gonversioncost: L a b o n Gri n d i n g(8 r OOO hr s. x S5.60l...............r r r .........'$.. 4418OO M a c h i n i n g ( 4 , 6 o O h r s . x S O ) . . . . . . . . , . . . . . . , . . . . . . . . . . . . . .2. 7. 1 6 0 0 48 r OOo F a cto ry o ve rh e a d : Gr inding( 8,OOO hr s. x $6) ................ 36'800 Machining( 4,6OOhr s. x $8) ...........' .
g!_qz'209 (s) I
Cost of materialspurchased: ....,.....r .o...o$ 60,000 18,000 $ 78,OoO L e s s m a t e r i a l s ,b e g i n n i n gi n v e n t o r y , . . . . . . . . . . . . . . . . , . . . . . . ! . . . , .2O , . ,OOO
Ma te ri a l s p u t i n to p r ocess ............... A d d ma te ri a l s,e n d i ng inventor y
s_99p99
.t
Chapter 5
I
P5-2
(r)
Materials 2r75O lndirect 411 Purchases t l'5OO Material 14'"250 Direct Material 1,755 r $9,7OS=
2r790 gr7o5 | 114s5
$2r45O + S97O + 36'285 (Job 2O7) (Job 2O4) (Jobs 2O2,2O3,2O5, & 206l
work in process ending inventory consists of iobg 2o3 & 206: Job 206 Job 203 (Slr48O + $ 555) + S t ' 9 8 O Dirgct matgria|s.........................r..... ( I rOOO+ 115OO)+ I ' O O O DifgCt |abOf .,...r............................... 8OO ( SoOr+ 14991 + Appliedoverhead.....'.,.'.........-......... + S3'78O Total ...r....r......r..,..................F3,.280 " #-S-l
Total
s 4,015 3,5OO 2,8OO
$ 1 o , g ts
'Applied overhead is 80% of direct labor cost' l2l
WorkinProcess....o.....,................. Materials Payroll
4,85O 1r25O 2,OOO I,600
...t..""t"""t""'t""tt"""t"""""""tr' """"r"""tt"t""""""""""t'r""""r""'t
Applied Overhgad....""""""""""'t"""""""' " Finishad Goods (4'7OO+ 1r25O+ 2,OOO+ 116OO) work in Procgss ..........r..........r,.....,........r..... COst of GoodSSo1d"""t""""""'o""""""t""""""' Finishgd Goods................................r.'.......... ACCOUntS RgCgiVab18............".......o.......'........'."" Salg3tttttt""tt"ttt"t"tt"ttttt"'r""t"ttt"tt"'r"t""'
9,550 9,55O 9,55O 9,550 14,325 141325
I I
I I L.
I
89
!
Chaoter5
t-
P5-2 (Concluded)
i
(31
Cost ol goods manufactured = cost of iobs finished in April' Job 2O5: Dirgct matgrial ........'........ $ Dirgct 1abor......".........'.o.. Applied overhead'....,.o'.... ' Total Job 205...'......'.... $
E I I
!
Job 2O2.........r.r...r'....t.........""t Job 204 r....t.......t.........t...'r"""' JOb 2O7'..................'.'..r..'...."'t
I
2,5OO 2,7OO (l 05 direct labor hours x S2Ol I,O8O (105 direct labor hours x 516) 6,280 9,550
(see requirement (2))
6193O
5,87O
Tota|...r..,,............,.'...... S28rO3O
!
(4)
Actuat overhead (1'375 + 2,5OO+ 2r7OO+ 2r790l. Applied overhead: s 5,280 Jobs 2O2' 2O3, 2O5' 2Og (330r hours x $16!. 1r52O .........'.."""'r"""' Job 207 .'........'.... 800 Job 2O4 ($l rZgO 5960l.r..'.r.......t..........".." Total appligd ovgrhgadr...'........r-........r.....
s 9,365
Undefapplied.'....'..D........'.'r............r.'.r...'......'......
91t99
7,6OO
'1OO+75+105+5O (5)
Jobs 2O1r 2O2,and 205 wene sold. Their costs are S8'45O + S9,55O + 56'280 = S24'28O. $36,420 Sales (524,280x 1.5) goods Cost of sold ....... 124,2801 Underappligd ovgrh€3d......'..........'.........r..r..'...... , ( 1 , 7 6 s ) .'....r...r....' $1O,375 Gross profit for April
P5-3
Work in Process
Finished Goods Bal. (i)
8O,OOO 32O,OOO 40O,OOO
36O,OOO
Bal (c) (e)
20,OOOl(il
32O,OOO
15O,OOO
go,ooo
l OO,OOO' 35O,OOO
3OrCnO
'$?3o,ooo
- SSo,ooo- $25o,ooo direct labor and factory overhead. Factory overhead is l50% of direct labo6 thereforo, direct labor is
sl oo,ooo
ChwterS
90 I
P5-3 (Concluded|
Cost of Goods Sold
Materials 8O,O(X) 12,OOO 92,W
l5'OOO
Bal. (b)
loo,ooo tt',NO
360,OOO
29,N
Factory OverheadGontrol
Applied Factory Overhead
l5o,ooo
6OTOOO l 2 ' OOO 75,OOO 147,N
Accrued Payroll
Accounts Payable TrOOO
1 O 2 ,O0 O Bal.
t72,OOO Bal.
loo,ooo 707,N
I I,OOO 175,OOO l8o,@o
5rW
Sales
Accounts Receivable Bal. (a)
45,OOO 5OO,OOO
480,OOO
g5,o@ 65,AOO
"Cost
(1t l2l
t3) (4) (5) (6)
rr) (8)
of goods sold is 72% of sales (r0o% - 28ohl.
Materialspurchased-$l oo'ooo Cost ol goods sold-$360'OOO Finishedgoods ending inventoryt4O,OOO Work in process ending invento4;-$3O'O00 Direct labor cost-$l o0,00o Applied factory overhead-$l 5O'OOO Ovep or underappliedfactory overhead-$3,OOOoverapplied Glosedout to the cost of goods sold account GGA-Canada (adapted). Reprint with permission-
Chaptor 5
P5-4
9l
l
(1)
COLUMBUSCOMPA}TY Cost of GoodsSold Statement For Month Ended October 3{
Materials: Materialsand supplies inventory,OcL I
s4O,7OO 24,8OO Materialsand suppliesavailablefor ]|so......,..........,. sgs,5O0 Less: Factorysuppliesused.......r...r........$ 3195O Materialsand supplies inventory PurghaseS .........'..r.........o........r................................t
OcL 31
31,75O
35r7OO
Materialsconsumed
s29,8OO 18,600 27,45O s75,850 4,O7O s79,920
DirgCt labOr .........rr..r..........'...r.'.
Applied factory ovgrh€ad.....r.,r.....,.........D,.....rt............... Total manufacturing cost........o..o............r.......r.......r........ Add work in process invgntory Oct 1................,........o,..
Less work in process inventory Oct 31 Gostof goodsmanufactunad o.r.,........o..................r........., Add finishedgoodsinventory Oct 1.,..,..............r......,.... Cost of goodsavailablefor salg .............r........o..,....o....... Less finished goods inventory,Oct 31 (2,500 units x
4,44O $75,480 g,g0o s85,280 9,250 s 76,03O
53.7O)r................r.......................................................
Cost of goods so!d......................
.............r....,....
rCalculations: Units in finished goods inventory, OcL 1
2,8OO
Units manufactured Units sold
20,4OO (2Or7OOl
Units in finished goods inventory, OcL 31 Cost of goods manufactured Units manufactured
=
s75,480 -t- - '1-.-.20,4OO
(3oo)
_3's09 -
Sif .7O
92
ChapterS I
P5-4 (Concluded)
tzl
COLUMBUSCOMPANY IncomeStatement For Month Ended October 3{ Sales Less safesreturns and allowances...................... t alaaa
Ngt
aaa a a aaaa a a aa a a a aa ar a aa a a a a ar a a aa o a a
sa|gs...........r...t....o.....r...............r....r........rr....
Lgss cost of goods so1d...,...,.........,................,.r.r. Gtpss
profit........r......r..r..............r..r....r...r....r.......
Less commercialexpenses: Marketing expens€r ............ $25,O5O Depreclation-building....,......... 30 Depreciation-office equipment 16 $25,O96 Administrativgexpense.....r....... $ 1 9 , 7 O O Depreciation-building.............. 20 Depreciation-officeequipment 24 19,744 Incomg bgforg incomg t?x..........r...r..
(3t
Amount of over- or underapptied factory overhead: Actual factory overhead: Factory overhgad paid,.............r $2O,1OO Indirect materiafs ..,...,............... 3,95O Depreciation-building .....r.....r.. 150 Depreciation-machinery and g g u i p me n t.............,.............r . 800 Indirgct 1abor.,.......r...,...,....,...r.. 4,4OO .s29,40O Applied factory overhgad ..........,......, 27,45O Underappfied factory overhead......... $ 1,950
s144,9OO 1,3OO $143,600 76,03O $ 67,5 70
44,940 $ 22,730
\'
Chapter 5
- "
P5-5'
(11
93
MORRISVILLE CANNINGCOMPANY Balancesheet December 31, 208 Assets
-
Current assets: $1 9tOOO
CaSh...'......................r........r....r....D.........
Accounts receivablG!............................... lnventories: Finishgd goods .........,......r............r.. S4rooo Wo rki n p ro ce ss............r .......r .r ........ lr 0O0 M atgria lS..'.'....r......'....o........r..........'
2tOOO
Prgpaid expensgs....r....'..........o.........o....
v
1O,OOO
7t OOO 5OO
s36,5OO 26,00O
Property, ;[:1:lllTll,lr',i?",";ffiil::::.::.::::
s63,599
TOtal aSSgtS t....r..'.............,...............'...........
-
Liabilities Currgnt
sl7,5oo
liabilitigs............,..rr..r...'.r...........r.r..
Stockholders' Eguity C o m m o n sto ck',...'..'..'........' ..!...,r R e t a i n e d e a rn i n g s,..........,................. Total stockholders' equity ............ Total liabilities and stockholders' equity......
s3o,ooo 15,OOO
45,000 s 62,5OO
Chagter5
94
P5-5 (Concludedf CANNINGCOMPANY MORRISVILLE lncome Statement For Year Ended December 31, 2OB
l2l
S3l
esaraaaaaaa...aaaaraaaar..aaa.aaaaaa.a.aa
araaaa.a.
s60,000
aaaaataaaa aaaa aaaaaar aaa a aaaaaaa
Gost of goods sold: Materials: tnvgntOryrJanuary1.....'......r...'..'..........'............$ 4tOOO PUrchaS gS ....r....................r....r......r.....'....t..o.t..t..
I 5t O OO
Matgrials avai|ab|gforuser.........................'...... $lgrOOO 2rOOO LgsSlnventOryrDeCgmbgf3l...'........'................ Matgrials consumod....'........o..........r..........'.......SIZpOO DirgCt
ITOOO
13bOf .......o..rr..........................r.........o..............
I,O0O Appfied factoly overhead r.,....... Total manufagturing GoSt.....,........,.......,...ro.............. 335rOOO jrOOO Add work In process Inventoryr Januafl I ......'..r,.....
s37,DDO I'OOO Less work in process inventoryr December 3l ...o.o... Cost of goods manutactllrr8d...........o....r.....r.........r.... S36r,OOO 6'000 Add finished goods inventory Januafl't ........o........o Cost of goods availabtoforsale..'.'...oo................o'..r-$.02rOOO 4rOOO Less finished goods inventory, December 3'l .....-..... $38^OOO
Gost of goods 30ld...'..'...r...........'rr.......o.........'r...tt.tt
Add underappllodfactoryoverhgad.,...,.................... 2t999 COSI Of gOOdS SOld-adiUStgd
Gross profit
aaa ataaa
............,..o..'.....o.,....r...
aat aa aaaaaa aa a a ataaa.
aa aa aaa aa aaa a t ttt
"
'
Less commencial expenses: Markgting expgns(0..........,,..............'...'..'.....'...'....r..$ 6rOOO Administrativg gxpensg...'....o......'............,..'..,.,......t 9t9OO lncOmg bgfOrg inCOmg t8X.'..,.J.........'..................'r.....'....
4O,OOO $2O,OOO 15tOOO
s 5,ooo
Chagler 5
9:
P5-6 (1) and (2)
TROPEZINC. Job OrderCost SheetsTo Post BeginningInventoryData March 1, 19-
Job 621 Matgrials .,.........r,r....r.. $ 2,8OO LIlbOr............r...r..rrr..... 2r1OO FactoryOverhead......., 1 , 6 8 0 TOtal .D..........r".....r. $ 6,580 (bl M ............,....... 5,30O
Job 622 2r7OO 2,160
$ 8,260 7r4OO
(cl M..,.......,
(4oo)
6r42O (hl oH ......,.........,. 5 1 1 3 6
8r160 6,528
Total .............r........ s23,436
s29,e49
(f}
L...r.....'...r.......
0l Completedand transferred to warehouse
J ob 623 s 1,800 1,350 I,O8O s 4,230 5,9OO
$ g,4oo
6,32O 5,056
s21,s99
Completed and transferred to warehouse
(21
Still in pnocess
Dr. (a)
Cr.
22,OOO.OO 22,OOO.OO
(b) Materials
(c)
18,6OO.OO 2,4OO.OO u
21,OOO.OO
600.0o 400.oo 200.00
(d)
800.o0 800.oo
(e)
38,OOO,O0 38,OOO.OO
(0
2O,9OO,OO 7,6OO.OO 5,7OO.OO 3,8OO.OO 38,OOO.OO
(gl
9,404.5O 7,154.5O
B u i l d i n g & Equipm ent....,.... P re p a i d In su r ance
2,OOO.OO 250.0o
.t
_
Chatsr 5 96
P5-6 (Concluded)
Dr. 16,720.OO
(h) Work in ProcgsS""""t""'r"""""ott"t"'t"""""""'
Faaory OverheadControl (or Applied Factoryoverhead)...'.....................'.....|t...
{il
nl Y'
(k)
Finishgd
Cr.
16,720.O0
53,384.OO
GoodStt""r""""'ot'or""""t""""t"""""o'
53,384.OO
Work' in PrcCess """"""""""""""""t"""""
741738.OO' 74,738.O0 S3l9stttttt"""""tttt"""""t"""t""tt"t""tt1t""" 53,384.OO GostofGoodsSo|d..............t...........|.t................ 53,384.00 Finishgd GoodS"""""""""'r""""""""t"""" 69,45O.OO t"trtt""'t""'rttt"tt"t"tt"""""""t"t""ttt"tttt"' CaSh 69,450.O0 AccountsReceivabIo'...'........................t...... ' (s53,384 r 4oohl+ $53,384 = $74'738 AccountS Rgceivab16.............o.."""tto""""""""'
Work in Process
Materials 3 1 1Ba l . (a) (c)
t 4 ' 0 0 0 (b) 22,OOO (d) 600
2 1 rOO0 800 2t,8oo
3/1 Bal.
(bl
(0
(h)
38,600
19,O7O (c) t8,600 (i) 20,9OO 16,720
400 53,384 53,784
753X)
14,8N
27,506
F i n i sh e dGo o d s 3/1 Bal'
0)
15,000 53,384
5 3 ,3 8 4
68,3U | 5,OOO
(31
TROPEZINC. Schedute of lnventories, March 31 s14,8OO 21,506 15,OOO
s51,306
t
l
97
Chapter 5
P5-7 ' (r) and (3) Materials
Accounts Receivable
3/1 Bal. 65,000.00 (dl (al 42,3OO.OO
I 1 7 ,5 OO.OO
(bi
53,73O.O0
s,aoo.oo'
tt3,loo.ao 59,37O.OO
AccountsPayable (al 42,3O0.O0 (b) 5 ,8OO.OO
Finished Goods 311 Bal. 78,83O.OO (g) (g) 9 4 ,5 O1 .6 5
94,5O1.65
48,tOO.OO
173,331.65 78,83O.U'
Accrued Payroll
Work in Process 3/1 Bal. 2921627.OO(g) (cl 98'884.00 (d) 53,73O.0O (0 3o,2OO.l5
( c)
I 1 1,364.00
1 1 1 , 3 6 4 , 0 0| ( c l
1 11 , 3 6 4 . 0 0
94,501.65
475,435.15 380,933.50
Payroll
Gost of Goods Sold
(c)
94,5O1.65
Applied Factory Overhead
FactoryOverheadControl
(cl (e)
1 2 , 4 8 O . O O (f) 281467.87 (3) 40,941.87
3O,20O.15
3O,2OO.15 1O,741.72
30,2OO.l 5
40,941.87
Over.or Underapplied FactoryOverhead
VariousCredits 281461.87
(31 1,558.28
Sales
(g)
117,50o.oo
.S5I8OOcould also be posted directly to the work in process accountr reducing entry (d) to $47,930.
Chapter 5
98
P5.-T(Concluded) l2lThetotalcostoteachfobattheendofMarch:
rtlill:ll matcrrarr.,.. Drrcct
Job 2OO
Job 2O5
Job 2O4 t
Total
Job 207
4or4lio 3 11r32O
OO,875.OO slO,O4O 5,800 lo,49o.oo
$170,285.00
Dlrcct labor......-....
21'4alO.OO 26,844.OO
33,24O a2t750
43,800.O0 28,920.00
2O'37O
210,414.OO
FactorloYerhosd..
l3'8OO.0O 7,717.65 '
22137O 7'375
19,388.00 9,314.50
0,893
85,736.15
3171,825.50
$49'503
3475'495j 5
Total CogL
$94,501.65
$159,605
The balancdin the work in processaccount
(JObS 2O5, 206, an d 207)....'...........o'.........r.......,....'.. s38O,933,50
' 3,355.5hours r sz.go = $7r717.65 P5-8
Dr.
(21 (a)
M at g fi a 1S.......r.r..r....r..r..........,......
r.......... '.... r.r... I
114,52O 114,520
Accounts Payable......-'.-...... (b)
PayrO11...........D.t..."t""t'rt'r""""t""""'r"r"t"t"""'
I I O,OOo 11O,OOO
ACCrugd PayfOll ..r....r..'..........................'."...
(c) Work in Process FaCtOry OVgfhgad COntlOJ...'..........................'..'.
Marketingand AdministrativeExpenses"""""" Payroll
Cr.
78rOOO 12,00O 2O,0OO 11 O , O O O
.......tt"t"t""tt""t"t"t"""t"tt""'ttt"""'
I08,175 FaCtOryOVgfhgadCOnttO1.........r.....'.............,,... 7 r52O Matgfials ................................r..................'., 42t75,0 (e) W O f k i n P f O C 9 S S . . . . . . . . . . . . . . . . . . . . . . . . . r . . . . . . . . r . . r ' . . . . r . ' . . . .
(d) Work in Proc8sS..........."""""""""""""""""'t"'
Applied Factory Overhead..........,.....""""""
(0
Cost of Goods Sold'....-.,...r.........r....,'..""""r""" Work in Procgss ...i.-..........'......r"'
115,695 421750
190,35O 19O,350
99
Chapter 5
P5-B (Continued)
(sl Gash
aaa a aa aa a a aaa aa aoattt
247 |OOO 13,OOO
at a a a
SalgS DiSCOUntS ......r....r.r...o...........r....r...........r...
.....................o....r......... AccountsRgcgivablo l5,ooo (hl Marketingand AdministrativeExpenses...........FactoryOvgrhgadGontrol........'.....r........'.....'-..r, 24,68O CaSh
a
(il
a.aaa.a..aaa......r..r..a....rr...r........4...............o.
AccumuIated Deprec i ati on{tl ac hi nery .......
0)
85,OOO
...........r................rr..r.................t........t.
Applied Factory Ovgrhead ............'.....,..........--... Factory Ovgrhead Gontrol .....r..r'.....'...'r..-.-r.
421750
GOSI Of GOOdSSOld ....'...............'........................ Fagtory Ovgrhgad Control .....,......'...,.....r..-.'
1,45O
(11and (3) 47,0OO (hl 247rOOO (i)
371680 85,OOO
1/1 Bal.
(al
5O,00o (gl 255,OOO
26O,OOO
22'oOO (dl 114,520
11 5 , 6 9 5
138,52O
122,680
M achiner y
Accounts Receivable
1 t 1 Bal.
1,450
Materials
294,OOO l7't,32O
(0
42,750
GENERALLEDGER Gash
1/1 Bal. (g)
37,68O 2,O0O
85,O0O
ACCOUntS Payablg'.r..r....r......,.".......r.r................ CaSh
260,000
1/1 Bal.
45,3OOI
Accu mulated DePreciation-
3O5,OOO
Machinery 111 Bal. (h)
Finished Goods 1/1 Bal.
32,5OO I
12,OOO
Accounts Payable
Work in Process 1 t 7 Bal. (c) (dl (e)
7,5OO 78,OOO 108,175 421750 236,425
lO,OOO 2,OOO
19O,35O
85,OOO 111 Bal.
(al
59,375 114,520 173,895
IN
Chapter 5
P5-8 (Continuedl Accrued Payroll
lor
Sales
lrn
11O,OO0
Palroll
RetainedEarnings
Factory Overhead Gontrol
(cl (dl (ht
l2,o0o 7,52O 241680
It/'r e"r. g4,gzs 13,OOO I Cost of Goods Sold
Applied Factory Overhead
(t)
42,7so l(e)
2OTOOO 15,OOO 35,OOO
Common Stock 1 1 1B a l . 1 0 0 ,0 00 WORK IN PROCESSSUBSIDIARYLEDGER
Job loi
1/l Bal.-Mat 1/l Bal.-L.b 1/l Bal.-OH (c) Labor (d) Materlalr (e) Overhead
Job 1O3 (cl Labor (dl Materiala (e) Overhoad
Job l02 600 1,OOO 400 4O,000 42,OOO 18,OOO to4@o
42,750
Marketing and Administrative Expenses
19O,35O 1,45O 79r,goo
1/1 Bal.-MaL 1/1 Baf.-[lb. 1/1 Bel.-OH (c) Labor (d) Materialc (e) otrerhead
42,750 1,45O u,2oo
41t 200
SalesDiscounts (gl
zss,ooo
18,0oo 14,575 13,5Oo 16,O75
Chapter 5
101
P 5 - 8 ,(C o n cl u d e d ) (4)
MID.STATECOMPANY Trial Balance January 31 171,32O 45,OOO 32,5OO 46,O75 20,925 45,3OO 12,OOO 88,895 11O,OOO lOO,OOO 34,925 35,OOO 255,000 13,OOO 191,8OO
600,820
(sl
600,820
MID.STATECOMPANY Cost of GoodsSoldStatement For Month Ended January 3{ $l08,175 78,OOO 42,750
Lesswork in processinventoryJanuary31 C o s t o f g o o d s so 1 d ...................,....r .t.....r ...r . Add underapplied factory overhead.........,,.... Cost of goods sold-adjusted......
s228,925 7,5qO $236,425 46,O75 s190,350 1,45O s191,8O0
CHAPTER6
DtscussloN ouEsTloNs 06-1. The basic obiective ol process costing is lo determine the costs of the products manufac' tured by the conrpany. Determinhg the cost of the productr manutacturedis necessary h order to properly cost ending invenlories for exlemal reporting Purpo3o! (i'e., teporting to credilors and ownen of thd company, lhe SEC' and the IRS) and lo evalual. the ptofilabilityof the man' ulacturing ac-tivity.In order to cost products, the costs musl be determinedfor malerials, labor, and taclory ovefiead used to process each unit of producl lhtough eaclr deparlmenl. products rnanufacturedwilhh a departmenl The 06-2. (or cost center) during the period can be helerogeneousil pb order costingis used,but musl be honrogeneous if process costing is used. In icb order cosling, producls are accounted lor in batches. The cost cil each unil ol product manufactuted on a pb is determinedby dividing lhe total cost charged to the pb by the number ol unils produced on the iob. Since the nranufactur' ing cosl ol each iob is accountedfor sepamtely' accuralo and uselul product cosl can be deter' mined even when the producls rnanulac{uradon dilferent ircbsare substantiallydiflerent' By con' trast, in procesr cosling, all nranulacturingcostg are charged to the departrnent,and the unit cost is determinedby dividingthe cost chargedto the deparlmentby the numberol units produced'As a consequence,the unils ol producl manufactured within a departmentmusl be essentially alike in order tor the cost allaated to each unil lo be meaningrtul(i.e., to reasonablyreflectthe actualc6l of the resourcesused to manulacture the prcducl). 06-3. (a) Process (b) Process,unlesssignilicantlyditferentrnod' els are manulactured (c) Process (d) Job order (e) Process (t) Process (S) Job order (h) Process,unless dillerent fabrics are used l o r d i f f e r e n tm o d e l s , i n w h i c h c a s o t h e conversioncosls may be accounledfor using proce*s, but the materialsusing iob order 06-4. Three productfkrw fonnats are: sequential,par' allel,ard seleclive, Seouentialmaans that the producl flows or is m a n u l a c t u t o di n a n u n c h a n g i n gf i x e d s e t o l oporalions,9oin9 lrom one d€parlmsntto tho nen. Parallelmoans that certainoperationalphases take place simultaneouslyin othor departments
and the partiallycompletedunils or Parls atg broughttogethetin subsequenldeparlments' Selective refers to the fact that a product does not necossatily rnove through every dopatiment' DependinguPon the characler or shape of the fhal product, ditlerent deparlments are angagecl in ccnptethg the desired Prcduct 06-5. Materials Costs-{n irb order costhg, rnaterials nrade to fiuisitbnr are uged and charges are jobs; in procoss costing, charges for malerials isgued to productinn are rnade to departmenls' with inlrequentusc of rnaterbls requisilians' LaborCosts-Time ticketsare used h iob oder -osting lo accumulatelabor costs for each job; in p r o c e s sc o s t i n g , l a b o r c o s l s a t s c h a r g o d l o d e p a r t m e n t s ,a n d , t h e r e f o r e , d e l a i l e d l i m e racordsarg nol nocossary. Factorv Overhead-Job order costing requires l h o u s e o f p r e d e l e r m i n a dr a t e s f o r c h a r g i n g overhead to jobs; in process costing, actual overhead may be used. (However, predeter' minEd rales are otten used in order lo smooth ovefiead that is not hcurred at the sarne rata a3 productior activity to the products manulactured throughoulthe Year.) SummarizinoCosts-A iob order cosl sheet is *Ja to accumulatelhe costs of an order in iob ordercosting;a cct of productionrePorlis usod in processcosting.In iob order costing,costs aro summarizedon completionof the job; in processcosting,costs charged to lhe departmenl and cosls accountedfor are summarizedin the cost of productionreport each month (or sornetimeseach week). 06€. Predeterminedoverhead tatos can and should be used if the pattem of overhEadcost incur' rence does not follow the pattern of produclion activity.Some items of overhead are fixed and not responsiveto changes in production aclivity' It production volume varies each month, then predeterminedoverhead rates should be used' Some items of overheadare incurredonly at cerlaintimes duringthe year, but benefilproduct i o n t h r o u g h o u t h e y e a r ( e ' 9 . , p a y r o l lt a x o s , insurance,propertytaxes, vacalion pay, eic')' These items can be recordedas prepaid oxpensesand amortizedunilormlyto each rnonth it actual overhead is charged to produc' tion. Altematively,estimatesof such costs can be includedin the predeterminedovefiead rale' and the actualcosi chargedto overheadwhen ralesis often incurred.The use of predeterminsd s i m p l e rt h a n t h e a l l o c a t i o no l a c l u a l c o s t s b e c a u s ea s i n g l ep r e d e l e r m i n e rda l e r e q u i r e s only one overheadcharge to aach department each monlh. ln contrast.the capitalizalbnand
l5,
I I
L,
I ! I
t I b
\,
143
Clppter6 arnorli:alion of .ach itcm ol astual ovcrhead nogld rcquirc nurrr.,orr. chargcr rach rnoth. OO-7. A sl of prodtgtioh npod b an offetivo rnqthly (c wookly) ourynary of tho cod of rnatorbb, labor, ard overhcad consrrm.d by eadr deparlrrJrl or cocl c.nl.r, abng with a rrcord cl tho guenlity ol productr menufrclurcd. ll providor hfsnnlbn necrslary lo col prodrctr, prep.r. irumel .nlrier lo rccord lhr trandcr of coslr bolwecn departmcnlr, end cmtrol cob. The rectbns ccnnurly lound in a cocl of pro 06€. ducttn reporl arc: (a) e quantity achcdub incJicalhg thc soursr and dispeitim oil thr unib of producl, (b) a cel charged lo the departrnent t clbn, indicathg the cost h total and pcr unil for lho c€l lrenlf.rrod in from tho procoding dopartmont, as woll as rnatcriab, labor and ovcrhoad cfnrgod lo the depadrnent, and (c) a el eounled for seclisr indicalhg the anpunt of cod assigned to thr unitr tranderred oti c/ the
dsparfnml,
as well as tho eet of ending hven-
tory. 06-9. Scparalo deparlmenlal cosl of production ropgrtt arc uced to accumulalo costs more accuralely and to prwUe rnore detailed data lor c6t cqrtrol purpooo. than a planl-wUe cct of ;roductbn rcport couki prwirto. In sornc ceses (c.9., a msnuteglurhg plant tul hss a sel*live prodwtim flow for its producta), a planl-wide c6t of prcduclirn reporl cannot bo us€d. 06-10. An cquivalenl unit cil produclicr ir thc anrornt cil a nrsounco(r.9, malcrbb, labof, or ovrfiead) lhat wouH bc required to csnplcto qrr unit of thr producl with respecl to thc cost clemenl behg cansidered- Thc lolal number of equivalonl unite. with rcspecl to a particular elementof cod, ropresonlslhe number ol unils of the prcdusl lhal could have been cornpletod with lhe resource3used durhg the perird.
Chaptar 6
ta1
EXERCISES E6-1
Cort from Precedlng Department Materlalr
(11
Equivalentunits transferred out """""" Equivalentunits !n ending inventorln Cost from PnicedingdePartment
2O,OOO
(1OO%r 5rO0Ol"'t"""""r'r""""' """"""""' Materials (l00oh r 5'OOO) Labor (60% r 5rOOO)"""""""o't"""" """ Factory overhead (4O% x 5'OOO) Total equivalent units...'.,..........."'r""""
Factory Overhead
labor
2O,OOO
2O,OOO 20,OOO
5r00o 5,O0O 3,OOO
l5,oo9 __?!,ooo23,OOO Cost from Precedlng Department Materialg
l2l
2,OOO 22,AOO
Factory Overhead
o
o
o o Cost in beginning inventory.....""""""" $4o,ooosl5,ooos 9,200 st5,4oo Cost added during current period'."""" s 9,200 sls,4oo Total cost to be accounted fot'.....,.......'. $4o,0ooS15,OOO 23,OOO 22,AOO 25,OOO 25,OO0 Divided by total equivalent units......,.'... Cos t p e r e q u i v a le n tu n i t........ E6-2 5O,0OO WOfk in PfOCgSS-Depaftmgnt X'......"..................t.."""' 4O,OOO WOfk in PfOCgSS-Depaftmgnt Y .............r........'..,"""""' Matgria1s..r..........rr............................................... WOfk in PfOCgSS-Depaftmgnt X......'..'..r...........t"""""" WOfk in PfOCgSS-Depaftmgnt Y.........................."""t"" Payro11
8O,OOO
70,00o
...........""t""'i""t""tt""ttt"t""tt""tt""tt"t"
WOfk in PfOCeSS-Depaftment X............r................,....." WOfk in PfOCgSS-Depaftmgnt Y .................'..o.,.............. FaCtOry OVgfhgad ..r...................,.r....................."'
18O,OOO 7O,OOO
WOrk in PTOCSSS-Depaftment Y .................'................r.. Work in Process-Department X'.....""""""""""
31O,0OO
Finished Goods lnventory Work in Process-Department
476,OOO Y ..""""""""""""
9O,OOO
l5o,ooo
25O,OOO 31O,OOO 476,OOO
\ L.
I l>
: I b
l-
105
ClppterO
Tlndol FabricatorEInc. Cutting and Forming DePartment Cost ' of Produstion RePort For November
E6-3
i/lst rbb
QusnUVSchcdub BcglnnlnglnvrntotY !'ttrt
d h proccg
Labor
Overhcad
thb Prrlod
QuanUty 800 3"20O
a,ooo
Dopertmrnt to Aromblhg Tnnrfcrrrd End h g lnvcntoty..,...'.........'.......'..--.
3/lOO 7l4r
1gY.
EV.
ooo 4,OOO
Cost Chargcd to DePartmcnt Eeglnnlng Inventory:
Total Cort
hvcntory
..otso'-...'..'....Fo..
t 21',07|'
Cort rddcd durlng currcnt Pcrlod:
t 08,025 .......oo...'...r...'.F......'.'. 14r75|, [.:bor 29190O Frctory 3113,377 Totel coot eddcd durlng currcnt pcdod......*-.3137,452 Total coct chargcd to deparbnct|t.......................'....'..,.'...,. Matarlalr
3,85O 3rO4O 3,55O
Unltr
Tnnrlrrrcd to Arrembllng Dcprrtmcnt Wort In Prccclr, cndlng hvcntory Metrrlelr
3/|OO
Total coct accounted tor
I
t
@o
ooo ooo
Total Cogt
Gompleta Unlt Cogt too% 336.70 75t/. &.h at.h
3U2A8 1.70 0.52
t22,4a a,70 9.52 s36.70
Vt
Cort Accountcd tor ar Followr
Labor Factory ovcrhcad
Unlt Cost"
171923 2rJ52 3l8OO
Matcrlafr Labor Fsdory ovcrhced Totel cort h bcglnnhg
Equlvalent Unlta'
3124,780 3 1 0 , 1 IO 1,128 11428
12,f,72 t137,452
.Total number of cquhralent unltr roqulrcd In thc coot accounted tor rccUon detormlned ar tol' lorvr: Orcrhcad Lebor Mrt rlsb 3/0OO 3/fOO Equtvebnt unttr tranrfrrrcd o9t...... 34oo 150 240 alro Equlvelent unttr h ondlng Inventory 3,55O 3,8!tO 3rO4O Total cqulvalent unltr : - Total cort 0,c., thc cort In beglnnlng Invcntory plur thc cort edded durlng thc curront pcrlod) dtvlded by thc total number ol cqulvalent unltr requlred ln thc cost accountod lor ractlon
Chagtor6
ta6
E6-4
SonoraManufacturingGomPanY MoldingDePartment Cost of ProductionRePort For August
Quantlty Scheduls Beglnning InventorY Started In procesa thlr per|od...........
Materiatr
Overhead
L:bor
Quantity I'OOO
0,ooo lOrO0O
Transferred to Flnlshlng Department Endlng inventory,.................,
75%
9,200 800
25o/o
25o/o
I O,OoO Cost Charged to Department Beginning inventonn
Total Gost
Equlvalent Unlts'
Unit Cost"
S 4,120
Materials
522 9El
Factory overhead
3 5,603
Total cost In beginnlng inventorY Cost added during current period: Materials [abor.... Factory overhead Total cost added durlng Total cost charged to department
s5.00
9,800 9,400 -!9,400
344,880 12,638 18 r779
1,40 2.10
::::::::::::::: :::::::::ll ffi
$e.so
:
o/o
Cost Accounted for as Followr
Unlts
Transterred to Flnlshlng Departmcnt Work In Process, endlng Inventory: Materials labor........ Factory overhead
9r200 800 800 800
Iotaf Coet
Complete Unit Cost s8.50 lOOo/t 750h 25o/c 25%
35.00 1,40 2.10
378,200
33,ooo 280 42O
3,700 s81,900
Total cost accounted for',..-,.............
Total number ol equivalent unlts required In the cost accounted for section determlned follows: Labor Overhead Materials 9,200 Equivalent units transferred out.... 9,200 9r2OO Equivalentunits in ending inventory 200 200 800 Total equivalent units
9,800
9,400
9,400
T o t a l c o s t ( 1 . e . ,t h e c o s t i n b e g i n n i n g i n v e n t o r y p t u s t h e c o s t a d d e d d u r i n g t f i e c u r r e n t p e r i o d ) divided by the total number of equivalent units required in the cost accounted for section
L \--
I
L I L
ChapterG
E6-5
I b
I
HypertecCorPoration FormingDePartment Cost of ProductionRePort For SePtember
QuantitYSchedulc Beglnnlng InYentotY.. Received from Cutting Departmcnt"'
Materialr
Trangfcrred to Paintlng DepartmenL' Endlng InventorY
QuantitY 1r4OO 4,600
6,000 300h
3Oo/n
80o/.
5,0oo 1,000 I,OO0
Total Cost
Coat Chargedto Departmcnt EeginnlnglnventorY: Cost from precedlng department""" Materials
t
FactorYoverhead Total cost In beglnnlnglnventory """'t"""""""" Coatadded during curent Period: Cost from precedlng department"""""""' Matarialr ....."...-....-. Llbo
Overhead
Labor
1...............o......r.......ro......r.....-......o...o...................
.""'t""""" Factory overhcad Total cost addcd durlng crrrcnt period"""' Total cost charged to departmcnt..""""'
Equivalent Unit Cost" Units'
21,120 5,880 2,914 5,228
g 34,U2
3 70,380 20,Uo 17,526 35,052 tl43,398
o,0oo 5,800 5,300 5,30O
s15.25 4.70 3.80 7.60 331.35
3178,24O ch
Coat Accountcd for as Follows Tranrtcrrcd to PainUng Dcpartmcnl. Work lrr Proccssl cndlng InventorY: Gort from preccding dcPartrncnt Matorlalr ........o.......'.. [.abor........ Factory overhead Total cost accounted for ...-.'....-..-..
I
Unlts
Total Cost
ComPlete Unlt Cost
5rOoO
1000h
$31.35
IrO0O 1r00o I,O0O 1,00O
lAOo/. 8go/o 3ooh 30,h
sl5.25 4.79 3.gO 7.60
s156,750 sl5,25O 2,82O 1,140 2,28O
21,49O
s178,240
eecuon determined as Total number of cqulvalent unlts required In ths cost accounted tor followg: Prior DePL Overhead Labor Materials Gost 5,000 5rOO0 5,000 5'OOO Equlval ent unitc transf erred out.... 3 0 0 3O0 O O O 1 , O O O Equlvalent unlts In ending Inventory 5,300 5,OoO 5,300 6,O0o Total equivalent units - Total cost (i.e., tJre cost in beginning inventory plus the cost added during the current period) dlvlded by thc total numbcr of cqulvalent'unlts required ln thc cost accounted for gecUon
\
Chapter 6
1@
E6-o
'
RamirezCorporation AssemblyDePartment Cost of ProducUonRePort For February
Quantlty Schedub
Materlalr
Overhcad
l.abor
QuanUty 400
BeglnnlngInventorY
aloo
Recahvedlrom Cuttlng Departmcnt.-
2,5O0 Trangferrcd to Flnlghcd Goodg..-..... Endln g Inven tory..,..........,..r....,....8....
Fooo 8Oo/o
EO'/o
8Oo/,
50O 2r5OO
Cost Charged to Departmcnt Beginning inventory: Cost from precedlng deparbnent.............,. Materials Labor. Factory ove
Totat Coat
Materlala l:bor Factory overhead Totat cost added durlng current perlod..,.... Total cost charged to department Unltg
Transferred to Finlshed Goodr..,....... Work In Process, cndlng Invcntory: ' Cost from preceding department Materia1s....,............
2,000
[abor....,... Factoryoverhesd Totalcost accountedfor...................
500 500 500
Unlt Cost"
. $ 12'590 4,OOO 1,20O 2,49O 3 20,190
Total cost In beglnnlngInven Costaddedduring eurrentperlodl Cort from precedingdepartment.
Cost Accounted tor ag Follory!
Equhralent Unlts'
s 67,410
2,500
s32.00
21,200 171060 35,320
2,400 2r3OO 2,3OO
10.50 8.2O 18.40
8141,59o :sl81,78O
.h Complcta
s67.10
WI
Unlt Cort
l00th
387.10
lOOc/, 8O'/, $Oc/o
S32.OO 'l O.5O a.2O
si34,20o
316'000 4,2OO 2,460
s191,780
' Total number of equlvalent unlts requlred In the cost accounted for gectlon determined as follows: Prlor DepL Overhead labor Materialg Cost Equivalent unlts transferred out.... 2,OOO 2,OOO 2,OOO 2,0OO 3OO 4O0 Equivalentunits In ending lnventory 3OO 5O0 Total equivalent unlts Z,SOO ,"3OO Z*C}O Z"SoO : : : : - Total cost (1.e.,the cost In beginnlng inventory plus the coat added during thc current period) divided by thc total numbcr ol equtvalent unlts rcqulrcd In thc cost accounted tor secUon
L. IL
L
E&7
I
I I I
Lt
109
Clppter6
Zupton Manufacturing Corporation Formlng DePartmant Cost of Pmduction RePort For June
QuanUVtlchsdulc Boglnnlng hvcntorr...m'o..--....c. Recolvcd fl.,omCutdng Drpartmont-.
Matcrbl A Materbl B Labor
Tranrlerrrd to Fhlrtrlng Departmcnt b
End lng lnvcntory...-'..--...o..0-......6..
Overhead
QuanUtY o00 31000 4,500
o%
100%
30%
300h
4,loo a00 4'50O
iI
I
Cort Chargcd to DePartmcnt Beglnnlng lnventorY: Cort trom praccdlng dcpartmcnt......-"'-"""""""""" A.--..**...,.'.'..-o-oo *letarbl 8........*..--........'.-.6.-6'Fts lletrrld |.e bor....'.....'..........D................... Frctory ovcrhcad
Total cogt ln beglnnhg hventorY @et addcd durlng curcnt Perlod: Cort from precedlngdepartment..........."" Matsrlal 4..-.....................,...... Fectory ovcrhcad 'fotat cori rdded durlng csrent porlod"""' Total cort charged to department..-'.--'--
Cort Aceounted tor r Followr Trandrrrod to Flnlrtrlng Doparbncnt Work h Proccgr cndhtg hvontorY; Cort from procsdlng dePartmcnt Matsrlal A -.-.-* Matsrlal I
Lebor Fectort ovcrhcad r....-................ Totrl cort eccountod for ..-....,...-*..
Unltr
V' Gompletc
4rloO
100%
400 400 400 400 400
100.h lOOc/. Ot/o
3Oc/o 3004
Total Cost 4A22 J 2,805 0 1,25O 1.875 :3 1 0 . 3 s 2
Equlvalent Unltr'
3 29,32E 19,695 14,350 151630 23.4a5 JtOZ.tt$
4,5OO 4,5OO 4,1OO 4,2i2O 4,2J20
Unlt Coct"
3 7.50 5.00 3.50 4.00 o.00
rl_1_?@o
326.O0
Unlt Coot
Total Cogt
3100,000
326.00 97'50 5.00 3.50 4,OO
$!l,ooo
o.oo
720.
2rOOO
o 4ao o,200 sl12,800
' Tottl numbor of rqutvelent unltr rcqulrcd In the cost eccounted tor rccUon dctormlncd ar followr: Prlor DepL l''abor Overhead A Coot Utt.t"li {ttttbt 4,1OO 4,1OO 4rl oo Equhralcnt unltr tranctcrcd out.... 4rl oo 4,1OO 120 120 o 4 0 0 Equtvalent unltr In cndlng Inventory 4oO 4,220 1,220. 4,1OO Total cqulvatent unltr I,5OO -4 , 5 O O - Total cort (1,c.,thc coct In beglnnlng Invcntory ptur thc coct added durlng thc current porlod) dtvlded by thc total numbcr of cqulvalont unltr requlrcd ln thc cogt accountod for rcctlon
.l
__
Chaoter6
110
E6-8
Pop Cola Company CarbonationDepartment Cost of ProductlonReport For October Hatcrllb
QuanUtySchcdulo
L^abor
QuenUtY
ry
IrOOO 2,OOO
Beglnnln g lnvcntotT -x..o'd"""-"'-o".*tr" Recelved from gyn rp Depe rtm c J1t....."""'-'-' Addcd to grocou ln CarbonsUon Departrncnt
Tranrferrod to BotUlng Dcpertmcnt -......-..... End In g brventory...osso....F.r-.-......h"'!"il'
c,ooo e,ooo 100%
25%
25V.
7"8OO 13OO
0,ooo Cogt Chargcd to Dsprrtmcnt Beginnlng hvcntorY: Coat f mm prcccd In g departmcnt..............lvlaterlalr Labor
Totrl Co.t
Equlvelcnt Unltt'
31,120 190
oo
120
Fectory Total colt ln boglnnhg hvcntory Coatadded durlng curcnt Pcrlod: Cort from prrcrdlng doptrtmcnt
t f/a90
Matorlelr [abor Factory ovcrhced Total coct addcd during current pcrlod....-.,"""'t Total coet chargcd to deparhnent.........--
3 o,oao
o,ooo
1,O1O lFEo 3,120 315,e7O 3t7/|60
9rOOO
8,loo 8,1OO
Labor Factory ovcrhcad -..............'...... Total cort eccounted for -'.-...-.*.
Totel Cort
Unltr Complctr Unlt Cct SrLOO 100% 7'800 l S oo
1oo%
11200
100% 25.h 25.h
1'3,OO 1,200
31:O 20 .20 AO
tl.20 20 .20 AO 32.0O
x
Cort Accountcd for r Followr Tranrforrcd to Botdlng Dcpertrnrnt Wort In Ploceur cndlng lnvcntoryl Cort from pncedlng dcPartrncnt Matsr1a1r,...........,......
Unlt Cocti'
il5,ooo 31t€O 2AO
co
120
lBOO 317,400
. Total numbcr of rquhutlcnt unltrr rcqulrod ln thr cort eccountod tor locUm dctcrmlncd I followr: Prlor DcpL Ovcficed Lrbor Matcrlab Coct
TBoo Equlvelcntunltt trenrfcrcd out ... Equlvalentunltr h cndlng lnventory l,2OO Total cqulvalsnt unttr !'099
TBoo 1'200 I'o99
7,8oO 3OO JrL99
TBoo 3OO 81199
* Totat coet (1.r.,tfir cg4t ln bcalnnlng Invcntoryplur thc colt addod durlng tlro currcnt perlod) dhvldsdby thr total numbcr oi oqulwlcnt unltr rcqulrcd ln thc coat eccountedfor rcctlon
Chapter6 E6-9,
111
Donegal Chemical Company Blending Department Cost of Production Report For Mar ch
Quantlty Schedule Beglnnlng lnventory,. Recelyed trom Reflnlng Department............,.. Added !o process In Blending Department..,..
Materials
Labor
Overhead
QuanUty 5,0o0 2O,0OO 5,000 3O,0OO
Tranaterrcd to Fin lsh In g Departmen t ............. Endlng lnventory..
100ah
gooh
goeh
26,OO0 4,OO0
99'o99 Cogt Charged to Department Beglnning lnventory: Cost trom precedlng department
Total Cost
Equivalent Units'
Unlt Costtt
3 4,750 21375 180 7fJ7 I 8,072
Total cost In beglnnlng Inventory Gost added during current period: Cost from preceding department............... Materlale Labor Factory overhead Total cost added during current period....... Total cost charged to department...........
...a...a.aaaaa
s25,25O _12,A25 2r740 8,113
3O,O0O 3O,O0O 29,2OO 29,600
94,8,728 956,80O
s 1.o0 .50
,to .30
$1.eo
c/o
Cost Accounted for as Foltowt Transferred to Finlshing Department Worl In Process, endlng Inventory: Cost from preceding department Materials Labor........ Factory overhead Total cost accounted for ......._..........
Unlts
Total Cost
Complete Unlt Gost
29,000
'1000h
91.90
4,000 4,000 4,0o0 4,00o
1000h 1000h aoeh
$1.oo .50 .10 .30
sooh
$49,40O $4,OOo 2,0oo 320 1,08O
7,4OO 358,80O
r Total number of equlvatent units required In the cost accounted for gecUon determlned aa follorrs: Prior DepL Labor Overhead Materials Cost Equivalent u nits transferred out.... 26,OOO 28,000 28rOOO 26,000 Equivalentunits In ending inventory 4,OOO 3,20O 3,OOO 4,OOO Total equivalentunits 3 O , 0 O O 3 O , O O O 29,2OO 29,600 " Tgtal cost (i.e., the cost in beginning inventory plus the cost added during the current perlod) divided by the totat number of equivalent units reguired In the cost accounted for aectlon
t
Chapter 6 112
E6.10APPENDIX
BrimhallManufachlrlngGomPanY Cuttlng Departrncnt Cort of ProducUonReoort For JulY
euanUVSchedulc
Matertalr AOoh
Bcginnlng Invcntory....""""'o"""''"Starbd ln Procesr thle Perlod \ Transferred to Assgmbly Department Endlng lnventorY'.
ry
onerhead QuanUtY 2Oo/o
2O'h
I,OOO lOOo/.
5Oolt
50'/o
Total Gost
Unit
Equlnalent Unlts'
Costt'
$ 2,940 390 585
Materlall Labor
Factory overhead
3 3,915
Total cost In beglnning InventolY Cost added during current Period: Materlala ..............-......
Labor...'... Factory overhead t....................................................t.' Totat cost added during current period'-'-""o""'
Totat cost charged to department"""""""'
Started and comPleted this Period Total cost transferred to Assembly DePartment ....'.......... Work in Process, ending inventorY: Materlals.. Labor........ FactorY overhead Total cost accounted tor ..............'..'.
850 150 I,OOO
Cogt Gharged to Department Beginning inventorln
Cogt Accounted for aa Followr Transferred to Assembly Departments Beginnlng inventolY. Gost to complete: Materialg.Labor Factory overhead """"
100 000
Unltc
340,530 t8,100 27r15O 39t,78o :395,895
940 905 905
349.50 20.00
.
30.oo See.5o
Total Cost
CurentT. Unit Gost 33,915
100
too 100 750
40ch 8Ac/o
sooh 100.h
t4e.so 20.o0 30.o0 99,50
1,98O 1,600 2,4O0
$ 9,895 74,A25
s84,520 150 150 t50
lOOo/c 3Oo/. 5Oo/o
$49.50 20.00 3O.OO
87,425 1,50O 2,25O
111175
s95'695
as follows: . Number of equivalent units of cost added during ttro current period determined Overhead l:bor Materials 80 80 40 To complete beginnlng inventory.. 750 750 7so Started and completed this Period 75 75 150 Ending Inventory.. 9 05 905 940 Total equivalent unlts of cost added - Cost added during thc current period divided by the number of equivatent units durlng thc currcnt Perlod
113
Chapter 6
E6.11.APPENDIX
KanduToolGomPanY AssemblyDePartment Cost of ProductionReport For November QuanUtySchodulc Beglnnlng InventorY Becelved from Cutung Department...
Materlals
l.abor
5Oolo
4ooh
Overhead
QuanUty
4Oolo
1r2OO 2,80O 4,00O
Transferred to Finished Goods
EndlnglnventorY..
9Oo/.
gooh
gooh
3,O0O 1,000 4,O00
Coet Chargedto Department BeginnlngInventory:
Total Cost
17,28O Cost trom precoding department..........'.... 5,55O Materlals ................. 2,4OO Labor 3,8OO Factory overhead 28,830 s Total cost In beginning inventorY Cost added durlng current period: Cost from preceding d epartment."..........................,...s 40,600 30,89O 1A,932 25 398 Factory overhead Total cost added during current period....... Total cost charged to department...........
I_1_3,610 s142,450
Equivalent Units'
2r8OO 3,300 3,320 3,320
Unit Cost"
314.50 9.30 5.10 7.65 s36.55
Chagter 6
ll1
E6-1I APPENDIX (Concluded| Coat Accountcd tor ar Followa Tranctcrrcd to Finlghed Ooodg: Beginn ing Inventoty """""""""' Cost to comPlete: Materlall.Labor.....'.. Factg-rYove rh ca d ...'....
Unltr
Currcnt'/o
Unlt Coot
Total Cott 328,&tO
1,200 1,20O 1,20O
I,8OO Started and comPlatcd thll Pcrlod Total cogt transferrcd to Flnlshcd Goodr Work In Proce3s, cndlng InventorY: 1,00o Cogt trom Preceding dePartment 1,00o Materialc.. 1r000 .................-. L:bor 1,00o overhead Factory Total cogt accounted tol .......-.-...'....
sooh 60.h
3 e.30 5.10 7.85
1OOV.
36.55
3Ot/t
5,39O 3,A72 5,508
3 {3,590 o5,79O 3100,380
100.h 00.h 80e/o 800h
314.50 0.30 5.10 7.85
314,500 8,37O 4,08O a,12O
3:!,070 s142,45O
. Number of equlvalent unlts of cogt added during the current perlod determlncd ar totlow::
Prlor DepL Materialr Cott To complete beginning inventorY Started and completed thil Porlod Endin g inventory............................ Total equlvalent unlts
o 1,800 1,000 -2'800
EOO 1,800 900 -9'399
Labor 720 1,80O 800 -3'339
Overhced
720 1,80O 800 -3'329
Cost added during thc current pcrlod dlylded by thc numbcr ol cquivalent unitr of colt added during thc current period
Chapter 6
1t5
E6-12 APPENDIX
NortheasternChemicalCorporation BlendingDepartment Cost of ProductionRoport For May QuanUty Schcdulc Beglnnlng lnvcntory
Materlals
Labor
100.h
20ch
Recelvedfrom RetinlngDepartment..,..........Added to proceaeIn BlendlngDepartment.,...
Overhead 4OV.
Quantity 2rOOO 5,000 5,0o0 12,0O0
Transtered to Flnlshed Goods Endlng Inventory..
lOOo/t
800h
gooh
1O,5O0 1,5OO 12,0OO
Coat Charged to Department Beginnlng lnventory: Cost from preceding department Materlals ........,.....,
L:bor........ Factoryoverhead Total cost In beginnlng Inventory Cost added during current perlod: Cost lrom procedlng departnrant;, Materlals... l.abor Factory overhead Total cost added during current period,...... Total cost charged to department.........
Total Cost
Equivalent Unit Units' Cost"
3 2,490 500 150 600 $ 3,71O s12,5OO 2,500 3,3OO 7163O
1O,O0O
10,o00 11,OOO 1O,9OO
s1.25 ,25 ,30 .70
$25,930 _s29,64O
32.50
Chagter 6
n6 I
Ef-l 2 APPENDIX (Concluded) Cort Accountcd lor er FollorYr frz-"tf-"tt"a to Flnlrhcd Ooodr: Bcglnnln g Invcntory """""""''Cogt to complcta: Matcrlrlr """""""""""" Itbol."*Fecto rI oYcrh4ad............ Started and comPleted thla Perlod Total coat trancferrcd to Flnlshcd Ooods Work ln Proces!, cndlng InventorY: Cost from Prsccdlng dePartment Matedalr...... Labor............... Factory overhead Total coat accountsd lor ...................
Unltr
Curcnwl
Unlt Coct
Totel Cort t3,71O
2,OoO 2,00o 2,00O 8,50O
ooh 8.0ch aoch 100%
3 .25 .30 .70
n
480 840
3 5,030 21,25O
2.50
s26,28O 1,5OO 1,50O 1,5OO 1,5O0
100ch 1000h 6Oc/c 80o/c
31.25 .25 .30 .70
31,875 375 270 840
3,360
s20,640
, Number of equlvalent unltr of coct added during thc cutzent perlod detsrmlned aa followg:
To complete beginning inventory.. Started and completcd thla Perlod Endlng InventorY.. Total equlvalent unltr
Prlor Dept. Coat Materlalt 0 0 8,50O 8,500 1,500 1,500 l O,OOO
L:bor 1,000 8,500 900
'l O,OOO 1 l,Ooo :
Ovarhoad 1,200 8,500 1,200 1O,9oO
Cost added durlng thc currcnt pcrlod dhldad by thc numbcr of cqulvalcnt unltr of cost added during thc current perlod
117
Chagter 6
PROBLEMS
1
P6-1 Modern Cabinet ComPanY Cutting Department Cost ol Production BePort
(1)
For August QuanUV Schedulc Beglnnlng InventorY.. Startgd In proceso this Perlod
Materlalr
Labor
Overhead
QuanUty 200 800 800
Transf erred to Assembly Department Ending Inventoty
gooh
60ch
600h
650 150 800
Cost Charged _toDepartment Beglnnlng Inventorp
Total Cost
Equivalent Units'
S 5,385 530 795
Materlals labor... Factory overhead
Total cost in beginning inventory....'...-......'...-.r... s 6,890 Cost added during current period: s28,035 Materlals
8,35O 12,323
[.abor Factory overhead Total cost added during current period-.-.-.. Total cost charged to department...........
7A5 740 740
Transferred to Assembly Department Work in Process, ending inventory: Materials l-abor Factory overhead
Unlts 050 150
150 150
3f0.oo 12.O0 18.OO
$48,91O
s70.o0
s53,6O0 %
Cost Accountedfor as Follows
Unlt Cost"
rot"l C*!
0omplete Unlt Cost lO0o/c 970.00 900h gooh 6Ao/c
s40.00 12.OO 18.00
s45,50O 35,4O0 1r08O
1,620
8,10O
s53,000
Total cost accounted for ...................
' Total number of equivalent unlts required in the cost accounted for section determined as follows: Overhead Labor Materials 85o Eguhralentunlts transferred out............ 05O 05O 90 90 Equlvalentunits in ending inventory.. 135 Total equivatent unlts
_JE
_J79
_Jl9
- Total cost (1.e.,the cost in beginning inventoryplus the cost added during the current periodl divided by the totat number of equivalentunits required in the cost accounted for aecUon
Chaptar 6
1t8
P6-1(Continuedi Modern Cabinet ComPanY AssemblYDePartment Cost of ProductionRePort For August QuanUV Schcdulc \ Beglnnin g Inventory.-,........""""'-'d Racelved from Cuttlng Departmsnt"'
Matcrialr
Tranaferred to Finiahed Goodr ""'-'End in g Inventoty..-..'...-.....'...
Quantlty 250 050 900
4ooh
Coat Charsed to DcPartmcnt Beginnlng InvcntorY:
Coct trom precedlng d epartnrent""""""""""""""""' Materlala
Labor Total cost ln beginnlng Inventory Cost added durlng curtent Pcrlod: Cogt from pt ""oiiJ departrnent"""""""' Materlall tabor......'. Factory ovefiead Total cost addcd durlng curent perlod"""' Totat cost charged to department"""""'
Overhead
l:bor
2Oo/o
20t/.
800 100
900 Total Cost
Equivalent Unlts'
Unit Cosf'
3 17,41O 3,451 3,811 3,011
3 28,083 ' 3 45'5oo 13'43:l 20'989 20'989
900 940 820 820
$ 69.eO 20.10 30.o0 30.00
sl oo,911 $128,994
s150.00
fi9
Chapter6
P6-1 (Goncluded) Coat Accounted tor as Follows Trangferred to Finlshed Goods....-.... Work ln Process, endlng lnventorY: Cogt from Preccdlng department Materlala-
labor FactorY overhead Total cost accounted for.....'.......-.....
Unlts
% Complete Unlt Cost
800
100% s'|50.00
100 100 100 100
1000h 4Ao/.
I
20o/c 200h
69.90 20.10 30.00 30.00
Total Cost
sl20,ooo 36,99O 804
soo 600
8,994
s128,994
' Total number of equivalent units reguired tn the cost accounted for section determined as followr: Prior Dept. Materials Cost 800 800 Equlvalentunlts transterred out.... 40 1 0 0 Inventory In ending Equtvalentunlts
Total equivalentunlts
900
840
Labor
800 20
Overhead
800 20
420
* Totat cost (i.e.,the cost in beginninginventoryplus the cost addedduring t*te current periodl dividedby the total numberoi equivalentunits requiredin the cost accountedlor section
(21
Work in Process-Cutting Department""""' Work in Process-AssemblyDepartment Matgfials
26,O35 13,433 39,468
...................'.........r..r...r..r......'....t..
Work in Process-Gutting Depattment""""' Work in Process-Assembly Department Payroll ..'........'......."....r..
8,35O 2O,989
Work in Process-Gutting Department ........ Work in Process-Assembly Department A p p l i e d F a cto ry Over head' ,......,.....
121525 2O,989
Work in Process-Assembly Department Work in Process-Cutting Depanment......."
45,5O0
Finished Goods Inventory Work in Process-Assembly Department ...,'
120,OOO
29,339
33,514
45,50O 12O,OOO
ChaDter6
120 P0.2
(rl
RathboneTool GorPoration Casting DePartment Cost of ProductionReport For December
QuanUty Schedulc Beglnnlng Invcntory-""""n"'xo""'r" StartcO In Prcccg thlc Perlod Trancf errod to Flnlghlng Department Endlng lnventoty.
Materialg
Labor
QuanUty I,OOO 8,OOO
0rooo 1000h
80%
7150O 1,5O0
8Oa/c
-9'ooo Equlvalent Unltsr
Total Cogt
Coat Charged to DePartment Beglnnlng InventorY: Materlalr
$
Unlt Cost"
ots 60 90
Total cost In beglnn Ing lnventofl ...........-......t..."' Cost addcd durlng current Perlod: Materialr FactorYoverhead Total cost added during current period""-' Total cost charged to department...
Cogt Accounted for aa Followg Transferred to Flnlshlng Department Work In Proceal, cndlng inventory: Materlals labor........ Factory overhead Total cost accounted for ..'....--..........
Onerhead
s 1,085 I,OOO 8r7OO
sl7,085 4,29O 6,435 s27,81O s28,875
817OO
s3.25
.h Completa Unlt Cost Unltg $3.25 100eh 7r5oo 1,500 11500 1,500
l0Oc/o gO./o ggoh
32.0O .50 .75
TotalCost 324,375 $3,OOO 600 900
32.00 .50 .75
4,500
s28,875 gecUondeterminedas
for Total number of equivalentunits requlred ln the cost accounted followg: Labor Materials 7,5OO 7,5O0 Equivalent unlts transferred out........... 1,2OO 1 , 5 O O Equivalentunltr in ending inventory.. 8,7OO 9,ooo Total equivalent units
Overhead 7,5OO 1,2OO 8'7OO
period) - Total coat (i.e.,the cost in beginning inventoryplus the cost added during the current secgon for cost accounted divided by thc total number of equivaient units required In the
-
- .
121
ClpPter6
P6-2(Continued| RathboneTool Corporation FinishingDePartment Cost of ProductionRcport For December
-
QtrenUV 9chcdulc Bcglnnlng Inventory.. RccelvcdfromCastlngDcpartmcnt.............-.
l-abor
Ovcrhced
QuantitY 1,50O 715OO 9,00o
-
Tnnrforred to Finirhed Goodr Endlng lnventory..
4O.h
'o.h
7,00O 2,0oo I,OOO
Cogt Charged to Departnent Bcginnlng Inventorp
Totel Cort
Equivalent Unttr'
Unh Cort"
Cort from praccding departmcnt...............r.r....oo6.ooeoor. 3 a'78!i
[.abor-. Factory ovcrhead Total cost ln beginning inventory Cort edded during currcnt pcrlod: Cost from prccedlng departmmt [-abor.-.Faetory overhcad Totel cst
Totrl cct
rddcd durlng current period.......
charged to dcpertmcnt-.-........
291 555 3 5,54l
324,375 2,130 3,18
I,OOO TBOO A,OOO
3324 .30 AA
32r"g3,
335,180
9r.oo
t2
Crtcplcr 6
P&2 (Goncluded) %
Cort &countod tor er Followr Tnnrferrrd to FhLh.d Ooodt.--.Work ln Ptpcs, oodlng hvrotorn Cort trom pncrdlng dcprrtrnrnt Fretory ovrr.hord Totrl cot eccountrd tor,.......--.--
Unltr Compbtr 7,000 1o0% 2,O0O
lOO%
2,OOO 2,0OO
/30L 30.A
Unlt Cqt 3t.oo 33.2a 30 .U
Totrt Cort 328,OOO
$S/38O 21O 4CO
7,i8O t35,180
' Totel numbcr of rqulvelcnt unttt ruqulrcd In thr cqt rccountcd for rocUon dotcrmlncd er followr:
Equlvrlcnt unltr tnnrfcrrcd out........... Equlvelcnt unttr h rndlng Invontory.. Totel cqutvrlcnt un|tr..........-.....
Prlor DrpL Cort 7,000 2,OOO g,0OO
t-abor
Ovcrhcad
7,OOO 8OO
T'OOO I,OOO
7€OO
8,0OO
- Totel coet 0.1., tfrr cort In bcalnnhg lnvcntory plur tfrr cort rddod durlng llrr currant pcrlodl dlyldod by t|rr totrl numbrr of rqulvrlcnt unltr nqulrrd h tho cort rccountcd for rocUon
l2l
Work in Process--Casting Department
| 7,085
Matgrials ......,....,.,,..........,..,............. Work In Process--Casting Departmont....o........... Work In Process-Flnlshlng Department... Payroll
..'o....o.......r...........
'
17,085 4r29O 2,139 6,429
...........r..
Work in Proces!-Casting Department................ Work in Process-FlnlshingDepartment.............. ApplledFactoryOverhead ....,.........
-
6,435 3,125 cg lr J vEYA A
_
WorkinProcess-FinishingDepartment........,..... 241375 Work In Process-Castlng Departmont........
24.375
FinishedGoodslnventory-.................,................. 28rOOO Work In Process-FlnishlngDepartment......
28,OOO
Ctpptcr 6
123
P€.3
(11
Jettcr Engine Corporation Gasting Departnrent Cost of Production Report For February
gchodub --chrtnUty Beglnnlng lnirrnbry
Hrt rbb
bbor
orlrrhcrd
QuenUty 500 3,OOO
atrrt d h procrs thb porfoa
35OO
Tnnctrrr.d Endhg
to Anmbly
Dcprrtnmt
Lrvrntory-E*_Ea
too!a
80'.
90%
2,7oo aoo 3"5OO
Coct Chrrpcd to Dc?rrtnrrt Beetnntngh;;t"m Mltarbb
bbof
Totrl Cost t 1O,9?S
--..-EE----H-E*-8..-
-*..s--.E..-*_
I
^L
2.&?9
3 ta,1o2
H.-.-__
s1.0575 to,3E2 4a/aEl
*_c_aa
_-
D---aa-aa-gFa_
Ftelory ovcrhotd Totrl cort rddcd durlng currrnt p.riod_.._ Totrl cst clrergad to rlcprrtmont_.._..-
Co.t A€€orrntrd for rr Folbwr Tnnrfrrrrd to Arrmbty Olptrtnrnt Wort_h Proce, rndbrj hyrntorrl
Hetrrletr *F.-_.-.€ bbor-_.,_ Fr ctory ovcrft ced,......8_..,.rts,.. Totrl cct rccountad for.__.**. ' A;*mbrr
of rqulvlbnt
Unltr
345.OO 5,OO
t5.oo
% Compbtr
s23g5og
305.o0
Unlt Cct
Total Cort 3r75^5OO
2r7OO
loo%
sas.oo
aoo
100% 80% go.h
845.OO 5.OO 15.00
800 800
3,5OO 3r3ao 3lzo
3211'398
33E,OOO 33OO IO,SOO
50,oo0 3225,5O0
unltr rogulrcd In thc cct
Equlnbnt unttt trenrtrrrrd out.. Egulnhnt unttr h rndtng rnvcntory-:*.*. Totel rgutvelcnt unltr
Unlt CotF
ssa
Frctory ovcrtrced Totrl cqt h beghnhg trvcntory Cort eddrd durlng currurt prrlod: Hetrrlelr b&8, Itbof ---.----.,
Equtvrhnt Unltr'
rccountad tor rocuon dctarmlncd er
Mrtarbb
Lebor
OYcrhced
17oo aoo
2,7oo G40
2,7OO 720
35OO
3,340
3r42O
- Totel cct (lr- thr.cort In bcainnlng brvcntory plur thc cor-t edded durrng $rc current pertod) -r.oo-"ii"l'n dhddcd by thr totrl numbct ";;;;bnt unti t,,a cort rccountod tor rccuon
Chaoter 6
121 l
P8-3 (ConUnued)
Jetter EngineCorPoration AssemblYDePartment Cost of Production RePort For February
QuanUty Schcdulc Bcglnnlng InvcntqttRccclvrd from CerUng DcPartment -
Matcrials
tabor
Orerhead
QuanUty I'OOO 2,7OO 3,700
Trendcrrcd to Flnlrhlng Dcparlrnent Endlng lnvcntolY-
7Ot/.
3oth
3Ot/t
2,9O0 800 3,70O
Cort Charged to Dcpartmcnt Beginning lnvcntoDn Cost trom prcccding departmcnt.*.-... Matcrlalr... [:bor.......Factory ovcrhcad
Total Cost ql,l50 3 40',28 12'426 12,424
Totel coet h bcginnlng
3128,260
Cost added durlng current Pcrlod: Cost from praccdlng dcparlrncnt -..*-... I'latcrialr 1:bor Factory ovcrhead Total coct added durlng current period"""'
3175,5OO 119,480 44r4O8 44,4O8
Totat cct charged to departnent.-.--......
€t"ttg
Equivalcnt Units'
3,7OO 3,49O 3,'t4O 3,140
Unit Cost-
3 04.50 45.30 18.10 18.10
3380'798 s146.OO
c/o
Coat Accountcd for ar Followr Transf crrcd to Flnlshln g Dcpartmcnt Worl in Ptlceca, cnding invcntorY Cost from prcceding dePartmant Materlalr [:bor Fectory ovcrheed Total cct accounted for .'.................
Tottl Cosl t423'4OO
ComPlete Unit Cct 10c.h s't40.oo 2,90O
Units
800 800 800 800
10o.h s 84.50 45.30 70.h 18.10 30.h 30ch
't 8.10
351,600 25,368 41344 4t3'44
85,65O
3509,058
' Total numbcr ol cquivalent units required in the cost accounted for secUon determined as followr: Prior DepL Overhead Labor Mate rials Cost 2,9OO 2,9O0 2,9O0 2,900 Equhralentunltr transferred out.... 24o s 6 0 240 800 Equivatant unlts ln cnding inventory Total oquhrelent unlts
3,7OO
3,400
3,140
3 , ' t4 0
- Totel coct (k., thr cort ln bcglnning invcntory plus ttrc cost added during thc current period) dMdcd by tho total numbcr of cqutvetcnt unlts requlred In the cost accountcd for rccdon
125
A189ter 6
P 6 - 3 ( C o n ti n u e d )
Je tter Engine Cor Por ation FinishingDePar tment Cost of Production Report For February
QurnUtY Schcdulc Bcglnnlng InvantorY.. Rccclvcd from Ascmbty Dcpaftment ."""""""'
Lrbor
Ovcrhcad
QuanUty
300 2,9O0 3,200 2,8O0
Tnnctorcd to Finlshcd Ooodl Endlng lnvcntotT..
50%
50.h
ao0 3,2O0
Total Cort
Cort Charged to Department Beglnnlng lnventory: Cort lrom p recedin g d epartment.'.............. l-abor Factory overhcad ...............'. Total cost in beginning inventorY Cort added during current period: Coat f rom p recedin g d epartm ent.....'.......... Labor... Fectory overfrcad
Unlt Cost"
Equlvalent Unlts'
I 42,840 2,78 0 4,140 3 49,740 9423,4O0 12,240 18,300
3,200 3,OOO
3,00o
Total cost addeddurlng current pcriod...............'agj,ooo 3503,740 Totel coct chargedto department..,,.......
-
3145.70 5.00 7.30 3158.20
.h
Cort Accountod lor ar Followr Tnnslcrrcd to Flnlched Goods Work ln Proceu, endlng Inventory: Cost trom preceding department Labor........ Factory overhead Total coct accountcd for ...................
Units
Complete
Total Cost
Unlt Cost
2,8O9
100ch 3158.20
400 400 400
100ch s145.70 5.O0 50cL 7.5O 5Oc/c
34f2,9O0 858,280 1,O00 1,50O
oo,78o 35O3'74O
' Total number ol squivalant unlts required in the cost accounted lor gection determlned al lollowg: Prior Dept. Ovefiead Cost Labor Equlvalentunlts transterred out............ 2,BOO 2,800 2,8OO Egulvalentunlts ln ending lnventory.. 200 400 200 g,ogg Total oqulvalentunltr 3,200 3,OO0 - Total coat (1.o., t h c c o s t l n b e g i n n i n g i n v e n t o r y p l u s t h e c o s t a d d e d durlng thc current Perlod) d M d c d b y t h e t o t a l n u m b e r o l e q u i v a l e n t u n l t s r e q u i r e d I n t h e c o s t accountcd lor recuon
haoter6
tfi
P6-3 (Concluded| (21
Work in Process-4asting DepartmeJlt"""""""" Work in Process-Assembly Departmellt """"""'
148,575 11 6 , 4 8 0 263,055
Matgrials ..o......,................o.,.........................
Work in Process.-Casting Department """""""" WorkinProcess-Assemb|yDepartmetlt............. Work in Prccess-Finishing Department""""""" Payroll" "" "" """ """""" """"" ""
16,362 44,4O8 12,240
Work in Process.-GastingDepartmont".."""""" Work in Pttcess-Assembty Department"o""""" Work i n Process-Finish i ng Department""""""o' AppliedFactoryOverhead....""""""""""""
48,461 44,4O8 18,360
Work in Process-Assembly Department""""""' Work in Process'-Casting Department
175,5OO
73,OlO
111,229 175,5 OO
WorkinProcess-FinishingDepartmellt.............. 423,4OO Work in Process-Assembly Departttlgrlt ""' FinishedGoods Inventory'......-.'.
Work in Process-Finishing Depalt[lellt """
423r4OA
442,960 442,960
s
127
Ctnptar6
P6-4
,
PersonaCologneCompany BlendingDepartment Cost of ProductionRoport
(11
For June -
Quandtf Schcdulc
Materlalg
Labor
Overhead
QuanUty 1rO0O 8r000
Startad In procegs thls period
7,00o Transterrodto FlnlshlngDepartment Endlng hventory..
6,4OO 6Oc/t
2oth
%'/.
ooo 7,OOO
Cogt Chargcd to Department Beglnnlng Invcntory: Materlalc
Total Cost
Unlt Cogt"
$ 19,620
9U
tabor
2,375
Factory ovcrhead
Total cost In beglnning inventory....o..,................. 3 22,939 Coat added durlng current perlod: Matcrlall .to..........'.r....................................i.......-......... $129rloo o,88O l,.abor Factory oycrhcad ..r.............. Total coct addcd durlng current perlod...,... Total cort chtrged to department.........
Equlvalent Unlts'
29,005
61760
S22.oo
01520 E'55O
120 /3.80
SlO5,o45 328.OO
...... 3187,984 oh
Cort Accountad tor ar Foltowe Complete Unlt Coat Unlts Traneforad to Finlshlng Department lOOc/o 328.00 0,400 Work ln Pmcess, cndlng Inventoryn Mater|a|r.,..o......,,....................... 6ooh 600 $22.00 Iabor..........,....... 200h 1.20 600 Factory overhead,...................... 4.8O 25% OOO Total cocteccounted for"""""""""'
, -
_ .
Total Cort
s179,200 $7,920 1U 72o
817&4 3187'984
' Total number of equlvalent unlts required In the cost accounted for secUon detarmlned ae lollowr: Overhaad Labor Materlals Equlvalent units transferred out........,.. 6,400 O,4OO 6,400 Equtvalentunlts In endtng Inventory.. 15O 360 1?:O Total| cqulvalent cqulvalent unltg li?gg _q,*9 SISS " Total cost (1.e., thc cost in beglnning inventory plus the cost added durlng the currsnt pcrlod) dtvidod by tho total number of equivalent units required In thc coet eccountcd for rcsuon
ChWter6
128
P&,4(Continued) PelsonaCologneComPanY FlnishingDepartment Gost of Production RePort For June thranUty Schcdub Beglnn Ing Invcntoty..F--.o.'--E-o.*@'F Rccclvcd from Bbndlng Dcpartmcflt*--'-".Added to proccta h FlnbhlnO Dcprrtmont '."""
lrbor
Hrt rbb
Transferrcd to Flnlsh.d Ooodr EndlngInvcntory
Ovrrhoed
Quan0V
rroo 6,.1o0 10,2O0 27IOOO 70%
100%
70%
20,OOO I,OOO 27,OOO
Coat Chargcd to DePartrncnt BeginnlngInvcntorY: Coat frpm pnccodln g d cpartmcnt.-..-.--.---..-F.*.-.-
Matsrlalr L-cbor... Factory ovcrhced
Total cot h bcglnnlng lnventorY Cogteddod durlni currcnt Pcrlod:
Cort f ro m p nccd In g d epertnrcnt --.---.-.-.'-.. Matsrlalr t-abor Factory
Totat coot rddcd durlng curront pcrlod-..-....-... Total cst
chergc'd to dcPrrtmcnt
Tote! Cort
i
Equlvalcnt Unltr'
Unlt ColF
g/aso 11395
100 050
t to,61o 317e'2OO z'r605 1g,elo oo,75l
27,OOO 27t OO 2Q,7OO 2gr7OO
36.e5 t.oo .75 2.30
3245/a75 329O,O85
311.OO
129
Clppter 6
P€-,4(Concluded) Cort Accountadfor er Follon Tnnrf rrrrd to Flnlrficd Ooodt.-....Work br Proccr' rndlng lnventorY: Cort from PncccdlngdcPartmcnt lletcrlrlrlrbot
Fectory ovcrhcad Totrl cott rccounted for .....--.-..---
Unltr
Vr Gomplctr
Total Cost
Unlt Coct
2OTOOO
100%
tt 1.oo
I'OOO I'OOO 1,000 I 'OOO
100% 100% 7OY. 70%
3 6.e5 1.OO .74 230
3280,ooO t8,950 I rOOO 525 1,81O
1O,O85 329O,O85
. Totel numbcr ol equlvalent unltt rsqulrcd In thc cot lollorvr:
accountod for rocUon determlned er
Prlor DepL Matsrhlr Cort
20,0OO Equhralentunltr transfered out.... Egutvalcntunltr In cndlng lnvcntory lr0oo Totel rquhnlcnt unltr ..................., 27',0OO
Labor
Overhead
28rO0O I'OOO
26,0OO 700
26,OOo 700
27IOOO
26,7OO
26t7OO
il Total cort 0,c., thc cort In beglnnlng lnvcntory plur thc cort addcd durlng tlrc curront perlod) dMded by thc total number of cquhyalent unltr reguirsd ln thc cort accounted for recUon
(21
Wo rki n P ro ce ss-B l endingDepar tm ent...r .....r ...o Work in Process-Finishing Department'............. Matgrials ..."........".....-...'.'-. Work i n Process-Blen ding Departmellt ...'.....'.... Work i n Process-Finish ing Department .............'
l29,1OO 25r605 1541705 6r88O 19,919 26,799
PayfOll .......'.....r.....................'........r.............
Work i n Process-8len din g Department ...r..'...,r.' Work in Process-Finishing Department..........'." Appli gd Factory Ovgrhgad.'.....o..'......'.....r""
29,O65 6O,751
Work in Process-Finish ing Department...'.......o.. Work in Process-Blending Department ..'...
179,2O4
89,816
Finishgd GoOdsInventory.........,....,....................'. 286,OOO Work in Process-Finishing Departmont.-'...
. 17g,2OO
286'0oo
Chaptor 6
tfr P6-5
Hytest ChemicalCorPoraUon ReltningDePartment Cost of Production RePort
(rl
For March
75i*
100rA
50}|
Totel Cort
3
....""r"-".-'D-t'-F""""n'-""""-o
Equlvalcnt Unltr'
725 30 00
, 7,272 1,920 4*O
......E....-'-r""-"--"'--""-"'Do'-'-'--oF ".-'F'
[:bor..'--..---Mo"h"""""*---H"'E'F
Factoryovcrhcrd...-....o8....'.|..g.-'.........-...-....9...d 1o1t1 6oct rddcd durtng curcnt perlod
8,OOO 7r75O 7,5OO
31.60
tl2,550
x
Fastory Total cot
rccountcd for.-..--**
Unltr 7r0oo I'OOO I,OOO lr0o0
31.00 20 ,10
311,732
Total coct chargcd to departmcnt....--...
Labor........,...
Unh CorF
818
Total coet ln bcglnnlng lnvcntory Cort rddcd durlng cunrnt Pcrlod:
Coct Accountcd tor ta Followf Tranglerred to Blcndlng Dcpartncnt. Work In Procc.r, rndlng lnvcntorY: Materlalr
T'OOO 1,O00 8,O0O
L-abor
Matcrlrlr
Quentty
8,OOO
Coct Chargcd to DaPartrncnt Beglnnlng InvcntorY: Matorlelr ovcrhced
Otrcrhcad
800 7r2OO
Trenctcrrad to B|cndIng Dcpartmont'*""""'-Endlng lnvrntort
Fa gtort
Labor
*btrrLrb
ol-nnEhr Uchcduh Beglnn ln g Invrntory --....-'-"""''d"'d---.* Startod ln procccl thb prrlod """"""'d""-'s
Total Cort
Complotr Unlt Coet ll.ao 100% 100% 73.h 50%
31,00 .20 AO
il1,200
t1,ooo 150 200
1,350 312,550
ll Totel numbor of oqutvtlcnt unltr rrqulrod ln tfir colt rccountrd for lccUon dctarmlncd followr: Ovcrhcad Lebor Mrt rbb 7,OOo 7,OoO T'OOO EquhraIcnt unttr trandcrrcd out........... 50o 75O I,OOO Equlvalcnt unltr ln rndlng Invcnto:y.. 7,5OO 8,OOO 7,75O Total cqulvalcnt unltt - Total coct (1.r., ttrr cort ln bcalnnhg lnvcntory plur thc cort added during thc currcnt pcrlodl rccuon dhyldcd by thr total numbcr oi rgulvatcnt unltr rcqutrcd !n thc cort eccountcd for
131
Chaptor6 P6-5 (Continuedl
HytestChemicalCorporation BlendingDepartment Cost of ProductionRoPort For March Quandty t]chedulc Beglnnlng Recclvcd from Refinlng Dcpartmottt ........-..--. Addcd to proccrr ln Blendlng Departmcnt.....--
Matcrlalr
Labor
Overhcad
QuanUty 1r4O0 7'Oo0 1,80O
10,20o Transferred to Finlshed Gooda Ending InventorY..
Cogt Charged to Departtnent Beglnnlng Inventory: Cort fro m p rcccdln g d epa rtment'......'........ Materlala labor Factory overhead
Total cost ln beglnning lnventorY Coat addad durlng curront porlod: Goat from precedlng department Materlalr Labor.....,. Factory overhead Total cost added during current pcrlod Total cost charged to department...........
89t/t
40ch
Total Cort
40o/c
9,20o 1,O0O 10,200
Equlualent Unlt Unlts' Cogt"
$ t,7sl 420 88 100
t 2,602 911,200 4,380 3rloo SrOOO
10r2OO 10,000 9,6OO I,OO0
s1.27 .50 .33 .60
924,280
t?n
Chapter 6
t32 P6-5 (Goncludeil) Cort Accountcd for ar Followa Tnngfcrrcd to FlnlghedGood3""""" Worlt In Proccar, cndlng InventorY: Cort from PrPcedlngdepartmcnt Materlala Labor Factory overh gad ..""""""""""' Total cogt accounted for .........-..---
% Complctc Unlt Cost 0,200.
100%
s2.70
I'OOO
1OO'/o gooh
91.27 .50 .33 .60
'l,0oo 1,OoO I 'OOO
49o/c 10o/o
Total Cost
s24,840
sl,270 400 132 240
2rO42
s26,882
as Total number of egulvalent units required in the cost accounted for secuon determined followa:
Prior Dept. Materials Cost
g,2oo l r ooo
g,2oo
Equlvalentunib transferred out..'. 800 Eguivalentunits In ending Inventory Total equivalentunlts.......:..........-. 1 O , 2 O O 1 O , O o o
Labor
Overhead
9,20O 400
9,200 400
9r8OO
9r60O
- Totat coct (1.c.,the cogt tn beginning Inventory plus the cogt added during t|re current period) tor sectlon dlvlded by thc totat number oi equivatent unlts requlred In the cost accounted
l2l
WorkinProcess-RefiningDepartment...,'.""""' Work in Process-BlendingDepartment....,""""'
7 1272 4,38O 11,652
Matgrials ....'.."""""""'t"t'r"""""""
Work in Process-Refining Department'......'t""" Work in Process-Blending Department """"""" Payroll
I,520 3,1O0 41620
.t...."t"""t""t""""""t"'r""""""""""
Work in Process-Refining Department """' r"""' Work in Process-Blending Department A p p ti e d F a cto ry Ove rh e ad' ..,...............""""' Work in Process-Blending Department r.......""" Work in Process-Refining Department """'
2r940 5,6OO 8,54O 11,2OO
F i n i s h e dGo o d s 1 n ve n to ry.......,..' ................,.........241844 Work in Process-Blending Department """
11r2OO 24,84O
t33
Chapter6 P6.6 APPENDIX
(1t
Upton ManufasturingCompanY Cuftlng Department Cost of ProductionRoport For October H.trrbb
Cluand(ySchcdub
Labor 1AV.
00t6
Beglnnlng
Orerhead 20Vr
Ouantlty I,OOO
0,ooo
Stsrtrd h proccs thb pcrlod..-.'.-.
1O,OOO
Tranrf rrrrd to Asrombly Dopertmont Endhg lnvrntory........--x..€.
80%
100%
'loo.h
8,5O0 1,50O lO,OOO
Cort Chargcd to Dcpertmrnt BeglnnlngInvcntory:
Totel Coet
Factoryoverhcad
.'...... $ 10'550
h beglnnlng hventory
Cort rddrd durlng currcnt pcrlod: 3 81,900 18,OOO 3930O
Matarlelr
l.bor Fectory ovcrhcrd Totrl coct rddrd durlng currcrit pcrlod-.'..' 1o61 sot
Transtcrrrd to Arocmbty Dcpartmcnts Ecglnnlnglnvcntoty.s.-6* Colt to complctr: Metcrlelt[rbor-*.Frctory ovrrhred ---Strrt d end complct d thb pcrlod Totrl coet trenrfrrnd to Ascmbly Doprrtmcnt --*. fVork ln Proccs, rndlng hvcntory: Metcdelr l.ebor Total colt eccountcd
Unltr
tor ...................
9r800
$ 9.oo 2.00 4.00
3130'7oo 3l5.OO Total Cogt
Current'A Unlt Cogt 310,550 10.h go.h
3 c.oo
I,OOO I 'OOO l,OOO
80%
LOO 4.OO
7,5OO
100.h
15.O0
ooo 1r2OO 3,2OO
3 15,850 112,500 3128,35O
1,50O 1,50O l r5OO
Factory ovcrhced
9,1OO or3oo
-... 3150J250
chergcd to depertrncnt
Cort Accountcd for rr Followr
Unlt Cogt"'
8,01O 1,750 790
l-abor Total cct
Equivalont Unltr'
100ch aooh 1O0'/.
t c.oo 2.OO 4.OO
313,50O 2,4OO orooo
21,9O0 $15O,250
Chapter 6
134
P6-6 APPENDTX(Contin ued) ar follows: . llumbcr of equlvalent unltr ol colt added durlng thc c'urant perlod detsrmined Materlab To comptetc bcglnn|ng Invontory"""o'D,""'o" Startod end complgtad thlr perlod o'D'-oo"o-" Endlng lnventorY Total cqulvalont unltr
Labor
Overhead
100 7r5OO 1,500
000 71500 1r2OO
7'5OO 1r500
e,1o0
o,3oo
e,8oo
- cogt addsd durlng thc current perlod dtvldedby thc numbor ol cqulvalent unlts of cost addod durlng the current Perlod
i-.'<--
t35
Clwtor6 P6-6 +PPENDIX (Gontinued)
UptonManufacturingCompany AssemblyDepartment Cost of ProductionRepod For October QuanUty Schedulc Beglnnlng Inventory
Materials
labor
Overhead
$Oo/t
75%
8Oo/o
Rccetvedtrom Cuttlng Department...
QuanUty 2,OOO 8,50O
'lo,5oo Tranctcrred to Finished Goods Inventory Endlng lnventory..
60c/c
40ch
4Oo/t
915OO 1,OOO
1O,5OO
Cort Chargedto Department Total Cost Bcglnnlng Inventory: preceding Coetfrom department................................. $ 4,000 Factory overhead Total cost In beglnnlng Inventory
$
0,800
Coatadded durlng current period: Cort from preccdlng department...,........,.................... 3128,350 30,100 Matorlalr... 21,315 30,015
Labor.......... Factory overhead Total cost added during current perlod....... Total cogt charged to department,..........
Total cost transferred to Finished Ooods Work In Process, ending Inventory: Cost from preceding departrnent Materlals Labor........ Factory overhead Total cost accounted for .,.................
Units
Unlt Cost"
400 800 1,800
Matcrialr
lsbor
Cort Accounted tor as Followr Trangtarrad to Finlshed Goods: Beglnning inventory,. Cost to completc: Materials.. Labor........ Factory overhead ........ Started and completed this period
Equivalent Units'
8,50O 81600 8,7OO 8,7OO
315.10 3.50 2.43 3.45
$2O9,78O
s24,50
s216,58O
Total Cost
Current % Unlt Cost $ 6,800
2,000 2,OOO 2,00o 7,5O0
2s%
s 3.50
40% 40%
2.43 3.45
1000h
24,50
1,750 1,960 2,760
g 13,270 18:t,75O 3197'o2o
1,0oo 1,OOO 1,OOO 1,OOO
1000h 600h 400h 400h
315.10 3.50 2.45 3.45
$15,1OO 2.1OO 980 1,38O
19,590
93:l'599
Chapter 6
t6 P6-6 APPENDIX'(Concluded)
. llumber of equhralentunlts of cort added during thc current perlod determlned as follows: Prlor DepL Materlale Cort
7o completc beglnnlng Inventory.. tltartsd and completsd thlc pcrlod Endlng Inventoly-r.-...................t.. Total equlvalent unltr
0 7,500 1,000 '8,500
Labor
Overhead
500 71500 Eoo
800 7,500
800 71500
400
4oo
8,60O
8,7OO
8,700
- Coatadded durlng thc current perlod dtvldedby the numberof equlnalentunlts ol cost added durlng ttre currpnt perlod
tzl
Work in Process-Cutti ng Department'................ Work in Process-Assembly Departm ent ....--....-'. Matgrials
r......r..r...
1 12,O OO
r.........'..'...r........
Work in Process-Guttin g Depa rtm 8f1t......'.......... Work in Process-Assembly Departme nt ....."..'.o. Payroll
81,900 30,1OO 18,600 21,315 39,915
.......r.....t.....................t"t""t"""t"tt"'
Work in Process-Cutti n g Departm gflt'................ Work in Process-Assem bly Departm ent ........'..,. Applied Factory Ovgrhgad ......"..............'.....
39,20O 3O,Ot5
Work in Process-Assembly Department....r.....r.. Work i n Proc ess-Cutti n g Departm gllt'........
128,350
69,215
Finishgd Goods 1nventory...,....o......"........',..r.......197rO2O Work in Process-Assembly Department ..,..
128r35O 197,02O
137
Chapter 6
P6.7 APPENDIX
(rl
Marston Manufacturing GompanY Fabricating Department Cost of Production Report For August
QuanUty Schedulc Beglnnlng Inventory Stlrtod In process thls perlod
Materiala
Labor
1OO'/.
Overhead 80o/o
4och
QuanUty 400 1,2OO 1,600
Tranrfered to FinlshlngDepartmcnt EndlngInvcntory..
1OO'h
8oo/c
9Oo/o
y
-
1,100 5OO
-1f99 Coet Charged to Department Beglnnlng Inventory:
Total Cost
Unlt Cost"
.. $ 29,280 1,900 11,80O
Materlals
Factoryoverhead Total cost in beglnning inventory Coat added during current period: Materlalc... l.abor Factory overhcad Total cost added durlng current period....... .a...aaaa
Total cost charged to department...........
Equivalent Units'
I 42,980 aaaaaa
$ 9O,OOO 1O,o8O 48,740
1,2OO 1,340 1,230
$ 75.OO I2'OO 38.00
S152,820 !199f99
s125.OO
Chaptar 6
,g
P8-7 APPENDIX{Continued} Cort Accountodfor ar!g!!ow: to FlnlshlngDepartment: f-rtf"-.a Bcglnnlnglnventory.' Cort to complste: Materlalr.. l-abor..-.--. FactotYoverhead"""" Startcd and completedthlr Perlod Total coct transfcrrsd to Finlshlng Dcpertmont Work tn Procesr, ending Inventory: Materlale.. Labor........ ' Factory overhead Total coat accounted for ...-.--.-..........
Unitg
Total Coet
Current 7r Unlt Cost 942,980
och 3 75.00 12.0O aoch 38.00 2Oolc 125.OO lOAo/"
400 400 400 700
o 2,880 31040
g 48,900 87,500 $130,4O0
1000h I 75,00 12.OO 800h 38'00 9Oo/o
500 500 500
$37,500 4,800 17,10O
59,4OO $195,8OO
. llumber ol equlvatent units of cost added during the current period determined ac follows:
Materials To completc beglnnlng Inventory Startad and completed thls Perlod Endlng InvcntotY.. Total equlvalent unltg
o 700 500 :
1.200 :
Labor 240 700 400 1,340
Overhead 80 700 450 :
1,230
- Cost added during the current period divided by the number of equivatent units of cost added durlng the current Perlod
CluptcrG
139
7g--7 APPENDX (Contlnuod|
Marston ManufasturingCompany FinlshlngDepartrtent Cost ol ProdustionReport For August *
llrt
Or||nuU&hodub
lrbor 20V.
rbb tnV.
Ovrrhcrd 3gYr
Rocrlvod from Frbrbrtlng D.p.rbnltt
Quentfu
ooo 1,1OO 1,7OO
Tnnrfrrrrd Endhg
to Flnlrhed Ooodr hvrntory
lnvrntory...,.o..m..F6.os,,o
oo?6
IOO%
oof)6
l r3OO .3OO 1,700
Cort Chrrg.d to Dopertm.ot Boglnnlng Invrntory: Cort from pncrdlng dcprrtnont --*...n...-.,...,.
Totel Co.t t 74'OOO
lbtarfrb-es.e..-F..F=
I,OOO 2,52O
s 78r3!to
3130/a0o 2r02O 19,880 20,42o
HltarhbH*ed-nare
trbor Frctory ovrrhred Totrf coet rddrd durlng currrnt p.r|od....... clrtrgcd to dcprrbncnt.,.*.-
Cort Accountod tor rr Followt Tnnrfrmrd to Fhlrhcd Ooodr: Boglnnlng Invcntory .-.-..-F.,-.Cort to complctr: Mattrlalr.-F.-.*nE bbor.--€.*ffi
Frctory oyrrftlad -* Ettrt d end complrt d trb p.rfod Totrl cort trrnrfrrnd to Flnbhcd Omdt
Unltr
lrloo 1r4OO 1t12O 1l2O
ti80,020 3267,37O
_
F.....r........
L^abor Fectory ovcrhcad Totel coct tccountcd tor ...................
3124.00 LOO 14.00 21.O0 3101.00
Currrnt 16 Unlt Cort
Totel Cort t78,&5O
oo0 oo0
ao.h s
2-oo
ooo
w.A
14.OO
w%
2t.oo
700
100%
101.00
720 Q1720 lOrO8O
3 95p7O 112t7OO 3208"570
Hhs.*
Wort h Procan, ondlng hvrntory: C;ort from pncrdlng dapertnrrnt Httorletr
Unlt CorF'
An
t bot Frctory Total coct h bcglnnlng hvcntory Cort rddrd durfng curnrnt pcrlod: Cort from pncodlng drprrtmmt---...-,......,,.....,.
Totel cct
Egulvelent Unltr'
400 .fOO .3OO 400
100% sl24.00 100cA 2-oo o o.h 14.OO 6O.h 21.OO
3{9,OOO aoo 3,3OO 5,O4O
58r8OO
3267,370
Chapter 6
140
P6-7APPENDIX,(Goncluded) . llumbcr of cqulvalent unlta of coct added durlng t{rc curent perlod determlned al follows: Prlor DepL Materlalr Coct
To compteto beglnnlng lnvanto4y" st *.0-"nd comPletcd thlt Perlod Endlng InventorY Total equlvalent uhltl
o 700 400
Labor
380 700 400
4ao 700 240
1,46O
1,42O
Overhead 480 700 240
1,42O
ft Coat added durlng the current perlod dlvided by the number of equlvalent unltc of cost added durlng tlrc currtnt Perlod
l2l
Work in Process-Fabricating Department""""" Work in Process-FinishingDepartment......'...'... Matgrials ..............
9O,O0O 21920 921920
...........-.........,'..r
16,080 Work in Process-Fabricating Departmeflt.......... Work in Process-FinishingDepartment....'..o.r.... 1 9 r 8 8 0 PayfOll
.............r....r..............rtr................t.t.r.
35, 960
46,740 Work in Process-Fabricating Departmellt .'........ 29,82O Work in Process-Finishing Department ..'.-....,..'. ApFliedFactoryOverhead......-.........'......,....
76, 56O
Work in Process-FinishingDepartment........r...., 1 3 6 , 4 0 0 Work in Process-FabricatingDepartment"
136,4OO
Finished Goods Inventory Work in Process-Finishing Department.....'
208,570208, 57O
141
ClvgtorO P6.8 APPENDIX
TWonkaBeverageGomPanY MashingDePartment Cost of ProductionRePort
(1)
For SePtember QrranUVSchcdulc BcglnnlnglnventorY Strrtld
Matcrlalr 9Oc/,
[.abor 60oh
gvcrhead 30o/c
In Proccsc thla Pcrlod
QuanUtY 800 3,OOO 3,6OO
Trandcrrcd to Bl ending Departmant. Endlng hvcntory
00%
400h
20c/o
3rloo 500 3,600
Cort Ghargcd to DePartmcnt Beglnnlng Inventory:
Total Cost 3 1,088 172 172
Equivalent Units'
Unlt Cost"
Matarlals l^abor Factory overhead... Total cost In beginning inventory...........'..'..,....... 3 1,432 Coat added during current Pcrlod: Materlalr
Factory Total cort addcd durlng currcnt period....-.. Total cogt charged to department............
3 O,O0g 1.47O 3,020
2,84O 2r94O 3,020
32.10 -50 1.O0
310'496 3t1i93g
33.60
Chaptor 6
112
P6-8 APPENDIXf0ontinued) Untts Currant7o Unit Cost Cort Accountrd for al Followr Tnnrtcrad to EtendlngDepartment BeglnnlngInvontory.......,..."""" Cogt to comPlete: 10% s2.10 800 Matgrialg...""""""""" .50 40o/o 600 labor.-..,... 1 .00 7Oo/" 600 """" Factory overhcad 'loooh 3.60 Stsrtad and comptetedthls Perlod 2,5OO Total coct trancterred to Blending Departn ent .....'.................. Work ln Proccct, cndlng Inventory: 8Oo/. $2,10 500 Materlalr.. .50 400h 500 l-abor........ 1.00 200h 500 Factoryoverhead Total cost accountedfor....,..............
Total Cort $1,4i12 126 120 420
I 2,098 IrOOO
311,008 t
6:10 100 100
830 sl1,928
. Humbcr ol equlvalent units of cost added during the current period determined ar tollows: Overhead
Materials
Labor
To completc beglnnlng Inventory Startod and completed th lg period ................. Endlng Inventory
60 2,500 300
240 2,500 200
420 2,500 100
Total cqulvalent unltr
2,890
2,940
3,020
Coat added during the current period divided by the number of equivalent units of cost added during tfie currrnt period
143)
Chapter 6
Po-8 APPENDIX(Gontinued) Twonka Beverage Company Blending Department Gost of Production Report For September Labor
Matarlala QuanUty Schedule 50ch eeglnnlFg Inycntoty.......,..r.,.........r........,............ Recclvcd from Mashlng Department.................. Added to process In Blending Department.........
20.h
Overhcad 2otlo
QuenUty I 'OO0 3,1OO 3,1O0 73OO
Transterred to Finished Goods Inventory Endln g lnventory..........
1000h
6Oc/o
60o/c
6,40O 800
J-,n9 Coat Charged to Department Beginnlng inventory: Cost trom precedlng department................
Total Cost
Factory overhead
s 1,999
Total cost in beginning inventorY Cost added during current period: Cort from precedlng d epartment...........'... Materials
-lt
Factory overhead Total cost added during current period....... Total cogt charged to department...........
Total coat transferrcd to Finished Goods Work In Process, ending inventory: Cogt from preceding department Materlals l:bor........ Factory overhead Total cost accounted for ...................
Units
Unlt Cogt"
$ 1r77O 100 55 74
Materlals Labor
Coat Accounted for ss Follows Transferred to Finished Goods: Beginning inventory.. Cost to complete: Materials.. l,-abor........ Factory overhead ........ Started and completed this period
Equlvalent Unlts'
t,ogg 1r4O7 2,OO4 2,''72
6,2OO
g,7oo o1680
6,ego
$1.70 21 .30 .40
$17,181 $2.70
$19,180
Total Cost
Current7n Unlt Cost si,999
1,000 1,00o 1,000
500h 800h
5,400
1000h
sooh
3 .21 .30 ,40
105 240, 320
2.70
s 2,664 14,580 317,244
goo 800
soo BOO
1000h 'loooh 600h gooh
s1.79 .21 .30 .40
s1,432 168 144 '192
1,930
319,180
,41 Chapter 6 .
P6-8 APPENDIX(Gonctuded| ' Xumbcr of cquhrafent unltr of cogt added during thc current period determlned as
To completc beglnnfng Inventory.. gt"rt"d and comptetad thlc perl;d Endln g Inven toly..-,F.F.........,......., Total cqulvalent unltr
" ff:;ffi'"HlllSil;t"'t (21
Prlor DepL Cogt Materlab
Labor
Overhead
5,400 800
5OO 5,400 800
8OO 5,400 480
6,20o
800 5,40o 480
6,700
9.880
6,ogo
o
foftows:
perlod divlded bvthenumber orequivarent unitsorcostadded
Workinprocess_MashingDepartment............... Work in process_BtendingDepartment,o............ 6,O06 7,4O7 Matgrials'r""".....-...r....r...-...-.r..........r.....r....
Work in process_Mashing Department ...........r,.. Work in pro.cess_Blending Depa rtment .....r..,.,... Payroll
"r""r"""rrr""r...--....r...rr.........rr-.r.-.....
7,413 1r47O 2rOO4 31474
Workin tT: ::s_!l-ashi1 g Departm€nt,......,....... Workin process_AlenOini Departmelt.............. Applie
d Factory Ovgrirgad r.................,......rD.
3,O2O 21672 5,692
Work in process-B_lending Department ............,. work process_rraainini
I 1,Ogg
Finished Goods Inventory.............. ......... work in process-Biending oepatt.;;i::::::
I1Tr244 t 'z'rq
in
oepart-;;f::.::::
1l,oeg 12,244
I
CHAPTER7 QUESTIONS DTSCUSSION Ot slity cost! rnay be groupcd hto the folbwing three classifications: Preventicn costs are the ccts hcurred lo 1. Ptcvent product failure. They include the cdt ct designinghigh quality productr and prcductbn rystenrs, irrludhg thc coett o{ implementingand maintainingsuch sys' ' lems. Appraisal coots ate the coets incuned to 2. detecl producl failure. They includelhe cet of inspccting and testing malerials, hspecting produc'tsduring prodwlion, and thr cogt d obtahhg hlonnatinn lrqn cus' lorners aborn product salisfastiqt. Failure ccts ato the cosls incuned when 3. a product tails, ard may occur inlemallyor externally. Intsmal failure cosls are those that occur duringthe manufacluringgr Productbn procoss(e'g., scrap,spoilage'and rework), and external failure cosls aro t h o s e t h a t o c c u r a t l s f t h e P r o d u c th a s b e e n s o l d ( e ' g . , w a r r a n l y r e p a i r sa n d r e p l a c e m e n t s3 , a l € s r e f u n d s ,h a n d l i n g cuslom€r cornplaints,and bsl sales result' hg frorn PoorProduclqualtty). Q7-2. TOM stands for total quality nwragemenl' which approach to quality improve' b a cornpany'wirCe menl in all processesand activities.TOM is a pervasive philosophyol doing business thal appliesto all funstionalareas of the company and to ail personnel. Q7-3. Five characteristicsof TQM syslems are: 1. The company'sobiectivelor all business activily is to serve ils cuslorners'The term product' is extendedto includeservices as well as groods,and'custorner'hcludes htemal usors as well as those outsideof the cornpanywho purctrasethe company's products.Each empbyee's activityis ori' serviceto the cuslorner. entodto provirCing 2. Top marngementprcvlCesan aclive leadership role in the qualily improvemenl rnovoment. 3. A l l e m p l o y e e sa r e a c l i v e l y i n v o l v e di n quslity improvement.Employeesaro nol only asked to contributeideas,but also lo lind batter ways of doing lhingsInvolvemenlcan be successlulonly when there is oncourago.neoland an open and honest environmentcl trust. 4. Thc cornpany has a sysiem of idenlifying q u a l i l y p r o b l e m s ,d e v e l o p i n gs o l u t i o n s , a n d s e t t i n gq u a l i l y i m p r o v e m e not b j e c t i v e s . T h i s t y p i c a l l yi n v o l v e so r g a n i z i n g empbyees lrorn all ranks and lrom dilferO7-1.
Q7-4.
O7-5.
Q7€.
O7-7.
07€.
Q7-9,
145
enl orgnnizationalunits along with man' agers who have authority to take the necessary actbn lo solve Prcblems. The company places a high value on its 5. empbyees and proviCescqrtinuous training, ar well as recognitionfor achieve' ment. Employees perform besl wfien they are well lrained, and they have the greal' est capacily to contribute when lhey are hightYeducaled. The concept cl continuousquality improvement ditlers frorn the cmcept ol quality optimizationin that csrtinuous quality improvemenl is a dynamb processof change under lhe assumptionthat the iCealis not an abrclute loown value;where' as, quality optimizationis a slalic approach to fhding the best solutbn to a given set of fixed and knorvnconstraints. The first problemwith trying to inspectqualily into the productis that il delects inlemallailures only afler coosiderablecost has been incurred. The second problem is that the rnagniludeol the cost of the internalfailures,delecled by inspeclion, is rarelymeasuredand typicallyignored. Cornpaniesshould concEntraletheir eflorls on preventhg poor gualily rather than on lrying lo inspectit into the Process,because il will result in less total qualitycost. The approachis found' ed on the belief ihat by increasingprevention c o s t s , t h e c o s l o f i n t e r n a ll a i l u r e s - s u c h a s s c r a p , s p o i l a g e ,r e w o r k ,a n d d o w n t i m e - w i l l decline by a larger amount than the increasein preventioncosls' Oualitycosts should be measuredand reported lo managemenlin orderto provideincenliveand d i r e c t i o nf o r i m p r o v i n gq u a l i l y . L a r g e q u a l i t y costs indicate large opportunitiesfor improvemenl. Also, moasurem€ntsprovidea basis lor moniloringthe cosl of quality and evaluating improvemenls. S c r a p i n c l u d e s( 1 ) t h e f i l i n g s a n d t r i m m i n g s remainingaller processingnraterials'(2) defec' live materbls that cannot be used or returnedlo the vendor, and (3) broken parts resultingtrorn employee€rrors or machine failures' Spoiled goods differ lrom scrap in that they are parlially or fully completedunits lhat are in some way delective and are not econornicallyor physically conectable. Spoiled goods rnay be unils of the product or componont Parts, and they may of may not have a salvagevalue. Bework is lhe p r o c € s so l c o r r e c t i n gd e l e c t i v em a n u f a c l u r e d gooos. Tho cost of scrap, spcilage,and rework shouH nol be ignored,because such costs are oflen
,16 quit. high and ofton re3ult trom hternal failures tirat can Uc elimihatod lgnoringlhe cosl of these htemd failures s€nds a signal to rnanagerslhal urc*r codr arc acceg,table.Reporling such costr provido inccntivl tor improvement,particularly il tho cctc are la'rgc' OZIO. tn ordor to know what to do with lhe cosl' the accountant musl know whether lhe spoilage or rework is caused by thc custorneror by an inler'
Chapter 7 nal failure.ll spoilageor reworkis the resultcl a custorner requiremenl,lhe unrecoverablecosl shoutd be charged to the trb. On lhe other hand, il the spoilage o rework is thc cutsequerrc o{ an intemal lailuro, lhr unrecovrrabb cocl should be removed lrom thc iob (i.e., charged lo Factory Ovefiead Control) and reported to responsiblemanagomenl
t47
CliwterZ
E)GRCISES I
E7-1 (1) l2'l (31 (4)
E7-2
Accounts Rgcgivabl8...'.......o..o..o................."....... 1r8O0 Scrap Salgs (or Other Income)...'.............o.... AccountS RgCgivab|o......................r..'..................
I r8O0
Cost of GoodsSofd
1,80O
' ACCOUnIS RgCgivablg."...'."...'......'r.....".'...'.....'.'. Factory Ovgrhgad Gontrof ..r....'.....r..r...........
1r8O0 1,800
AccountS RgCgivab19........................'................... I ,8OO Work in Procgss ........,.,.,,,.r....................r..,..
272
$27,OOOtotal iob cosVl,00O chairs = $27 cost per chair S p o i l e d Go o d s l n ventor y ( $g x 1OOchair s) ,......,... Factory Overhead Control ((,$zz- $9) x 1Oo)......... Finished Goods Inventory ($22 x gOOchairsl ...,... Work in Process...................,.,..r.
9OO 1,80o 24,3oo 2TTOAO
E 7 - 4 S p o i l e d g o o d s In ve ntor y( $9o x 1OO' units) ............ 9,OOO Gost of Goods So|d.,...., .r.............,...,r...D. 95.OOO Work in Procgss ,.....,,.....,,.............o.......o..r,.. E7-5
1,800
12o 152
Spoiled Goods Inventory.,...,.r....,..ro...,................. Factory Overhgad Control ......,.........,..........o........
Work in Process.........,.. E7-3
1,8OO
FactoryOvgrhgad Contro1.r..,..,....,............,........,. Ma te ri a l s(1 0 Ounits x $1.5O) .....,.. Payroll (1OOunits x 114 hour r $1O per'hour) Applied Factory Overhead (1 OOr 1 1 4 hr x $12 r ate).,.,.,........,..r ........
FinishedGoodsInventory.....,........ Work in Process
.,.....,.
l O4'OOO
700 150 250 300
6,900 6,80O
ChapterT
18
E7-6 Work in Pnocess""""""
8,5OO
1r0oo
Matefials (1 ,OOOUnitS X $1)...r............r,...,,...
215OO 5,OOO
unitsx 116hourx $151........... Payroll(l 'OOO ApbtieOFactoryOverhead(l'ooo r 716r $3ol COSt Of GOOdS SO1d...........................'r...r.........o....
73,50O
Work in Process($651000+ $8r5O0!.....'.......
Accounts Receivable($73r5oor I 5oVo1...........r... I lo,25O Sal gSt'.....r....r............'.................r...r.........r...
73,5OO 1 1O,25O
149
ChapterT
E7-7 ,
(11
Manx ComPanY FormingDepartment Cost of ProductionRePort For August
Quantlty Schcdulc Beglnnlng Invenlory Started In procesc thla perlod s.........
Matarlalr
Labor
Otrarhcad
QuanUty I,OOO 9r000
19'009 Transterrcd to Finishlng Department Ending Inventory............,.....,............. Spolled In procccr.....x..,,........,.'s.....
100% 100%
7,rh 100.h
50o/o
100.h
8,OOO 1,50O 500 1O,OOO
Gogt Charged to Department Beginnlng Inventory: L.abor Factory overhead
Total Cogt
Equlvalont Unlts'
Unlt Coat"
$ 1,260 770 1,4O0 g 3,430
Total cost In beginnlng lnventorY Cost added durlng curent perlod: Materliglr Labor Factory overhcad Total cost added during current period-..'...
Soa'745
Totaf cost charged to department.......,..,
Sry-
$?6,240 10,78O 21,725
Cost Accounted for ac Follolvl Unltr '/aComplste Unlt Cost 100.h s7.45 Transfered to Finlshlng Dcpartmcnt I,O0O Chargc to Factont Overheod tor gpollage: lOgo/. 3S.ZS 500 Materlialc.... 1.20 1000h l-abor..... 500 2.50 100.h Factory overh ead ....................... 500 Work ln Procees, endlng Inventorp s3.7s Materials,. 1000h 1r500 1.20 Labor.....,.. 750h 1,50O Factory overhoad 2.50 500h 1r500 Total cost accounted for ...................
1O,O0O 9,825 9,25O
s3.75 1.20 2.50
s7.45 f:trt C-! s59,OO0 s1,875 800 1,250
3,725
s5,625 1,35O 1,875
8,850 372,175
Chapter 7
150
E7-7 (Goncluded| '
lor recuon determlned ar Totat number of cqulYalcntunltr rsqulred h thc cort eccountod lollorvr: ovcrhead Labor Matsrlalr I,OoO I,OOO I,OOO EguhraIent u n ltr tranctorrcd out "-""'-"'o""" 750 1,125 1,500 Equlvalentunltr ln cndlng lnventory" 500 500 500 Equlvatent unltr of rpollagc...*."'-"""""':' er?99 0$25 Total equlvalontunltf .....'............,.............."" =to,ooo : a : :
h Total coet fl.c., thc coct In beglnnlng Inventoryplut the coet added durlng Bro currant period) dlvtdedby the total numbcr of equlnalentunltr requlrad ln tha cogt accounted for section
(Zl
Work In Process-Finishing Depattment............., FactoryOverhgadCOntrol...,,.....,..,.........,.r...'...ro. work ln Process-Forming Department.,....,
591600 3r725 63'325
151
ClppterT
E7-8 ,
(r)
JuniperComPanY FinishingDepartment Cost of ProductionReport For July
QurnU(y Echrdulo
Hdrrlrb
Lrbor
Orcrhcad
Quan$ty 500 41500
Rccrlvcd trom CutUng Dcprrtmtnt-
5,000
Trenrfrrrrd to Flnldt.d Ooodr...-* Frd hg humtot7...*.-.o.s....'......-r. 8polbd h prccoE.-.m--..,.x.d.
&Vr 100%
20% 100%
20% 100.h
3,800 800 400 5,OOO
Cort Chrryo'd to Dcprrtmont Boghnlng hvontory: Coct from prcccdlng Matcrlalr
3
Frctory ovcrttcad Total cort In bcglnnlng InventorY Gort rddrd durlng cgrrant prrlo'd: Coct from prrcodlng dcpr Hrt rlrlt
Unlt Cst"
s 1o,4oo 3 54,500 20,olto 10.200 24,39O
Frctory ovcrhcad Totrl cort eddcd durlng currcnt pcrld.--..
5,000 1r52O ar36O ar3oo
31e00 5.OO 4.OO
o.oo
3115,800
Totrl cort ehargcd to dcpertnrcnt.........-
Tnnrlrrnd to Flnlrhrd O,oodr-..--Trenrtcrrr'd to Spollcd Ooodr krvcntory rt rahrago vrlur .-s-.....-..*.. Ghergr to Ftctory Ovrrhod for rpollrgo: Cort of complctcd rpolbd unttr l.rrr ratvagr vtlur oil tpotlcd unltr Work h Proccsr rndkrg brwntorf Cod from prrcrdlng dcpertnrcnt Matrrlelr_ L-ebor..-.... Fectory ovcrhcad Totrl cort rccountcd for
Equlvafent Unltr'
11180 11770
L.abor
Cort Accountcd lor er Followr
Total Colt 5r5OO 1ro5o
327.0O
1126'200
Total Coat
%Completr Unlt Cort 100.h $27.00 3B0O
Unltr
ti02,000 4,OOO
510.OO
400 400 400
100.h
800 800 800 800
100.A 10.h 20ch 29Vr
s27.oo 10.oo
$1O,80O 4.O00
31e00 5.oo
s or6oo
4.OO
o.oo
1,600 040 000
6,8OO
12,800 312O,20O
Chapter 7
152
E7-g(Gonctudedl . Totat numbcr of rqulvrtent unltr nqulrrd h thr cott tccountcd for rccUon dctcrmlnod r followr: Hor Labor Ovorhced Metorbb DcoL Gct 3BOO spoo 3BOO 3r8OO Equhvalent unltr trandcrrcd ollt -" l8o t8o 320 800 Equlyalsntunttr h rndlng lnvcntory aoo aoo 400 400 Equbralent unttr o'f rpof bgc....'.*' 4,3OO a,3oo 15,20 5,000 Total equlvalcnt unltr - Total cort (1.o.,thr coct In bcglnnlng Invcntoryplur thr-colt eddcd durlng llrr currcnt pcrlodl t1'r cort eccountrd tor rostbn dtvtdcd by thr toUf i"iUrr oi rquliiini u"ftt rrqutrrd br (21
Finishgd Goods Inventory..,,........o...r..'.'......r........ spoiled Goodg Inventory ..'...r...........'..........'...."" FaCtOly OVgfhgad COntfOl .....,r.......t..""""""rtt""
Woik in process-finishing Department"""
1O2t60O 4tOOO 6t8OO
l13t4OO
t53
ChagtarT
E7-9
1
CoastalPetroleumInc. CrackingDepartment Gost of ProductionRsport For MaY
(11
QuanUty Schgdulc Beglnnlng lnventory
Matcrbb
ConvcrslonCoot
QuanUty 5,OOO
55,000
Startsd In procer tfilr perlod
99499 Transfemad to Reflnlng Department Endlng logt h pnocar
49,000 6,0O0 5,00o
7O'/.
100ch
60,ooo Coet Chargcd to Departmant Beglnnlng Inventory:
Total Coet
Egulvalent Unltr'
Unlt Cogtt'
'l,9oo
.......'.....'..... $ Matcr1a1c..............,.o...........'..... 380 Convgrrslon cost................,.....,.....................,.o,..F...r... Total cost In beglnnlng Inventory.......'...'.........o... 3 2'280 Cost added durlng current Perlod: Materials Convenlon colt
s2o,1oo
- 7,420 Total cort added durlng current perlod.....-..,...... 127,72O Totel cort charged to department........... _320,989 Cost Accounted for ar Follorrr Trangferrcd to Reflnlng Department Work ln Procesc, ondlng Invontorp Materlalg Convcrgion coct
55,0OO 53,200
9,000
7000h 70.h
,4O .15
.15
s.55 Total Coat
Unltr Z. C"-prclc Unlt Cost 49,OOO 100ch s.55
o,o0o
3.no
326,950 $2,400
sro
3rO3O
s20,980
Total cost accounted for
Total number of equlvalent unlts raqulred ln the cost accounted for lecUon detcrmlncd ae tollowr: Materialg Conversion Coat Equhralent unltr translerred out.... Equlvalent unltr In ending Inventory Total equlvalent unlts
40,00o o,0oo
49,OoO 4r2,OO
55,00o
53,2OO
Total cost (1.c.,thc coat In beginnlng Inventory plue the cost added durlng thc currcnt parlodl divlded by tho total number of equlvalent unlts requlred In the cost accounted for rectlon
(2)
Wo rki n P ro ce ss-R e finingDepar tm ent............... Work in Process-Cracking Department......
26,95O 26,95O
Chapter 7
1il
E7.1OAPPENDIX
(r)
Sun ValveGompany Tooling Department Gost ol ProductlonReport For March
QuanUV lichcdulr l Beglnnln g InYcntoly',...."""""'€"r"{ Startod thlr pcriod........"""""""!"-',
Labor 70%
l,lstrrlab lO0t/o
Chrerhead
go.h
QuanUty
2r0oo 13rO0O
15,000 Tranderred to Flnlshlng Dapartment -' Endlng InYcntory........"'t""""""FF proccar.-...................-."'Spolled In
100%
c0%
lOOt/o
9Ot/o
Coet Chargcd to DePartment Beglnnlng InventolY: Labor Factory overhead .... Total cost ln bcAlnnlng lnventory ..'..........r........Cogt edded du ring current pcrlod: Matcrlala Labor Factory ovcrhcad Total cort added durlng currant perlod'......
Unltr
Total Gogt 3 1,600 290 950 3 2,&oO
Equlvalent Unlts'
3 0,750 2r32O 0,2oo
13,OoO 'l1,600 11,500
Unlt Cost"
3 ,75 .20 .80
821,270
s1,7s Tota! Cost
Currcnt % Unlt Cost
Transterrcdto Flnlshlng Dcpartmenb From bcglnnlng lnvcntory---* Coatto complatothla perlod: Materlala,..........F...-d
7r000 3r00o 5,000 15,00o
324,110
Total coct charged to departmcnt Cogt Accounted tor er Follorvr
10?r, 90./,
s2,840 2,000 2,OoO 2,000
labor Factory ovcrhead -....5,000 Startod and completcd thlr pcrlod Total cost trangforrsd to Flnlahlng Departmcnt Chargc to Factory Ovartread for apollagc: Materlalr.. 5,000 Labor.-..... 5,00o Factory overhead 5,00o Work ln Proccu, cndlng Invantory: Materlala 3,OOO L:bor........ 3,0oo Factory overhcad 3,OOO Total cqt tccountod 1or.........-...-
o.h 30'/t 40t/o
3 .75 .20 ,80
100.h
31.75
o 120 640
$ 3,ooo 8,750
sl2,350 lOOt/. 9O'/o 99o/o
$ .zs
1000h 30c/t 40ch
t .75 20 .80
.20 .80
g?,75O 900 3,80O
8,25O
s2,25O 300 9EO
3,51O 324,1'lO
155
ChapterT
E7 -1O APPENDIX (Concludedl ' llumbcr of cgutvalcnt unltr o,f coot addcd durlng tlto currsnt perlod determlned as follows: Matcrialr Lrbor Overhoad
'
To completo beglnnlng hvcntory,€.*.m.o abrtrd end complctrd thlr pcrlod Em&i
c 5,OOO
o00 5,OOO
800 5,OOO
Endlng lnvcntory 8pollcd unltr Total cqulvalent unltr
3,OOO 5,000
1,500 4,500
1r2OO 4,5O0
1't,600
11,50O
't3,ooo
Cort added during thc curront period divlded by thc number of cquivalent unlts of cost added durlng lfic curent perlod
(2'l
WorkinProcess-FinishingDepartment............., 12,350 FactoryOvgrhgadControl..........'......r.,,...'......r.... 8,25O Work in Process-Tooling Departme[t.....,,..
2O,600
Chaptar 7 1ffi
E7-1I APPENDIX Plastico FurnitureComPanY FinishingDePartment Cost ol ProductionRePort For SePtember
(1)
Mlterlgls
Quantltyllchcdutc Beglnnfng
InYontoty"""'F""""""""o'
.
8Oo/'
ry,4Oc/o
Overhead Quantity 4O'/o
naiclvcd-trom Fabrlcatlng Department
Tranrtercd to Flnlshed Goodg""""" Endlng lnvantorY Spolled ln Prccer
1r2OO 0,000
7,2OO lOOo/o 100%
Coat Chargcd to DePartmen! Beginnlng InYcntorY: Cort from precedlng department """"' labor'.............. Factory overhead
Totat cost In beginning inventorY Costaddoddurtngcurrent Perlod:
Cort from precedlnf department """""""' ......'.""""' Matcrlalr ...."i""""" Labor..'...FactolY ovorhead Total cost added durlng current period"""' Total coct charged to dcpartmet1t """""""""""""""""""'
80.h 100.h
80% 1000h
Total Cost i 14,160 1r21O 1,30O 3,250 s 19,920
s 72,000 6,24O 12,24f) 30,600
!t r1,o80 3141,0O0
5,000 1,50O 700 7,2OO Equivalent Units'
IrOOO a,24O 8,120 6,120
Unit Cost"
312.OO
'l.oo 2.OO 5.OO
320.O0
157
ChapterT ET-1 1 APPENDIX (Concluded) Cort Accountad for lr Followr to Flnlsh.d Ooodr: Trenrfrmd g lnvontott .-.-..-boglnnln Frorn Coft to complctc thb Pcrlod: Metr da b.....-o.od-..D.
Currcnt 116Unlt Cot
Unltr
31e,e2o
r3oo 13oO
Labor
Total Cort
20% @.h
3 1.00 2-oO
2a 1r4.4o 3,O00
oo% 1r2OO Factory ovsrftcld ....-.. 100% St rt d rnd complctod thb porlod SBOO Tottl cort tranrfcrrod to Flnbhhg Dcprrbncnt Trenrfcrrod to Spollod Ooodl lnventort 7oo rt uhragn velur rs...'...-.......s.. rpollagc: for Ovcrhcad Chargo to Factory 100% 7Oo Cort of complctrd rpollcd unltr 7oo Lcg ralvagc valuc of rpollsd unltr
320.00 1LOo
tlJtr0oo 8/fOO
Work h Procaor, cndlng hvcntorn Cort trom PrccedlngdePartment
ilzoo
t18,ooo
Matorlalr
bbor Frctory ovorhead ...,.......n-....'..,. Totel cott eccounted tol .......-.......... . Xumber of cqutvatrnt unltt of cct
1r5OO 1,5OO 1,500 I,50O
100% 10a.h 80%
oo%
5.OO
3zo,oo
$ 25too 7O,0oo tloll2oo 8,4OO
312-OO
1.OO 2.00 5.00
5'800
1,5OO
trSoo 4,500
25,80O
tl4t,ooo addcd durlng tfio currrnt pcrlod dctrrmlncd .r followr:
Hor DcpL Coat
Ovorhead
Lrbor
Spolled untts
3FOO 1,5OO 700
Materbb 240 3B0O 1,500 700
720 sBOO 900 700
720 3BOO 900 700
Totaf cgulvalent unltr
O^0OO
6,rAC'
-a'J20
o,120
To completc beglnnlng lnvontory.. atert d end complctcd thb Pcrlod Endlng hventory.........'.....-...........
o
* Cort tddcd durlng tttr curcnt pcrlod dtvldcd by thc numbcr ol cqulvalont unltr of cort addcd durlng tlrc currant pcrlod l2l
Finishgd GOOdSInVentOfy.oo..........,.....,.r............... lOlr2OO 8t4OO Spoilod Goods Inventory .................r.t.o..........r..... 51600 Factory Overhead Gontrol .'...............-'.-..-......-.-... Work In Proce*s-Finishing Departmetlt.....'
115t20O
ChaptorT
tfi
E7.12APPENDIX Local PoPInc' Cooking DePartment Cost of ProdustionRePort For December
(1)
ouenutv!c!g!g!:
i
BeglnnlngInvcntotY
Labor At%
Mtt rbt! 7s%
(hrcrhred
QuanUty
at%
lorooo aor0oo
Racclvcd from Mhlng Depertncnt-
Tranrferred to Botulng E)'epartmontEnd In g lnventory..F.o"o""'o'tr-"-i" ......"o"@' Loat In procotl
60,o99 73.4
100.h
75V.
37,000 8,OOO 5,OOO 5O,O0O
Total Cort
GostChargcdto DePartmcnt BeglnningInventorY: Cost from Preccdlngdepartmcnt
Equlvalent Unltr'
Unlt Colt"'
t 2,920 305 140 210
Matcrlalr [abor....'..... Factory ovcrhcad Totel cct In bcgtnnlng lnventory
t 3,575
Cogt added du rlng currcnt parlodl Cost from prscedlngdcPartment-..'. Materlalr
3lo,85O l,5oo 21430 3,645
35,OoO 371500 4Or5OO 40,500
S,31 .04 .o6 .o9
sl8,425
Cost Accountedfor ar Follorvr Translarred to Bottllng Departmcnt From beglnnlng lnvcntotY..."* Cort to comPlcto thir Psrlod: Mater1a14.................o.. Labor........r.'..r""""'..' FactorY ovcrhcad ...--. Started and compteted thla pcdod
3-5o
322,OOO
Total coct chargcd to
Unltr
Total Cort
Currant 7r Unlt Gost
33,575 IOrOOO lOr0OO
25t/o
10,ooo
75% 73.h
27.OOO
1OO'A
Total cost transferrad to Flnlshlng Departmant Work ln Procesr, endlng Invcnto4n 8,000 Cost lrom preccdlng dcPartment 8,0oo Materlalr 8,ooo l-abor........ I,OOO Factory overhead Total cost accounted lor ...-.--....--..
8.04 .0E
,oo
too /gto 673
9.50
3 4,8OO 13,50O 3't8'3OO
100ch 100ch
3.31 .o4
7sch
.06 .09
7'ch
32,480 320 360 540
3,7OO 322,OOO
t59
CtpptorT
E7-72 APPENDIX (Concludad| s
;
' XumUer of rqutvaturt unltr of eort rdd.d durtng ttrc curcnt pcrlod dctarmlncd rl follorvr:
To cornplctc bcglnnhg lnvcntory.. Stlrt d rnd complct d thb pcrlod Endlng
Totelrquhnlcnt unttr
Hor DcpL Cot O 27,OOO 8'OOO
-3s,o09
tlatcrlab 2FOO 27POO 8,OOO
gFog
lrbor 7,5OO 27,OOO O,0OO
_lo'5gg
Ovcrhcrd 7r5OO 2T,OOO O,O0O
JoFgg
" Cost lddod durlng Ott cgrrent pcrlod dtvHcd by thr numbcr of cgulvelent unltr ol cort tddcd durlng thr curant pcrbd
(21
Work in Process-Sottling Dopartment................ Work in Process-CookingDepartment.......
1gr3OO 18,300
Chagter 7
1ffi
PROBLEMS
P7-1 SpoiledGoodslnventory(2oounits x $2'25)"""" (1) FaCtOry OVgfhead GOntfOl .r............r.................'o.r WOfk in PfOCgSS .................r......r...........t.t..t.
l2l
Accounts Receivable ($55O+ $450) """""""r""t' SCfap
450 1,35O 1,80O Ir O0O 550 450
Sa1eS r.,.....r.............r..r....................t...
Spoiled Goods lnventory t..o....""""""""""" P7-2 (1)
S9O,OOOtotal job cost = S18 per unit 5 ,OOOu n i ts o n j o b
SpoiledGoodstnventory(200units x St5 salvage) FaCtOryOVgfhgad COntfOl...........r..........r..'.'........
3,00o 600 3,6 O0
Workin Process(2OOunits r $18 cost).."'r"
COSt Of GOOdSSO1d..................................'....'.t....t
86,4OO
Work in Process(S9or00o- $31600|,.'......,... (586,400r l 4O%l,.............. 1 2 0 , 9 6 0 AccountsReceivabte Salgs""" {2)
"""""""'
"""""
Spoiled Goods tnventory (200 units x $15 salvage} Work in Process .'......'......,..r....r....'....'...'..... COSt of GOOdSSO1d..........,..,..........r.,...............'.....
""""""""'o"'r"'
120,960
3,OOO
3,OOO 87,OOO
Workin Process($90,00o- $3,000).-...-...-... AccountsReceivable($azrooor 14a%l,..'.....--r... 1 2 1 , 8 0 O Salgs'.'...
86,4 00
87,000 121,8OO
ChaPtarT
161
P7-3 (1)
Factory Ovgrhgad Control ,.......,...,.....,...,...,.......,. Matgrials (1oO units x $4|.....,....,,.,r.....,.,...,.. Payroll (lOO units x 112hr r $12 ratef .......... Applied Factory Overhead (1OOr 112 hr x $24 ratgl ,.........,.........,......
2r2oo 400 600 l 12oo
Cost of Goods Sold..
2OOTOOO
20O,OOO
WOrk in PrOCgSS r.....rr...r...............o.r.o...r......r
AccountsReceivable($2OO'O0O x 15O%)..,.......... 3O0,0oo SalgS...r..r..rr....
l2l
3OO,OOO
..........'.'...r...r.....or..
Work in Process.,.......
2r2OO
Materials (10O units r $4).....r......,....r,.......... Payroll (lOO units x 112hour r $12 ratel ...,.. Applied Factory Overhead (1OOr 112hr r $Ze rate)....,..............D....... Cost of Goods So1d.,.,.....,....r..........,r...rr.....r......... 202,2OO Work in Process ($200roo0 + $2r20O|,,......... Accounts Receivable (S2O2.20Ox 150%) ............. Sa| gS......r......r.......r..............r.r.r.rr......rr...r.....
400 600 1r2OO 202,2OO
303,3OO 3O3,3OO
'te P7-4
Chaptar7
(1)
I
Overstrost GompanY Cuttlng Department Cost of ProduetionRepor For April
QrandU Schcdub
Matcrlrb
Labor
Orcrlrcrd
Quen$ty
Bcglnnlng
5,OOO 2O,0OO
Tnnrferrcd to Ascmblln g Dcpartrncnt ...-dEndlng lnvcntorY.'
: 18,OOO a,ooo 3,000
tltrrt d ln Procar tlrb Pcrlod
Spolled ln procog
2!t,ooo
1AO.A too%
OO% g0%
Cort Chargcd to DcPertmcnt Be!lnnlng InventorY: Mate Labor Factory ovcrhaad Total cogt ln beglnning InventorY
Total Cost 3 1,260 780 lr78O
25,OOO Equhnlcnt Unttr'
Unlt Cort"
$ 3,838
Coct added durlng curcnt Pcrlod: Materialc l:bor Factory ovcrhcad Total cort addcd durlng curcnt pcrlod...---..-. Total cogt charged to Unltr y.Co.pl"t" Cost Accounted for !t Followt l0O% Trangferrcd to Asscmbttng Departmcnt i8,OOO Charga to Factory Ovcrhcad for rpollagc: lOO% 3,OOO Metcrlalr eO'/. 3'OOO Labor g}'h 3'OOO Factory overlrcad u.,...-.-.d.--. Work In Proccsr, cndlng Invantory: Materlalr....... l:bor......... Factory overhead
60% eo% '
a,ooo a,ooo
1oo'.h ao%
4,OOO
6O.h
330,240 lo,7ot 21,311
25,OoO 23,100 23,100
3150 50 t.OO
$88,312 372,150
ir.oo
@!
Unlt Coat
$54,OOO
if'OO 3150 50 1.00
34'500 1'350 2r7OO
$l.so 50
80'000 l'2oo
1.00
2,4OO
8'550
9'600 $72,150
Total coct accountad fof ..........-*...
. Total number of equlvalent unltc requlred In thc cost accounted tor recUon determlned aa follorvlr: Ovefioad Labor Materlalr 18,OOO 18'o0O 18'oOo Squlvalcnt unltr translerrad out.. 2'4oo 2,4OO 4,OOO Equlvatent unltg ln cndlng Invcntory'.. 2r7OO 2,7OO 3'OOO Equlvalent unltr of rpollagc.... Total cqulvalcnt unltr
3!'099
39'109
-23'199
pcrlod) - Total cort fl.c., thr cest In bcAtnnlngtnvcntory plur thc cott added durlng thc currant rcstlon dtvlded Uy tfrc totat numbcr of cqutvatcnt unlb rcqulrcd ln tho cort accounted tor
;
,63
ClppterT
P7-4 (ConUnued| Overttreet Gompany AssembllngDepartment Cost of ProdustionRoport For April CFenU(y Schcduh
tletcrtrb
Lrbor
Otcrhced
QuanUty 4'OOO 18,OOO
Rccrlvrd lrom CutUng Dopertm.nt-.
22,099 Tranrtrrrrd to Fhlrhrd Ooodr lnvcntory 80% Endhg hvrntory proccs 100% ln Epolbd
17,0O0 2gYr 100%
20?i', 100%
4,0oo IrO0O 22,OO0
Cort Chargcd to Departmcnt
Total Coct
Ecalnnlng hvcntory: Cort from prcccdlng departmcnt
Equlvalent Unltr'
$ 1O,9OO 38,028
Matcrlelr
t 57pr8
Totel cort ln bcghnhg lnvcntory @rt rddrd durlng currrnt prrlod: Cort from pnctdlng drprrtmont....-..--.
t 54,OOO "ll,4.r4g2
lletrrfalt
Lrbor
15Aat 23,1OO
Fectory ovc Totel cort eddad durlng current pcrlod....... 8257,U2 Total cort chargcd to deparbncnt ..,...,,.........r,....r..............,9314,300
22,OOO 21,2OO 18,8O0 18,8OO
100.4 80.h 29Yr 20ch
315.00 5.OO 2.95 0.55 1.00 1'5o
9.55 1,O0 150
Totel Cort 3255,000 5,000
$ 5.OO 1OO.A
t ze5
t15,00
Cort Accountcd for g Followr Unltr % Complctc Unlt Colt Tnndcrrod to Fhlrlrcd Ooodt.....-.. lOO% 315,OO 17,OOO Trenrfcrcd to Spollod Ooodr hvontory rt rahragc virlur M-o..mo..o... I,OOO Chergc to Fectory Ovcrtrcad lor tpollagc: Cort ol complctod rpollcd unltt I,OOO bu ralvagc veluc st rpollcd unltl I'O0O Work In Proccr, cndlng Invcntorp Cort lrom precedlng departmcnt a,ooo Materlalr.. 4,00o t^ebor_...... 4,OOO Fectory ovcrhcad. 4,O0O Totel cott rccountod lor .......-...---.
Unlt Cort"
i15,OOo 5,000 311,800 30,560 800 1'2oo
10r00o
a4,360 g?14,3OO
Chaoter7
164
.
P7-4 (Concluded| . Total numbcr od rqulvalcnt unltr rrqulnd In t||r cat rccountcd for rocUon dctcrmlncd ar follom: Hor DcpL Cot l7rOOO Equlyalentunltr tranrtorrsd out-.. ''OoO Invcntory Eiun^i"nt unttr ln ondtng I'OOO iiuhralent unttr of ryollagc'-"--Total equlvalentun|tr..r..............r.. 2,OOO.
Ovcrhcad lebor Mtt rbtt '17'0OO lTtOOO l7'O0O 8oo 8oO 3,2OO I'OOO I'OOO I'OOO 't8eo9 212OO. l8po9
- Total coct 0..., thr cort ln bcglnnhg hvcntory ptur thr cort eddrd durhg tfro current pcrlod) rccdon dtyldod by thr total numbcr oi rqulvatcnt unltr rcqulrcd h thc colt rccountcd for l2l
Departmellt."...."' Work in Process-Assembting ....ro.,.....r...................... Factory Ovgrhgad COntrOt
54IOOO 8t550
621550
Work in Process-Gutting DepartmeJlt......... FinishedGoodslnventorY.... SpOiled GOOdSInVentOfy ..r....r.....r......'....r............ FaCtOfyOVgfhgad COntfO|......r........,.................'..
Work In Procegs-AssomblingDepartment..
255,O00 i
5r00O lOr00O
27O'OOO
165
ChapterT
P7-5 ,
(11
HometownBreweryComPany Miring and BrewingDepartment Cost ol ProductionReport For January
QuenUU llchcdulc
l.ebor
Meterlrb
Ovcrhcad
Bcglnnlng lnvcntory
QuanUty 4rOO0 36,OOO
Startod ln procer thlr perlod
10'9.99 Tranrfrrrrd to CennlngDcpertmrnt Endlng hvcntory
10.h
100%
1OV.
28,0OO 6,OOO
o,0oo
loet h pnoc..f
4O,OOO Cogt Chergcd to Dcpartmcnt Beglnnlng lnvcntory:
Total Goot
Matarlalt
$
600 8a 124
3
810
l,.abor Factory overfiead Total cort h beglnnlng lnventory Coct addcd durlng currunt perlod:
Metrrhlr
9{rso
Lrbor
8.24 1,O88
Frctory ovcrbcrd Total cott eddcd durlng currcnt pcrlod....... Total cort charged to departmcnt...........
Cort Accountrd lor tr Followr Tnnrfcrrcd to CannlngDcperbnant Work h Procor, ondlng hvcntorln Matrrlelr l^ebor
Equlvalent Unlts'
34,0OO 3O,4OO 3O,4OO
Unlt Cost"
$16 .o3 .o4
38,752
s7,5O8
s.23
Unlt Gogt
Total Cost
Vr Completa Unltr 1OO'/o 28,000
Fectory ovorhcad Totel cott tccounted for
6,0oo 0,00o or0oo
lOOt/o 40ch &ch
3.zs 3.ro .03 .04
36,44O 3960 72 96
1r1?8 37,568
Totel numbcr ol cqutvalcnt unltr requlrcd In tho cogt accounted for recUon determined as followr: Materials Equhratontunttr trancf orrcd ou t........... Equhralcntunltr h ondlng Inventory-. Total cqulvalent unltr
Labor
Overhead
o,ooo
28,OOO 2r4OO
28,OOO 2,4OO
34,OOO
3O,4OO
3O,4OO
28,OOO
h Totel cort (1.c., thr coot In beglnning lnventory plut thc cort added durlng tho currant perlodl dtvldcd by thc totat numbcr of cqulvalent unltr roqulred ln tho coet accounted lor tectton
ChaoterT
tffi
P7-S(Continued)
HometownBrewery Company CanningDepartment Cost of Production Report For January QuanUty Schcdub
Mltrr|lb
Lebor
overhced
Quan$ty
,poo Becelvcd from Mlxlng and B rewln g Departm4nt..................
28,000 30,OOO
Translerred b Flnlghed Goodg lnventory 1OO'/o Endlng lnvantory.. ,looc/. Spolled In procau
30% 800oh
50!h ao.a
25r000 1,OOO 4rOOO 3O,00o
Cort Charged to Departmcnt
BeginnlngInventory: Cost lro m p recedlng d epartment............................'....3 Labor Factory overhead
Total Cogt
Equlvalent
Unlts'
Unlt Coett'
550 190 75 150 0gtt
Total coat ln beglnnlng Inventory Cost added durlng current perlod: Cogt from precedlng department............... Materlalr [-abor... Factory overfrcad ........
3 6,440 1,52O 786 1,572
Total cort addad durlng currcnt pcrlod
i1O,318
Total cost charged to departmcnt
30,000 30,00o 28,7OO 28,7OO
$.23:t .057 .030
.os0 s.380
$11,28dt
V. Cogt Accounted lor aa Followr Completc Unlt Coat Unltr Trancferrsd to Flnlshed Goodr lnventory25,0OO 100% 3,38o Chargc to Factory Ovcrhcad tor apollagc: Cost from precedlng departmcnt 100.h a,o0o 3.23:t Matcrlala.. .057 4,000 100.h Labor...-...030 ao.h 4,000 Factory overhead 80t/c 4,000 .060 Work In Proce8s, endlng Inventory: Cost from precedlng department lOOo/. 1rOO0 s.233 Matarialt.. lOOo/. 1,O00 .057 Labor........ 50ch 1,OOO ,030 Factory overhcad 500h 1,OOO .060 Total cost accounted for .................-
Total Coat I 9,500
s932 228. 96 192
lr4/.g
s233 57 15 30 $11,2a3
fuptor7
t67
P7-6 (Concludedf ' Tottl numbrr ol ogulvrbnt unltr nqulrrd In thr cot rccountrd for rcctlon dctarmhed at blbwrs Prbr DopL Co.t Equlvrbnt unltr trenrfrrrcd out* 2tt,OOO Equlyetrnt unltr ln rndlng Invcntory lr0OO Egulnlcnt unltr of lpol!rgo.-.-.. ar000 Totrlrqulvdrntunltr-.*...o...-.. 3OrOoO
lbtrrbb 25,OOO 1,OOO 4,OOO
bbor ZI,OOO 5OO 33OO
3OTOOO 2,,r7OO
Ovcrhod Z,,OOO IIOO 3'200 28!7OO
- Totel coct S.l.r thr coet In boglnnhg lnvrntory plur the cort rddcd durlng thc cunrnt pcrlodl dMd.d by tltr totrl numbrr of rqulvelont unltr mqulr.d h thr cort eccountcd for rcctlon
(21
WorkinProcess.-€anningDepartmeJtt..,..........,. Work In Procass-Ittliring and Brewing DepartmeJlt.......................r........
6,44O
FlnishedGoods Inventory Factory OverheadControl Work In Process--CanningDepartment .......
9,5OO 11448
aataaaaaaaaa
6r44O
10,948
Chagter 7
168
P7-AAPPENDD(
(r)
HandyTool Gompany Fabrlcatlng Departmont Cost of Productlon Report For April l/lrt rbb
OuenUtySchrdub
100%?6 Strrtad
trbor
orrcrhred 70%
7O%
thlr pcdod*i..-.rude
QurnS(Y 2'OOO 3'000
:l-'oo9 Tnndcrnd to Flnbhhg Drplrtnrrt Endlng hvontory-s-dFs spoilcd In procctrD-...-..-d-.H
lOO% lOO%
'aota
&* 60%
COta
e'OoO t'5o0 Eoo I I,OOO
Cort Cherged to Dcpertrncnt Beglnnlng Invontory: Hgtafletf
Totel Cort I
-t..--.-.dr,....''..s.--qd*o.*.-is
Labor Factoryovcrhcad Totat coct h bcglnnlng lnvcntorY @rt addrd durlng surtrnt Pcrlod: Metadalr-.---.F-H6.E*d*-dd-.*s 1sbor..........--.r.r..-d.m.._..-Fff.-.....-'.'F.* Fectory ovcrhord ----6-..tr.--.*.-.r.--..-.* Totet coet rddcd durlng curont Totaf coct chargcd
to dcprrtrncfrt
pcrlod-...'
---.-aimrp..-..,.m
Equhnlcnt Unltr'
Unlt Cort"
ItgOO
340 IrO2O I 33oO t
gtt80
gtooO
21125 C'375
8r5oo 8i5OO
3t'02 '25 '73
317'O8O 32O'?4O
_-t2,o2
' I
169
ClppterT
P7-q APPENDIX (Continued) Unltr Currcnt !6 Unlt Cost @rt Accountcd lor er Follon Tranrlcrrrd to Flnlrhlng DcprrtmcnE From bcalnnhg lnvcntoty -........ Cost to complctl thb Pcrtod: 30% t25 2,000 1:bor-*. .73 3(,% 2rOOO. FactorYovortctd.*3LO2 TrOOO 1 0 0 % 8trrttd end complctcd thb Prrbd Totrl cort trenrtcrrcd to Fktbhlng Dcpartmont Chergr to Ftctory Orrcrheadfor rpollagc: Metorlalr
.-.i....-..-.-O
labor
Factoryovorhcad'.---.1...-........ Work In Proccsr' ondlng InventorF Matcrlalr lrbor Frctory ovcrhead
Total Cost 33,26O 150
4so
3 3BOO 14,140 318,OOO
500 500 ' 500
100% EOV. AOV'
31,02 .25 .75
3 slo
1,5O0 l"5oo 1,5OO
1000h 10ch 10V.
$1.02 25 .75
91r5:!O 150 450
75 225
810
2,130 32O,94O
Totel cort rccountcd fot ..--..-"......
r Humbsr of cqulvalent unltr of cott added durlng thc cument perlod determlned ar lollowg: Materialg To completc beglnning lnventory tltrrted end completad thlr perlod
Endlng hvcntory Spolled unltl-....... Totel rqulvalcnt
unltr
a................,......
o TrOOO 1r5OO 500 9,OOO
Labor
Overhead
600 TrOOO
600 TrOOO
ooo
ooo
300
300
8,5OO
8,5OO
- Cort rddcd durlng trc currcnt pcrtod dlvlded by thc number ot oqulvalent unltr of cost added durhg thc curront pedod
,70
Chapter 7
;
P7-6 APPENDX (Continuedl HandyTool Company Finlshlng Department Cost ol ProduetlonReport For APril Qurndty tlchcdub BcglnnlngInvcntorY Rccclved trom Febrbrtlng Deplrtnrtt
Hrt rbb lO0.A
Tranctercd to Fhlth.d Ooodl--* Endlnghvcntory-o-sffiH_ Spollcd ln procar
Lrbor &%
otrcftcrd /fo?l \
l0Ort roo%
2!'?A 100%
zr?i loot6
QurnUS trOOO I'OOO 12,OOO er000 2'OOO 100
l2,ooo Coat Chargcd to Dcpertmcnt Beglnnlng lnvsntory: Cort from prccrdlng dcprrtncnt Factory Totel cort h beglnnlng hvcntory Cort rddcd durlng currrnt prrlod: Cort from prrcodlng drprrtm Metorlelr l.abor Fastory Totel colt eddrd durlng curront prrlod-.**
Total cot cherpod to dcprrtncnt
Total Cort
Equlvelcnt Unltr'
Unh Cortft
i c,roo 520 780 310,000
lt8,ooo l0Boo 3,720 5r38O
o,ooo o,ooo eFOo
Szoo 1,;o ,A
0,3OO
.3O
:l38,too
t4rpoo
3r.,:o
' '
I
t7,
ChapterT
P7 -O APPENDTX (Concludedl Cort Accountad for r Folbwr Tnnrforrrd to Flnlthod Ooodr: From beglnnhg lnvcntort ----. Co.t to comPlrtl thb Pcrlod:
Unltr
31O,9OO 3,OOO SrOOO
Fectort ovcrhoed .'...... Sttrt d rnd elmplctod $b pcrlod 6'900 Total cort trenctcrred to Flnlsh.d Ooodr Trrndrrrrd to Spollod Goodr lnvcntory rt rehregr
vrlur
tro
60% 60%
Cfrrrgr to Fectory Orrrhead for rpollrgc: Cort ol complctcd rpolbd unttr Lor relvagc velur of rpollod unltr Work h Procc+ ondhg hvcntorP Cort trom prcccdlng departmcnt Mrtrrlelr.lrbo r......................,.. Frctory ovarhaad..............-....... Total cort eccountedfor .'.................
720 1,O8O
.60 3f30
100%
312,700 28,980 3f 1'880 100
tl.oo
l OO
......Fo.o..........xr
Total Cogt
Curront !6 Unlt Coct
100 100
100rA
2,OOO 2,O0O 2,000 2,OOO
100% 100%
3l:o 1.OO 32OO 1.20 AO ,60
%t/. %rh
9
.20 100
3 4,OOO 2,4OO 200 300
320
6,90O
s49,O0O
. llumbcr of qqulvalent unltr of coot edded durlng thc curront perlod determined ar follows:
Prlor DcpL Cqt To complctr bcglnnlng lnventory.. Strrt d end complet d thb perlod Endlng lnvcntoly.....o.......-...o......... Spollcd unltr.......-.,..-......-........... Total rqulvalent unltr
o or0oo 2,00o 100 ,POo
Metcrbb
o Greoo 21000 100 I,OOO
Labor
Ovcrhcad
5oo roo
1,8O0 8,90O 500 100
9r3OO
9r3OO
1,8OO 6r00o
n Cott rddcd durlng lhc currcnt perlod dhlded by thc number of cquivalent unlb of cogt added durlng trr curront pcrlod
l2l
l8rooo Work in Process-Finishing Departmeflt..'.'......... FactoryOverheadGontrol..o........'....'-.-.......r.-...... 81o Work in Process-FabricatingDepartment..
18'810
41r68O FinishgdGoodstnventory'...........,.....o.......r.......... Spoiled Goods lnventory..'......'.'..o.......r.-......-'.--.r Factory Overhead Contro|.............. Work in Process-Finishing Department..-...
l OO 32O
42r1OO
Chapter 7
172
-
P7-7 APPENDD(. )OO(ChemicalComPanY DlstillaUonDepartment Cost of ProdustionReport ForJune
(f l
QuanUty tlchcdub Beglnnlng lnvcntory.i Stlrtod thlr pcrlod
Tranrfcrrcd to Rcflnlng Dcpertmtnt . EndIng Invcntory...,.-*,.--
, M8tortlb 1OO%
l^rbor z0.h
1OOV.
80%
overhced 20%
80%
l-ot In pnocclr
QuenUty a,000 1Or00o 20r0OO 1{,00o 2'OOO 4,OOO 20,OOO
Coet Charged to Departmcnt Beglnnlng Inventory: Matedalr Labor
Total coct h beglnnlng lnvcntorY Coct addcd durlng currrnt parlod: Materlalr Labor Factory
Total Cost 3 3,824 90 480 t 4,200
sto,8oo 1/480 7,4OO
Total cort addcd durlng currcnt perlod..,,.-.......- 31e1680 Total coot chargcd to dcparbncnt 323,880
Equlmlent Unltrr
Unlt Costs'
12,ooo
3 ,eO
14r8OO l4r8OO
.lO 50
$'t.50
i
Chapter 7
173
P7-T APPENDIX(Gontinued) t
Cogt Accountad for ar Followz Transferrcd to Refl nlng Departnrenb From bcginning lnventory ......* Cogt to completa thle perlod:
Unltr
Current 7r Unlt Cost
Total Cost 94,2OO
labor 4'000 Factoty overhead........ 4,OOO Startsd rnd complstod this period 1O,OOO Total coet transferrsd to Refinlng Department Work In Proce!1, cndlng Invcntory: Materlalg 2,OOO Labor 2'000 Factory overhead 2,000 Total cmt accounted for ..........-..-...
BOV. AOoh
S .10 .50
lOOo/.
S1.SO
32O 1,600
S 6,120 15,OOO SC1)12O
l00o/c 8Oo/o Sooh
$ .eO .10 ,50
31,800 180 go!
2,78'0 323,880
' Number of equivalent unlts of cost added during tfie current period determined as tollows: Materials
To completebeginninginventory Started and completed thts period
Endlng Inventory Total equlvalent unlts .,o..,..,..r
Labor
0 3,200 1O,OOO IO'OOO 2,OOO lr8OO 12,OOO 14,800 : :
Overhead 3,200 IO,OOO lrgoo 14"SOO
- Cost added during the current period divided by the number of eguivalent units of cost added durlig the current period
Chapter 7
t71
(Continuedl P7-7 APPENDTX )OO(ChemicalCompany RefiningDepartment Gost of ProductlonReport For June QuanUty Schcdulc
BeglnnlngInventory
Labor
Matcrblr
50%
lOO%
olrefiead iOV.
QuanttY 2'OOO
1a,0oo
Bccolved from DlcUllaUon Dcpartment
:_6,0Og Trangferred to Flnlghed Goodr lnventory 100.h EndIn g lnventory........-...'ar-......D'-.. lost In procest
30ra
30'h
12'OOO 2,ooo 2rOOO
ll'o9.9 Cost Charged to Departmcnt Beginnlng lnventory: Coct f rom preccdlng departrnent..,..-............-.-.-.-.--6. Materlals Labor Factory overhead........'.....,.. Cost added during curont pcrlod: Cost lrom precedlng department............... Materla lr .......,............ Labor
.
Total cost added during currcnt prrlod.--Total cost charged to deparbnent
[abor Factory ovsrficad..-,-. Started and completed thia pedod Total coat transferrcd to Flnlshcd Goodr Work In Procest, andlng Inventory: Cost from precedlng department Materlalr [abor.... Factory overhead
Total cost accounted tor .............,..-.
UnR Cocti'
I S'SOO
240
too 9oo
SZtrtZO
1,Ua 1,740 1O,t'4 O
Factory ovcrhead .....
Unltr
Equlvalont Unltr'
3 a,8oo
Total coct ln bcolnning InventorY
Cost Accounted lor ar Follorw Transferredto FinlshcdGooda: From beginningInventorlf.....,.... Cost to completethls perlod:
Total Cct
12'O0O
12,OOO 1l,600 1l,600
31.7C
.12 .15 .9o
SSarTaO
t2.03
339,540
Total Gogt
Current % Unlt Cost $4,80O
2'000 2,OoO 1O,O0O
5ot/o 50%
3 .15 '90
lOO'/t
92.93
15O g0O
3 5'850 20,300 335,150
2,000
'l00ch
31.76
33,520
2,O0O 2,000 2,OOO
1OO.h 30ch 3}oh
.12 .15 .9O
24O 90 54O
4'390
939,540
175
QEpterT
P7-7 APPENDIX(Concluded) I Xum,brr of equlvalcnt unttr of cot rddcd durlng thc currcnt prrlod dctcrmlncd er lollorrr:
To complrta bcglnnhg hvcntory tltlrtrd end completod $b perbd Endlng
Hor DcpL Cot O lO,OOO
Hatcrbb O lO'OOO
2,000
aooo
Totrl rsulvalentunltr...................,12'999
i2'999
Lebor I'0OO 10'OOO
ooo
otrcrhced I'OOO 1O'OOO
Goo
_11'099 l_1499
.l Cort rddcd durlng thr currrnt pcrfod dlvHcd by thr numbor of rqulvalcnt unltr of cort eddcd durlng llrr currcnt porlod
121
Workin Procegg-Refinlng DepartmeJlt,.......,.,.... Work in Process-Distillation Dopartment...
21r12o
Finishgd Goods 1nvOntoryo....o...r...............'......D...o 351150 Work in Process-Refining Departmeflt.,.,...
21,120 35r15O
Chapter7
t76
CASES goal at Star C7-1 Although improvement in product quality was clearly a stated Disk Corporatlon, the company's reward structure suggests otherwise. Employees cannot be expected to put quality first if rewards are dis' pensed for achieving obiectives that are often in conflict with quality improvement (i.e., short-run production volume goals). The quality improvemgnt itto* seems to have been focused solely on manufacturing aciivity, and the approach taken seems to have been to improve quality by inspecting it into the product. Such an approach is inadequate, blcause it waits too late in the pnocess(i.e., after costs have been incuped in manufacturing defective prcducts, instead of before) and focuses on only one piece of the problem rather than the whole problem. In order to turn the problem anound,top management must become actively involved. The reward structure should be changed to ensune compatibility with quality goals. Quality teams that include employees from all business functions (product design as well as manufacturing) and all levels (labor as well as management)should be created to help identify quality problems and find ways to solve the identified problems. Top management should actively participate in these teams in order to emphasize the importance of quality,coordinate efforts between organi' zation units, and provide direction. Employeesare more likely to become motivated when they understandthe importance of qualitg and top management participation and leadershipunderscore that importance. In addition, alt employees must refocus their efforts on serving their respective customers. The data presented in the case suggest that managers frpm the different departments put all their attention on meeting production volume goals rather than on meeting the needs of their customers (i.e.,the department receivingtheir output). Atthough product inspection should be continued, emphasis should be shifted to preventing poor quality rather than detecting it. Prevention should start with product design and extend throughout the entire manufacturing process. Some things to be considered include: (al reducing the number of parts required in the product; (bl using higher quality materials; (c) using standardized parts; ( d ) u si n g w e l l -kn o w n p ro ductiontechnologieswher e possible; (e) minimizing retoolings; (0 increasing employee training; (g) reorganizingthe manufacturingfacility from production departments to manufacturing cells to promote teamwork and decrease inventory costs; (h) upgrading or modifying machinery; (i) installing a statistical process control system to monitor production q u a l i ty a n d re d u ce p roductionvar iability.
Chaptor7
t77
C7-1 (Concluded) A few of the biggest and most urgent problems should be identified and tackled. In order to achieve results, effort should be concentrated on a lew costly problems that can be solved. Tackling too many problems results in dispersed efforG and little observable accomplishment. lmproving guality takes time and never ends. The company and its employees need some successes to build confidence and create the momentum needed to turn the quality problem around. C7-2 Product cost may be increasing as a result of an increasing amount of scrap, spoilage, and rework. Since the costs of these internal failures are not measured, management cannot evaluate the significance of the problem. In addition, since these costs are not measured, employees have no incentive to reduce or eliminate them. Treating scrapr spoilage, and rework as a norrnal production cost encourages such waste. As a consequence, overall costs rise. The company's cost accountants should develop a system of determining the cost of scrap, spoilage, and rework; implement the system 0.e., begin measuring such costs); and repod these costs to responsiblemanagers. lf the cost of scrap, spoilage,and rework is high, management should initiate a guality improvement program that concentrates on preventing these internal failures. This may involve organizing employee quality teams to identify problems and develop solutions, locating new vendors to obtain higher quality materials, redesigning products to improve quality, modifying or upgrading manufacturing machinery,training or retraining employees, andlor reorganizingthe production processes.
CHAPTER8 DISCUSSIONQUESTIONS Og-1. Joint products represenl lwo or more produds sepaiatedin the courseol the same processing operation,with each produci having such relalive vatuethat no one produd can be designated as a maiorProdud. A by-productis relativelyminor in lerms of torat vaiue and is derived incidsntallyftom lhe ol onE or more maior productionor manufac'ture Producls. O8-2. Revenue from the sale ol by'producls may be listed as olhet incoms,addilionalsales revenue. a deductionfrom the cost ol goods sold of the main product. or as a deduaion from the cost of produclionof the main ProductO8-3. Yes, when by'produclrevenueis deducledfrom the total productioncost ol ths main product'lhe unit cost of the main productis reduced;conse' q u e n t l y ,t h e c o s t o f t h e e n d i n g i n v e n t o r y changesalso. O8-4. The r€placementcost methodcan be used in such cases. In this method,the by'ptoduclsthat go into makingother unils are valuEdat ths cost the companywould have to pay il it wete to 90 out on the marketand purchasesuch materials' O8-5. (a) Ths treatment described tor by'products may be justitied when, relative to main products,the revenuegeneratedby lhe by-produclis insQnilicant;when no clearly d e l i n e d b a s i s o l i d e n t i f y i n gb y ' p r o d u c t cosls oxist: or whsn the cosl of more relinedaccountingwould be disproportionato to lho benelitsteceived. ( b ) T h e t r e a t m e n ld e s c r i b e dh a s s e v e r a l shortcomings.All gross profil is ascribed lo maior productsand is incorrscl as a measure of total gross profit, since the i n v e n l o r i e so f b y - p r o d u c t st h a t m a y b e unsoldat the end ol the periodwill have a zero value. Failureto assign valueslo by' productsmay well mean lhey are not rscognizedas inventorissat all. This' in turn. could lead to their wasls, lheft, or other mishandling.ll by-productsare sold irregularly and invenloriesare albwed to accu' mulate,bolh a materialunderstatemontot invenloriesand a distorlionol reportednet incomeof suqcessiveperiodsmay rssun. Q B - 6 .Y e s , s o m e o f l h e i n i t i a lm a n u l a c t u r i n gc o s l s , additionalmanufacturing costs (when by'ptod' and ucls aro lurtherprocessedalter separation), p e r h a p se v e n m a r k e t i n ga n d a d m i n i s t r a l i v e expensssmay be chargedto lhe by'produds. O8-7. Methodsfor allocatingthe total ioint produdion cosl to joint productsare:
Allocate the pint oost on the basis of the relative market value of lhe pint producls. (b) Allocatethe Fint cosl by using an .werage unit cosl obtained by dMding the tolal joint manulacturingcost by lhc total number of units produced. ( c ) A l l o c a t et h e j o i n t c o s l o n t h e b a s i s o l weight factors such as size' ditficulty ol manufaciure,ot amount ol materialsused. (d) Atlocatethe joint cost on the basis of some u n i t o f m e a s u t e m e n ts u c h a s P o u n d s , lons, or gallons. ll lhe ioint products are mt measuredin the same way' they musl be converted to I denominator thal is common to all the unils Produced. O 8 - 8 .T h e m a r k e t v a l u e m e t h o d c o n s i d e r s t h e revenuegroducing ability of lhe ioint produds by assumingthat each shouH be valued according to ils cost absorptionability. Resulling invenlory @sts are in harmonywilh revenue producing abitity and, il the combined joint producls are profitable,the market value method avoirJsallocating more cosl lo a producl than hs revenue; thus achieving a neutral elfect. However, this method may be diflicult to apply if the matket value al the splitofl point is nol known. The averageunit cost method,while simplelo apply when unils are measursd in liks tsrms' lails to considerthe heterogeneousnatureof tho individualProducts. O8-9. Joint costs musl be allocatedto ioint producls when lhere is invsnloryto be costed. O8-10. Not exaaly. A new manufadurerwould do well lo consullthe InternalRevenueServiceaboul the methodsto be used, so that an IRS agent can make a decisbn beforethe tax rslutn is pro' p a r e d . l n o t h e r c a s e s ,w h e r e a n a l l o c a t i o n method has been apdied consistentlylrom year to year, to apply for a ruling would not be good $ralegY. O8-11. The methodused in cabulatingunil costs pro' ducesthe same unhcostlor all gradesof lumber sold. The owner is then led to bolieve thal lhe same cosls in the sams ratio are attributableto the low as well as the highgradenumber. h must also be recognizedthat becauseof lhe inhotentnalureol thE materialsand the milling promss, il is not possibleto eliminatelow grade number. Thus, the profitabilityof the oPeration can be viewed best by consideringthe aggregale ol tovonue and costs of both the high and low gradesol lumber,coupledwith conttolsto assurethat all practicalstsps are laken to obtain high quality logs and to mill them properly.A (a)
I
I
I I
L I
!
I |}
179
CtuptorB highor prbo lor bgr rf,y b ,utttti.d h tonrr of r gnclrr erncrnl of ltigh grradolumbor' ero inolovanl 6-1?4 Fq debi'rcrt nnoh,itrg,iinl ab rnlo{ thoy arc rlgrslcd b changc !| t r..ui
of h. lplldl
docitixr. Uaualty, stly ero rebvanl
co.ts bcywtd thr
Chapter I
PGRGISES
E8-l
(f l
Net revenuo method: Grogsngvenuolrom sale of by-product.............. Productloncogt aftgr soparatioll.......'.............r.. Ngt rgvgnuefilm sale of by-product'.................
$2O,OOO 5,OOO
glg,ogg
(21 Market yalue (reversalcost) method: Final market valua
r lOTo)........... $2,ooo Less: Profit ($eOrOOO 2'OOO MarkeUngandadministraUveerpetlsos... 5'OOO Prpductlon cost aftor 8oparaUoJl..............
$2o,ooo I,OOO
s11,OOO
Jolnt cost allocatedto the by-produGt......'......... E8-2 (1)
Calculation of manufacturing cost betono separation for by-products,
By-Product
Sales.
r..............
A
B
$61000
$3r5oo
Manufacturing cost gftgr separatioJ|..............,...,....... $trlOo 75O Marketing and administrafive oxpenses..........,.......... 9OO (A, Profit allowance l5%i B, 12oh1..........,........,,.......r. $2,750 Manufacturing cost beforg separation,.......,...r..,..o..,. S3r25O
S 9Oo 55O 42O $1,87O
9I'639
L
I
I It'
\
I \>
Chapter I
t8l
E8-2 (Concfuded)
LOGANCOMPAI{Y lncome Statement For Month EndedApril 3O
t2l
II
Main Product
!
-
SalgS
By-Product A
Total
$zs,ooo s6,0oo s3,500sg4,soo
ir............r.r.rr..........rrrr.r.....r....r.....
Cost of goods sold: Before separation (requirement (1)). s32,620 s3,250 51,630 s37,5oo Aftgr se paratiort...,..................,.,.....,1 1,5OO 1,100 9 0 O 13 ,500
b
t
GrOSS p rOfit ....'..............r.................r......
Less marketingand administrative gxpgnsgs
s44,12O $4,350 $30,880 $1,650
$2,530 $51,000
750
550 7,300 $ 420 s26,200
r............,....r........r,..,.....,....r.
6,000
Profit from operationS..........,.........,....r.. S24,ggq
s 900
E8-3
Market Value at Split-Off
Product tt, Ul rrrrrrrrrrrr
...........r..
\t ,4............
Y I
,
G
r a. aaaaar a..a....aaa...r .a
aa .aaa.r.r.aarr..aat
rrrerrrorrroaaaaaaaaaaaaaaraaaaaaraaaaaaaaaataaaaarrarrataa,
?aaal I V rCtl
orrreo...........r..
,r..r....
$ 8O,OO0 6O,OOO 40,OO0 20,000
s200,000
$ 97O s33,5oo
Apportlonmentof Joint Production Gost'
s 64,000 48,OOO
32,000 16,000 $160,000
'9Ln9,00O. = goo/o s200,000 E8'4
\
z : M a rke t va l u g p g r u n tt...r .........,,..,...........,,,.........r ,. Gross profit, consisting of: Op e ra ti n gp ro fi t....r......,.. .........,...,...... 31,OO Ma rke U n g a n d a d ministr ativeexpenses.o.......... 1.OO Further processing cost Value per unit of by-product at split-off.............. Value of by-product to be credited to joint cost (2 ,OOO u n i ts x 5 2 )
$ 6,00 2.AO $ 4.00 2.OO $ 2.00
91'009
r I
I \
Chagter 8
ta I
E8-4 (Goncludedl X and Y: Uttlmate Martet Valuc Units por Product UnR Produced
x
$eo 25
Y
IrOOO I O,OOO
Hy?otheUcal Markot Value
Processing Cost Uttimate After Martet
Value
Spllt-Off 318O,OOO $ 4O,OOO 25O,OOO 7O,OOO
$l2o,ooo
Apportionment ot Joint Production Cost' $ 8O,OOO
l20,ooo s4lO,O{)q sllO,OOO- sstoo,ooo $2oorooo'r 18O,OOO
' Ratioto allocatecostpriorto separauon:19'999 = 3 3 $3OO'OOO value of credit for by-producl ..$2O4,OOO cumulatlvefoint cost less $4'OOO E8-5
ApportionUltlmate ment ol HypoProcessing Mar|cet Joint thetical Gost Ultimate Value Production Market After Market por Units Cost Value Split-Off Value Unit Produced Product 3OTOOO $129,OOO $3O,OOO $ 99,OOO $ 6 6 , 0 0 0 ' E $4.3o 5O,OOO
{1 }
s c
6.OO 6.OO
1 5 ,OOO 1 3 ,OOO
99,OOO 78,0OO
33O8,OOO
Total
2{,OOO 27 |OOO
75,0OO
5l,ooo
991'o09 s225,OOO
34,OOO $15O,OOO
'$15O,OOO r 213= 966'000 2/3; $99,OOO + SZ2S'OOO= l2l
Differentlalrevenue(t5rooox ($6.60'$5'25)1"""""""""'t"" Diffgfgntial
COSI...............r..........o....r..r........ttrttt""""""tt'tt"t'
Net eflgct of sgparable processing .""""o""""t
$20,25O 24rOOO
$(3,7sO)
the Conctusion: Based on tho Information given, S should be sold at split-oft poinL CGA-Ganada(adapted).Reprint with permission'
f
I I
I I
t83
ClvpterS
l>
EiEgg3q;l
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rfuil is3
b
s Ei:EI iFfli]I N F tl
iFiti irqgl o o o_ o o
I,
o
+ 0 o 0_ €o
$fiil iaqfll q, N J'
r
$allfll i'sgl #lffflfll ro
e
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ct
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=
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___
Chwter I
,u E8-o(Conctudedi t2l
A 900
Diffgrgntialrevgnueper unit ....,""""""""""""""""' Differentialcost Per unit:
$25rOOO * 1rO0O............r............r.........................25 360TOOO
+ 31O0O..r...........r.........r....o....r................
Product B $rs
c $zs
20 27
+ 5rOOO.............,............,..,..................... Sl O5TOOO
$1s
s 4
$ (5)
Conctusion: Only product Bts differential cost exceeds its differential revenue. Therefore, only product B should be sold at the split-off point. (3)
Yes, because the short-run impact ol further processing of B is then:
Differgntial rcvgnu€................r.........-. + 3'OOO...'.""" Differential cost: ($60,000- $18rOO0) Bgngfit to furthgr processin$.........,...............'.o""""'
$rs 14 _$
r
(ln the long-run decision to invest in the capacity (facilities)needed to iurther process B, the fixed cost should, of course, be considered.) (4)
the benefit of further processing is 91 for each of the No. From part (31, -or 3,ooo units of b, $g,OOO.But that must be compared with the benefit of the alternative use of facilities, $6,000 - $1,OOO= $5'O0Oof short-run benefit. So it is better in the short-run to selt B at split'off and devote the facilities (the ones that woutd have been used to do B's further process' ing) to their alternative use. CGA-Canada(adapted).Reprint with permission'
E8-7 (1) Average unit cost method:
Product A B
c
Total
ooT;*.1:ilf""t H:,'ffil: units Produced
ProductionCost
Split-Off
Total Production Cost
3,OOO 4,OOO 3,OOO
$ 30,ooo
$ 2o,ooo
$ 5o,ooo
4O,OOO 3O,OOO
3O,OOO 5O,OOO
7O,OOO 8O,OOO
sl oo,ooo
sl oo,ooo
s2oo,ooo
__--t\
ChagterB
185
E8-l (concluded) (21
Marketvaluemethod:
Product A
c
Ultimate Market Value I 60,000 11O,OOO 9O,OOO
Total..... $26q999
'
Processing Gost After Split-Off
$ 2o,ooo 3O,OOO 5OTOOO
s1g9'oog
Apportionment of Joint Production Cost
Total Production Gost
s 4O,OOO $ 25,OO0'
s 45,ooo
Hypothetical Market Value 8O,OOO 4O,OOO
$169,009
8O,OOO 75rOOO
SOTOOO 25,OOO
sloo,ooo 9?oo,00g
= .6zsi$4o,ooox .625= $25,ooo $l oorooo* $160,000
E8-8 (1)
Average unit cost method:
Product K L M N
Units Produced
Joint Cost Per Unit
5,OOO 2O,OOO 15,00O 1O,OOO
s1.40
s 7,OOO
1.40 1.40 1.40
28,OOO 21,OOO 14,OOO
s?o,ooo
_so,o99 '
Joint cost Total number of units produced
(21
Joint Cost
per unit tr|ffi =$1.4o
The weighted averagemethod:
Product K L M N
Units Produced x 5,OOO 2O,OOO 15,0O0 l O,OOO
points 3.0 2.O 4.O 2.5
=
Joint Cost Per Weighted Weighted Units x Unit' 15,OOO 4O,OOO 6O,OOO 25,OOO 14O,OOO
Joint cost
Total number of weighteOunits
$.so .50 .50 .50
Joint Cost
I 7,5oo 2O,00o 3O,000 12,5O0 $7O,OOo
$70.ooo = S'5o Perweightedunit iAopoo
)
Chapter I
186 l
E8-8 (Concludedf Ttre market value method:
(31
Ultlmate Market Value per Unit Product s5.50 . K 1.60 L 1.50 M 3.OO lf
Processing Hy?oJoint thetical Cost UlUmate Cost Market After Market Units Allocation Value Split-Off Value Produced SrOOO $ z7,soo $ 1,5OO $ 2o,ooo $18,2OO 2Or3OO 29,OOO 3,OOO 321000 2o,ooo l4,oo0 20,0O0 2,500 22r5OO 15,Ooo 17,50O 25,OO0 5,0oo 30,0oo l O,OOO
st t 2.ooo sl2,ooo sl oo'ooo
Joint cost Hypothetlcal market value E8-g
product
x Y
$7o,ooo
- $7o'ooo - .7o = Tooh $1OO,OOO
Materials cost:
Unlt r
lo,ooo 8,0oo
Welghted Polnta = Unltr 3 2
30TOOO 16,00O
Matsrlalr Cost pcr Welghted = Unlt 32 2
Total Materialg Coat 360,OoO 32,000
Product Unltg 1O,OOO 8,000
Materlalt Cost por Product Unlt $6 4
392,O00
40,OOO
Gonversioncost
Product Unlt r
Welghted Polntr = Unltt
x
topoo
6
Y
8,000
1
50,OOO 32,OOO 82,OOO
Converslon Coct par Wclghtod Unlt 31.5o 150
Total Convcrrlon + Cort 3 75,000 48,O00 3123,O0O
Converaion Cogt per Product Product Unlt Unltr = 1O,O00 8,00o
37.5o 6.00
187
CtnpterE
PROBLEMS I
P8-t
-
'
(ll
Averageunit cost method: Apportionmont Units (kgl of Joint Produced ProductionCost
Product ,
B.
1OO0O
S2O5,OOOr
c
f o 0oo
2o5,ooo
20 00O
$53O,OOO
Tot81..,....
Processing Cost After Split-Off $
58O,OOO
72qooo slr3OOrOOO
Total Production Cost $
845,OOO
985,OOO
gl,83g,ogg
'Jolnt cost of $59O,0OO less $€O,OOO by-product credit ($f S r 4 OOokg) = + = 20 OOO kg SS3O,OOq $26.5Oper unig $28.50 r 1OOOOkg = $S3O,OOQ $265,00O. TotalProduction Units in Finished FinishedGoods Product Gost per Unit GoodsInventoly Inyentory B I OOOkg $84.50 $ B4,SOO c 98.50 5OO 49,250
9193,?sg (21
Market value mothod:
Ultimate Market
Product B c
Processing Cost After
Hypotheticat Market
Apportionment of Joint production
Total production
Value Split-Off Value $1,300,ooo $ 580,ooo $ 72o,0oo 1,2OO,OOO 720rO0O 4go,ooo
Gost Cost $318,000 $ 898,OOO 2l2,ooo 932'OOO
Total...-.-. $2Ego,ogg 91,3og,ogg$tggg,oog
$sgo,ooor$t,B3o,ooo
r Joint cost loss by-product credit * $1,2OO1OOO = .4417; .441T x SS3O,OOO $72OrOoO= $318,ro24= 8ppnoximatelyS3l8rOoO; .4417 x $ego,o6o = $21 2r0i O = approrimately $Zi 2,OOO. Produst
B c
Total Production cost per unit
agg^Bo 93.20
Units sold
, ooo kg e 5oo
Cost of Goods Sold
$ 8og"?oo 885;4OO $1,693,6o0
{
Chapter I
tffi
P&l (Concluded) (31
Neitherthe marketvaluEmethod nor averageunit cost method of allocatingjoint cost is a more accurateway of determiningioint product costs. Joint cost, becauseof its nature,cannot be accuratelysplit up amongioint products,sincs joint cost is incurredto producs ono or all of the ioint products.That is, ioint cost cannot be reducedby dropping one of the products.Thus, to make decisionsabout joint productionrone must look at the revenueand separablecost of each product to determine whether it ls profitableon the margin.In such decislonsrfoint cost ls not relevant.The only purposefor allocatingioint costs is to determine a cost for inventorieson the balancesheet and for cost of goods sold on the income statement. For financialstatementpurposes,in most situationsrbetter arguments can be madefor a value-basedallocationbasis rather than a physically-basedone. At times, the physicalbase can result in absurd allocationsof costs amongproductsbecauseof the disproportionate relationshipbetweenthe relativevalue of the joint product and the units produced,relativeto other ioint products.
\
189
ChaptorB
ssElnl$ll , o co o t o t l l o co o l 0 l l t o ao n OJ'f,JI lljF I F Eo
o
l oBo0oo 3al
s!3{ 'l$ll o n5) o l n l l
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rfl $lBll E3l Flfill o oo o l c , l l o cc)) o oo o I)ra) |1,, o|1
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Chapter 8
190
P8-3
(rl
Ultimate Market Value Units per Producedl Unit Product Alp h a . . . . . . $ 5 12 Gamma'.. Tota1.........
Processing Hypothetical Gost Market After Market Value Spllt-Oft Value 46,2OO t$zgt,ooo1$ 38'OOO slgs,Ooo t 15ro6oer 23r66O 4O,OOO
Joint Cost Allocation3 $ 44,4OO
75,600 315,OOO 1651000 s726.66O $220,O60 S5OO,OOO $l2O'OOO 4SOrOOO
rDiagramof Flow of Pounds(not raquiredl $?8,OOO
$23,660 Alpha (41 46,200 pounds
(2) 66,00Opounds
Beta l9,8OOpounds
$120,OOO pounds ( 1 1 1 1 O,OOO $ l 6 5 ,OOO
(3144,OOOPounds -4'OOOPoundslost pounds' _4O'OOO
Gamma
'Computationof poundsof good output of Gamma: LetX=loodoutput .lX =X 4 4 , O O-O =X {o,ooo zMarket value of Beta (19r80o pounds x $1.2O|...r,................. s23,76O 8,1OO Less marketing expense of Beta ....r.........."......-...............'... $15,660 Ngt rgalizablg ValUe Of Bgta.'....r..............o.....o.........'..r.r......ro sThe joint cost is 24oh of the hypothetical market value.
t9l
Chapter I
P8-? (Concluded) (2'1
BROOKSCORPORATION Statement of Gross Profit for Alpha
s192,OoO
SalgS (38r4O0 poUndS X $5) ...,.r..........r.............'.........r..,.
Productloncosts: Allocatedjoint cost
t
a.
a ra
aa ra
a aa a a aaa.a
a
sl 02,ooo 38,O0O 23,660
Grosscost of productlon Lessnet realizablevalue of Beta
s163,660
l5r gOOr
$147,760 gnding 2gr552t Less inventory.....r.,...............,...........r.,,.............. Ngt cOSt Of prOduCtlOIl....'..'.......'.....ro.....,.........r.........'...r
Cost of goods so1d...........rr.r........
................,...,
118,208
s 73,792
GfOSS prOfit.'..r..rrr...r.........'..r................r..........r...........rr.
'Net realizablevalue of Beta equals the revenue fnom Beta (S24,OOO) less its related marketing expense t$erf OO). nEnding inventoryeguals the net cost of production (S147,760)times 2O%. P8-4
(11
Jana
Reta
Total
Sa|es..................... $2OO,OOO $3OO,OOO S50O,0OO Cost of goods sold: Joint cost ($236,000- Bynd net revenue ($l1,OOO- $5,000 separablecost))..,. $23O,000 Separable cost ($215,0OO- $5,OOOfor Bynd) ...rr.......r................. 21O,OOO 2.1O,00O Total cost ..........r.r....e...rrr.............
s44O,OOO $ 60,000
Gross profit (12% of sales).......,o,.....
(21
Total
Jana
Reta
Ultimate sales va1ue.....,..,r..r.. $5OO,OOO S2OO,OOO$3OO,O0O Less 72oh gross protit .........t..,....., 6O,OOO 24|AOO 36,000 Total cost..,.................... $44O,OOO $t76,OOO $264,0O0 Separablecost ...................... 21O,OOO 21O,OOO Joint cost allocation...... $23O,OOO 9176,000 $ S4,OOO (31
Gross profit for Jana and Reta-see line 2 of requirement (2),
t. Chapter I
192
P8-5 ApportionUltimate ment of HYPoProcessing Market Joint thetical Cost Uhimate Value Produetion Market After Market per units Cost' Value Split-Off Value Produced Unit Product $ 874,000 $1,926'000 $ 960'000* spr--g 3o.oo Too,ooo S2,8OO,OOO psT-4 6.00 35O,OOO 2rlO0rooo 816,000 lr281rO0O 640'000 $4,9OO,0O9 9!,690,009 99,2lO,OOO9!,8OO,OOO
(ll
'Joint productioncost ............ $l rTO2rOOO Less cost assignedto by-Product 1O2'OOO gallonsr (S.7O*S.1O)!....-..... RJ-s (f TOrOOO $1,8oo,ooo "(51,926,000+ s3r2lO,OOOl rsl,6OO,dOO= sPL€
l2l
$ g6OrOOO $ Jointcosta1toc3tion..................r............
Additionalprocessingcost.........r,..........
8741000
$960'000 PST-4
RJ-s
6401000 $lO2,OOO
81qr090
Total cost $1,83{,OO0 $1,456,000 $lO2,OOO galtons produced.......,........., TOOIOOO 35OrOOO lTO,OOO Dividedby $.go $4.16 s2.62 Cost per gallon.... : : : : lnventory costing: 3'OOO 52'OOO l8rOOO November I inventory (gatlonS)....... 17o,ooo 35o,o0o 700,ooo November production 4O2,OOO t73,OOO 7t8,OOO 325,OO0 15O,OOO Novembersales 650,000 23rOOO 77rOOO 68,000 November 30 inventoil[.................... $.OO $4.16 Cost per ga||on...o.......,.,.................. $2.62 Cost assigned to November 30 finished goods inventory....,...,....
9._!-Z91169 $ 32or32o
(31 Per gallon sales value beyond the split-off point.,.... Per gallon sales value at the split-off point.......,...... Diffgrontial salgs value .r......,.........r..r...r.....r,............ Additional processing cost per gallon (S816rOoO+ 35O'OOOgallons).....................r..........
Per gallon gain (loss! of turther processinft..............
$ l3'8o9
$6.00 3.8o
-52.20
2.33
l_!:!31
Alderon lndustries should selt PST-4at the split-off point, as the difforential novenueof the sales beyond the split-off point is less than the additional cost of further processing.
-T
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194
P8-O(Continued) Additional GomPutations: EquivalentProduction:
Transfgffed
oUt "i"""""'r""""""'o"""""r"""""'
Ending inventory (work this period)""""""""""
Labor and Factory Overhead Process 3 Process 2 9,OOOunits 20'000 units 'l,000 1,000 units 21,OOOunits 1O,0OO
Unit costs: Matgrials,Process1............'...."""""""""" Labor and factory overhead,Process 1"""" Totalcost to be accountedfor, Plocess 1 "" Labor and factory overhead,Process2.......' Laborand factory overhead,Process3........ Cost from precedingdepartment, Process2 Cost from preceding department, Process3
s58,OOO
= $1.8125Per unlt
32,OOO $30,000
= $ .9375 per unit
32,OOO
$ga,ooo 30,ooo
= S2.g00OPer unlt
+ $18'0OO= 92,0OO $2.0000 Per unit 10,0oo + $60'O0O= i3,OOO S3.0oooPer unlt 21,OOO s27,OOO
= $2.0769 Per unit
13,OOO $74,500
= $3.2391per unit
23,OOO
Joint cost apportionment:
Process 2 Product $10 price ......t..........t....ttt""""1"t"rtt"t"rt""'t"tt"t""tl" Salgs 2 point r"""' Lessprocessingcost subsequentto split-off
Process 3 Product
$ e
:
Hypothetical market value at split'off point: 58 x 1Or00Ounits transferr€d .....'............r"""""""" S12 x 20'OOOunits transferlgd ....................""""""'
$8O,ooo
Joint cost allocation: x .2625'. SSO,OOO r .2625 S24O,OOO
s21,OOO
. S84,OOO-. (S8O,OOO + $24O,O00)= -2625
$1s 3 -$ t e
9240,009
s63,OOO
f-
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Chapter I
-
195
P8-6 (Continued)
'"ttt?"t",:oo + lo,ooo units............o.. + 2o,ooounits $691000
.
:s2.1o s3.15
-
,
Transferred to finished goods storeroom: Procgss 2.............,r.......,.............r....54.O769 x Iroo0 units = $ 361692 Pnocess3.........................r............... $6.3864 x 2OTOOO units = S12T.T2Z,
s
'S6.3864 x 2O,OOO units = $1271728,To avoid a decimal discrepancy,the cost transferred to finished goods storeroom is computed as follows: $137r5o0 S9,773 cost assigned to ending inventory = 51271727.
.-
*ot[,T":T"";:'-"noins
inventory:
r . . *
.
Cost from preceding department...,.. $2.0769 x 4,OOOunits = Sg,gOB L a b o r a n d fa cto ry o ve rhead.............. S2.O0OO x l,OOOunits = S 2,OOO Process 3: Adjusted cost from preceding department..............,.....,...,.......,... 53.9864 x 2'OOOunits = $61723 L a b o r a n d fa cto ry o ve rhead.............. $3.oooo x 1,ooo units = S3,OOO
(2t
fii:flTHllSl;:;;;;;;';':::::.::::::::.:::::::::.::::.:. "l;BBl O3,OOO
Work in Process-Process 3 ..,.... Work in Process-Process 1........
8B,OOO
Finished Goods Wo rk i n P ro ce ss-P rocess 2......,..,...,.....,r .......
3 6,692
F i n i sh e d Go o d s......,,....... Work in Process-Process 3........
.........
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197
Chapter I
P8-6 (Continued| Additional Computations: Equivalentproduction:
Labor and Factory Overhead
Process3
Process 2 !
I
t-
Thanslgrrg d o ltt .................. "..r..... t.......o...t... r't....
Less beginning inventory (all units) r..........r........ Started and finished this period........,.,..........'... Add beginning inventory (work this period)........ Add ending inventory (work this period).............
I'OOO units 3,OOO 6,000 units 2,OOO l,OOO I,OOO units
2OTOOO units 3,OOO 17,OOOunits 2,OOO I,OOO 2O,OOOunits
Unit costs: Matgrials, Process 1......,,......,..'r.................. l-abor and factory overhead, Process 1........ Total cost to be accounted for, Process 1 .... Labor and factory overhead, Process 2........ Labor and factory overhead, Process 3........
358,ooo 32,00o 33o,ooo 32,00o $€t4,ooo 3O,O0O $18,OOO 9r0oo 36O,OoO
= 5 1 . 8 1 2 5p e r u n i t = S .9375per unit per uni t = S2.8OOO = $2,oooo per uni t per unit = S.3.OOOO
20,OOO
Joint cost apportionment:
Sales price ,ro,...,........,...........
Process 2 Product
Process 3 Product
slo
sl5 3
..........'...
Less pnocessingcost subsequentto split-offpoint ........
2
$_g Hypothetical market value at split-off point: units transferred ..... $8 r 1O,OOO 99o,ooo ..,....,......,.....,,....,.r.... $12 r 2OrO0Ounits transferred
s12
9319'099
Joint cost allocation: SSOTOOOr .2625t.
..r..,.........
x .2625 S24O,OOO r SB4,OOO + (S8O,OOO = .2625 + S24O,OOO)
s2lr9oo
99!'o99
r - l
r
I
Chapter8
tw P8-6 (Goncluded|
Unit cost:
$21 rooo + I Or0oo unitS .....r.......r.............r.....r.o...o'.'.. UnitS r............r...............'......,...."t' $6{lrOOO+ 2OTOOO
t4l I '
Finished goods.............r.............r......................... WOfk In PfOC.SS-P.OC.SS 2.,......o.....'-"""""""" 3 """"""'t"t"""""""r Work In Process-ProcgSg WOf k I n PfOC oSSl-PfOC Finishgd
Goods
...........f
g!l!J I ..............t.o"r"
$2.1o
s3.15 4r0oo 21r00o 63,OOO 88,OOO
"o"'
..rrrrroIrroirr.r...............r......
36,8OO
work In Procgss-Procesa 2................'.........r. Finighed Goods ...........r.............,..........'.,.............727 1860 work In Procgss-ProcgsS 3......................'.....
38,600 127$60
CASES c8-1 in pnoporThe markot valuo method of ioint cost allocation assigns cost (1) tion to oa;h productb markel Yaluoto all products as follows: Market Value of Each Product at Split-off Total Market Valueof All Products at SPlit'off
x
Joint Production Gost
sales lf thera ls no market valuo at split-off, then the value at the first valuo point, tess separablecost, lg used. lf ioint products have a markot will at the split-off point, the margin for ail ioini products at the split-off be the samo. (as The joint cost i3 altocatedin proportionto n8v€nuogensrating ability contrastodto some quantita*re'measunesnot r€lated to rsvenue)' Therefore,this accomplishesJim Simpsonb obiective that inventoriabls cost shoutdbe based on each productb ability to contribute to the recovery ol ioint production cosltt
199
Chapter I
C8-1 (Continued) (21
(a)
Because both main products have a market value at the split-off point, this value, rather than the tinal sales value, is used to allocate the ioint cost
Joint productioncost to be allocated..r.t.................. x (.55 -.05)) Net revenuevalue of by-product(24OrOOO Joint cost to be allocatedto main products Market Value at Split-off
Product
Units Produced
Pepco-1......,.r.r..........900r0OOgallons gallons Repke-3............r.,......T20rOOO
Per Unit
Total
$2,640,000 12O,OOO
93,s20,009 Percentage of Total Market Value
s2.00
s1,800,oo0
1.50
I,080,0OO
62.5o/o 37.5
s2,880,OO0
100.0%
Allocationof Joint Cost November s1,575,000 x .625)........................... Pepco-1(s2r5Z0r00O x .375).,...,.......,.....o.........r....... 945,00O Repke-3($2r52or000 120,O00 SE-s............ a ata ara ra a aaa aaaaa a a a aa a a a a a
November ioint production cost.... Pepco-l
(b) Allocation of joint production cost.......
.,........r..r..
52,640,000 Repke-3
SE-s
s1,575,0OOs 945,000 s120,000
Additional processingcost 720,OOO aftgr split-off.....................r'1,800,000 Total manufacturingcost......... s3,375,000 s1,665,000$120,ooo 72O,OO0 24O,O00 Divide by gallonsproduced...... 90o,0oo 3.75 9_23125 g___-99 Manufacturingcost per gallon. s Inventorycosting: 20,000 lnventory November1 .,...... 10,000 40,000 Novemberproduction........,. 900,000 720,000 24o,ooo Inventoryavailable..,r.o.......r 920,000 760,000 250,000 Novgmber salgs .................. 800,o0o 70o,o0o 200,000 Inventory, November 30 ...... Manufacturing cost per gallon. Cost of finished goods
inventory
120,Ooo 6O,O0O x S3.zs x 52.3125 :_glggfoo
50,000 x $.50
S13B,ZsO S25,ooO
T
Chapter I E
C8-1 (Gonctuded) (31
WhenSE-s becomesa main product,the joint productioncost would be altocatedproportionallyto all three productson the basisof the market valuo of each product at the split-off point. The net revenueof SE-5 will no longer be deductedfrom the joint productioncost prior to aflocation becauseSE-s will no longerbe a by-product.
c8.2 Thereare a number of areasthat appearto be problematicin HayesProducts' Theseareas,which are outlinedbelow, costingand decision-makingpnocesses. perhaps modified. need to be reviewedand (f l
The use of the averageunit cost methodfor altocatingjoint product cost. Units produced,althougha simplemethod of allocation,is not necessarily the best method for apportioningcost acrossjoint products.This method can distort the cost-valuerelationshipof a joint productand give an ospeciallymisleadingpictureof the gross marginprovidedby a ioint producl For example,assumethat in meat processingof cattle, one producedground beef and steaks.Each pound of groundbeef would be assignedthe same ioint cost as each poundof steak,yet the sales prices per pound are quite different.For this reason,it is betterto use some value-relatedallocationbase,such as the market or salesvalue method, to allocatecost.
l2l
Inclusionof all spoilagecosts in productcost. Spoilagein production pnocessescan be assessedas normalor abnormal.Whetherspoilageis should guidethe way in normal(expected)or abnormal(unexpected) product which spoilagecosts are handledin costing.Normalspoilageis part of product cost since it is plannedfor in implementatingthe production technology.Abnormalspoilageshould be written off as a loss in the period,and if the amountis materialor the spoilagecontinuesover some period,the source of spoilageshouldbe found and corrected.Hayes Productsdoes not seem to be distinguishingclearly betweennormaland abnormalspoilage.This needsto be studied,and somechangesneedto be madein the applicationof spoilagecoststo product.
(31
Decisionmakingbasedon fully altocatedcost. Hayesappearsto be aboutto make a product line decisionon fully allocatedcost data with ioint cost included.Decisionswith relationto any of the productsshould be basedon the separablecontributionmarginof products,i.e., separable revenueless separablevariablecost.This problemneedsto be lookedat closelysince the allocatedjoint cost figuresshouldbe used onlyfor financialstatementpurposes.
201
Chaptor I
cg-3 , (1)
The market value mothod does not proviile additionaldata for the rlsrkeUng deeision. Joint cost sllocation is necessarilyarbitrary and' although used lor financialaccountingpurposes,ls not relevantto the decision to market DMZ-3 and Pestrol, The VDB joint cost is irrelevant to this decision becauseit ls incurred in both cases, i.e.' the method of cost altocafionhas no impact on tho differentialprofit. TalorChemical Gompanyshould calculatethe differential prolit of its alternate choices by comparing the differential rsvenues and diflerential costs.
(21
Talorb analysisis incorrsct becauseit incorporatesallocatedportions of the joint cost of VDB.The weekly cost of VDB (3246,000)will be incurred whether or not RllA-2 ia converted through lurther processing. Thus' any allocation of the ioint cost of VDB is strictly arbitraty and not rslevantto tho decision to market DMZ-3and Pestrol.Talorb decision not to pnocessRNA-2further is incorrect The decision results in a loss of in profit per week, as indicated by the following analysis: $2O'OOO
I
t-
L
Revenue'fromfurther processingof RNA-2: DMZ-$ (4OO'00Or ($57.5O+ 1OO)|,...................,.............. s23O,OOO 23O,OOO Pestrol (40Or00Or ($57.5O+ loO))'...'r.'...................-...... s46O,OOO Total nBvenuof ro m fulther p rocessin 9...............r.......... 32O,OOO L8SS ngvgnUg ffOm Sale Of RNA-2,....,......D..............o,r....... Diffgfgntial Differential
f9V9nU9...........'.........r.........'..r..r..........'. cost' .'.'...r'.,....r........"...
Diffgrgntial profit .......,......r........-........,'..'.'.,'.
sl4 O,OOO 12O,OOO
s 2o,ooo
'The cost of VDB is not relevant and, thus, is omitted lrom the solution.
c8-4 (11
[The requirement does not ask for a list of responsibilities Vickery has violated, but, merely, which of the fifteen responsibilities apply to Vickeryb situation,) Management accountants have a responsibility to: Comoetence: Perform their professional duties in accordance with relevant laws, regulations, and technical standards. ffhe inventory cost Vickery is being asked to accept violates accounting principles of congervatism and of matching current cost against current revenue.)
Chapter 8
c8-4 (Concludedl preparo comploto and clsar reports 8nd nocommondationsafter appropriate analy:et of rolsvant and rsllable information. (Vickery has coiryinclng evidence that lallure to make the adiustment will misstate the resulting fi nanclal stataments.|
.
lnteoritv: Befraln from either actively or passively subverting the attainmeFt of the organizationb legiUmateand ethical obiectives. fflrere is prrssurc to subvart legitimateand ethical obiectives to the immediate need for tavorablefinancial statements.| Communicate unfavorable,ag welt ag favorable, Informatlon and professionalfudgmentgor opinions.(Vickeryis being asked to thwart communlcationof unfavorableinformation.) Refrainfrom engagingIn or supportingany activity that would discredit the profession.(Preparingdeliberatelymisleadingfinancial statements,clearly ls a discredit to the profession') ,
Obiectivihn Communicateinformationfairly and objectively. Mckery would violate this responsibilityif the inventorywete not restated.) Discloselutly att relevant informationthat could reasonablybe erpected to influenco an intended userb understandingof the rtports' comments,and nocommendationspresented.ffhis material overstatement of inventoryand profit violatesthis ethical responsibility.)
(21
In addiUonto his ethical responsibilitiesto his company,Vickery has ethical responsibilitiesto: (al the bank (bl the companyb stockholders (cl the managementaccountingprofession
' -
:_
CHAPTER 9 DISCUSSIONOUESTIONS O9-1. The mosl lreguentlyused documentsin the procuremenl and use ol materials are purchasereguisitions, purchase orders, receivingreports, materials requisilions,bills ol malerials, and malerials ledger recods. O9-2. The invoice shouH be routed to the Accounting Department immedidely upon receipt.A copy of lhe purchaseorder and a copy of the receiving report'with an inspection report should be compared by lhe accountingclerK When lhe invoice is found lo be correcl in all aspectsor has been adjusted for errors or rejects, the accounting clerk approves the invoice, anaches il to the underlying documents il they are in hard-copy lorm, and sends these documenls to another clerk for lhe preparationof the voucher. O 9 - 3 . I n v e n t o r i a b l ec o s l s h o u l d i n c l u d e a l l c o s t s incrrred lo get the produc.tready for sale to lhe customer. lt includesnot only the net purchase prica bul also the olher associatedcosts, such as freiThl-in,incurredup to ths lime produclsare ready for sale to the customer. Q9-4. No, administrationcosts are assumedto expir€ with lhe passageof time and do not anachlo the product. Furthermore,administralivecosts do not relale directlyto inventories,but are incursd for the benefitof all lunciionsof the business. O9-5. The three key questionsto anstv€rin designing an inventorycontrolsyg€m are: (a) how much to order-economic order quanlity (b) when to order-order point (c) satetystock required 09€. The firm benefilslrom lhese techniquesby having a crnsistenl, standardizedapproachto its inventorymanagsment.lnventorycosts and servica lo customsrswill be optimallybalanced. O9-7. The purpose ol an economic ordor quantily model is to determinethe optimumquantityto order or producewhen filling inventoryneeds. The optimumquantilyis delined as lhat quanlity lhal minimizssthe cost of inventorymanagement. Q9-8. The decision concerninghow much to order or produce at a given lime involvesa compromise belweeninventorycarryingcosts and orderingor s o l u p c o s l s , E x a m p l e so l i n v e n t o r yc a r r y i n g c o s t s a r e : i n t e r s s lo n t h e m o n s y i n v e s t e di n invontoriesthat could have b€en investedelsewhere, propertytar and insurance,warehousing or slorage, handling,deterioration,and obsolescence.Orderingcosts includeths cost of preparing the requisilionand purchaseorder,receiving lhe order, and accounlingfor lhe order.Setup @sts involvethe costs ol seningup equipment to make lhe actualproductionruns.For all these
203
costs, only lhose thd vary with adivity are relevant lo the E@ model. O9-9. The @nsequencos of maintaining inadequare invenlory levels indude hi;her purcfrasing,handling, and transportation costs, bss ol quantity discounls, produclion disruptions, inllation-related price increases when purchases are deferred,and bst sales and customer goodwill. Mgasursmentof the costs of lost orders and bst repeat business is not easy because meaz suremenl may be largely subjective. On the other hand, the other factors listedcan be measured with fair certaintyand grealer ease. 09-10. In computingoptimum produaion run size, CO ropresenlsan estimaleol lhe setup cost and CU is lhe variablemanulacluringcost per unit. 09-11. (a) The order point is the low poinr ol stock levef that, when reached,means a replenishingorder shouldbe placed. (b) Lead time is the intervalbetweenplacingan order and deliveryof lhe orderedgmds. (c) Salety stodt is the minimum inventorythar provides a cushion against reasonably expecledmaximumdemands and against varialionsin leadtime. O 9 - 1 2 . M a t e r i a l sr e g u i r e m e n t sp l a n n i n g ( M R P ) i s a compuler simulationthat integratoseach prod, rjct'sbill ol mderials, inventoryslalus, and manufacturingprocess into a feasible production plan. 09-13. Eftectiveutilizationof capital, which inctudes inveslmentin inventory,is the responsibility of g e n e r a lm a n a g € m e n t ;l h e r e l o r e .t h e p r i m a r y interestis in linancialcontrol.Atthoughgeneral or top-levelmanagernsnlis inlerestedin providing customerswith gmd productsand services, the schedulingof produaioninrolves unit control primarilyand is the responsibilityof production and purchasingdepartm€nts. 09-14. ln the control ol materials,the opposingneeds are the mainlenanceof an inventoryol sufficient size and diversity lor efficient operations,and the mainlenanceof an investmenlin inventoryat a level that will maximizeearningsand minimiza costs. O9-15. When a relativelyfew malerialsit€ms account f o r a c o n s i d e r a b l ep o r l i o n o l t o t a l i n v e n t o r y investmonl selectivecontrol is indicatod.Hbh. value ilems would be under tight control,whilu low-valueitems would be under simple physical conlrols. Automaticcontrol refers lo orderingwhen a malerialsrecordshowsthat lhe balanceon hand has dropped to the order point.At this time, the q u a n l i l y t o o r d o r i s a u l o m a l i c ,h a v i n g b e e n delerminedby balancingthe cost to order with
(_\
2U the cost lo catry inventory' Aulomatic control is mosl ellective ih companieslhat use an EDP syslem. 09-16. Appendir The average cost m€lhod assumes that each batch takon ftom the slore' room is composed ol uniform quanti' ties from each shipment in slodt at the dale of issue. The lilo method is based on the assumptionthd the firsl goods received are the first issued. The lilo method is based on the assumplion that lhi latest gds received are lhe lirst issued. O9-17. Appendir In an inflationary economy' lifo pro' v i d e s a b e t t e r m a t c h i n go l c u r r e n l costs with currenl rovenue because costs ol inventory issued are at mora
Chapter 9 r e c e n l p u r c h a s ep r i c e s . N e t c a s h inflow is generally increasedbscause taxable income is generally decreased, resulting in payment of bwer income lax. O9.18. AppondixFifo. The higher costs ol the earlier purchases would be charyed against cosl of goods sold. GGA-Canada (adapted).Beprint with permissbn. 09-19. Appendix (a) lilo (b) filo (c) fifo (d) lifo (e) lifo (t) lilo CGA-Canada(adaptsd).Roprintwith permissbn.
-
205
ChaPter 9
EXERCISES
* \ Eg-l -
(1)
Freight allocatedto materialsbased on cost
= l=21o= = = $- 016 Perdoltarof cost s17,5O0 PartA: $ 8,600 x S'or0 = $137.60 Part B: Part C:
(21
5,060 x 3,840 x
qlzrsoo
80.96 61.44
s280,oo
Freight allocatedto materialsbasedon shipping weight
s280 I 400 kilograms
Part A: Part B: Part C:
= S.20
63okg x x 49O x 28O
1:j99kg E9-2
.O16 = .016 =
S'2O = .2O = .2O =
S126 98 .!!
E289 Units
Total to be provided ...,........,....... Qu a n ti tyo n h a n d rS eptem ber l,..,..,....' .......' ........o' ..' 4r 4OO On ordgrfor Septembgr dg1ivgryr....r........................'r 3r600 On ordgr for October delivery,.........,.......................... 4.1OO Quantity to ordgr for Novgmbgr dgliv€]1|'...................
4,2OO 4,400 4,7OO 3,600 16,90O
12.1OO 4.800
I
Chapter 9
206
E9-3 (1)
Forecastusage:
4,8OOunlts 5,000 5,600 15,400 units
JanUaryttt""t""'ttt"o""t""""tt""ttt'tttt"
"t"t""""t""""tt"t""tot"tt"""'
February
t"t""""t"t"t"t"t't't""t"ot"t"t"tt"
March
Desired March 31 inventory level
4,8O0
(61000 x 80%)""""""""t"t"t"r"""""t"
Total to bg providgd""""t""""r"""' Scheduled suPPlY: January 1 lnvgntoff """"""""o"""""r' On orden January delivery'.."""""""""""""' February delivery'r""""'o""""""""' Quantity to order for March delivery """' l2l
2O,2OOunlts 6,000 unlts 4,1OO :l,6oo
JanUary 1 inVgntOf] ..........r.....o.r...r.."........."""""'tt"tt'rt""
On order for January and February de|ivery"""""""""""'
FOfgCaStUSagg-ranuary and Fgbruar1/.'........""""""t"""' (a)
MafCh
'l
inVgntOfl
...................o..................t.tt"rtttttt"tt
To order lor March delivery(requirement(1))""""""" FOfgCaSt USage-M3lch
(b)
.........r.r..r...........'........r......'."
14.700 5.5OO unlts 61000 units 8.700 14r7OO units 9.800 4r9OO unlts 5.500 1O' 4OO units 5.500
MafCh 31 inVgntofy .......,..................'.......'..........t.......-4eo
E9-4
2 x100 x $5
(1)
EOQ =
tzl
EOQ =
(3)
EoQ = rl r
,al
S55 x 15o/o 212,250 x$12
$25
= J5iloob- = 24O units
= fiopoo = 3oo Aiets =
1,440,000
units
L 207
Chapter 9
E9-4 (Continuedl
(41
(a)
l,ooorooo
2x25,000 r$20
EOQ
al I
$8 x 25o/o
J 5OO,O0O
= 7O7cartons Annual required units
I
(b)
S
Economic order quantitY 365 days
\-
35 orders
(s)
=
= 35 order:peryear
ry
= 10.4 orevery 1O days orders should be placed
(a)
= Jl8o,ooo = 424 (b)
18J990 = 42.4sor approxlmately42 orders per year 424 365 days = 8,2 or approximately one order every 9 days 42 orders
(c)
-
EOQ = -12 \r|
x 18'000 x S15 $6 x 2Oo/o
540,0oo LN
= {450,000 = 677 (6)
(a)
x 1 8 ' 0 0 0x S 1 5 EOe = -j2 Y 57.50 x 2oo/o
540,000 = { 360,OOO
= 600 units . 6
(b) lr
A A A
= 30 orders per year
# OUU
365 days in year 12.767 or approxinrately = 30 orders per year one order every 12 days
\
(c)
E^A EL'IJ
=
54O ' OO0
m
;-=
Y
52.50 x 2Oo/o
= 1 1 0 3 9u n l ts
;1i5-
E--= 11,08O,0OO
I
Chapter 9
n8 E9-4 (GonUnuedl
ftl
(al
EoQ =
2 x 4 8 r O O Or $ 1 O $2O r 12Vo'
lo5-oFdd-
lJz;lr-
632 dozen baseballs
t'4o + 1oo/oreturn on investment = 12oh $20 (bl
Annualorderingcost = $ffi
= 4 8 , O O Or 800
$1O = $600
CUTCCTEOQ Annual carrying cost = 2 $2O x 12oh r 8OO -
Total annual inventorycost to sell 48'OOOdozen basgbal1s..t..t1..................rittt"""ttttt"t"t"t"t"""t""
(8)
960
sl.560
r EoO = -f2 r 5t0oo $Jrooo-
Sg r 2oo/o
V
^ / 6 1 2 5 O ' O O O= 2 r 5 O O c o l u m n s
(e)
2 r t 2 , O O 0r 5 1 6 $9 r 2ooh
384,OOO 1.80
(al
EOQ =
(bl
= 462 units The frequency of order placement: l2roo0 annualusage = 26 ordersper Year 462 EOQ
365 days
26 orders
(cl
EOQ =
14 days
2r8,OOOr$16 $9 r 22oh
36O units
2 5 6 , O O O1.98
.,!Tzg,zgg
ChapterI
209
E9-4 (Qoncluded) (10)
(a)
EoQ =
2x500x56 $1Ox .25
=
16,00o
2r4OO = 49 units
4 l - =
Y 2.50
$61.22 + $61.25 = $122.47 $ 1 0 x . 2 5 x 4 9 = total ordering and carrying cost per year (b) 49 + (49 x.10) = 54 units per order 5OO x $6 49
5ot}9q . Y (11)
= S.5s.56 + $6z.so= $123.06
The effect is small becausethe total cost curve ls relativelyflat aroundthe optimum level. To compare the two alternatives,the carrying cost and the production initiation cost must be calculatedfor each alternative.These two amounts are calculated as follows: x manufacturingcost Carrying cost = Annual cost of carrying (2OYol (SSO1 x averageannual inventory. Production initiation cost - Numberof runs x cost to initiate a run
(s3oo)
Current situation: 2 production runs of 3,000 units per run Average inventory: 3,OOOunits + 2 = 1,50O units Present costs: Carrying cost (.2Ox $5O x 1,500)..... 51S,O0O Production initiation cost (2 x $3OO) OOO
s15"600 Proposed situation: The EOQ formula can be used to determine production run quantities by substituting cost per order with production initiation cost x 6-'000 x 9?00 production quantity, ,/2 $5Ox'2 r
3,600,000 =
V360,000 = 60O units
Averageinventory: 6 O O + 2 = 3 0 O u n i t s Numberof runs: 6,000 + 600 = 10 r uns Proposedcosts: Carrying cost (.20 x $5O x 300)......,.....,...... Production iniUation cost (1Ox $3O0)
E3,ooo 3,OO0
s6,ooo Expected annual savings
$9,600
Chapter g
2t0 E9-5
(11 (21
-
= t';500,ooo= tin?"u
lzr('tzxl,5oo)rS5o EOQ=rl-= r.4O 1
i3
Lots ol 2,AOOunits should be ordered, based on the following computations: QUANTITATIVEDATA '11225units '14.7 Average inventory ....r...'....'......r..................r.' 612.5 units Order size Number of orders Per Year.
a a.
a.a
a a a aa a aa
aa
a a a aa
aaa
aaa
COSTDATA . $ 735 Gost of placingorders at $5o r..........r.....,..r.,r Gost of carrying inventory: 612.5 x $3.00 x .40 ..r......r.........'....r........... 735 IrOOOx 92.85 x .4O ..............,........,............ Discounts lost (12 x 11500x 33 x .05)..,.....,... 2r7OO $4.170 Cost to ordgr and carry..'............r.,......r"'o.....
2r00O units I 1,000 unlts
$ 4so 1,140
$1,590
E9-6 (1)
Orderingand carryingcosts under current policy:
(T , $3Bo)*(sr ' #) (21
= s2,2Bo + $zso= s2,s3o
Economic order quantity and the related ordering and carrying costs:
j2 x 3'ooo t stSo = \fm-o! s l
= 1,5i0 units
$zss + $755 = $1,510 related = i + # x $ 3 8 0 ) . ( t " r y ) orderingand carryingcosts
I
2li
Chapter 9
E9-6,(Concluded) (3)
George should decide to order In quantlties of 3'OOOunlts, based on the following computations:
DATA QUANTITATTVE Order si2g.,............r.....r.....r...r.....r......o......'...
1r510 unlts
Numbgr of orders pgr year.....,..........'........'... 1.9868 ,Averageinventory....................o........r..r......... 755 unlts
3,000 unlts I 1,50Ounlts
COSTDATA $ 755 Cost of ptaclng orders at $380 '...'...o............. Gost of carrying inventory: $1
x755...........o...r..........tt.'tr..r.rr.t...t.t.......
$ 380
755
($f - S.05) x 1r500......'.......t....'o...............or
Discount lost (31000x $5 x .05).................,..o. 750 Gost to ordgr and carryr.o........................r...... $2r260
11425
$1,8 05
CGA€anada (adapted). Reprint with permission. E9-7
91600 + 24O = 4O units daity usage
Normal lead time usage(2Odays x 4O unlts)...,..................,.... 800 Safety stock ((30 days- 2O days)x 4O unlts)..........,i.o............. 400 Ordgr point.......i...............,.........r..r.....,........................,r.........
Le99
E9-8 (1)
Ma xi mu mu se p e rd a y................,.........,.,o- .... 6OO unlts NOrmal usg PgrdS!...'.............r.....................r500 Safety stock (maximum)..........................r.r.... i6-O unlts x 5 days of lgad tlme = 50O unlts
(21
2,500 unlts 500 3.000 unlts
(3)
3,000 unlts 2,500 500 units 3,500
{0AA units
Chapter 9
2r2 E9-8 (Concluded)
3tOoO units
Order poiot.........r...........rr.....................o....ttt""""'o""""t"""'
5oo r 5).....,..o....'..---.'..-......... Minimum'*" Juringleaoii;6 (1OO units "" 60 on handst time orderngcgiyod......................................."f' 3'500 UnitS
(41
QUanUty Ofdgfgd ......"..."t""""""r"t""t"t"t"""""""""""""t'
gJQg units Absolutg marimum inventoly.........................""""""'o"""""' .cGA-Ganada(adapted}.Reprintwithparmission. E9-9
2OOunits 120 units r 12 daYsof 6 lead time = 960 units lt44O units Normaluse per day (120)r daysof lead time (i2!........o......,...96O '
Marimum ugo per dS!""""""""""t""o""""" Normal uso por d8!"t"""""t""""""""""""" Safg$ stock {marimum} """"""""""""""""'
(1)
l2l
Saf ety stock order
.r......or....................'......o.............."'tt"t'o"tr""t""'
po1t1t............r....t....r........r..........r..............""tt"t""""tt
"
&
units
2r4OO units '1 I,44O HOrmal USedUring lgdd timg (t20 I' 2| .'..'.................'........"' units On hand St timg Ofdef t€CeiV€d.........'....,........r'..o..................'960 3,OOO Ofdefgd r........r...'.........r.o...........r................'.."'r"""" QUan$ty
(31
Ofdgf
pOint....................................................1.........."t"ttttttt"'
3,960 units NOfmal madmUm inVentOry...r.....................'.........o..........."'t" (4)
Order poi Minimum uso during lead time (8o r 12)
2r4OOunits 960
On hand at time ordor t€ceivod......--..r.
1r44O units 3,OOO
Q u a ntity o rd ergd ..r..........o....'....""'
4A4O units Absofutg marimum inventory.........r...,.................'...o....r.,.......
CGA-Canada(adapted).Reprint with permission' E9-10 3efcU Stock Lcvrl (Unltel 10 20 40 80
Annuel Humbcr Probabltl$ ErPcsted Annual of of Ordorr x Secr(993 =9tockoutlr . 4 2 3 6 2 1 7 6 .1 .oa ! .2 .o4 6
Goct P.r gglgt 7
Annual llafety Stock Annual Carrylng Annual Comblncd Co.t Ff Stocltout Coct + pcr unltl = = Coat
5 5 75 76
The recommendod level of saletY stock is 40 units.
3t50.oo 75.OO 30.oo 15.OO
310 20 tn 8('
3100.oo 95.OO
70.oo c5.oo
I !
Chapter I
I
r-
213
E 9 - 1 1 A P P E N D IX (1)
Average costing: Received
I I
:,
I !
Date
Quan- Unit tity Cost
lssued Total Quan- Unit Cost tity Cost
Jan, I 6
200
10
400
I !
$1.25 $250
1.30
560
500
$1.25 SZOO
1.40 700
27 !
Total Quan- Unit Gost tity Cost 5OO S1.2O 70o 1.21
520
15
25
Inventory
400
1.32
528
Balance S 600 g5o
lr1OO
1.25
1,370
54O
1.25
670
1,040
1.32
1,370
640
1.32
842
Fifo costing:
el
Received Date
lssued
Quan- Unit Total Quan- Unit tity Cost Cost tity Cost
Jan. 1 6 10
2OO $1.25 $250 400
1.30
520
500
1 .4 0
700
15
25
27
Inventory Total Quan- Unit Cost tity Cost
Total Cost Balance
500 $1.20 $600 $ 600 500 1.20 600 200 1.25 250 850 so0 1.20 600 200 1.25 250 400 1.30 52O 1,370 500 s1.20 $OOO 140 1.25 175 50 1.2s 75 400 1.30 520 695
140 260
1.25 1.30
175 338
140 400 50o
1.25 175 1.30 520 1.40 7OO
1 ,395
140 500
1 . 3 0 182 1.40 700
882
I
Chapter g
214
E9-1 1 APPENDIX (Concluded) (3)
Lifo costing:
Received Date
lssued
Inventory
Quan- Unit Total Quan- Unit Total Quan- Unit Total tity Cost Gost tity Gost Gost tity Cost Cost Balance
s00 $r.zo $600 s 600
Jan. 1 6
10
200 $1.25 $250 400
1.30 520
400 $r.go $seo 1 6 0 1 . 2 5 200
15
25
27
s00
1.40 700
400
1.40
560
500 200
1.20 600 1.25 250
s00
7.20 1.25 1.30 1.20 1.25 1.20 7.25 1.40 1.20 7.25 1.40
200 400 500 40 500 40 500 500 40 100
850
600 250 52O 1,37O 600 50 650 600 50 7OO 1,350 600 50 140 790
I
Chapter9
215
PROBLEMS
P9 - 1 (1)
(21
(3)
P9-2 (1) (21 (3)
Budgeted acquisition cost
Budgeted purchases
$18, O0O _ 12.Soh applied acquisition _ =--= S144, OOO eosting rate for the month
$148r5O0 net purchases x 12.5o/oapplled acqulsition = $18,562.50 applled costing cost added rate to materials purchased during the month The overapplied acquisition eost of $362.50 (Sig,562.50 applied cost _ S18'200 actual cost) should be credited to Cost of Goods Sold or prorated to Cost of Goods Sold and inventories.
E O e = . / 2 x 2 - 4 ' 0 0 Ox $ 1 . 2 0 \l S 1 Ox T O Y o
57,600 = 24O units 1
Annual regulrements _ 24.OOO 'W = 100 ordersneededperyear EOe E$ (Cartying::"t ) * Annual reguirements fOrderins cost ) z 1 per unrr / EOe ( p", order ) 5240 total cost
=ry($rox 1oo/o) .'hi#o ($r.eo =:t#iltr"ill +$120 ) =$reo
for the year (41
The next order shoutd be placed in three days. This conctusionis arrived at as follows: (a) Number of days' suppty in each orden Days in year
@=#=3'6daYs (b)
Number of days' supply left in inventory:
6 days' UnitsIn inventory Days, supply _ 4OOx 3' 6 days - supply x, = f in eachoii"r ffi (c)
Days before next order should be placed: (Days' supply left) - (Delivery lead time) =
left
6 days _ 3 days = 3
Chapter9
216
Pg-2 (Gonctuded) to apply the EoQ (51 some of the difficulties most firms have in attempting formuta to Inventory Problems are: (a) Inventory ls not always used at a_constant rate; the constant usage assumptlonls lmpllclt in the EOQformula' (b) fne Ede lormularequires estimates of (1) annual requirements'(2) orde-ng cos! (3) purchase price per unit, and (4) cost of carrying lnveritoiies. These estimates may be extremeff difficult to obtain with accuracy. P9-3 (1)
Normal use per day (2OO)x days of lead time (10) """""""' Safgty Ofdgf
(21
SIOCk..r......r.........r.....r.............o.......o.'...r........r"""ot" pOit1t......r...............r..r........
.........r.................
2,000 units 300 3i3o9 units
2,300 units 2,000 Normal use during lead time (2O0x 1O).....'.."""""""""""' On hand at timg Ofdgf fgCgiVed..........,......'.,....r.................. 300 units 4,000 QUantity Ofdgfgd..........',.....r.............o..............r.........'o........
Ofdef
pgint.....r....,..r...r...........r..i........r......'.3...'.r...............t.t
Normal maximum inventory..-......r....
""""""""""'
4.3OO unlts
(3)
2,300 units M i n i m u m u se d u ri n g te a d ti me ( 150 x 10) ............,.""""""" 1 , 5 0 0 800 units On hand at time order received 4,0o0 ....'..,...... Quantity ordered....'.......'. Absolute maximum inventory.,.,..............r............'..""""""' 4.800 units
(4)
Let S equal cost of storing one unit for one year.
Ofdgf
point.......r.......................................r.....r...'.r'.'....r.'.""
EOQ =
2xRUxCO CUxGG
x (2oo x 250) x S8o 4 ,' o o 0 = r!2lY> S 4'000 = 1 6 ' 0 0 0 ' 0 0 O= S -
8,0o0,o00
g,ooo,ooo
s 8,000,ooo = S.5O
1 6 , 0 O O, O O O GGA-Ganada (adapted). Reprint with permission.
l
Chapter9
217
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Chapter 9
218 I
P9.5 APPENDIX (1)
Fifo:
Date
Quantity
Unit Cost
Inveniory
lssued
Recelved Total Cost
Quantity
Unit Cost
Total Cost
40() s19.50 $ 7,800
600 $20.00sl2,ooo
5 12
a5o
21.50
15O 350
s00
5OO 150 2AO
3,O0O 6,825
19.50 21.50
975 7,525
21.OO 11,55O
28 31
Balance
20.00
4,OOO
750 4O0
2O.0O 15,0OO 19.50 7,8OO 22,8OO
150 4O0
20.00 19.50
3,000 7,8OO 1O,80O
50 350
19.50 21.50
975 7,525
975 19.so 50 35O 21.50 7,525 5OO 22.OO 11,000 50 350
550
2O.OO 19.50
22.OO 11,0OO
22 26
Total Cost
150 20.00 3,000 4OO 19.5O 7,8OO 35tO 21.50 7,525 18,325
7,525
t5 18
Unit Cost
75O 32O.OO$15,OOO $15,OOO
Marchl 3
Ouantity
22.OO 11,000 21.0O 3,150
8,500
19,500
5OO
22.OO 11,OOO
I 1 ,OOO
500 55O
22.OO 11,000 21.0O 11,550
22,550
4OO
21.OO
8,4OO
8,400
4OO 200
21.0O 20.00
8,4OO 4,000
12,400
Chapter9
219
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\. -
221
P9-6 APPENDIX (1)
Cost of the ending inventory under the fifo method when a periodic inventory system is used:
!
133'"'o 3 tll : tl:i33
b
100
@
12 =
1,2OO
$4.300 (21
Cost of the ending inventoryunder the lifo method: (a) When a periodic inventorysystem is used: 20ounits @ $tO = S2,000 100 @ 11 = 1,100 $3,100
(b) When a perpetualinventorysystem is used: Received Date
Quantity
Unit Cost
lssued Total Cost
Quan. tity
Unlt Cost
lnventory Total Cost
Jan. I 12
3 1I
$1,1OO
100 9r r 1OO
200
12
100 lOO
14
100 100
17
12
1,700
14
Total Cost
Balance
S2,OOO S2,OOO 2,O00 t,loo 3,1OO
2AO 100
10 1l
lOO
10
I,OOO
I,OOO
100 200
10 72
1,000 2,4OO
3,4OO
100 100
10 12
1,O00 1,200
2,2OO
100 100 100
10 12 14
1,000 1,2OO 1,400
3,600
100 100
10 72
1,00o 7r2OO
2,2OO
100 100 100
10 72 17
1,000 1,2OO l,7oo
3,goo
$1,1oo 1,000
1,2OO
1,4OO
Nov. 10 Dec. 5
10
2,4OO
May 1
July 15
Unlt Cost
2OO $rO l OO
Feb. I April 16
Quantity
1,4OO
CGA-Canada(adapted). Reprlnt wlth permlsslon.
r +
Chapter 9
222
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Chapter g
223
P9-7,APPENDIX (Continued) (b)
First-in, first-out method: Received
Dste
Quantity
Jan.2
2,000
Unlt Cosl
lssued Total Cost
Ouantity
Unit Cost
500
s5
31
700
5
1,200
Total Cost
Quantity
Unit Cost
2,000
35
$2,500 t,500
5
7,500
800
5
4,OOO
8OO
s5 310,000
15
Feb.2
Inventory
6
3,500
7,2OO
15
600
28
200 700
5 5 6
3,000
8
12,0OO
t5 31 1,900 15
30
7
5
S e,ooo
6
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11,2OO
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5 6
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g,2oo
s00
6
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6 g
6 I
3,000 800 1,4OO
800
8
6,40O
13,3OO
$10,ooo
1,2OO
s00 to0
DOr.2
Balance
1,0oo 4,2OO
Mar.2 1,500
Total Cost
3,OOO 3,OOO 12,0OO
.ts,(x)o
I
11,2OO
600
8
4,800
600 l,goo
I 7
4,800 l3,3OO
19,1(X)
600 100
8 7
4,8OO 700 1,800
7
t2,6OO
700
7
4,900 1 , 1 0 0
7
7,7OO
rI - tr t
Chapter I
224
P9-7APPENbIX(Concluded) (c) Last-in, first.out method: Received
Date Jan.2
Quantity 2,000
Unit Cost
lssued Total Cost
Quantity
Unit Cost
5OO
$5
31
700
5
1,200
6
600
28
600 300 1,5OO
g
600
31
15
30
8OO
t,goo
Unit Cost
2,OOO
35
$2,500 1,5OO
5
7,5(X'
800
5
4,OOO
8OO 1,200
5 6
S 4,0OO 7,2OO 11,200
800 600
5 6
s00
5
2,500
500 1,500
5 g
2,5OO 12,OOO 14,5OO
500 900
5 8
2,5OO 7r2OO
g,7OO
5OO 100
5 g
2,500 800
3,300
500 100 1,900
5 I 7
2,500 800 13,300
7
16,600
500 100 7,2OO
5 I 7
2,500 800 g,4OO
11,7OO
5 8 7
2,500 800 3,500
6,900
3,50O
6 5
3,600 3,6OO 1,5OO
12,000
15
Apr.2
6
8 8
4,800 6,400
13,300 7OO
70o
7
7
Total Cost
Quantity
7,2OO
15
Mar.2
Total Cost
S5 91O,0OO
15
Feb.2
Inventory
4,900
4,9OO 500 100 500
Balance |S|O,OOO
4,000 3,600
7,600
(21 Average
Fifo
S a l e s ( 5 ,5 0 0 u n i ts @ S IO) s55,000.00 s55,00o Cost of goods sotd: Purchases ........,... $42,5OO.O0 $42,500 Less inventory, Aprit 30.......... 7,805.60 7 r7OO s34,694.4O s34,gOO Gross profit s20,305.60 939199
Lifo $55,oOO $42,5OO 6,8OO
s35,7OO
El e,gqg
CGA Canada (adapted). Reprint with permission.
I
225
Chapter I
CASES
c9-1 (1)
(a) Topp Desk Gompanywould be attempting to minimize total setup cost and total carrying cost (b) Variablemanufacturingcosts per unit t
DirgCt
matgfials.'..............r...........r..................r.t..r.....o...
s30
14 Variablg factory overhead..,..........................,.,.,.......*.... 6 Total variable manufacturing cost per unit........ $50 Numbgr of dgsks destroyed,.........,r.,..............,................... x 1 2 DifgCt
|abOf.............................r........'..r..'rr....'.........r.......
Total setup cost..................r..r.r..r....r.,r'..r.......................r...
s600
Optimum production run: 1
=
$50' x 10.870
21,600,000
{4F66p6o = 2,ooo desks rVariablemanufacturingcost per unit (c)
Number of production runs per yean Annual demand
Optimumproductionrun
(21
=
€#
= 9 Productionruns
(a)
The following factors affect the desired size of the safety stock for ' any Inventory itemr (1) Variabilityof product demand (21 VariabiliU of lead time (3) Stockout costs (4) Carrying costs
(b)
The minimum safety stock level that could be maintainedwithout being worse off than being unable to fill orders equal to an average daytsdemand is the level at which the safety stock carrying cost equals the cost of a stockout, i.e., Stockout cost Per unit carrying cost
s2,295 S50 x 1O.B%
=ffi
=42sdesks
Chapter 9
226
c9-2 (1)
1
Equipment MaintenanceDepartmentcosts:
SalafieS (2 X 5 X $91 '.........r......'...............'..!...'..' $ 90.00
Employeebenefits($90x 2O%1.............-..'.......'. 1 8 . 0 0 $108.00 Production department costs: $rgz.so Salafigs(5 X 5 X $7.501.....................r........'........ Variablefactory overhead: Direct labor hours base (25 x $2.75).-..'.....-.... 68.75 Machinghours basg (1 x $5).....,.,-..-............,r. s.00 261.2s 150,00 - $50)....'..........'.............'..r..'.. Direct materials($ZOO s519.2s Estlmate of Model JE 40 setup costs...........,..........-,. Explanationof costs: (a) The full cost of the maintenancesalariesand employeebenefits ls included becausethe $1o.8o St9.0o+ ($9'00 x20%17incurred per labor hour is incurred solely for the purpose of effecting the changeover. (bl The other costs of the EquipmentMaintenanceDepartmentare not inctudedin the estimate becausethey are fixed costs of the department and will be incurred regardtessof the maintenanceworkers' activities. (c) The satariesof the 5 productionworkers for the full 5 hours each are included in the setup cost becausethey must be in attendance all of the time, though they are neededonly part of the time. lf the workers could have been assignedto other iobs during the changeover,then the full amount would not be charged to setup. (d) The variablefactory overheadcosts of the production department applled on the direct tabor hours base are incurred as a function of the direct labor hours; therefore,a full 25 hours of cost are assigned to the setup cost. (e) The variable factory overhead costs of the production department applied on the machine hours base are incurred as a function of the operation of the machineryltherefore, I hour is assignedto setup cost for the t hour the machineryis used in testing. (0 All production departmentfixed factory overheadcosts (both those applied on the basis of direct labor and those applied on the basis of machlne hours) are not included in the setup cost becausethey would be incurred regardlessof the activity in the departmenL (g) The net materials cost of $f SOis included because it representsthe portionof the materialsused for the setup and not unsalvageable for the production of a salable desk.
I I !
I
Chapter 9
\,
C9-2 (Concluded) (21
' ! , b '
cg-3 (11
Circumstancesnecessaryto shift raw materials inventory carrying costs (a) Reliabilityof the supplier.Will the supplier ship products on a mone rigoroustimetable and be willing to keep inventorywithin its own storagefacilities?
.
lf;:$ff""1H;i*:;iili,g,""""XXiii;i1""ff'il# traet terms.
(c) Carefulcontrol of inventoryrequirements.Are production schedules clearly defined to reduce the potential for stockouts?
*
>
The cost items that would be included In an estimate of Pointer Furniture Gompany'scost of carrying desks in inventory include: (a) All costs related to warehousing and handting the desks In Inventory that vary in amount by the number of items stored. The cost of the funds committed to the investment in inventory. tb)
\
!
(21
Gircumstancesnecessaryto shift finished goods inventory carrying costs to the customer include:
(a) (bl
b E
227
theriskor i.,?::[FT[il:;:?H'i;ffill=ll?lil?ll#:,'take
Closer production planning.Gan production schedulesbe refined to such an extent that delays in the sale and distribution of the finished inventory are minimized? (c) Garefulcontrot of inventoryreguirements.Are customer orders carefully monitoredand anticipatedto reduce the probabilityof finished goods stockouts?
CHAPTER10 DISCUSSIONQUESTIONS OlO-1.
010-2.
010-3.
Qt0-4.
Ql0-5.
. O10€.
010-7.
Ql0€.
The purpooecil a JIT system is to minimizethe levelc of raw malerials and work in process invcntory inverlmcnt!, while improvingthc werall rnanufacturingpr€oss. Thc htent b to pull inventory through the syslem mly as il is required. JIT seeks loleliminate all formr of wasle, including produclion losses such as defects. Successful reduclion of these problems contribules lo producl guality, and, so, is a part ol TOM. To avcid inventory buildup, the entire JIT system shuts down whenaver defecls are found; so to achieve a good rale of flow, lhe number of defects must be srnall. Theoretbally, h an ideaf JIT system the EOQ i! o.re; each time nrcre oulput is needed, one more part or unil is produced. Althougha zero inventorylevel is unattainable, JIT stimulates improvernentin the environmenlal condilions lhat cause inventory buildup, such as long seiup times, high selup costs, p@r guliy, and poorly bahnced work loads. The relalbnshipbetweenvelocityand WIP levels is an inverse relationship;doubling the vekrcity m€ans lnlving the WIP level, provided lhe outpul rate is held constiant.This is sirnilar, bul not irdentical, to the relationshipexpressed in lhe familiar inventoqytumover ratio used in f inancialstatem€ntanalysis. The stralegic advantageol improvingvelocity throughout lhe company, lrom product researchand devekrpmentto shipping,is that lhe company can then respond taster to any changing cuslomer need or to an opportunity for a new or altered product. Reducingthe level of WIP also reduceslha maximum numbsr ol detectives,il the defects are c{ a kind that will be discoveredal the nexl work staiion afler lhe unils are held waiting belween slalions. lf .l00 units are wailing b€tw€enstations,up to lOO detectivesmight be producedbefore the problemwould be dis.
228
covered; il 10 units ars heH waiting, no rpr. than 't0 delectives could b. produced before lhe prcblem would be discovered. Q10-9. A blanket purchasc order ir an agreement between buycr and seller slaling lho total quanlity exp€cled to be needed over a period ol three or six rnonthr. Ot0-10. In many JIT work cells, these distinctionrbetween dirrl and indirecl labor and between producingdeparlments and ssn6 service lunctions--do nol exist, because the sarne workers (lhe leam assigned to the cell) perlorm all these tasks. Q10-11. In bacldlushcosting,the work in processinvenlory accounl is not adjusled lhroughoul lhe period to rellect all lhe cosls of units in process;thore are no delailed subsidiary records mainlalned for work in process; and a single accounl may be used lor both raw malerials and work in process. 010-'12. In bacKlush costing, lhe rnaterialsand work in process inventoryaccounts mighl be cornbined into a single account because malerials might be pul irnmedialelyinlo productionwhen lhey are received. 010-13. Posldedusiionis the sublraslbn lrom the work in process accounl cil sorne or all elements d the cosl of completedwork, afler the work is completed. Q10-14. The periodicinventorymethodused by many m e r c h a n d i s i n gc o m p a n i e si s a n a l o g o u sl o backllushcoslingas used by manufacturers. 010-15. lf a backflushcostingsystemexp€nsesall conversion costs to the cost of goods sold account, tho corrgct arnounl of conversion co.sl is included in hventory accounts by making an e n d - o l - p e r i o da d j u s t m e n to f t h e i n v e n l o r y accounts' balances.The oflsetling entry is an adfustmentof lhe cost of goods sold accounl. The corracl amounl of sonversioncost to be includedin each inventoryaccountis estimaled when invenloriesare physicallycounled.
I
I
Chapter l0
EXERCISES
' b >
\'
v
Elo'lrhe:::ffi: :llt"ir:1H'""J,rr:ii'.'r'i;l:n',"r'J,'"ll"liiilS tollows: Carryingcost savings = = = =
2Oohr reduction in averagevariabtecost of Wlp ZOohr 3O7ox past averagevariablecost of Wlp . 2 x . 3 x ( 1 Or 3 O Ox S B O ) $14r4o} Savingsin cost of defects = $25 x reductionin numberof defectiveunits (reductionin (numberof out-ofnumberof = S25 x defectiveunits x control conditions producedper not discovered undiscovered immediately) out-of-control ondition) = $25 x l3O%x 3oO x S%l = $25 x 4.5 x 2QO = $22,500
\-
x
(1/3 x 600)
ElO-z The average lead time will be 26 days, calculated as follows: Re d u cti o n o f ve n d o r l ead tim e = 116x 18 days = 3 days Be ca u seth e ra te o f o utput will be unchanged,a r eduction of W lp to onethird of its present level will triple the velocity. The average order will then remain in wlP only one-third as long, saving two-thirds of time presently being spent in WIP: Reduction of time in WIP = 213of present time in Wlp = A3 x i2 days = g days New lead time = present lead time - reductions = 26 days
i
--
IH::iJffx""n.;:H: :ffs,:Tlillff :'xiJ":"J3::i:ff'.:il"i,i1 components of total lead time are known, as in this exercise, then the ne w l e a d ti me ca n b e calculatedby adding all its components:
( 5 / 6 x 1 8 ) 2+ + ( 1 1 3 x 1 2 ) + 2 + 3= 1 3 + Z + 4 + Z + 3 = 26 days
Chaptor 1O
2g
calculatedas follows: EIO-3 The expeited annualsavingsis S2,2OO,OOO, Doublingthe velocityof all tasks,from receipt of order to shipmentand from ordering materialsto issuing materialsto production, will reduce WIP and materials inventoriesby half' therefore: . Reductionin materials carryingcosts = Z}ohx materials reduction = 2Oohx(112 x $3,0O0'OOO) $3OO'0OO Reductionin wlP carrying costs = 2oohx wlP reduction = 2|oh x (712x $5,OOO'O0O} = $5OO,O0O This changewill also reducecustomerlead time from eight weeks to four weeks. Becausecustomersare willing to wait up to five weeks for There will no longer shipment,alt shipmentscan then be made-to-order. be a need for finishedgoodsinventory.Oncethe existingfinishedgoods inventoryis liquidatedby salesor scrapping,the annualsavingsfrom not carryingfinishedgoodswill be: Reductionin finishedgoodscarryingcosts = zloh x finishedgoodsreduction = zloh x (l OO%x $7'O0O'OOO) = sl,400,oo0 Totalsavings= s300,000+ s5o0,0oo+ sl,4oo,o0o - $2,200'OOO flhis exerciseis basedcloselyon an actual case of a partialJIT implementation.The name of the companyand dollaramountshavebeen altered.) E10-4 (1) (al
Equivalentproduction= 4,500+ (.5Ot-2gl = 4,51Ounits; s 3 O O , 7 4 O_ $66.683 per unit 4,51O
st,o9l?oo = (b) $i66.067per unit r-' 4r5OO
(c)
units started = 4,500 + 2O - 24 = 4,496 units;
s3oo,o0o= 4,496
(2)
566.726 per unit
5 6 6 7 , b eca u se 2 O x .5 Ox 5 6 6 .683 = $666.83. 5 6 6 7 , b eca u se 2 0 x .5 o x 5 6 6 .667 = 5666.67. S 6 6 7 , b eca u se 2 0 x .5 o x $ 6 6 .726 = $667' 26'
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i
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Chapter l0
231
EIO-4. (Goncluded| (3) Consideringthat the results of requirement (2) wenethe same (to the nearest dollar)for all three methods,then method (il (b) would be recommended becauseof its ease and simplicity. Method-tii ttl is a ctose second choice,also becauseof easeand simpticity.The detiils of method (11(al may not be iustifiable in these circumstances. (41 Prccessingspeed is very fast, with the result that work in processinventory levefsanekept to a very low level-both in absolute terms and in ielation to totat productionactivity for a month. Elo-5 JournalentriesinvolvingRrp and/or finishedgoodsare: Raw and In Procgss............t.r....!..r!.......rr........,....... Accounts Payable .r......'................,.........r.o......
456,OOO 456,OOO
A-summary entry for all receipts of raw materials during the period. when direct materials are used, no entry is needed, be-ause the
materialsremainin RlP.
Finished Goods......t.....,..r....-...,................,...o........r Raw and In Procgss'...'.....'...r'r.................r....,.
4SSTOOO
455,000
To backflush material cost from Rfp to finished goods. This is a postdeduction, The calculation is: Material in May I Rlp ba1ance...,.....,.....,.,.S 19,OOO Ma te ri a l re ceiveddur ingMay.................... 456;OOO s475,OOO 2O,OOO $4SSpOO
Ma te ri a l i n May 31 RIR per physical count A mo u n t to b e backflushed..........
Co st o f Go o d s S o 1 d ...........................r ..........,........... 461r OOO F i n i sh g d Go o d s............,......................D..,......... 46i To backflush material cost from finished goods to cost of goods sold. This is a postdeduction. The calcutation is: Material in May I finished goods r......,....,. S 16,OOO Material backflushed to finished goods.... 4S5,OOO :_--
Material in May 31 finished goods, per
$471,00O
physical count..............r..........,.............
IOrOOO
A mo u n t to b e b a ckf!ushed.............r ......,..,....... $461,OOO
L
r OOO
,
I
i
Chapter l0
232
Eto-5 (Concluddd) COSI Ol GOOdS SO1d...t..............r......o.............'....t...'.
2,300
Raw and In Procgss.....o..... Finlsh
gd
Good3.....tt.t...........t""t""ttt"t""ttt"tt'
300 2,OOO
Conversioncost in RIP is adiusted trom the $2,3OOof May I to the at May 31. bonvsrsion cost In finished goods is $2'OOOosgmato aOjusteJtrom ttre $Sr5bOof May t to the $4'5Oo estimate at May 3i. The offsettlng ontry ls made to the cost ol goods sold account' where all conve*ion costs weno charged during May. El0-6 The Journalentries InvolvingRIP and/or finished good! 8r1o: 222'OOO '...... Baw and ln Ptlc8ss.........o......' Accounts
Payablg.....t""'r""'ot"""o"""""""""
222,OOO
A gummaryontry for all receipts ol raw materials during tho period. When direct maierials atu used, no entry is needed, becausethe materialsnBmainIn BlP. Finishgd GOOd3...r..r.r...............r........r....r....r......."r.. RaW and In PfOCSSS..............i....'........r..o.....'.!.
221r5OO 221 ,5OO
To backflush material cost from BIP to finished goods. This is'a postdeduction.The calculationls: MatgriatIn Jung I RIPbalanceo..'....r......i.I I O,5O0 MatgrialrBcEirgdduringJune r...............'. 222,AOO $232,5O0 11,OOO Material In June 30 RIR per physicalcount Amount to bg backflushlgd...........'.......""' s22t,5OO Cost of Goods Sotd.............................-..............r.tt.. 223t5OA 223r5OO Finishgd Goods....r.....o...........i.....................'... To backflush materlal cost from finished goods to cost of goods sold. This ls a postdeduction. Tho calculation is: Material in Juna I finished goods............' $ 8rO00 221r5oo MaterialbackflushedfromRlP.""""""""'
s229,500 Materialin June 30 finishedgoods' per
o,ooo physical cou!1t.......,....r,..............r....'.-.'. Amount to be backflushed ..........'....o..r'...' s223,5OO
I
I !
Clppter 1O
2s3
Elo-O (Concluded| Raw and In Process..........r.....................................r Finishgd Goods.....................D........r...r,.....r...... Gost of Goods Sold ;..........,.,..................,.!....r..
500 300 200
Gonversloncost In Rtp ls adjusted lrom tho $lr2oo of June I to the $lrT0oostimate at Juno 3o. convorsion cost in finished goods is adjustedfrom the 94rooogt June I to the $3rzoo estima.-te"i .1u"" 3o. The offsettingentry la made to the cost of goods sofd account, nfiero all conversioncosts wero charged durini June. Elo'7 Journal ontriss Involvingthe Rlp accounta arl': Raw and in Procgssr................r....................r.......... 20O,OO0 Accounts
Payable .r....'......r............r...r,,or.......,.
2OO,O0O
A-summaryentry for all receipts of raw materials during the period. when dlrect materiafsaro used, no entry is needed,belausJtrrev remaina part of RlP. Finlshed Good8....................r..........r.........o.....o........
Raw and in Process
rt
aa ao aaaaaaaaa
199,8OO
aa
199,8O0
To backflushmaterialcost from Rtp to FinishedGoods.This is a postdedugtion.The calcutationis: Material in March I RIP balance s I,OOO Materiaf rcceived during March,..........,..., 2OO,OOO s2O9,OOO Material in March 31 RIR per physical count 9,2OO Amountto be backflushed.,.....,...,,,........,. Si99,gOO Raw and in Procgss...........................................o...o, 3OO Cost of Goods So1d............,.......,........,.......,..,.
gOO
conversion cost in RIP is adjusted from the $1,ooo of March 1 to the $lr3OO estimate at March 31, The offisetting entry is made to the cost of goods sold account, where all conversion costs wene charged during March.
rI I I I
Y
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)
.
:.
1 I
; !
ChapterlO
El0-8 Journalehtriesinvolvingthe RIPaccountsare: 367'000 Raw and in Process............ 367rO0O AgcountsPayab|e.r............,.,........................... A summaryentry for all receipts of raw materialsduring the period. When direct materialsare used, no entry is needed,becausethey remain a part of RlP.
. e
.'
365r4O0 Finishgd GOOdS,..............'.......o..........r................o....
Raw and in Process..,..
aaaaaa
a aoaa
365,4OO
at
To backflush material cost from RIP to Finished Goods' This is a post-deduction. The calculation is: Material in April I RIP ba1ance..................$ 291600 Ma te ri a l re ce i ve d d u ringApr il.........,.r ....... 36710OO $396,6O0 31,2OO Material in April 30 RIR per physical sount A mo u n tto b e b a ckf|u s hed........................ S365,4OO : Raw and in Process..........,...r,........,.. Cost of Goods So|d.,..... .........,..........
y
4OO 4OO
Conversion cost in RIP is adjusted from the $1,4OOof April I to the S1,8OOestimate at April 30. The offsetting entry is made to the cost of goods sold account, where all conversion costs wene charged during April. EIO-9 Journal entries involving the BIP accounts are: R a w a n d i n P ro ce ss............ Accounts Payable ..............
'
_,
246.000 246,OOO
A summary entry for all receipts of raw materials during the period. When direct materials are used, no entry is needed, because they remain a part of RlP. Cost of Goods So1d...................... ,........o...,. 24Z.OOO Raw and in Process........,.,. 247r0OO To backflush material cost from RIP to Cost of Goods Sold. This is a postdeduction. The calculation is: Ma te ri a l i n Ma y 1 R IP balance., Material received during May........ Ma te ri a l i n Ma y 3 1 R IR per physicalcount A m o u n tt o b e b a c k f l u s h e d . . . . . . . . . .
$ 11,000 246,000 $257,OOO lO,OOO S24Z,OOO
v
l ,/t
t-
1 ) V
I >-
I I
Chapter 10
235
EIO-9 (Concluded| ' Raw and in Process ,..........,...,.r. Cost of Goods So1d....,.......o,.......
1
800
800
conversion cost in RtP is adjustedfrom the $lr3oo of May I to the $2'1oo estimate at May 3r. The offsetting entry is madetb the cost of goods sold account,where all convercioncosts were charged during May.
Elo-lo (1)
The most recent purchaseinvolveda quantity greater than the total materialsin ending inventories,and that purchasegives a cost of materials of $42o'o0o/l,4oo, or $3oo per unit of output; t6erefore, Materialscost of finishedgoodsendinginventory = 50 units x $3OOper unit = $15'OOO
(21
The conversioncost per unit is calculatedby dividingthe total GoDV€rsion cost by (al the number of units startedrlb) the number "o.pl"t"d, or (cl the number completedplus the number oi partially "onu"tt"i units in the RIP ending inventory(not an equivalentunits calculation|: (l) $eSOrlSO + 3,OOO = $96.72conversioncost per unit (Ot $29Orl6O-r grlOO= 993.60conversioncost per unit (c) s29o'l6o + t,f 2o = $g3.ooconversioncost per unit
(3)
The three possibleamountsfor the conversioncost of the 5Ounits in finishedgoodsendinginventoryare: 5O units @$96.22= $4,93Oof conversioncost 5Ounits @$93.60= $4,690of conversioncost 5O units @S93.OO = $4,650of conversioncost
(41
b
L-owest= g15,OOO materials+ g4,650conversion= $19,650 Highest= $l5,OOomaterials+ $4,g36conversion= btg,ggb Dollardifference= $19,936- $19,650= $1gO Difference,to nearestl/1O percent= $1gO* $19,650= O.9%
7-1-
Chapter lO
2ffi
810-1|
r
(f l
A $3OOmaterialscost per unit was calculatedin requirement(lf of the pneviousexercise; therefore, Materialscost of RIP ending inventory= 22Ounits x S3OOFer unit = $66,OoO
(21
The three possibleamountsfor the conversioncost of the RIP ending lnventoly ol 20 units, SAohconverted,are: x $96.72 = $967.2Oof conversioncost 2O units x SOoh 20 units r SOTo r $gg.0O= $9gOof conversioncost 2O units x SOoh x $93.00 = 9990 of conversioncost It seems inconsistentto assign 50% conversioncosts to RIPwhen the units in RIPlyere countedas whole physicalunits in the denominatorof the conversioncost per unit calculationin requirement2(c)of EIO-IO, and when they were not countedat all in the denominatorof the calculaUon in requirement2(b)of El0-10. But the total dollardifference assignedto RIP is immaterial.Whateverthe amount of conversioncosts assignedto RIPand finished goods,the remainderof total conver':sion costs simplyremainsin cost of goodssold.
(3)
Lowest = $66,000 materials + S93Oconversion = $66,930 Highest = $66,OOOmaterials + $S0Z conversion = $66,967 Dollar difference = 566,967 - $66,93o = $37 Difference, to nearest 1/1O percent = $37 + $66,930 =.1oh
\
y \d
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L 1 l>
Clpptsl0
PROBLEMS
t I t
I
Pto-l (11 The erpected annual savings 8no$72OrooO,consisting of $gg4,ooo csnyIng costs savings and $336'O00savings in the cost of defects, calculateb ag follour: Carrying cogt savings = = = =
-
30% r redustlon In avoriagovariable cost of Wlp 3Oohr 4Ao/or past avoriagovariable cost of Wp ,3 r .4 x (4Or 2OOr $lOO1 $384,0OO Savingsin cost of delects = $60 r rsdustion in number of defeetive units
b
!
= $6O x
(reduction in number of defective units produced per undiscovered flaw)
= $60 r (4O%r 2OOr 2Oo/ol = $60r 19r350 = $33610OO
(2',
(31
x
(numberof flaws not discoveredimmediately|
x
(114r 1,4o0l
Likely benefits that are not assessablefrom the information given includs the following: (al Faster cycle time resulting from the higher velocity of VUlp.(Because the rate of final output will not change,velocity wiil change'inversely with the changein WIP levets.)The faster cytle time will imptove the speedwith which orders can be filled, thul increasingcusio;ne1. saUsfacUonand perhapsincreasingperceivedprcduct value so that prices can be raised(or price cuts delayedoravoided|. (bl lf, as a rasult of the shorter cycle time, total lead Ume becomes less than the Ume customensare willing to urait for an order, then the companywould no longer need to maintain a linished goods inventory. This possibilitywoutd resutt in additionalsavings in ffoor spaco and other Inventorycarryingcosts. flhe value of the floor spacg ireJo up by eliminating 4o7oof Wlp storage lc not an addltional benofig Inventory cirrying cosfi includa etorage costs, so the valua of the floor space is incluoed in the cirrying cJst s""Ingr calculatedIn requiroment1i;.| Costs and other negativesto be comparsd with (al Tho Increasedliketihoodof shutdowns duethe savings inctude: to work l6cations being gtarved for WIP; lower WIP levels at each staiion nepnesentlower safety stocks, so stockouts are monelikely at all toca-Uons, (bl The cost 9f -startinga larger nu-u"iof baiches oi lot" into produquon, which incrudesthe iost of processing.o* ;;* orderc, pro_
2fi
Chapter l0
Plo-l (Concluded) duction orders,and material requisitions.flo reduce averageWIP size, either smaller batches must be started at shorter intervals, or protracted stockouts must be allowed to occu6 otherwise, the averagssize of WIP will not drop.l (c) The cost of handlingmore loads of materials.lf lot sizes are small enoughto require only one load per lot both before and after the chanCe,then a larger number of lots will result in a largertotal numberof loads. (dl The cost of performinga larger number ol setups to permit running a larger number of batches or lots of smaller size. ldeally,as part of the JtT implementation,setup cost will be driven down to eliminate this problem. Pl0-2 (1) Protechcould achievean averageleadtime on these ordersof 42 days' calculatedas follows: Reductionof time in WIP = 314of presenttime in WIP = 314r (360 days + I O! = 314x 36 days = 27 days Reductionof vendor lead time = 113r27 days= 9 days New lead time = presentlead Ume- reductions = 78 days - 127days + 9 days) = 42 days Note: lt is not stated that Protechdefines WIP and WIP turnover in a way that excludesthe two days spent in receivingand the three days spent in linal inspection.To check that the averagecycle time of 360 days/lO, or 36 dalrs,does excludEthose steps (sothat there is no double-counting), note that a cycle time of 36 days,when added to the other intervals mentioned,givesthe stated total lead time of 78 days: 6 + 27 + 2 + 36 + 3+4=78. (21 The advantagesof shorter lead time inctude: (al The value of the floor space freed up by eliminatingthree-foudhs of WIP storage, (b) lmprovementin the speed with which orders can be filled, which should increasecustomer satisfactionand perhapsincreaseperceived product value so that prices can be raised (or price cuts delayedor avoided). (c) lf the new 42-daytotal lead time is less than the time customers are willing to wait for an order,ttren the companywould no longer need to maintaina finishedgoodsinventory.This possibilitywould resuJtin additionalsavingsin floor spaceand other inventorycarrying costs
.-
-
: -
"
:
-T
I
I i
rc
dnpW'10 I
Plo-2lConcludcd| Costs and other negatlver to bc compatrd rxlth Ste savlngs Includa: t3l (al The Incrsaged llkellhood of rhutdonmr duc to work tocations belng gtaryed for WIB lower WIP levelg rt cach ctatlon repnosontlower safety rtockr, so stockoutr erc mort llkely at alf locaUom. (bl Tha co;t of startlng r larger numbcr of bgtchee or totr Into producUon,wlrlch.lncludcr thr cort of pmccedng moncwork ordera, productlon ordan, and mgtorlal nqulgldonr (Beduclng averagc WIP rlza generally rcqulrca rtartlng rmaller batcher gt ghorter Intervals.) (cl Thc cogt of hendling morr loadr ol materlalr. ll lot sizac arc srnall enoughto rcqulra only onc load pcr fot both befgrc and after the change,then a larger number of lotr wlfl rosult ln a larger total numberol loads. (d) The cost of performlng e larger numbcr of eetups to permlt running a larger number ol batchcc, or lo'tr, ol rmaller 3lze. ldeatly, as part ol the JIT lmpfementatlon,lotup cogt wlll be driven do*m to eliminatc thlr problem. (el The tmc and eftort that may bc rcqulrcd to Induce yendors to reducc thelr lead Umc by onc-tlrlrd.
Pt o€ (1) (a) RawandIn Procasg
85O,OOO
AccOunts Payable ........o........................r.......r.
(bl
A summary entry lor all receipts of raw materials during the perlod.When dlrect materlalsaro used, no entry ls needed, becausethey rrmaln a psrt of RlP. FastoryOverheadGontrol l3,ooo Supplles ,..or.......
lndirest materials ara rccorded as used. (c)
(d)
4OO,OOO AcCru gd Payroll ................r...o.........r.....r......... 4OO,OOO ACCrugd Payrott .o...................r..r......................... 4OO,OOO r.ro....r...r....r-...r....r..oo.r........r.o..aa..............
4OO,OOO
cost ol Goods sold -......r.r........oo............o...,,.,..... 6O,OOO Factory overhead contro|.....D....o..,,,................... 120,OOO MarkeUng Erpenses Control ..................o.....o...o. l3orooo Admlnlstrauvg Expensgg contro|,.o............o.,.,... 9OTOOO P81rO11...............ro.rr..,...
(e)
13,OOO
Pa1rro11...........r.D....o..r...........D.rr..............o....o........
Gash
\
8so;ooo
4OO,OOO
Dirost labor ls crpenaed to thc cost of goods gold accounL Factory Overhead Gontrot......r........,.....t....,..r..,..6gi'OOO Accumulated DepreclaUon.,.....D..........,...r...... Oggrooo Prepald In9urance...............................o........,.. t3'OOO
r I
Chaptor l0
24)
PlO€ (Continuedl (fl FactoryOverheadContro1.o,................,......'. 83,OOO 54,OOO Cash 29,OOO AcCountsPayab1e................o.................... 897,OOO bl CoStof GoodsSo1d..............
897,OOO
FaetoryOverheadGontrol
(hl
Overheadls erpensed to the cost of goods sold account. 844,OOO FinlshedGoods 844,OOO Raw and In Process......r.. To backflush material cost lrom RIP to finished goods. This is a postdedustion. The calculatlon ls: Materlal in Juno 1 RIP balance '.'r.......r.. M a te ri a l re ce i ve d d u ri n gJune...............
$ 4OTOOO S5Or OOO $89O,oOO
Material In June 30 RIR per phyaical COUllt....r................r........o.......
46r OO0
Amounttobebackflushod.........'...........S844.OOO (il
Gost of GoodsSo|d,...........,..............'..r....,..' tt** 852IOOO
Finishgd Good3......oo....o...................o...t..'t
To backflush material cost from FinishedGoodsto Gost of Goods Sold. The calculation ls: Materialin June I FinishedGoods.,r....o $ lgor0oo 844'OOO Material cost transferred trom RlP..'..... slr034,OOO Materialin June 3Ofinishedgoods,per physical CoUtlt.....'r'......r.................'...
I 82tOOO
Amount to be backflush€d'......'..'.......... 3 852'Ooo 0l
Raw and in Procgs3...o.....,...o..r.....r.....,......... Cost of Goods So1d...,,....r..t......'..r..r..r........... Finishgd Goods.....'....!..........r...r.....".....r..
3oo 2r7OO 3IOOO
Conversion costs In tho inventoly accounts are adiusted to the estimates made in ths June 3O physical counl For RIR the adiustment is from the $11600of June I to $1r9OOon June 3Q for Finlshed Goods, the adiustment is from the $18O,OOO of Juno I to $177'OOOonJune 3O. The offsetting entry is made to the cost of goods sold account, where all conversion costs were charged during June.
:v \_/
. 242
Chapter 10
P1o-4 (Continued)
.
. -
(gl
656,000 Gost of Goods So1d..,.,.....,........... 656'000 Factory Overhgad Control ....,...................... Overheadis expensed to the cost of goods sold account.
(hl
6t 5rooo Finished Goods........rt..........................r....,....'. 615rooo Raw and In Process................o.................... To backflush material cost from RIP to Finished Goods. This is a post-deduction.The calculation is: Ma te ri a l i n Ma y 1 R IP ba1ance.,...........r .,o.. $ SO,OOO Ma te ri a l re ce i ve d d u ri ngMay..............,..... 620r OOO 5650,000 35,OOO Ma te ri a l i n Ma y 3 1 R IR per physicalcount A mo u n t to b e b a ckfl u shed.......... S615,OOO :
(i)
C o s t o f Go o d sS o |d ....... F i ni sh e dGo o d s...................
-
!
605,000 605,000
,.......r .
To backllush material cost from Finished Goods to Cost of Goods S o ld . T h e ca l cu l a ti o ni s: r v
Ma te ri a l i n Ma y 1 F i n i shedGoods.........,,.. S15O,0OO Material cost transferred from RIP ........... 615,OOO $765,O0O Ma te ri a l i n Ma y 3 1 F i n ishedGoods,Fer p h ysi ca lco u n t..... A mo u n t to b e b a ckfl u shed.......... 0)
160,000 $605,000
R a w a n d In P ro cg ss........,..............,.,....r ....,..... 800 F i n i s he dGo o d s.... 4,OOO C o s t o f Go o d sS o |d .......
4,8OO
Conversion costs in the inventory accounts are adjusted to the estimates made in the May 31 physical count. For BIR the adjustm e nt i s fro m th e $ 1 ,3 0 Oof May 1 to $2,10Oon May 31; for Finished Goods, the adjustment is from the S13O,OOO of May 1 to on May 31. The offsetting entry is made to the cost of S134,OOO goods sold account, where all conversion costs were changed during May.
i
Chaptar l0
I
24a
P l O -4 (Go n cl u d e d ) (21
The three completed accounts are
5t1 (al
(r) 5/31
511 (d) (g) (i) 5/31
Raw and in Process 3lr3OO (h) 615,OOO 62O,OOO 800 37,1OO
511 (h) 0 5/31
Finished Goods 28O,OOO (i) 605,000 6i5,OOO 4,OOO 294,OOO
Gost of Goods Sold -O50,000 656,000 605,000 1,306,200
Plo-5 (f )
I
I
I
Contribution margin of lost sales (2O,OOO units): R e ve n u e($ 1O,g OO - 900 units) ........,......,...........,....... 12.OO s Variable costs: Gost of sales (S4r050+ 9O0),.............................,.... s4.50 Marketing and administrative($gOO- 9O0).,.,........ 1.OO T o ta lva ri a b l gcost ...,.....,.............,.,,....r .....,......., $5.50 U n i t co n tri b u ti o nmar gin..........,....r .,,........................., $6.50 V o l u meo f l o st sa l e s ...,,. r 2O,OOO Total contribution margin of lost sales,...,.....,........ s(l3O,000) Overtime premiums (overtimecost is less than the. additional contribution margin of tost sales): 1 5 ,OOO x $ 6 .5 0 = 597,500 > $4O,OOO s (4O,OOO' R g n ta lsa vi n g s...,r..,............................r ...............,....,.. 6O,OO0 Rental income from owned warehouse (12 ,0 0 0 x .7 5 x S 1 .50)...,.................r ...,..,.,.,......,..... 13,5OO Elimination of insurance and property taxes 14,OOO Opportunity cost of funds released from inventory investment: Investment in inventory $6OO,OOO '1 . 2 0 1 20,000 In te re st b e l o re ta x i .tz \ 1-.40/
Estimated before-tax dollar savings I I
t>
9_q2tr9_
v
Chapter tO
PIO-S(Goncluded) l2l
.
Conditionsthat shouldexist in order for a companyto installjust-in-time inventorysuccessfullyincludethe following: (al Top managementmust be committedand providethe necessary leadershipsupportin orderto ensurea company-wide,coordinated effort. (bl A deQiled systemfor integratingthe sequentialoperationsof the manufacturingprocessneedsto be developedand implemented. Raw materialsmust arrivewhen neededfor each subassembly, so that the productionpnocesstunctionssmoothly. (cl Accuratesalesforecastsare neededfor effectivefinishedgoods planningand productionscheduling. (dl Productsshouldbe designedto use standardizedparts to reduce manufacturingtime and reducecosts, (el Reliablevendorswho can deliverqualityraw materialson time with minimumleadtime must be obtained.
.
*
: -
s
I
I
L
CHAPTER11 DISCUSSIONQUESTIONS
I
!
,l b
Ol 1-'1. Yes, lo lhe exlentthat il is practicalto m€asure the r,ralueadded or the productivityof a worker. However, msasurement of lhe cootribution of each individualis never exacl. Also, a business cannot pay more for materials or labor than the sales price will recover.Materials,workers,and machines produce products and services. There must be a differencebelween revenue irnd oosts consumed;othenrvise, lhe business cannol sun/ive. Otl-2. Productivitymay be defined as the measuremenl of produclion performanceusing the expenditureof hurnanelfort as a yardstick.ln a broadersense,it may be describedas the etfi. ciencywith which resourcasare converledinto cornmoditiesancVorservicesthat people wanl. Ql 1-3. Productivityis importantto a lirm becausehigh productivityreducesthe unit cost ol the outpul a n d m a k e s i h e f i r m m o r e c o m p e l i t i v et.t i s importantto workersbecauselheir real earnings should be increasedwhen productivityis h i g h . P r o d u c t i v i t yi s i m p o r t a n l t o s o c i e t y bEcauseincreasedproductivityenablessociety to gel moro and better oulput from the basic resourcesof lhe econorny. Ql 1-4. To measurelabor efficiency,it is necessaryto e s l a b l i s ha s t a n d a r do f p e r f o r m a n c e T . his means determininghow much a workershould be able to produce,or how much a worKcr6w should be able lo produce.The standardis delerminedby time and motionstudy,lest runs by skilledworkers,and averagesoi past performanceby skilledworkers. Q11-5. The purposeof an incentivswage plan is to inducea workerlo producemore,iesultingin a higher wage and reducedconversioncosl oe, unit. Freguenily,machineoutpul is limitedby worker performance.lt employeeperlormance can be increased,machinecost per unit of produclion will decreasa.An incentivewage ptan m a y a t s o r e d u c el o a f i n g ,i n d i f f e r e n c ea, n d carelessness, and may generatea cost.consciouslaborforce. Ql 1-6. Generally,hourly earnings go up with increasedproduction,and laborco.-st per unit ol outpul is reduced.High productionrates also reduceoverheadcosl per unit of output,which is oftenthe mostsignificant savings. _ Ql 1-7. (a) Duringperiodsol curfailejactivity, it is iust as n€cessaryto keepcosls down as i t i s w h e n o p e r a t i n ga l f u l l c a p a c r t y , Assumingthat the incenlivewage plan r e s u l t e di n g r e a l e rl a b o re f f i c i e n c a yno lowercoslsper unit at full capacily,than the laborcost per unitshouldbe lowerin a slackperiodif the incentive wagescate
245
is conlinued, A shdrter workweek or sorne other syslem of sharing lhe work wouH be indicated. (b) Ordinarity,it is not a propiliour tine to hitiato an hcentive wagr ptan wtrena phnt is operating far below capacity,because the worker is alreadyfearful d sornething less than full employrnent.ll a ,easonable day's work is being receivedfor the going rate ol pay, po.stponementof the . incenlive plan is indicated. However, there is a nalural tendencyfor workerslo reduce output durhg such perlgds,thereby increasingcosls, wilh a lendencylo bring about further reductionin the volume lhat can be soH. With luft e4planalion and underslandhg of thc situation, the incentivewage could be htroduced with a planl operatingat 6006capacity. O11-8. In the straightpieceworkplan, each worker is paiC a certain amount for eadr unit produced, while being guaranteeda base hourlywage.ln the 100% bonus plan, €ach workor L pai
246 and tho arnountl withheld for various PurP€' es; and recordgthe payroll liability and pay' ment each PaYrollPeriod Thc cost accannting8sP€cl is concemod with time worked oo each Fb or h each cost conlet, in order to detetminethe labor houn and bbor cosil ol Ptoduclion. Ot1-13. tui eflbient labor force beghs with the design ol the producl gnd en analysir of produclion teclrnQuceand i9b reguiremenls.Wi|h he per' sonnel departmentadeqtntely informed aboul job specifications,it is lhe lunclion ol this deportneot !o locura the pcrsanel qualiliedlo do each iob. The produclion planning deparl' menl keeps the work llowing smoothly. Ths timekeeping, payroll, and cost accounting departmentscontributeto lhe lotal elficiencyby accountingfor the time purchasedand by rnak' ing paymentlor the work as well as charging the cost to lhe proper dePartmentand producl. Q11-14. (a) Delermininglabor hours worked by each empbyee is prirnaritylor payroll PurPo3es and linancialaccounting, (b) Determinatirn ol labot hourc consumed on each irb or h a department is a part ol cosl determinalion for a job or pnocoss.lt shouH also be a measure of labor efliciency,since hours consumed and productiveoutput can be cornpared. Ol 1-15. (a) The cbck card showgthe amounlol time an employeespenl in lhe plant €ach day ol a payrollperiod. lt is evidence that lhe empbyee'stime has been purchased. (b) The time ticket shows tho amounl ol lime an employee spends each daY on 6ach icb or in each department. ll is an ilem' ized invoice ol the time thal the employ' ee selb to lhe empbyer. 01 1-16. Since the clock cards show the time employ' oes are h the pbnt, the lirst step is to make sure no error exists on the time tickets. lf the total time shown on the time tickets is cortecl, trren the workers speot time in the phnt when nol working or not assigned lo specific'jobs ot dopartments,gr when assigned lo maintenance or repairwork For the time thal is idle or assignedto indirect bbor, a chargo is made to FactoryOverhead.
Chapter 11 01 1-17. Bar codes are symbols thal can be processed electronicallyto identifynumbers,letlers, or special characlers. Bar-codedempbyee idenlF lication cards or badges, and lask identilicatbns can be used to replace clock cards and time tickets to collect payroll data ard to mea' sure worker activitY. Q11-18. AppendixOne method would be lo charge the premium costs directly to lho Prod' usts in thc same rtrarne, as straighl' lime labor cosls. This would be a P p r o P r i a t ew h e n P a r t i c u l a ri o b s have to be rushed to ccnPlelbn. A secmd method woub be to tr€at the ptgmium as an ovefiead elem€nt lo be ctrarged to all ptoduclirxt through the allocationol overhead. lt would be appropriatewhen lho ovatlim€ is a recurring condilion normally inci' dsnt to the levelof oPeratiens' 011-19. AppendixThebonus and vacationpay should be accruedovet the benefitedtime period.When the bonus and vacatinn pay are pairJ,the accrued liabilily account is debited and the cash and withholdingaccounls are crediled. Ol 1-20. AppendixThe recornmendedmethod in com' puting costs under a pension plan is to detemine aciuariatlylhe eventual pensionpaymenlslo covered empkry' ees and to cfrargethese luture pay' menls as a cost gt curt€ntproduction over the exPectedgeriodof aclive serviceof coveredemployees'Costs based on Past services should be writlen oll over some reasonable period on a systematicand rational basis that doos not distorl the operat' ing resultsof anY one Year.These costs are incurred in contemplation of lhe presenland lutureseryicesnol only of the individualemployee'bul also ol lhe organi:ationas a whole' Benefits ol the Plan-such as improvedmorale. removalof super' annuated employees'and attraction o f m o r e d e s i r a b l eP e r s o n n e l - a r e exPecledlo imProvethe oPerating etficiencYof a comPanY.
I
Chapts ll
217
EXERGISES El 1-1 ORANGECITY CA"I{NINGCOMPANY t^aborSchedule for Terry Paco For First Week in June
Units producod
ara
a.
a aa
aao
a ara.a.
aa aa...a
r.
ar
40 1,32O 1r2OA 110o/o
S9 9396 s9.90 s.30
E11-2 (11
U9"d"y Hoursx hourly ratg............ $64.00 Unlts abovestandard. o Hours saved............r..........
Value of tlme gavgd....o...o.. SOohof value of Ume saved Earninga............................ s64.OO
(21
= Efficiency ratio: -860 800
Tuesday Wednesday
s64.OO
to
.50 s 4.OO $ 3.20 s67.20
s64.OO l5 .75 $ 6.00
s 4.80 $68.80
lo7,50h
Earnings: 1O7.sohr $8 hourly rate r 4O hours = $344 (31
!
Earnings: ($8 hourly rate + 5Ycrate increase) r 24 hours = S8.4Ox 24 hours s $2O1.EO
s200.oo
I
I
248
Chapter 11
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ChWtar ll
219
Ell\5 19A productivityratio = ' 194 standardhours for work done * 19A total actuardirsct and Indirect rabor hours = 943,823 + | $251324 = .422089 Hours neededfor i 98 productionat l gA productivityratio = 198 standard hours for work done -r i 9A productivity ratio = + t422o89
558t51o
..r.rr.........o.....r.r....o.....o...............................
Less l9B total actual direct and indirect labor hourt,...,....:.-, Hours
savgd
............-...o...........r...........r..r...r.r.......
113231204 1r2g4rgg3
38'227
Valueof wagessaved= hours savedr lgB svoriagehourly pay plus labor fringe benefits = 38,221r $i4.7O = $561,949 Employeegainsharingincentivetotaf = vafue of wagessavedr 5OZo= S561,849x SOoh = $28O,g24.5O Gainsharingincentiveper employee= total gainsharingincentiver- number of eligible employees= + 755 employees= $?Z2.Og $28Or924.5O Ef l-6
I batch ...r....,.....,.....,..t.,.............o.......... $60rooo
2 batches..........,...,...........,.............,..,.,, $lgroOO 4 batchgs..o.r.......................r.r................ Sggrcoo 8 batches....................,..........r...,.r.......,. $gorzzo 16 batches............r.,..........,........r............ $zorszg
lgo%of $6Oroogf igorhor Scgroooi iaoy" or $grcooi igow of $3or72o)
E11-7 Bridge Number I 2 4 I
x
Cumulative Average Required Weeks per Bridge 100 BO (1OOweeks r 8O%l 64 (8Oweeks r 8O%f 57.2 (64 weeks x 8O%)
7 additional bridges must be buitt in order to bring the cumulative BVB'age below 52 weeks. I
Y I
I
Chapter | 1
Ell-8 The schedule below demonstrates the 8O7olearning curve that the company expects to experienco in producing the time devices:
(f l
Cumulative x Lots I 2 4 8
'
l2l
Cumulative Average = Time hours 9O.OO 72.OO 57.60 46.08
Cumulative Time 9O.OOhours 144.OO 230.40 368.64
learningfactor,the cumulativetime to produce 8 lots At an SOoh should be 368.64 hours.At a standardlabor rate of $9 per direct tabor hour,the standardamount for total direct labor cost should be set at $3,317.76(368.64x S9). The companyshoutdestabtishthe standardfor direct labor time equal to the marginaldirect labor time requiredto producethe eighth lot' providing steady-stateproductionoccurc after the eighth lot. To assurethat this standardtime will be accurate,the companyshould: (al Keep accurate recordsthrough the first I tots to determine if an EOohlearningfactor is experienced. (bl Continueto keep accurate recordsfor each successiveproduction lot to providea basis for: 1. Conformanceto expectationsabout labor time (i.e.'steady state productionafter 8 lots)' or 2. Determiningwhen steady-stateproductiondoes occur.
E11-9 APPENDIX (1)
Overtimepremiumchargedto productionworked on duringthe overtime hours: Work in ProcgsS...,......,.....,..............,,.......,.................495 Payroll (4Ohours x $91 + (1Ohours x 1.5 x $9)..,,..,.
(21
495
Overtime premium charged to factory overhead: Work in Process (5Ohours x $91........,....,..,......o......... Factory Overhead Control (1Ohours x.5 x S9)........... Payroll.... .........,.....
450 45 495
I I
I
I
I
Chagter ll
25r
E11-1O APPENDIX Subsidiary Record
FactoryOvgrheadControt.........,................. Bonus Pg1|..................,....,.r.................l34.4Ot VaCatiOn P8f.......r........r...r.............o.... G7.ZOz Liability for 8onus..........r............r,........r. Liability for Vacation Pay .....o.r..........;.....
l-
" b
Dr. 201.60
Cr.
134.40 67.20
(9lO + g32l x 40 hours r 4 weeks = S6'Z20 + 5O weeks = 5134 .4O 2 ($fO + $32) x 4O hours x 2 weeks = g?,36O + 5O weeks = 67.20
EI 1.' 1 APPENDIX Factory Overhead Controt lgeS,OOox 2gTo1...,.... 9,8OO Marketing Expenses Gontrol (SgrOOO x Zg;/o1...... 2124O AdministraUve Erpenses Control ($7,ooo x 2a./"1 1,960 Liability for Pensions (S5OTOOO r T.go/o1..,...,,Liability for Other postretirement Benefits ($5o,ooo x 2.3o/o1.....r.r.,,...r......,...... FfCA Tax Payable (950,O0O r T.S%1..........,... Federal Unemployment Tax payable ($50,ooOx .g/ol ....r,....r.......r..................... State Unemployment Tar payable ($SO,OOOx 4.6Tol...,..........ro...............,....., Workerst Compensation Insurance payable
($5o,ooo r l%1.,.,.......,...
.....,......
Medical Insurance payable ($SO,OOO x 4%1..
3r go0 1,150 3,750 400 2r3OO 500 2,OOO
GGA-Canada(Adapted).Reprint with permission. El 1 . 1 2 A P P E N D IX
tl)
The entry to record the payrollliabilitp Payroll ...t..........r.....r....,..................
Employees Federal Income Tar payable .......... EmployeesState Income Tax payaL|o.......,...... Employees City Wage Tax payable .......,.,...,,.... llCA Tax Payab18....................,..... Accrued Payroll!.,...,,......
(21 l
l-
26r7OO.OO
The entry to distribute the payroll: Work in Process,....................,......,..,,........ 18,OOO.OO fac-tory Overhead Control ..,............ Marketing Erpenses Control ............................r... 3,OOO.OO Administrative ExpensesControl.............,....,..,... 4r2OO.OO 1,5OO.OO Payroll
2,5OO.OO
500.oo 267.OO 2rOA2.5O 2 1,430.50
26,7OO.OO
_\
Chagter | 1
252
E11-12APPENOfi (Concluded) (31
The entry to record the employer'spayrolltaxes: 2,394,OO FactoryOvgrhgadGontrol....................'...........--.. ........'....................... 478.80 COntrOl Markgting EXpenSgS ............or'.......... 1 7 1 . 0 0 Expenses Control Administrative
'
FICA TaI Payab19........'..r......'o.'................r.......
TaxPayab|g...............,..,. State Udemptoyment FederalUnemploymentTaxPayabl€....'.".........
2,O02.5O 854.40 186.90
IL
I
ChWter tt
253
L I I
PROBLEMS
P rl - 1 (fl
Present cost
I I
Direct labor per hour $10 Factoryoverheadper dirrct labor hour... 12 $22 -r 5 units per hour = $4.4Oconversioncost per unit
!
t l I
PcrWorkcr por 8-Hour Dey
!
unltrlrromblcd pcr &Hour Day
Plccowort Rrt
Dlrcct Labor
10
szoo
3 80.oo 05,40
rs9s.oo eo.00
110.00 12650 144.00
06.00 00.00 03.00
4ft 50 55 80
(21
b
2.12 z.2o e.3o z4o
Fectory Ovcrhead
Totaf convcrzlon Coot
Convcnbn Cal pcr Unlt
3176.00 101,40 20s.00 222.50 240.00
Sf.4o 1.8 1.12 .3.05
a.oo
lf a producuon rate above 4o units per employeo per g-hour day is noasonablyattainable by the worksr, the employeo oarnings wili increase under the pleceworkproposal,Since convercioncost per-unit decreases with increasedoutput, managementshould favor the iiecework proposal.
P11-2 (t) Boguhr Worksoot Employoe Clrnct D--...l,,ukon, T.--..&hott, J...-..... Totrl dnct
flrclt
b
lncrndyo lflagr Plan
Hourty Rrtr
WorlWork
Totrl l'bor Cort
!O.OO r 4O hn, E 32a0 B.OO r ,3Oh.!. r 320 I.0O r aO hrr e 280 hbor._._._.
- t8.fo r llog
_t&ao
hbor oori Incroor
Incrntlvr Pay Boe Pay (Unltr Producrd r (Boo Frtr r Wort Hourr) + InconUvo prrmlum)
lc.go r 4o hn = 't.to 5.5O r 4O hn 4.5O r 4O hn
-
2t2O
=
18O
#*
r
lO5 r $t,OO= 3to!t t iO5 r l.OO= t0tt 105 r l.0O = t0tl
Totrl dlnct lebor -
Proot:
Totrl Lrbor Coel
= 2g.2% trborcort
OO5 3S!t O45
tl,ql5 Incro'r
Chaptor | |
254
Pl1-2(Gonctudedl l2l
To assess properly the effectiveness of the new plan, it is nocessaryto anallze lts eftect on convorslon costs and not just on direct labor costs. Although dlrect labor cost per unit may rise, this Increase may be moro than offset by distributlng the overheadover a larger Yolume. A comparisonol the two pay plans and their effects on convsrsioncost per unit shows: Totrl bbor Cort
tncsntlvc wagc plan Stnfght hourly ratc
tl,o35 84O
Dtflcrcncc
lrbor Cort prr Ur*t
tA.Zt 5,OO
t .o7
Tctrl Frctory orrorhod
tlr2Oo IJIOO
Ovorlrerd por Unlt
J|ZZ 8.OO
l.El
Totrl Convotrlon Cott
t2,235 2,O4O
Unlt Corwonlon Cott
$1355r 13.002
9_1.09)nct decrearc
152,235+165=$13.55 2 $2,O4O + 150 = $i3.OO The decreasoIn conversioncost is minimat;however,the fact that customels can be s€ryed sooner might be worth additionallabor cost. Based on learningcuryo theory the productivityof the worker might increase sufficientlyto reach a more satisfactoryoutput and cost level.
'
I
t I
L
Chapter 11
255
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256
Chaptar l1
Pl l-3 (ConcludeUf Hours worked 40 Units produced 855 Standardprodugtion(20 units x 4O hours|..-.............. 800 (855 + Efficiency ratlo SOOI 1.06875 .aaaraaaaaaaa
Basewageper hour
$9.0o
Basewage plus bonus (1.O6875r $91...............o.....,..$9.91975 Wggklyearnings($9.9t975 r 4o hou1s1........r.............$384.75 Unit cost ($384.75 + 855 unltsl ..or.......t.....r....,....,r.o...
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2fi
P11-5
Straight Piecework
Units produced-regular tlme Piecework rate p3!r.......r.o.......................r........t..r....t..t....
PigCgWOfk
DowntimoPaY
p8!....r...........r....r....rr........r...r........o...........
OVgftime Total
l\r3$lB3 por
WaggS
aaaaataaaaaaaaaa
.......ttt""""tt""to"""'rttt""tt"""t"'ttt"""' bookstt"ttt"ttt""ttt""rt"tt"'r"to""tt"t""""'
U n d efp aym OJ1t...............r......r.....i....o.r..
r.....o...........r..
Lowo Hare Dodd 370 410 400 .O6 .66 I .66 $ $ $264.00 $270.eo 9244.20 24'OO o 30.oo 54.OOr 36'00 o s294.OO$aZc,oo $304.20 284.OO 277.2A 302.20 $ IO.OO$ 47.40 $ 2.99 : = - z :
t6.r $6 x 15ooh= $54 Percentage Bonus Plan UnitS pfOdUCgd,o..r..r.........................'r....'.....'r.........'...."' Standafd pfOdUCtiOtl................'..o......'.......o......r.............. fatiO.o.....,o.r....rr...........r'......r....r..r...r.......t.."'r'
EffiCignCy RegUlaf
Wa993.......r.o..........D...................o..r..r...t....tr....t"'
8OnUS.................oo...r...r..r...........rr....r.r.......r....r.........."" TOtal WageS
wageS pef
.........................t""ttrtt"t""t'tt't""t"tt""""t"o bOOkS ..r.........r..r.........r...r..r.o.........r..o.r....r...t..
UndefpaymO;.1t......r...r.....r........r..r...r..............ro...r............
r25oh pnemiumx $24O regular wage = $60 or S6.00 hourly rate x .25 pnemium 51.5O bonus pay S1,5O x 4O hours = $60
125o/o
RuPP 180 200 gooh
280.OO
l71.OO
Ober
250 200
s240.oo S2oo.oo o 60.oo1 $3OO.OO $2oo.oo 20.oo s::z: 29.OO $ =:
I I
I
Chaptar 11
259
Pl l-5 (Concluded)
I
E
Emerson Efficienca System Suggs 240 300
b
Unitg produced..t.........r..
Standard production Efficigncy ratio..........
80o/o 20o/o
BOnUS lillt8 .......r..,.,....r...............
Rggular wago.r...or............r..........,......r..................r... Bon us'uraff o ...............r.r......r.....r.r...r...................r.r...
Downtime pay (2 houra x 35.60}. Totalwages............,..... b
aataoaaaaaaaaaaaraaaaa
Wages por books........r........,., Un d erp aym (!Dt....r..rr".........r........,.r.r.....r.r...... t
Ward 590 5701 103.5% 450h
i..........
6OOunits (standardproductionfor 4O hours )
5224,oo2 s2l2.go3
$ 44.90
95.76 11.20
s268,8O 233.20 :---$ 35.60
S319.76 2go.o0 $ sg.zo
= 15 units per hour
15 units per hour r 38 productivehours = 57O units (standardproduction for 3g hours) z4Ohours x $5.60 = $Z24,OO s38 hoursx $5.60 = S2i2.gO P11-6 (1)
Hoursworked (5 workersr 4Ohours)................,,.r...,,.........,... 200 Regularwage (2OOhoursr $61.........,.......... s1,2OO Units produced...........r...........r...........r.....D......,..r......r....r...r....
Bonus
b
""t'ot'rtaDtaaaa.aaaaataaaaraa.aaaa.arraaaaaaaaaa..aaaaoaaaaraarr.....aa.aaaaaaor.a.
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s52r $i,252
garnings.o....r......rr........r...................,...........,..o.......r... we-ekly unit labor cost Gtl1252 + 452),.....,.,..........r.....,...o........o..r....,..$2.7699 Unit factory overhead ($f r4O6 * 452).............r..r..,...,...o.r..,.r.., $.?.0973 Unit convgrsion coSt....'...................r..r......rr.......r.....r..r.......r..
$5.8672
t l-
b
452 unlts produced 4OO units standard _52 units abovestandard 52 units x $i workersrshare = $S2 bonus
I
I
Chaptor | |
P11 - 6 ( C o n c l u d e d )
Unltl-...'......-.. Standardhoun for unltt.--..-.. Actual houn..Bonurr to r houn ttvcd..Total carnlngr. Unit labor cort. Unlt factory ovgrhcad ,....,.{ Unlt convcnion coat ,............,.-
72 361 . , 4
8t
95
nrn
171t2 10
&
102
102
152
5t
5l 40
22A 200
ao
3 s
trs
3zlo 333333
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33.45A8
32.9471
glzaul
toJ508
35.947a
foo 3300 33.OOOO
3 t8o2 31,380 $3.Os31
327451
3Z74nl
33.0073
35.74tn
35.74tt1
30.1504
f06
t 4Oounits per 40 hours= 10 units per hour 1Ounits per hour + 5 workerc= 2 units per hour 72 units produced+ 2 units per hour = 36 hoursstandardtime z lf the group bonus is computedfor the week, rather than daily' the bonus would be 36 x 2o hours saved,or $156. Then,$1,356+ 432 units = $3 unit + 452 units, or 9?.O973per unit. labor cost. Overheadcost would be S1,4OO P11 - 7 (1)
THOMAS INC. Quarterly Bonus Allotment At End of March
Employees Participating
Points Allowed for Each Employee
1 Works managgr....r...... 2 Produstion engineers., 5 Shop supervisot'tg......... 1 Storgkgopor.,.,..,....r...,. 5 Factory office clerks ... l5O Factoty workefs ......
250 200 200
loo 10 20
Total Points 250 400 l,0oo 100 50 3,O0O 4,8OO
ra
2 7 O , O O Ounits actual production 2 4 O , O O Ounits normal production 3 O , O O Ounits excess ovor normal
3 O , O O Ou n i t s r $ 5 O = $ 1 5 , O o O s 1 5 , O O O+ 4,8OOpoints = 33.125 qer point
Shara per Point s3.125r 3.725 3.125 3.125 3.725 3.125
Total Share
s
781.25 1,25O,00 3,125.0O 312.50 156.25 9,375.0O
9!9'o99.09
'
fl I
Chapter | 1
Pl1-8
(rl Gumulative
-Cumulative
Number
Numberof Units
of Lots
(Lot Size = 50) 50 lo0 2OO 4 OO 8OO
I 2 4 I 16
Time in Hours Cumulative Cumulative Time Average Time Per Unit 4.0000 360.00 (3.6000 x 1oo) 3.6000 (4.oooo x.9l 648.00 (3.24OOx 2OO) 3.24OO(3.60OOx .9! 1' 166.40 ( 2.9f 6O r 4OO) 2 .9 1 60 ( 3.240Ox.9l 2.6244 (2.916Ox .9) 2rO99.52 12.6244x 8OO)
DireCt tabOr hOUrS reqUired tO prOdUCethe firSt 8OO UnitS r..,............... 2tO99.52 Direct labor hours required to produce the first 2OO units .......'....o'...., 648.00 DireCt fabOr hoUrS feqUired tO prOduCethe next Ordet'.....,................... :11457.52 600 Numbgr of units in thg ngxt ordgt'....,.....................,............'......r......o... ---
DirectlaborhOUrsper unit for the nextorder(1'451.52 + 600).'.......... 2.4192 CatonicPart NumberPGB-31 Unit Costsand Pricesfor RexEngineeringCompany Estimates Incorporating a 9oohLearning Gurve S18O.OO Materials (2 ,4 1 9 La b o r a n d e m p l o ye eb e n e fi ts x $ 20) .,,.,............r ........, 48.38 24.19 Varia b l oo v e r h e a d(5 O%o f l a b o r),.......,,.......,............. Total variabtg coSt.,.......r,..r....i................,,..,....'..r...... 5252-5| 4O.0O ....r ....r Fi x g do v g r h e a d. . . ..................'..................,...' Fult cost. SZSZ.SZ .....!........ Profit contribution (1Oohof full cost) .,...........,...,.... . 29.26 Estimated contract price...........,.,. S321.83 l2l
The implications of an 80% learning curve as opposed to a gOohlearning curye are: (a) An 80% learning cunre indicates a greater effect of experience on efficiency. (b)
Most of the increase in efficiency (decreasein time and cost per unit) due to an SOohlearning curve occurs early in the production r u n ; t h u s, sa tu ra ti o ni n l e a rningis achievedear lier with an AOoh l e a r n in g cu n e .
'
fl I
Chapter | 1
Pl1-8
(rl Gumulative
-Cumulative
Number
Numberof Units
of Lots
(Lot Size = 50) 50 lo0 2OO 4 OO 8OO
I 2 4 I 16
Time in Hours Cumulative Cumulative Time Average Time Per Unit 4.0000 360.00 (3.6000 x 1oo) 3.6000 (4.oooo x.9l 648.00 (3.24OOx 2OO) 3.24OO(3.60OOx .9! 1' 166.40 ( 2.9f 6O r 4OO) 2 .9 1 60 ( 3.240Ox.9l 2.6244 (2.916Ox .9) 2rO99.52 12.6244x 8OO)
DireCt tabOr hOUrS reqUired tO prOdUCethe firSt 8OO UnitS r..,............... 2tO99.52 Direct labor hours required to produce the first 2OO units .......'....o'...., 648.00 DireCt fabOr hoUrS feqUired tO prOduCethe next Ordet'.....,................... :11457.52 600 Numbgr of units in thg ngxt ordgt'....,.....................,............'......r......o... ---
DirectlaborhOUrsper unit for the nextorder(1'451.52 + 600).'.......... 2.4192 CatonicPart NumberPGB-31 Unit Costsand Pricesfor RexEngineeringCompany Estimates Incorporating a 9oohLearning Gurve S18O.OO Materials (2 ,4 1 9 La b o r a n d e m p l o ye eb e n e fi ts x $ 20) .,,.,............r ........, 48.38 24.19 Varia b l oo v e r h e a d(5 O%o f l a b o r),.......,,.......,............. Total variabtg coSt.,.......r,..r....i................,,..,....'..r...... 5252-5| 4O.0O ....r ....r Fi x g do v g r h e a d. . . ..................'..................,...' Fult cost. SZSZ.SZ .....!........ Profit contribution (1Oohof full cost) .,...........,...,.... . 29.26 Estimated contract price...........,.,. S321.83 l2l
The implications of an 80% learning curve as opposed to a gOohlearning curye are: (a) An 80% learning cunre indicates a greater effect of experience on efficiency. (b)
Most of the increase in efficiency (decreasein time and cost per unit) due to an SOohlearning curve occurs early in the production r u n ; t h u s, sa tu ra ti o ni n l e a rningis achievedear lier with an AOoh l e a r n in g cu n e .
I
I
i
Chapter | 1
P11-a (Goncluded) ' (31 The degree of tearning that takes place in an industrial operation would be reduced by (al a low proportion of assembly labor to machine labor; (bl an operation ol low complerity; (cl high employoe turnoveq (dl tedium; (el poor working conditions. Pl 1-9 APPENDIX (11
Charge to work-in-pnocoss: Normal working houns = 40 houra r 2 = 80 hours LetX=overtimehours
X =
sr,r4o-(8or$r2)
($lz r r.5) X = 10 hours
l2l
Therefore, charge to work in process = gO r $lZ = $l,OgO Factory overhead charge for Emptoyee tloTl: Gompany benefits paid by employer....,, $273.20 Overtimg premium t............oo.................. 6O.O!t ($trf 40 _ Slrogol
s."9€9 (31
The cost of idlenessshould be chargedto the departmentaffactory overheadaccount
PI I.I O APPENDIX (l)
Apr. 7
Payroll,..,.......... ........,....r. 5,8gO.OO Accrugd Payro|1......r.....r...rr..................r. Employees lncome Tar payable (9.5olo).. FICA Tar payable (2.5|.,.....,....r..r,..,........
4,888.70 559.55 441.75
14 Payro11........................,..r....,......... 4,92O.OO Accrugd Pa1rclt.'..........r...............r......,.. Employees Income Tar payabfe ..,....,...,. FICA Tar payable ..,...,.......,.....,..,....,,.....
4r083.6O 467.4A 36g.OO
21
Payroll ......o...r..................,.t......,...............rsrgoo.oo Accrugd Pa1ro11......r.........r............r........ Employees Income Tar payabts.............
FlcA Tar payabto.............:.....................
I
l-
2A Payro!|.......r.......r........,..r. ...r.....,. 4rggo.oo Accnred payroll.... ,................... Employeeslnco^meTar payabfo............. FlcA Tar payable .............:.....................
4rggZ.OO 560.50
44z.so 4,O5O.4O 463.60 366.00
Chapter l1
264
Pl l-1 OAPPENDD((Goncluded|
t2l
Subsidiary Record Apa 3O Work In Procgss ..r........r..............o..... Factory Overhgad Gontrcl'...,....'....... lndirgct Labor .'.......r.........'..... 5,6OO
Dr. 16,400 5,6OO
22rOOO
Payro|1 tt...............................t........
Apa 30 Factory Ovgrhgad Gontrol ................. FlcA TaxlS22rOOOr 7.5o/o1.,.... 1 r 6 5 0 Federal Unemploymont Tax ($22rOOOx'8oh1..................... 17f, State Unemployment Tar ($2ZrOOOx 4oh1...,.................. 880 Vacation Pay l922rOOOx 8o/o1.. 1 , 7 6 0 FICA Tax Payab19"..................r..... Federal Unemployment Tar Payable State Unemployment Tar Payable Liability for Vacation Pay.......,......
(31 Apr. 7 14 21 28 30
Payroll 5189O Apr. I 4rg20 30 5,9OO 4188O 2164(, 24.23O
2r23O Apa I 7 22rOAO 24J,sO 14 21 28
Cr.
4r4eB
1,65O 176 880 1,760
Accnred Payroll 2r23O.OO Mar.31 Bal.2,23O.OO 4r888,7O 4r888.7O Apr. 7 4,083.60 14 4,O83.60 4r897.OO 21 4r897,OO 4'O5O.4O 2A 4,O5O.4O 30 2,04O.0O 20,149.7O 2e789.74 2,840.OO
2,640 2,640
I
I
I 265
Chapter 11
CASES
I
b I
ct 1-l b
(1)
I
(a)
!
E
!
t E
b
Arguments used by each proponent:
.
1,00O-pieces-per-hour-rate: {1} Studies show that machines can be operated at this rate. (21 Variances determined by this output rate will measure the inef'' fective use of the machines. (3) This rate can be a target level to be strived for, and the changing variances will show pnognesstoward this ta4get. (4) A goal of this natute will motivate the supervisor, and thereby the workers, to reach this rate of output. (b) 750-pieces-per-hour-rate; (1) This rate of output has been attained by some workers. (21 The IroOo-pieces-per-hour rate has not been attained, nor has any rate near to it been attained. (3) The 6oo-pieces-per-hour rate is an average of actual performance and does not represent good economical performance. (4) The standard cost should reflect production rates that can be attained when good economical performance occurs. The 75Opieces-per-hour rate, capable of being achieved by some workers, would seem to be such a per{ormance. (5) The variances would measunethe extent by which this economi. cal levef has been exceeded or the extent to which it has not been met. (6) lt should provide motivation for the supervisor to improve on the 60o-pieces-per-hour cunent rate and in turn motivate the employees to improve their performance. (c) 6OO-pieces-per-hourrate: (1) This rate has been achieved by the departments as a whole. The standard costs should be set to reflect the ability of the whole department. l2l The variances from standard cost based upon the 6Oo-piecesper-hour rate would measure the departures, favorabte and unfavorable, from the current effective level of operations. (31 For two thirds of the workers, the 75O-pieces-per-hour rate would be dlfficult lo attain and would tend to frustrate them, thus making even the present 6oo-pieces-per-hour rate difficutt to maintain. For all workens, the 1r0Oo-pieces-per-hourrate could not be attained' thus lowering the morale of the department and probably lowering output below current levels. (4) The 6oo-pieces-per-hour-rate, when passed down to the production worker, wourd be an appropriate goal for those three employees who are producing fewer than 6oo pieces per hour.
266
Chapter | |
C11-1(Concluded) The purposeof standardcosts and standardcost reporting is to measure l2l the performanceof a departmentagainsta level of cost incurrencethat nepnesents attainablegood economicalperformance.The variancesindiperiods cate the when the performancevaried (favorablyor unfavorably) from this acceptablelevel. To be used effectively,the rate to motivatethe supervisorand, thereby, the worker,sto improveperformancewould depend upon the perceptions as to what is attainable.lt would also dependupon the reward structures within the firm. Other variableswould also affect what output rate would motivate improvedperformances. The value picked(e,9.,ir00o, T5o,or 600)must be a compromise betweenthe level that witt havethe most effectivemotivationalresult and that which will be an effectiverepresentation of the costswhen the departmentis operatingat an acceptabteeconomicaflevel.The 1,OOOpieces-per-hour rate shouldbe reiectedbecauseit does not providethe basisfor a measureof an acceptablecost tevel.lt woutd also be of questionablevaluefrom a motivationalpoint of view,becauseit appearsto be unattainableby the productionworkers. The 75o-pieces-per-hour rate is a possiblechoice.lt is capabteof being achievedby some workers and as such may providemotivationto the supervisorto bring other workers up to that level,thus achievinga departmentaloutput of 750 piecesper hour.tt also may representthe appropriatebasisfor a standardcost becauseit is a possibleacceptable level of performance.tt may also be a suitabledepartmentaltarget establishedin connectionwith the introductionof the standardcost system. The 6oO-pieces-per-hour rate is also a possibtecandidate.The Punch PressDepartmenthas achievedthis tevef,and three of the six employees have been ableto achieveit. lt is, however,the currentlevel of ouiput and that may make it ineffectivein motivatingthe departmentand its workers to improvethe level of output.As the basis for standardcosts, it coufdrepresentan acceptablelevel of output;but it does not incorporate the possibleimprovementtikelyto be obtainedin connectionwith an introductionof a cost system. The 75o-pieces-per-hour rate seemsto be the best choice of the three alternatives.More informationaboutthe conditionsunder which the engineeringstudieswere done,the trainingand experienceof the workers' and the trend of worker and departmentoutput in recent periods would be necessarybeforethe numbercould bs chosenwith some assurancethat it would meet the statedobjectives.
;I Chapter 11 I I
S
c11-2 (1) '
I b
t !
l>
\,
I t
An advantage of the new payroll incentive plan is that it recognizes a problem' which should improve employee motivation. Action taken by management will be perceived as a positive effort to resotve a problem, and employees may feel more a part of the group and behave as team members. Some disadvantages,which could lower employee motivation, are that employees' files are open to scrutiny by peers, and that employees may feel that they have to be a part of the "in groupttto be assured-recognition for wage increases.The plan could degenerate into a popularity contest.
(21
some advantagesthat should improve employee productivity are the incentives the plan provides for employees to perform efficilnt|y and effectively,and the beneficial competition it promotes among employees, as long as it is in harmony with corporate goals. A disadvantagethat could lower employee productivity is that the plan could lead to collusion among groups of employees to keep productivity levels artificialty low. Employeescould approve each otherb'wage requests without appropriate merit. The plan also coutd resutt in inefficiencies, because employeeswho have had their wage increases turned down may not work up to capacity due to a loss of inierest.
(3)
some advantagesthat shoutd improve goal congruence between the employee and the company are that the plan indicates the company's interest in the needs of the employees,and that the plan may result in increased profit through improved productivity,which may lead to employees earning a larger income through increases in wages. S o me d i sa d va n ta g esthat could lower goal congr uencear e that e m pl oy - . e e s ma y mi stru st a w age plan suggestedand implementedby m anagement, and that there may be an overemphasison a limited range of performance measures.
(41
a
267
Some advantagesthat should improve administration of the plan are that procedures for requesting a wage increase and for its approvat are clear and unambiguous,and the plan allows for relatively quick positive feedba ck a n d p e e r re co g nition. Some disadvantagesthat could hamper plan administration are that there is a limited amount of management input and control, and that there will be additional record-keepingresponsibilities associated with the voting procedures and maintenanJe ot'empiov"" productivity records an d p e rso n n e lfi te s.
r I
I
2ffi
Chpter 1l
cl1-3
(rl
l2l (31
I
The basic premiseof the learningcurve is increasedproductivityas experienceis gainedin the performanceof repetitivetasks. Various lnputs to the productionprocessmay be used more efficienily as cumulative output increases,but in most productionprocessesthe maiority of cost savingsassociatedwith a learningphenomenoninvolvethe use of human labor. ( s , z o o+ 2 , 2 4 o ) + 1 6 = = BSohtearninsrate 3,200 + 8 ;;3 With a learning rate up to cumulativeoutput of 32 units, averagedirect labor hours usedto producethese 32 units shouldequal gs% of the averagedirect labor hours usedto producethe first 16 units. tn short, averagehours employedfor each unit when 32 units are completed shouldequal: 340 x .85 = 289 hoursper unit. This impliesa total of 289 x 32 = 9,249hoursused in the productionof the first 32 units, or 91248 - 3,200 - 2,240 = 31808 hours
usgd in the productionof units lz through 32.lf the averagehours per unit in this productionbatch is taken as the direct laborstandard,the standardper unit becomes: 3 ,8 O8 h o u rs
16 units
(41
238 hour s per unit
Bid price on order of 96 units:
s
1,500 5,95O 9,52O 16,97O 5,091
22rO61 x 9 6
(5)
FoT" applications of the tearning curve in the planning and controlling of business operations are setting performance siandardi, preparing cost estimates in competitive bidding, determining budget ailowances for l a b o r a n d l a b o r-re l a te dco sts, schedulinglabor r equir ements,and deter m i n i n g p e rfo rma n cee va tu a ti o n sin which per iodic pr ogr essr epor ts ar e c o m p a r e d w i th a cco mp l i sh me n tsexpectedunder the cur ve.
--I
Chapter | 1
cl1-4 Shoitcomings: (1) Actual payroll hours are not approved by production managernent. (21 There is inadequate segregation of duties within the Payroll Department. (31 Personnel Department should not have access to payroll checks. (4) Departmen-tsupervisors should not distribute the payroll checks. Suggested corrective action: (f l All incoming time cards should be signed by both the ernployeeand supervisor. (2'l The payroll clerk preparing the input for data processing should not do the reconciling, but rather a second clerk should reconcile the payroll journal to the time cards. (31 An employee of supervisory level should authorize voiding of computer, g e n e ra te dch e cks a n d the subsequentpr epar ationof a manuat r epl ac eme n t ch e ck. (4) R e p l a ce me n tch e cks should be pr ocessedfoltowing good inter na l c ontr ol p ro ce d u re s. (5) A l l p a yro l lch e cks, i n cludingunsignedr eplacem entchecks, shoul d then be given to the Accounting Department rather than to the Personnel Department for storage in a secure location until payday.No Accounting Department employee with payrotl recordkeepin g responsibility should have access to the undistributed checks. (6) On payday,checks should be distributed, preferabty by a Treasurerrs D e p a rtme n te mp l o ye eor by an Accounting Depaftm ent employeew ho d o e s n o t h a ve re co rd - keepingr esponsibilities. cl 1-5 fi fh e re q u i re me n td o e s not ask for a list of r esponsibilitiesOsbor n ehas vi o l a te d ,b u t, me re l y,which of the fifteen r esponsibilitiesapply to Osb o rn e ,ssi tu a ti o n .) Ma n a g e me n ta ccountantshave a r esponsibilityto: C o mo e te n ce : P repar ecom plete and ctear r epor ts and r ecomm end a ti o n s a fte r a p p ro p riateanalysesof r elevant and r etiableinfor m ati on. (Osborneknows that if he consents to Wallace's request, the resulting ma i n te n a n cej o b co st r epor ts would be m ater iatlymisstated and w oul d p re se n t fa l se a n d mi sleadinginfor mation.)
I
b
Integrity: Refrain from engaging in any activity that would prejudice t h e i r a b i l i tyto ca rry o ut their Outils ettr ically.( osbor ne is being as k ed to be a party to an activity that woutd erode hii abitity to carry out his duties ethically.) C o mmu n i ca teu n favor abteas well as favor abteinfor m ation and pr of e ssi o n a lj u d g me n ts o r opinions.( osbor ne is being asked to thwart c om mu n i ca ti o no f u n fa vo r ableinfor m ation.)
Chapter l1
Cl1-5 (Concluded) Refrainfrom engagingin or supportingany activity that woutd discredit the profession.(Preparingdeliberatelymisteadin! maintenancejob cost reports clearlywould be a discredit to the profession.) Obiectivity: Communicateinformationfairly and objectively. (Osbornewould violatethis responsibilityif the maintenancejob cost reports are,altered.) Disclosefulty all relevantinformationthat could reasonablybe expectedto influencean intendeduser'sunderstandingof the reports, presented.(Theshifting of cost among comments'and recommendations maintenanceiobs wouldviolatethis ethical responsibility.)
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GH4pTgR 72 DISCUSSIONQUESTIONS 012-1.
Supervircrs' salaries, hdirect labor, overlimo prcrniurn, lupplier, indirrct nratorials, payroll tarq tactory hlurancc, and deprrciatian. Ql2-2. Thr nst inportant r.elon fa variatbn in faelory ovrfiead b tho pnroncc of lired and rarF ablo rrpenrer. Thordorc, ar prcduction volurno changs frqn nrnth to rrcrth, tho coCc will do likowicc. Howcvor, ovcrhead alco wifl '' cltrtgo bccause of inrprovcd or dccrcssed cflF ciencies and ctrangos in pricer paU for overhead ilrns LEh s! rupplies ard repairs. 012.3. Predclerminod ralcs aro ured when it beconres obvious that 8ny other melhod of charghg overhead resullr in inequilabfccocthg and delays tho reporthg ct firancisl results. Charghg aclual overhead io ic6s and producir can resufl h charging unreasonablearnounls of owrhead to varbur perirdr and in dehyed rcporling of corl data. Thc urr ol prcdclcrmined ralcs alao onhances control through analyria ol over. or underappliedlaclory overhead 012-4. Sir bases used for applying taciory overhead aro unitr prodrced, direst rnateriatr cost, direci labor cosl, direct labor houc, machhe hours, and transaclions. lmportant consideratioogin seleclhg a base are the relatbnship (conelation) ol the base used and lhe use d ovefiead items in manufacturingoperalbns, as woll as the clerical prac-ticability ol using a particuhr bge. 012-5. Predetermhedrde! are used to charge overhead and becornethe basis for determiningthe cost cil a lcb or producl.Thereforo,the reasonablenessof such costs is to a hrge exlent determhed by the reasonablenessol-the rat€. Shce these cqsts are used for costing hvenlo ries and play sn important ole h esiabtishing sales prices, the selectbn ol proper predetermined rates can be appreciated. Q12€. An objectivein seleciing the baso lor prede_ a lermined factory ovefiead rale b lo engurelhe application of factory overhead in reasonable proporikmto a benefbial or causal relatbnship lo jobr, producls, or work perlormed or lo be porformcd.i,c., for rrtimaling purpose!. Ordiurily, the base selostodehojj be'closety rolded to ttnctions represenledby the applioC overhcad cost. lf tactory overheadcosls are predorninantlylabq oriente4 such as supervisirt and indirect hbor, the proper base would probably be dirccl bbor hours. lf taclory overhead costs are predominantlyretated to the cosl incurredin the ownershipand operatbn ol thc madrinery, the proper base would probably be machhe hours.
271
\
Anotrer otriectivo in selecthg the base b to minimizo clericel st and dfort relativo to tho bonrlitr ottaincd. When two or more ber.s pro\rid. apprcximatcly thr rgrno applicrJ ovor_ hood cst to specilb unils 6t prodrrtbn, the rirplcsl ba$ lhouH be usrd. Q12-7. (a) Theqrfrcal capecity b actuslly tho nrarirnum produclion possible frorn e givon pbnl wit|r no allo*arrr rnade for ccsla. lion of operations for hotidays, wrok_ endr, malerials shorleges, or machino bnakdorns. (b) precticsl capacity ig theoretical capechy lege an ellow.ancefor interruptimr euch as brealdo*,na, delayr in recciving rup plict, and worker abgencer. prjcticsl capacily is usualty 75 to 85 pcrcent of theorelical capacity. (c) Erprctrd ectual caprcity ir prtctical capacity adjusted lor tho lach of autfbiont dcmrnd h a tinglo oporathg period and may br usod h building oporating bu+ gelr tdrcn expected capacity ditfen gub., stantially lun norrnel capaciV. (d) Normal.capacityis practical capacity adjusted to give consideratbn to t o toci of suflicient dernand over a pcrird bng enough lo hclude cyclical and reassral fluc.luatbns.This is usually the basis for l o n g - r a n g ep l a n n i n g . s l a n d a r d a ,a n d preferably for the determinalbn cJ owrhead rates. 012-8. The underappliedoverhead will be higher lf marinum capacity is used and bwer if normal is used. ll this cost is charged lo lhc currrnl perird, then nraxirnumcapacity will prcducr a krwer, and normal capacrty a higher, operating prcrtii. O12-9. (a) ldle capacity costs arisc from idlc employees and idte tacilitiec. ldle employeer give rise lo colte auch ar base wages paid, employor,r sharc of payroll laxes, and other lringo benefit cosls. ldle facilities cause capacity 6te due lo delerbratbn with time, apprehi n g o b a o l e o c o n c e c, o s t ! f o r u p k o r p , readiness,maintenance,repairs, lhelter, a n d p r o l e c t i o no f v a l u a b l e er u c h a r hsurance. (b) When iile capacity b prescnl, an dtenrpt should be made to regregalr idlo employees and idle lacilitier through proper recbssiticatbn. Tho rcurnula$on ol lhe cost attributabtelo theso Ulc worksrs or facililiec in excess _cla reasonablc budgnted arnounl migrht be in aorno ki,rd
t-
272 ol overhead account to be lreated separately aa e'rnanagemenl by erceplion' faclor. ldb capacily corlr should bt accounlod lor soparalely lor lhoro rea!ons: (1) to Pttv.nl dittortkn end srlurirr h thr rna[air of ptoduclin cctt; (2) to bililetr ircqne dclominalixt; (3) to csrtrol ogcraticts; 8nd (4) lo phn nrrt year'r hdget edrquatdy. (c) Exeorc crpe.*ty cod h8! bem iJentilhJ with thoo capacity.cootr thol rcrull frqn grealrr produclion capacily lhan lhc cqnpsny couH rvcr lrqe lo usa, or frcrn unbalancrd rquipmenl or machincry withh dcparUnenls.In creatng lhc fote casl budgrl, il ir irportanl lo bobto the .xc.r capacily cosl ro lhal managomcnl can bo made aware cil ilr responsibility rcaardng the excess invesUnentin labor and machhec. Q12-10. (a) Anaty":r and identifythe ovefiead transactisrs. (b) Joumali:,cthc lransrlisrs. (c) Enlcr transaclbnr in general and gubsktbry lodgen. Ol2-1 1. Ovefiead applicd lo prcduclicn ir enlered as a credil h |he lactory orerhead control accounL Aclual ovrrhrad it debiled lo lhc same
Chapter l2 accounl Therefore, ovefiead has beon oerapplied when lhc account lras a crcdil balanc.. Q12-1z- Ovcrhead cen br ovcrappliod beceuso (a) actual oveficad waa bss than budg.l.d; (b) capeity utli:.d war greetor |h8n that eslirnaF od h cnpdhg ovofirad rale; (c) lho wcrhcad cdinatc war lo hiCh (a mirtate); (d) lhr produclian ortimab wat l€ low (a mirtakc); (r) corn|liulkns of thr abor. Q12-13. Over. or undcrapplicd faclory ovcrhead may be proralod arrrcng work h proc.ss, finished goods, and cosl of goodr sold, or it may bc lrcaled rntirrly ar a period cogl. The firsl method would have a smsller effcl oo cct ct goods soH and |hcrelqc qr lho net ircorne for the pcriod. 012-14. Thr cxislcncc ol largc undcrabcorbed variancis doot nol necossarily mcan ihat unil costs ar. incorrecl. An analysis of thc underabsorbod figwer will irdlplc (a) whether actual ororhead ir loo high or whcthcr oxponseg havo been incorreclty estirnated; and (b) what part of thc underabsorplion is caused by unusod capacity. ll Eclual ovrhead is cmtiJered lo b. t@ high and thcro ic Ule capacity, unil coctr ccnpulcd ate morc rearcnablo lhan they would bc if overhead rale! wero cornputed to absorb all of the aclual overhead.
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Chapter 12
2n EXERCISES
I
E12-7 (l)
$l'75oro0o fixed overheadand $72o variable overheadper ton, calculated as follows: For both the ngrmal capacltyand expected actual capacity,the problem states the total budgeted overheadcost and the number oi ton" of activi' ty. The high'low method of estimating cost behavlor can be used to determine the overhead budget, usin-gthose two points: Activity Level Normal capacity Expected actual Difference
Tons 6,000 5,000 I,O0O
Budgeted Overhead $6,O7O,OOO 5,35OrOOO -s
720,Ooo .
Variable 5720,00O . overheadrate=ffi-=$72ovariab|eoverheadperton Budgeted fixed overhead = $5rg5O,0OOtotat overhead - ($ZeOx 5,000) variable overhead = 55,350,000 - S3,OOO,O0O = g1,75O,OOO or, budgeted fixed overhead = $6,070,000 total overhead - ($72Ox 6,000) variable overhead = $ 6,070,O0O - $4,320,OOO = gt,TSO,OOO
lv
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274
Chapter12 I
E12-1(Concluded) (2'l The predeterminedrate at practical capaclty would be $895 per ton. Using the budget for fixed and variable overhead, a predetermined oyerhead rate can be calculated at any level of acUvity withln the relevant range.Assumingpractical capacity ls wlthln that range, Orecalculation is: Predetermined overhead rate at = Budgeted total overhead at practlcal capaelty practical capacity PracUcalcapaclty In tons (8,0OOtons ) Budgetedfixed overhead + Budgetedvariable overheadat 1O,O0O tons _ $1,7S0,000 + ($ZZOx lOr0OO) = {O'0 OOto n s
IO' OOOtons
_ 9 1 , 7 5 0 ,0 0 0 + $ 7 ,2 0 0 ,0 0 O) _ $8r 95Or OOO= $895 per ton {OTOOO tons IO' OOOtons
o\
$72o variable overhead per ton + ($trT5orooo/lorooo tons) = $72O per ton + $175 per ton = $895 per ton.
E12-2 Work in process balance, Septernb:r 3O........,....r........r...r.r.....,.........,.. $12,200 Lgss materials sti!l in procgss...,...,......,.,.....,..,.............................,,....r. 5,56O Factory overhead and dirgct labor sUlf in pnocgss...,.,.......,.r.,...........,..$ 6,6co
Chargedto V/ork In Process o/o Amount Factory overhead.......... Dire c t l a b o r , . . . ..........o ..,
dlolot 56
515,840 20,160
x x
$6,640 6,640
= =
s36,o0o 100% 's 15,8 4 0
* $36,o0o = 44oh (or)
S15,840-(factoryoverhead) * S2O,16O(direct tabor) =.7gST Let X = direct labor still in process Then,X+.7857X = S6,640 1 . 7 9 5 7 X = 5 6 ,6 4 0 X = $3,218.429T direct labor still in process .7857X = S2,g21.SZO2factory overhead stilt in process s6,639.9999
$2' 921.60 3t718.4O $6,g4O.Oo
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Chapter 12
275
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El2-3' (11
135 peopter 8 hrs. per day r 5 days per w6ek r 4g weeks = 259r2OOdirect labor hm.
-
l2l
{35 peopler lo hrs. per day r 4 days per week r 49 weeks = 259,2OOdirect fabor hrs.
!
Et24
: I
Factory overhead rates: b
(11Units of production: $225,000+ 5y000 units = S45 (2f Materialscost
* $SoO,oOO =,{5 = 45oh $ZeS,OOo
(3| Direct labor hours: $225,OOO + 56,25ODLH = 34 (41Direct labor cost:
$225,oo0 + (56,2s0 DLH r $81= .5o = soo/o
(5| Machine houns:
+ 75,OO0machine houns= i3 $225,OOO
El2-5 (fl
Assumingnormal capaclty: (al The factory overheadrate: (90OO,OOO + 5O,OOO| + $6.69 = $14.69 (bl The fired part of the factory overhead rate: $e6o,ooO+ 5o,ooo = 38
l2l
Assuming erpected aetual capacitln (al The factory overheadrate: 1$lOo,oOo+ 4oroo0!+ $6.89 = $i6;69 (bl The lixed parf of the factory overheadrata: $lbo,ooo + .to,Ooo= $lo
El2€ b
Actual
\-a -
! ,:
ovgrhgad
r.......'.r...r.....r.....r,...r...,.............,..!......r..r,........
AppliedllAoty factory overhead(S2rSoO machinehours r
SZZgTOOO
$5.iOrt..............r... 267.TSo
r"se'sPP"tttl underapplied l.lgtClry overneao factory ovgrhgad tor period ......,..........r,......r............ for tne thg pgrlod ......,..........r......,r......... $ 1j1r?54
t$255,o0o +
5oro0o budgeted machine hours = $s.1o
Chapter l2 I
El2 - 7 (1l
Work in Process.'.'..............................o......o................1 ,45OrOOO Matef|a18..........r..r.........r.......o.....o....rrr.o.....o........
Work in Procgs,.....,......o...o...
l r45OrOOO
928,OOO
Pa1rc!|......
928,OOO
Factory OverheadContrcl... ......i.... Materials, Palnoll, Accruals, and Various Credlts
563tOOO
Work In Process
551,OOO
563,OOO
Applled Factory Ovgrhgad,..........,.........,.......,...r Appfied Factory Overhgad .r.................'.,......'rj-,r.rorr Factory
Overhead rato :
Ovgrhgad
551,OOO S5lrOOO
551,OOO
Contrcl...or......,..o.,rrr-ooooorrroiror
Estimated factoly overhead Estimatedproduction
$57O,OOO $19 per dr ill 30,OOO
Underapplied factory overhead: $563,000 . $ 5 5 1 , 0 O O= $12' OOO
l2l E12 - 8
Agtual factory ovgrh gad r.....t.......r......!.................t..... Applied tactory oyerhead (4rlO0 units x $2.46)r..,....r.
$ 9,5OO 10.086 (586) s
Overappligd ovgrhead....?.......o......o..r,,.,..,.......r......,.... *
va tiabl g facto ry ovgrh gad fiito .......,...........,r....,..r.o.... Fired fastory overhead rate ($ir44O + 4'OOO units)....
$2.10 .36
Total fa ctory overhead rilto ......,.r,...........r......rr.....,..,.
92.46
E12-9 (f l
Applied factory oyerhosds sl6,92O = $ .47 lired portion of rate 36,OOOmachinehours 2.7O variableportion of rate _S2€I
total rate
$2.57 x 2,7OAmachine hours = g6,939 apptied factory overhead
t2l
Actual tactory overhead ........................,... Applied factory overhead U n d e r a p p l i e do ve rh e a d
57,4OO 6.939 s 46,1
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L Chagter12
L. I I I
277
Et2-10 Agtual factory ovorhoSd ..D.....................r'................r..!....o..,... -iio.ooo Appliedfactoryovarhoad (2ro,ooomachinehoursr tt.:::::. $836rooo
o1rgrappliedfactory overhe8d............'.................,................. s ta.ooot
b
E72-17 I I
\-
(11
Fixed portion of the factory overhead application rate:
st50,ooo
I
tOOTOOOmachine hours
(21
variable portlon of the factory overheadapplication rate: 1OO,0OO machinehours
(31
= $1.50 per machinahour
= $2.5O per machinehour
Actual factory overhead .........r...........$4i {,OOO -654 Appliedfactoryoverhead (lOS,ooo x S4.oo1.....:::::::::: Overappliedfactory overhead... r.........r(9€oo)
E72-12 fctu--altactory overhgad .........'........r...........r......................... Applied factory overhead (2Oo%of $gri lZ) .........,...,.,,...,.....$141334 16.234 overapplied ovgrhg?d.........,...,..........................,....r..,.ro.r...... E_f:.gggl
:t Chapter12
278 812-13
Regulrements(11& (21 Account Percentage Applled Percentage Overhead of Total of Total Balance 4% $ 2,ooo 5 % $ 6,000 Work in process ..'o""'r"t""' 32% 16,000 31 zgoh 38,00O Finishgd $ood8..,.....t"""""" 64oh 32rOOO 76,OOO 631noh Cost ol goods 8old.-.....,...... ch $50,ooo 1oo%. Tota1...............r...................$12OtOO]9 t00
(11
work in Procesz l5o/oof $8r0oo),.......,......r.......'..'r....r 300 1,9OO FinishgdGOOdS 131ZnohOf $8rOO0)............'......,...'o'.. 3,8OO cost of Goodssold 1631nohof $610001.....,................ FaCtOfy OVefhgad GOntfOl.,,.,..'...,..,....'....'..r'o.....
(21
FaCtOfy OVgfhgad Contt!|........,......'.............r..'....'.r"' Work in Process (5% of $6t000|""""""""""'t"'t Finishod Goods 131 znoh ol $6'0OO)""-""""'o""
o,ooo 300 l r9OO 3r80O
Gost of GoodsSotd (63 lnoh of $6tooo1"""""""
(31
WOfk in PfOCgSSl4o/oOf $6rOO0|.'...,...'..'r..............t.." Finished Goods l32o/oof 361000)""""""""""""""""' Cost of Goods Sotd lA4% of $61000!"""""""""""""' Factory Ovgrhgad Contt!1 """" """"""t"""t"""'
o,ooo
240 1,920 3r84O
6,O0o
' v
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Chaptu 12
279
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PROBLEMS ) b
I I
P72-7
(rl
-
Agtual oVorhead lpcurred .........'...'....'...........r.r...r,.r..........r..... $3r3g5,OOO Applied ovorhoadt..........................r.....r.........t......,.o............... Underapplied ovgrhgad r.......'.........'..............r..tr..D......r..........rs
I I
3.325.000 60.000
'acrr3!It41_t_ prodoterminsd rate based on expected astual capacity = 9,5OOMH x ($3,500,000/lO,00O MH) = 9,5OOMH x $35O per MH = $3,325,OOO
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(21
The predetorminedrate at practicafcapacity would be $316.67 per machino hour (MHl,calculatedas follonrs: Flrsg find thc budgeted total lired oyorhoad and the budgeted variable ovorheadrato par MH. The problem states both the total budgetedoverhead cost and thc number of MH of actlvity,at both the normil capacity and orpected astual capacitylevels,so the high-low method of estimaiing cost behaviorcan bE used: Machine
Astivlty Level Erpected actual Normal capacity Differsnce
Hours
lo,ooo I,OOO 2,OOO
Budgeted Overhead $3r5OO,OOO _ 3TOOOTOOO $ 5OO,OOO
V a ri a b l e $ 5 OO,OOO= a $25Ovariableoverhead perMH or"rf,""J'i"t" = frffi
l-
b a
I
Budgetedfixed overhead = S3,50O,O00 total overhead - ($2SOx 1O,OOO| varfableoverhead = s?r500,ooo- $2r500,ooo= $l,ooo,ooo or, budgeted fired overhead = $3,ooo,oo0totat overhead - (S2SOr I,O00f variable ovorhead = $3,0001000 - $2rooo,ooo= $l,ooo,ooo Then,usingthe budgetfor fixed and variableoverhead,a predetermined overheadrate can be calculatedat any level of activitywithin the relevant range.Assumingpracticalcapacityis within that range,the calculation is:
7
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Chapter 12
2W I
P12-1 (Goncluded| Predetermined overhead rate at = Budgetedtotal overheadat practical capacity practical capacity Practlcal capacity in MH (15,OOOMHI Budgeted fired overhead + BUdgetedvariable overheadat 15'OOOMH _ Sl,ooo,ooo+ ($25o x 15,OOO} 1 5 ,OOOMH 1 5 , O o OM H $ 1 , 0 OO,0 0 O+ $ 3 ,7 5 O,OOO 1 5 , O O OM H
$4,750,oOO =
$ 1 5 , O O OM H
$316.67 per MH
+ 15,OOO MHf ot'r $25o variableoverheadper MH + ($f TOOO,OOO = $25Oper MH + $66.67 per MH = $.?16.67per MH. (31
yyereunderappliedby $1O,OOO, then lt the actual overheadol $?,405,O0O - Slor0o0, Applied Overheadwould have a credlt balance of $3r4O5rOoO or 33,395,000.The closing entries ane: 3r395rO0O Applied Overhgad.....r.......,.,......................r...o...... 3r395rOOO Factory Ovgrhgad Control r...,,.........r.,.......... Gost of Goods So|d....... ..,...........r........'.. Factory Overhead Control .r.............r........t...
(41
1or00o
Account Balance Work in process ............o...r.r.,r....... Finishgd goods..................or.,...,.....
Cost of goods sold Total
$ 2oo,ooo 4OO,OOO 7,4OOrOOO
IOrOOO
Percentags of Total 2.5% 5.O% 92.50h
100.ooh
_s8,ooo,oo9
Work in Process (2.5 % of $lOr0Oo)...........r......r...r..... Finished Goods,.,.
Gost of GoodsSold Factory OYgrhgad GonttD1..............r...'..........t.....
250 500 9r25O
1O,OO O
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C@ter 12
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0
I
i g
tfll
I'
0
b
ototl totl
G
.o
Chwter t2
P12-3 (f l
Total cost of Job 50: Work In process, December I December costs: Matorlal8..... Direct labor ($lO2,OOO+ 8,5OO|r 3,5OO| Factory overhead (34.50 r 3,5OO|
3 54,OOO 45,OOO 42|OOO 15,750 $156,750
aaaaaaaaaraaataaaraaaaaaaatataaaraaaa
(21
Factory overheadcosts applied to Job 52 during Decemben $l.SOx2,O0O=$9,OOO
(3)
Total factory overheadcosts applied during Decomben $4.5Ox8r5OO=$.?8r25O
(4)
Actual Decemberfactory overhsadincured: Supplies
a ataaaa
aa aaaaaa
aaaaaaaaa
ataataa
Indirect labor lygftos....,...
$ 3,soo 15,00o
Supervisory sa!ari|B3.........r....or..........oo......r......r......r.r.....rr...... Building occupanqy costs..t.................'r,...'....r...............o......r Factory equipment costs...o.....'...........o.............................r.o... Othgr factory costs...r...........r....r..................r'r..........'.r...r......
6rOOO 3r5OO 6,OOO 5rOOO
$3e,999
(s)
An insignificant amount of ovep or undsrapplied factory overhead woutd
be treated as a period cost.
(61
Agtual
ovgrhgad....r.....r...r...r......rr...r.r....r.rr.....r...r'.......r......tr..
Applied overhead Underappliedoverhead
$39,OOO 38,25O
$
75o
I
Clnpts 12
283
P724, (11
Actual factory overtread: Indlrect materlalg and supp1ies....................................o.,...,.r.. $ 18,O0o
lndlrggt
1abor....t....r........r...............r..o......r.o.r........................r.
Employec benefits.....................r...............r,.............r.............. 5 3 , 0 O o Depreciatroll Supgrvisioll
23,00O {2,OOO 20.o00
tttt.t............r.....r....r............t........1.............r...r...... "tttt...o.'..r.o.r......................1..rrrr.t1..r.......r.....o.r.......
fl?s'qaa I
l2l
Ovep or undoriapplledfactory ov€rhead! Totaf dlrect labor, 2o-
r.r.............r........'......r...........r.....rr......o Factoryoyerheadrato per direct rabor dofraro......,,.....,......r.,. s 7o,0oo 1600h
Applied factory ovgrhgad .........o..........o.. Actua I factory oygrh ea d ..........o,.,.r,,.......
st 12,OO0 126.OOO Underapptigd factory overhe3d...........,.o,...........r.,........r.......,. s 14.000
(31
Amount included in cost of goodssold for Job 1376: Beginning
ba1ance..r.....r......rr....................r..............r...r.......rr.
Matgriafs
and labor r 20-
..r.Drr.....r.....r......................r.......r....,.
Appf ied factory overhead, 2O-- (S7,OOOx l6O%)
$ 72,5OO 8,OOO 11,2OO
9_91,?og (41
Gost assigned to the work in process account at the end of 2o-z Beginning
balance (Job i376)...,..,.,.....o.......,......r Cost charged to work in process, 2O-: Materialg ..........rr...................r...................o..
$ 72,500
$ 43,ooo
7O,OOO Appfied'factoryovgfi ead .....r,...................... 1l2,ooo 225,OOO $297,5OO Less cost of Job i376, wtrich was completed L€bor
and
a..aaaaaar-.aaa..o.a.a.a.a.-aa.........aa...aa.aa.arra..a..a
so|d.......r....r.....o-..-.r.o.....rrr..........r......r...
91,7O0
s205,8OO
--
2U
Ctlpter 12
P12-5 (11
Predetermined factory overfisad rate based on nonnal capacitln $29 t25o
4sroooTF $ 1 8 ,OOO
6o,o00TH .-(21
'
-r-r-r--r!^= S.65 variable portion of rate for erpected actual and normalcapaclty
=
Predeterminad factory overhead rate based on expected actual capacitr s29t25o
4s,ooo MH $18'OOO
r - L r - portion -^r!-= $ .65 variabte of rate for erpected actuat and normal capaclty
A5^oooitH =
(31
fired portion ol rate based on norrnal capacity =.19 $.95 total rate based on normal capaclty
.4o
of ratebasedon expectedactual
H:,rffon 9!.Og totalratebasedon erpestedactualcapacity
Amount of-factoryoverheadchargedto production if the company used the normal capacity rate: 47,OOO MH r $.9S = $44,650
(4)
Amount of factory overheadchargedto production if the company used the expeeted actual capacity ratel 47,OO0MH r $1.05 = $4g,3SO
(5)
Actual factory ovgrhgad.........o..................,..r..r...o....r....,......... Applied oyerhead(from (3) normal capacity ratel r......,........... $42,1oo 44.650 Underappligd overhgad '............'......................rr.o....roo...r....r...
(61
Actual factory ovgrhgad ....o..'..r........o.o..........D..r....r................,
Applied overhead(fmm (4f erpected actuat capacity;i;t..,..
Overappligd ovgrhgad ...'..............'...r.........,.i........r......o,.o..,...r
$ 2.4so $42,1 oo
4e.3so $(?€gA)
I
I
I
Chapter12
285
Pl2-q (11
b
Work in Process:
Flnished Goods:
Dfrect materialg ....,.. $ g,ooo Dlrect 1abor.............. 161000 Factory overhead (2'OOO x $3.601..... 7r2OO
Dlreet materials r.....,... $ 1 O , O O O Dltuct labor,........,....... 4O,OOO Factory overhead (5r0OOr $3.601 r.....r. l8,0oo
Total .........,..r....
s32,2OO
Total
s68,OOO
\-
(21
s t7,5OO 29,050 23,goo
Heat, light, and power Depreciatlon-fa ctonr bull dlngs
zqpp
4,00o sOoo Depreciation-factory eguipment... Miscellaneousfastory overhead..
6,5.O0 8,250 7r5OO aaaaattaaaaaa
aDaataaaaa
Total actual factory ovgrhgad r.,............................r!.,r..,...
(3)
Agtual ovgrhgad ........r.......................... Applled ovgrhEad r...o.................r.o.....r...................,..............r..
Underappliedoverhead
i-
9,goo
9r.z,oog $l l7,ooo 115,200
9_1999
ChWter 12
2ffi
P12-O(Concluded) COLUMBUSCOMPA}|Y Cogt of GoodgSold Statsment For January
(41
Materialc: Inventory January I Purchasar Lggt tlturng
$ 2l,ooo $1O8,OOO
to rupplleJ''t!,..........r...........
Matgrialsava11ab1c................................. lnventory Janualy 3l Dlract labor Applied factory January manufacturlng cost..,........,............r Add work in procesr, Janualt 1................... Lgss work in process, January 3l ,........,...,.. Cost of goods manufactured Add finished goods, Januaql I Gost of goods availablg for galc.......,.,......... Less finishgd goodq January 3l ......,......!.... Cost of goods sold gt normal ...r...r............... Add underapplled factory overhead .......D..o.. Cost ol goods gold at 8ctua|........................r
61050
lO2r95O
$123r95O 9'OOO $114,950 25O,OOO 115,2OO $488r15O 32r50O
$5l8,6lio 32r20O
s
-
9080,450
l8,ooo $so4,lso o8,ooo s436,45O lrSoo $438,25O
' -
I
Cluptcr 12
287
CASES cl2-1
(tl High..aa.......r....................a.1...........r......a,
!ow Differsnce
Dlres{ l.abor Hours
Factory OverheadGosts
217601000 hours 2rl60'000
334r5OO,OOO 2grggo,000 $- 4,620,000 '
600,000 hours
varlabfc rate = ${ro2orooo + 30oroo0hours = $7.7O per dlrect labor hour Total
OOSt
......r...r....rrr'xlr.aarar..lraal.r....lrr..............
Variablecost $!Z.ZOper dlrcct labor hourl......... Firgd elem gnt ......1.....1.......r.r...r..-.....r...............r.
Estlmatedtotal fagtory oyerheadfor next yoan Total yariable factory overhead(zr3o0;o00r
High $34r599r999 2lr252rOOO $l3,24g.ooo -
$7.70).....,........
Total firgd fagtory ovgrhgad .........,.,.......r....o.r..,..D.......r..r......
Total factory oygrhead,................,...,..........
(21
Low
s29rgg0,0oo lor632,000 $13,249,0oo . -
SlT,zlorooo l3,24g,ooo s3O,g5g,ooo -
Utility ol cost behavior Informailon: (al EYalustlonot product pricing decisions-Tha calculation of the fac. tory overheadrate requfredthe company to esUmatethe variable fagtory overhaadcost. tn short-term-priie-cutting srtuations, the price get should cover at least the varlable materials, labor, facto'/ ovarhead,and nonmanufacturingcost8. For the longer toil, tfr" total cost asslgnedto the various products may pnovide some basis for price dlfferentials among the ltems. (bl cost control eYaluation-Tho calculauon of the factory overhead rate rcqulrsd the companyto estimate tho fired t*b;y-;;rhead cost and thc varlable lactory overhead eost per direct labor hour. The amounts arc esumatesbt what ttro cost shoufd or witl be during t" let! yoar. Thc amounts can be used aJtnr uasis roi prsparagon of a budget alforvancelor actual activity to U" compared to actual cost incunrd. Any drftenancobetween ine ruoget amounts ano actral cogt woufd be I moasunoof the ereaivJness or ractory ovorhead cost contlol. (c) Developmentof budgets-The estimates of fixad factory cost and the.variablefactoryov_erhead"o"t p"l' direct overhead tabor hour aro usefur In budget deveropment.They p.rriith" "o,np"nito carbu_ late thc estlmated factory overheal iost roioirerent that arc berngconsrderedas the budget tsteveroped.activity levels
e
CHAPTER13 DISCUSSIONQUESTIONS Departmentalovefiead ralot aro prcfrrrrd to a sirgle talc becausc they irprovr tre cmlrcl of orcfiead by deparlnenl headr rosponrbb for csrtrollablr ovrrtrrad, and lhry incroar lhr ' accuracy ol product and job corting whcn productr or iobt rovo througfi variql prduch9 depsdmonb. 01$2. Deparlmrnlalizing faclory ovrrhrad ir an exlension of mclhodt used in ralablishing a single ralc becausr (a) an application baso musl be selected and crtimaled; (b) ovefiead estlnales musl bo rnadc; and (c) adual werhead musl be accwnubl.d sd cqnparod with applied overhead.Thcsc rteps an reguiredfor each producing deparimenl, whereas wilh a single rale, mly tolal factory dale ere neccrsary. Ot3-3. The surn cil departnatal over- or underapglied ovefiead would be diflerent. Every direct labor hour *ouH havc thc sarno arnount of applied overhead whcn a planl-wiJr ovrfiead rato b used, assuming lhal thr applicatbn base ir direcl labor hours. However,tho usc crfdepartmenlal ralec resulls in ditlcrcnt amounts ol applied ovorhoad, depending on thr labor houn in cach dcparlmcnl and tho indivirJual departmenlal ovcrhead ratos. For cxarnple, a firm wilh an ovorall ratc ol $2 would have S20,0@ ol applierJovefiead la 10,000 hours; the seme firm wilh departmcntal rates ol 9l and $3 lor its twe produchg dopartnents could have more or lcss applied orerheed, depcnding an the breakdown c, labor houn receivhg lhe S't ard 33 overheadcharge. Thc lotsl cet cf gmdr lold ard tdsl hvcntory rtould also be differerd, becausr departmental rate! could cauro diffrrcnt unil cogts. Thereforc, invenlory and cost of gods sold would be hfluenced by productss
288
of a company'soperalions,processes,and machinery;(b) locatbn of operatbns. processes, and machhery; (c) responsibilitieslor produclion and cosls; (d) rclalionshipol opcra. lions lo llow of product; and (e) number ol deparlments or work centers. Thc number of d e p a r l m e n l s e s l a b l i s h e dd e p e n d s o n l h o emphasis placed on cosl control and on the develognenl of overhead rates. Qt}€. Physbally different segrnentsof a department or clst pools for ditferent kjrds ol costs wilhin a deparlment rnay be driven by activity baser that are guite dillerenl, lhur callhg for lhc usr ol subdepartm€nF tor taclory overhead accumulalion, application, and analysis for each physicalsegmenl or cest pool. Q1$7. No. A more correcl method is the use of thc planl assel records lo c€mpute deparlmental depreciation,property tax, and fire hsurancc charges, provided the recordg arr sufficienlly detailed lor this pufpos. and thc rvork hvolve'd is nol too complex. Swh a rnethodwouH give proper recognitionlo lhe various depreciation rales used and fire insurancepremiumspaid becauseol varying tlpea of equipmenl 0198. Factors involved in selectingthe mosl eguitable rale lor applyhg factory overheadinclude consideralionof the nature of a department's operalions,the relationshipol overhead elements to operalians involved, and any clerical difticuties arising through the use of a particular rate. 0 1 3 9 . T h e s e v e r a ls l e p s f o l l o w e di n e s l a b l i s h i n g deparlmenlalfactory overheadrales ar6: (a) Estimatingdirect overhoad ol producing departmentsand lhe direcl costs of service departments. (b) Preparinga lactory surv€y for the purpose of distributingindirectdepartmental cosb and servics deparlmentcosts. (c) Estirnatingand allocatingindirect deparlmentalcosls. (d) Dislribulingservicedeparlmentcoste. (e) Compulingdeparlmentalfactory overhead rates. Ol$10. The questlcnrlhgt musl be resolvedin allocaling service deparlment cosl! to benefiting ' departmontsinclude: (a) Determhingwhich departmentsare bonelited. (b) Selectingan allocatiqrbase. ( c ) C h o o s i n gt h e a l l o c a t i o nm e t h o d ,i . e . , direcl,slep,or simultaneous. Ql3-11. (a) Direct-No servicedepartmenl costsare allocatedto otherservicedeparlments. (b) Step-Service departmentcosts are allo-
l
t
I l lr
1I Chapter 13 I
celcd in thr order of th. d.partmonlr !.rying tho grcatest number of departmentr and rrcriving tcrvic. lrom tho arnallesl numbor, or in thc ordcr of thc brgesl rorvb. deportmont st allcatod lo oth.r cervict dcparlmrnts. Onco a r.rvicr dcpartmenlie cortr havr bcen rllocalod, no cortr of othrr r.ivico dcpadmontr an a.lteatrd to it. (c) Simullanoour-Tho full rcciprcal interrelalio'rshipe ol bcnolitr amo.tg servico d.partrnontr an csrs idcrcd. Tho rinultanoour method b thr mat accu ralt lor prduci coclhg ard for iJerdifying tcfal c6lt tor ogeraling particulnrgeryice departmmtc. Howevcr, thir mrthod b atao thc nrod difficull to conrput.. 01$12. Contrcl of crtrtrheadia achieved by oornparhg aclual rcsulla with ptanned or estimatod rreullr. To makr arrh cornpericcrr, both tlgor of orrcrhead must br aocumubled and rcportod in lho sarn. rE.tnor. Sincr thc ernputdbn c{ overhead rater with required ovcrhead ostirndcs procodeclho ircun.ncc and accumuhlbo of astual o\rcrhcad, th. cqnputatiort prc> duro dolermho tho accounlinglq aslual wcrhead. 01313. Oepartmentalover- or underappliedovefiead it determhed by curqrsring astual and appliod ovcrhced. 01$14. ll a cornpfer product lhe is produced in a nqr. deparlrnentalizedfactory or in a single depart,
I b
t b
t:
b
I
289 monl of r taelory, onc appnoach lo accuratt producl cosling is to use muhiple overhead cosl p@lr and mulliplo bases wilhin a sirgb rospcrbility c.nlcr. 0 1 $ r 5 . Nqrmanufacturing businorses (lrch ar rrtail ltdcr, fluncbl iuilildilu, irsuranc. cdnpsniot, oducalionrl i,nttitutirnr, tnd horpitela) rhouH b. divu.d into dopartrrrnb to brrdgrt and control stl. For oranlpb, a rrtail rtoo mighl br dcprrUn nlalhed as folkrp* a*ninirlralirr, occllplrlc)r, ralc prwnclin and advcrtirhg,, purc{rarhg, relfing, and dclivcry. Ar h mmulrturhg butirosser, departmcntal cootf afr proreled lo ?ov3nuc-producingralor dopadrncntsby urhg a cfrargingor billi.rgratc. Departnentalizatinn ir particub rty n""J""rry lor hcpitab and cducatioral hstitutbnr, whbi must budgel lheir costr on a deparlmenlal berb fo ccrtrol costs and to chargc adcquatr rut rccorcring feee, or$16. Govomrnent agencies employ targc numbcn of people, and as they spend brgei and targer surnt ol lax money for varbus seruicer, laxpayor! arr domending more otficient urr of lhd nrmey. Thercfore,rervices CrouH bo rendered al thc l*ost coct with thc Arrdcst cffl. cioncy. Govcmmcntal activilier stpuU b. hrd. gnlod and lheir csts controlled on a reaponsibility accounting baeis. The efficioncy of tervicer ahouH bc mcasurcd by ushg stch unit3 of measurementas per capita, per milo, q por loi1.
\
290
Chagter 13
EXERCISES
Et3-1 Work In Proceer Applied F8story Qverhead--DepartmentA (1TtOOO j..,...,( r $89 J -.......................,... Applled Fac,toryOrerhead-Department B --f (1 SIOOO I $l rOl
33,31O 151130
...............o..r...........rr.......r.r.r.....
18,19O
' $l7'8OO + 2O'OOO= ti89
*$2or2oo + 2o'ooo= $l.ol El3-2 Dcprrtmcntal
Mecfilnlng
Ovcrh cad Column r
Gencral trdgcr
Pelntlng
Genenl Factory Arrccmbly Cogt Pool
600.00
300.00
Crcdlt
(al Factory Oncrhcrd Control ....,.,D...-.-F Accumulltcd DoprrSulldhg[
trl
(cl
{d)
(e)
tr) bl
Frctory Ovrrtrod Con trol ...,..--ro....Accumuhtrd Depr.-filechhrry
l'5OO.OOO
3,OOO,OO
or00o.o0 aooo.oo 1,2oo.oo
4OO.O0 0,800.00 I,O()0.00
Fectory Ovcrhcrd Control ......ro........Accrucd Proprr$ Trr Pryrblo--.-
550.00
Fectory (hrrrhrld Control -,....8hAccr. Wortorrr CompmteUon...
450,00
Factory Ovrrhod Controt-... Accrucd Powor Peyebb...,...*..
ooo,oo
Frctory Ovrrhod Control ..........,F...,. Accountr peyebtr
900.00
Ftctory Ovrrhred Control Mstrrbb
3,ooo.0o
20it.33
170.00
74.67
1,000.00
1,0oo.oo 180.00
100.00
850.00
850.00 60.00
90.00
750.oo 750.0O
360.00
360.00
18O.0O 1,800.00 1,8OO.OO
1,8OO.OO
2,3OO.OO
5OO.OO
4,60O.OO 4,6OO.OO
i
t_ 1 E I b
Et3-3
I
S
291
Chapter13 I
(1) Budgeted factory ovorhoad ""'t"" Oepiltment Sl distribuUon (go/3OO,2l o/3o01..-u..D-....."""" bepartment 52 distrlbuUon (64/8Ot I 6180l """"""""o"t"""""r
Budgeted factory overhead "D"o"t' Machlne
hoUrlB tt""""t"""o""""'ro'
Prgdetgrmlned rstc ........'r""""o"' Diroct lsbor houfE'."""""'r"'o"""' Prgdgtormlned rate ......ro,o"""""D'
Job,437 ovorheadcost: DepartmentPl
P1 $346,O0O
s2
$368,OOO $IOO,OOO SSO,OOO
3O,OOO
7O,OOO
40,0oo
I O,OOO
$416,O00 + 64.000
sl (lOO,OOO)
(5O,O0O)
$aae,ooo
---_$6.5q
- l0q0m $4.48
$19.50
(3 x $6.5O) ..........""""t""t""t'
DepartmentP2 (2 x $4.48)"""""""'t""""
P2
8.96
"""'
$?glg
(21
Plantwidepredeterminedfactory overheadrate:
, ,T1lo1o. ' . = $6.40PerDLH
i35,OOO DLH
Sl9'2O J o b 4 3 7 o vg rh e a dco st (2 x $4.48)""""""""""""""""""""" cGA.Ganada(adapted}'Heprintwithpermission.
Chaptor t3
292 I
E134
(11
$ 4 O , O O O+ $ 2 5 ' O O O + $ 3 6 1 ' 9 5 6 + $ 4 2 0 ' O O O 452rgOO + 567125O
(21
$846,956 1rO19,25O
= s.83
Building and Machining Assembly Groundg
Total
Factory Administration
Budgeted factory overhead
r.........rr.,..
$846,956
5361,956
$42O,OOO S4O,OOO 325,OOO
Distributionof: Buildingand gnounds.........!.. Factory administration.. Total $846.956 Base: Machine hours Direct labor hou r s , . . . . . . . . . . ...., Rate................o.....,r
18,OOO
2O,OOO (4OrOOOl'
1 3 ,2OO
13r 8OO
$393.156
2,OOO
l3z€gg)"
:s 4 5 3 , 8 0 0
1 9 5 ,60O $2.01
567r25O $,80
- gl2o, 1ol2o, ltZo to Machining, Assembly, and Factory Administration, respectively. n 44lgor 46190to Machining and Assembly,respectivety. t
CGA-Canada (adaptedf. Reprint with permission. E13-5 MainAdminGutting Assembly tonanco istration ove rhea d b u d g e t . . S i ,2 9 o ,o o o S 5 2 O,OOO $42o,ooo S2OO,O0O Si5o,oo0 Distribution of: Maintenance 12113O,9/g0l,.. 14O,OOO 60,000 (2oO,OOOl Administration Total
llslzs, lolzsl. overheadbudset.. gl,ZrrJAA Machine hours......
overheadrate.......
9o,ooo 60,000 : S*g€gg fr_4JlQg 2STOOO
2O,OO0
3o,oo
$27.oo
(15o,oool :
CGA-Canada(adapted).Reprint with permission.
--1
dlaptcr
'
293
13
E13-C' Producing
Service
Departments Product Finishing Cafeteria Design
Departments Total
Mixing
Budgetedfactory overheadbefore distributionof sorvict depart$364,000 mentr DistribuUon of 'sorviee department costg: Cafeteria ($1o,000 -r 2OOemployees = $5O)....'.'......'.... P;oduct Design G!SO'250+ 3OO product orderc = $167.50|..,,.,..... E .
g364.000
Bases: machine hours Rates r............,.
$1O4,O0O $2OO,OOO slO,OOO
3,250
6,500
16,750
33,500
S5O,OOO
(1O,O0O)
25O
(50,250)
S124.OOO S24O,OOO
4O'OOO $3.1O
6OTOOO $4.OO
GGA-Ganada(adapted).Reprint with permission. E13-7 (f )
Producing Departnients
Service Departments
Si 52 P2 Pi Total Budgetedoverhead... $5s2,75o $2o8,ooo $300,000 $1o,ooo S34r750 Distributionof: 250 5,250 ( lO,OOOr 4,500 DepartmentSl .... (35,OOolfi 15,000 DepartmentS2.... 20,000 Total fastory overhead ,$EEZJSO $Z3Z€O_q S3?9€99 ' t8O/4OO to Pi,27O|4OOto P2, 10/4OO to 52 i' {,OOO/7,OOOto Pl, 3,OOO lT .OOOto P2
P l : $ 2 3 2 , 5 0 0 + 4 , O O Om a c h i n e h o u r s = $ 5 8 . { 2 5 r a t e p e r m a c h i n e h o u r P2: 3320,250 + 10,000 direct labor hours = 532.025 rate per direct labor hour
Chaptert3
Elg-l (Conctuded) plant-wlderate: $544r75Or- l5rOOOdirect labor hours = 336.317plantwide rato Por direct labor hour
l2l
Individualfobs lnal rsquiro relauvelydifferent amounts of time in each departmenl ll Pl is machine-intehsiveand P2 is labor-intensive,then ssparate departmentalrates would providea-fairerallocation of costs to iobs.
(31
CGA-Canada(adapted).Reprint with permission. El3-8 (1)
Total
Maintenance
Personnel Machining Assembly
Budgeted factorY overhead....,.......... $27O,OOO s3OrOOO sl5,OOO SI5O'OOO Allocate Maintensnce + 4OTOOO (S3O'OOO sq. ft. = $75 Per
(30,0001
sq. ft.) r..!......o..
Allocate Personnel + 12O (S18'OOO e m p l o y e e s= $ 1 5 O per employee|.
3,ooo
14,250
12,750
( l B,ooo)
6,000
12,OOO $99,750
s170,250
$27O,OP Divided by machine hours .............. Divided by direct labor
$75'OOO
22,700
,
16,625
hourS...r.r...'....
s7.50
Factory overhead rate (21
s6.oo
Job No, 37522 Machining
s60
Materials Direct labor
Assembly
7
$oz
99
123
66
141
s172
$331 :
s
24
Factoryoverhead: 1o machinehours O $7.5o..................... 11 direct labor hours O 36.00
Total
75 slse
:
CGA-63nada (adapted).Reprint with permission.
lL
-
s
Chapter13
295
Er3-g'
(11
Equation1: E = $2O,0OO +.2OF Equation2: F = $2O'OOO +.2OE Equation3: G = $1O,OOO +.3OE+ .iOF SubstituUngEquatlon 2|nto EquaUonl: E = $2OrOOO +.2.O($2O,OOO + .2OE) E = $2orooo + $4,ooo + .o4E .96E = $24rO0O E = $25'00O SubstituUngE = $25,OOO into Equation2: F = $2OIOOO +.2O($25,OOOI F = $25'0O0 SubstitutingE = $25,OOO and F = $25,OOO into Equation3: = G $1O,0OO +.30($25,OOOI +.1o($25,o0o1 G = $2O,OOO
(21
ProduclnE Dcptrtmcntt
S !
>
_
T
m
licrvlcc Dcpartrncntr
Mrrlcgng
c
Dcprrt- Ocncnl n t O f f l
c
o
E
F
O
T
o
t
a
l
Dcpartmcnt oycr|teed bcforr db-
trlbuUon of rcMcr dcpertmrntt iEoroOO igo,Ooo 320,000 t20,000 $1o,ooo 32oo,ooo Dlrtrlbutbn ol! Dcprrtnrnt E..... (25,O0O) 5,OOO 12,50O 7,5OO Dcprrtmlnt F-..., 7r5OO 1O,OOO 5,000 (25,oo0) 2,5oo Dcprrtg,o0o ment O..... O,ooo i4,ooo iz,ooo {2O,OO0} Total..... ST5,SOo 311g,5oo S4,ooo S2,ooo s2oo,ooo
296
Chapter 13 :
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Chapter13
297
Et3-12 Lot Sl = $2O,OOO +.2OS2 5 2 - 3 1 7 , 6 0 0+ . 1 O S l SubsUtutlng: Sl = $2O'OOO + .2O ($iZ,600 + .1OSt) Solving: Sl = $2O,OOO + $3,52O + .O2Sl .9gSl = $23,520 Si = $24,OOO SubsUtuting: 52 = $17,600 + .1O ($2C,OOO; = $ 1 7 ,600 + $2,4OO
= $2o,ooo
Total Pl overhead = = = =
$94,OOO+.4O (Stl + .5O (S2l $94r00O+,40 ($Z0,OOO) +.5O (S2O,OOO} $94r0OO+ $9,6OO+ $1O,OOO $113,600
Ef3-13 (11
The dual predetermined overhead rates are: S4OO,OOO = $25 per direct labor hour l O , O O Offi and $3OO,000
4,OOOmachinehours l2l
= S75 per m achine hour Job f345 $1,OOO 300 1.500 s2.BOO
2ln
Chagter t3
I
E13-t 4
(11
The dual predeterminedoverheadrates are: $9OO,0OO = $250 per machine hour 3,600 machine hours and
s6oo,0oo= 30O tonr
(21
$ 2 '00Oper ton Job flo3
Parts and matsrials Applied overhead: 7Or $250 = $17,5OO 4 x $2rOOO TOtal
=
9r0OO ..r....................r.r....r...
........r.......r.....r..aa..r...aaaaaa.ra...rr........r.r.........r.
$22,OOO 25.500 $47.500
b
iL
Chapter t3
I
I L
PROBLEMS Pl3-l
(r)
DigtrlbuUon of Sorulcc Department Overhead Using the Dirsst Method
Producing
cringl1g s-ooutilg
Total Overhead before distribution ot sorvicrg departmOntS
....r............r
f 2,667 133,333
83,333 06,667
s32t,ooo $soo,ooo +
4'OOO -r 3OTOOO
$
80.25 -$
7
eoo/l,o8oto smoothins i19:{t,98.otg Grind-ins, 6/9 to Grinding,3/9 t; Smootiiing
b
f,laintenance
Gener Fector
$68l,ooo $l7s,ooo $23o,ooo $76,000 Szoo,o
DistrlbuUonof Maintenanco..,...,.. GentlFactory..r..... Total factory OVefhgad.r.,........ s681,O0o -
Machine houtg..,.., Direct labor hour:. Overhead ratos: per machine hr.., per direct l a b o r h r...,..,....
Sorvics Departments -_
2
(76,000I' ___
l3gg,o
go
Chaoter t3
P13-l (Continued)' l2l
First, the simultaneous equations ane solved: Let
M =$76,000+(l/lOlG G = $2OO,OOO + l72Oll,8OO)M
Substituting; M
= $76,00o +.1($Zoo,ooo +.4oM)
M =, $76,0OO+ $2O,OOO+ .04M .96M = $96rO0O M = $ 1 OO,O0 O Substituting: G = $2OO,O0O +.4O ($1OO,OOO1 = $2OO,OOO + $4O,OOO= $24OIO0O Solving:
Distribution of Service Department Overhead Using the Simultaneous Method
Total Overhead before distribution of service departme n t s $ 6 8 1 ,0 0 0 Distribution of Main t e n a n c e . . . . . . ... Gen'l Factory
Totalfactory overhead Mac hin e h o u r s . . . . . , Direct labor hours Overhead rates: per machine hr... per direct labor h r . . . . . . . . . ..
Producing
Service
Departments
Departments MainGeneral tenance Factory
Grinding
Smoothing
S 1 7 5 ,OOO S230,OOOS 76,000
$200,0OO
5O,OOO (1OO,OOO) 4O,OOO :-(24O,OOO) 72rOOO 24,OOO
1O,OOO 144,000
S681,OOO$S29,OOOS352,OOO +
4,OOO + 3O,O0O
s
82.25 s
11.73
180/1'8OOto Grinding, 9OO/1,8OO to Smoothing, and 72011,8OOto General Factory .* 6/1 O t o G r i n d i n g ,3 /1 O to S mo o th i n g ,a nd 1/1Oto M aintenance
Chagter 13
JOi
P l 3 -l (C o n cl u d e d ) (3)
Distribution ot Service Department Overhead Using the Step Method Producing Departments
Total
qin!!ry
Sr*!!gg
Service Departments MainGeneral
tenance
Factory
Overheadbefore distributionof service departments ..r.......,...r.,.$6911000 $175rooo Distribution of: Maintenance....., 7,600 Gen'l Factory..... 153,600
$23orOOO 576,000 38,OOO
76,800
(76,000)
S2oorooo 3O,4OO' (23O,4OO)"
Total factory overhead.,........,. $691,ooo s336,2oo s344,gOO Machinehours...... + 4r0OO Direct labor hours + 3O,OOO Overheadrates: per machinehr.., s 84.05 per direct laborhr.........,. s 11.49 ' 18o17'8ooto Grinding, 9oo/1,Booto smoothing,and z2otl,Boo to Generat Factory '*6/9 to Grinding,3/9 to Smoothing
Chaptor l3
w2 P13-2 (1) Predeterminedlactory OVgfhgad ft1t9...................""'.
Actual activity base amount... Appliedtactory overhead...,...
Cutting Department
Assembly Department
s 2.40lMH x 10,800MH
r 12,4OODLH
s25,920
s92,oo9
Finishing Department
s s.oo/DLH $
1.60/DL$
ry g!_os,60o
(21 Revisedfactory overheadrate
overhead for 1 /Actual overhead for f - /Proiected |. second sir months / \ first six months )
/Actual activity base \ -. /Proiected activity base \ ( for first sir months / \ for secondsix months /
CuttingDepartment(machinehours):
+ $-z?t'1oo szSro-o-9 1 O , 8 O O+ 9 , 2 O O
- s2.3o permachinehour ry2O,OOO
AssemblyDepartment(directlabor hours): $ 5 6 , 8 0 O+ S 5 7 , 5 O 0'_ $ l 1 4 , 3 C - s4'5o per direct laborhour 12,4oo + rg,ofo: ffi FinishingDepaftment(directlabor dollars): s98 '5oo + $96'5oo - $195 '0o0 sl.5o per directlabordollar 5 6 6 , 0 O O+ $ 6 4 , 0 0 0 S 1 3 O , O 0 O
Chapter 13
Pl3-2 (Concludedf (3)
The applied overheadaccountsshould be adjusted by the differsnce in the factory overheadrates (revisedrate less original rate) ilmes the actual activity for the first sir monthg. GuttingDelartment
(9?.3o-$2.4O) r
tO,BOOl$ (i,O8Ol
Assembly_Department (f.!o - $s.oo)x t z,looi is,zooi Finlshing Department ($|.SO:-$1,60)r $gO,ooOi iO,oooi ' Dgct8asein appliedfactory overhead..............,......... gFa*t,
The applied overheadadiustmentis altocatedto the inventoryaccounts and cost of goodssold on the basis of the unadjustedoverheadcomponent in each accounL Workln Procgss......'r...r..'........,.........,..o,...,........D...$ t2rOOO Finishgd
Good8.......r'.r..............r.oo..'..r...........o.......ro
4BTOOO
Gost of Goods So1d........r............r..........,.......r...o...o.f BO;OOO
$24O,OOO Applied Factory ovgrhgad-cutting ..r......,........,..,.r fnntieO Factory OverheachAssembty...,,......,.......,. Appfig9 Factory Overhead-Finishin g r..........,...,..,.. Work In Process Inventory (Sf grggO x.05)....., Finished Goods ($l3rgg0 r .20|...............j.,.,,.. Cost of Goods Sotd fiti3rggo r .ZS)........,......r.
Debit 1,09o
50h
20 75 looo/o Credit
6r2OO 616OO 694 21776
l0,4lo
Chaptert3
n4 P13-3 Produclng Departmentr
Dlrcct departrncntrl overherd: 32or3OO 3u pc rvlr lotl'....-.....'.. 5r.4OO tndlrcct bbor ** 'lr85O Indlrcct ruppllrl.* ap72 Labor frlngc bcncfltr Equipmcnt !rooo deprccleUon......-Property ter' . deprecbtlon ol bulldlngr, ctc..-.... Total
316rooo 31{,ooo 8r0oo G,0oo
Sorvlcc Dcpertrncntr Gcnarel Frctory Cort Pool
37r2OO orlgl
:!8,000
5,OOO 0,349
5/a3O 10,14!t
rraoo 640
7 j2OO 3r6tt1 700
8,000
10,000
500
1r74O
324,000 18,00o I,O7O 2,100 11100
..........'.......6,..-..o
ProraUon of llght end pOWCf ...-.......n.'-.--.
3{5,482 Dlrtrlbutlon of rcMcr departmenta: General Factory Cort Pool ..'........-......F.. Sto rcroo m ...,...ro-F.... Repaln end Mebitenancc... Total--produclng departmontr .............
16B00 81894
'47,271
20,160 51670
35O,38lt
31O,212
23,52O 2,83!t
2,688
32i2,467
367,200
167,2OOl'
11,2,O
Macilnc houn.....-....... Ovcrhead ratc pcr mech lnc hr.....,....,-.,,
'General Factory Gost Pool can be distributed either on the basis of S.8O per squaro loot ($67p2OO+ 84'OOOsq, ftl or on the basis of the following pencentages: 25ohr3goh,35oh, 4oh, and 6oh tor the first five departments. The percentages aro determined by dividing the squansfootage in each department by the total sguano footage. - Storeroom can be distributed either on the basis of $.07 per requisition ($18,900 + 2TO'OOO requisitions) or on the basis of the tollowing percent' sgos: 4gohr30ohr TSo1r'and 9% for the three producing and one service departments. The percontages aro determined by dividing the number of requisitions in each department by the total rsquisitions. * Re p a i r s a nd ma i n te n a n ce ca n b s distr ibuted either on tho basis of 31.88 pe r m a i n t e n a nceh o u r (S 2 8 '2 OO+ l 5 ' OOOhour sl or on the basis of per centages: 32ohrZgoh,and 4Oohto the throe producing departments. The percentages a r e d e t e r m i n e d b y d i vi d i n g th e maintenancehour s in each depar tment by th e total maintenanco hours'
!
CluptxtS
fis
Pt3-4
(tt
I
Departments Power Molding
Repair Assembly Departmentcosts,..................... s48,OOO s25O,OOO s2o4,ooo s32o,o0o
Allocation ol service department costr: Repalrll 19,8191.......,....,,,,.. (48,000) 5,333 PowerF 18,7 l8l ......'.r.r.....r (25O,OOO) 218.750 Total ovgrhgadGost....,,r.....,...... s42soa3 Dirsct labor hour: 4O,OOO Overheadrate per direct labor h O Ur.a...a.aa
(21
a a o r . . r . r a r l a a r r aa . a . o . . . . . .
$r o.70
42,667 3l r 25O
s3s3,e1Z l60,o0o s2.46
Algebralccalcutations: R = RepairDepartment P = PowerDepartment
Substituting:
R = $48,O0O+.2OP P = $ 2 5 0 1 0 0 0+ . 1 0 R R = $48,000+.2O ( SZ5O,OOO +.1OR)
Sofvlng:
R = 948,000 + $5O,O00+ .O2R .98R = $98rOO0 R = $IOO,OOO SubsUtuUng: | = $250,000+.iO ( S1OO,OOOI P = $260,000 Heparr
Departments power Molding
Assemblv
Department costs...............,......s ;a,"ro sffio $zo4poo s3zo^ooo Allocationof seruice department costs: Repairllll0, it7O, g/lO1..... (1O0,ooo) 1 O , O O O l O,OOO SOTOOO Power l2y'lO,7 l7O,l/l 0i ..,,. _92,ggg (26O,OO0l 182,OOO 28,OOO Totaloverheadcbst,...,.......r...... Dirgct labor hours .......,,.......r.,,. Overheadrate per direct tabor hour (3)
$396.OOO 4O,OOO s9.90
$426,oo9 1O0,000
s2.68
Altocating service department costs to producing departments onty ignoras any service rendered by one ""fuil" department to another, whlle the simultaneousmethod t""ogni."s service departments' support to one another through the use of simultaneous equations. The latter method is more complete and shoutd lead to results of greater use to managemenL
Chagter 13
ffi
Pl3-5
(rt
P2 Si Total Pl 52 Before distributioJt........,.,...... $65,000 $25,ooo $23r8OO $ TrZOO S9TOOO
Distribution of Sl (4/9' 5/91.'.. Distribution of 32lUAr 4l8l....
3r2OO 3'OOO
Aftgr distributioJl-,.........o........$65.ooo 53i.20o
Total
tzl
Pt
4,OOO ftr2ool 6,000
(9,OOOl
$33r8OO
P2
Sl
32
Before diStributiott................. $65'000 $25'OOO $23r8OO $7r2OO $9rOOO DistribuUon of 52 (21O, 4l70l 4/1 Ol ......r.....r........ro...r.....r.t
Distribution of Sl (4/9, 5/91,...
3,ooo
4,8OO
O,OOO(lO,8OOl
Afterdistributiolt.,.....,,..o.r...o.. S65.ooo $3{.6oo
(31 Let Substituting: Solving:
3rooo (9,oool
l,8oo
$tgr{OO
3l =33:333 l:133? Si = 37,200 +.40($9r0OO+,10Sll
.9651 = $iO,8OO S l = $ 1 1 r2 5 O
Su b s t i t u t i n g :
+.1 0 ( S11,250) 5 2 = S 9 ,OOO = 52 $ 1 0 ,1 2 5 Total
Pl
P2
Sl
52
BeforedistributioJt.................$65,000 $2s,ooo $231800 $7r2oo I 9rooo DistribuUon of Sl (4/tO,illO 11125 5,625 (ll,25ol I /1 O1t..........r..................r..r. 4,500 Distribution of 32 (U7Or 4l7O,
( lO,t25 ) 411ol 4,O5O : 4,O5O 2p25 Afterdistributioll..........,r...,,.,. $33r{75 $65.ooo :iCr.szs :
\
g7
Chapter 13
Pl3-O (11
Let r= Powerhouse;y= Perconnel;z= General Factory r=$161000+.foy+.202 Equationl: x - .f oy - .2o2 = $161000 y = $29r5oo+.1or +.152 Equation2: -.lor+y-.152=$29r5oo z = $42rOoO + .2ox + .OSy Equation3: -.2Ot -.Osy+z = 30aOOO Muftiply Equation 2by 1O and add to EquaUon l: r-.lO.y-.2O2=$16100O -x + 1o.o0y - 1.502 = 295r0OO 9.9Oy-l.7Oz=S3tlrOOO Multiply Equation 3 by 5 and add to EquaUon l: r - .l$y - .2Oz = $ 16,000 -x -.25y + 5.Oot = 2lorooo - .35y + 4.802 = S228'OOO Then eliminate y between the resulting equations: 9.90y-1.702=$3ltrOOO -.35y+4.8O2=$228'OOO (.351(9.9Oy) (.35)(l.7oz) = (.35X$3tl,OOOl (9.90X-,35y1 + (9,90)(4.802) = (9.90)GB226,Oo0l 3.465y- .5952 -3.465y + 47.5202 46.9252 z
= = = =
$ 1O8,85O s2r237,40o $2,346 1250 g 5O,OOO
From the last equation, z = $5O,oOo;putting z = $SOrooOin any one of the eguations in which r has been eliminated enables one to find f 9,9Oy7 . 7 O 2= $ 3 l l , O 0 O = $31i,OOO 9.9Oy l.7O ($5O,OOO) 9-9OY = $398'OOO y = $ 4O,OOO Then putting y = $4O'0OOand z = $5O,OOO In any one of the original eguations enables one to find r -.2O2 =$1O,OOO r-.loy - .2O($5O,OOO} = $16,000 x - .iO($4O,OOO} x = $3O,OOO Hence the solution is: I
= $SOIOOO
Y = $40'ooo
z = S5OTOOO
w Chagter t3
Pf3-6 (Concfuded)
(2t Totel -_ Prlmaty @!t........ $g2,goo DbtrfbuUon: Powcrhouro..... Pcltonncl ...._. Ocncref Fectory
Mhtng ^-:-
irzcsrooo t 0o,ooo T'SOO lfrooo 12|SOO
Powrn
Rcftnlng
trd"oooffi##
Ttoo
srs.,ooofr.gg
'-i"-9;'dffi 3,OOO
!,ggo (3o,ooo,
t2rOOO lO,OOO
-3482^3OO - -
Porrm- ocncnf
Ftnlattng ilil:
:':::
torooo
# 3*r"6
r -vtvYv'
ro,ooo '-'-vv
?'5oo
i:333
2rooo z.t;,go
tso@l
P73-7 (1)
Annuaf normat cost center overhead ratesl
Departmont1O: Gost Centgr ...............o..,....... cost center I!!-f o-2 ;:;::::::::........ Department2O: .....r................r... lost Centgr Gost center ?9-! 2o-2::::::::::.::::::.:.......
(21
Factory overheadapplied
Jolat Rato
Fixed
s2.40
I .go
3.OO
$l.f s 7.25
Rate
Variabte Rate
f.f5
s .32 .30
$f .50 1.95 $ .83 .95
to:
Cost Department1O:. Depts. enters Gost Center 7,220 machinehours x cost center l9_1, $e.eO = S2,928 to-2: tboo rnlinin" hours x $l.oo = Department20: 6100O Sg,g2g Cost Center2o-1: cost Center 20_22?r??Olabor hoursr 31.15 = $2rsgz.so t;6s; ffi; t'ours r S1.25 =
(3)
overhead........,..... 3-T:lfactory r'actory ovgrh ga
d "fi ;;:;!!'!'t""'t""""'.r....
2,O62.5O
qe&lq $9, 430. oo
Underapplied (overapptied) ...r..,._..,....:.:_:.; ffi
$4,650
Dept. 2O
s4r005.oo 4,65O.oo -
-$ - (ocs.oor . - - ,
Chapter 13
&
Pt3-8 !
i
1
(11
The dual prodeterminedoverheadratas art:
-
$4oorooo
lorooo ffi
_ $25 .ra! ___ r!= Pardirect taborhour
= S3oPermachinehour
# (21
Job 1564
Direct rnateriaf......
....................... $2rOOO --t;;; liregtlabor(3or$101............r.................r,......,... Applied overhead: 3Or$25 = $75O 1OX $3O = 3OO...........,.,......r............,....... IIOSO ?alal
tl'Lt1
"r"""""'r".....t.ar......r...r....oa....r...r................. $3r3so
(31
Job l6il2
S2TOOO :i::l fabor :i:gTl.::::.:........r...,............................... Dirgct (3O x $i 01.......r,o.r..r.r..
Appfied overhead: 3OrS25 = $ ZSO
60 r $3o = lr8oo .....................r..r.... Total .........,.r.......,;;.....,...............r.......
300
zrsso $4rg5o
(41 (a)A single predetermined overhead rate based on direct tabor hours would be: S4OO,O00 + $600,00O
l6,000 OirCAlaOortrours = 362.50 per direct labor hour
310
Chapter 13
Pl3-8 (Conctudedf (bl
Job 1564
Dirsct materlal Dirgct labor (3O r $1 O1................'.........."o.D...................t......... Applied overhgad (3O r $62.501....j..................r...........oo.'........
$2,OOO 300 1,875
Total
9!'1?9
(cl
Job f6il2
Direct materlal
$2,OOO Dirgct labor (3Or $l O1..............r......o.........................'....'........ 300 Applied ovgrhgad (3Or $82.501............'....................,...D.o......r 1,975 Total $4,175
(51
The competitive lmpllcatlons of a single overhead rate are that on jobs requiringmuch labor and littfe machinetime (e,9.,Job l5gdl, Mn will compute lts cosB at too high a level and will thsrefore quote too high a price to the customer.These iobs will probably be lost to competitors who know their costs betten on fobs requlring much machine time and little labor (o.9,, Job 16321,MTI will calcufate its costs at too fow a level and will, therafore, quote too low a price, These jobs will probably be won by MTI becauseof the low price, but will generate less profit than erpected, or perhaps eygn a loss.
CItWter 13
c13-l
311
CASES
(1)
EmpcoInc. is currentlyusing a plant-wideoverheadrate that is apptied on ths basis of direst labor dollats. In general,a ptant-widemanufacturing overheadrate is acceptableonly if a similar relationshipbetween overheadand direct labor erists in all departments,or the company - manufacturcs produc-tswhich receive proportional services from each ' department" In most casesrdepartmentaloverheadrates are preferabteto ptantwide overheadrates becauseplant-wide overheadrates do not provide: t a frameworkfor reviewingoverheadcosts on a departmentalbasis, identifyingdepartmentalcost overruns,or taking corrective action to improvedepartmentalcost control. ' sufficient informationabout product profitability,thus, increasing the difficultiesassociatedwith managementdecision-making.
(21
BecauseEmpcouses a plant-wideoverheadrate applied on the basis of direct labor dollars,the etiminationof direct tabor in the Driiling Departmentthrough the introductionof robots may appear to reduce the overheadcost ol the DrillingDepartmentto zeno.However,this change will not reduce fired manufacturingexpensessuch as depreciation,p-lant superuision,etc. In reality,the use of robots is likely to increasefired expensesbecauseof increaseddepreciationexpense.Under Empco's currcnt method of allocatingoverheadcosts, these costs wi1 merely be absorbedby the remainingdepartments.
(31
(a) In order to improvethe allocationof overheadcosts in the Gutting and GrindingDepartments,Empcoshould: o establishseparateoverheadaccounts and rates for each of these departments; ' selectan applicationbasisfor each of these departmentsthat best reflects the relationshipof the departmentalactivity to the overheadcostsincurred(e.g.,direct labor hours,machine hours, etc.); ' identify,if possible,fixed and variable overheadcosts and establishfired and variableoverheadrates. (bl In orderto accommodatethe automationof the Dritting Department in its overheadaccountingsystem,Empcoshoutd: o establishseparateoverheadaccounts and rates for the Drilling Department; ' identify' if possible,fixed and variabteoverheadcosts and establishfixed and variableoverheadrates; ' applyoverheadcoststo the DritlingDepartmenton the basis of robot or machinehours.
:*i
Chapter13
312 I
cl3-2 (11
(21
The companyshould use departmentalovorheadratos since the two departmentsanoproducingheterogeneousproducta.The added accura' cy is requlredfor pricing decisionsand for better cost control information. The fixed cost of both seruice departments should be allocated based on long-rangefacitiUesutilization.Variablecost of purchasingwould be better lllocated using a cost driver,such as purchaseorders, becausethere is a stronger explainedrelaUonshipthan by use ol volume of materials ordered.Allocationof variabtecleaningcost basod on square footage soems reasonable;however,the variablecost of maintainingequipment should be isolatedand chargedto departmentsbased on the cost of services provided. A futler considerationof the interactivebenefits of departments woutd be achievedby use of thE step or simultaneousmethods' and preferablythe simultaneousmethod.Such considerationis desirable becausethe ssrvice departmentsprovideservicesto each other.
cl3-3 A letter to the president of Summerville InC: (1)
Dear Sin From a study of the manufacturing operations of Summerville lnc.' it is recommended that in distributing its factory overhead, the company use predetermined overhead rates applied as percentages of the direct labor cost. Tho company should use predetermined rates based on nor' mal capacity rather than actual overhead rates because of the wide cyclical flustuations in its business. Using actual rates would, due to targe frxed overhead costs, make the per unit overhead cost high in the low production periods and low in the high production periods. Using predetermined rates, the per unit overhead cost would be level the year round. For quoting prices and pricing inventories per unit, costs which are neither Inflated nor deflated by the cost of factory facilities are best. The company shoutd use departmental overhead rates because the rateg obviously yary so markedly between departments. An overall rate would not be correct for any department. Summerville lnc.ts overhead is a large part ol factory cost, and any inaccuracy in the per unit cost caused by the use of an overall rate would be material. lf all the products made used all departments proportionately, an overall rate would result in a substantially accurate total (but not departmental)unit overhead cost. Howeve6 in Summerville lnc. the products do not use all the departments proportionately.Furthermoneruse of de partmental rates aids in pinpointing cost control responsibility'
Chapter 13
3t
C1'3.3(Concludedl (21
Wagerates are substantiallyuniform within the separate departments, and departmentallabor costs ara closely proportlonatato labor time. Therefore,distributingthe factory overheadon the basis of direct labor cost would in this caso effest about as accurate a distribution as would the direct labor hours baso. The clerical erpense of the dirsct labor cost base would be low becausethe method does not requiro accu mulaUonof the number of direct labor.hours applicableto each job. Applyingoverheadon the basis of prime cost is not recommended becauseof the wide differencesin the costs of the materialsused to make a given lamp or fixture. Factory overhead is the cost of factory facilities.The factory facilities used to make a lamp of silver are not morc'thanthose used to make the same lamp of copper.For this nsason the use of prime cost (sinceit includes materialscost) would rasult in an ercessivechargeto lamps using erpensive materials. Sincerely,
cl3-4 (1)
l.
The ten cost items can be categorizedinto four basic gnoupsfor purposes of discussion: Item All ltems in this categoryshouldbe distributed. (a)Salariesand benefits.....,.,,..,,., (bl Supplies..,......,,.,....
Allocation Method
Direct Direct
Justification
The costs of these two items are directly incurred by the activity centers and can be controlled by the supervisor. A part of the salariesand benefits might be ercluded from a variable cost charging rate.
Chapter'13
311
Cl3-4 (ConUnued| ll.
Item All ltemr In thlr category rhosld be dlstributed becauge a dlrast caussl baslr erlstr, but theY ghould be crcluded from a variable cost charging 18t8. (cl EqulPment malntenallclg .......
(dl
lnsurance......-.....
(gl Equipmentand furniture (el (hl
lll.
Allocation Method
Direct Direct
Justification
The costs of these items are directlY Incurred bY the activitY conters but are controlled bY corporate PollcY'TheYwould be includedin a lull cost charging rate and excludedfrom a variablecost chargingrate'
The costs of these items are diroctly incurred bYthe activitY centers. TheYare not Direct (onceenteronM controllabtebYthe centerc in the usual sense.TheYwould be Buildlng inctudedin a lull cost rate and Direct lmprovements excludedfrom a variablecost depreciatig ll ........ (one center on$ chargingtate.
dePreclatloll........ Heat and alr conditlonill! ..'..'.
This item should be distributed because a reasonablemeasure for estlmatlng the caugal relaUonshiP eristg. m ElgctricitY.........'..
Direct
Equipment and wattage ratings
A reasonable estimate can be made of the electrical charges that can be controlled by effieient use of equiPment. The cost should be included in a full cost and a variable cost charging rate.
Chapter t3 3t5 g
Ct3-4 (Conctuded) Itam
fv.
TlrcroJi6Gisftems
Allocation Method
Justification
thould be dlstributed lf r fufl cost charging rato lg required.
m
ol
(21
Buitdins
occupancyand security...............
Squaro feet
Gorporate admlnlstrative chargesr.............. ilumbgrof employees or some other generaf basis
There is no cost controt benefit from allocation of these costs. The only reason to ailocate is for a futl cost charging rate.
Thc number of hours serectedfor.determining the charging rate depends upon the purpo:" estabfishingthe rati. ii tie ouiectiie is-to "i"rg" 9f utor departments for all the coslts-ofcomputer-operations, the actual hours that can ba identified wittr ur? wiil be incruded $;e;p"ir"nt" In thc base hours.This amounG-to3r5oo hour:, determinedas fogows: Actual User Time Tesungand debuggingffi Setupof jobs .......,.....,. Procgssingjobs ...r......,................... Total hout€.... ra a a a a a a a a a a r a a a . o . a t a a a a a.r
a r a a a a a aa a a a aa a a
250 500 2,750 3,5OO
To promotecost contror,the companymight consider a duar charging rate, wherebythe variabrecosts wouid uJ crrirg"d or",. actuaruser time (31600hoursl and fired costs over avairabfetiml (cre42hours).
250 500 2,750 742 4,242
Chapter 13
316 I
cl3-5
(rl
l2l
Actual factory overh gad """""""""t"""" Applied factory overhgad ....."""""""""" Underapplied tactoly overhe3d""""""""
$85,OOO 60,000 (15'O0Ohrs. x S4l
tactory The too overtime hours resulted in $4oo additional applied overfactory astual ttre overhead.The overtime premium increased The extent head of the department3525 (StO.5O+ 2l r lOO hoursl' to which these items ifect the underappliedfactoryoverhead used in dependson whether or not they wenoincluded In esumates compuUngthe $4 factory overhead-rato' (bl Wagi l;cia""" to direJ laborers do not affect lactory overhead numerdirectly,However,such incteaseswill cause an increaseintaxes' ous lringe benefii costs such as FlcA tar, unemployment also worter{ compensation,and pensions.lt the incttase wers factory in increase grantedto indirect worierc of all categories,the overoverheadmight be substantiat,causinga largor underapplied head amouni, or a smaller overappliedamount' (cl The FabricatlngDepartmentbshare of the loss would be sll2'5O overhead and would be a tactoi in causinga targer,underaPPlied was distribution the "roun{ * a smalter overapplieOamount' Slnce given in be mosi tlkely a managementdecision,the reason(slshould relieved an erplanatorynote in the cost reports and the superuisor of the responsibility.
(al
Clppter 13
3t7
cl3-O (tl
Allocationbasis:
October Hours %
f,lachinehours: Fast lood f urniturg .....r........ 1r32O Gustomfurnitur9.......r...r..... 18r48O 19,8OO
Direct labor hours: Fast food furniturg.........o.... IO'OOO Gustomfu rniturg.,........,...... 30,OOO
40,o99 Cost reallocation:
6.67 93.33
Hours
%
21560 17,O4O
13.06 86.94
l_9o,oo _1_Uoo 100.oo 25.OO 75.OO
17r 5OO 40.0o 28)25O 60.oo 100.oo 43r75O 100,oo
October Dollars
%
Machinehour base: MaintonaDCg.................,..... $ 5orooo Depreciatioll ,..,......r.r..,....... Property tgx .....,.......,....,r..., All othgrr........,.....,............,.
November
November Dolfarc
%
$ 48,OOO 42,OOO IrOOO 24,5OO
42tAgO IrOOO 32rOOO
_grzpeg
Total to bg allocatgd .,,...,............@f99 Fast lood furnitur9.,....,.......$ 8r8OO 6.67 $ 16,000 Custom furniture,,..r.......r..., 123r2OO 93,33 l06,500 s132,OOO 1oo.ooS!_egoo October
Doflars Labor hour base: Supervisio|l.........,...r,..r,...... $ 13rO0O Employee benefits...,.,........ gS,OOO
Totstto be attocated..................,5io6, oE
Fagtrgog rasf foodrurn1run9.............. furn|ture..............ffi $ zTrogo Gustom furniture..r..t,.....,.... 81'OOO
%
13.06 86.94
1_gg.oo
Novomber
Dollars
$ 13,0OO 1O9,5O O $122,5OO 25.ooFffi z5.oo $ 49IOOO 75.OO Z3'5OO
%
4O,OO 60.00
_$log,oggl_oo.oo_$123,s99 !-oo.o0 (21
Whon gross profit is recalculated, with the factory overhead reallocated on the base necommended by the controller, as shown in the fotlowing Schedulo, the figures tend to support the controllerb conclusion. Also, the allocation bases suggested appear to have a neasonablerelationship to the costs being allocated.
AEiler
318
13
I
Cl3-O (Concludedl COMPANY AOUAFURNISHINGS RevlsedStatement of Gross Prolit (ln thousandsl November October Fast Food Custom Fast Food Custom Furnituru Furniturc Fumituro Furniture S8O0.0 $ 800.0 $900.0 Grosssa1os...........,......r............. $400.0 $4OO"O $ ,OO.o $225J Dirgct matgriats.................r....... $rOO.o Direct labon ,FOrming...o.............,.......r..... Finish|ng.............,............... Assemb1y.....r....,...D...r..........
Factory ovsrhoad allocation: Machinehour base...,........, labOf hOUf bi!1O..................
17.O 4O.O 33.O
82.O 142.0 8O,O
8.8
123.2
27.A
Cost of goods gotd....,.........r....., $gzs.g Gross profit
Gross profit percentaffo............
8l.O
31.O 7O,O 58.O
72.O 125.0 53.O
16.0
106.5
{9'0
73.5
$713.2
$624.0
$ 830.0
s 74.2
s180.8
$176.0
s 170.0
18.6oh
20.f|oh
22.Ooh
21.?lt1,:h
CHAPTER '4 DlscusstoN ouEsTtoNs Ql.t-1.
C.;qnparedto tradticnal coeting,ABC b I rpro lhorough applicalion of cost traceability. Tnditioal corthg traccr crly dirccl matcrial rrd dirrsl labor to odput; ABC ncogni:er that rnany cther cosils aro traceabb, it'ncl to ouput, Utenlooftercod obieEtrcalled activitiec. Q1+2. The rcle ol aciiviilbs h assigrrhg cctr to prod, uclr, uring ABC, ir to rcrvo ar thc link b.lwcon products and cogls; activitiecarc nquired to producr cr.rtput,and it b hc activilicr lhat consumo rcaourccg,thur causing codr to be hcuned This dtten lrorn traditbnel cooting h whicfi output ir ossurnod !o cause cod!. Q14.3. Examples of rignificant, costly activities in manufacluringefr rctting up, changing dcrigns, recciving matorials, reguisitioning malerials, moving materials and products, oderhg lrorn yendo6, and inspecting. 014-4. Thc two circumgtancer that mugt be presenl for a traditbna, cocthg ryrtcm to repod distorted prodwt c€st! arc a oqnplax cosi strusture and a diverss prodrrt line. Q1+5. A conrplex€sl Elrustureis presenl if a significant parl o{ overhead cocl b not relatedto the volume ol ouput Q146. A dversc prdwt lhe is me h sfibh diflerent producls consumr different mixes s{ volumerelcled and nonnolume-relaledccts. Q1+7. Thr four leveb cil cqb and drivers in ABC are tho tnit level, the batch level, the product level, and the plant level. O1+8. ll a productconrumer l0% of all unit.level astivities and 3ogl of all batch.level activities, lradilbnal costing will under-report its cost by assigning10% of all overhead costs lo tho product, including l096 of batch-level costs, whon 3096 of batch-level costs should be assigned to tho produc{. Q14-9. When both bw-vdume and higft-rolume prod. uctr arc produced h a cornpany using tradili
319
volumr product'r cost b gencrally distortcd downwad by tradilinal ctinq and thr highvolurnc prcdrrfr cct b diCodod rpwerd 01+10. In assigning pbntdvol co€il! to prcclrtr, ABC offen little or no advantagt ovor traditbnat clh9. 01+11. Thr dillercncc bctwecn CM and ABC tr prirnarily rrplahed by thc fact thd AgC b a bng run decicion-makingtechnique, while CM ic ahql-run analysis. Ot+12. lf a procl.rctb dirqrthued, lhe cocir reported lor that producl by ABC will rpt necessarily bo rvoided, bocaucr ABC only measuns how rasource3 arc cgrsumed by products, not how spending will be affecled by discontinuinga prdusl. AvoHhg a cosl requircs ttrat lesr br spstl ql sorrp rosqtnoo(s),and ABC docc,pt predbl changos h spending Cfhis it also lrur of Iraditboal absorption costhg.) 01+13. The relstbnshipbetweenABCand ABM b hat ABM uses inlormation obtainod fronr ABC to rnake improvornentsh thc finrr Q1+14. The area ol ABM that lollows directly from ABC's revisbn of product ccts b the strategic realigrnmentof thc tirm,r prbhg rtructuro and product line, permitting thr firm to retain or regnh high-volumebusiness h spitc of prbhg pressur€, and pronrpling managomentlo reexamine lhe roles ol sorne lorv-volumeprcducts. Q1+15. The high costs ol eqne activitiea,especially non-value-addedactivities, can focus aientirr m lhe need to reduce or elimirate them. 014-16. ABC can lead to improveddociriona h designing a producl becauco ABC tella thr coot c{ each activity required h prcduchg thc product This informationpermits designen lo makc design decisionr more acsuralely, eo that the npsl cosl-ettsctivedesign can bc selecled Q1+17. The link between ABC and TeM is that ABG reveals the cosls ol each activily, including lhose that do not add value, and TeM aeeksto reduce or elimhalo non-value-addedasliviliec. Thus, ABC can focus attenticn h a TOM ollort and can prbritize TOM's imprwernentl.
329
Chapter 14
Pl4-4 (Continued)
l2l
SHAUTONCOMPANY Product Costs from ActiviW Eased Costing System
overheadrates: tl3ttrooo aetup-relatedcosts dividedby 90 aetups= 81'5oo per setup designhourr = 33Oper designhour design-relatedcosts dividedby 8,OOO S24O,OOO direct labor hours= 327.50per direct laborhour ou:er overtreaddividedby 3O,OOO S825,OOO
Fancy .....,.....r......... S 60,000 $ Direct material 28r0OO Dirgct fabor......,..............'..'.............'.. Overhead: Slr5OOx45setups,....,.......'.'........... 67r5OO $1 r5 OOx 4 5 se tu p s,.....,........r ........... 9OTOOO $3O x 3rOO0design hrs......'........,..... h rs............,........ S 'OOO d e si g n x S3 O 77' OOO S 2 7 .5 Ox2 ,8 0 0 D L H ,...,..............,..' .,, S27.50 x 27 r2OODLH ,.......,,........r.,...
(3)
Total Plain 160'000 S 22O,OOO 3OOTOOO 272rOOO 67,500
135,OOO
15O,OOO
24O,OOO
748,OOO
825,000
Because the existing system used direct labor hours as the only alloca= I rrcohof direct labor tion base and Fancy consumed 2,8OO|3O'OOO hours, the existing system allocated 9 lrcoh of all overhead to Fancy. The activity information indicates Fancy consumed 45/90 = SOohof setup= 37.ioh of design'-related activity, so the related activity and 3,OOO/8,00O reconciliation is as follows: per Unit Total
Cost of Fancy from traditional system, ca l cu l a te di n re quir em ent( 1).......... szoO,0OOsl,OOO.OO Adjustments fon Understatement of setup costs, $ 1 3 5 , 0 0 0 x ( 5 O %- g t r c o h l $54,900 Understatement of design costs, x (37.Soh- g t,coh|..,...,.. 67,600 S240,OOO Total adjustments......... 612.5O 122,5OO Cost of Fancy from ABC system, as ca l cu l a te di n re quir ement( 2).......... 993?,s99 q,6l3.59
321
Chagter 14
= O.l oh of all overhead to El4-5' The existing system allocated only 5O/5O,OOO Product RK last yean but Product RK accounted for 120161000= 2oh ot design change activity last year. Therefore, with respect to design change costs only the existing system understated RKb cost last year by a total of: (2% - O.1%l r S2,ooO,0Oo= S38'0OOunderstatement = 2Oohof all overhead E14-6 'to The existing system allocated $40'OOO/S2OO,OOa yea6 for 2I2OO= 17o of the BB accounted only but BB last Product purchased subassemblies last year. activity of maintaining supplies of Therefore, with respect to the cost of maintaining supplies of purchased subassemblies only, the existing system overstated BBts cost last year by a total of: l2o% - 1%l x S5o,ooo = $9,5oo overstatement El4-7 (11
$126 of overhead cost will be allocated to a unit of f456, calculated as follours:
, Oo s l , 4 O OO l O,OOOma ch i n ehour s
x 9O m achine hour s
$ 12 , 6 0 0 1OOunits of Product f 456
l2l
= $12 , 600;
= Sieo perunit
9554 of overhead cost will be allocated to a unit of #456, calculated as follows:
##
x 6 setups= $15,boo of batch-levelcost;
$ 5 O0 ,0 0 0 4 ,OOOd e si g n h o ur s lo,ooo
x 2BOdesisnhours =
machine hours
,r"ot"T:[t"t",olo",,
s5'4oo of unit= " ' r ' v hours x 90 machine "v.'s and plant-level cost.
Therefore,the overhead allocated to a unit of Product #456 is: (S15,OOO + $35,OOO+ $5,4O0)llOO units = S55,4OO/1OO units = 5554 per unit
ChWter t4
El4'8 Because itt" toCiti:ltlsJstem uses machine hours as the onty allocation bas-e'Product f456 is allocated 9o/1o,Ooo = O.9079 of all overhead. The actlvlty data indlcate f456 shoutd be assigned 6112o= 5oh of batchlevel costs, 28ol4ro00 = 7Voof product-level costs, and o.g7o of all other overhead. The reconciliation is: Per Unit
Total
Cost of #456 from traditionalsystem,as eafculatedin part (f l of El4-7,.........,..,. $12,600 Adiustments for: Understatementof bateh-tevel costs,$3OO,OOO r (Soh- O.g%1............ $ 1 2 , 3 0 0 Understatementof product-level costs,S5OO,OOO r (Zoh- O.9%).....,..,... 30.500
Total adjustments.......,............,rr..r...,.'. Cost of f456 from ABC system, as cafculated in part (21of E14-l,..,....t......
$teO
$4z,goo
428
s55,4OO
s554
E14-9 (1)
5140 of overheadcost witl be allocatedto a unit of #456,calculatedas follows: , OO sl, 4OOO r 2 QO D L h o ur s = Sl4, OOO; 2 0 , O O OD L h o u rs
sl4, O00 1OO units of Product # 456
(21
= $140 per unit
S74o of overheadcost will be alfocatedto a unit of #456,catculatedas follows:
$soo,ooo
of batch-tevel cost; 5OO setup hours x 3O setup hours = $i B,OOO
ssOO,OOO
- S5o'oooof product-tevet 4 O d e s i g n ch a n g e s x 4 designchanges cost; S 2 O 0 , 0 O O + S 4 OO,0 OO 2OOdirect labor S6,000 of unitX . = 2O,OOO DL hours houni and plant-level cost. Therefore, the overhead allocated to a unit of product #4s6 is: (S 1 8 , O O + O 3 5 O,OOO + 5 6 ,OOO)l l OO units = S74,OOO/1 OOunits = SZCOper unit
Chapter 14
323
E 1 4 - l O Because the traditional system uses direct labor hours as the only altocation base, Product f456 is allocated 2ool2o,ooo = 1oh of all overhead. The activity data indicats f456 should be assigned 3O/5OO= 6oh of batch-level costs, 4l4o = looh of product-level costs, and 1 oh of all other overhead. The reconciliation is:
Total
per Unit
Cost of #456 from traditionalslstem, as calculatedin part (1)of El4-9...,,.... sl4,OOO 5140 Adjustmentsfon Understatementof batch-level costs, $SO0,OOO x (O%- 1oh1......... $ 1 5 , 0 0 0 Understatementof product-level costs,Ssoo,ooox (1o%- 1oh1....... 45,OOO Totaladjustments...,...,. s6O,OOO 6 0 0 Cost of #456 from ABC system,as calculatedin part (21of El4-9 ...... s74,OOO s740 E14'11 Activitiasgr u, y, and dd are the only onesthat definitetyadd value. Activity k is questionable,becausea single deburring aiter drilling would be sufficient to removeall burrs. The first deburring,k, is proba. bly performedto make it easierand safer for workers to handlethe productin the interim.lf the needfor so much handlingcan be eliminated (perh-aps through automatedmaterial-handlingeguipment),k could be eliminatedwith no tossof vatueto the custbmer iand perhaps at a net savingsto the company),so it is reallya non-value-added activity.
Chaoter 1n
PROBLEMS P14-l (f l
The overhead rates in the eristing costing system are S20 per machine hour, and 31 4 per direct labor hour, calculated as follows: SSO,OOOof machine -related overhead = S2O per m achine.hour S28O,OOOof remaining overhead costs 2 O,OOOD L H
(21
= S14 per dir ect labor hour
Makingonly the changessuggestedby the study,the structureof the ABC systemwould be: Pool machineoperation...........r......,... setup and materialhandling....... other materials-re|ated.,.,..,........ all remainingoverhead.....,..
Driver machinehours setups purchaseorders direct labor hours
*
.
The study did not suggest any change for machine operation cost, nor for the "other overheadtt category.
(31
The ABC slEtem's overheadrates (driverrates)are S16.25per machine hour,$45 per setup,$5o per purchaseorder,and $1o.ZSper direct labor hour, calculatedas follorlrs: 5 6 5 , O O Oo f ma ch i n e o p e ra ti o n over head = S l o . 2 5 p e r m a c h i n eh o u r 4 ,OOOma ch i n e h o u rs 5 1 5 , O O Oo f m a c h i n e - s e t u p o v e r h e a dp l u s S3O,OO0 of materials handling overhead = $45 per setup 1 ,0 0 O se tu p s SgS,ooo of other materials -related cost 7OO purchase orders S 2 1 5 , 0 O O o f tro th e r o ve rh e a d tl
ZAffi
= S5o per purchaseorder
= SlO.75 Perdirectlaborhour
!
, _
-
I I
Chagter 14
s
'
P14'2 per 11) The three overhead rates in the edsting costing system are S17.5O l r per. labor direct machine hour, S.8Oper direct material dollar, and $1 .25 dollar, calculated as follows:
$700,O0Oof machine-related overhead = $12.5o per machinehour 4O'O0Omachinehours S8OO,OOOof materials refated overhead -
@
Sooh of direct material cost or
I dollar S.8o per direct material
material cost
$ 2 ,5 OO,OOOo f o th er overhead cost
=
m
125% of direct labor cost or
$1.25 per direct labor doltar
direct labor cost l1l
(3) b
Making only the changes suggested by the study, the structure of the ABG system would be: Driver Pool maChingOpgfatiOn.......r.....,...,..., maChing hOUfS setups setup and material handlio$ ,...... purchase orders materials administration..........r.. pOUndS
ffeight-in r...r....r.......r.,r.r..........,...
matgfial
all remaining overh€ad.......,..."...
direct labor cost
The study did not suggest any change lor machine operation cost, nor for the "all remaining overhead" categoly. The ABG system's overhead rates are $12.5O per machine hour, 51'OOO per setup, $35 per purchase order, $.75 per pound ol materials, and $1.25 per direct labor dollar, calculated as follows:
$5OO,OOOof machineoperationoverhead = $12.50 per machinehour 40,OOOmachinehours $2oo,ooo of machine-setupoverheadplus of materialshandlingoverhead $3OO,OOO 5OO setups S35O,OOO of materials administration overhead
IO'OOO p u rch a se o rder s
= $ 1 , O o op e r s e t u P
= $95 per purchase order
Chaptar 14
326 I
P14-2 (Concluded)
$150,0OOof freight-in = $.75 per poundof materials 2OO,0O0poundsof materials S2,5OOr00Oof other overhead cost
m direct labor cost
labor cost or = 125oh ol direct $1.25 per direct tabordottar
Pt4-3 tl)
DRAPERCOMPANY Product Costs from Eristing CostingSystem
Overheadrate:
of overhead divided by $3,OOO,OOO 94,5O0,0OO of direct labor cost = 150oh of direct labor cost Standard
Direct materia1..............,..........,......,.., $ 882rOOO Dirgct l?bor'......'...r........................r.... 219t 0rO0O
Custom
Total
S 1215OO $ 894r5OO 9OrO0O 3rO0Or0OO
Overhead: 150ohr $2r910rOOO........,..r,r..,.....,....41365rO0O 135,OOO
1 SOoh x 59OrO0O......,................t.r...,..
Total cost .......,.-.......,..r....,................. $8r157rOOO Units produced.........,.....-......ri.......... + 731500
$23715OO +
125
C o s t p e r u n i t . . . . . . . . . . . . . o , . r . . . , . . . . . . . r . . i . . . t . . .$
S
lrrOO
1lO.rB
4,5OO,OOO
gg,3eds09
I
I
E
v
Chapter 14
.v
P14-3(Continued) l2'l
DRAPERCOMPANY
ProductCosts from Activity Based Costing System Overhead rates:
Si:IOOTOOO aetup-relatedcosts divlded by 6Oretupr = $STOOO per aetup s9oo'o00 deslgn-relatedcostq divldedby 15rooodeolgnhourr = $oo per designhour $il'300,000other overheaddivided 1'loo/o of direct labor cost @ Standard Direct material s 882,OOO Dirgct 1abor..........,..r.r.r...........r........... 2,g1Or 0Oo Overhead: S5TOOO r 3O setups .....................r,.... 150,OOO 35r0oo x 3o setups .......................,... $60 x 12rO0Odesign hls.........,........, 720,OOO $6O x 3,OOOdesign hrs,........,.,....r.... I fioh x $2,91Or000.........r....,r........... 3 , 2 0 l , O O O 1 1O% x S90r00o.......,....,..r,..,.,.,.,...r.. Total cost .......o.................!.,.....r..r.......
Custom Totat s 1 2 , 5 O O s 8r4FOO 9O,OOO 3,OOO,OOO 15O,O0O
3OO,O0O
180,OOO
9OO,OO0 3,3OO,OO0
s?effipoo ##
s8,394,599 125
_L _1,252 (3)
Becausethe eristing system used direct labor cost as the onty allocation base and custom consumed $9o,ooo/s3,ooo,ooo= JTo of direct labor cos.tr-theexisting system allocated 3oh of ail overhead to custom. The activity information indicates custom consumed 30/6o = sooh of setuprefatedactivity and 3,ooo/15,ooo = zooh of design-rerated activity, so the reconciliationis as follows: Total Cost of Custom trom traditional system, as calculated in reguirement (1)..,..,.. Adjustments for: Understatementof setup-related
$237,5OO
Per Unit
s1,goo
. _costs,$3oo,ooox (So%- g%1........514 i ,ooo Understatementof design-related
costs,$9oo,ooo x (Zo%- g%1........ 1s3,ooo
Total adjustments......... Cost of Gustom from ABC system, as calculated in requirement (2) ............
294,OOO
2r352
s531,5OO
s4E2
\ * \
Chapter t4
P14-3(Concluded) (41
The only costs handleddifferentlyby the two costing systemswere the of setup-relatedcosts and S9OO,0OO of design-relatedcosts, S3OO,OO0 for a total of $l,200r00O;this nepresentsonly 27% of the total overhead of $4'500'00O. The changein the costing system causedthe reported cost of Customto changefrom $237,500to 9531,50O,which is'an increaseof 124oh.
P74-4
(rl
SHAUTON COMPAI{Y Product Gosts from Eristing Costing System
Overheadrate:
$l,2OO,OOO of overhead divided by $SO,OOO direct labor hours = $4O per direct labor hour Fancy
Direct materia|.....................ro............. Dirgct fabor........,................r.,..........r.. Overhead: S4O x 2r8OO DLH ...............,.o.........-.r S4O r 27r2OO DLH .........r.....,..........,..
S 601000 $ 28'OOO
Plain 160,000 $ 272.OOO
Total 22O',OOO 3OOTOOO
l lZ,OOO lrOBSrOOO
ir2OOrOOO
Totalcost...........................o..,.,.......,... Srooilooo $1FzO^ooo $1r?ro^0oo Units produced..........r......,................, + Cost per unit,.....,.....,.....r.................... S
2OO + l^OOO S
l6'000 95
-
329
Chapter 14
Pl4-4 (Continued)
l2l
SHAUTONCOMPANY Product Costs from ActiviW Eased Costing System
overheadrates: tl3ttrooo aetup-relatedcosts dividedby 90 aetups= 81'5oo per setup designhourr = 33Oper designhour design-relatedcosts dividedby 8,OOO S24O,OOO direct labor hours= 327.50per direct laborhour ou:er overtreaddividedby 3O,OOO S825,OOO
Fancy .....,.....r......... S 60,000 $ Direct material 28r0OO Dirgct fabor......,..............'..'.............'.. Overhead: Slr5OOx45setups,....,.......'.'........... 67r5OO $1 r5 OOx 4 5 se tu p s,.....,........r ........... 9OTOOO $3O x 3rOO0design hrs......'........,..... h rs............,........ S 'OOO d e si g n x S3 O 77' OOO S 2 7 .5 Ox2 ,8 0 0 D L H ,...,..............,..' .,, S27.50 x 27 r2OODLH ,.......,,........r.,...
(3)
Total Plain 160'000 S 22O,OOO 3OOTOOO 272rOOO 67,500
135,OOO
15O,OOO
24O,OOO
748,OOO
825,000
Because the existing system used direct labor hours as the only alloca= I rrcohof direct labor tion base and Fancy consumed 2,8OO|3O'OOO hours, the existing system allocated 9 lrcoh of all overhead to Fancy. The activity information indicates Fancy consumed 45/90 = SOohof setup= 37.ioh of design'-related activity, so the related activity and 3,OOO/8,00O reconciliation is as follows: per Unit Total
Cost of Fancy from traditional system, ca l cu l a te di n re quir em ent( 1).......... szoO,0OOsl,OOO.OO Adjustments fon Understatement of setup costs, $ 1 3 5 , 0 0 0 x ( 5 O %- g t r c o h l $54,900 Understatement of design costs, x (37.Soh- g t,coh|..,...,.. 67,600 S240,OOO Total adjustments......... 612.5O 122,5OO Cost of Fancy from ABC system, as ca l cu l a te di n re quir ement( 2).......... 993?,s99 q,6l3.59
t - \
Chapter tl
330
P14-4 (Concludedl (4)
The only costs handled differently by the two costing slrstems were the of design-related costs, $135'OOOof setup-related costs and S24O,OOO
for a total ol $375,00O;this repnesentsonly 31.25ohoI the total overhead of $1r20OrOOO. -
The changein the costing systemcausedthe reported cost of Fancyto to $322,500,which is an increaseof 6l .25oh. changefrom S20O,OOO P14-s (11
TUNNry COMPANY Product Costs from Etisting CostingSystem
Overheadrate:
direct of overhead divided by 5O'OOO $1,OOO,O0O per hour direct labor labor hours = $2o
lrlormal Direct materia|...........o........... $ Direct tabor,.......o.........r....,...o Overhead: S2O r 45rOOODLH................. S2O r 4r5OODLH.....,...r,......D, S2O r 50O DLH...........,........'.
Enhanced
Super
6OTOOO S 2OTOOOS S'OOO S 5rO0O 35'OOO 30O,OO0
Total 85rOOO 34O'0OO
9OOTOOO 9O,OOO
1O,0O0
1,0OO,OOO
. . . . . . . . . . . . . . . . . . . . . . . , . . , . S l r 2 6 O r O O O $ 1 4 5 1 0 0 O S 2 O T O O O 91,425,oO9 5O + 30,OOO + I'OOO + Units produced..,.........,. 409 CZ $ Gost per unit .,...r......,.....,o...... $ . t AS $
Totalcost
331
Chapter ll
P14-S (Concluded) (21
TUNNEYCOMPANY Product Costs from Activity Based Costing System'
Overheadrates: 3400,000batch-leveloverheaddhvldedby 500 rcgulslUona= 38oo pcr requlsltion direct labor houn = 312 per direct labor hour $800,000other overheaddividedby5O,0OO
Normal
Enhanced
Directmateria1....,............... s 60,000 $ zorooo
Super
s 5,ooo s
Total
85,ooo
3OOTOOO 35,OOO 5'OOO 34O'OOO Direct 1abor,......,...... Overhead: $ 8 OOx 1 5 0 t'e e ..,.........,...., 120r 00O 160,OOO $8OOx 2OO|1ee..............,.., 12O,OOO 4OO,OOO $8OOx 15O Fee..........,....... 54O' OOO $1 2 x 4 5 r0 OOD L H ......,...,,.. 54,OOO $1 2 x 4 1 5 0 0D L H ............... 6,000 600,000 $1 2 x 5 o o D L H T o ta |co st.......,,.r...r.,........!.. Slr o2or o0O S269' 000 $136r ooo s1,425,099 Units produced.....,...r........r. + 3OTOOO+ I'OOO + 50 C ost p e r u n i t,,....,.........,....,.S 34 S 269 $ 2r 72O
(31
Becausethe existingsystem used direct labor hours as the only allocation baseand Superconsumed5OO/5O,OOO = Ioh of direct labor hours, the existingsystem allocated1o/oof all overheadto Super.The activity informationindicatesSuperconsumed15O/5OO = 3O7oof batch-level activity,so the reconciliationis as follows: Per Total Unit Gost of Super from traditional system, as calculated in requirement (1).....,......... Adiustment for understatement of batchfevel costs, S4O0,O0O x (3O%- 1%1..,,...,
Cost of Super from ABC system,as calculatedin requirement(21.......... (4)
$ 2O,OOO 116,000
S136,000
$
4OO 2,32A
$2,720
The only costs handled differently by the two costing systems were the $4oO'oOOof batch-level costs, which represents onty 4}oh of the totat o ve rh e a do f $ 1 ,OOO,OOO. The change in the costing system caused the reported cost of Super to ch a n g e fro m S 2 O,OOO to $136,000,which is an incr ease of Sa }oh.
3g2
Chapter tl
Pl4-6
(rl
TEKSIZECOMPANY Product Gostsfrom Eristing CostingSystem
Overheadrate:
direct $1,500,00Oof overheaddividedby 5O,OOO labor hours = $gOper direct labor hour Regular
Large
I 1o,ooo S 120,OOO
4o,ooo s 48O,OOO
Total
5O,OOO 6OO,OOO
3OO,OOO l r20OrOOO
I,50O,OOO
$43O,00O 91,72O,OOO s2d90,999
(21
+ |OTOOO +
IO'OOO
4 3 $
172
TEKSIZEGOMPANY Product Costs from Activity BasedCostingSystem
Overheadrates: S515,OOO setup-related costs divided by 1O3 setups = SS,OOO per setup S985,OOO other overhead divided by 5O,OOO direct labor hours = 319.7O per DLH
Regular I
Large
4o,ooo s l O,OOO $ 48O,OOO 120,OOO
Total 5O,OOO 6OO,OOO
255,000 26O,OOO
5l5,OOO
788,OOO
985,OOO
197,00O $582,O0O $1,568,OOO 52,15O,OOO + lO,00O + 1O,00O
s
58.20 s
156.80
33?
Chapler 14
Pl 4 -g (C o n cl u d e d ) (31
Because the existing system used direct labor hours as the only alloca= 20oh of direct labor tion base and Regular consumed 1O,O0O/50,00O to Regular. The zooh overhead of all hours, the existing system allocated = activity information indicates Regular consumed 51/103 49,51456ohot setup-related activity' so the reconciliation is as follows:
Total Gost of Regularfrom traditional system,as calculatedin requirement(11......'.... S43o,0oo Adiustmentfor understatementof setuprefatedcosts, $515,O0Or (49.51456%- 2oo/o1... 1 5 2 , 0 O 0 Cost of Regularfrom ABC system' as calculated in requirement (2).".........,......'.,.'..... 9582'OOq (4)
Per Unit
S43.oo 15.20 998.20
Yes, Teksize Company does have a diverse product line in the sense in which the term is used in ABG. The fact that the two products have the same annual unit volumes does not matter, because the existing cost system does not use units as the atlocation base. Regular represents only 2Oohof direct labor hours but nearly SOohof setup-related costs, while Large has a very different mix, so a diverse product line is present in Teksize Company.
334
Chaoter t4
CASES
c14-1 (1)
DALI-AS DIVISION Product Costs from Existing Costing System
Overhead rate:
of overhead divided by 2OTOOO direct SSOO,OOO labor hours = S{Qper direg! labor hour 1327
s
#333
6,000 3O,0OO
S lso 600
288,OOO
4,80O
s324,OOO
s5,55O
+
+
s (21
2r4OO
13s
6
s 92s
DALI-ASDIVISION Product Costs from Activity Based Costing System
Overhead rates: batch-level costs divided by 1,BOOeetupe = Si5O per setup S24O,OOO product-level costs divided by 2,OOOdesign hours = SlOO per design hour S2OO,OOO s36o'ooo other overhead divided by 20,0oo direct labor hours = sig per DLH
#327 #333 150 $ 6,000 S 30,000 600 6,OOO 600
32,00O 2O,OOO
12g,600 2,160 $2O3,6OO s + 2r4OO + s
84.83
23,510 6
gegeeg
3a5
Chaptor l1
C l 4 -1 (C o n ti n u e d )
(3)
U su a l se l l i n g p ri ce.............o. PfOdUCt COSt."..........,...'......r.'...'............r........o.
#321
f333
sl so
s1,50o
135
9_!s 10% #321 (4)
slso.oo Usualsellingprice ...............,.'.,................'....... Product cost.........r......"..r..r...'....r...........'r...r....
84.83
Gross margin 0oss)......................r..........!.........s 6 s . 1 7 Pgrcent of salgs r.........rr'...r...,.'r......'.'....t.r"t.....
925
s 575 3goh
f333 s 1,5OO.OO 3,918.33
s(2,418.331
430h
(s)
The ABC system shows that the relative prolitabilities of the two products are the reverse of what is shown by the edsting system: the existing system shows a very modest gnossmargin of lOoh on f321r which is probably not enough to cover its marketing and administrative costs, while showing a respectable 38% gross margin on f333. ln contrast, the ABC system shows a 43oh gross margin on #321 and a substantial loss on f333. The low-volume product appeansto be the more profitable of the two under the existing system, but appears to be a money loser under ABC; the high-volumeproduct appears weak under the existing system, but highly profitable under ABC.
(6)
Based on the results of the ABG study, Dallas division management sh o u l d co n si d e r meetingthe com petitor ' spr ices on fl321; this pr i c i ng strategy can be profitable in the long run and should avoid loss of market share. The strategy for f 333 is not as clear. Gustomers are not likely to accept the 20O% price increase needed to make #333 reasonably profitable, and Dallas could lose some customers who also buy large amounts of #321, if management discontinues #333 or increases its p ri ce to o mu ch . Managementshould consider sever al possib i l i ti esfor low-volume products such as f333: (a) Reduce batch- and product-level costs enough to become an efficient producer of low-volume products. This may require creation of a small job-shop environment in a portion of the plant (or in another facility) where low-volume products could be made more efficiently. The case indicates the existing plant was designed to produce long runs efficiently,which may explain the high batch- and product-level costs.
Chaoter l4
336 I
C14-t (Concluded)
(b) Reducethe numberof productsby designlng" new one that can be substitutedfor severallow-volume,unprofitableproductsthat can then be discontinued;this essentiallyerchangesseverallow-volume productsfor one of much highervolume,with substantial batch- and product-levelsavlngs' (c) Convinceone of the current buyers of the low-volumeproducts to becomea distributorof severalsuch products;buyingthem from Dallasin largerquantities,maintainingsmall inventories,and selling them to othJr customers.This can reduce Dallastbatch-levelcosts and marketingcosts,but it risks the loss of customerswho like to buy the full line from one supplier. priced.This (d) naise pricesgradualtyuntil all productsaneneasonably does not mean all productsmust show profits.(lt is acceptablefor a good customerto occasionallybuy a money'losingproduct.)Rather' it meansthat the companyshouldnot continuemakinga moneytosingproductwithout a good reason.lt is not acceptableto havea customerwho buys only the money-losingproducts,nor for the "good companyto continuemakinga money-losingproductthat no customersttare buying. (e) In additionto the usualpenunit prices,chargea lump-sumamount per orderfor any small order of a low-volumeproduct. This charge . coutdbe set at a levelto coverestimatedbatch- and product-level costs. cl4-2 (1) O v e r h e a dr a te :
WARRENTONDIVISION Product Costs from OPICS
s 1 , 9 3 0 , 0 0 0of overhead divided by 25'ooO direct laborhours= 577.2Oper DLH fl33
#44
sl5,ooo s120,ooo 6,000
60,000
341740
463,20O s55,74O s643,2OO +
1OO +
2'OOO
s5s7.40 s 321.60
:
J)/
Chapter 14
Cl4-2 (Continued) WARRENTONDIVISION Product Costs from TPTCS
(21
Overheadrates: machinehours = S17 per MH machine-relatedcosts divided by 2O,OOO $gCOTOOO direct material cost = iigO,OOOmaterials-relatedgosts divided by $1'32O,OOO 25% of direct material cost of remaining costs dividedby 25'Ooodirect labor hours = S360,000 + $9OO,OOO S5O.4Oper direct labor hour #33 ..ir.r.r..........r..r....r,.r....r..........t.........tt..t....
DifgCt
matgfia1
DirgCt
1abOf...........r...........r.r.............r...r....r.r.r..........r.r...
r44
s15,OO O s 1 2 O , O O O 60,000 6,0o0
Overhead:
5,1O0
$17 X 300 MH ..,.....o...........'r............,...............t............. $17 f 3rOOO MH ........,.........................t........r.........'....... 25oh x $l5rOOO r........"r'............,.'....-.....-.-..r'..,'...r.....'... 2 5 o h x $ 1 2 O r O O O. . . . . . . . . . . . . , . . , . . . . ' . . . . ' 55O.4O X 45O DLH.......,....'....o....r,...'......................'....... S5O.4O X 6rOOO DLH............,.....r....,.........i.,.......r....o......
51,OOO
3,750 3O,OOO
2216fjo 302,4OO
TOtal COSI.,....,...............,.............,............r....,.....,............ ...............r...r'...'...,.r.-. Units produced...r...........
s52,530 s563,4OO
COSt pef Unit...............'r........,.r'......'....................r.
s525.30 s 281.70
+
1OO +
2,OOO
I
(3)
TPICS is not an ABG system because all the allocation bases are at the unit level. The changes management made do show many of the attributes typicalty associated with a change to ABC: the increase in the number of overhead cost pools, the attempt to create homogeneous cost pools' and the use of three distinct allocation bases. These changes show an attempt was made to capture differences among the demands placed on resources by the different products. But because there are no batch- or product-teveldrivers used, the system cannot capture the demands placed on batch- and product-level activities, i.e., it is not an ABC system.
(
Chapter tl
3g
Cl4-2 (Continued)
(41
DIVISION WARRENTON Product Costs from ProposedNew GostingSystem
Overhead rates: troubleshooting costs + $140,000 machine setup costs divided by SI OO,OOO 3,OOOsetup hours = $8O per setup hour S135,OoOmaterial handling costs divided by 15,000 loads = 39 per load S195,Ooomateriali administration costs divided by IO'OOOvendor orders = 919.5O per vendor order 4,000 design hours = $65 per 3260,000 engineering design costs divided by design hour overhead machine + other divided by operation costs S90O,O0O $2OO,OOO machine hours = $55 per machine hour 2O,OOO #44. s l 5 , O O O sl20,OOO 6,OOO 6O,OOO f33
24|OOO 32,0OO 180 540 1,755 2,925 18,2O0 19,5OO 16,5OO 165,OOO s81,635 $399,965 + I O O + 2'OOO s816.35 S 199.98 (5)
(6)
The proposed new costing system is an ABC system because it uses cost drivers that include non-unit-level drivers. The unit-level driver is machine hours, the batch-level drivers are setup hours and loads handled' and the product-level driver is design hours. Vendor orders could be either a batch- or product-level driver, depending on whether orders are placed for each batch; the case does not tell whether this is so. For the low-volume product, #33, the proposed ABC system shows a substantially higher cost than did either of the other two systems. This is the general result when ABC implemented and compared with traditional systems. At the usual selling price of S8OO,the ABC system says this product is a money loser. Equally,or perhaps more importantly,the prop o s e d A B G syste m sh o w s th a t the high- volum epr oduct can be pr iced very competitively.
.t r:t
Chapter 11
C 1 4 -2 (C o n cl u d e d ) f/)
Based on the results of the ABC study, Warrentonb management should consider meeting the competitorb prices on #44; this pricing strategy can be profitable in the tong run and should avoid loss of market shat€. The strategy for #33 is not as ctear. Some customers may not accept the price increase needed to make il33 reasonably profitable, and Warrenton could lose some customers who also buy large amoqnts of #44 if managementdiscontinues il33 or hikes its price too much. Management should consider several possibilitiesfor low-volume products such as f3 3 : (a)
(b)
(c)
(d)
(e)
Reduce batch- and product-level costs enough to become an efficient producer of low-volume products. This may reguire creation of a small job-shop environment in a portion of the plant {or in another facility), where low-volume products could be made more efficiently. Reduce the number of products, by designing a new product that can be substituted for several low-volume, unprofitable products that can then be discontinued;this essentially exchanges several low-volume products for one of much higher volume, with substantial batch- and product'level savings. Convince one of the current buyers of the low-volume products to become a distributor of several such products; buying them from Warrenton in targer quantities, maintaining small inventories, and selling them to other customers. This can reduce Warrenton's batch-level and marketing costs, but it risks the loss of customers who like to buy the full line from one supplier. Raise prices gradually until all products are neasonablypriced. This does not mean all products must show profits. (lt is acceptable for a good customer to occasionallybuy a money-losing product.) Rather' it means that the company should not continue making a moneylosing product without a good reason, lt is not acceptable to have a customer who buys only the money-losing products, nor for the company to continue making a money-losing product that no 'igood customers" are buying. ln addition to the usual sales price, charge a lump-sum amount per order for any small order of a low-volume product. This charge could be set at a level to cover estimated batch- and product-level costs.
d
CHAPTER15
DlscusstoN ouEsTtoNs Profil plarning oncompasses(a) sales estirnathg and sales plannhg prograrns;(b) budgeting progra,nr lor contol cf all costs, both rnanufacturhg lnd nqrrnanufacturing;(c) planning and programming addilions to or deletions lrom working capilal an'dplant hveslmenl; and, (d) a review of all laclors that have an impacl m retum on inveslmcnt, both from a shorl.lerm viewpoinl of one year and longer periods of lime. Thr profil-planningfunction must not be merely financial in scope. ll must disckrse the melhodg and programs by which the financial groalsare to be achieved. O1$2. A budgel is the oxp€ctedtarg€t that managemont strives lo achieve, whereas a lorecasl is a level of revenue or cosl that an organizalion predictswill occur. Olt3. The three approaches lor setling profit objec. lives are: (a) A oriori. Managementspecifies a given ratc of rolum to be achievedin the long run ard then draws up plans lor achieving that rale. (b) A msteriori. lr/lanagemenldraws up plans and.then sels lhe rate resultingfrorn the plans. (c) Praomalic.Managemenluses a target p r o f i t s t a n d a r dt h a t h a s b e e n t e s t e d empiricallyand sanctionedby experierrce. Qt$4. Long-rangephnning deals wilh specilic areas of the cornpany's plans, such as future sales, long.lerm c-f ilal expenditures,research and developmenlastivilies,financialrequiremenls, and the protil goal. Short-rangebudgeting plrces the plannhg and particulariycontrol into perirds of three. 3ix, or tw€lvo mstths. Ql$'5. A budget is a detailedfinancialstalementof the organizalion'sstrategy. lt converts generEll s t r a t e g y s t a l e m e n t si n t o s p e c i f i c p l a n s o l action, measuredfinancially.lt is related to control,becauseit is the fundamentalguideline for whal the organizationshould do. Thus, it is lhe benchmarkagainst which aclual perfor. manco is cornpared.This processof ccnparison is a vital gart ol the conirol function in lhe organizaticr. QlS. I n c a r r y i n go u t m a n a g o m e n t ' sl u n c t i o n so f phnnhg, organizing,and controllor lhe deveF opmenl ol a budgetary conlrol program, il is neco3saryto: (a) organizethe budgetcommiilee (b) organizethe entirebudg€tarycontrolpro01$t.
(c) (d)
gra!71 plan sales wilh the sales manager determine the linished.gods inventory
a0
O1$7.
Q15-8.
requirement in harmony with the sales budget (e) plan production with the production manager based on the sales budget (f) -meel with heads of all dopartments-toth producing and service-relative to direct rnalerials, direcl labor, and lactory overhead coslr required for the production budgeted (S) establish materials purchase requiremenls based on production planning, a doparlment's malerials raquiremenls, or tho produclbn budgel (h) eslablish €xpsnso budgels wilh marketing, administrative, and financial division heads (i) budget capilal expenditures and prepare a researeh and development budg€t. develop a cash budget 0) (k) coodinate and surnnrarize ccrnpany.wide budgets into a masler budget..+ummarized in the budgeled incorne stalEmont and balance sheel Thc periodic budget ropresents a formal communication channel within a company for the lollowing r€asons: (a) The periodic budget involves a lormal comrnitment on lhe parl of management lo lake posilive actions to make actual events conespond to the formal budgel. (b) The periodic budget is usually raviewed and approved by a higher authority and, qrco approvod, is changed only in unusua.lspecified circumslances. (c) The periodic bucjget conlains explicit slaiemonts of the imolementation of managomenl objectives for a period ol time, published to all parlies wilh conlrol responsibility. (d) Comparison ol actual results with the periodic budgel forms lhe basis tor managoment control, motivation, and pedorrrance evaluaticn. Budgels are required for planning, moniloring, and molivating, and because they include eslimat6s, they always involve uncertainty. The procass ol budget preparation forces idenlificalion ol variables and attsmpts at eslimation. Reiteralion should improve the process, and the process should cause a positive atlhude to atlain goals. Of course, a poorly estimaled budget can causs dysfunctionalbehavior. I n t h i s s i t u a t i o n ,t h e b u d g s t s h o u l d p r o v i d e incentive lor going after bids. The inclusion of budgsted and actual conlribulion margin data
I
t-
[ ;
l
Chaptor l5
h periodic roporb c{fers an early hdkxtion c/ ' bobtf, par ccrlributbn, or the pesible noed lo reduce bid prices, or olher corroctive action thst rnay be reguire'd. CGA-Canada(adantcd).Beprinl with permis' airr. Q15-9. All omployeec (including txoculivr manago' rncnt) must accoPt fir inportancr of budgeting and bo willing to parlicipalr fully in budgol prcparatbn and irnpbmentatirxr,or hc budgnt . will nst rtork. a1$10. (a) Etlective ur cl budgrthg rholH rocult in botter perlorrrlinc. by the organizatbn because ol betlcr pe rformance by the rnanagonr.Tho behavirral bonefit lies h the ability crfthr budget and he btdgeling proqgss to rnolivalc tnatragtB to accorn' plish thc orgranizatbnobjec'lives.This is done by ushg the budget ss a vehble for c o m m u n i c a t i n gc o m p a n y o b j e c t i v e s , etablishhg subobjectiveein accord with rnanagerobjectives,and providinga thqqrghly undcrctood ccrrvno.r bssie for porfonnenco rrreuuilTlont ard fcedbck. (b) The budgeting procoss has been sublect to criticism by behavioralscienlislr and clhers on sevcral counls: (1) The mosl scrbus charge is that the budgeling pr€oer faib to recognhc thal individuals may not accopt company objective as their own. The resull is hck cl eflort to achievethese objectives. (2) The level of objectivessel may be eslablishedwithout regard lo how this will m o t i v a l c l h c m a n a g e rl o a c h i c v e l h e o b j e c t i v e s .T h o r e s u l l s m a y i n c l u d e underachievcmentol polenlially obteinable levels ol performance and/or dostruclbn of employeenrorale. (3) The budgetie used as a pressure device lo force conlormity lo and accoptance of lhe objectives eslablished in the budgel. This often resuhs in employees finding ways lo beat' the budget rather than actuallyimpoving pedormancc. (a) The budget b adrnhbtercd by hdivUuals noi direclly hvolved in the operaling elivrty ol thc organizatbn and not particubrty skillful h dealing wiih people. (c) Thc rnosl coriour problem lhat must be overcome h qdor to rclve the problems idenlifiedby tho crilicismsin (b) is the
u1 bck o{ understandingof the lorccs that cause ma Bgcrs to 8cl as they do. ll musl bc recognrizedthat the tradilbnal assumP tims undedying thc budget and budgel Proces! atc nol .ntir.ly valid.Such agsurnPliatsincludo: (l) Managcn tulqnaticslly acc.Pt cqn' pany obiecfiveeas lhcir qwn. (2) Tighl gtandardsate best bocaur they ropr.rent hard-to-reach goals, which rrwt pcople strivc lo achicvc. (3) Uppor levolc of managcmentan bol equFped lo ostablishoperathg subobirctives. ll is necesssry to rccognizethc bchavbrsl influence (psychobgi=l and rcb bgbal) 6r tho rrprk ol menagers. The rnost corr[Tronspecific neoorrvrpndali'on is thc use cd parlbipative budgelhg, sinco il prwide lor an opportuniiylo identify objeclivos of thc managcr and ccrrrpany,hcreaseg the ability of both to develop opcralhg activitier to reach thr objcclive, and onhancesiho likolihoodol setting objectives at levels elfcctive in molivaling managors loward company goals. 01tl1. Conrnercbl €xponsosare grouped into lunctions by their actions or operalhg units. Thesc functisrs are boked upon ae departmenlsend should br gel along organizalional lincg in order to identify lhe expente with an autho' rized and responsible individual. Grouphg by prcducls and by lenitqies may be desirabL al well. 015.12. The budgeled incornestalement summarizer in one stalernent the result! of lhe complelo plan of aclion. lt expressesin financiallerms the erd resuhs of proposed plans. ll can also be used lo lesl the adequrcy or inadeguacyof those phns. Q l F 1 3 . T h e b u d g e l e d b a l a n c es h e e t r e v e a l r l h c expectedlinancial conditionai the end of I particubr perird. One ol the measurecof tho adequary ol propoeed operaling and linancbl planr is the etfed ol the cxecution of thcro pbns on the linancial condilbn of the buainesr. lf the budgeied balance gheel shoflg a polenlial unsatisfactorycondilion, propooedplant csn be reviewed end perhapo revised lo ptc. ducs sallsfaclory resulls.
Chapter 15
342
E)GRCISES Ei5-1
BROWI.IBROTHERSi Budget of Sales Revenue8nd Grcss Profit For the Year 2OB
Produst
Rer-Z Sip-X Tok-Y
Averagc Saler Saler In Pricc per Poundsr Poundr 2O,OOO $34.50 24.15 12,000 18.90 7r5OO
'Product Rer-Z SiP-X Tok-Y "Product Rer-Z Sip-X Tok-Y *'!'od*! Rer-Z Sip-X Tok-Y
l9A Sales lO,OOO
9,00o 7,50O l9A Price
s30.00 23.00 1 8 .OO
Cost of Goods Sold per Poundffi
GrosE Pttlit por Pound
$25,00 18.00 14.30
s9.50 6.15 4.60
198 Sales 20,OOO 20a.oooh l2,600 140.OAoh 7,50O 1OO.O07o 198 Price lncrease s34.50 115,00% 24.15 I O5.OO% 18.90 lO5.O07o lncrease
19A Price
I9A GP
19A Cost
s30.oo
$lo.oo
$20.oo l5.oo l3.oo
23.OO 1 8 .OO
Grcgs Profit Revenue $ 690'000 sl90,OOO 77r49O 304,29O 34,5OO 141,750 s1,r36,O4O $3O1,990 Salec
8,OO 5.OO
lncrease 125.OOoh 12A.OAoh t lO.OOTo
198 Cost
s25,OO 18.OO 14.30
E15-2 FINEFLEXCORPORATION ProductionBudget' For the Second Quarter Ending June 30, 20-
Salgs forgcast..........,... ...,.........r, Add desired ending inventory (June 3O1,... Quantity required for tho quarter............., Le s s b e g i n n i n gi n v e n to ry (A p ri l 1 1 ...,......... Requir e dp r o d u c ti o n fo r th e q u a rte r.........
6,OOO
Units of Olap 37,50O I o,5oo
27,OOO
48,OOO
Units ol Flop 21,O0O
(s,5oo)
21,5OO
Units of Ryke 54,O0O 13.OOO 67,000
qf_,o99) (14,soo) l-z'seq 9Z€99
u3
Chagter l5
E 1 5-? '
MAGICEHTERPRISES ProductionBudget For the Quarter Ending March 31r 20-
Moon Glow Units requiredfor sa|9s..............o...,.. 25O,OOO
Enchanting Day Dream 175rOOO
3OO,OOO
t5rooo
I O,OOO
2O,OOO
Total units roguinad..o.,o,................ 265,OOO Less beginningInventoryof finished
185,OOO
32O,OO0
1O,OO0
12,OOO
25,00O
249,0OO
173,OOO
295,0OO
4r2OO 253r2OO
2,OOO 175,OOO
6,OOO 301,OOO
Add ending lnvontoryof finished Unitg
UnitS
..i............rr.....r..........rr......o.....t
raraaa....tor..r........r!r.r..a.aa.........rr..
Units to be transfered to finished gOOdso..........rr...a.....a..r.......oo...r....raa.
Add endlng work in process inventOry
...r....ro........r..r..or..........r....
Less beginningwork in process inventOry...............r..........r....o......... 2rOOO Equivafentunits to be ptlduced....... 251,2OO
1,8OO
5.600
173,2OO
?p5Jp9.
E15-4
(11 Mid an d High Ba nd
Three Band
Low Band
Mid Band
High Band
Low and M id Band
200
300 30
400 50
250 50
350 50
200 30
330 (30)
450
300
400
230
_999
_380
Units reguired to meet sales budget .r.............o......,.........r....
Add desiredendingInyentoty.... 4 0 Total units required during period .,.........,.r..........r.... 240 Less beginning inventory .......... (sol Required production quantity.... 1 9 0
(701
eal 280
(3ol 370
(201 210
Chapter 15
344
El5-4 (Concludedl
(21
Materialgpurchases'requirements: Total Metcrlrlr Fcqulrcmcntr
Pcr Unlt Matcrbb Rcqulrrmcntr Fccd' Produc' llnr fbn Con' Mrtrl RequlriTublng Inducton nccton mcnt
Modcl
Mctrl Tublng l r9OOleet 2r1OO
lnductort
Fccdllnc Conncctorr
l,9oo
190 300 380
190 300 380
4r780
560
280
740 630 2r8OO 800
370
lr 73O 500
3,6OO
2'23O
6.OOO
I,OOO
1.500
Matgrialspunchasesrgquirements .......'.......'.'...z,SJ20.
-2'609
730
Low band...... Mid band,...... High band...... Low and m id b a n d . . . . Mid and hig h b a n d . . . Three band....
190 300 380
1 O fe e t 7 5
280
17
I I I
1 I I
4,44O 1 2 12 41620 I 3 22 Quantityrsquired to meet production budget.... 791720 Add desired ending materials lnventory.....'....... 7,0oo Total quantity of materials required for the 37 O 21O
261720
period Deduct matorials on hand at the beginning of the period
.......................t.t.'...............t...t.....t...
E15-5 (1)
Salesbudgetfor fourth quarten Product x Y
z
QuanUty
Unit Price
Sales Revenue
4,5OO 2,OOO
$12.OO 25.OO
$ 54,OOO 5O,OOO 6O,000
20.o0
3,0oo
s184,OoO _
Total budgeted sa1es...............,...t.... (2)
Production budget for fourth quarten
x Budg e t e ds a l e s in u n i ts.. 4,5OO 900 Desired ending inventory 5,4OO Quantity required .............. 600 Beginning inventory Req u i red p ro d u cti ort..,.,..................lf99
Product
Y 2,OOO 400
2AOO 500 1,900
3,OOO 500 3,5OO 400
3,100
z'ro
Chapter15
345
E15-5 (Concluded| Materials usage budget for fourtfr quarten
(31
Product
x Y
z
Planned MaterialsRequiredPer Unit Total Materials Required Proc A B dustion A c 2 3 I 4,8OO 4r8OO l4r4OO 9,6OO 4 3r8OO 2 l,9oo 3,8OO 2 Trgoo 3 2 3rl oo 3,loo 9,3OO I o,2oo 21,3OO
(41
23,4OO
Materials purchase budget for fourth guailen Material B
A Productlon requiremgnt r.......,... Desired ending inventory .....o.... Quantity required ..................r... Beginning inventof''lf.......,.......... Quantity to be purchased ..,..,.... Unit
17,9O0
COSI...r.'....r...,.rr.r....r.....r,.r,.
Purchasg req uiremoot....,..........
21,3OO 2,5OO 23,8OO
2,0oo 21,8OO
s
,50
c
Total
17,9OO 2rOOO
23t4O4 2,AOA
19,9OO {.000 18,9OO
25,4OO 2,5O0 22,gOO
3 z.oo 3 1 . 5 o
slo,9oo 63z.goo $34,359
s 83,O5O
E1 5 - 6 (1)
Tribolita Units requiredto meet sales budget Add onding inventory Total units 1equirad.......,............. Less beginninginventory..,,.............. Plannedproduction............
8O,OOO 6r0oo 86,OOO 5,OOO 81,OOO
Polycal 4O,OOO 2,OOO 42,OOO 4rOOO 38,OOO
PowderX lOO,OOO SrOOO lOSrOOO I O,OOO 98,OOO
Chapter t5
a6 Et5-6 (Concluded)
tzl
Material B
MaterialA
= 1 6 2 O O Ok g
TribOlitg r.........r........r.
8 i , O O O1 2
PowderX ............,,.....
g8rOOOrl =
81,00011=8lO00kg 12 = 76 ooo Polycal.......................3 8 , O O O
260 00o kg
157 Ooo kg Add ending inventory Less beginning invgntorY...........'...... Unitsto be Purchased Cost per kilogt'ar[...... Total cost ot pU nCh aSgS ................
98O;
15 000
12 000
169 oOO kg
275 ooo kg
I 500 {59 5oo kg x s.20
11 000 2 6 4 O O Ok g x $.10
s3{ .900
$ZOrlaIl
(31 Tribolite
Polycal
Total
PowerX
Materials: I A: g t ' O O Ox I x S .2 Or..........'. $16,2OO s15'2OO 3 8 r O O Ox 2 xS .2 O ..'.......... x2xS. 1O........,...' 16,20o B: 81rOOO s 9,8OO x I x S.1O,............ 98,OOO $32,4OO 915,2OO s 9,8OO s Direct Labon s s32,4OO 8t r 5O I 38 ......'!...'....t......... s38,OOO 38 r 125 r $8 ...,...............r.... s 9,8OO 9 8 x 1 2 . 5 x 5 8 ,......................
16,200 l5,2OO 16,20O 9,8OO 57,4OO 32,4OO 38,OOO 9,8OO
$32,40O s38,ooo s 9,800 s 80,2oo
Factory overhead-variable: 81 X 50 X 56.................r....r..r
s24,3oO
s 24,300
28,50O s28,50O 3 9 r 1 2 5 r 5 6 ..........,..,.......... 7,35O 7,350 $ 9 8 x 1 2 . 5 r S 6 .......... $24,3OO s28,5OO $ 7 , 3 5 0 s 6 0 , 1 5 0 Total variable manufacturing S 8 9,1OO 99l,7oo S26,e59 s1e7'75O cost........ F ix e d m a n u f a c t u ri n gco st (n o t a tto ca tedto pr oducts).......... T ot al m a n u f a c t u ri n gco s1 .......,..........,...
4O' OOO ' g?%ttg
u7
Chaptorl5 El5-7
wt(z lNc. Budgeted Gost of Goods Manulactured and Sold Statement For the Year 20-
Materials: Beginning inventory....
5OO,OOO. 2.600.0oot PUrChaSgS..................r........o................i.........t.t.. $3,1OO,OOO Matgriats avaitablgfor usb .........o..........r......r..... $
Ending invgntory'...........'..'........o...o...-..............'.. 600.ooo Cost of matgrials usgd....................................t't. L3
s2,5OO,000 4 ,34O,OOO 1 '840'000e
bO1...............o....o..o......................o.o...r.r...........tt..
FactOry ovgrh gad .........r........r.........r.t....................
TotalmanufacturingCoSt.,......................'.............. Add beginningwork in processinventotlf........'.....
S8'68O'0000 1O0,000 s8,780,OOO 3OO,OOO S8 r 48O,OOOz SOO,OOO s9,280,00O 1,000,000 s8,28O,000r
Deductendingwork in processinventory.......,..,.. Cost of goods manufactungd r...r,..........'.r...r.....'....
Add beginningfinishedgoodsinventory.....'.."...... Cost of goodsavailablgfor sa|e.......,'...,.....r.'.r.'.... Deductendingfinishedgoodsinventory.,...,..,...,.r GoSt Of gOOdS SOld .............'......o...o"...........o.....'.... tEarnfngr lE h of S2O,OOO,00O = tlr200,OO0l Marketing, administrative, and financial erpense3
looh ol sales 21 31ah of sales 69
Cost of goods sold (Sa,280,00O)..,..
lOOc/cof sales zCost of goods rold s8,290,000
Cost of goods manufactured s8,48O,OoO
Ending linishcd goods inventory 81,oO0,ooo
Beginningfinished goodsinventory s8oo,00o
=
rCost of gooda manufactured 88,480,000
Ending work In process inventory q3o0,000
Beginningwork in processinventory
Total manulacturing cost (materials, labor' and = lactory overhead) s8,680,OO0
.Total manufacturlng cost 88,gg0,ooo
Labor lSOc/ool manutacturing cost) 94,340,000
Cost ol materialg used
Ending materials Inventory s600.ooo
Beginning materials inventory s500,ooo
o
Cost ol materlals used s2,500,000
sl oo,ooo
=
Factory overhead s1,84O,000
=
Materials purchases s2,6OO,OOO
32,5oo,ooo
-----7
ChaDter 15
348
E15-8
PATZCOMPANY BudgetedIncomeStatement Second Quarter, 20-
first quartgrsalesr 2)'..'..,......r...'.."... Sales(S500r000 salesx (1o0%- 4o%ll cost of goodssold ($1'ooo,ooo
slrooo,ooo 6O0,0oo
sal gs x 4Ao/o1,..............,......!o... Gross profit (9t rOOOrO0O Commercial erpenses: Uncotlectible accounts ($l,o0o,ooo sales r2%1.'.'.. $ 2OrOo0 + 2O yearsl r 114year! ..-'... 1O'OOO Depreciation (($8OO,OOO Marketing: {OOr000 SaleSX lO%1,..,......r...D..,...... Vafiable ($l rOO0rO0O
$
FiXed.r.........r..r.................r.rro.....tr...........t.......'.o...
4OO,OOO
SOtOOO
.............'. 3o.ooo Administration (all fixed).....or..,,... lnCOmgbgfOfg inCOmgtax ..,.....,..,.............'.,..,..............
2{O.OOO
3 l90.ooo
(adapted).Reprintwith permission' GGA-Canada Els-9 ME)OACORPORATION BudgetedIncomeStatement For the Year Ending December 3'lr 2OB
in l9A x 1.O5 quantity increase x Sales (S9,OOO,OOO pri ce i n cre a se )...,............D' ....' .r ....,' ........... 1. 10 Less cost of goods sold (56,000,0OOr 1.O5 quantity increase x I .O6 cOStinCfeaSe!...,............,...,..'.,..'............... GrOSS
pfotit...r..r........r.........r........r..r....r..rr.......r...t.....
$1O,395,000 6,578,OOO
s 3,717,000
Lesscommercialexpenses: Marketingexpenses (S78O,OOO increasein advertising).sl,20o,0oo + S42O,OOO 2,1OO ,OOO gs,......,...'...............r............ 9OO,O0O gxpens Administrativg s 1,617,O0O Operatingincomebeforetaxes and interest.........-.... Less interestexpense + ($4OO,O0Oasset increase x 1oo/orate)) ($14O,OOO ln com g bgforg income IEIX........,.....,.......,................'.. Less income tax expense ($l ,447 .OOOx .4O tax rate) Net lncome..........., ,..,,...... ..,...........
180.OOO $1,437,00O 574.800 s a62.200
-
349
anpbr 15
PROBLEMS
Pt5-1 Sales Budget
(11
Price
Unit b
Thingonc
OO'OOO
.....................!......oir..oo....oor.....r..............
Thingtwo...... PfOieCted
70
S
.......r.......... 4Ot0OO
l OO
Total 34t2OOtOOO
4tOOO;OOO
881OS.r..r........oo...o...........rr..r.............
l2'l
Produstlon Budget
ffiffi
Oejired inventoriosr Decamber 3l' 2O8.. Less elpected inventories, Januar! 1, 208...'.....
(31
25'OOO 85,OOO 2O'OO!
I'OOO 49,OOO 8t0!9
99,ooo
41,OOO
Raw Materials Purchases Budget Raw Mrtcrlrlr C
Thlngoor (O5'OO0unltr prolcctcd to bc produccd) Thlngtwo (41,OOOunltr prolectcd to bc producr'd) Produc,t|on rrqulnmrnt..........Add dcllnd lnvcntorlcr,
Dccrmbrr 31, lg8*...-
-
Totel nqulrrmcntr..* L.cr rrpcctcd brvcntorlcr, Jrnuary 1, 198.--. h,rrchar roqulrcmcntt....Cort pcr pound or unlt.*
260,OoO lbr
130'OoO lbr"
2O5,OOO
123'OOO
41'000 unltr
485rOOO br.
5it'Oog
{1'OOO unltr
3E,ooO 5OI,OOO br, 32,000 469'OOO lbr. $8
Totel coct of purchaeGr...... 33,252,000
br.
32'OOO 285'000 lbr. 20'OOO 256'0OO lbr.
35 3i,2go,!o9
Total
7'OOo 48'OOO unltr 5.ooo 43'000 'sr unttl
'g13gggg
sl,rclpoo
Chaoterl5
3fi I
Pt5-l (Concluded) Dlrect Labor Budget
(41
Thingonc Thi n gtwo
.......o.otttt"r"t"t"tt' ............r.ot"t"t"tttt'
Prolected Hourr Productlon Per Unit (Unltsl g5rooo 2 3 4t,ooo
Total Ratc $8 $l,o4orooo IrloTrooo 9 s2,147'OOO
Total
t3o,ooo l23,OOO
FlnlghcdGoodsInventoryBudgc! Deccmber 3l' 2OB
(sl
Thingone: Raw materials: A-4 b2
pOUndA O $8 ...r.....r....r...r..'.'.........'."""' pOUndS O $5 ...............r..............r...r.......
$gz lo
Direct fabor-2 hourg O $8 o.r............r.......'..""" Factory overhead-2 hours O $2 per direct labor a...aa"
h o llla......ar...a..taa...a..
ttr'!
"
""t"
t tt t""
9,42 16 4
tt"t
s62
: $82
r 25tOOO unlts
Thingtwo: Raw materials: A-5 poundS O $8.......................r.'..r......r...... B-3 pounds O $5 ..........o..o......o."""""""""" C-l
unit
O
$3
$l,55O,OOO
r...........o..'........"t"""tt"ot"
...t..............t..tt'r"t'o'o""t"tt"ttt'
Dirgct laborq? hours O $9 r.....................'.."""" Factoryoyorhoad-.? houra O 32 per direct labor hour........tt......o...t1...t.......t..t.""t"t"t"t"t""
$co 15 3
$ss 27 6
rlel 591 r IrOOO unit8.....'..'.........r............'..'.o.....
Budgetedfinished goods inventory, December 31, 2OB
8l9,OOO
I34w
35t
Clwptor 15
P15-2 ,
(11
ROLETTERCOMPAT.JY Budget for Produetlonand Direct Labor For the Quarter Ending March 31r 2OB
Month February January l2rOOO Salgs (uhitsl .....................'............ IOTOOO l6'000 12r5OO Add ending inventOt'.........,...,.... 24r5OO TOtalUnltS feqUifed ....,,..o,....,..,.... 26'000 l6'000 lO'OOO.. Less beginning Inventoryr...o......... 8r5OO Unlts to be producod.................... IO,OOO r 2,O 2.O Direct labor hours per unit.........'. r
Total hours of diract labor time n ggd ed
........o...........r.......
20,0OO
t7,ooo
March I'OOO 13r5OO 21r5OO 12r5OO 9'OOO r 1.5
Quarter 3OTOOO 13r5OO 43r5OO 1or00o 27r5OO
13,5oo
5o,5oo
Direct labor costs: Wages1$8.00per DLHI........r...$l oO,OOO $136'000 $1O8,OOO S4O4,OOO Pension contrlbutlons ($.25 pef DL10...........r..r.,.....
5'OOO
Workergtcomponsatlon 2'OOO Insurance($.1Opsr DLH)..... Employeemedlcal Insurancc (3.4Oper DLI[.'.......r............ S'OOO Employerbsocial security and unemploymenttares 16,000 (ss.oor.1o = g8o per DLH| Total direct labor G(tst......... $191rooo
121625
4t25O
31375
1r7OO
1r35O
5'O5O
61800
5r4OO
2O'2OO
13,600
1O'8OO
4O'4OO
$182,350 : : -
s128,925
s4 82,275
rlOOc6 of the first foltowing monthb sales plus 5O% of the second following monthb sales.
---
Chagter l5
P75-2(Concludei!) (2) (al Gomponentsof the perlodic budgot, other than thc producUonbudget and the direct labor budget, that would algo use tte saler data include: (1) the salegbudget l2l the cost of goods manufastured and sold budget igl the markating and administraiivcoxponsosbudget (4) the budgeted Income statement (b) Gomponentsof the periodic budget other than the production budget and the direct labor budget, that would also use the production data include: (11 tho dlroct materiab budget l2l tho tactory overhead budget (3) the cost of goods manulacturedand sold budget (cl Gomponentsof the periodic budget, other than the production budget and the direct labor budget, that would also use ttro direct labor hour data include: (1) the tactory overheadbudget (for determiningthe overheadapplication rate il based on direct labor hours! (d) Componentsof the periodic budget, othcr than thc production budget and the direct labor budget, that would elso use the dirsct labor cost data include: (11 the lactory overheadbudget (for determiningthe overheadapplication rate il based on direct labor dollars and for dstermining the cost of employeebenefits attributable to wages earned by direct labor) t2) the cost of goods manufacturedand sold budget (3) the cash budget (4) the budgetedincomestatement
313
Chagtor 15
P15-3 ' (1)
EsUmated cales lor third guarter (July-Septemberf .........r.,..... 1 8 , O O O Add ending Inventory p'OOOr 8O96)....,.r.o.....,..........o..o.,............ 5,600 23,6OO Lgss bgginning lnventoly ..................r....'..... 5.600 18.OOO Material
t2l 101
Unlts to bo producgd'.'.........r.o............... l 8 r O O O I6 Matgrials I'irto ...,.......,...o,.,. Unltg of matgrials required ...,.......,...o..,.. lOS' OOO Add ending Inventory: 33,600 5t60O I 6 ..............r............t................
211
242
lSrooo t 4
72,OOO
18,OOO
x2 36,OOO
22r4OO
5t6OO I 4 ...............t.'rr...t................o.t. 5t0OO I 2 .........r............r..........r..i.......
1 1,2OO 47,2OO 13.OOO
141,600 Less beginninginventory.,.....,.,......,.r..o..35rOOO
94,400 3OTOOO PUrChaSgS......r...........r............................ 64,4O0 f OO"gOO 34r2OO per Cost r s2.40 x $3.60 unit x$1.20 Total cost of purchasoS.............,............. 9255r84O $231,84O $4'to4Q
{31
Hours por Process Production Unit FOrming .o.........tr...rr... ,80 18,OOO ASSemb ly ....r.............. 2.OO 18,000 Finishing .o........,........, 18,O0O .25
Total Hours
Total Labor Rate
Total Labor Gost
l4,4OO 36,000 4.500
$8,OO 5.5O 6.00
$115,2OO 198,OOO 27 |OOO
54,9OO (41
ErpectedannualproductioJl.............r........
Astual producUonthrough June 30 :
,
9940'299 60,000 units 27,OOO
Erpocted production during last six months of 20A...,.. 33pOO units Variable factory oyerhead per unit ($i gZ,Ooo + 27,0ool x $6.00 Budgeted variable factory oyerhead...........,.r.,,..o....,..... $lgBrOoo Budgeted fired factory overhead 93,OOO Total budgeted factory overhead
Chagter 15
3gt Pl5-4
(tl
RevlsedSaleaBudget in Unlts Bagodon tho Inder Terrltorles I IrO00 t r 1 O,8 OO
1-lb. pack3ff o......."' 2-lb. packago...o.---.Total ....'....'.........
llf99
6-Month Other Total 551r7OO 585,OOO l3,5OO lo,2oo lo,8oo 704,7OO 7{2,5OO 29'-7OO :-21,600 1,256,4OO tl327,5OO .il
lll torSOO
t l O , O O Or . 9 = I ' O O O 212'OOO r.9 = lO'8OO
Sales Budget in Dollars
(21
Territories ll I gPZS $2,ZSO' $ 5,4OOr I,l OO
l -lb. pack?ffo.......... 2'lb. package.......... Tota1................
6-Month Total Other lll $146,25 0 $2,7OO $137,925 371,25O 5,4OO 352,350
E?rsso 9!Jr475 $8.roo s490,275 $glJ.soo
| 9,9oo revised estimate r i25 (per packago!= $2,25o ,1o;8oo revised estimate x $.5o (per package)= s5,4OO Materials Purchases
(3)
Grain R
Bu.
@t 5rOOO $ 6,5oo
Total
Grain S
Bu.
Gost
Bu.
@t
7,OOO $ 8,9oo January..o..r........... 4,OOO 3,0o0 1,2OO I,0oo ''rjo February ........o..r... t,oro 3,75O 3,00o 3,OOO 3,750 Malth......o......'..'..r 15,OOO 1 1 , O O O .,ojo .,:o April,...,................. I,OOO l2,ooo 4r5OO 3,OOO 4,5OO 3,OOO May .....................o. 1 O,4OO 8,0oo 4,OOO 4,OOO June,............,...,..,. 4,OOO 614OO 35doo E4Or5s9 sl4,350 4,OOO. $32,200 :13.OOO : 2,OOO $ 2,4OO
aqE
Chapter t5
P l 5 -4 (C o n cl u d e d ) Materials Requirements for Production
(4)
Production of 585rOOO1-lb. packages..'.....-..........................r..... 585,OOO lbs. 1,485,00O 2'lb. packages...r....-............-...... Production ol 7 4215OO Total materials requirements for six months ...............'...............2,O70,0OOlbs, Three bushels of grain in the proportions of 2R:1S produce 198 lbs. of finished producl R weighs 7O lbs. per bushel and S weighs 80 lbs. per bushel. Weight per Lbs. Bushel Bushels Grain 14O 7O lbs. 2 R 80 8O lbs. 1 S 220 22 1 O7 oloss We i ght of finished Pr oduct..' 198 Since each 198 lbs. of product calls tor 22O lbs' of grain, the total weight of lbs. is: grain required tor 2.O7O,O0O t#
attat
lYo
lbs., to be apportioned as follows: r 2,070,O0O= 2,3OO,OOO
= 1,463,636lbs. = 20' 909 bushels @ 70 l bs . eac h Gra i n R = 1 4 0 x 2 ,3 OO,OO0 220
GrainS = (5)
#
= 836,364 lbs. = 10,455 bushels @ 8o l bs . eac h x 2 ,3 OO,Ooo Materials Account (Fifo Basis) Grain R
Grain S
Cost Cost Bu, 1 O , O O Os l 2 , O O O 3,0oo s 3,ooo 22,OOO 32,2O4 1 3 , 0 O O 1 4 , 3 5 0 3 2 , O O O s44,2OO 1 6 , O O Os l 7 , 3 5 0 Bu.
1 O , O 0 O $12,ooo 5,OOO 6,5O0 2,OOO 2,8OO 3,909
5,864
2O,9Og s27,164 11,O91 Sl 7,036
3,OOO $ 2,OOO 1,OOO 3r OOO 11455
3,000 2r4OO 1r2OO 3r750 11455
10,45 5 s l 1,8o5 5 , 5 4 5 s 5,545
,
I
Chaotar 15
356 P15-5
BudgetedIncomc Statoment (Ooosomittadl
(1)
Quarter Second Third
ft$ Sales: CommglciSl .........."""""t" GovgrnmgJlt.'..........t""""" tota
t .r.......
t.......
t t tto"tt"
"
Cost of goods 8old ..".,....'..'... Grosg profit .........r.....'.......".t. Other op€rating arponses: Advertising ..'.............-----.--
Fourth
Total
3268 120
3275 lto
$goo sl,o91
s38lt 177 3208
9{1s
$18e
s386 178 $208
$
$
$
9
s250 loo 33sO tot o
35 32 ............'...r.. Admi n istrativg 23 Gengral ofticg ...........r.'....-. $go TOISl ...........r..........tr....t. Sglling ........r..............t"""'
se3 lncome before income t?r..'... 37 Incomg t3I.....'.................""... Ngt incomo ............................. $ 5 6
6 39 35 25
$l05 Sl03 41
' $ 6 2
6 39 35 25
$los 3103 41
s62
115 l9l
445
s1,536 707
$,224 $ ezg o 42 38 27
$ 2 4 155 140 100
b
-
$113 s 41e $rrr s 410 44 $67
163
s 247_
j
I
-
i
357
Chapter 15
P15-6 (Goncluded)
BudgetedIncomeStatement with 5% Incrtaso In GommercialSales (OOOs omitted)
(21
Quarter
Fi$ Sales:
Comm grci8l ................trt'ttr . GovgrnmOrlt...........t'.....'."'
Second
$zsg loo
$27e
$36s
s390
Third
$zss
Fourth
Total
$31s
s|,146
Gogt of goods Eold ............-.... Gross protit ............o......'...t...'
1A7
184
llo $3e9 184
$1e6
s2l5
$21 5
s232 s 858
Other operating expensos: Advertising
$
$
$
$
Total
....t..........o....."trt"t'
Selling .............................t'
AdministraUvc................... Ggneral oftico .........t....t.r... TOtSl ...t.......t..t....t.........'
lncome befora income tir".... lncOmg t3L.....r.....-................ Ngt inCOm|Et t.....r...............tr.....
8
120
6
36 33 24
40 36 2g
$eg $e7
$l 08 $1 07 43
39 358
9_g!
6 40 36 26 $108
sl 07 43
Sse
115 9f30 198
6 43 39
2a
445
s1r591 733
$ 2 4 159 144 1o'4
s l 1 6 s 431 $ 1r s 9 427 46
171
s70
s 256
Chapter tS
358
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Clapter 15
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Chaptar15
w P15-6 (Concluded)
JOHNSON AI*IDSMITH, CERTIFIEDPUBLIC ACCOUNTANTS
(3)
Budgeted Income Statement
For Year Ending June 3Or zON
Revenuefrom chargoableUme: Blllable Hourr 700
Emplovee
Johnson
l,loo
t.r..t'ttttttt'r'rtto"t""""tt"r""t"
Smith Vi ckg
r3.....
tttt
' l"tr"
Lowe KennedY....""'
aaat
"ttot
t""" -aa
aa aa a aa aa aata
a aaaaaaa
a a r rrr
"'
" ttt""
rooo
a aar ort
rr
a" rro
Quinn '... GarCia
...ott.t"""t'ltt"ttttt"tt"""t'l"t'
Hammond '. LyOnS
.......ttoo"tt""t'tt"t"t"ttt"""""
Erpenses of Producingrevenue: Salaries: Partner:8.... Profgssi onal staff ....,r.r."""'
Sgcrgta ri g3""""tt "r" "t "" " " Frin ge bgn gfits""""""'o"""""' Other oporating erpenseg .o.."' Gross
prcfit.......o.."t'o"t"tt""tt"""'
Gross siliing Fees Rate gg,ooo $90.oo $ 77,OOO 70.oo 78,O0O 02,4OO 52rOOO
1,5OO l,600 1re25 11625 500
52.OO 39.OO 32.OO 32.OO 17.50
I,l oo 1,0o0
l5.oo
52,OOO 8,75O l61500
15.OO
15.OOO s424,650
stoo,ooo 97r76O 39r520 35,OOO
0 2'37o
334,650
s-lgpoo
36t
Chapter 15
P 1 5 -7 l
Schedule1 SalocBudget Areas South
Total
Southwest
Model l5O Units
3'OOO
...r..r.....t..ot.
Unit prico Total
4'OOO
9_l_Zg 9__!-75 g_7ooeg t__925€99
..rr...............t.....o.t.tt.r.o..t.
TrOOO 775
g!,?ailoo
M o d e l l OO
Unitg Unit price
..t.........r.......rr......r..r.r..
TOtal ......r...........r.rr.....'.r...'.r...
Model 50 Units ..............
ra. r....r..
r . r . a . a a a a a aa aa . . o . r r t
l2rOOO
r zo $_139 $ 9_eoop.99 E__glgpoo 91,41!.ooo 20
I,OOO
t_eo s___99 gl20{99 9-_e99€99
TOtal r..'.....r.... a.aa.ar....rtr
7,OOO
5rOOO
7,OOO
Unit price ............... TOtal
q__!
s
15,OOO 90
il-egpoo fllTsE.OOO $3fgg,ooo s{ptlpgg
Schedule 2 Production Budget
Units required to meet sales budget (Schedule l)
t-s
Model
1_99
99
TrOOO 1 2 , O O O 1 5 , O O O Add gnding invento}y.,..,..,........r..r.o.,r,r...............r.. 400 300 200 Total units requirad..............r..........................r,..... 7 r2OO 12,4OO 15,3OO Lgss beginning inventory.,....,...,...o..,..............r....,. 200 300 400 Planned producUontor thc year........r...............-.. 7 , O O O 1 2 . 1 0 0 1 4 . g O O
Chapter 15 fi2
P15-7 (Continued)
Schedule3 Direct MaterialsBudget in Units Finish Lumber Units ln ln Board tq Be Pints Manuiactured Feet 9Peakers Model 15O Utits to be manufacturod (schgdulg 2! ""t"""""""""" Matgrials
7,O0o
lSte """""t""""t"tt"
Units of materials rcquired """
ModelloO -Units to be manufactured
l2,l oo
(schgdulg 2| """"""'t"""""' Matgrials
lSto
"tttt"t"t""to""t"'
Units of materials requlred """ Model 5O -Units to be manufactured (schedule 2) ......"""""""""' Matgrials lSto ....."""-""""""' Units ol materials required...." Total units of materials requirad "
12 84.OOO 35.000
14.OOO
I 96,800
36.300
12,100
29,800
14' 900
l4,9OO
89.400 270.200
lE-loo
91poo
Schedule 4 Purchases Budget
Materials @ Units requiredfor Production (Schedule 3)..............-....... 27O,2AO Add gnding inventofl.........-.. 30,ooo
3OO,2OO
40.ooo LessbeginninginventolY...'.. .......... 26O,20O Unitsto be Punchasod ,75 Estimatedunit cost .............. $ Total cost of purchaseS........ $_esJlg
l ot,l oo 8.OOO 1O9r10O I O.OOO 99,1oo
-. - . Finish
Total
41,00O 2.OOO 43,OOO 1.500 41r 5OO
s r5.oo $ z.oo $83.OOO @
s1.764,650
Chaptor 15
3&3
P15-7 (Gontinuedf Schedule 5 Cost of Materiala Reguired lor Production
Materials Lumber
Model l5O Unitr of materialr roquired lor producUon (schedule3|.........,.........
Speakerg
g4rOOO
35'OOO
Unitcost..,..........,,.........r... t__ .25 f_l!E.og Total....,....,....,................ t-lgrg0O U2SOgg
Finish
Total
i4rOOO
$ 2.oo $28.OOO$ 6i O'OOO
M o d e l 1 OO Units of materials reguired tor producUon (Schedulc 3f .......,..r..r.,,.. Unit coSt......r..............r.i....
Total
90r8OO
t_-
3gr3OO
.75 L-19:oo
L72€oo
12,1OO
$ z.oo
$__gg{,5OO $24,2OO
641,3OO
Model5O Units of materials raquirod for production (Schedulc 3) ...........r..r.... 89,4OO Unit COStr....r.....,...............o t---75
TOtal ...... r......r............r.... TOta1...........r.....r..r..r........r..
r_o7ggg gg?.s5o
2grgoo
l4,9OO 9__--1-g.og $ 2.OO $29,800 543.850 $lrJse e!E! !,soo $82.OOO $ 1 . 8 0 1 . 1 5 0
f
Chapter l5
url ' P15-7(Continued)
ScheduleO Dirsct Labor Budget Cuttfns
Model l50 .375' Hourg per unlt '.................. Unitg to be manulactured 7.OO0 (schedulg 2)..........o.....o.. 21625 Hourg of labor l€quiJ€d..... 3 6.00 Labor cost per holtt.'."..'... Total labor CoEt..,..........., S15.750 Model 1OO .375 Hciursper unit................... Units to be manufactured (s c h e d u l e2 ) ..,....... 1 2 .lOO 41537.5 Hours of labor rcquircd..... l-abor cost per ho1tt........... $ 0.oo TOtallabOr COSI..........!.... 527,225 Model5O .375 Hours per unit...'...r'.......... Units to be manufactured .l4.900 (Schedule2) ................... Hours of labor rlquired..... 51587.5 L:bor cost per hour........,.. S 6.00 T o t a l l a b o r co st.............,. 3 3 3 ,525 Total....... 376,500
Assombll$ 2.OOO
Finishinq .375
7.OOO 7.OOO 21625 l4rOOO 5.oo $ 4.oo 3 i 7O.OOO $1O.5OO l'5OO
$ e6'25O
-25,O
12.1OO l2.lOO 3'025 18rl50 5.oo $ 4.oo 3 $ 9O.75O $12.lOO l'5OO
Total
13OrO75
'25O
l4.9OO 14.900 3t725 22.35A O.oO 5.oo $ $ Sl I 1.75O $14,9OO $272.5OO $37,5OO
160' 175 3386,500
----------T\
365
Chapter 15
P15-7 (Continuedf Schedule 7 Factory Overhoad Budget (Applied Overhead| Cutting Model 15O Unlts to be manufactured" TrOOO (Schedule21..................r departmsnt Estlmated factory overhead.,,or......, $ {'OO Total cost..................,..... $ 7,OOO Model tOO Units to be manufactured (Schedule 2f .....,,,.,......... 12r7OO Estimated department factory overhgad ..r......... $ 1.OO Total cost........................ 912.1OO Model 5O Units to be manufactured (Schedule.2|................... 14r9OO EsUmated department factory overhead r........... $ Irog Totaf cost........................ $14.9OO Total factory overhead.......... $34,OOO
ASSqrnb[lg TrOOO
Finishins
7rO0O
.ZS $ Z.OO $ $l 4.oOO S 5.250
12r1OO $ 1.5O S18,150
'l4r9OO
Total
S 261250
12r1OO .5o $ $ 6,050
36,300
14r9OO
$ 1.51 $_'l!! S22.35O $ 7,450 S54,5OO Sl8,750
44,7OO SlO7.25O
\I - \ \
Chapter 15
366
' P15-7(Gontinued)
Schedule8 Beginningand Endinglnventories BeqinningInvenlo_ryCost Units
ry
Endinq lnventorv Total Gost Units
Materials: .75 $22,5OO $ Lumbgr............. 4OrO0O 9 .75 $ 3O,OOO3 O T O O O l2O,OOO 8,OOO 15.OO Speakers.......... l O,OOO 1 5 . O 0 150,000 4,0oo 2.oo 3,OOO 2,0oo 2.00 1 ,5 0 O Finish .r.....t....... $146.500
s183.OOO
Total
Work in process: None Finished goods: Model 150.......' Modgl l OO......'. Modgl 50.......... Total r...........
Total
200 300 400
se8.oo s 1 9 , 6 0 0 62.OO 47.OO
18,600 18.800 57,OOO s
200 400 300
slos.50 s 2 1 , 1 O O 66.75 50.25
s240,ooo
2617OO 15,O75 $ 62.875
s209.375
S ch e dule9 Manufactured and Sold Staternent of Goods Cost Budgeted Materials: Beginning inventory (Schedule 8)...............'......," $ 183,OOO Add purchasgs (Schedule4!...........r............r.,...... 1 . 7 6 4 , 6 5 0 Total goods available for use............,r.......,..........$1,947,650 146,500 Less ending inventory (Schedule 8) .....'..'............ $1,8O1,150 Cost of materials used (Schedule 5l .............'...... 386,5OO Direct labor (Schedule6) ....................t.....,.,.........,... 107,250 Factory overhead (Schedule 7)..............'......'.oo..'.,..'. $2,294,90O Total manufacturing cost .,....,....r..........r.......r........... Add beginning inventory of finished goods 57.000 (Schedule 8| ............,..r..........................'r....'.... s2,351,9OO ....,.......,... Gost of goods available for sale.. goods Less ending inventory of finished 62,875 (Sch e d u l e8 ) . .....................,.. Cos t o f g o o d s s o l d . ......r..............,............ €3;!9,939
%7
Chapter 15
P15-7 (Concluded) Schedule 1 0 B udgeted lncom e Statement
Amount Sales-all models(schedule1)...."""""""""""""
s4,o15,ooo.oo 2,289,O25.OO
Cost of goods sold (Schgdulg 9) ,..'........""oro"""'t'
s1,725,975.OO Grossprofit.......,......,.........,.,................,.... $5o0rooo Markgiing'erpgnsS....--..'..............'.. 800.ooo.oo Administiativeexpenses........r.o...r.. 3O0'OOo s 925,975.OO lnCOmg bgfOfg inCOme taX,.....,..r.......r............,...... 462.987,50 PfOViSiOn tOf inCOmg tax i.r......'..........r....o.'..o......... Ngt
inCOm€).......rr...,..o...........o.'...................o....,...rr
9192€gZ.so
P15-8 Schedule 1- Sales Budget
EconomvModel Asia EuroPe -oqooo WesternUS 25,0oo 75,000 5O,OOO Units...,... so S $ so so S Unit price S A------5o
Total 210'000 so
Tota1...,.... s3sooJoo s2,soo.oooI 3,?lo,o0osl,25o.ooo9J9r999rOOO
S t a n d a rdMo d e l 18O'OOO 35r 0OO 6OTOOO 45,OOO 4 OT OOO U n i ts.,...., zO S 70 S---7o S_-7o 70 S Unit price S Tota1........Si.AOO,OOO$3,15O,OOOSIT2OOP.OO S2.45O.oOOSl3f99pOO D e l u xeMo d e l I 10'OOO 3O,OOO 35,OOO 25,oOO 2 o ,o o o u n i ts ....... go 90 $ 90 S 9---9o Unit price S S---9o q--9rl-99roo0 S--$99o.ooo S2.7oo.ooo Totat........ 51.8OO.OOo -S2.25o.OOo
S11rl0op99 €9499p99 q93-ro00p99 Total........,...57.600.000S7,9OO.OO0
Chapter t5
368
Pl5€ (Continued) Schedule2-Produstion Budget Economy Model Units required to meet salec budget
2lorooo (from Schedule 1! ............o..o."' lAi Ogslrod endlng Inventory.................o......... 20.OOO zto,ooo l5.ooo
Total units ruquircd lor Year Less beginning Inventory..........-.
Productlon required for the year..........,....rorriror2f 5p99
Standard Model
Delure Model
lSorooo l lorooo l5.OOO
IO.OOO
105rooo t 2o,ooo ls.o(xt l5.ooo !-8OPOO 1O5P99
Schedule3-Direct MaterialsBudgetin Units Economv Modcl Unltr to bc msrutrcUrcd (Schcdufu 2)..*......,..*. Metcrlelrquen0Uporunlt Total quanU$ o,f mttcrleb pqulrcd..,..,.-. Standard Model Unltr to bc manufectrrcd (schcdutc 2)...-.............. MaterlalrqutndtYperunlt Totel quentlty of metcrlabruqulrcd.......... Dclurc Modcl Unttr to bt manufecbrcd (schcdufu 2],.-....-.-...... Matcrlstr quanflV pcr unlt Totel quanU$ ot mstorlrlr rrqulrod.......... Total unltr of matorlalr rcqulredforproductlon..
Bor
Tranr formcrr
Dlodc Rcstlflcrr
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Fltten 2lSrOOO 2
Rcrleton
Wlrc 0n tcet!
215'OOO 215'OOO 5 5
43O.O0O 43O.OOOi.O75.OOO1.075'OOO
18O,OOO18O,OOO 180'OOO 18O'OOO l8O'OO0 8 3 2 t
18O'OOO o
ISO,OOO360.000
72O,OOO 54O,OOO1.44q.OOOl'08O.OOO
!O5,OOO lOtt,OOO .3
1O5,OOO 105'0OO 6 5
1O5,OOO3i5,OOO
525.OOO 630.000 LOSO'OOO 840'OOO
105'000 10
105'0OO 8
89O.OOO1.675,000 1,OOO,0OO3.585!OOO?f9EOOO SOO,OOO
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P15-8,(Continued) Schedule S-Dlrect Labor Budget
Delure Economy Standard Model Total Model Model AssemblvDepartment Units to be produced (schedule2|......,........' 215rOOO lSO'OOO lO5rOOO l.OO .75 '5O Hou.rsreguired per unit.. Hoursrequired...o...r....... 7O7'5OO 135rOOO lO5rOOO 347r5O0 lo.oo $ lo.oo Labor rate por ho1tr,.,..... t__ los t____l_o.oo $ Total departmental labor cost for pnoduct......... $!ro751Q99 t1€gg'1Q99 $!ro5o€oo 93.{75'1|oo TestingDepartment Units to be produced (Schedule2!,.........,..., 215'OOO lSO'OOO lO5'OOO ,O5 Hoursrequired per unit.. ,O5 .O5 Hoursrequired...D.....r..... 10r75O I'OOO 5r25O 25rOO0 Labor rate per hour...,.... A-___l3.oo E__13.o9 S__U.og S__!3,oo Total departmentallabor
costfor pioduGt......,.. t-_Izsoo
s-l-9999
Total labor cost for the period.............or.r.....,.9!r?9!r00o $rlggfoo
t__qg.ooo so.ooo $!rl-!3rooo aJzjpgg
Schedule 7-Budgeted Machine Hourc in Testing Department
Economy units to bo produced (Schodule21.......... b b
Hours ol machine Ume required to test uflit.......
215'OOO .15
Standard Model lSO'OOO .25
Deluxe Model
rotal
lO5'OOO .35
Total machine hours
required................,.....r... g2r2so
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36rzso
tl4rooo
Chapter 15
372
Pl5-8 (Continuedl Rates schedule g-Budgeted Factoryoverhead and Departmental
Variable Budgeted Variable Gost Hours Fixed Coit Rate AssemblvDePartment lndirect materials and suPPlieso..........."""' $158,O0O $r.so lndirect labor.....-.'......r 35O'OOO .5O .05 Payrollt?ros'........-...... 382;5OO Employeefringe
347,5OO $521'25O $ 679,250 347r5OO 347,500
773r75O 17,375
.4O
5231750 399,875
347,5OO 65,OOO
347,5OO EquipmentdePreciation 65,000 bgngfi ts.........-..r.......
Repairsand maintgnar|c(t............ 25,OOO l2,ooo Allocated building cost general Allocated factorycosts............ 241t125
Budgeted Departmental Overhead
347'5OO
139,OOO
164,000 12,OO O
241,125 TOtal depaftmental bUdggtgd OVefhead..'...'.....o..,..........."""""o"' $2,432,5oo 347,500 baSe (direCtlabOr hOUrS),......"""" BUdgeted OVerheadattOCatiOn Predetermined departmental factory overhead lElt€ ............o...r.... $-_7.09 Testing Department lndirect materials and $ 1 5 7 ,OOO $ .gS 114,OOOS 39' 9OOS 196' 900 s u p p l i e s . . ................. l.OO t l4'OOO 1 l4,OOO 3641000 Indirect 1abor..............t 25O;OOO 66' 400 l1r 4O0 .tO ll4,OOO Pa y r o l lt a x e s ................ 5 5 ,OOO Employee fringe Il4tOOO b e n e f i t s . . . ...........r'....l l 4 rOOO 215' ooo Eq u i p m e n t d ep re ci a ti o n 2 1 5 'o o o Repairs and 2061000 I l4,OOO l71r O0O l.5o m a i n t e n a n co............ 3 5 ,OOO 9'OOO I'OOO Allocated building cost Allocated general f32'70o |ftzr7}O tactory costsr.........., Totat departmentat budgeted overhead r.....'............'.....""""""'D"' 91t254tOoo Budgeted overhead altocation base (machine hours) .........!.t......... 114.OOO Predetermined departmental tactory overhead rate...'....
AssemblyDepartmentbudget factory TestingDepartmentbudgetedfactory Total budgeted factory overhead
..........j....
s3,9ggE99-
s73
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Chapter 15
371
Pl5€ (conclud?n"or,e io--Beginningand EndingInventories Beolnnlnglnvtntety Matarlrlr: Trrnrtorm crr ...--..-...--. Dlodc rccttllen -..6-.... Fllten
........-.....-.H--.-x
S/lra ........-r....D,.'............
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chranutvunlt cort Total cot 't l5,ooo IO,OOO3 r.5O g7r3OO4.5o l5,ooo l7'5OO .70 zt,ooo €r75O 1.75 *t,ooo 2,000 .2o to,0o0 3OiOOO
.5O t
15,OOO ti2s.oo 15,OOO 38,50 15,OOO 35.25
Schedule 1l-Budgeted
3
Endlng Inventory
Quanutv Unlt colt Tstalsost
15'000 loo.750
375,000 7Tf FOO 828'750
5,ooo I t.5o aso
IOTOOO 2!',OOO 2O,OOO 5OTOOO 4O'OOO
t
7"5OO alt,ooo 17"5OO 3li,ooo IO,OOO 20,ooo
.7O 1.75 .2O 50
Ll3r0oo 2O,OO0 325.15 30,25 15,000 58,4!t 10,000
tL78'!-e!!9 91,942f0o
3
5O3,OOO 588,750 564,500
tL,050,25O
$J9125o
Gost of Goods Manufactungdand Sold
Materials: $ Beginning inVentOfy(SChedUle10| ........................'or..............'.
l60,750 1 0 , 912,250 Add pUfChaSgS (SChedUle 4)....'.'...........o..'......'..rr.........r.....r.... $11,073,O0O Matgfials availablO fOf USe.'..r...'...r.'...r.r".'......'..r...'................. 135,OOO Lgss ending inventOry (SChgdUle i0!........'..r.........r.....r.....'....r. Cost of materialsused in production(Schedule5)'..'..........-.... $1O,938,OO O 3,775rOOO DirgCt labOr (SChgdUle6|...........'...'................'...............,.........". 3.686.500 FaCtOry Overhead (SChgdUle 8)....'..'..'.....'r............r......'............... pefiOd...........,.....,......... $18,399,5OO COSI Of gOOdSmanUfaCtUf8d dUfing the 1.781.250 Add finished goods beginninginv€ntory(schedule l0) ...'.-......-.. $2O,18Or 75O GOstOf goOdSavailable fof 3a1e..........................'.r.'.............r.r.r.. 1.656.250 Less fi nished goods ending inventory (Schedule I Ol.--.'.--.---.-.-'.. s18.524,500 GOSI Of gOOdS SO1d....r.................r..o...............r........r......rrr.......r...
ScheduleI 2-Eudgeted IncomoStatemont Sales (from Schgdule ll .,.......................,............... Less cost of goods sold (Schedule 11!....,............o. Gross
plltit...............................r.r.o...rr..rr......r........
$33,OOO,OOO 18.524,500 $14,475,5OO
Less commercialexpenses: MarkeUn g exponsgs ........o....r.,........................r..s6,145,OOO 8.475.500 2.330.500 AdministraUve erponse3 .r............oor-.ri-r..r lncomg bgforg taxgs ..'............o.....t...'.'.................. s 6,000,000 2.400.ooo Less income tar (4O% tar rate). s Net incomo............ : 3.600.000 -
375
Clppler 15
Pl5-o ' (1)
CL CORPORATION ProspccUvoStstoment of Incomc and RetainedEarnings For Year Ending December 31r 2OB
(OOosomitted! Revonuc: Salef
S600,OOO I,OOO S609,OOO
aa.aa..r...a.a.a4.......r......t....t..r..o..a..r.......a
Oth gr' lncorllC
..r..........r.....r...r...r...............t
Erpenrcr: Cost of goodsmanutacturadand sold: $213,OOO 218,OOO 130,OOO Variable fagtort ove rh ead ..'.......r........... gad 12,750 ......o....'-'........... Firgd factory ovorh $573,75O Boginning inventol]f ...'...............o..........o... 4g,ooo $621,75O Ending lnventory r.r.r...i.......r..................'..' _!l-t!J!o' s5O7,OOO Materlglc
Dlrect labor
MarkeUng: Salari gr r.r..............r......r..,,.. Gommiss1on3............r.rt.......r't......r............
$ to,ooo 2OrO0O 45.O00
PromoUonand advgrtisln$........................ Generaland administration: Salarl es ....o..'.r'...r.............
81,OOO
$ lg,ooo
Thavel Office cost3......
2r5OO
9.000
27.500
Incomc flossl bglorc Incomo t8r......'..o..'....'. Incomc tar rgfund (4O%1............r,..............r. llet InCOmO(IOSS|....r........................'.'......'.'. Beginning rctaingd earningS ..'.........r..rr..,....
Subtotal Less dividends
$
015.500 (6,500l 2,60,0
$ (3,e001 108.200
$lo4,3oo .
5.OOO
Ending rgtaingd earnings ..,........r.......o......... t tseginnlng Invcntofl.....o...r...rr.......o..............r.r.............oo...ror... Adding to Invgntory (45OrOO0 - 4OOrO0Olr.........r.,,.r.......r...o..,. Ending
Inventoly....r..oo......c'.'..o...o..r.o....ro.r'....r......'......'.rr.......
units 4O,0OO
50.ooo
units 9OTOOO
198 cost per unit ($573175O+ 45OrOOOl ...............,..,,..rr..,...,..x s1.275 Gost of ending lnventory .......i...... s 11 4 , 7 5 0
Chaptar l5
376
P15-9 (Gontinuedl CL CORPORATTO}I BalanceSheet Prospectiveas of December31' 20B (0o0s omittedl
Assets Current asseta: GaSh r..............
aaoaataaaartaaaaaaaaaaaaaat"ttott"t"
Accounts receivable lnVentOfy
.........aa..a........r..a.....aarr...........rr....ar......t......-a
lnCOmg taf fgCelvablA ...............'....o...........D...o...r.....o... Plant and eqUipm6llt-...........,............r.o......'............'.....t.. LaSS ACCUmUlatgd depfgCiatlOn r.r.'.......'..........D..t..."'t' TOtal aSSets.....r......r.......1..r..........r..'...r'.r.....r..............t
i
l,2oo
80,OOO 1l{,75O 2.800 $198,550 $l3o,ooo 89.OOO 4l.ooo
s287.550
Llabilities and Shareholdsrs' Equity Current liabilitieg: Accountg pa1nb1e.......o...........o.....rr.....r................'....'.'945tOOO 23r2SO . lccruaO paya0tes..r.....................rr....'....o.........rt......... Notgs pty"ble .,................!.o.............t......r.........t.......... 5O.OOO Sl l8t25O Shareholderg' equltf $7Ot0OO Common stOCk....o....o.........................................r......... 99t3OO 1O9t3OO ...........................r.........r.......r.....'..r. €arnings Rgtaingd :9?!l?:55O Total liabilities and shargholderst €QUit!......,.....r...r..... pooner than in l2l (al The profit performanco lor 2OB is forecast to be much 2oA.-A loss after Income tar of 3.?.9 milllon ls prodicted, companod-to a profit aftor Income tar of $12.6 mitlion. Tlre company erperienced the loss despitc a ggoh Increase in unit sales Yolumo. The maior problem sosmE t6 Ue in the inabitity to raisa prices and/or in cost contlol. Tho costs noso In every anoa of activitp (il Variable manufacturing costs per unit increased 7.loh (from $1.16 to
sl.2464. (21 Fired manufacturingcosts increaseds750,000, or g.3oh. (31 Marketing costs, erctuding commissions,increased316 million' or 36o/o.
(4) General and administrative costs increased $3.5 million' or 15oh.
Chapter15
3n
P15-9 (Goncludedf (bl All srsas will require spectal cost analysis because the costs in all aneas Increased,but apecialattenUonshould be paid to: (ll Produstloncost Incroaseg,because although relaUvelysmall in pen centage,the dollar amount ls high due to the volume of units. l2l Selllng and promotlon coat Increases, becauae the rate of these cost Inc;gaset was lraater tlran the rate of sales increase. Tho saleo prlce wa8 not Increa3ed in spite of the increased cost. The hlgh sale! volumo Inciaase may be the result of too low a price. Further Investigatlon Into markbt prico and price-volums relationship is needed. A review of tho balancc gheet Indicateg a material deterioration in the companyb working capltal position. Inventory has more than doubled. This increaso appears to have been financed by a significant incraase in current llabilities (more than a three-fold Increase| and a material decllne In cash. The need for so large an Increase In Inventory and the effeet of dectlning profitability on tho cash and working capital position need to ba thoroughly lnvestigated. (cl The following lmprovementsshould be consideredby management: (ft lmproved coordlnatlon between gales, Inventory contlol' and pro' ductlon, an a no-€Yaluatlonof the product pricing policy' l2l Developmentof a standard cost system to monitor product sosts. (31 Developmentol a line of credit for short-term liquidity problems.
Chapter l5
CASES
ct5-1 (ll Businesg plannlng and budgetlng acUviUeslor Maiton Company ane impon tant because: (al A long-run commitment of resoirrceg to specialized assets is about to be mide.,A one-time decision for major erpansion that could involve a large amount of financial resouncesovor a long period of time is about to be undertaken. This Investment will be committed to specialized assetg and can be rccovercd only from the production and sale of one particular YalYe. (bl Tfte daily operatlong of the company will becomo mono compler. Mai has had no erperience wlth the day-to-day operaUong of a large business. The business ptanningand budgeUngproceduraswill provide Mai the opportunity to review the company performanco and will allow the company to develop and evaluate atternative counsesof aetion to satisfy corporate objectives. (cl They will asslst in obtainlng capital from erternal souncss.An erpansion pnogramol this magnitude, with a significant amount of initial funding' will require the generationof additionalcapital either through borrowing or issuing stock Obtaining nacoliliary funds can be enhancad bY and may requlra an orderly presentation of, the business plan and budget acUviUes. (dl They will highlight potential problem situations. Disciplined business planning and budgotary procedurescould emphasizea variety of prob' lem situations that might be encounteredduring the period of the plan. l2l Listed below are the major probtems that would most likely be disclosed because Maiton Companyis about to erperienco a significant growth. (a) The lack of adequate production facilities to manufacture the valve at the quantities required. The company has served a small part of the markeL The new segment is much larger,thus calling for more produc' Uon facilities than previouslyneeded. (bl The tack of adequate Internal capital gources to finance the asset erpansion (both working capital and plant and equipment).The company is smalt and probably generatesmodest amounts of capital. The amount is not likety to be enough to meet the new requiremonts.Gonsequently' the companywitl need to seek capital from the outside, and probably has little erperience because it grew slowly and had no previous need for outside capital. (c) The lack of adequate managementnesources(people)to administer the company as lt gFo\rs. The company ls small and, thus, probably solely run by GeorgeMai. As lt grows, there will be the neod for more managerial people.This need probablycannotbe met with current employees.
Chaptorl5
379
Cl5-1'(Concluded)
(d) Lack of planningand budgetskills. The companyprobablyhas had little need for planning.Consequently,it may experience difticulty in organiz ing for and developinga five-year plan. Specific problems could occur with regard to forecasting,production,marketing, and cost of capital. c15-2
(1) Factorc that Marval Products needs to consider in its periodic review ot long-rangeplanningincludethe following: (al The curent state of the economyand its expected future statusl (bl The current and future availability of resources, such as personnel plant and equipment,and capital; (cl Consumer attitudes with regard to product appeal, changing travel modes and patterns, and changinglife styles and affluence; (d) The level of industry sales, Marval's current and projected market share, and Marvalb degree of influence or dominancein the industry; (el The product lines with respect to the naturs of the production pnocess length of time the product has been established, and utilization of nesourcesand plant capacity. (21 Factors that Marval Products needs to consider when developingthe sales componentof its annualbudgetincludethe following: (al The pricing strategy; (bl The size of Marval'smarket share and the relationshipto its competitors; (c) The sales mix of products so that contribution can be maximized; (dl Availableproductioncapacity; (el The effect of advertisingon sales volume; (f} Nationaland internationaleconomicconditions.
g0
Chagter 15
cl5-3 submission (r) Divisionand plant personnelbiasesthat may be inctudedin the of budget estimates include the tollowing: tend to be lower than actually (al Budget sales estimates probabfVw9.9lO, and the curexpected because of ths high volatility in product demand rentreward/penaltysystemformissingthebudget. (bl Budget cost'estimates n itt u" higher [han actually expected in order to protect the divisions against thJ effects of down'side risk of business stumps and the possibility ol increasedhigher costs' The reward/penalty system encouragesthis action. (c) Plant and division managementcan incorporate slack and padding into the budget without the litetitrooo that it will bE temoved, because c9rporate ieadquarters does not appear to get actively involved in the actual budget PreParation. use to monitor divil2l Sources of information that corporate managementcan sional and plant budget estimatesinclude: (a) Regional and naiional leading economic indicators and trends in consumer preferenceand demand; (bl Industry and trade associationsales proiectionsand performance data; finani"i prior year performance by reporting units as measured by their cial, production,and sales rePorts; (d) Performanceof similar divisionsand plants' (31 Services that could be offered by corporate managementin the develop' ment of budget estimates are as follows: (a) providirig economic forecasts with regard to expected inflationary trends and overallbusinesscycles; (b) providing national and regional industry sales forecasts for products as developedby corporate rianagementor obtained by managementfrom other sources; (c) Sponsoringtraining pnogramsfor ptant and divisionalpersonnelon bud' geting techniques; (d) lnforming divisionsof overall corporategoals in terms of sales, market share, and profit. (4) Factorsthat corporatemanagementshouldconsiderin decidingwhether or not it should becomemore involvedin the budget pnocessinclude consider' ation of costs and benefits and the resultingbehavioraleffects. (a) Coststo be evaluatedinclude: (f ) tncreasedcosts at the corporate level, because monetime and perhaps additionatstaff will be required. (2) possibletower profits, due to an unfavorablechange in divisionand plant managementattitudesand motivation'
Chaptsr15
ffi1
Cl5-3 (poncluded) (bl Benefitsto be consideredinctude possibteprofit improvementfrom: (il More accurate budget estimatesthat might reduce lost sales and/or reduce costs incurred; realistic budgets; l2l More effective managementbecause of more budget pnocess' igi lmproved coordinatlon and control ol the (cl bin"rioral variablesto be consideredInclude: (f l Effect on goal congruence;corporate manageizi Effect on lhe communicationchannels between ment and divisionalmanagement; (31 EfeJ of restricting authority over the budget process at the divisional level; (4) iossible negative effect on motivation and morale, due to loss of authority and autonom$ (sl Effect oh pertormance due to a potential reduction or increase in bonuses.
Chapter 15
cl5-4 budgetary 3ystom' Schaffer Company appears to havc a woll'doveloped production' Budgetg for each of tlre important areas requiring attention'-€ales, Included In thc inventory levels, olpense", Jii capltal invesiments-are the constntction pnocoss.Insufliclbnt detailg are frovided to properly evaluate prcduction and Invenand uso ol the UuJg"t" lor ssleq capltal lnvegtmentr and the arponse side of tory levels. Thug, t{re analyslr li this caso must focus on the budgeting Pnoeac8. procaAlthough an elaborate budget pmcosr odsts' analysia-of the elponse purpose3: Tho dures raveals a number of gtroricJrJng" for ptanning and contrcl months ot basic Input to the oxpsnso nuOgoi fotift" comlng yoar i9 the first slr rsflect the current yearb actuat pedofrance' tfic oxponso budget (modified to The porcontage' unconttollable eventsl, and the corporato olponse rcduction comnext erpanse budget ii basically tait yeart actual costs reducod by the puted orpense percentage. planning This approach does not capture the full potential of the budget lor pripurpo"."l--niln shoutd Ue torward-looklng.Thc Schaffer budget ls based marily on past r""rft" and doeg not tpcognizs any planned changes in operating does not activi$es, The acrcss-the-board corporata olponso reduction target for cost improvemonF' consider the diffenencssamong ptantg in opportunities lrstrong' managers to build t"V permit the The review ol division r"n"g"iJni proposed slack into the budget And tho lacts Ao not make ctear whether the lor planned volume budget is based upon the currsnt yearb sales volume or ttre in the budget year. Witnout such an idiustment, an additional weakness exists the procedurc. is The process atso falls short for contrcl purpose":-Tl" maior shortcomingto its failure to Incorporate changes in operations that occur subsequent with August. Comparisons of perforriancos that inctude these late changes'incluThe provide usEful information for control' - budgets that do not, will not would t-afo sion of allocat"O "orporatton and division costs in plant budgets contain they the erpense budgets less ettecUre for control purposel-Pe9.ausa division irrelevant data iJr ptant-level cost control' The possibility that some the reduces also managensmay be iUte to Introduce slack into their budgets effectivenessfor cost control. particiThe budget process appeaF to omit the plant managels trom active tho improve pation in budget preparation"nC revision.Their participationvould cost control and'ptanning benefitg of the budget pnoce:s'--Theuse of acnossthe-boardoxpensccuts and Inclusion of allocatld costs in tho budgets u19d-f9r performancomoasurpmentlr further avidence that tha connpanlfhas 'failed to considerthe effect of lts system on managementemployees. With its budgetary syst-em,the company tries to plan and control its operations. To this end, tne company ls be*er off for having developed its__tJt"r' However,tuttft"r benefits coulibe gainedby eliminatingthe weaknessesin its procedures.
Ct;gtpter15
g3
c15-5
(rl
(21
Tho manstaeturing managert vievrg can bo ssparatod into two argumonts-thc ugc oi ttre Eamc lmprovement tsrgetr lor all plants snd lnconsistent appltcation of target ravisions. In both casesr the manufacturlng managefe argumontg 8rc valid. ihc manufaciuring manager claims that the use ol the aamo lmprovement targets'tor att plants fails to racognize the different abllities oi-pf"nt" to achiive targeta. His,criUcisrn ig valid because plants do have ditierent opporhrnlues ior lmprcvemenl and thls should be recognized in "gtaUtfnind mprovement tailetr. Wrilo hlr arguments- ma-ybe valid to aupport trir vie* thet older plantr havo lesc opportunity for impmYement' tn6re are Insufficlont dst8 presented to vorify his claim. The manufaclgring maneger obiects to the nowor plants' obtaining revised targets and th6n being able to perform better than the ruvised targel ThJ modification of targets in light- of new information is an apiropriate budgefrng technique. Newer plants may need such revisions get parameters and because their lnixpeience makes it morc difiicutt to crercise contrpl. ilo*erer, the manufacturing managerb alSumant is valld becauge adlustmentr iravc not been avallable to ell plants' and' turthermorc, Ute "Oiu*rn"nts granted to new plants appear to make lt easir lorthem to achleve target* The rssultng treatmint in establishing end revising targets' when coupled with e pertotmanco sppnrisal and rcrvard system' does sppear to discriminate in fayor of the newsr plants. This would apparently lead to lower bonuses, appraisats, and morale among management of the older plants. Both old and new plants have the capability of concealing slack in their budgets. The otderptants cannot introduce budgetary slack t*rrough their cost estimates because their costs havo ostablishod a pattern over'the yoars. HoweYer,the ptant managoment knows thoso aneasof operations wtrere changer and'improvements can bs initiated. These operatlng changesc8n be Initiated after tho budget io adopted' The newer plants can incorporato budgetary slack in other ways' Their coSt estimates ang mgno uncertain because the plants an6 newar' The plant operafions havo not stabilized, so ptant management may be able to intlate costg slightly above what can be realistically erpected of thom. There may be more o-pportunitiesfor improved operations that may not be recogniz6dat the ti;; the budget is adopted. In addition, there is aomo lag ln lncorporating Into the budget the cost savings of tho IncreaseJ erperience of tho workerg and the efficiency in functioning of the equipmsnt and machinerF
g1
Chlptt
15
cl5-6 ln thc cas. err not llkely to prcduca eftec' (f r-'l The budget practlcg? d?:c4bed can bc tfuo budget?ontrol In thc long runr'bccsusc rcveral weaknesscr ldentified: (al There 8ppoars to be no partlclpaflon of plant poFonnol In thc budget develoPment. In lour yoarE' thc manags' Ol Cii"n ttrit ttrere have been flvc manage6 budget lr rcalistic' havo had nobpportunity to assess whether thc (cl. lt app""rr ihst adlugtmentr to tho budget, oubsequent to ltr adoption' are not permitted even In tho tlght of newlnformatlon. (dl The budget la being uoed to pressuts Fc plant menegoa (21 ile lmmedlite effect wltl Ue a tnrstrated manager, who wlll not meet thc budget and who will bc reptaced a! 8 noaultof belng unwllllng to cacrilfcc the luture for the present, or s frustratsd managorr who meets the budget by making decisionsthat raerlflco thc futurc for thc preaent. ln elther casor Drake Inc. ls unfavorably affected. Ttre long-term eflect wllt be to rcducc thc management affectivenes! of Drake Inc. imployeeg. The arbltrary method of budget developmelt' lack of partlcipaUon, in,i ttrc usc ol the birdget as t pnossurc devlca wlll result In loss of talenied managors,developmentof nonproduetlvemethods by man' agors to nbeat' ttre Uudge! decisions taken to meet the budget but wttich arc detrimental to the company in the long nrn, and low moralc and motivation. ll the present methods of budget administratlon continue' Davld Green may adopi nonptoductlve methods and becomo an Ineflectivo managsr. However,it tre is talented and conUnuasto raise such lssues as the poor condition of thc plant and hls short tenuto, lt lg likely ho will rssign or be fired.
CHAPTEB 16 DtscussloN QuEsTloNs A capibl olgcndituro b an upcrditure hlrtd' od to bcnelil futun pcrio6. ll ia nornally asrocblrd wilh thr acquiritbn or imprwemrnl of plant asrcte. Thr rral dislinclist betweln a copital and rcvenul cxpendilure is not lhe immediato charging of the expendilurc to ilcotnc, as gppood to ita gradual atrprtizatim, but thr bngth cil limr required lor ils recovery in castr. Bccovericr ol rvenur expenditurel, rtrch ee product c6ll, aro expected to lako placr in a matlor ol weeks or, at the mosl, monthr. Thc tinancial rccovery of capital e:gendilures b measured h lerms of years. O1&2. Purpoces cil e reoearch and devebpmonl Pte Itarn are: (a) A planned gearch lor new knowlodgc pertainingto the industry withoul reler' ence lo a specific applicatict. (b) Crealion of a new producl or improve' ment of an exislhg ptoduct. (c) lrwcnlkxr cf a new or impoved procost or machhery lo mEke a fhishe'd produci orgnponenl Bcs,rsrg fc a research and devclopmont Prograrn arg: (a) To protcct thc cabc dolbr, that ic, to meet csnpotitbn. lmproving lhe quality of pedonnancr cl produds or achieving cod savhgr in eilher openting or capilal erpenditurer falb hlo this categpry. (b) To do research to promole new saleg dollars,eiiher by enterhg a new market or by aignili:anlly expanding an existing msrket. (c) To invesligate problems with respecl lo environmentalprotrtbn, saletv"-rvorking cordilirns, elc. Q1S3. Budgetary prccecbres for research and deveh opment expendituro are designed to: (a) lorce management to lhink aboul phnncd elgendilures; (b) coordinate rosearch and developmenl plans with thr inmediste ard lang-range pbns of the conpany (c) lorcc lhs research and developmenl stafl to considcr major nonlinancial aspects cil lhc prograrn, such as personnel, equipmcnl. and facililies requirernenb. Q1S4, A cash budgct involveo detailed estimates of anticipaled cash rcceipls and dicbursemenlr for a rpccified perird cil time. lt Lr designed to assbl monagemenl h coordinaling cssh tlow lrcrn operaticr3 an a basis lor financial plans and conlrol. The cash budget provides a sysOl&1.
rt
'-
85
temalic approach lo lhe synchronization ol caglr regorlrce3 with needs. n a$bt! mansgernent h rnakhg hlelligenl dccbionc corccrning capilal expcnditures, dividend polbies, hveglment3, and other financial matler3, and often exerls a caulionary influencc on any ol lhe abovc phns. Porirdic roporb wnparhg aciual with planned receipls and disbursemenl! permil effeciivc ard cqrtinuous csrtrol ol cash by signalhg signili:ant deviations fronr the firancial planr for |he perird. O1S5. (a) Nqrmanulasluring busiresses musl plan la the tulure jusl as carelully as rrralufaclurhg cqtcerns. Seasonal pattemr in ngyonuqrand expenditur€smust be povided for, and requircd rquipmcnt replacementand expansionsmusl be budgeled. (b) Not-for-profitorganizationsgenerally operale on relatively fired incomes lhal are received at ono time. Such recoipl patlernr aro common for organi:ations that rely sr tax dollars lor support.These funds must be allcaled throughoutthc year in order to mainlain operalions. Careful budgel plans are a necessity for such albcalbns. Q l S ' 6 . P P B S g t E n d sf o r P l a n n i n g , P r o g r a m m i n g , Eudgeting Syslem, and is an analytical lool focueed on lhe outPul ot final results ralher than input or inilial dolbrs expended.The oul' put is directly relatablelo planned goals or objectives. O1&7. Zerobase budgeting[ZBB) is a planning and budgeting lool using cost.benefil analysis of projects snd functbng to imprwc an orgraniza' lion's regoutce allocation. Budgel requecls consist of declsbn packageslhal are analy:ed, evalualed, and ranked in a priority order based on cost-benelil analysis. lvlanagernenlcan then evaluate pqssble astivitier for the corning peri' od, selecting those that will best achieve orga' nizalioal grels. Traditional budgeling tends lo concontralo on the differential change fmm the gdot yean, assumhg hat existhg astivitiec arc essenlial, must be cmtinued, are currently performed in a et-officient and optimum tr16tr1er.and will be cost-effectivo h the canhg yest Cost! arc devebped monr on a line-ilem tather lhan atr activity basis. ZBB orgranizerall budget cootr h the lorm of activilies ancl/oroperaliau (deci'' sion packages) and evalualec tho effeclivc' ness of each decision package as if it were a new aclivity.
Chaptdr t6 ffi I
cl16-8. (!) Zcro'btsc budgctingtcquirc! mlnlgcrg thclr Lntirc budgat rcQuast' lt tb justity -thc burdan d Progl on thc Plates mantgcr lo i|J3tifywhy any.moncy tt tll chould bc budgctc'd' ll docs thb bY sttrting wilh thc essumplion lhet zcro will bc rpcnl on arch tctivity' to thc budgating plocctr bcainr with r brrc of zafo. contidcrcd (b) ' Thc two kinds of tllcrnrlivca for cach rcrNiry erc (1) diflcronl wrp oil pcrforming thc ectivity end (2) diflcrcnt lcvcls d cftort In pcrlcming thc lciivity. (c) A dccirion prckegc include en enrlyris d an sciivitYt cat rnd Purpotc, sltcmativa courlcl of rclion' mcltura3 rctivitY' pcrlormencc d thc ol consaquoncct of not Pcrfaming Urc activity, and thc tctivity'3 bcncfitr. (d) A packegc idcntifico end dcscribsr onc tctivity in ruffrcicnl dcteil eo thtt it crn bc cvaluatcd rnd compercd with olhcr acllviticc. (c) Succesr in thc imPlemcntation of zcro basc budgctingrcquirer thc following: 1. Unkagc d :aro-balc budgcting wilh short-.sndlong-rangcplanning 2- Susteincd 3upport end commitmcnl from axocutivc mlnlgomcnl in 3. Innovelion bY mtnsgcn dcvcloPing dccislon Prclcrgcl 4. Acccpttncc ol zcro'besa budgcting by Pcnont who murt Pcrform thc budgcting work O1e9. Prorprtivr hformrtbn lhouH br prwitod h oxlornrl finencial ltrlom.nlr whrn il will enham thr rli:rbility cil tho ucor'r pndi:ticnr. 016-10. PERT b prttbulatty rpProprhto u e rchlduF hg and ccntotlhg trd'rniquo fot Ptoioctl sl' rirling of e lergl numbor of trskr, roorr ol whidt cannol bl strytrd unlil otrrn rt. corY}' Plclr, and lsno of rttrbh can br undrriakon cdrcurtontly. Conceptually. lhr rllrrrncl ir to e nrtrrprl of intordependcntectivities wtrijr. rr I group' roquiro cocli.tabb tlm to ccrnpbto. Thrn b usually subctsntbl srt.up linr (and cel) a$ociated with enatyzing, defhhg, and onln8lhg c6ch discrot. prcied sstivity; thur, lhl bonefii is h proicctl rcquirhg a cstsUerablo sttpunl ol limo and consbth! of r reblivcly ccnpler netrrorlc PEBT albw: thr ucrr to uPdal. erd rovisr thr rchrdubd activilis rnd thoroby drtrmilr rilrts ol changor st tho worall pojrct. lt b Pattbubrty apprgrbte whon thl timing cl irdi' vdual aciivitbr and thr Proi.ct cotplolict dale arc criibal lo lr,rccatt. 016-11. Slack is c6npd.'d by rubtracting thr rarlicsl oxpocled timo lrsn thc latctt allowablo limo.
ap.cl.d linr L th. .arl'Ltt titn Th. .rtlbtl rctivity rn cln br orprclrd lo ttrrt. lhrl b.ctutt cl'ltn roldbnrhip to pondng rtivitior. Thr btort ellrrrrbb tino b tho blst llna thd 9rr ldh;ily mey brgin rtd nca doby catpblbn of tho Poioa. Sbck ir drlorminrbb onty in rrbtbn !o an ontirr path th ngh thr noilorlL Ol&12. PEBT/iort ir rmtly rtr .xl'nlion of PERT' evailabb, il sootnt sdvttsbb Wih linoqtins to .ltign cat to llnr end eclivilior, thoroby proviling load fiu rcbl pbnnhg rd cc'rttol by I rnctistsl rcPonribilitY. Ot&t3. CanrPulr lrpport olfon dbtirrl advanlagor lo PEFIT urn. PEF|T'tr e rnethrnltrtbalty'orionl' U.rlV ruilod to ed itdrniqur rnd is thlr.ld. thr high'rpo.d t.tpont. of compulrn for drriving lhr critical path' llack limrr, end elrd tor storhg erd rrporting tttultt !o elr, tnanagom.nL Flovisbnr to all sch'dulo olo' mtnlt' whothor during thr initiel retirnaling phar or durirg tho seiiv. Ptoiccl Phar' can br updatod and thr rlvircd rcluhs PrqnPtly reporlrd. Cornputrr'ruPPorf b hdpful in dosling with largr, canplox nrtworkt cil intrrdepondencior and whon proirct conlrol roguirol timrly progt.3r rrporting againrt th. uPdat.d Platl' Most program ptcktgrt oflrr e varirly of rrporling frelunl and tormrl!. including gtsphic notwork dirphy !t w.ll er prinlrd r.Porlt el verioul summrty lovrlr. Curronl rrpodhg prwidrl inlonrulbn !o Ptoj.cl tnsn' agon, rnabling qubk t.|ctigr to dovietiqts'
Cl'ppter 16 Q1&14.
Tho lrcditioal budget focurer on qrc rel cl 'aseunptirtr. Thc probabilbtic budgel povbes for tvaluating rlvoral gets of acsumplions, ircludhg the prcbability odeach and a ccrnPc' ilc oxpectedvalue, range, ard standard devrs' tiqr lor eaci budget elemenL
g7
w
Chagter 16
EXERCISES
E16-1
January
Beginningcash balance Budgetedcash recaipts: Gollect accounts rtceivable: Novembercradlt sales: (S60TOOO r 1 Oohl..o.'.....,.........'..t
@s
March
$ o,ooo s2o,5OO 326,500
$ 6,000
Decembercredit sales: r OO96)... GiTO,OOO
42,OOO
$ 7,ooo
x 1o%l GlTO,ooo
January credlt sales:
r 25%l GGGGtsO,ooo Glso'ooor 6O%l
l2,5OO 3OrOO0
(S5O,OOO x lOTo| ....
$ 5,000
Februarycreditsales: f 5,ooo
(S6OtOO0r 25%l .........o.............. ($60rOOO r gO%l .........D.'.r'..r..o...
36,OOO
March credlt sales: (llTOrOOO r 25ohl .,..r......r.,...,..r... Total cash receipts....................r.t.r........ Cash available during month..............,......... Budgeted cash disbursements: Pay accounts payable: December purchases: r S0ohl........................ S!2OTOOO January purchases: Stf 5'OOOt2Oc/o1....
17,50O
$6O,5oO $srilooo $sB"soo $86,5OO $72,5OO s85,OoO
$16,OOO 3rOOO
r 8O%1,...........,.....,..... Gll5rOO0 February purchases: r2Oohl ... G$E2S,OOO
$l2,ooo 5,O0O
$2o,ooo 21,0OO 6,OOO
$46,000 $2O,5OO
4,OOO 22,OOO 23,OOO 6,OOO TrOOO 26,OOO
$4g,ooo s79,OO0 $26,5OO $ 6,000
g9
ChaPler 16
E16-2
-
Finlshed Goodg
UnitSreqUiradtO meet SaleSbUd9et..........-. Add desired ending inventory l2oohot fotlowing monthb sales|.....o..r...o...o...... Total units required.....i,..r......r.............r... Less estimated beginning Inventory l2}oh Of CUrrent mOnthb 8a1e31............. Planngd productlolt'...........
April I'OOO _4tOO€ l lpOO 1r8O9 9,2OO
May June IOTOOO l2rOOO 2r4OO I2AOO
2r2OO l{/rOO
2rOOO
2r4OO
lOr4OO
l1,8OO
Materialg
Aprfl
u -
Units reguired to meet planned pmduction (planned productioll r 3|....-................. Add desired ending inventory pO% of following month's production requirements) Total matgrials requ|red.....,......,......o..r.... Less estimated beginning Inventory (4oohot current monthb requiremoJltsl..........-.. Planngd purchases...,........r,........o.....
May
27rgOO
31r2OO
12r48O 4O'O8O
14'160 {51360
11rO4O
12r48O
-2grO4A
-92r88O
June 35r4OO
Gash disbursements during May for payment of accounts payable for material purchases: 113 r 29,040 r $2O x.98 a3 r 32,880 r $2O x.98
= $189'728 = 4291632 $619,369 CGA-g3nada (adapted). Reprint with permission'
3
n
Chagter 16
l
Et6-3 Par produetionbudgets Unlts regulredto meet sales budget............o....... Add desired endlng inventot"lf......... Total units req Lass beglnnlngInventory Planngdprcductfoll ................'o..
June 5Or0OO
July 3OrO00
3'OOO 53'OOO S'OOO 48,OOO
3,OOO 33'OOO 3,OOO 3O,OOO
\
Tee purchasesbudgets June
JulL
Units requiredfor producUon: 48'OOOr 3 ......... 3O,OOO r 3 Add dgsired endlng inventot! .....,..........,,..........r.
144,OOO
l4'OOO 158^OOO Lass beginning Invento1yo.................r......r..o.......r 2OTOOO Unlts to bg punchasod..............................r...o......r 138rOOO
9OTOOO
,
I I,OOO f Ol "OOO t4'OOO 87,OOO
,
Cash disbursements In July for purchasss of Tee: 1 3 8 , O O Or $ 5 r 1 1 3 r . 9 8 = $ZZ5,4OO 87,0OO r 35 r 213 x .98= 284r2OO $5O9,8OO
GGA-Canada(adapted!.Reprint with permission.
CMptcr16
39t
E16-4
(rl
CROCKETTCOMPAT$Y GashBudget For July
Cash balance,July I Cash receipts:
s 5,OoO
June salgs Sl3OrO0O r 4S%1.....o...............o.r........-....... $14,4OO July sales (S4otOoor 5O%1,o...r............o..r..........o......... 20,OOO Cash aYailable r..r........................................r.r...r...'r.........
Cash dlsbursements: Jung purchasas($r orooo I 75%1.......'..r...........'........, I 7,5OO July purchasgs($l 5rooo r 25o/o1...,r,o.r.............-.......... 31750 Other marketingand administrativeexpeflsoS............ lO,OOO Incomg t3Xt....r.................ro.....r................................o... Dividgnds......r.....r............o.....r...o..'........'...o.r.'..r.'.r....r Gash
balance,
July
3t
2rOOO* 15.OOO
o..r..o........................o.........r.o...r...r.
34,4OO $39,4OO
38.250 $ 1.150
tCalculation of June income tar: Sal
es......aa...a.a.a.t........r.a.......t.rtaar.r.....t.r....o.
aa... ara..rr. arr....
Cost of goods so1d.........o...r.,.!.o..,.,.............,....r....r...r....r Gross
protit
$l8,ooo
t.........rri.rr....'......o.r.......r....r.rr...r...........r......
Commercialerpenses: DepreCiatiofl ....................r.............,.......... Other marketlng and administrative.........
$4,OOO 9.OOO
Taxablg income................r.........'.r'...r.r...........r....!,...r.....
Incomg tar ($4rggO r 4Oo/o1............................ (21
$:o,ooo l2,ooo
13.000
sl,gag $.2,99q
Sincethe desired minimum cash batancels $5,OOo,arrangements should be made to borrow $3,850 ($S,OOO- $i,1SO),
CGA-g3nada(adaptedl.Reprint with permission,
392 E16-5
(f )
l2l
Chapter 16
I
PERTnetutork:
Alternate paths and times and the critical path and the erpected project time: 1-2€-6-7 = 11 weekg r- critical path l-2-3-5-8-7 = lO weeks 1-2€-4-5-8-7 = lOweeks
(3)
The two activities In question ano3-4 and +5. lf these activities weno eliminated,thelt would be no effect on the critical path or the expected completiontime because3-4 and 4-5 are not on the critical path.
Clppter l8
393
E{ 6-6
(rl
Astivlty
1-2 1-3 1-4 2-6 3-5 4-5 5-O
l2l
Path 1-2-6 t-4-5-6 1€-5-6
(to I 2 t 2 4 3 4
+ tm(41+ 2(41 3 6(41 9 6 4(41 t8 1r(41 6(41 I 5 4(41 6 5(41
hl
= Total
l2 35 23
u
30 24 30
-F
t8
6 6
6 0
2.OO 5.83 3.83 10.67 6.OO
6
5.OO
o o
{.oo
Total t,
_bl 2 + 1O.67 3.83+4+5 5,83+6+5
12.67 12.83 16.83 +
critical path
CGA-63nada(adapted|.Reprint with permission,
Chwtert6
E16-7
6
tf)
+
5
11 +
+
+
4
=29
3
l . + 2 - - 5 - . O - r - f 7 - d 9
6
+
r
l
+
2 --{ 5 -r + 9 I 6 + 1 . . . . r 2 + 4 . g + g O + 4 I ...+ 2.d 6 + g + 2 --.) 4 ..-.+ I -.+ O + 3 6 + 1 . + 2 - 3 . + 4 6 O + 3 I + I
I
€
-
2
6
+
-€
.r-
3
O
S
+
.r..4
4
+
3
i
+
2
=
2
I -r..9 0 + 3 + 4 d O - - . 7 ' d g : + 2 + | 8..--. I 6 1 3 + 2 = g 8 3 + + 4 + I . - . + 7 - 4 9 + 2 + I + I
+
0
i
--+
I
5
=3Ocriticalpath =26 2
9 =25 =21
---|
I
3
+
2
=
2
4
4
+
3
=
2
9
l - + 2 - . + 3 - + 4 - { 8 9
i
O
+
3
+
9
+
' l - + 3 - - + 4 - . d 6 . . d 7 . + 9
iO 1 - + i 1 - . 3 ',21
+ 2 + 1 3 + 9 + 3 - - r 4 O - - 8 - 9 O + 3 + 1 3 + - . 4 - + 8 - - . . + 9
=25 2
=
2
Event
Earliest Erpected Time
Latest Allonrable fime
1 2
0 0
o
3
to
4 5 6 7 8 9
1 1 2 2 2 3
4 7 3 7 7 0
6 tl 14 18 2 2 2 3
9 Slack Time
o
3 7 A 0
0 1 0 I 0 0 1 0
CGA-Ganada(adapted!.Reprint with permission.
395
Cluptcr 16 E16-8'
(11
to = $o + 4t,,, + ty' + 6 = (1 + (4 r 2l + 9l 'F 6'=
3days
(21
(31 Time Reguired Path O - 1 - 2 - e - - T= 4 + 3 + 6 + 5 0-1€-4-6-7 = 4 +4 + 3 + 3 + 5 O-l-3-4-7 =4+4+3+O 0-1€-5-7 =4+4+E+6
=lSdays = 19 daYs =lTdaYs =2Odays
The critlcal path is O-1-3-5-7,because lt requires the greatest total time (2Odays|. (41
2O days
CflUCal pathtltl|O"............r'...................'.......r.r.....,....
Less time rsquired after event 2: Activlty 2.6 Agtivity tl-7 ..............
.
a a.
aara
a aa
a t
a aaaaalaa
6 days 5 days
a t
Marimum time lO gVent2 ......................"....'.............. Estimatedtime to event 2: AgtiVity
O-l
Astivity l-2
.t.tr...r.....r...D.............r.........................r.. aoaaa
a a aaaaa
aaa aa aalaa
aaaaal
4 days 3 days
Sfack timg at evsnt 2..,..o.........o..........r..r....r......'.........
1l dayrs 9 days 7 daYs 2 daYs :::
I
Chaptar 16
396
PROBLEMS P16-l Budgetedcash disbursementsduring June: Purchaseof materials: May (1 1r25o1x$2o r 460/;1...,.'r...."""""" Slo3tsoo l3lt544 Jung'(l irlgo' r $go r54%l r.........."""""' Marketing' general,and administrativeexpenses: $23r713 xa6%1,.......t.o.r.......,.......... rufaytSSirSSOa x 54%1.............................. 261622 June'($a6reOOl
(11
$235,O44
5O,335 37r9OO5
Waggs and salad€S ......."t"""""t'r"""t""""' Total
$323,279
.t..........'........!..r"""""""'t"o""'t"""t""'
1 May 3l endinginventory(11,4O0x 130%)..,..... Mai pfOdUCtiOn.r.....r.................r.r.......r......r...... MatgfialSnggdgdinMay,.....ro.........,........r........ April 3O ending inventory ($309,4OO + $2O1...... May pUrchaSgS ..r......r....r............t.........r..r.........
l4r82O units I l t9OO 16r??oUnitS l5'470
:!j!r25O UnitS 2June 3O ending inventory (12IOOOx 13O7o)......' 151600 units JUng pfOdUCtiOft...................r..............r....o.....o.. I lr4OO 2 7 ' O O Ou n i t s MatgrialsnggdedinJung....'............................. 14r82O May3l ending inventoryo.....................r..r.........
June purchases.........,......,.......,.............--
!-2J!9 units
3 (S357,OOO depreciation= Sst'55O May sales x t5%) - S2,OOO 1 a-^ -^^ depreciation= $49'3OO (S342'OOO June sales x 15%l- $2,OOO 5
Accrugd payroll on Jung 'l .,.......'... Payrollearnedduring June.......r...r
$ g,goo 38,000 $41,30O
3,40O Accruedpayrollon June 3O.........., Cash paid out for payro11................ 937,90O
(21
Budgeted cash collections during May: $ 31,860 March sales ($354,OOO x 9%).,t...,.............-,..-... oh Aprif sales ($gogrooo r 97 r 607o)......................-'........'.-. 211,266 90,75O .'-....-....-.--... April sales ($SoS,OoO| 25ohl Total
99s9dz9
397
Clvpter 16
Pl6-1 (Concluded)
(3)
units ol inventoryto be purchtg-d during July Budgeted goohl"" 15'860 units 3ilv 3l ending inventory l12,2obx f ..,..............r....'.............r....'... | 2tOOO JUii' ptOOUCtiOn MatgfialSnggdgdinJUly...................o..t...'.o..
I 13O7o!"' June 30 endinginventory(12'OOO .......... July purchases
.
t
2?rS60UnitS
l5'600 12e6O units
Chapter 16
398
P16-2 Beglnnlng cash balancc
Cash recclPtr durlng monthl Cottecttonrof accounts recelvable: Februarysales: ($2rOOOrOO O I 4O'/c1""""'o"""t""t"""""""'
June
May April t loo,ooo 3 loo,ooo3
lOO,OOO
3 SoO,OOO
March aaler: (Sl 18OO'O0O r 60olo)..'.""""""""!""""""""
1,080,OOO
t
Glf rSOOrOOO I 4Oohl.-....................ro......""""'ts"'d
Aprll rales: (S2,200,O00r E0%)..-'.'..-...-...r.. tS212oo'ooo r 40%)-....,..o..-.o...--....-....................d MaY sales: ......o.x. (32,500,000 x E0%)................-.'-
72O,OOO l132O,0OO t
88O,O0O
l,Soorooo
3 1 , 8 8 O , O O O i32,o4O,OOO32,38O,OOO Total cash collecUons 32r14O,OoOs2,48O,OOO s1,98O,OOO Cash available tor use during Cash disbursements during month: Accountc payable lor Purchascs: FebruarY Purchasec: 80,000 (S2,OOOpOO February sales I SOohr 4O'/ot 20ohl 3 108,OOO (S1,8OO'OO0 March sales r SOchr 600/o| 2Oo/ol...March purchases: 2g8,OOO (S1'8OO'0OOMarch sale3 r SOt/t r 4Ot/oI 8Oo/.)...528,OOO 8O%)......t 60'/. (S2,200,000 April sales r 30o/ot 72,oOO 3 ..... | 2O'/cl 4Oo/o r (St,8OO,OOO r SOoh Mareh eales 132,OOO (S2,200'OOOAprll sales r 50% x 600/o| 2Oo/o1........ April purchases: 352,OOO Aprit sales I 5O'h t 4O1/or 8O%).....-' {32,2OO'OO0 6O0,OOO (S2,5OO,OOO May eales r 5Oo/tt 8O'/ot 80%)......-. 88,OOO 3 galG3 (92'2OO,OOO r 5Oo/ct 4O'h z 2Ot/ol.*...Aprit 150,OOO (S2,5OO'OO0 May sales r 5O'h r 6o'h t 2O'/c1...-...,. May purchages: 400,ooo (S2,5OO,OO0 itliy salcg z SOthx 4O'h r 80t41......... 672,OOO 8O%)"---. x E0% r SO'h r (S2'8OO'OOO Junc csler Wages l2Oo/ool current sales): 44O,OOO -.-..-....o......... April (92'ZOO'O00t 2Oo/o1...... 5OO,OOO ...................,. May (S2'5OO'000x2Oo/cl-*..
June (32'800'000t 20041.......... Generaland administrativeexpenses: Safarles 11112 r 3480,000). PromoUon 11112x SS60,000). Propertytar6 1114r S24o,000)
fn guranca 11I 12 t 936o,oO0) UtiliUea (1I 12 z S30o,00O) lncomc tarer (St,o2Orooo lncomc t 4ooh tar rate) .-..-
50o,ooo
40,000 55,OOO
o
3O,OOO 25,OOO 408,OOO
40,000 55,00o
o
3O,OOO 25,OOO
o
40,ooo 55,O0O
50,ooo 30,o0o 25,OOO
o
$1,806,OOO s2.07O.OOO s2,Oo2,Ooo Total cash disbureements............ (22,OO0) 3 334,OOO S 4'O,OOO Cash balance beforc borrowing or lnvestment.-............... 3 (234'0OO) 122,OOO tgro.oool Cash to be borrowed (or invested)...-.-.-...3 l O O , O O O3 loo,ooo s__1!-qp_q_q Ending cash balance'............
Chaptor 16
399
P l 6 -3 E II/!A1gP'4"- BIHG COMPA}IY TVIAY1I Ca*r Budget For thr Ycan Ending March 31 208
20c
Balancc of cash at beglnnln! ..........-.-...... Caeh generated from operatlons: CollecUonc from curtomergSchedule A....,..........
3825,OoO
$1,O65,0oo
Digburgcments: Dlrect materla ls-Sch edulc B ...,.,...,....... Dlrect 1abor..........a.-6....F.... Varlablc overhead
3220,000 300,000 100,ooo
3 245,ooo 360,00o
Total disburrementg
3750,00O
3
Excess of caeh collectlong over cash disbursementsf rom operationg Carh avallable lrom opcraUonr Cagh recelvcd from llquldaUon of erlsUng aicountr rcceivablc end Inventorier -.-.
s 75,OOO
120,O0O l3o,00o
3 75,Ooo t 75,000
855,OOO
2l0,ooo s285,OOO
eo,0oo
Total cash avallablc ....,...........,......,_.....r.... Paymentsto generat credlton fllguldatlonproceeds)
tl85,OOO
Balance ol cash at end
$ 7S,OO91
90,O00
s285,O00
270,OOO2
t ts,ooo
i Thlg amount could have bcen uaed to ply gcnoral credlton or cerried forward to thc begln. nlng of the next-year. 2 6ooo,ooo r Eoo/c|sgo,ooo
.
:
Chapter16
Pl6-3 (Concluded) ScheduleA--Collectionsfrom customets:
sgOo,ooo sl,08o,ooo 75,OOO o
tttttt"t't"tttt"t"tto"to"r"ot""t"tt"t""t"""""'
SaloS
igginning accounts rgcgivablo """"""""""r" TOt!l
ttttttttto'itttttt"'ot"tott"tl"'orr"""tt"t'o""'ot"
Less ending accounts rccgivabllB"""""""""" ColIections'romcustomen;........................|.'.
$9OO,OOO 75,0OO
4O,OOO3 $240,OOO
o
tttttt""""t""r"t"tt"""""""""""""ttt'lt"
Lgss beginning inventory"'t'Do"""""'t""""""" t"t"tt'o
"t'r"
Beginningaccountspayab1e""""""""""""""
"'
9OTOOO
20c
2oB
s2oo,ooo
Direct materials requinedfor production """"' Requirgd ending inventory o""""""'ot"""""'t"
PU fC h a S93..r.....................r.t........o
$t,155r OOO
s829roo9 $o65poo
ScheduteB-Disbursements lor direct materials:
Tot3l
20c
208
$24O,OOO 0
s 24O,OOO ' 5O,OOO
S 29o,ooo 4O,OOO $ 25O,OOO 2O,OOO
$24o,ooo $ eTo,ooo
25,OOO 20,OOO Less ending accountspayab|9......t.........1....,.. s220.ooo s- 245.OOO Disbursgmgntsfor diract materials""""""""' 2'Ooox S2Op€r unit = $4O,OOO 3 12,Ooounits | 2112= 2.AOO; 2,5oo x S2o per unit = sso,ooo . is,ooo units x 2112= 2-r5oo7 TOtal...ttttt""""t"""""t""""""t"""t""t""ttt'
Pl6-4 ProductionBudget: Requiredto meet sales fotecast sales+ 915Oper unit}""""""""' January($3601000 Feuruary(Sas6rooosales + S15oper unit)""t""""r' sales + $150 per unit """o"""""'o' March (54-gorooo Desiredfinished goods ending inventorlr: ((S600,000A-prilsales * 5f So per r-rnit)a l0ohl'r 1o0) Total quantity of product to prociuce""-"""""""""""""
214OO
3,0oo 3,2OO
Direct Materials Purchases Budget: r S2o)..'.. Materials *quii"J ior proOuttion (9,1Oounits """""""' Desired materials ending inventotY first quarter """"""""" Total di rect materiats purchases during
8,600 500 9,100
s182,ooo 2,OOO sl B4,OOO
Clpptor 16
101
Pl O?4(Concluded) Cash Budget for First Quarter Ending March 31, 2oA: January l, cash balanco.............o..o.........r.'..o...r.... Cash receipts: InYestment by owner s 5OTOOO
Mortgagetaken out
CoflecUons of sccounts receiyable: January saleg: (SS8O,OOO r 3Oohr Seohr 98%o1.o..,..,.. (s360rOOOI 3ooh x 2O%1..,...,.o,.......o...
s
o
t5o,ooo 941672 21,6OO
(S360,O0 I 3 O7of......o....r,o.,..........r...,... 108ro0o St36 O,O00 I 38 7o)...,..............oo....o.,..... t36rgoo
Februarysales: x 3Oohx SOoh x g$o/ol,,...,..,r 105r84O Gt4sOrOOO G|45O'OOOx 3Oohr 20%1,.....r........,ts... 27',OAO (S4SO,0 0o x 30 ch1...oo..........r....r.......r... 135,OOO March sales:
x3Ooh xSooh f 98%1...'...... G!48O,OOO (S480,OOO x3Ochx2O%l Total cash availabte for use during quarter,r.......D. Cash disbursements:
Accounts payable
a aa aa aat
aaa a aaaaaa
1121896 28rgOO
96O,608 $ 960,608
$184,OOO 265,5OO 1361500
Dlrect labor (grlOO r $3O)- $7r5OO1r.,............. Varlablg oyerhgad (grlOOx $l5i .....-.........,....... factory rent (910 r S'OOOcapacity x 3) .,......... Sales commlsslons (gr60Ounlts x-$g;...........,., Office rgntals ($t ZrOOor 3! .,..,...........,.....,.,.,.r fnterest payment ($iSOTOOO x 2oh r 3|.,....,,..... Payment of princlpal on long-term note.......... Equipment pu rchasos..........-. March cash balance before currsnt financing,._... Currgnt financing reguired ..,............r,r.................. Desired March 3i cash balance .................r....r.r..r
t5orooo 68,8OO 36rOOO IrOOO 3O,OOO
l50,ooo $ (69,1821 8,4.16.2
$ ts.ooo
I I I
Chapter l6
102 Pt 6-5
TRIPLE.FHEALTHCLUB BudgetedStatementof Income(CashBasis)
('tl
For the Year Ending October 31r 2OC (000s omitted)
Cash nevenue! Annual membership fees' $gSS r 1.1 r l.O3
$,402.2
Lgsson and cfass fggs,- s$234 1 8 0 r $234 '......r............o..o.............'.......
Miscellaneous,92'0 ;i"
I
$2
304.2 2.7
a...a................a.aa.a..aaa.t..a.aaa..aa.a..aararato'r"'
TOtal CaSh fgVgnUe.......rr.............rr........rr..........r............o...........
s709.1
Cash expenses: Managefb Salafy and bgngfitSr$gg X 1.15..'.......................r...........s 4 1 . 4 218.5 RegUtafemployeestWagesand benefitS,S19Of 1.15'.'.'....'.......... 291.5 Lesson and class employee wages and benetitsr3195 x 1.3 x 1.15 TOWeISand SUppligS,$16 f 1.25 .......,.,......r...........r..... Utititigs (heat and lightl , 522 X 1.25...................o.r......'r............i..,.. Mortgagg intereSt, $gOO X .09....r...o.....,........'r........'r...............r...... MiSCgllangOUS,$2 I, 1.25 ..................r...r....................r..............r..... Total cash expgnsgs.....rr.................ar........r.........o...........t.....r..t.. Cash income......................r..'...r............r..........o............r.......r...............
Cashpayments: Mortgage
paymgnt ....o.......r.r....r...........r
AccountS payablg balanCg at 10131IB ....'......".".......o...............'.... Accounts payable on equipment at l0l31lB.... Planngd new gquipmgnt purchase.................r. TOtal CaSh paymgnts..r................r.........................r...............t..to.
20.o
27.5 32.4 2.5
3633.8 3 ?53
$ 30.0 2.5 15.0 25.O
s 72.s 2.8 8.3
Cash surp1us..............................o.....r.......r.........................r............r..o.. Beginning CaSh ba1anC8...................r..........'..............r.....................'t...
$
Cash available for working capital and to acquire propetty.......o..........
LlQ-t
(21 Operating problems that Tripte-FHealth Club could experience in 2OG inc l u d e : (a) The lessons and ctasses contribution to cash will decrease because tho projected wage increase for lesson and class employees is not made up by the increased volume of lessons and classes, (bl Operating expenses are increasing faster than nevenuesfrom membership fees. (c) Triple-F seems to have a cash management problem. Although there appeani to be enough cash generated for the club to meet its obligations, past due amounts occur. Perhaps the cash balance may not be large enough tor day-to'day operating purposes.
Ctle,pta- 16
':'::'*fli^d*Tl#$, tog
pto-s (concrudedf (31 Jane c fn ttre c annuafi clubb rr
mentpun^has-e:6ffi ;iir"irH:rr:r,if rri:fi}H"Tl"v."qui;_prope'ty, lil"-g;'i;"otr""Tlilt cantincll"-:9r"!"ins ln: !":F o"li.5" ,o purchas
sl,ipuonTil.l""nffi ":*i[**_.':l;;*"ff :"","j1*;i1fu: P'O.E (1) Schedufe of b.gdgetedcash - -r" '|neceipts by (ooos omitted): month for the thtrd guarter of zoA Billings
Receipts
Actuat/ Itfonth
Percentages |ut"t"o
n'6;.-...... frli-::-...-#
*
J,ne""'...'.1 srooo
;9
.1.:::........... T;SSS-?:" SrOOd ;:
s,ooo uo {.::"....-;;;r;;; nl
rf1JDo...,.......
i{g
90 iJ
{u1r.,..."'..... iffi
l3
i,T$* :;fri
J3 il
:,,1?: d;
septembe, f;::: septembe, F,:9g
eo
Auou-sr.jip: August L.d;'
slv
ffi 40
sffi 2oo
i9,
"'333
#
20
i'iii to;s ,o#
u"ry..-...] :,::g uurv..-....._ :':99 .tuf!"....,...,.. :':::
&ff";
Timins
# ;3
$;ss I,o 45 2'o2s
20
t8o
:3 'o
ffS eoo so
;3 23
."j:#idTfrilfrfu","'.: rota, ;"J;,f::::::::::.--# *: > ";;
$
2'2so
;3s
....................91980 S _C-- qF @ d
Chaptar16
&1
Pt6-6 (Goncludedl quarter ol cash dlsbursementsby month for the third budgeted of schedule l2l 2OA (OOOsomitted):
July Salarier Variable: $4,500 t 2Ooh $5,OOOt2Aoh $5,5Oo x 20oh
3 900
t a a aa aa at a aaaaa
'
t t t tt
$l,ooo
9OO l,5oo
Strooo
$1,1oo $t,l oo
lr5OO
lr5OO
s2,4OO
$2r5OO ':"
$z,6oo
$3,750
s4,55O
$
Total variabl g .o.'o"""""""""
Fired
Disbursements August SePtember
"
Total salarigs """""""""t'trt
':"
Purchasgsof pr€viousmonth"""""""'
lr Soo 450
lntgltSt......t.""""""t""""t"""ttto"t""o'
Depreciation (not relevant! ""'o""""""' Total cash disbursgm€llt3 """"""""""
(31
$3,60O ::
#
(oooomitted|
$
Cash balance-.fuly 1, 20A...,..... Cash receiPts in third quarten J U l!tttt August
tt tt""tt'r""t"""t""tt'o"t"t
t"""t"""'otttt'
ttttt""ttt"t"""ttt't""""t"""tt"t""""rttt
$4,580 4r43O 4,660
SeptembgFttt"tttttttrtt"t'tttr"t""t'r"""t"""""t'
Total cash availablg.r.................'.....................,.." Cash disbursemcntsln third quarten JUlltttttttt"""""t"""'t"t""tt"""t""t"t""t"""'
August
aalaaaaaaaaaaaa""t"'Dt"
Septembolttttttttttt""ttt"t""t"""t"tt"ot""""tt'
Proiectedcalrhbatance-September30' 20A""" Minimumend-of'monthc:rshbalancenoquirod Gtt ;SSO r IOo/o) """""o"""o""""""'t""""""'
Cash available to acquire capital items """""""' Gapital erpenditures planned for October l' 20A Amount of borrowing necessary on October l' 2oA
$3,8OO 3r75O 4,55O
300
13,67O $tg,g7o
I l,9OO $ 2,O7O 185 S 1,885 (3.700) $J915)
CnaprcrtA
Pr8-7,
46
(1'
rt
+
7
+
10
1 R
v
+
1
0
+
5
7 E e
+
I
T
+
- - r _ 4
rE
+
S
+
7
(2'l
t
+-i--
3
A'B
2
As
4e
I
A'B
I
Ec,D,E
:
I'C,D,E
;
5 l ' o, o ,t t
16
2
3,1'
2
=20
::::* ::::* :^:::*
Cost
s 8oo s 8oo
$ 8oo
=$t,6oo
=$1,600 =$f,6oo =$l,600
ffi*ff* ==s; -:,;;; $,ffiill;;li
i 3;3;i
F , C , D ,I H, c, I H,c, l H, C, I H, G, I H,G,I
H,G,I H,G,I H,G,I
J: J: .:' :r
= 1 7 7
f 800+ $ , $ Boo ::99.
o
:: .t: :: .,: .,: ::
to
7
Activities
Et
ii
5
= 2 2 critical path =20
7
H H
se,ood
--'-vv
;Si;lll
= $2rooo
GGA-Canada (adapted).Reprint with permission.
Chapter 16 16
Pl6-8
(rl
G
B
rl
Start
,% &xx D
A
c (21
Finish
A-B-E-G-H = = A-B-E-F-H A-B-D-E-G-H = A-B-D-E-F-H = A-C-D-E-G-H = A-C-D-E-F-H =
H
E I
#
Path
o
F
Time Required 13 weeks = 2+5+3+3 14 weeks = 2+5+4+3 ll weeks 2+2+l+3+3= 12 weeks = 2 + 2+ 1 + 4 + 3 12 weeks = l+4+l+3+3 1 + 4 + 1 + 4 + 3= 13 weeks
path' The critical path is A-B-E-F-H,becauseit is the longest (31
The totat cost of the proiect as plannedis: Activity A-B ...................tt
Normal Cost
$ {,ooo 800 1,50O 5,1OO 2,5OO 600
A-C......'............o. B_D...4.......t...o...ta
B-E ...............t..'.. C-Dt.................... D-E..................o..
E-F ..................... 1 , 7 0 o F-H .....................
lr2oo t,4oo
G-H..........r..........
1 ,3 OO
E-G..............r..r...
Total normal cost
stT,too
\
.\
Chapter 16
407
P16-8{Concluded} (41
Since the critical path requires 14 weeks, at least 2 weeks must be cut from the project in order to complete it in l2 weeks. As originally planned (determinedfrom requirement(2)),the following three paths require monethan 12 weeks: Path
A-B-E-G-H = A-B-E-F-H = A - C - D - E - F - =H
Time Required = 2+5+3+3 13weeks = 14weeks 2+5+4+3 1+4+1+4+3 = l3weeks
The first place to start reducing time is the critical path, A-B-E-F-H, becausethe largest amount of time must be cut from this path. tn this project' each activity on the critical path can be crashed, so the first activity to crash should be the one that has the smallest crash cost per week. By crashing activitr F-H, which costs S2r8oo, path A-B-E-F-His shortened by one week to 13 weeks. ln addition, since activity F-H is on path A-G-D-E-F-H,it is shortenedto the required 12 weeks. Now one more week must be cut lrom activity A-B-E-F-Hand from activity A-B-EG-H to bring each path and the total project down to 12 weeks. The activity that costs the least to crash and that is common to both paths is activity B-E, which witl cost $5,2oo to crash one week. The only other way to reduce both paths by one week would be to crash one activity on each path (activity E-G for 9rl,6o0 or G-H for $2,300 on path A-B-E-G-H and also activity E-F on path A-B-E-F-Hfor s3,zool, which will result in a minimumadditionalcost of $6,000.Therefore,the minimum cost to reduce the total proiect timo from 14 weeks to l2 weeks is $g,ooo, resulting from reducingactivity B-E and F-H by one week each for costs of $2'8oo and $5,2oo,respectively.Sincethe minimumadditionalcost of 9lqilg two days off of the total time reguired to complete the project is $8rooo,the minimum total cost of compietingthe project in 1?weeks is $25'lo0 ($12''loonormatcost from requirement(3) pius $8,o00 additional cost).
I L
Chapter 16
Pl6-9 (ll
The normal critlcal Path ls: =ilweeks + I + I + I 3 + S L H - K E B A the stors is the sum of tho in openlng The normal cost to be incurrad norrnal cost of all l4 aetivities-$85'ooo.
(2t
The minimum time in wlrich the store could be opened is I weeks at an additionalcost of $l l,5OO,or a total cost ol $96,500 ($85,0OO+ $t I '5ool' Potential New Time ErPected Alternative Time
Redugtion
Time
A-B-E-H-K-L
llweeks
4(A-B'B'El
Tweeks
A-C-F-!-K-L A-C-F-.,-K-L A.D-G.J.K.L
7 10 7
2 FJJ-n
Paths
2 (D-G,J-R
'" 5
The new critical path becomes A-C'F-.r-K-L. ReducedUme pnogramswould be initiated on the following activities: Activities A-B B-E F-J J-K
Reduced Time
Reduced Cost
lweek 3 2 I
$4,5OO 3,500 2,OOO 1 ,5 0 0
sl l,5oo The activity D-G reduction ls ercluded becauseit would not contribute to reducingthe total proiect time. (31
The store should be opened on the normal schedule becausethe cost The reduced pnogramwould save Fllr5OOl erceeds the benefit Gt6,OOo). 3 weeks at a cost of $11r5OO,while the earlier opening can be expected per week' or a total of $6'O00. to yietd an operating income of S2,OOO
I
\
1
Chapter 16
t-
l
, c16-1
\.
409
CASES
I
(f )
I b
l b
l !
i b
l
b
I I
\,
b
"
Network snalysis torces the companyto plan ahead and developa detailed plan for proiect completion,lt presents a visualizationof alf individual tasks and their interrelationships. Network anallrsis proyides ;;;sgement with timely informationlor controlling schedules,shorrs the effects on tho entira proiec! of changes mado lo individuai activiiies, ano allows for the continual updating of project pnogFess. DisadYantagesof netnrcrk analysis as e means of organizing and coordinatingproiects include the use of probabilistic scheduleslh"t ."y be highly subiective, a bias torvard overly optimistic time estimates often based on managementerpectations,and the need for cooperation smong a large number of units to estabtishconsistant priorities. A disproportionateamount of managementtime and effort may be required for planningfor the benefit reclived; there may be other alternatives that could be mors effective. (21 Norm Robertsonwould be concernedwith the defay in activity A-D because it would shift the critical path from sta*-B-c-F-l-.J-Finish. shiela NeilPsestimate of the time tor activity A-D (i o to r2 weeks) results in start'A-D-G-J'Finishrequiring 23 to is weeks. Furthermore, Neillb ment that activity A'D cannot start until after activity-B-E means combecomespart of this new.criticat path, making ttre criucal path that B-E E-A-D-Gd-Finish with a time requirernent of Cg to 3o weeks. start-BThus, the change in the relationshipof ths activities woutd change the critical path oven mororso that the project will be completed I to io weeks later than the originafestimate. (3) Norm Robertsondevelopei tlre PERTdiagram for the vector.12 project with inadequateinput. RobertsonstroutJiave consulted alt tho departments involvedin the project to ensurethat the expected times required to complete the activities wora attainable.Because Neill was not consulted, the Ume reguirementfor activity.q-Dwas incorrect, and the relationship between activitiesA-D and g-E was missing from tho network (41 The behavioralproblemsthat could arise within caltron Inc. as a consequence of-the pranningof tho vector.l2 project incrude: (al A lack of commitmentJo the proiec[on the part of the department direstors, particularly Neill, beciuse of their exctusion from the planningprocess. (bl conflict among the department directors that could affect future working relationships. (c) A tack of goal congiuencoamong tho departmentsinvolved.
CHAPTER 17 DTSCUSSIONQUESTIONS Respcrsbilirty accounting b a program encotn' paming all operalhg managomcn! f.ot whiclt ihr accountlrg, oill' or budget dMritrrr pro vidr lcclrni:al aristanc. h thr form ol daily' wcckly. or rurthly ontrol t'pottt' Th' obiec' tivt of rerponrbility accounting ir to prcvilo managcrnont with I weilul cod csrtrol Ool" To bo clfrctivr u I control mochaniam, thr rerpontibility accounting tyd.m rccordr and reportr cootr ircurrod ar a neull of roch ecfivF ty to the individual in thr company who ir reoPonsbb lor cantrolling ho aclivity. reunting ia or O17-2. Tho crnpharb of nrpcsbility htemal coct csrtrol raher ttran on deierminhg ptdtrt cod. Thb reguircr a rtritt h cnphasir frqn delcrminhg tho cost of reoouncotused h manulacluring e product to dctormining lho amounl of control indivkjual managen hovc ovor cost. Fblponribilily accounling delerminc thc cst ircuncd by an rlivity or group ol aslivilier, rathcr than thc cost incurred lo produce a Producil. O17€. Cartrolbbb c6lt arr thool thal arc lrcunod al thc rerult of. or lor thr bcnefil of' a businss activity. Presumably, suclr a eocl will ircreaso or decrease as a reaull ol lhe lovel of effriency with which trc aclivity lhal genenles lhc cost is conducted or managed. To bc ctfeclive, mud hold e managcr reoponsbility reunlhg responsble fa crly tlpse cods thal he or she can conlrol. Ol 7-4. Tho organization musl br arrangod so thsl thcro aro m ovortapphg lher of mrpcnibility (i.c., no morc than onr indivkJualrhouH be rcponcbL tor.adt eslivity). In edditbn, caclt hdivi48l h thr organizalirr murl havo a cbar understandhg cl hir or hcr rcsponsbilities, and musl havr rulficirnt aulhority lo lakc tho actbnr necellary to meel ttroot respctsibili' liec. 017-5. Thr cet of any oxpondilurc clarcifhalion ir of t*p ebmenll: thr unit pricr and thr quantity cl thr itenr ured. Ono irdivirJual may havo cqrtrcl of pricr wtrile ano0ror hdivUua! har control ol quantity. Evon in caror whoro prico door nol changr, lhc quanlity urcd mey nol bo fully cofrollabb by tho irdivUual ufio o\^rrilr.r fho acfivity that srrurnec tho ilrn. Thr qrality cl tho itsn nrsy dtrt th. guantity urod and tho quality may br delcrmined by thr purcfrascr, or tho ctfbiency with which tho item ia used may be affeclcd by decbboa rnsd. at the executivo monagemrtt levcl (e.g., porsannel ctranger and machhery acguisitionr). Sincr lha accounlanl cannot alwayr dclcrmino absoluto control, costs Ol7-1.
017€.
Ol7-7.
017€.
Ql7-9.
110
should be assigned on lho basis of relalive conlrol, and variancor should be viewed al quedbnr rather than as atlewcn. Opinion ic dividcd on this subiecl. Somc believe that for thc mel effeclive overhead cqrlrol, &partrnont headr shouH bo chargpd crly for ho.. codl thal they ircur. lf lhey arc cfiargod wilh uncsttrollable costs, they could spend rignili;ant atrpunt! ol limo lryhg !o cct' tlol cosl that they havl no ability lo cqltrol, or they may bccqn hultrated and givc tP tryhg On the ofter lrand, ssne to csrbol 8ny stt. believe that deparfnent headg should aPprocF atc thc fact that many auxiliary costs musl bo incurred to tuPPort their activiliel; thereforc, they $ould bo charged with a fair share of suclr cct+ clearly labeledas uncsrlpllable, Total costs c/ servica departmenl overhead aro included in overhead rales h order lo charge irbs and prod.rcts wilh all overhead hcurred h their production. Aclual service deparlmenl cetl et. cqrtolled il they are accumulated in seryice departmenl accounts where they can bc assigrredto setvico deperlmenl managen. ll rervice dePatltnent ccls atc charyed direct' ly to producing departmonte,3uch costg becsne an indirect, noncontrolhble item of the departmantbreceivhg lhe charges. Servicc department costs should be charged lo user deparlments by predetermined billing rales rather than by allocating aclual ccat al lhr end of the period. The use of predeler' mined rates maker il posrible lo determinc sewicc departrnent gfticierEythrough lhe corn' putalbn of spending and idle capacily yari. anooa. ln addilixr, uscr department elficiency can bo evaluated nrore elfectively by eliminat' ing noncaltrollable cosb frorn service depart' menl charges. This is parlicularly imporlant where user dePariment3 have some control over lhe anrount of the services usod. In such csses, usors thould be held accounlable for their usc ol seruices,but the rales lor pricing ttpoc eorvicegstrouH be known by the users in aclvancc. (a) No. Thc ctrargc is an arbilrary allocalbn ol cost. lt cannot bc influenceddirectly by acticrs of ihe divisinn rnanagorneni. (b) Yea and no. The amounl ol computer seruicc used ir within the contol of the divbbn managemenl However,lho c€t pot unil of servicevarieg with the efficiency of the computerfacilily and lhc amounl of use by other divisions. Consequently,the charge is cnly partly controlbblo by divisicn rnarragemenl-
I I
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Clnpter 17 (c) '
b
b
i b
b
I
tb
I I
b
!
l
Yct. Thr chargr for goods purchaced tro.n anothor diviridt is conlrotlablo by thc diVisbn managcment, provided that thr quanlity of g@ds purchascd b cartrollabL by tho divbbn managcrncnt and lhat thr prb. it an rxtemally sCsblished rnarkcl prict. 417-10.(e) Thr highor al.ctric pcrfler cob rnay be thr resull of any ono or snbination of thr folbring (t) ircroaser h tir prbes paU tor tuel, labor, rnsinlcnorco, rlc., (2) incflicicnt oporaling praclices or macfiho lailurcr withh thc porrer deport,nont, (3) lhr acquirition ol erpensive new crFacity, ancl/or (4) incrcarcd production of electricity requircd to rroot uror demand. (b) To lho oxtont thd any incffbiencies exist h tho po'vor drpartmcnt tho cunent slb, calbn rctremr wilt pass them on to the wcr dcparfncntr. Wlth the kind of alb, catirn usod by Errmonr Cornpany, il is nol possiblo lo drlermine wtrat caused lhc cost incroatr. A better syslem of handhg lhis depsrtment'scosl wouH be to chargc user deparlments for acluat uragrr on lho basir ol a predetermined variablc rdc, and lor available usage on thr basb ol tho power doparlmont,s ability to provUo rowbo at maxinum capacity. Bndgetrd fixcd cogt rhould be allocat. cd on lhc barir of ability to provide oeryico, becausr the Electric power Dopartnrentcanncl control aclual usage. Thb apprc*h rucuH make it possible-to c o m p u l a s p r n d i n g v a r i a n c e sl o r t h e Electric Powcr Dcpartment, which are ureful in cvaluating lhe department,s optraling effir:iercy. Ot7-11. (a) Highcr total cort incurred by the Mahlonsrrcr Drpartrnent (i.o., hcreases ir lht priceoandor quantiliesol the varF our ilem! ol corl in the Maintenanco Dcportrmrn), fowcr tolaf hours of mshtenancr rorvicr provided lo all ure r 6partn.nt! during the period, o, a combinatlxr of both could rcsull in a higher aclual mainlonancc co3l pcr hour, Howcvor, rucfi incrcaser in cosfr should remain in thc MaintonanceDepartment artd nd be drargredlo the usorc. (b) An improvcd mcthod tor distributing i/binlmancr Dtpartnent cost would bi lo rslablbh a prcdetermined rate lo be chargod lor oach hour of maintenance torvbo prwirJod to users. Thc ratc wor,rld bo octablirh.d annually by dividing thc oudgclcd hours of servico to bc por_
411 formed during the period into budgeted Maintcnance Dopartment cost for thc samo period. Using lhis predetermined ralo, cach usor deparlmcnl's maintcnanor cost rouU deperd qr lhc nunber of furrs of servbe il reeived. By using thc predetermhed ralr, lho aciual cqt could be compared with totel charges madc to u3ere and thc dilfcrrrrcr decqrF posed into spending and idb capacily variances lor tho Mainlcnanco Department. These variances arr useful i n t v a l u a t i n g t h e e l t i c i en c y o l liahtenanco Dopartrned scnivity. A fudher refinement would be to requirc ho lr,lahtenanco Dopartmcnt to lubrnit estirnatescil cct lo users beforc providirg services. This rvoutd not mly give the dopartment reccivhg the sorvbe rqne idea of the cogt of tho work, bul would afso restrain the Maintenance Department from spending loo much time on a icb. Q17-12. The flexiblc budget (a) provides the monthly budg€t allowance regardless ol the flucluating nurlhly volume of produclitxr; (b) permits not having to estimate the operating activity ol a rnooh in advancc ol the period lor wtrich the budgot is prepared; and (c) recognizeslhe fixed and variable nature ol costs, wfrich leads to easy adjustments when evaluating actual perfornancc, Q17-13. A spendhg variance is the dilferencebelween actual cost and the budget albwance (i.e., the budgeted anrowtl sdiusted lor the aclual level of aciivity erperiencod). tt is caus€d by difterencos b€tween the prices and the quantitiesof the variotrs ilemr ol cost budgotod and actualty incurred.To the extent that a manager has conlrol over eilher price or quanlity, or bolh, the manager has control over the_amounl of the spendingvariance.However,il the mrnagcr doeg not have conlrol over both prices and quanlities,lhe rnanagerhas mly lirnitedcsrtrol over lhc amounl ol thc spending variancc. N c v c r t h e l e s s ,s i n c e a m a n a g c i m a y h a v c somr control over spending variances, they arp us€d lo evaluale efficiency h responaibitity reportirg. Q'l 7-14. To aiJ rnanagoment in evaluathg and cqrlrolling cosl, a spending narbnco tor each ilem or classilicationof cost should be reportedlo responsible management each period. Itemizcd varianccl tell responeiblc managomenl which ilem war inefficientlyured. Thic detoilod hto.rnatbn phpohts wtreie thc roarsh iJentily causos shoutd begin. io at7-15. An idlo capacity variance is lhe amounl of ovor- or underappliedbudgeted tired faclory overhead. In responsibilityreporthg, it b used
Chaptor t7
112 l
er a mcarut. of capacity utilizatkxl. To the ortent thal rnanagement can cstlrol capacity utilhatinn, thr kilo capacity variancr can bo controlled. Howevlr, lho arnounl of capacity utilhed ir cillrn a furction ct fotcs ot ttij' th' cfittol d hdivHrrsl depadment suprrvboo' Ql7-16. Thr two primary PutPolct of rrsponsibility raPotlt tra: (a) To nrolivato inclvi
Most rcsponsibility accounting and repodhg rlalrns irnpmperly bese allour' ablc budgrtl on volume'based mca' ruret of astiv,ty thal havc litlle to do with cosl incurrrncr (1.9., labor hourl, rnacfihc houn, rtc.). lf nqlvolune rnca' surcr (o.g., m*hinl rcluP!, relooling, nrwhg or do.ing parlr or prodtrl' ctc.) arr maior corl driveru, aclivity based cethg should br uced as thc basis lor budgcting end PrcParing variancr reportr. (b) Conhol daia ryailablc in a nsponsibility reporting ryrlem are lo aggregated lo bc ucaful. Thb ctilicicrn slems frotn an anemPt lo ur rcspotsbility reporis tor operating control. Even ilemized vari' ancr reporlr may nol bc suflicient lo rolvo thic problern (c) Cqrtrol data availabl. lo rnanagen ar. financbl and not oalily intcrpreled by operating lcvol managers' I'ho are nol trained in accounting and finance. The accounting slatf chould provide assil' tance, when practbal h trainhg operal' ing pcrsonnel in lhe use ol tinanciEl reporls. ln addition, nonlinancial mea' surer that can bc easily understood by operating managers shouH be reporled along with lharcial data, when pnclical. (d) Control data availablc lo tnanagore ate not tlnefy onough to br weful. This critl' cism cteint frqn an atlempl to use financiat based reponsibility roPorb for day' today operathg controL Morc frequent tePortingwill not likely solvc lhir prob' lem, because il slill takeg dalts or weeks to collect tho necegsary dala and pre' pare financial reportr. A better solutitx is to use statistical procesr conlrol and other operatirg control syslems lor daytoday openthg csrtrol ard lo use periodic financial rcporlr lo cvaluate thl financial elfcclivenclc of lhe businesr t)Etomt and thr Prees! cooltol syslemr used h mcriloring activtty. Ot7-20. Despile thc tact that nsrfinancbl measures of oporating podormancr arc mot. easily hter' preted and can br nradc avaihble qt a moro timoly bacir than linencial data' financial reports genrrated by a responsibility accounl' hg syslem slill havr value bocau3e they PtovUc hformation about tho impact ol bueiness systemr sr incornr. To bc effective, manago' ment musl nd d|ty bclievo lhal roducing invcntory, spcilagc, c rework will inprovc proCilabilF ty, but also it must rrpnitor thc lmpact that guch cfforlr havc on incomo. Thc tio belwcen clrogor h bushess s)lstems and the effect of thoo change3 on it6ne Lr provided by lhan' cial ropodr(a)
\,
:
Chwter tZ
413
RCISES E17-1 (11
MaintenanceDepartmentcqst should be charged to all dopartments on the basis ol a predeterminedcharging rate and could be computed as follorvs: Fixgd
COSt...................r......................r.......r...........r........o
Variablecost (15,00Or $8.5O| Total MaintonanceDepartmentcost
ffi
b
'I !
l27r5OO sl35,OOO
= $gPermaintenance hour
The agtual MalntenancoOepartnrentcost for November,gl32rOOOwould bo chargod dirscUy to that departmenl The $9 charging rate is used to charge other departmentsfor MaintenanceDepartmentservice received. The Novemberchargeswould be $1261000(l4,ooo actual maintenance hours x $9 chargingrate|. The same approach woutd be followed for Generat Factory cost, except that transfem and chargesfor such costs would be made to producing deparunents only. The rate woufd be determined as foilorvs: Fixed cost $3O,OOO Variable cost (1rO0Or $201..r..r...,...
Total General Factory cost $5O,OOO b
$ z,5oo
I,OOOemployees
20,OOO
sso,OOO = $50 per employee
The actual cost chargodto tho GonoralFactoryIn Novemberwould be $51r0o0,and GonoralFactorycost charged to producing departments would be ${srooo (98o actual employeesx $50 charging rate}.
l v
Chaptert7
{'t1 1
efl-1 (Concluded! f,lalntenance DepL
t2l ACtUal COgt ........D......o......
General Factory
$l 32rOOO
$511500
Budget ellomnce: Variable cost: l4rooo hours I $85o..$119,OOO 98O employeesr $20 7r5OO l20,5OO Fired cost Spending varlancc..r........ Budget allowancc..,...,..,..
3O,OOO
S 5r5OOunlav. $128r5OO
Cost charged oub l{'OOO hourc r $9......... 990 employeesr $50....
ldle capacityvarialrcro...... Totalvar|ance...............
$19'600 49,gOO $ {.90o unfav. $491600
126,OOO
49,00o $ 0oOunfav. $ 2.5oounfav.
500 unfav. $ unfaY. 5-TF
El7-2
(11
Billinsrates: Carpenter Shop:
#ffi
= $lo perhour
Electrlctans: -qggjo-oo = Si 2 perhour
(2)
2,5OO hr s. Charged to producing departments: Department
2 3 Total 1 CarpenterShop. .................o...,.. $ 4rooo $ Irooo $ 4r5oo $l61500 E|octriciansn...............r.............l2'OOO lO'2OO 61600 281800 Tota1......t..........r....,....rrD.......r.$l6rOOO
$l8r20O
$t I,too
$45,300
r4oo r $io = 34,o0o;Boor $to = $8,000;45or $io = $4,5oo - 1,ooor $12 - tll2,OO0; 85Or $12= $lo,2oo;55or $12 = $6,600.
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Chapter17
1r 5
E17-2 (Concludedl (31 VariancesIn each service department: Monthly Budget
GarpenterShop Electricians
Flrcd Cort Percentage
$2O,O0O 70% 3O,OOO 80
FLcd Coet
Varlablc
Gost
Varlablc Rata Per Hour
$l4,ooo $6,000 s3.OO 24LOOO
Carpenter Shop
61000
2.4O
Electrlclana
Actual co!t-*-...... Acbral corEt-** 31e,8OO s27,7OO Eudgct ellowanccl Budget allowancc: Varlablccoct (1,050 Varlablc cost (21400 htt. r lXr,OOl.-, 3 41950 hn r 32,401 ..-. I 51780 Ftcd colt*.-* 14,000 18,050 FLod Go!t*...-24.OOO 2017go yarlancc Spcndlng Ytrlanc. 85O unfav. Spcndlng t S (2.06O)fav. Budgetrllowlncc.,. Cort chargcd to produclngdepartmcntr {mq.2}..-,. ldlc capacltyvarlancc
I b
s18,95O
Budget Ellow8ncc... Coat chargcd to produclng departmentr (ttg.2)-....
t29,760
16,500 S 2,450 unlav. ldlc capaclty varlancc
28,80O 3
96O untav.
E17-3 (11
Billing rate for MaintenanceDepartment Fired rate! $12r8OOtotal lired cost + 3,2OOnormal maintgnanCO hOUf3.......r......,.........,....r
Variable rate: Variable rate per maintenance hour fo r l a bor ...... $8.70
$ 4,00 p er hour
Variablerate per maintenancehour for other costs: S up ervisio Jl ...,..,,..... Tools and supplies,. Mlscellangous..r...r..
Totalaa..aataaaataaaa....r.........aaaaaaD.a.aoar.......r......rrr...r...........
$.so .75 .o5
1.30 10,00 $1{.99 per hour
Bllfing rate for PayrollDepartmenb Fixed rate: $12'OOO budgetedfired cost + 1,290 aygr:lggnumbgrof employggS...........,. $lo per employee Vari ab I g riNto.....,......r...,...,...,.,..r.,.r, 2 Tota1.....,.......ro..r..r,.,r,........
per employee _q!_?
The billing rate for the Maintenance Department was based on the rurtber ol maintenance hours worked, because it was the only variable given on which a measure of operating results could be computed. For the Payroll oepartment, the billing rate was based on the number of employees' because it was an adequate measure of operating results for that department.
Chapler 17
416
E17-3(Concluded) MaintenanceDePartment
(21
g47,2OO
Actual CoSt..........."""
Budget allowance based on actual hours: Variable cost (31355hours r $101..'..... 933,55O 12r8OO Fired cost Spendingvariance
9_99.9 unfaY.
Budget allonrance based on actual houls.'. Cost charged out (31355hours r $14)....,,... ldl g capacity variar|G19.............'................'.'
s48,350 46,970 $ (62o) lau
Payroll Department:
tf6r35o
s13,875
AgtUal 9OSt....'.....................'...."""""t"""t'
Budgetallowancebasedon actual number ol employees: Variablecost (l rl65 employeesr $21 Fired cost
$ 2,330 l2,ooo
l4r 33o
L:('t9!l tar.
Spending variancg ............'.'.........t........'...' Budget allowance based on actual number of employees
3l{,33O l3198O 35O unfav. 3
Cost chargedout fl'165 employeesr $121 ldle capacityvarianco...
E17-4
(11
Producing Departmentr B A
Firgd costt ...,.....r.... Variable cost (rate r hours)n........ Total.......
'
Dept. A B
x Y
Hourc l O,OOO 2OTOOO l2'OOO I,OOO
% 200h 40 24 16
5O,OOO
lOOo/o
3oruice Dcpartments
Total
x
st,2oo $2,4oo $ 1 , 4 4 0 l,600
2,600
$960 $O,OOO 6,800 1r4OO 1,20O
$2,840 $2,160 q!?f99 $2,800 89p99 $2,849
F i re d cost
$l,zoo 2r4OO 1r44O 960
s8,ooo
rA
=
I,OOO hls.
B = l3,ooo X = Y =
TrOOO
orooo 34,O99hrs.
$6,8oo 34, OOOhr s.
= 3.20
variable rate
Cltwter 17
417
El74 (Goncluded) (21
The two generalprinciplesfor the allocation of service departmentcosts applicableunder tho circumstancesare (a) distribution on the basis of servics or benefit receivedfor the variablecost; and (bl distribution on the basis of readinessto serve or capacitythat must be maintainedfor the fixed cosL This solution distributesall variablecosts incurred. A predeter' mined variablecost rate should be calculated,so that the efficiency of the power plant could be judged. The present $.ZOrate is based on the actual monthly consumptionand cost.
E77-5 (11 oh of Standby Gapacity Total Cutting,.......o...o.. 35'OOO 35oh Grindin9,........r........... 26'000 26 Polishing........,...........,..,.,...,.......... 3OTOOO 30
Benefiting Department
St0J€S.'...o.......o..'.....rr............'r.......
TOtaf r...................................'.r........
I;OOO
I
630
I OOTOOO
lOOo/o
s?,oo,9
Variablerate = VariabteCost* ,*""*O = =
Quarterly Fixed Cost Billing S2,45O 1,920 Z,I OO
Onnr"ilp""i
S30,OOO+ 30O,0OOKWH $,1o per KWH
ry
Chapter 17
118
El7-S (Concludedl
Benefiting Department Grindlng Pollshing Stores
Total
First Quarter Bllllng: .1o .1o $ . l o $ .10 S .1o $ $ Variable lilto.."""""-"' 85,OOO 61500 Agtual consumPtloo.... 29r5OO 20,0OO 2910OO VariablgGost............'.. $ 2,950 s 2rooo $ zrgoo $ 850 s 8,5OO TrOOO 630 2rloo 1r82O 2A50 Firgd CoSt....."...""'o"" t"" $ 5,400 $ 3,820 $ 5,OOO 3l,2gO S15,5Og Total . t..oo..t......."t"" Second Quarter Billing: .to $ ' . 1 0 .lo $ Variable lllto.........-.'.t.. $ Actual congumPtion .... 33,5OO 24r75O 23,5OO Variable cost ............... $ g,gso $ 2,475 $ 2,350 2rlOO 1,820 2r45O Fired GoSt............"""" Total ...........r........r""tt'
$
.10 .10 3 8,250 9O,O0O
s 825 $ I,ooo 630
7,OOO
$ 5,goo $ 4,295 s 4,450 $1,455 sl6,000
Third Quarter Billing: .lo .10 $.10 $ .lo $ .lo $ Variablg itlto........'....... $ 86,000 6,500 32.-750 21,25O 25,5OO Agtual consumption .... Variable cost ...'........... $ 3,275 $ 2,125 $ 2,550 $ 650 $ 8,600 7,00o 630 2,10o 1r82O Fired GoSt.................... 2,45O $ 5,725 $ 3,945 $ 4,gso $1,280 $15,600 Total .....o.............'.......' Fourth Quarter Billing: ,1o Variable rato......,..,...... $ Actual consumption .... 28,25O Variablg cost ............... $ 2,825 Fixgd CoSt'.........r......... 2r45O $ 5,275 Total '.'...........
l2l
$
.1o $
.1o $
23,OOO 27,75O
$ 2,3oo i 2,775 7r82O 2 r l O O $ 4,120 $ 4,875
$
.lo .10 $ 6,000 85,OOO 600 630
$ 8,5OO 7,OOO
$1,23O $15,500 $5,345 $62,60O
Annual Total @ $ 1 5 ,450 $16,200 sl5,9OO s l 5 , 4 O O $ 62,950
Second Third First Quarter Quarter Quarter
Fourth
Actual cost....... Less budget allowance: .1O .1O $ .1o $ Variable rato .............. $ .lo $ .to $ 85,OOO 346,000 Actual KWH provided 85,OOO 9O,OOO 86,000 Variable cost.............. $ 8,5OO s I,ooo $ 8,6O0 $ 8,5OO $ 34,600 28,OOO 7,OOO 7,OOO 7,OOO Fired cost..,.... 7,OOO Budget allowance...... $ 1 5 , 5 O O $ 1 6 , 0 0 0 $ 1 5 , 6 0 0 $15,5OO s 62,600 35o (so)s 2oo s 3oo s (1oo)s Spending variance ......,.,....... s : - : : : unfav. unfav. fav. unfav. lav.
Ctapter 17
E17-{'
\-
4t9
UNTYERSITY MOTORPOOL BudgetReportfor March
Monthly Budget Gasoline $ 5,513 Oll, mlnor repairc,parts, and supp||gs........,......r. 37t' Outside repairs 236 lnsurance 525 Salaries and benefits 2r5OO Depreciation.......'.r............o..o..!r.rr.,,....r....o...r...... 2,31O Total $!1d93 Total m11g3............................r..r.r.......rr.................
Gostper mile
(Overf March Actual Under $ 5,323 $ tgo 38o (21 50 186 525 2,5OO 2,31O
9!rf99 9--32!
21 2 1 63,OOO 63,OOO $ . 1 8 1 9 $ .1700 $,ooss .
Supportingcalculationsfor monthlybudgetamounts: Gasoline:
b
Oil, minor repairs, parts, and supplies:
6(l,000 miles
16 milesper gal.
x $1.4opergallon = $srslz.So
63,000r $.000 per mile = $.328
Outside repairs: Insurance: Salaries and benefits:
= $23o.25 Annualcost for one auto: $0,O0O+ 20 autos = $3OO Annualcost for 21 autos: 21 r $3OO= $61300 Monthlycost $g,3OO+ 12 = SSZS No change
$3O,OOOannual cost
Depreciation:
.
b
:
= $2,5oo per month 12 months Annualdepreciationper auto: $26,400+ 2Oautos = $ir32o Annualdepreciationfor 2i autos: $lr32o per auto r 21 = $2T.T2O Monthlydepreciation:$27l2O + 12 = $2r3lO
Chapter 17
120
CLAYTONCOMPAITY Assembly DePartment Flerible Budget-9Oc/olovel
E77-7
$18,OOO 1O1125 500 "'t' SUpefViSiOJt..............r......1................o.......................t......o...'.'."t'r"t" I,600 hdirect materiats ($zsO+ lgOohr ($l t75o $2sQlll"""""""'t""""""" 300 t3I..r........................t............................t.t....t..o.t.t.""t"tt"ttt"tt' PfOpgfty 1r (9O% r Gtlr600 $600111...'........r....o.................... 5O0 Maintgnanco ($600 + 290 + Paohr ($3OO- $200jll '......... Power
Dirsct materials l9O%r $2O'0O01 Dircct labor lg0% x $l 1'2501
Gt2oO
Insurancer....r.r......'........ Depreciatioll ..................
aaaaaaaaaaaaaaoaaaaaaaaaaaaataaaaaaaaaaaaa
Tota t......ro.,..D................r....r....r...............r......r.o......r....r..................t.r.
17s
l1600 S34 t 09O :
421
Chapter 17
E174
ONE MONTH FLEXIBLEBUDGET FOR FINISHINGDEPARTMENT
Ooeratinq level Based on labor hours.....,.r.. Percentage of cipScit!....... Variable cost: s Indirgct |abor.........o.........o.. Factory supplies....r.r......,.r.. Power.,...,......,..r..,............... Rework operations.............. Payrolltares....................... Repair and maintenanco..... Generaffactory.......,........,.. Total variable cost........... $ Fixed Cost: Indirect |abor................,...,.$ Superuisior|......,.....r......,...., Factory supp1ies............o..,.. Powgr'..........'....r..........r...... Rework operations......,....... Payroll tares.....,....,....,....... Repair and maintenance,.,.. Property insuranca.........,.... Property taxes..................... Vacation p3!.....,......D..,...,....
8OO 80o/o
lr2oo,oo s 1r88O,O0 600.00 4OO.OO IrO40.OO 320.00160.00 5,600.00 S
9OO g0oh
1r35o.oo $ 2rl15.OO 675.00 45O.0O 1r17O.OO 360.00 18O.OO 61300.00 $
lr5oo.oo $ 2'35O.OO 750.oo 5OO.OO lr3OO,OO 4OO,OO 2OO.OO TTOOO.OO$
lrlOo l7Aoh
11650.00 2r585.OO 825.OO 55O.OO 1'43O.OO 44O.OO 22O.OO 7'7OO.OO
4r000.oo S 4roo0.oo $ 41000.00 $ 4rooo.oo 2'5OO.OO 2,5OO,O0 2'5OO.0O 2'50O.OO 9OO.O0 9OO.OO 9OO.OO 9OO.OO 5OO.OO 5OO.OO 5OO.OO 5OO.OO 2OO.OO 2OO,OO 2OO.OO 2OO.OO 8OO.OO 8OO.OO 8OO.OO BOO.OO 600.00 600.00 600.00 600.00 7OO.OO 7OO.OO 7OO.OO 7OO.OO 3O0.OO 3OO.OO 3OO.OO 3OO.OO 2r2AO.OO ZT2OO.OO 2,2OO.OO 2.2OO.OO
pensioncosts.,... l,2o0.oo 1,2oo.oo Employee Employee healthp1an...,...... 1,8oo.oo 1,8oo.oo Machinery depreciation,..... Irooo.o0 l,ooo.oo Water and heat..........o......r..
I'OOO l00oh
600.00
600.00
1,2oo.oo irgoo.oo 1,ooo.oo
i,2oo.oo f ,goo.oo i,ooo.oo
ooo.oo
600.00
Buildingoccupanc!......,...... Irooo.oo lrooo.oo Irooo.oo Irooo.oo Generalfactory...................lr5oo.oo irsoo.oo irsoo.oo ir5oo.oo Totalfired Gost................ $ir"goopo $1r"goo"oo$ir"BooJo $lr"Boooo Totalco$..................r......... $r5,4oo.oo$A6rtoo.oo $r6"900.00 $r?Foo^oo
Chapter 17
El7-9 Original Budget Budget @ Gapacityhours Variablecosts: Supplles Repairc and maintenance ...... lndifeCt 1abof.......................... Powgr and !|ght.....r..............,. H63t................r........,...r.....'.r..
Spending Aetual Variance Cost Unfav. (FaY,l
8,0oo
$2,ooo $2,2oo $2,goo 88O 4r4OO 1t32O 44O
8OO 4rO0O lr2OO 40O
subtotal................,.......... $ Sroo
9OO 4r3OO lr4OO 5OO
ldlecapacityvarlaDCo........r...............r.,.....o.
13r2OO $ (36Olfav,
Actual factory ovgrhgad........,..r...,..,..........o. $l3r060 Applied lactory overhead l3,2OO Overapplied factory overhead 3 (r4ol Spendingvariance
20 (f OOI 80 60
$ ,"r4o $ ,roo
Fixedcosts: Buifdingorpense.................... $ 8oo $ 8oo $ 84o 2r4OO 2r4OO 2r4OO Depreciation-machinely....... 4OO 42O 4OO Propertytar and insumnco.... Subtotal $ 3,600 $ 3,600 $ 3,060 Total costs sr rpoo $l r^s4o $13,060 Appliedfactoryovgrhgad...o..,.......r.....,,.o.....
$loo
S
ldle capacityrvariance Overappliedfactoryoverhead.r.................... $
22o untav. (36O!fav. (140)
4o O 20
s 220 unfav.
I
L
i l-
L I L
.123
Clppter 17
Er7-Io Budget Original Budget Allonrance ,"gOO IOpOO Direct labor hout'r8.....'......'............ : = : : :
!
I
I b
Variablecosts:
lndirgct 18bor......r........'r......... $ 7O,OOO$ gz,zoo$ 7o,ooo 6O,OOO 59r04O 6lr 5OO Payroll t3xg3.............r......o.....r gs'..r................r 25r92O 28,OOO 27rOOO Factory suppli l2,ooo 1 1 , 5 2 O 't2,ooo El gctric utility......-.!...r............ 5,76O 6,1OO 6,OOO Gas utility...oo....o..-.o.....'.......or. 1r44O l15OO lr 5OO Water Utility.......'...........,........
MachineryropairB.................. b
t
L S
Maintenatlco ...............r..r....'.. Ovgrtimg pnomium ..,.r....r.......
I
io,ooo 2l,ooo IrOOO
32,8oo
960 2rO80 480 340 60 9,60O 400 ' l0,ooo 20,1OO 15,OOO (5,t 60l 8,640 360 IrOOO
Subtotal ....o........r......r..".. $2l8,OOO $2O9,28O$2t t,600 Firgd costs: ............r..................r.. Supgrvisiofl ...........r.....'........r. Indirgct labor.......'........r......r'.
$ 4g,ooo$ 38,OOO
Vacationp?!.....................".... 4O,0OO Payrol I t8I33......r................'...
Employee insurancg............... Factory 3upp1i6s.......r.r.....'..r.' Elgctri c uti1ity................r.......,
8,OOO
l2,ooo l9rooo l5rooo
48,OOO 36rOOO 4O,OOO 8;OOO 12,OOO 19,OOO 15,OOO I,OOO 5,OOO 23,OOO 5O,OOO 15,OOO 12,OOO
48,OOO 36'000 4O,5OO I,OOO 72r25O 19,OO0
l5,ooo
I,OOO I,OOO 5rOO0 5,OOO Maintgnance ............,........,..., 23,OOO 23,OOO Machinery depreciation .......,. 5O,OOO 5O,OOO Building rlB!1t.........'.....'.r......... 15,OOO 15,OOO Propg rty targs ....,..........tr....... l2,ooo 13,OOO Property insura n c g..,.....,........ l5ro0o l5,ooo 15,250 Subtotal ............o......r.,....,$307,OOO q3O7,OOO$3O9,OOO Gas uti1ity,...t......r............r.r.... Watgr util ity.....'..!....ror...... r.....
i-
Spendi ng Variance Aetual Cost Unfav. (Fav.) ,1600
Total costs .r.........D...
O O 5O0 O 25O O
o O O O O O I,O O0 25O
3525,OOO$51O,28O $52O,OOO 91'329 Appli ed factory overhoad ..........o........t...,..... 5O4,O0O untav. ldle capacity variallco ..,...,..,..........r.o,..,.....r$ 12,280 unfa% Agtual factory overhgad....r.r...........r............$Szorooo Appliedfactoryoverhead.......,..................... 5O4rOOO Underappliedfactoryoverhead.................... $ l61600 t_
i-
Spendlng varianco S 4r32Ounfav. ldle capacity variallcg ...................,.....r........ 12,280 unfav. Underapplied f actory oveth ead ........,,.....,....
il_6,6OO
Chapter 17
424
PROBLEMS P77-7 (1 )
Factoryoverheadapplied for each prcducingdepartment: Dept. A: 20r48Ohrs. x $4.2O = S881016 921535 Dept, B: 291850hrs. x 3.10 = = 751375 x 3.75 hrs. 2O,l0O Dept. C:
Oner.or underapplledfactory overheadfor each producingdepartment Producing Departmants c A Erpenses Actual departmentfactory
(21
ovgrhgad,.......r.r...
s52,85O
$56,02O
Prorationol seryice departments: Utilities (on actual hrvh).......... 1 31755' Repairsand maintenance (on actual dlhl .-....o...'...... 181432r' Total actual department factory
$42,580
161170
12r 53O
26,865
18,O9O
overhead $73,2OO ..o.r......r.................rr. s95,885 $88,207 75,375 92,535 Appliedlactory ovgrhgad........,..r. 8 6 , O 1 6 (Oven)or underappliedfactory overhead $ 2,191 unfav. $ 3,95Ounfav. $ (2'1751fav.
r 39r3OOr $.35 = s13r755 t'20,48Or$.9O= 18.1432 (31
Total variance for each geruice department: Repairs and Maintenance
Utilities
Actual cost befors allocationof Utilities Department
COSt .............................r...r......rr
$56,320
$5O,O4O
Utilities Department cost allocation (1 8195O kwh x S.SS; ....r..,.....r..o.............,o......
6,633
$oz,sss
Services allocated (sold)to other departments: ffOt43Ohrs. x $.90;.............'........'.............'..63t387 (14orz5o krrh r gssl r...........,....................... $
(434! fav.
4gro88 $
952 unfav.
L t
L I
L I
I
425
Cllo,pty 17
P17-2 (f l
Maintenancs Department Total estimated cost
Total osUmatedmalntenancehours
_ s t o , S o o= 3 3 3,5OO
per maintenance hour
UUlitles Department: l
b
Total estimated cost - S8'40o - 9 . 1 2 p e r k w h 70'OOO Total esUmatedkwh
(21
Service
b
b
I
b
I
L
Variable overh ga d..........D.......Dr'. $l5rooo l8r0oo Fired ovgrhead .....,...r....,..,,...r...
I
I,OOO
l5,ooo
Direct departmentalovefiead .. 333,oOO $24,oOO DistribuUon-eeruice d epts.: Maintenance: (2r5OO x S3).,................, (1,OOOr 33)..............r....
3rOO0
Utilities: (45rOOO r $.12|.,............ 5,4OO (25'OOO r $.12).............. 3rOOO Total factory ovgrhead..,.,......r... _$15,eooigo,ooo Dirgct labor hours .o..,................ 12,0O0 7,50O Overhead rate per dlh ............... $3.825 $4
$ 4,5OO 6rOOO
$f o,5oo
Otilities s3,6OO 4,8OO
s8,4OO
(1O,5OO)
(8,4O0)
Chapter 17
126 I
P17-2(Continued! (31 Spendingvariance: Astual factorY overhead Add distribuUongarvice dePartmentsr Total departmental factorY ovgrhgad ..........r..o....
Radial Drills
Planerg
s2,3OO
93,l2o.oo l,44O.OO
480
s4,560,oO
$2,780
Budget allowancebased on actual hours: Variable:n Planera(1'O2Ox $2.325;..........r.r.$21371.5O Radial Drills (680 x $2f .........' Firgd.t........"...""t""
Spending Yarianc8..........
ltSOO'OO
$1,ggo 1r25O
3,871.5O S 688.50 unfav.
2,61O
S 170 unfav.
rDistributionof service departmentcosts to producingdepartments: Planers Maintenance: S 960 Ptaners(32Ohrs. x $31r,.r..............'.........'...r....'.r.......... Radial Drills (8Ohrs. r $31.........'...'.....................""""' Utilities: 480 hrs. x $,121 Planers (4,OOO hrs. r $12'..........-......... Radial Dritls (2,OOO
s1,44O
Radial Drills
$ 24o 240 $ 480
"Variable ovorhead rate: = $2.325 Planers: 33.825 - ($tS'OOO+ 12,OOO} Radial Drills: $4 - ($1510oO+ 7,5oo) = $2 Planers ldle capacity variance: Budget allowance basod on actual hourE...... $ 3 1 8 7 1 , 5 O Lass applied factory overhead: 3,9O1.5O Planers (1,O2Ohrls.r $S.aZq.. Radial Drills [680 hrs. r Sa].....'. fav. s___19_9€9) ldle capacity varianco........
Radial Drills $2,61o 2r720 $ ( 11 0 ) fav.
427
Chaptor 17
P17-,2(Continued) (4)
Maintenance
Actual sgrvicgdepartmentcost..............................,....$ t1170 Distributedto producing departments: Maintenance(4OOhrs.x$3|....,.................,..,........ lr2OO
Utilities
$ 710 720
s
(3ol
s (tol
Spending variance: Actual service department cost .............,. S1'17O.OO STi O.OO Budget allowance based on actual hours: Variab1e.,r........,...... $ S14.Z8l $Og.4O2 Fixed................,...... 5OO.OO IrO74.28 4OO.OO 7OB.4O spending variance..... $ iss.?z unfav. $ i^6o unfav. ldle capacity variance: Budget allowance based on actual hou1s.....................r..$1roi4.2g Less applied overhead: Maintenance (4OOhrs. r S31..., i,2OO.OO utilities (6,000 kwh x $.121...... f dfe capacity variance...,.....,....,.. g (i gS.72ltav. Net variance........ $ (go.oo)t"*r. t Estimated variable expense
gstimffi-
$4, SOO
3,soo
' Fr
$ 1.2 8 5 7 r 4 0 O h o u rs = $5i4.28 2
Estimated variable expense
ffi. .
$.0s14x 6,o0okws = $gog.qo
$31600
zo;ffi
- $.0514Perkwh
$Zog.4o 72o.oo
9l1l:o9)rav' $ (lo.oolfav.
Chapter 17
P17-2(Concluded) (51
Reconcillatlon of total variances: Agtua I ta gtory ovgrh gad ...........r........
$713OO.00
Lsss: Applledto work In Process-
Planers...........'..............""tt
Applied'to work in ProcsssRadiat Dfit13,..........r......o......
$3t9Ol'5O 61621.50
2'72O.OO
678,50 unfav.
Ngt total Yariance.......'r.r..............o...o
$
Unfavorable Variances: Spendingvariance-Pt3ll9!'t3....... $ 688.5O 170.Oo Spendingvariance--RadialDrills ld le capacityvariance-Plan 8t3.. ldle capacltyvarianceRadialDrills ."..........'............... 155-72 SpendingvariancFllllaintenance 1.60 Spendingvariance-utilitios.'..... ldle capacityvariance-
Favorable
MaintgnaDCO..........'.......r.......'.
ldl e capacity variance-lJtilities.. Net total variance
$
3O.0O 110.OO
185.72
l l.oo S 337.32 s1,o15.82 $ 678.50 unfav.
429
Chapter 17
Pr7-q (1)
Budget allowance for each producing department in Januarp
(a) Basedon scheduledproductionhours: Variablefactory overhead: Machining (5,000units r S.45t per unit) or (1r25Ohoursx S1,8Oper hour).r......r........ S2,25o (5,OOO units r $.ggeper unit) or (l rOoOhoursx S1.9Oper hour)..........,...... Fixed factory overhead: ($17r52O + 12 months)............o,,.........r......... ($34r23O + 1 2 months).........'..............r.r......r
Assembly
sl,90o.oo
1,460
Share of service department cost: '625 Maintenance (1r25Ohours r $.SOsper hour) Maintenance (1,OOO hours r S.5Oper hour) . Janitorial (9lrggO + 12 months).....,...,.......... 165 Janitorial (S2r97O+ 12 months).................... Total budget allowanc€ ...."...,.......,..r.......,.........,.. sdggg
2,852.5O 500,oo 247.50 s5,5OO.OO
r Machining:S2T'OOO + 6O,OO0 units = S.45per unit; S2Z,OOO + l5,OOOhours = $ 1 . 8 0p e r h o u r z Assemblr $22'800+ 6o,ooounits = S.gBper unit; $22,Boo+ l2,ooO hours= $1.9Oper hour 3 Maintenance: + 27.OAO hours= $.5Oper direct taborhour $13,5OO (b)
Budget allowance based on actual production hours:
Variablefactory overhead: M achining (1 ,3 4 Oh o u rs x $1.8Oper hour | ,......,............ $ 2 , 4 1 2 (1 ,0 3 0h o u rs x Sl.gO per hour )......,...,........., Fixed factory overhead: Gl17r52O+ 12 months).,........,r.................r.... 1 , 4 6 0 ($34r23O+ 12 months),............................,... Share of service department cost: Maintenance (1,34Ohours x $.50 per hour) . 670 Maintenance (1,03Ohours r $.5O per hour) . Ja n i to ri a l(9 1 ,ggO+ 12 m onths) ........ 165 Ja n i to ri a l($ e rgZO+ 12 m onths) ............,.....,. Total budget allowance s4,707
Assembly s t,957.0O 2r852.5O 515.0O 247.50
99,s?2.0o
Chapter 17
P17-3(Continuedf The budget atlowancescatculatedin (af and in (b) include the service department shares by two different mothods: the share of the MaintenanceDepartmentcost is basedon the charging rate of $.5Oand the actual hours worked, which is in harmonywith the general procedurs advocated.The share of the JanitorialDepartmentcost is based on 7112 of the apportionedcost. This approachls used becauseit is believedthat ianitorial services have no relationshipto the number of hours worked In the producUondepartments,In fact the lllustratlon could be made moFo realistic by basingthe apportionmentof Janitorial Departmentcost on the basis of the relative amount of floor space occupied by the producing departments.As long as no changein the spaco has been reportedrthe share would remain as establishedin the budget figures. It should be noted further that the maintenancecost could be chargedto the producingdepartmentson the basis of maintenanco hours and not direct labor hours.An additionalrefinementwould apportion fixed cost on the basis of a predeterminedmaintenanceschedule' and the variablecost on the basis of maintenancehours actually used. (21
Spendingand idle capacily variancesfor each producingdepartment' based on astual produstionhours: Assembly Machining Aetual departmentalfactory ovgrhgad ..............r....... S5,24O.OO s4,2OO Add share of budgeted service departrnent costs: Maintenanco Department r.......... Janitorial Department................. Total actual factory overhead..........,,
s15;oo
670 165 $51035
247.50 $6'002.50
Budgetallowancebasedon actual productionhours..
8,572.OO 4r7O7 Spending variance .,....r......r.......r...... S 328 unfav. S 43O.5Ounfav. : :
Budgetallowancebasedon actual productionhour:s,......,...........,....o S4r707 Applied factory overhead: (1'34Ohoursr $3.6Oper hour).... 41824 (1'O3Ohoursx 95.50 per hour).... ldle capacityvarianco...,.... 9_Ill f) ta*
S5r572.OO 5,665.OO
$
(93.oo)fav.
Chagter 17
431
Pf 7-q (Concluded) (3) Spendingvariancefor each servicedepartment: Maintenance
Janitorial
Actual cost (month ol January).,....,.. $lr3SO.Oo $iro4o g?s Budget a||owancgt..............r............. 1rl4Z.g3 Spending variance.,,..o................r......$ ,OrJ? unfav. S 215 unfav, *Variable lactory overhead: ($S,t AO+ 27rO0Obudgeted hours = $.189 per hour) l2r370 actual hours x $.199 per hour) r......,.. $ 447.93 ($ZTZOO + 12 months)..............h.. S zas Fixed factory overhead: (SA,COO + 12 months)........ 7OO.OO (S7'2OO+ 12 months)..............t... 600 Budget a||owancg....,.,.....,..,.............. $1rl4Zr3 g25 $ P17-4 Capacit1r...t...,...r............................o....,........ g}oh gooh l OOoh Dirgct labor hou!s.....................r...,........,,...4OroOO 4srooo sorooo Variabfgcosts:..r........t....o......o.....o.............. $ 4rOOO $ OrSOO $ SrOOO Indirgct |abor..................r....r................IBTOOO ZO'.2SO 22rSOo Payrolftaxes and fringe benefits.......... slrz4o oc,ggs 71,5sol P o w e r a n d |i g h t..,..,.....r .........,....r ........, 1r 2oo r igso 1r 5oo2 Inspectiott.........,........r.........,o,..............4rgOO grOOOg SrAOO . Other sgmivariablgcosts....,.,.,.,,.......... 6'OOO O'ZSO 7r5OOa Total variablg costs.r..r..o....r........,..r.r... g 91,24o $io2r64s $1 lqoso
Fixedcosts: Depreciation..................,.................r..,.$grooo$grooo$gro Insurance ..r...,......,.. 1r5OO t,soo l r5OO Maintenancecost......,......,.......r....,..r.,.Z4rooo Z4'rooo 24rOoO Propgrty tdr.,...........r....o.....,.........r...,... l r5OO Supervisorystaff '..,..'....o...r.....,.....t..o...gorooo Powgr and |ight.,....,..........r...,..,........... 2OO Inspection......,.............r....r..............r.... 4r2oo
f 'SOO gorooo 2OO 4r2OO
l r5OO 361000 2OO 4r2OO
other semivariable costs...................... i,4oo i;a;o 1,40o Totalfixedcosts,..,....,..... ...... $ 77,goo $ ??"soo $ ??"goo Totalfactoryoverhead ...-.....,--... .. slqt,t* $t "t,t* lirttras
Chaoter l7
432
P17-4 (Concluded) rPayroll taxes and fringe benefits: = 50'OOOht€. x S7.50 Direc't labor cost = hr:s. x $ .45 5OTOOO Indirect tabor cost
s375,ooo 22,5OO S397'5OO x . 1 8 = S 7 1 r 5 5 O
2Power and light: Hours Lt:-ttllUaa
a.a
a..aa.....a
aaaaa
aaaaa.raaaaaa.
aa aa aat.at..
aa aaa a..r..........
a a
aao.
st,7oo
5OTOOO 4O,OOO
aaaoaaaaaaa..aaaa.aaraaaaaaaataraoraa...r....t........aaaaaaaaaaaaaaaaa.....t....
LOW..r.a.r..a.a
Cost 1,4OO
10,0oo s 3oo s300 1 0 , O O Oh r s . Total cost
$. 03 per directlaborhour a a aa
a r r
ar
a a a a a a a a a a.
a aa
t
a a aa
aa
a a a ta
a aa
aa
a aa
a a a aa
a a a aa
a a a aa
rl
aar
s1,7OO 1,5OO
a a a
S :
...........................r.....r....
Fixgd cost........,....,,............,..,..!.
2OO
clnspection: Llt-
I ll!ral
r.
a.a.......aaaaaaa.aaa.aa...raa.aaaaaa.aaaraaaro......aaa..a...aaaaa.taaata.aatala
Low.....
a t
a aaa
a t
Diffgrgn cg.............
aa
a aa aa
a a a aa ra
a..
a a a aa ta
ata
at
ata
ao
aaa
a a a ta
a a a
..........r!....r.,...r...'....
Cost Hours 5O,OOO s1o,2OO 4O,OOO 9,OOO
10499 $ 1 , 2 o o
s1,2OO - . S' 12 Per direct labor hour ie-dffi; Total CoSt ....rr.r.....r..o...............r..r..............r.'...........r.......................
Sl Ot20O
Variablo cost (5OrOOOhrs. x S.12)......r......r.'.'....................t......r'.....
6tOOO
Fixgd
4t2OO
GoSt..........rrr..............r.......r....rr.......r.....1..........r............r..rt....
$
lOther semivariable expenses: Gost Hours 5O,O0O $8,90O 7,44O 4O,0OO 1O,0OO s1,5OO
s8,9OO 7,5OO
Fixed cost
sl,4OO
t
Chapter 17
P77-5. (1}
ONE MONTH FLDOBLE BUDGETFOR FABRICATIONDEPARTMENT
Ooeratino level Based on machine hours,,.. Percentage of capacity .......
1r 600 gooh --
lrgoo
2,OOO
2,2OO
_so%
|_oo%
11o%
Variable costt Indirect labor .....o.. $ gr44o.oo $ 3,87O.OO $ Factory supp1ies,,r....,...,...... t,2oo.0o 1'35O.OO go0.oo goo.oo POWgr.........r.rr.....'....r.....r....r Rgwork operations.......,.,.... 490.00. 540.Oo Payroll targs ..,.r......r.r......... 580.0O 630.00 Repair and maintenanco..... 400,00 450.oo Ggngral factory ..,.............o.. 320.0O 360.00 Total variable cost........... s 7,2O0.0O$ 8,1OO.OO$ Fixed cost:
4,3OO.OO $ lrsoo,oo ITOOO.OO 600.00 700.oo 500.oo 400.oo I,OOO.OO $
4,73O.OO l1650.00 l r l oo.oo 660.00 770.OO 550.OO 440.OO grgOO.OO
Indirect|abor....,..o.....,..r.r,.. s 2rooo.oo$ 2rooo.oo$ 2rooo.oo $ 2TOOO.O Supervision..,...................... 2rooo.oo 2rooo.oo zjooo.oo erooo.oo Factory
supp1ies.,................ Power...,....,..,..............,t..,...
600.00 4SO.OO
600.00 4SO.OO
OOO.OO 45O.OO
Payrolltaxes""""""""""'.. lrooo.oo Repairandmaintenance,.... i,!oo.oo l-p"tty insurance.....,........ z5o.oo l-p"tty taxes............,...,.... 5oo.oo
irooo.oo rrooo.oo rrooo.oo t jooo.oo lr4oo,oo 1r4oo.oo 7so.oo z5o.oo 7so.oo 5OO.OO 5OO.OO 5OO.OO
Employee pensioncosts..... Irooo.oo Employee healthp1an.......,.. goo.oo Iltlachinery depreciation...... 3,5oo.oo
trooo.oo goo.oo 3,soo.oo
vacation pay......................., l'7OO.OO
Water and heat..o..............r.. 4OO.OO Building occupancy............. 9oo.oo Generalfactory...,.........r..... lrog,g jg
Totatfiredcost.........,,..... !@f9 Totalcost.....,.,..r..............o.. ffirr*
s*'.
600.00 4SO.OO
l,TOO,OO
l'7OO.OO
l'7OO.OO
Irooo.oo goo.oo 3,soo.oo
4OO.OO 4OO.OO 9Oo.oO 9oO.Oo ITOOO,OO ITOOO.OO
$lgpoooo !!t $rrrrrr", *rr*gg
Irooo.oo goo.oo 3r5oo.oo 4OO.OO 9oO.oO Irooo,oo
sr;ffi ffi
Chapter l7
134 I
P17-5(Goncludedl FABHCANONDEPARTMENT VarianceReport
t2l
For the Month of Februaryr 2OBudgct Allowancc Actual CapaclV
Based on machlnc houn..o-...€ Parccntagc ol capacl$ o.........-.-
Budget Allowancc Hormal Capaclty 1,800 00%
Varlabla cott: Indlrcct labor
I g,azo.oo
3 3,999.00 1,395.0O 930.0O 558.OO 651.00 465.0O 372.OO
t 4,125,00 1r5:t4,00 e7050
3 8,1oO.OO $ 8,370.00
3 8,924.99
Factorysuppllct Power Rework opo rat!ont........,..'.....'..... Payroll taret ..........x......,....o,....... Repalr and malntelEDCC......'....... Gen era I lactory ..................o..o...... Total varlable cost .'............xo Flxed cost lndlrcct labor Supcrvlglon Factory auppllel
Powcr Payroll taxeg Repalr and malntenancc..........-Proporty Insu rancc ...................... Propgrty
t8jf 8t......,.oo..............-...
1,35O.0O 000.00 540.O0
so,oo 450.00 360.O0
Actual Coct
1,88O 93'/o
11088,25 675.50 125,75 3a5.OO
3 2,ooo.oo 3 2,OoO.OO t 2,ooo.oo 2,OOO.O0 000.00 &50.00 1rooo.0o 1,40O.0O 750.OO 500.0o 1,70O.O0
2,OoO.OO 600.00 4no.00 1,ooo.0o 1,40O.OO 750,OO 500.oo l,7oo.oo
1,ooo.oo
1,O0O.OO
2,009.0O o00.00 4!to.oo
IrOOO.OO 1,4OC,OO 785.OO 490.00 1,7Oo.OO .1,OOO.OO 845.O0 3r500,OO 405.00 900.00 I,O0O.OO
VacaUon pay -.-..-. Employee penslon cocb Employec health plan ...-.-. MachInery d eprcclaUon ...,.....-..Water and hcat .............,.,. Eulldlng occu pancyoo................... General factory Total fired cost
800.0o 3,500.0o 400.0o 900.00 I,00o.oo sl8,ooo.oo stS,ooo.oo
Total cost
$2O,loo.og s26,370.00 9p'o5o.o9
800.0o 3,500.00 400.00 900.00 1r000,00
Applled factory overhoad (S14.5Orate x 1,880 actual hours)...,-......,....... ldle capaclty varlancc Actual tactory overhead cost.......... Applied factory ovsrhead.. Underapplled factory overh ead Spendlngvariance ldla capacity variancc Underappliedfactory ovefi ead
Spending Variancc unfav. (lav.)
3l2E.OO 150.OO 40.50 530.25 24.50 (ql0.25) 13.OO
o.oo o.oo 0.oo o.oo o.oo o.oo 35.OO (1O.OO)
o.oo o.oo +t.qo 0.00 olt,o0 0.00
o.oo
$18,135.00 3689.0O untav.
28,g7O.OO
@f"". s27,059,0O 2g,97O.OO
9__-_@ 3 3
689.00 unfav. (800.0o)fav. 89.00
'
l
Chaptar 17
P17-6 (T}
435
' ONE MONTH FLDOBLE BUDGET FOR ASSEMBLY DEPARTMENT
Ooeratinolevef Basedon direst labor hours Pelcentageof capacity....... Variable cost: Indirect labor
lr2OO _80%
$ 2rzoo.oo$
Fagtorysupp11es.................. 1,44O.0O
POWOi ............o.....rr...r.....r.r.r 420.0O goo.00 Rgwork operations.............. Payoll targs ......................r 420,OO Repair and maintenance..... 180.OO Ggngral factory r...........r...... 240.00 Total variabl g Gost........... $ 6,000.00 $
Fixed cost: Indirect labor ...................r.. s 2,500.00 $ Supervisioll ............r............ 1,80O.0O Factory guppll gs......D...or...... 500.00 POWer.....r.......r.rr.r............... 150.00 Rgworkopgrations............,. 600.00 PayrOll targs r..............r....... I,OOO.0O Repairand maintenance..... 350.0O Propefi insurance.............. 150.00 Propgrtytaxes.....,.....o......... 200.0o Vacation p8|....................r... l'8OO.OO Employeepensioncosts..... 11200,00 Employeehealth p131t.......... 500,00 Machinerydepreciation...... 450.00 Waterand h gat..............,..r.. 400.0o Buildingoccupancy....r........ 900.00 Ggngral factory ........o.......... ITOOO.OO
lr 35O _90%
1,5OO
Iga%
1,650
yo%
3r037.5O $ 3r375.OO $ 3,712,50 ITO2O.OO l,goo.oo 1,ggo.0o 472.50 525.OO 577.50 675.OO 750.00 825.00 472.50 525.OO 577,50 202.50 225.OO 247.5A 270.OO 300.oo 330.OO _--
o,z5o.ooS 7,5oo.oo $ 8r25o.oo 2,5OO.OOs 2,5OO.OO$ 2,5oo.oo
lrSoo.oo 500.oo
1,8OO.OO
1,8OO.OO
600.oo
500.0o 150.00 .600.oo
ITOOO.OO
ITOOO.OO
ITOOO.0O
350.OO 150.OO
350.OO 150.0O 200.0o lr8OO.OO
350.OO 150.OO 200.00
150.OO
200.oo lr8OO,OO 1'20O.OO
500.oo 450.0O
400.oo 900.oo IrO00.oo
l,2oo.oo 500.oo 450,00 400.oo
goo.oo
500.o0 150.OO 600.oo
1,goo.o0 1r2OO.O0
500.oo 450.oo 400.oo goo.oo lr0oo.oo
I,OOO.O0 Totalfixgd cost.,......r.,.....sl3,5OO.OO$l3,5oO.OO$13r50O.0o $13,5O0.0oTotal cost.......r............r....r.. slgr500.oo $eor2so.oo s2lrogo.oo
$21'75O.OO
Chapter 17
16 I
P17-O(Concludedf ASSEMBLYDEPARTMENT VarlanceRePort
t2l
For the Month Ending August 31r 20Budgct Allowancr Norrnel Capacltil Bs$d on dlnct hborhourr * Prrccntagr of cePaclUF@n Verleblc cosi: hdlrrct bbor
Fecloty stppllcl
Powrr Rcwort Plyroll
opcraUonrffiForu tarcr ...-o.Hffi6...o.d
Repalr rnd nulnteflttlcl --*-Oencrel tactory ---...*.E.--.Totel varlrblc @tt ..-.'...D...s Fhed coaE
tFsO 90.t 3 3,Oil75O IrO2o,OO 172.5O 675.0O 172,4O 202-50
tlo.oo t 0,750.00
Budgot Atlowencr Actual CaPecltY
Actuel Cod
Spendlng Varirncr unfev. tfavJ
lr2,0 80%
t aoo2-5o
3 srso.oo 1,6!t+OO 405.OO 4€a,3rt alt150 1,173.75 3a5,OO
1r5a&oo 45150 o45.OO 41t1.50 103'50 258.0O 3 6,450.00
3a7.50 100.00 13.50 (150.751
o.oo 982.25 127.OO
3 7,800.50
o.oo o.oo o,oo o.oo 0,oo o.oo 0.oo
lndlrcct
t 2'5OO.OO t 2,5OO,OO 3 2,5OO.OO
Factoryruppllcr
500,o0 130.00 150.00 ooo.oo oo0.co ooo.oo 1,o0o.oo I,OOo.oo I,OOO.OO 3:to.oo 3:io.00 3rio,o0 15.00 1s5.OO 150.00 l50.oo 10.50 21050 200.0o 200.00 400,0o 2120O.OO 1BOO.O0 l18OO.OO 0.00 1300.00 1300.00 1300.00 o.oo 500.00 500.00 9o0.00 0.oo 4llo.00 450.00 450.00 05.oo a65.00 400.00 400.00 o.oo 000.00 900.oo 000.00 0.oo I,OOO.0O I,OOO,0O t,ooo.oo tl3,50o.oo Itt3,5OO.oo 313,090.50 tt20,250.00 319,950.00 321,800.00 t1,010,09_ unfav.
lBo0,oo 500,oo l50,oo
Powcr Reworl
opcratlonr-offi-.-.ffi
Papoll terar Repalr end malntenlnc!...,......Propcrty
lnlurancc
lpoo.oo
-tr*-ffi
Propcrty t-rcr,..-* VacaUonpat
Employcopcndon oortt -** Employcr hcrlth phn *.*.Machlncry dcproclatlotr-o--* Watcrrnd hoet Bulfdlngoccuprnqy Oencrel factory Totel lhcd cod Total cst,
Appllcd factory ovcrhred Fl5.00 retr r 1'290 rctuel houn),.-...,......,-... ldlc capaclty varlrncr..ActrtI tectory ovrrhud eort...-...., Applled factory ovcrhcrd... Undonppllcd fectory ovrrhced SOondlngvarlanct ldlo capeclty verlancr
3 1,910'OOunfav. OoO.O0 unfav.
Undcrappllcd fectory ovc
3 2,51O.O0
19,3!10,00 OOO.0O unfav. 3 321,89O,OO 19,35O.0O 3 2,510,00
I,aoo.o0 500.o0
Chapter 17
'
43t7
QASES
c17-1 (f l
(21
The factors that influencethe behavior of the production managers, described in the case, conflict with the factors that motivate the maintenance managens"The productionmanagenshave been given a monetary incentiveto improvethe costs in their own departments.They require the support of the other departments,(e.9.,Storrrcom and Maintenance| to achievetheir objective;but the incentives (monetaryand otherwise) have not changedin the other departments. To lmprovetheir costs and earn the incentives,the pmduction mansgonr have postponedrepairs;demandedemergencyrepairs more frequentlythan in the past demandedrepair work be done monequickly to reduce downtime;demandedspecial treatment in some cases; pfaced undue pressuneson maintenancemanageni;and complainedabout the maintenancecharges. The results of the demandsby the production managansconflict with the following tactors, which appear to be important io the maintenanca managensand reflect on their performance:good relations with other managens;high quality repair work, inctuding making machinery safe and maintainingits normal life; and orderly work schiduting. lf monetaryincentivesto the pmduction managensare to be continued, complaintsand conflicts could be reduced by revisingthe chargingsystem as follows: developpredeterminedhourly charging rates for each skill levelwithin the MaintenanceDepartment;Oertloi predeterminedor budgetedhours for routine or repetitive maintenancework; develop budgeted costs for parts and materials;use maintenancejob time cards that are initialed by productionmanagerswhen the job is done; and developa penaltyrate to be chargedto those production man"g"o ;rho need quicf servicethat could havebeen avoidedby timely maint-enancsschedut'ing. lncreasedproductivityand reduced conflicts between managens probablycould be more effectivelyachieved by revising the renrardand evaluationstructure. Evaluationslnd rewards tor indiv'idualefforts should be eliminated,and cooperationand continuous imfrovement should be encouragedand tewarded.High rejection rates and internal conflict suggestthat far moro is wrong wittr ttre current "yit"than just the chargingrates.
KB
Chaptor l7
c17-2 (11
(21
Variousalternative answerEmay bo consideredacceptable depending upon the lustifications given and top managementbreacUonsto any resutgng wriances. The main objective ig to ensure that the costs are allocated to the aneasthat ara rasponsiblefor the incurrenco of the costs. (al $8,OOOcost of idle time in the AssemblyDepartment-This should be chargedto the MachiningDepartmentbecauseit is a direct result ol their decision to change productionschedules.By charging Machiningwith this cost, they beeomeawanoof the overall effects of schedutingchangesand the overaltcost to the companyof their decision.SomejustificaUoncould be given to charging$3OOof this to the PurchasingDepartmentbecauss.thatwould have been the added cost to the companyif the schedulehad not been changed and it is a direct result of the PurchasingDepaftmentb decisionto go with a new supplier. (bl $1,OOO savingsin costs due to layoffs in MachiningDepartmentThis should be credited to the MachiningDepartmentbecauseit is a direct result of their decision to lay off machinists' (c) S1,5OOcost of training in the MachiningDepartment-This should be chargedto the MachiningDepartmentbecauseit is a direct result of their decision to lay off machinistswho must be subsequently replaced,This would ensunothat they ane aware of the total effegt of their decision on the overall companyinstead of iust their own department. (d) S2OTOOO lost profit on sales resulting from AssemblyDepaftment downtime-This ls an opportunitycost that is not normallyrecog' nized in the accounting records and, therefore,would not be chargedto any departmenl In evaluatingthe AssemblyDepartment' considerationshould be given to the shutdownthat occurred in the MachiningDepartmentand its effects on the output of the Assembly Department, Overall,the companyb present budget and leward (bonus)system would appearto be causinga fack of goal congruence,poor communicationt and an overatlemployeedissatisfactioncaused,in whole or in part' by the following: (a) The companydoes not appearto be followingthe basic conceptsof responsibilityaccountlngand reporting(asevidencedin (1)).The companyshould try to ensunethat the responsibilityfor a cost is directly retatedto the authority to control the cost in order to establish a fair evaluationsystem. (b) The companyappearsto havea "budget-constrained" style of evaluaUon,in that all managersseemto havetheir prime concern focusedon meetingtheir budgetregardlessof tho overalleffect on style would be more appropriatot the company.A sprofit-conscious"
Clppter 17
Ag
Cl7-2 (Concluded) whery a -managerwould feel free to exceed his budget if it would benefit the overall company {without fear of aoreoJlv affecting his/her evaluation).For example, Winston woutd have been prepared to have the added cost of air freight charged to hirsoepartment, resulting In a considerable cost savings to the overal company (el The companyb present renrardsystem of giving uonuses managerb ability to meet budget tends to ptaci ioo mucrrbased on a emphasis on the short-term, to the possibte detriment of thelong_term. Managersare making decisionsto ensunotheir bonuses maximizingthe overarfggrpany objective". An "-,,.,pr" instead of of might be the decision-ofValqueztolay off workers tJsave this $l,ooo in this period and, therefore, gat the bonus, evsn though output was reduced.This action wourd rssuft in adaed "o=t" ;ili,5oo to replace the workensin the next period. (dl Generaily,an ail or nothing bonus "y"i". such as this poor motivator,becausetoo much emphisis is pracedon is a meeting the budget' This may lead to a lack oi goal congruence as evidenced in this case-manipulation of the dati to meet the budget parin one ticular period and/or overatlemployee frustratio;;;;1, ' their inabitity to meet unreatisticbudgets. (el The companyb overalfattitude seems to be that yariances budget representpoor performanceby the ,"n"g"r;-This from courd lead to serious motivationaland Inot"i" problems with the staff. Emphasisshould be ptacedon the raci tirat variances attention directors and indicate the need to invesiig"t;are only why things were different frcm expected.The variances may indicate that tho originarbudget uraswrong and shourd price of part # 88 would appearto be be up_dated(for exampre,the unrealistic),that overalt company objectivesand/or proceduresneed to be or that things hava happenedthat are oifterent from ";;;;a ext;;ilbut beyond the control of anyonewithin tfr" org"iLtiorr. (0 The companywoutd appearto be u-singa static budget for its evaluations,as evidenc-edby the fact ttraivitquez their bo-nusesfor being under ilteiioriginal and Diron received budgeted costs for the period' ft is also evidencedby the ractirrat Wnston had an annuat rimit to the amount of air freiiht costsattoweo instead of an ailowancebased on the totar purcrrases made in the period. Evaruationsshourdbe based.il ""ip"ri"on of actuar resurtsand erpected p.sults using a fteribleruuog;t, based activity achieved'Thi; is to isolat"-trtll"riances on actual levels of caused by efficiencies/inefficienciesas op.posg{ ttrose caused to by a change in vor_ ume of activity from that whict'"r"i o-riginariy;#;i";
Chapter 17
440 I
c17-3 (11
(21
(3)
Danielb perception of scott, the controlle4 is that she is: (i) an accountant who knows and cares little about the production aspects ol organization; (21 unsympatheticand not helpful in providingsertices to the pro' duction dePartments; (3! an accountant who is unwilling to change or nequestexecutive managementto make changesin reporting requirements. (b) DaniePsperceptionof corporate headquartersis that it is: (11 unfair beciuse they are using the cost report as the sole-iudge of performance,thereby ignoring monErealistic cost comparisons' product quality,employeepride, and motivation; productionpeople; iZ1 ins"niitiue io the needs and concernsof pnocess' igi resistantto changein reportingpoliciesand budgetary es, (c) Daniel'sperception of the cost report is that it is: (il a shortsightedreport overemphasizingcost minimizationas a singfeobiectivei (21lnflexible and not subject to the changingproductionlevelsand operatingconditionsof a dynamicproductionprocess; give til a biaied repoft highlightingshortcomingsand failing to pnoperrecogniiionto lmplovements in performanceor innovative pnocesses. (dl Daniel'sperceptionof himselfis that he is a: (il qualiiiedproductionmanagerinterestedin a quality productat a reasonableprice; (2! frustrated managerunable to get satisfactorycooperationfrom the AccountingDepartmentor executivemanagement; (3) discour"gJd production managerrecognizingthat the current reporting situation is nearly hopeless,and that others before him have been equallYunsuccessful. Danieltsperceptionsadverselyaffect his behaviorand performanceas a productionmanager.Operatingin a ttnowinttsituationin which he believesperformanceneportsdo not fairly representhis accomplishments, pius the inabilityto communicatehis desiresor needsto appropriate peoplein top management,can inhibit motivationaldesiresand curtail incentive. Ghangesthat could be made in the cost reportsthat would make the inlormationmonsmeaningfuland less threateningto the production manageniare as follows: (a) Includea monedetailedbreakdownof labor and overheadcosts. (b) Use a budget allowancebasedon actualactivity rather than a static masterbulget for measuringperformance'so that changedconditions, voluniechanges,and fixed versusvariablecosts are recognized in the rePortingProcess'
(al
-
ChWter 17
lUl
Cl7-3,(Concluded)
(cl
(d)
Separatecontrollablecosts from noncontrollablecosts and clearly identify those erementsor the report for whicrr the production-manager is diresily nesponsibte.Tlrese actions wiii p-ride a mors meaningfulanarysisor operationsand manago; wil kn;;Lsponsi_ bilities. A variance column that highlights both favorable and unfavorabre circumstances would provide a less negauve report. significant variancescould be hightightedto drawlftention to them.
cl7-4 (11
ra
Functional_anddysfunctionalbehavioralnesponses: (al Delayingaction on certain reports during pttioo" of peak could be dysfunstional. lf the reports contain information activity requiri-ng immediateattention' any delay in action woulJ h;r; tr be dysfunctional. lf the reports continueio accumulatewith no action taking place(i.e.,the departmentheads do not catch up during the tulls), this definitely is dysfunctionatbehavior. (bl Havingtoo many reports so that no action or the wnongaction is taken is a dysfunctionalnesponseand a gooo eia;;i" tion o.verloqd.The departmentheads were unable to of informaassimilatethe supplied informationpnoperly,and therefore ttreyeiitrer did not use it, or used it incorecily. (c) Delayingaction untit remindedby someone can be dysfunctionat.lf continuafly place take "nJ re"ult in complicationsand/or 9"!")rs delaysin other departments,this tack of action is dystunctional. (d) The departmentheads'actions""n u" consideredboth functional and dysfunctionat.The developmentof information f;m alternative aourrcssis dYsfunctionafto the firm becausethe formal system is not producingthe informationin a usableform ano irtl process of deveropinginformationfrom other "our"", probabry has a cost. However,the fact that the departmeni tr""o ,r"" "dl" io generate the needed informationfrom other "our""" in that action courdbe taken is a functionatnesponseto the order probrem.
I
\
Chapter t7 I
C17-4(Goncluded) l1l
was a The dysfunctlonal behavior that occurred In McCumber Company sysinlormation that dlrect rcsult of management'slailure to recognize it tems "r" Jyn"mic. Once a system is designed and lmplemented' any incorporate and should be iontinually rcviewed to acknowledge committeo' c-omposedof bolh systems staff changes.-A"y"i";situCy and to and users, siiould Ue estatrtishedto reYiewthe present system information. educate ui"rs as to Information needs and the uses of During U," systems review, the committeeb attention should be directed toward informagonneedei by department heads and the information's form and timing. Unnecessaryreports ghould be eliminated, and individual reports sno-utObe rsdesigned-so tlrat only relevant information is included. once the reporting system is rovised,the systgm should be reviewed periodicallyto seJttrat it is functioning smoothly and to make any necessarYcorections.
CHAPTER18 DlscusstoilQUEST|ONS Ol&1.
Standardclr ar. thr predetermhed coet! of rnelru{ac{uring prodrdr durhg a specifb podod mdcr cunonl or anthipded opcrathg crdtkrrr. Stsndardr airJ in phrning and wrtrollirp opcntims. Q1&2. A ftw uscr cil etgrdard catr are: (r) oatablirhhgbrrdgntt (b) conlrclling coetr by nrotivating .rnployoot and rnrarurhg rtfpbncier (c) rirplityhg coting preeduroo and epc. diilhg cod roportr (d) aaaigning cortr lo materials, work in proc.sr, and finklhrd god inventqicr (r) forming the barir lor ostablishing conlrecl bidr and for retthg saler prbes Ot&3. To tol rabr pricct, exccutivesneed cogt hformalion lumished by tho accounting departrnont Sinct $ardard cod! repr$€nt the ost that shorrld bc a&ained h a weil-nanaged plant oporalrd al nollral capacity, thcy arr ideally cuitrd lor fumishing hfonnati:n that will enablc lhr aalor depaimont to prbc products. Eudgetr are urcd for planning and coordinalhg lulurc activitics and tor curlrolling currrnl rliviticr. ttlhcn budget figurec erc baged qr rtendad c€lq the aocuracy ol lho resulting brrdgct i! strwrgly hfluenced by the retiability J tho rtandard costc. With standards avaihLb, prodtrction figurer can be translated into the manufacturhg costr" Q18-4. Sbrdards are m htegral pE t of irb order and proce$ co3l accumulation, but do nol compdr a lydom that ouH b. utilized h licu of sro of lhc accumulaftxr rnothoclr. C,ets rnay be r.cumuhtcd wilh or without thc use d stanct rdr. Q1&5. Critcria to bc used wtron rolecthg thc operalirnal activitiea lor which rtEndar& are lo be rrl includc thc fdbrrhg: (e) Thr activity should be repetitive in nalur., with thr repetition occurring in reldively short qrcles. (b) The hpd-and output (product or rervice) of thc aclivily shoub be measurabteand unilonn (c) Tho obmonlt ol coal, ruch as direcl meltriab, d,act labor, snd facto.y orerhoa4 mud b. dsthed cfoarly at the unit lovol of act vity. Qt8-8. Norrtel or currntly attainablo standards arc proforablo to th.oretbal or Ueal siandafdr for (a) porformancc rvalualion and/or emptoyee rnolivation, qn!, (b) budgeting and ptanning. Thoorctirl or Ueal ctan&rds-are nol realisticllly attainabtr. Ar a con3oquenc. of using
/t43
rucfr standards, employees rnay bocanr dir. couragcd ralher lhan rrolivated, and budgetr or pbns arr likely to be distodod end unroliabL, Qt&7. Behavinral bsuer lhat need b br cqrsUend wfien selec.ling tho level of portorrnsnc. to b. ircorporated into ctandards inctudo tho fdl*, hg: (a) Thc standards musl bo fcgitimatc. Tho atandads noed not rellect thr actual cogl ol a ahgb ilem or o7clo. Fbrrew?, lhcy iteally will repraent the coci bst thould bo incuncd in the productbn of a giron produgt or the perlorrrlance ol a jiven operatian. (b) The standardr musl be attainable. tt/trcn the atandards arc set too high, thc ropealod failure to chievc them wilt tond lo reduca thc rrotivatbn lor attahment. Thc cqrvenr b sbo trur. Standadr h8t aro loo looro represonl an invitatiqr to relar. (c) The participant shoutd havc d voice or influencr in the establirhment of rlanderda and reeulting pedormancr measures. Innolvement in the formutatbn ot standards gives the participant a gmalor sense ol understanding and commilment. Q18-8. (a) The role of the accounting department in l h e e s t a b l i s h m e n to f s t a n d a r d s i a t o determine their ability to be quantified and lo provide dollar valuee for ryecific unil standards. (b) In the establishment of ctandards. tht lole of the depariment in wtrbh thc pcrformance is being mearured ir to prwido hformatim lor realistic dandards, and to albw tor subsequent perfonnance evaluatkrn lor the purposc of delecthg problems and irprwhg perfomance. (c) The role ol the industrial engineering department h thc estsblishment of ctan. darde b to provide reliable nreasurer c, phyaical activitieg related lo thc rtandardr ol performance, and lo vcrity tho consirterry of the pertomancr botwcon departrnents. Q1&9. Thr factory overhead variablo etficiorrcy varF anco b ! ,nea3ur. of tho efficient or ineflbirnt uac ol lhe tase. thet wac used in allocating fectory overhead to production. To thc crnont that the activity used as an allocatircnbaso driver variable lactory overhead, lhc variablo efliciency varisncc is a mearurc oil tho cort
Chapter l8
444
01&10.
01&11.
01&12.
018-13.
savings or cost ircJnence that is attributableto tho etlicieot or hefficient uso cl lhal acfivity' Thr factory overhead spending variance ir a mealurr cl the ctficient or inefficientuse of the varbur itsns of tsctory ovefiead ll ir caused by dilfcrmcea in thc prices paiJ lor thc itens cf ovcrhcad actually used (i.c., lhr differences between tho ac'tual quantity at thc aclual prbe and the sctual quantity at the standard prico for all ilomr ol lactory. overhead) and lhe ditf er' encee h the quantities ol the varbus ilerru of tactory ovefiead adually used (i.e.' the difler' ences between the standard quantity allorved for the actual level of the aclivity base at the etandatd price and the actual quanlity used at thr gtandard price lor all items ol lactory over' head). The factory overhead volumc variance is a measute ol the under' or over'utilizalion of pbnt failitier' lt it tho diflererre between the total budgeted lixed factory overhead and the amounl charged to (or chargeable to) aclual production based on the standard quantily allowed for thc activity base used lo allocate overhead. Thc volume vatiance may oo thought of as ttle emount cl under' or ov€raP' plied budgetedfixed lactory overhead. Atter variances have been dEtermined'rnar:' agemenlshould: (a) decide whether each variance ig suffi' ciently signilicant to require invesligation and explanaliro (b) hvettigate and obtain, frorn the resPo.rsible department head, explanationsof signilicantvariances (c) take coneclive acticn and recognize and reward desirable performance,whsro sppropriale (d) revise standardsif needed (a) Featuresol lolerance limils include: ('l) A standard cost control syslem is established,specilyingexPoctedperforrnance levels. (2) An hforrnation syslem is designed lo highlightthe areas most in need ol hves' tigntkrnand poesibleconeslivc action. (3) Variancc rangos for areas and ilems are compuled. Managemenl does not spend tirne on parts of the operations thal producr satislactory pcrlormance leveb wilhh theso ranges. (4) lvlanagemenl's Ettenlion and etlods arr csrcentraled on signifi-nt variancec frorn expccted resuhs. which sigoal the prosonca of unplanned condilions needing investigalion. (b) Tolerance limils have potenlial benefits because they may resuh in more eftec' live use ol management time. Thc rnan'
age/s tirne b not wetod on lho prcest ol kJentilyingimportant problems or in workhg m unirnPottant ones. Thc man' ager should bo able lo concenlratb etforls on inPottant problems' becausc the teclnkPc highlightr lhern. (c) lt may br difficult to determine which variancor ere rigrrilicant. Also. by focus' ing on varianceg abovc a cadain level, other sscful hformatbn, suclr as trends' rnay not be notbed at atl oatly stago. ll thc evaluatbn lYltrn b h anY waY dircctly tied to thc variances, subordinals! ttlsy be ternpled lo cover up n€$a' tive exceptbns or not tePort lhem al all. Jn addilirn, subodinatea tnay not receivo t e i n f o t c a m € n tf o r t h o r e d u c l i o n a n d rnahtenance cf coat leveLg,but only rep' rimands tor those itemc which exceed the range. Subordinate morale rnay sut' fer because of the lack ol Positive reh' lorcemenl for work well done. Using toF erance limits rnay also atfest supervisory emgloyeer in an unsatislactory m'vlner' Supervisorsmay feel that lhey ars nol getthg a cornplete review of operalions because they are always keying on prcblems. ln addiliqt, superisors may think that they are excessively critical of their s u b o r d i n a l e s .A n e g a t i v e i m p a c t o n supervisorYrnoralernaYresuh. 01&14. Overemphasison prico variancescan resull in a large number of lorr cast vendors, high levels of invenlory, and poor quality materials and parts. Since lhe emphasig is on price rather than quslity or reliability, purchasing will likely have a large number ol bw cct vendors avaiF who can be played cre against the other able, . to got the lowest pqssible prices. ln addition' purchasingwill likely purchase invenlory in largo quantities to take advantage ol purchase discounls and to redwe the need to place rush orders that resull in premium prices. Inventory tends to becorne unnecessarilylarge, resulting in excessive€rryhg costs, and rnaterial qualF ty tends to decline, resulting in poor producl quality andor excessivespoitage,scrap, and rework Overemphasison efticiency variances can reault in long production rung, largc work in ptocoss inventories, and attemptr to control quality through hspestbn alone. Long produc' tion runr reguire lewer mschino set ups and reduce tho amounl ol inelficiency resulting frorn thc leaming tequired to changc produc' tion lrorn one product to snother. Large work in ptocoss inventorier resull frgn bng prodrrclion runs, and large invenloriegare likely to be viewed by departmentmanagors as buftero
Clppter 18 thet ern bo utod to rbrorb rnschino broakrdownr, rmployrt ebrrnlorism, end rlack demand for thr product. Atthough carrying hrge hvernori.. b €3ty, thr carryhg sn do not affri thr offbienqy yariansf, whi*r in tum oncourlgor d.plrtmantrl rnrnagrn to ovrrproducr. Shco offlcioncy variencot meerur. lho utr cJ inRlr h nhtixr to ouput volum, rtto.tr b sttrol Crrsfrtyl.nd to bo orisrtd to
45
intprctbn elone. Stopping lho procorr lr rrprrinrnl wlh allemdivc prodrrtbn nrethoc!. lo pormanen0y conect a problem or improv,, Cualty can rccult h an unlarorable labor rffi cbncy v8rianc.. In cqrtrast, increasing tht vol. umr of prodrstbn and rrrodrhg or di*arding dotccb har e rnaller inpact sr rtrr cttbienci varianca.
Chapter18
pGBClsES El8'l
QuantlW
AetualmaterlalsPurchasod at aCtual OOSI""""r""""'
{,5OO lbc;
Actual matarials Pur'chassd at standald cogt""""'o"" 4,5OO MateriatgPunchascPricc 4r5OO Yariancc
Astual materialg usod at standard GoSt""""""""" Materials Prico usago VafianCO
...."t"tttt"ot"tttt"'
Unlt Cost
=
54.OOO S
Unit Cost
=
$13'50 standard
Materials quanUtyvariancc -2AO. lbs'
13.5Ostandard 13.5Ostandard
Quantltv
Actuat materiab Purchasad ..'.....-.'.....'. 5,OOO at actual ClOSt Actual materials Purchg$orl at standald coSt......'t'....' 5,OOO MaterialspurchasoPrico .r........r..r............
Amount 553,640
$13.41 actual
9l.oe)
4,OOO
5rOOO
QugnUtY
Actual nnaterlalspurchased at standardcost.,.,...or..-.6,000 Actual materialglssued at standardcost..,,....,.o...r.., 4.4OO Materialsinventoryyariancc __q99
Unit Gost
(36O) fav.
Amount s54,OOO 51,300 3 2.7OO unfav.
=
Amount ${1o,5oo
522.10 actual
I12.500
22.50 standard S
$__J.49) Unlt Cost
(4O5) fav.
:S
lbs.
variance
60,750
13.5Ostandard
4rOOO
QuanUtv
El8-2
Amount $60,345
$13'4{ actual
Ll.ogi
4'OOO lbg.
Actual materiat3 usod 8t i,o6o standard |ElO8t..."""""""' quantltY allowed Standard at standald cogt.'.....o""" 3.800
=
13.5Ostandard
Quantltv Actual matariala used 8t actual cost
Unlt Cost
=
(2.00O) fav.
Amount
a
$22.50 standard 22.50 standard 22.50 standard
$112,5OO 99.OOO :B 13.5oo unfaY.
Clppter 18 447
El8-2"(Conctudedl Quantitv
Unit Cost
Aetuaf materials issued at standard CoSt.....,...r........ 4r4OO Standard quantity of materlals at standard GOSt aa...aa..........r..o............ 4.300 Materials guanUtyvarlanoo _t_99
=
Amount
$22.50 standard
$99,OOO
22,50 standard 22.50 standard
96,750
l-3e9
unfav.
Et8..?
(rt
Quantitv
Unit Cost
Astual materials purchased at actual Cost..................6,OOO Actuaf materialspurchased at standald cost........r..... 6rOOO Materials punchasoprice YafianCO ..rr....r.................
Astuaf materials used at
$4,2Oactuaf
$ .2o
Quantitv
x
gtandard Gost ......r....ro..... Trloo
Standardguantity allowed at standatd cost...........r....6.9o0 Materials quantity variance 200 (21 Quantitv Materialsbeginning _ inventOt]f......................... 2rOOO Materials punchasodduring If|O11th...................r.......... I,O00 Materialsavallablefor use.. I,OOO
x
produCtiOr1....................... 7rf OO
Materialsendinginventory Too
r
24,OOO
unfav.
_Lli2oo
Unit Cost
=
Amount
94.OOstandard
$28,4OO
4.OOstandard 4,OOstandard
27.600
Unft Cost
=
$4.12 actual
Materiafslssuedto
Amount $25,2OO
4.OOstandard
6,OOO
Quantitv Aetual materiats used at - actual averago cost........ 7rl OO actual materials used at stan dard GGISI ................r. Trloo Materialsprice usago varlanca......o....... 7rl OO
=
g__e99 Amount $ 8,240
4.2O actual 4.f B average
25.200 s?3,44O
4.18 avor:lgo 4.18 averago
29.679 _$_9,762
Unit Gost
=
Amount
$4.18 average
$29,678
4.OOstandard
28..400
$ .18
unfav.
-$_ff78
unfav.
Chaptar 18
El8€ (Concludedl (31 Materialsbeginning
QuantiW
Unit Cost
Amount
=
210oo
9.12 actual
$ 8,240
6,000 Materialsavailabletor use" 8rO0o
4.20 actual
25,260 $33,44O
2rOOO 5.100 Materialsending inventorY _900
4.12 oldest 4.29 nowost 4.2O newest
inventory
.t"t""t"'rtt"tttt"'
Materials Purchasedduring mOnth...ttttt"tt"t""t"ottttt"
Materials issued to
pfOdUCUOfl."t"t""""""""
Quantitv
Actual materials used at actUal GOSI """"""""t""'
Astual materials ussd at standard cost.........."'r"ot
2rO0O
5.1oo Trloo 7,10O
Unit Gost
8r24O 21,420
=
$ 8,240 21.420 $29,66O
$4.12 oldest 4.2O newest 4,OOstandard
MaterialsPrico usago YafianCO
28.400 l-11260
.r..t""tt""'Dtttt"tt'
(41 Materialsbeginning
Amount
Quantitv
Unit Cost
=
Amount
$4.12 actual
$ 8,240
It.ooo Materialsavailablelor uss.' 8r0oo
4.2O actual
25.200 $33,44O
6t0oo 1.100 Materiatsending inventorY. _900
4.20 newgst 4.12 oldest 4,12 oldest
25r2OO 4.532 S. 3,708 -
inventoql
2,0oo
Materials Punchasedduring mOnth
..t...."tttt"t"""o"tt"'
Materialsissued to production
QuantiW Actual materials used at aCtUal COSI .........'.........'.r
6,000
t l oo
Unit Cost
=
$4.20 nswest 4.12 oldest
Trl oo Actual materials used at standard GoSt.......r..........T r l o o Materials price usago varianCg .....r....r...
unfa%
Amount $25,2O0 4,532 329,732 28'400
4.OOstandard
3 1,332 unfav. r
-
dlg.ptcr rs
119
Et8:{ Houn
Rstc = $ 9,8O 8ctu8l lO.OOstsndard qj.2qt
Amount
650
= , Rate o.oo $t standard
Amount $6,5oo
600 50
lO.O0 standard |O,OOgtendald
Aetual tabor hours rvorkod.. 650 Actuaf labor hours work6d,. 650 Labor rate varialtco............. 650 Aetual labor hours workod.. Standald hours allowed (lr2OOunlts r1l2 hour 1abOrf ...r....ror...............o....
Labor efflclency varlancc...,
Hourr
$51370 6.500 S (i3o) fav.
I,OOO $ 5OO unfav.
Et8-5
(11 Quantltv Actual materials purchased l,5oo Actual materlals purchased lr5OO Materlalspurchaseprtce Vafia nCg .r........D...............
1,5OO
l-(3OQl fav.
1,350
$ r.201
Quantltv
_930 I2l Houns -TioAstuallaborhoursworkod.. Actuallaborhourcworkod.. 3rO
r
x
Laborrate variallcrg............. 3lO
Hours faborhoursworked.. 3 l o l$uqt Standardlaborhoure allowed...r,.....
$ (.2o1
o.ooo
= -Unlt Cost Amount $3.8O actuat $5,130 4.OO-Etandard 5.400
Actual materialsused ......... 1,35O Standard quanilty allowed .. I,O20 Materlafs guanUtyyariance
labor"rri;;;;#il::.:
Amount s5,7OO
Quantity
Agtual materlalsused........r 1,35O Actuat materlatsused,..r,.... '1,35O Materfafs prica usage VafianCO ...o....r.....r...........
Unlt Cost = $3.8O actual 4.OOstandard
340 (301
Unlt Cost = $4.Oo standard 4.OOstandard 1.OOstandard Rate = $12.20 actual 1z.oo standard $
r
.20
Rate = $12.0Ostandard 72.OO standard 72.OOstandard
$_EZO fau Amount $5,4OO 4,Ogo
$!,329 unfav. Amount $3,782 3.720
$_0?
.unfav.
Amount q?,72O 4,OgO $ (geQ) tav.
Chaptcr 18
150
E18-6 " " """' -'-':: Actu al la gto ry ove dl ea d "" ::;':':::
:: ^ -
" "" " " "'
$166,000
eabIeto:"Y:1 tP1.::17 rate).. ililari-o""?rt " " d.chare overhead r 312.5o ; iil,ffir-"t-"i;;ffip ead varianco ."."d """
o"Lraff factory ovefi
t a aoaaaaoaa
a
gad ..........t.......""""'o't"""""'!"""t"""' ACtUal taCtOfy OVgfh
137.500 S 28,5OO unfav.
s166,OOO
allowed: Budget --v;;;tleallowancJUasedon standardhours machine overhead(11'ooostandard hoursattowedi'sn.sovariableovefiead rate) s49'5OO 145.500 96'000 ruageted"""""""""""""""' Fi;;;;;;rreal S_ 2O.5OOunfav. COntfOltablg VafianC1O...........................o.....o......""""""""""'
allowed Budget atlowance based on standard hours (ffOm
abOVe).r....................o............""""""t""o""'o"t""to"'
Standard factow o"e rhead chargeabt^"!o g"duction rat6)'. (t I rooo standard hours ailow;o r sl2.5O overhead VOlUmg
VafianCg
rrorrorororLro....o...rot..."."t""""ot""""tt"tt""o"oo'
s145,5OO 137.500
8.OOOunfav.
-t
$20t5OO UnfaV' COntfOllablgVafianC8.......................""""o 8.ooo unfav' volumg yariance............................!o...'r..... 128'5oo unfav' orrerall factoly ovefiead variance """"o"r Et 8 - 7 " " " """o""""""""r" ACIUal f aCtOfy O.Vefhgad o....................."
overheadchargeabteto actual producUon CianOarO overheadrate)""""' iS,ZOOstandardhours allowed x822 Overatt.f actory overhead variance""""' ""'t""""""' """""""o""""""' Agtual factory overhgad""""""" Budget allowancebased on standard hours:
variableo""ttt"iJis,zoo standardhoursr 36) 33!'?99 90t0OO
Fixgd ovgrhgad """""""""""o"""""""""""" GOntfOllable VafianC18......................"""""""""'
Budgetallowancebased on standardhours (ffOm abOVe)...r......i..........................'.r.........or.........."""""
Standardtactory overneaOchargeableto production (lfOm
abOVe).................o.................................""t""t"t"'oot'
Volumevariance
aoaaaaaraaa.aa
controllablg varianc9...."""""""""" volumg variance ......""""""""""o' Overatlfactory ovefiead variance
"t"""o"t""'
""""""'r"""o'o ""'r""""""""""
$13O,OOO S r
125.400 4.600 unfav'
$13O,OOO 130.200
s130,20o v
t 25.400 3_ 4.8OO unfav.
(2oo| fau 4.8OOunfav. -$-:!J99 unfav' $
Ctnpter 18 Elg-g
t*51
,
Agtual factory ovgrhgad ...-...........-...rD.....................--...........sl2l,OOO standard overhead chargeabreto actual producuon (4r2OOgtandard hours aflowed r $2{,gb overhead rate}.... l04.l go Overaflfactory ovorhsad variance _L!grq40 unfav. Actual factory ovgrhgad ..'.........o..........t.o............,....o..o.........
$12f,ooo
Budgat allowancebased on actual machine hours: Variable overhead (41600actual machine hours r $5.8Ovariable overhead ratef .....,.. $26,gBo Firgd ovgrhead budgeted ..,..o...Dr.........r.......... 95,500
Spending
variancg ...........,..oerorr--r'orr
I l2,1go
j$__e,820 unfau
Budget allourancebased on actual machine hours.......D......, $112,180 Budget allowancebased on standard hours attowed: variable overhead l4r2oo standard machine hours allowed r $S.8Ovariableoverheadrate)..... g ZCTSOO Firgd ovgrhgadbudgetedr'........r.......i............ g5.5oo 109.960 variabla
efficiency variance....r.o.......'.r.......o.,.............,r..r...... _S 2.320 unfav. Budget allowance based on standard hours allowed.,.......... $f 09,860 Standard overhead chargeabrE to actuar production (4,2oostandardhoursailowedr $24.gb;verrreaa rate)..., f 04,t 60 volume variancg
t'o...........r......r.............o..r..r.......rr.o.........r.....
E_5'7O9 unfav.
spending variance "...............'........o.....r....r......................o.... variabfg efficiency variancg......r....................r.............r......... $ volumg variancg "'....r........r.'.........i.......r...............,......rr...r... overall factory ovgrhgad variancg.,r....r.r.,...r....r..,.....,r..........
r t \
8,820 unfav. 2r32O unfav. 5.7OO unfav. _$_16.840 unfav.
\ .\
Chpler 18
El8 -9 AgtUal ladtOfy OVgfigad
...............................o......tt"""""""t'
--(''OSO oyerhsad chargeable to actual prcductlon sundard Standard hOUrSatlOWedf $5 OVerheadrate1........... Q1fgfall faCtOfy OVgfhgad VaflanCe ............o....'....""""""'o""'
Astual lastorY overhead Budget atlowancebased on actual hourc: VJriaUleoverhead(l,9OOactuat hourg r Sl.5Ol
S 2'850 7.OOO :3
Spending variance
Budget aftowancebased on actual hours ffrom above)""""' Budget atlowancebased on standard hours: Variableoverhead(2'O5Ogtandardhours r rr.r,.o.....o.......,.................................i.
I 0.250 25o unfav. _$ 3 1O,5OO
FiXgd OVefhgad ...............................................
s1.5Ol
3 1O,5OO
s
t
9,850
3to75
I0.o75
7.OOO
Fired overhead
9,850 65O unfav.
effiCignCy VafianCO........r...o...!..'...r.......r.......t....."t"'
Vafiablg
Budget allowancebased on standard hours (from gbovol.... Standardfactory overheadchargeableto productlon (from above)..,..
10,250
aaaaaaaaaaaaaaa
Volume varianCg .....r.....o"'.o.'t....'....."t""' Spending VafianCg...............o...o..........,............................o.r... Variable effiCignCy VafianCO..................r.'............'o...o.......o."'
Volume Yariance...
3 1O,O75
aa rt
oa a ara
aaaoa
aaaaaaaoaa"
"
s
(17s1 fav,
3
65o unlav. (2251lav. (1751tav. 25O unfav.
t ttto"""
Ovgrall faCtOfy Ovgfhgad VafianCe r..o.........r..'....................""
3
El8-10 ACtUal
faCtOfy
OVgfhgad
r.....r.r............,......r...r.......r.o.....r.r.t..r
Standardoverheadchargeabteto actual produc$on(38'OO0 units r 2 standard hours por unit r $9 ovefiead rate|"""'
sToo,ooo 684.OOO
Ovgrall faCtOry OVgfhgad VafianC9...........,,...............r............ S 16,000 unfav .
Chapterta
453
E18-1O,(Concluded) (1)
Tlro-variancemethod:
Actual factory
ovgrhgad
...........rrr.r...r...........r.r.......r.........r.r..
Budget allowance based on standard hours ailowed: Variable oyerhead (ggrOOO units r 2 standard hours per unit x $6 variable rate) .....r......... $456'000 Fixed.overhead(SO'OOO budgeted hourc
s7OO,0oo
X $3 fiXed riate)..................................,......r.. 24O.OOO controllablg rrarianc€.-...........r...'.........r........................rr......r Budget allowance based on standard hours ailowed (from -
above)ttttt"t"4.t....t...r...............o...h.r...........rrr..r..rrD....
variancg
_L
{.OOO unfuv.
$696,OOO
standard overheadchargeabreto actuarproducffon (sa,ooo units x 2 standard hours per unit x $9 overhead rate).......
vofumg
6g6.ooo
694.ooo
"tt1..r....rr...r...........r.D...r.rr......................r......
S_j!-&ggq unfav.
controllablg varianc8....r...r............t.....D..r...........,r.....,......or... volumg variancg t".r.....r.....-.r.....r........rr....r.........r...r.!r...r...r...
$
4'OOOunfav. 12.OOO unfav. ovgrafl factory overhgadvar|ancg.......,...................r.r...D....,,. _$ 16,]0o9 unfav.
(21 Three-varlance.method: Actual factory
ovgrhgad
r.....r........ro.r.r..........r....r..........r..t.....
Budget allowance based on actual hours worked: Variable overhead (TTTSOO actuaf hours x$6 variabfe rate)........,..,......,.....r...o........,. $465rOOO Fixed overhead (gOrOOO budgeted hourc x93fixgdrate).,..,............1..........,..r............ 24o,ooo Spgnding variancg..........t.r.....r..rr.........rr......r....r...r.,.....
Budgetallowancebased on actuat tlry
above)ttt.......r..........r..r...r...........r.......r..D....r.........r....
variablg efficiency variancg...r...D......r.......r....r.................r.....
Budget allowance based on standard hours atowed (from above)...............r...,....... ^-
standard overiread crrargeabil i;'#;;
ilil;;;;'&ft;
units x 2 standard hoJrs per unit x $g overtreJd otry.......
volumg
variancg
r""'r'r"r...r.......r.........r.r,................r..trr.......r.
.Spendingvariance .............,........ " " " "' t " " " " " " " " " " " " " r" " " b le effi Cien Cy Vafia n Cg.....,..' _YbflA volumg
variance.:..--_-___-__r.,..,....r......r..r.......o.r.r...or...o.........
overari r*iil;;;;';;;.:::.:.::...::::::..::.:................. ra a aaa a aa a a a a. aa a
1 { \
705,OOO
hours worked
1!ove)ttt.tr..r.....................r....r.......!...tr....r................r Budget ailowance based on stanoard hours ailowed (from .-
$7OO,OOO
$7O5,OOO 696,000
]L__grgqA unfav. $696,00o 684.000 ]EIS.OOO unfav. $ (5,ooo) fav, 9r0OO unfav. 12.0OOunfav. _L _10pgq unfav.
Chapter 18
El&11 Materials Price variance: Actual Standard Materlals Actual Standard Cost QuantitY Varlance . Prlce Cost Gost {LFs'}, - Per Lb' Ingredients $ 6,500 unfav. Cocoa nedtls'..... 325rOO0 $eO $ 195,0q, $2Ol,5oO (28,500) fav. 712,5OO 684,0(X' '5O Mi|k...........t........ 1t425IOOO (2,5OOlfav. 97.500 100.0q) '4O 25O'OOO Sugar..r.'..........,! fav. :198{l,ooo 31.OO7,500 - -:$(24,500) :: Materlals mix varlance:
Standard Forrnula Standard Actual for Actual Materlals QuantitY Difference Cost QuantitY per Variance Mix Lb. (Lbs.)'in Lbs. (Lbs.l Ingredients 9.60 $ 3'0OOunfav. 32OrOOO 5,000 Cocoa Ue?DS...'.. 3251000 (27,500)fav. .50 1r425rOOO 1r480r000 (s5,0001 Mi1k.................... 20.000 unfav. .40 50,000 200.000 Sugar.t.r,....,....... 250.000 fav. 0 2,0oo,0oo 2.OOO.OOO -
'cocoa beans = (8oo+ 5,000) x 2'0o0'ooo Milk = (3,7OO'+5,OO0)x 2'OOOTOOO x 2'OOO'OOO Sugar = (5OO+5,OO0)
Materialsyield variance: 400 387 ACtUal yield in Ong-tOn batCh€S....,........,...'..'.............'..r.t.'." 13 UnfaVOfablg yigld in batChgs ...............'...'.r.'.'....'..r.r......."r"' Standafd COSIpef One-tOn batCh...........'...............r'..rr....r.."' s 2,530 Matgrials yigld VafianC9...,........,......,..r.o'.........r...'.......'.....t"r932,890 unfav. lbs. input + 51000lbs' ="""'t"o"" Expectedyield: 2'OOO'OO0
Chapter18
455
ela42 (1) Materials purchase price variance:
lnErcdients
Actual Standard Quantlty Gost Purchased por Standard in Llters Llter $]_
Echot:..;.........,..... 2s ooo Plotgx.....t..r....r.r!....
$-zoo
i3 0OO
.425
89n2.......'............... 40 ooo CT-40"'...r...r...,.,.....
.iso
7 5OO
.3OO
Materials Actual Purchases Cost Price Variance f srooo $ sr36s $365 unfav. S'S2S 6'1240 715 unfav. orooo srgao (160)fav. 2.ZSO (3O)fav. 2'.iO $18,775 $'l9.665 $99O unfau
(2) Materials mix variance: Actual Quantlty Used ln lnqredients Lttens Echo| .....,....1...,...,... 26 SOO Ptot9r............,........ i2 660 Bgnz ...,r.........,.r...,.. 3Z 4OO C T - 4 O..,..............,....T l 4O
g1-org
Standard Formula for Actual Quantlty in Litersa 2g OOO i4 OOO 95 OO0 TOOO
84 ooo
Dlffen Standard ence Gost per j4 Liters Lfter
(1 2001 (1 340) 2 400 140
o
Materials Mlx Variance $.20o 9(24O.0O)fav. .425 (569,50) fav. .150 360.00 unfav. ,300 42.OOunfav, fav,
@s)
'Echol = (2OO+ 600) x g4 O0Ollters Protex = (1OOr. 6O0) x 94 000 llters lenz = (25O+ 600) x 84 O0Otiters CT-4O = (5O+ 6O0i x 84 0OOtiters Materialsyield variance: Erpected yiefd: 84 OOOllters input + 6O0 liters E''..--.-'r, Agtual yield in 50o-lltgr batchgi.........,..r..r.......D.....r.r............ I:frYoTbte yield in batchgs ............r..r.....r.........rr..,.,...r..r.,.. -o-"-noltdcost per SOo-lltgr batch .........r,.............................. f,'latgriafsyigld variancg..r............,.........r....r...r.....r........r.......
740 136 4 $13s
$SCOunfuv.
Chagtar18
1fi
El8 -1 3
BENJAITIIHPRODUCTSCOMPAHY DePartment2 FaEtoly €)vertreadVarlanco Report FoiMonth
Ending June 3O
(rl
l2l Budget Budget Allowable Allowance Standard Normal Houru GapaclW Sloo 6000 Dlrgct labor hourg ................'. CapaClU
t...o........t....."ttt"ttt"t'
loo%
VariablefactorY overhoad:
$ 2,4OO ManufagturingSuPPli€3...... 2 , 1 O O 800 t....t..........tt!"ttt"t'o" Repairs 100 poworr llght...-.... and Heat TotalYarlablgcost .......... $ , , 5 . 4 o o lndirgct
18bo1.........r..'t't"t"'
Fired taetory oYefisads Supervision lndirect labor Manufagturing 8upp|183...... MaintgnallCo .'...r................ Heat, powor, and light r.....r. Machinely depreciaUotl ..... lnsurance and targs ".'r.r.r.. Total firgd co8t..'............
$ o,ooo 514OO
lr02o 960
120 540 360
$14.4oo
Totatfactoryoverhead...........J!-g€Oo Standardfactory overhead chargeable to work In process (5'tOOstandard houra r $3.3Oratel Volumg Y4riancg.r.o..rr.........D............r......
Reconciliation of variances: Actual tactory ovgrhead .-.ri.....!.......'. Standard factory overhead chargeable to work In procesS ........'.....""""'o' Glerall factory overhead v8rlsnce ..... Controllable nrlanCo .."""""""""""' VoIu m g Yariance.'.""'o"""""""o""""' Overalt factory overhead varlSnco ""'
(3)
(4) Controllable Varianco Actual UnfaY.(Fav.l (31- (21 Cost
-Eolo
$ 2,o4o 1,785 680 85 {.59O 3
$ o,ooo
5,4O0 7,O2O 960 120 540 360 $14.400 $18,990
$ 2,1OO 1,8O5 850 l05 $ 4.660
$60 20 (301 2A
$ 61200 5,40O I,O20 960 720 540 372
200
$14.612 s19,272
o o o o o
12
w
unta% _l 0.830
s 2 , 1 8 0unfav. 319r272 16.830 3 2.442 unfav. s 282 unfav. 2.1g 0 unlav. 3 2,442 unfav.
< \
Clnpter t8 457
E18.I4 APPENDD( $15,OOO budgeted overhead
2,5OO budgetedm-chino houF
= $8 overhead tato
variable overhead SSTOOO 2r5OO budgeted machine hours
= $2 variable rate
Agtuaf factory overhgad.'........................r.....rr........o.....r..r.....
standard overhead chargeabfeto astuar producuon (2r4oostandard hours attowedr $o ovirtrJal ratel..-..or...
ovgrall factory ovgrh gad variance .............r.r
Agtual factory ovgrhgad...........'......D...................,...........Dr.....
Budget allowancebased on actual hours: Variable overhead l2rTOO actual hours r $2|...
Budget allonrancebased on actuat hours (from abovef ......... 2'7oo actuaf hol,' r $o factory overheadratg...,.,................ variallco..r..........-r..r..r..rrro.rr.rrrr.r...o..r............rr...
2r7oaastualhoTs r $6 factoryoverhaadrate (from standardfactoryoverheadchirgeabreto pruductionabove| (from abovef
t4.400 unfav. lliloo $f 6,500
$ 5r4OO
FiXgd OVgrhgad.........................r..r.............r.... 1O.OOO spending variancg.........r.r..r...r.......r..........t..D....r.r,................
ldfg capacity
$f 6,500
tt"""t"""t'....a.D...a.a...aa.r....a............r..........o..r...........
Efficigncy varianco .......'....r..........r................oi.....r.r.t..o.........
15.400
_S_l,.:!gqunfav. $t5,4oo 16 .200 fav.
$to,zoo 14,400 _$_l.8OO unfav.
spendingYariance.........-......r.....r..............r......r.................... $ 1,1OOunfav. ganacftyvarialtcG) .........."::::'..,................r....r..,......r........ l-d.l-e (8O0| fav.
Efficiency Yariancg .............r......r....................r............ro.......r
Overaflfactory overhgad variance...........
1.8OOunfav. -jFl.lOO unfav.
\ \
Chapter18 48
E18.t5 APPENDX $t6'8oO budg"t"d o""th""g
iFoTuageted laborhours $4,8oO variable overhead
iFo-oE-dg eted labor hours
= $14 overheadrate = $4 variable rato $15,8OO
taCtOfy OVefhgad......................""tt"""tt"tt""t"""""" -Ct"nJ"tU ACtUal ovirhead chargeableto actu8l producUon overhead rsto)""""' d;to standard hours allowod I $14 orreratlfactola overhoadvariance I ta a a aaaa
a -a
16.380
$15,8OO
Agtual lactory ovgrh9ad..r......."""""""'
Budget allowancebased on actual hours: Variabteoverhead(7r12oactual hours x 94|"' Firgdovgrhgad"""t""""""""""'o't"""""'t""
Spending
VafianCe
$ 4t48O
16,480
I2tOOO
............r......r.r.........t.r.t.......tttt"""ot"t"t"t'
Budget allowancs based on actual hours (from above)""""' 1.J2Oactual hours r $14 lactory ovgrhgad 13t8"""""""""" ldle capacitY variance
aaaaaaaatatataaaaa"attttt"'
1r12Oastual hourg r $4 Variablefactory overhead rate .t...... tittO standard hours x $4 variable factory overheadr8t6...' Vafiablg
gffiCignCy VafianCg ........................t......r't"""""t""r'
1r12Oactuat hourSr $1o fiXedfactory overheadF3to........... f rtZO standard hOursx $10 fixed factOryOverheadFiito"""' FiXgd gffiCignCy YafianC18 .................r..r....r....ttr..t.."""t""""r' Spgnding
(58o1fav.
3'
4"""
VafianCe......r.......r...........r.o.r.......oo....r...r...........ttt"
ldlg CapaCity Vafia11CO..............rr.........'...................o........""ti Variablg effiCienCy VafianCg,................'....'............."........""' Fifgd gffiCignCy VafianCO,.....,..,.,.......r............".........'....o..."' Ovgrall faCtOry OVerhead YarianCO ...............rrr....r..............'."
#
$16,480 15.680 S 8oo unfav.
$ 4,480 4.680 - S (2OOlfav'
$1t,2OO 11.700
S (5oolfav.
:-E:
$
$
(6801lav. 800 untav. (2oolfav. (5001lav, (5801fav.
'----
ClpOlcr 18
451
PROBLEMS P t8 -l (f l Factory overhead per unit: Variabl e ($3o r 2l gl ..'.........,..................o............. Firgd ($go r 1/31..............................................r..
s20 to $go
Variable tactory oyerhoad por unit Dlrcct tabor hours per unit
= $?O _ $5 variabfe overhead rate per direct labor hour 4
l'lormalcapacitydircct labor hours(2r4oolr Fired tactory overhead rate per direct labor hour Gtto * 4l = 2r4oor $zso = $6,000nr"Ji"Jory overheadbasedon norrnafmonthfycapacitp
(21 Agtuaf quantity purchased..... Agtual quantl$ punchased..... Materlals punchasoprlce VAfianCO
....-.r.....r................
Actual quantity usgd ...........r.. Standard quantity allowed .,... Materials quantity varianco.... Actual hours worked ......,,....r. Ac-tualhours workgd .............. Labor ratg variaJlGo ........r..t.o,,
Actual hours worked .......r..,... Standard hours allowed ......... Labor efficiency vgt'ianco.......
Yards
ls,ooo l8rOOO
t8,ooo
r
Unit Gost
$rssaffit
=
St4tiiii;
1.3S standard
24-.gOO
$ .o3
$
Yards r Unit Cost = 9,5OO $1.35 standard 10.000 1.35 standard 1.35 standard
Hours x Rate 2 , 1 o o $9.15 actual
Amount
54o unfav.
Amount $f 2,825 13.500
s l67slfav.
=
s .15
Amount $19,215 19.900 315 unfav. $
Hours x Rate = 2,100 $9.O0stanCarC 2,000 9.OOstandard too 9,OOstandard
Amount $t8,9OO 1 9,000 909 unfav. $
2rlOO 2r7OO
9.OOstandard
lctual factory ovgrhgad....r................r........................,....,.....,., $16,650 Budget allowance based on standard hourc aflowed: Variable overhead (2'OOOstandard hours attowed r $5 variable ovgrhgad riltg|.......r...................... $lOrOOO Fired overhead budgeted.o..........,....................o.... O.OOO f 6.ooo controllablg varianco........'..................r.................................... 650 unfav. $ Budget allourance based on standard hourg allowed ............... $1 6,OOO Orerhead charged to production (2rOoOr $2.5o!.......,..........,.r. 15.000 Volumg variance ..,........... ......................, $ 1,000 unfav.
\
Chwter 18
1@
P18-2 Materials B A
(1)
Units completed and transferred out this 4,600 period Lessall units In beginningInventofl.....'....,... 500 Equivalentunits started and completedthis
Direst Factory Labor Overhead 41600 500
4,600 500
4r lOO 4r 1OO 4 r l O O t40 0 Add equivalentunits in spoiled units.............. 200
4,10O 200
Add equivalentunits requiredto complete 500 0 150 beginningInventorythis period................., ooo 540 Add equivalentunits in ending Inventory....... 600 production period...... 5,2OO 4,930 4,9OO Equivalentunits of this
250 600 5,150
pefiOd
41600 500
.......a..........o.r.......a..............t.....D.......
Standard quantity allowed per unit of 3 units 2 units
112hn
t hr.
productiol| ......,,,...r...........r...r.....r...,....,...... 14.700 lO,40O
2,465
5.15O
pfOdUCt ....r.......r.........r
Standardquantity allowedfor current
(21 Quantitv x ActualmaterialA purchasedat aCtUal COSI ........r......o.......r.
16,000
Actual materialA.purchasedat standardGost.....,,.............. 1 6 ,OOO MaterialA purchaseprice variancg...........,..,............,.l 6 , o o o Quantitv
Unit Gost
Amount
$4.60 actual
$73,600
$ .to Unit Cost
Actual material A used at standardcost ..................... 1 4 ,8 0 0 S4.50standard Standardquantity of material A allowed at standardcost 14,700 4.5Ostandard MaterialA quantityvariancs.. ___t_99 4.50 standard Actual material B purchased
Quantitv
at actual cost..................r.r 1 2 ,0 0 o Actual material B purchased at standard cost ................. 12,OOO Material B purchase price variance .r........................... 1 2 ,OOO
72,OAO
4.50 standard
Unit Cost S1.95 actual
9_11609 unfav. Amount $66,600 66.150 9__450 unfav. Amount
s23,4OO 24.OOO
2.OOstandard
$ (.os1
$
(oool fav.
Clppter 18
461
P18-2 (Continued) Actual material B used at standard COSI..................... Standard guantity of material B allowed at standard cost Materlaf B quanUtyvariance.. Actual labor hours worked at actuaf labor riatg................. Astual labor hour: workod at standard labor it1to.....,....... Labor ratg variartco............,... Actual labor houru worked at standard labor lilt€..,.......... Standardlabor hours allowed at standard labor JZlto........ Labor efficiency vSrlilncg.......
Quantitv r
Unit Cost
Amount
l lrooo
S2.oOstandard
$22,ooo
10.400 _6OO
2.OOstandard 2.OOstandard
20.goo
Hours
r
2,550
$lo.2O actual
Rate
2,550. lO.OOstandard 2,550 $ .2o Hours
x
$ l,2OO unfav,
Amount
$zo,oto 25.500 5tO unfav. $
Rate
Amount
2,550
$lO.OOstandard
$25,50o
2.465 85
IO.OOstandard lO.OOstandard
24.650 S
85O unfav.
fctuql factory ovgrhgad................r........................o................r.. s75,0oo standard overheadchargeableto actual production (5rl50 standard hounsallowedr $lS overheadrate) ...,.....r... 77.250 Overallfactory overheadvariance................ ................ .il3€99 fav. Actual factory ovgrhgad.....'...............................,........,....,......... $75,OOO Budget allorrancebased on standardhours: Variableoverhead(5rl50 standardhours x $5!...... $2S'7SO Fixgd
ovgrhgad'......o............r.............!..r..r..r.r.....ro..
SOTOOO 75,750 Controllablg variancl9....'....................r..................,.......r............
_$ _l7so) fav.
Budget allormnce based on standardhours (from ilbov€f........,. $75,75O Standardfactory overheadchargeableto production - - tfrom
above)tttt...................r.......r...........r....ro...r.......r..r.r..r....r.
Volume varianca .r......r..!............
77,250
l.ll_,€gg) fau
Gontrollablg varianGo...........o.r....................r.....,..,r......,............. Volume variance...r..............r......................r..r.................o....r.....$ rtsol fav. ( 1.5001fav. ovgrall factory ovgrhgad variance.o.....r.............r............,........... $ (2,2501fav.
Chapter 18
62
P18-2(Concludedl (31 Standard cost ol units transferred to finished goods: (41600units r $37.50 Standard cost per unit of product!,............ sl72,500 Standard cost of apoiled units charged to factory overhoad: Materlal A (2OOunits of product r l0ooh complete r 3 units each f
94a5O)
aa.....aa.a.aa.a.aaaaa..aaa.....a....r...a.....aaa......r..D.-.aaa.a.aaaa....aatattt'
$
2,7OO
Material g (ZOOunits of product rOoh complete r 2 unitg each I S2aOOl
aa.a...aaaat.aaaaaa.a.aaaaa.a.aa..oa......
o
a.aa...aa..ara..oa.aaat...aaa.aaaa""t"tttt'
Direct labor (20Ounits tTOoh completa t1l2 hn each r $lO.OOI , Fastoryoverhead(20o unlts r l0o% completax I hr. oach x S15.OO| TOtal COSI Of SpOilgd UOitS,.........rt.....r.o,.........r........
Work in processrending inventorP Material A ((iOOunits of product t lAooh complste r 3 units oach f
34.5O)
a.a.aao.a...aa..aaa...oaaa...aa........aaaaa.l........ra..t.aa...aaa.o.a..aa'attt"t'
f
S2aOOl
taa.rr..aaaa.....a....aaa.aara.r..........aa....rr.......l.....a.....atr"ttto"ttt"
Material A IOOOunits of product r loOohcomplete x 2 units each Direct tabor (6OOunits r 9O% completo r1l2 hr. each x $1O.OOI Factoryoverhead(6O0unlts r IOO%complets r I hr. oach x $l
5 aO01 ...ao. aa..a a..o ar..r.ao....a......a...
a'4"t"
r.r.....o...........ta...taa..4.4aa.....
TOtalStandard Cost Of work in process, ending inventory......r....
700
s
3,OOO 6,400
$
I,loo 2,4OO 2r7OO
9.OOO g 22.200
Pl8-3
(11 Januaryequivalentproduction: Material A 8,00o TFansferredout 3.000 LessbeginningInventory(all unitsl.... 5,O0O Startedand finished this period,.,....., Add beginninginvontory(work this period) Add ending inventory (work this periodl Add abnormal gpoilage .............,.....,...
Material B 8,OOO
o
5rOOO 1.OOO
llpoo units
!t.o0o 5,OOO 3,OOO
o
l.OOO 9.OOOunits
Conversion Costs 8,OOO 3.O00 5,OOO 2rOOO 2rOOO 1.OOO I O,9OOunits
LI ClpOter 18
,tA
Pf 8-3 (Continuedf
(21 Actual guantity of Material A USed r...r.....
Aetual quantity of Material A
Gallons x
.............r.....1a.1....a....r.a
Astual guanfity of Material A USOd ...............
Standard quantity of Material A a11OWgd.....or.....................
Material A quantity varianco..
-
Actual quanUtyof Material B
,
USOd ......j.............r.........o....
s
Actual quanfity of Material B USed
...........a.a......a...._.........
Materlal B price ulritgo -
VafianCe....r...........rr.........,.
Actual quantity of Material B USed ..............................
Standardquantity of Material B allowgd
....r..r.................D.
Material B guantity yarianco..
Amount
5O,OOO $t.0o actual
50,0OO Material A price uliago varianee 50,0oo Uged
Unlt Gost
Galfons x
$ so,ooo
l.2O standard $ (,201
60.000 fav. _$(!-e'.!999)
Unit Cost
Amount
5OrO0O
$1.2Ostandard
s6O,OOO
44.OOO 6,O00
1.2Ostandard l.2O standard
52.goo
Squarc Feet x l8ro0o l8,OOO l8r0oo
Square Feet r 1g,o0o l8,0oo __q
Unit Cost
_Lzi2og unfav, =
$.75 actuaf
Amount
$13,soo
.7Ostandard
12.600
$,05
Unit Cost
S
=
gOOunfav.
Amount
$.7Ostandard
$12,600
,7Ostandard .7Ostandard
12.600
__!
Hours r
Agtual hours workgd ............r. Actual hours workgd .r,.....,..... Labor ratg variaJtco................
Rate = Amount 7Or2OO $12.oOactuaf $722,4OO 10,200 tl.5O standard t 17,300 7Or2OO .50 S_5OO unfav.
Actual hours workgd ............r. Standard hours alfowed ......::: Labor effi ciency ydriancg .......
Hours x Rate = Amount lor2oo $11.5Ostandard $l t 7,soo I o.o00 11.5Ostandard I t5.ooo 1f .5Ostandard ]9_ 3i99g unfav. _ 200
Chaptor 18
&l
Pl8€ (Concludedl $ 60,100
tactory ovgrlrgad ..D."""""""""' -euJget Actual
altormncebasedon standardhoursallowed: --Viri"Ole overhead(lOrOoOequivalentunits r --i *anOardhour per unit r $l'8o Yariableratel $t8,ooo Fired overhsadbudgeted(7'8OOlabor houra at normatcapacityr $5 fixgd l?ltof....,.....'.......'. 39.OOO COntfOllablg
57,OOO 3 3.loo unfa%
#
VaflanCO,................r.r......t.tot..."t""""""tt"tt"'tt"t"
Budget allowance based on standard hOUfg
allOWgd
$ 57,oOO
(abOVe1r...r....r......r.............rt.t.....t...tt'o"tt"ttt"tr
Standard overhead chargeable to actusl producUon gtandardhOUrSallowed r $6.80 oyerheadrate) ...'."' (lO'OOO VOlUme
68.OOO $(11,oOOlfav.
YafianC4......r............o....r.......r......or........r.r.........."ttttt"t'
CGA-Ganada(adapted).Reprint with permission' Pl8-4
(11
UnitS COmpleted and tfanSf gffg d OUt'....................... LoSSbgginning lnVentOfy(all UnitS)..........'....r....r..... Units started and complgted this period .....'."""""' Add beginning Inventoly (work this period) ........""" Add ending inventory (work this period)........""r""" Add abnormal spoilage (work this periodf ...........""" Equivalent units of production this period..........r""'
Materials l7' OOO 4.OOO 13,OOO
Conversion Costs lTrooo 4.000 13,000 3,20O
2,150 850 16.OOO
860 850 17.910
o
= Amount Unit Gost Quantitv r (21 Actual materials purchasod at $237rOOO $3.95 actual actuat CoSt.........................6O OOOkg Actual materiafgpurchased at 240.OOO 4,OOstandard standard GoSt..'..................60 OOO Materialspunchaseprice $ (3.0001fav. 6OO0O variancg............r................ $Js) QuantiW
Actual materials used at standardclost..................... 50 OOOkg Standard quantlty allowed at standard cost (l6,000 r 3 kgl 48 000 Materialsquantity varianco.... 2 OOOkg
Unit Cost
Amount
$4.OOstandard
S2OO'0OOunfav.
4.OOstandard 4.OOstandard
192.OOO S 8,ooo unfav.
\
Chaptar 18
, '
Pt8-4 (Goncludedl H o u r s x R a t e = A m o u n t Actual labor hours at actual
' lZltG!.................'..'................
.
9rO0O
$1 2.OO actual
SI OS;OOO
Actual labor hours at standard l?1to........o.o......r...................
9r0OO
Labor rate varia11cg................ 9r0o0
I l.OO standard
$ 1.oo
99.OOO
$
9.ooo unfa%
H o u r s r R a t e , = A m o u n t Astual labor hours at standard rirto.....................................IrOoO $t t.OOstandard Standardlabor hounsallowed at standardrate (l7r9lO equivalentunits r 1/,2hour per uni 8.955 11.OOstandard Labor efficiency variance.......
45
1 l.OO standard
S99r00O
98.505 495 unfav. S
Actual factory overhead.... $134,9OO Budget allowancebased on actual hours: actual hours) S54,OOo Variableoverhead($6 rate r grOOO Budgetedf|Igd factory ov9rhead.......r........r...... 8O.O0O i34.OOO 90Ounfav. Factoryovgrheadspendingvarianc9.r........................r........r.... :S
s
.
Budget allowance based on actual hours (compUtedabOve)....r'.....,..................................................... S134tOOO Budget allowance based on standard hours: Variable overhead ($6 rate r 17,91o equivalent
units x 112standardhour per unit).,...........,.. $53r73O Budgetedfixed factory overhead...........,... 8O.OOO 133,7 30 Factoryoverheadvariableefficiencyvariance.........................s 270unfav.
. '
Budgetallowancebasedon standardhours(computedabove| S133r73O Factoryoverheadchargeableto productionat standard ($14rate x 17191O 125,370 equivalentunits x 112standardhour)...Factory ovgrhgad volumg variancg.......r,...................r.............. $
8r360 unfav.
(adapted).Reprintwith permission. GGA-Ganada
Chaptar18
ffi
Pl8-5
(rl Units completed and translerrsd out this period""" LgSgall UnitSln bgginning InVento;1f...................""' Equivalent units started and completed this period ld6 equiyatentuni6 nequinedto complete beginning inVentOfy this pgfiOd ......................r.......'.......r......
Add equivalontunits in ending lnventory""""""r""' Equivalentunitg of producUonthis period""'r"""o'r' Standard quantlty atlowed per unlt of product """"' Standard quantlty allowed for current produetlotl"" (21 Actual materials Purchased at actual GoEt ......-r-..........r.
o 2.000 29,0oo 3 unltr 87,OOO
Unit Cost
QuantiW x I OO'OOO
Materiall 32rOOO 5.000 27,OOO
=
36.54 actual
Actual materials Purchasedat standard G(l8t ..................'....
Unit Cost
loo,ooo
$o.OOstandard
92.OOO I,OOO
6.0Ostandard 6.0Ostandard
Actual materials issued at standardcost ...'.............'..... Materialsinventoryvarianco..
Unit Gost
QuantiW
Actual materials issued at standard cost Standard quantlty ol materials
92,OOO
$6.00 standard
at standald CO8t.....r...!..r'.....
87,OOO 5.000
6.O0standard 6.00 standard
MaterialsquanUtyYarianco....
Rate
Hours
Astual labor hours worked at agtuallabor riato........,,......... Actual labor hours worked at standardlabor riatc........o...... Labor rate varianco........'.......
I,OOO
$l 0.60 astual
g,ooo I,OOO
l O.OOstandard
s
.60
3rOOO 1.600 3l,600 1 1 4h n 7.900 hrc' Amount $654,OOO
Actual materials Pur,chased 6.00 standard atstandard cost........'-..r.... lOO'0OO Materialspunchaseprice 1OO,0OO s ,54 variance Quantitv
Gonversion Gosts 32rOOO 5.OOO 27 rOOA
600.ooo $: 54,ooounlav. =
Amount $600'000 552.OOO
unfav. 3 48.OOO =
Amount $552,OOO 522,OOO
unfav. : 3 3o,o00 =
Amount $84,8OO
80.ooo 3 4,8OOunfav.
\
Chapts 18
167
Pl8-5 (Concluded)
Hours x Rate = Amount Actual labor hours worked at standard labor t'gto............. 8rO0O $lO.0O standard $8O,OOO Standard labor houru allowed st gtandard labor tilto ........ 7,9OO lO.0Ostandard 7g.ooo Labor efficlency yarianco....... ____!_gg IO.OOstandard ll.OOO unfav. Agtual factory overhead..r..............'......................'................... 975,OOO Standard overhead chargeable to actual prcductlon (7r9OO standard hourg allowedx $1OoverheadriStrB),...,.,....... 79.OOO Overall factory overhgad variance.,...r...........r.........................._s_rcpgg, fav. Astua| fagtory overhead Budget allorrance based on astual houra: Variableovefiead (81000actual hounsx $21..r...,.. s16,000 Fired overhead(8r5OObudgetedhourc x $81,....... 68,OOO Spendingvariance
$75,ooo 84,OOO 3p.ooo) fav.
Budget allourancebased on actual hours (from above!,,....,.,... Budget allonrancebased on standardhours: Variableovefiead (7r90Ostandardhours x $21..... $l5r80O Fixad ovgrhgad.............
.,
68.000
$g4,ooo 83.gOO
Variablggfficigncy varianclg......................................,........r....., l__ Budgetallonrancebased on standardhourg (from above)i....... Standardfactory overhead chargeableto pruduction (from abovef.o....r........................r.....................................r....
2oo unfav.
$83,8OO 79.OOO
Volumevariance
$ 4.8oo unfav.
Spending wriance..........r..................r.rt..r.r...........r.r..o........r....
$ (e,o00lfav.
Variablg efficiency variance.......r.,.......................r.,....o............. Vofumg
variancg................r...............r....r.....r........r.rrr.....r........
200 unfav. {.800 unfav.
Ovgrall factory ovgrhead varianca ..........,..........,.....r.......o,......._$_(!poo) fav.
a
--
Chapter18
4@
Pl8-6 Standard cost of Production: (1) QuantitY (dozensl Lot
22 23 i
l,ooo
1,700 1,2ao (direct materials) 980 (direct labor and factory overhead)
Unlt Gost
Yards x (2) Actual guantitY Purchased..... Actual quantitY Purchased.',.. Materlals purchase Price variancg ...r.......'.............."'
(3)
Total Standard Gost
Sbndard Gost per dozen $53.10 53.10 26.& 26.70
i s3'too
gor27O 31,680 25.632 -s200,682 =
Amount
-
95'OOO 95'OOO
$1.12 actual 1.1Ostandard
$t06,100 104.500
g5,oo0
_$ .o2
3
Lol 22 (al 24r1OO Achral quantity used ......... Standard quantlU allowed: 'l r 24 Yatds........... 24,OOO rOOO 1r70Ox 24 Yards'....'..... 1r20Ox 24 Yards.'.....'.'. 100 x yard..'... $1.1O per Standardcost Materials quantity variance -$ l f O unfav' (b) Actual hours worked r.......' Standard hours allowed: 11000x 3 hours...."..r.... 1170Ox 3 hourcr.'..,....... 960 x 3 hours'..r.........
Lot22
Standard cost per hour..'.'. Labor efficiency variance ..
x $4,90
(c) Actual labor rate.........,...... Standard labor rate ........... Actual hours worked .......', Labor rate variallco '.....'-...
Lot 23 40t4d,O 40,800
Lot 24 28,825
28.800 25
(360) xl-L!-g. x $1.1o unfav. - $(3961fav. _$27.50 Lot 23 5,130
2r98O
unfav. 1,9O0 .
Lot 24 2,890
3,000
5,100
(2-o)
-tjgg) Lot 22 $5.OO 4,90
fav.
2.880 10 30 x $4,90 x S4.9O 3 147 unfav. $ 49 unfav. Lot 23
$5.oo
Lot 24
s5,oo
4.90 $ .10 $ ,1o $ .ro 2,89O x 5,13O x x 2,980 3 298 unfav. $ Srg unfav. 3 289 unfav. 4.90
- \
Chapter18
lm Pt8-7
CI-AFFYMAilUFACTURINGCOMPA}TY Department 2 Factory ChlerheadVarlance RePort For Month
(r) Btrdgd
Allomlrr lforrill
9:negry Proccrelng Umc In houn....,...'.. Ccprclty,......F.-
O'OOO IOO%
Varlgblc factory ovcriud: lndlrcct labor... 3 2'OOO Manufacturlng ruppllcr....-.,. 2r4AO Repr|rl..,......... I'OOO Hcet, powcrr tnd 3OO llght......--.-. Totalvarhblc li 6.700 cort........-.
(21
t3l
Budgd Allowrncr Strtrdrrd
Brdgtrt Allowrncr A.td
5r7OO 95%
6r84O 97.33%
t lr9OO
I 1,047
]bun
Houn
(.1
Acfirrl
Coet
t tr92o
trl
{o}
VrrlrHo Et|lctongt Yertrnoe lJnilv. (Frv.l Fl-fiD
Spcndlng Vtrlencc Unfrv. (FrvJ f.l - {31
317
q27l (r1)
2$125 I'OSO
50 23
szlt
7
3.t
opo
2,gto 073
246
a2
E 6,415
t 6Ji48
3 6.620
t a,o@ 63OO
3 +Ooo
3 +OOO 63OO
o o
o o
IOOO trl o o
aooo
aooo
0
1110O
IOOO I'OSO
o
o (201
1/0OO
1r4OO
ir4oo
lr4oo
o
o
ar5oo
416oo
a'5oo
4r!OO
o
o
9q)
900
900
070
o
70
32O,1OO
t2O.t0O
s20.loo
3a0,160
32!t,8OO
$21t,"5f5
s25.O48
!326,770
31gr unfrv,
tl2t2
428{)
77
'Fhcd
factory ovcrhcrd g ar(XX) Supcrvirlon -... lndlroct lrbor... 6'200
Menufecturlng rupplloc......... ilalntcnanco..,. Heet powcr, end llglht..,..... Mechlncry deprcclaUon.. Inrurencc tnd lrtc!.......,...-.
63OO
lrlOO
Totel lhcd
cort........... Totrl frctory ovcrhcrd
Strndrrd fostory ovtrhoed chargceblc to wort In procrsr (5r7OOrtandrrd houn r 3l3O rrtcf .r.-.-... Volumc verienca...
unfiv.
2a.6lO E 1.oo5 unfev.
I
l'-I I
tl
I
L '
Clapter 18
I
171
L
ef*ifl s F s e s8,"sFp, lgllg oiflg l F a a o o F o o o slog l l g E fig s $ a e g g F " g g SHili ' oooooooo sf$!fl lgli 3 ,E,s lJl i$uqfl ;s33i3-Hdl
I
L
F!t
' Y
t_ t
? ? rtY
L-
D
6 .6a6 o F l ) 6
I
F
!
2
t-
- Y F
5
Y
s=iF P5 s ; =!tiigl
t-
i*uilg ii$sss,iflg1 E " I Easilsl3-ll $$'31fl ii3333'ff1flI : stii;le*il f $F, i3uqg ils$33"1g$ fl1 'n egilfl3Fll i$s:lfl iisi*ru1$g1_ 95r,S
I
5
$F € E
I E
o
l
'i 'ii i i iji i i is,; i i,s isii i igii f:S; iigi ii;ii;rsFi; tiig;ifi i;ff3jF;frii :
o I
o F
G
l
l Chapter 18 I
Pt8-8 (Concludedl Reconciltatlonof variances:
$3O,OOO 28.800
ACtUal faCtOfy Oygfhgad ..................."'t""""""""""""tt""t"'
process"""""""" Standardoyorheadchargeableto work in
-S
gad Yaf ianC9.."""""""""""""""""""" OVgfalt faCtOfy OVgfh
Spending variance: $ogo unfa% Spending quantity variancg """o"""""""""" 150 untav. Spgnding price Yarlance""""o"""""o"""""" variablg efficigncy YarianctB.,............,......'....'....... VOlUme
VafianCe
....r....r.r..r.r.............r.......tr...t"rt't"""ttttt"tt""""
OVgfall faCtOfT OVOfhgad VafianC9.........""""""o""'r"""""""""
l.2oo unfaY.
84o unfav. (36O)fav. 72Ounfav. $ 1,2oounfav.
$
P18.9APPENDIX Equivalentproductionfor Septemben Than sf g rrg d o lrt....
t. t " " "t " tt""
" t' t " " t' t t t " " " t t t "'
Less beginninginventory""""""""""""t"""" Startgd and finishgd this period'""r""rt"i"""t'
gonversion 42r0oo
Materials 42,00o
lo,ooo
1O,O0O 32,OOO
o Add beginningInventory(work this periodf""' 5,OOO Add ending inventory(workthis period!""""" 37.OOO :z: Equivalentunits of product ....""""t"t""i"""" Unit Gost Pieces x $'5o aetual Actual quantity used.,..,......... Zopoo Actual quantityused.............. ZOTOoO ,'48 standard S'02 Materialsprice us:lgovariance 76'000 = Unit Gos! Pieces x .49 standard Actual quanUtyused ..........r... 76,00o Standard quantitY allowed .4g standard (37rOOOI 2! ..................'.."' ZI'OOO .48 standard MateriatsquanUtyvariance.... -3p99
32rOOO 510oo 4,50O 41.500
Amount $38,ooo 36.480 $ 1.520 unfa% r
Amount 936'48o 35.520 960 unfav. S
= Amount Rate Hours x $18O,ooo $8.0o actual Actuaf hours workgd.............. lzrsoo 17l.OOO 7'60 standard Actual hours worked....r......... 22'tsao S- 9.OOOunfav. -$-'4O Labor ratg varia11co................ 22r5g0 Hours Actual hours worked .......-....-. Standard hours allowed (4t r5OOI 1 121."""""""""" Labor efficiency variance ...""
x
Rate
Tz,soo
$7.9ostandard
2O.75O 1,75O
7.6O standard 7.6Ostandard
=
Amount $171'ooo 157.700 S 13.3OOunfav'
Chapter 18
173
Pt &e APPENDTX (Conctudedf Actual fastory overhead .................... $42rOOO Budget allorrancebased on astuaf hours worksd: Varlable cost (22r5OOastual hours r $1.4O variable overhgad ratef r..........r............
g3l,5oo
Fired cost budgeted
g,ooo 39,500 Spending rrariancg......r.................................r..or....D.r.r......r....... ,......,....... _L3rsOOaunfav. 'll|e spendingvariancoIncludesthe differencebetween actual and budgeted fired cost, $zoo ($8'200 - $8,oool. Thil portion coufd ue separately labefed as a fired spendingvariancc,leavinga batanceof S2,3ooss the varia-ble "p"roiig varianco. Budgetallovyancebased on agtual hours worked..r...r,,..........r g39,5OO Actual hours l2Z,SOOl r standard overheadrate (Si.BOi:.::::::::: 40.500 ldle capacity
variaJlco '..........'........".....r..............r.,rr.......o......o.
$ (1.OOOI fav.
Actuaf h9gr" l22rSOOl r standard overheadrate ($l.gO).,.....,... $4O,5OO Sl9f! hours (4t,5OOr1t2lr standardoverheadrate Gtl
tB 0l tttt"t"t"
ttt'o...t....a.......t....r......................o..r...r......r.......
Eflicigncy varianco .........-....r......o...........,.............................r...
37,350
l__9'!5g unfav.
CGA-Canada(adaptedl.Reprint with permission. Pl8.1O APPENDIX Raw material: Actual quantity purchased..,., Actual guantity purchased ...,. Materials purchase price Yariancg .........,.....o..........r..
Gallons x Unit Cost = Amount 6OO,OOO $t.ef 7 actual $ 1 , i 5 o , o o o 6OO,O0O . 2.OOO standard 1.200.o0o 600,o00
Drums: Drums Actual quantity purchased,.... 85,000 Actual quantity purchased..... g5,0oo Materials purchase price variance ............................, g5,oo0
r
Unit Cost $1 actual I standard
Amount
$
8s,ooo g5,ooo
o
Raw material: Actual quanUty used Standard quantity altowed ..... Materials quantity variance....
Gallons TOO,OOO $2 600.ooo 2 too,ooo 2
Unit Gost standard standard standard
=
Amount $1,4OO,O OO 1.200.000 $ 2OO,OOO unfav.
Chapter18
171 I
Pl 8-l O APPENDIX(Continued| Drums: Actual quanUty used ....r......... Standard quantltY allowod .-... Materials quantltY varianco.... Dirsct labon
Drums 6O,OOO
60.ooo _____9 Hours r
Actual hours workgd .......'...... 65,00O Actual hourg workgd .............. 65,OOO Labor rate var|atlGo................ 65,OOO Actual hours workgd'......r...'.. Standardhours allowed '...or... L-aborefficiency varianco......'
Rate gtandard $l I standard I standard
=
Amount $8O,OOO 60.ooo
_9
= Amount Rate s47O,OoO 37.231 actual 455.OOO standard 7.OOO g_.231 S l5,OoOunfav.
Rate Hours x standard 37 65,0OO 7 standard 60,000 7 standard 5,O00
=
Factoryoverhead: ACIUal faCtOfy OVgfhead....................,....................'..................
Amount s455,OOO 420,OOO _S 35-OOOunfav-
$666,5OO
Budget altoumnce based on actual hours worked: Variable overhead (65,000 actual hours r 36 variable overhead ratel.r.o,..'...r..,............r.S39OroOO Firgd ovorhgad budget...................................... 275.OOO Spending variance r......i............'.........r.......r..........'.r................
665.OOO
$
1,5OOunfav.
Budgetatlowancebased on actual hours worked (see above) $665,OOO Actual hourg (ssrOoolr standard overheadrate (S10).............. 650.OOO
$ 15.OOOunfav. ldle CapaCity variaJ|C8.......r...,.............o.,........'.r.........'............'.
Crlaptr 18
175
Pi &1 q APPENDIX(Concludedl
hr, O8r75Onormal capaclty hours r 94 fixed overhead titto........... $275,OOO 651000actual hours worked r $4 ffxed overhead ri8tg,,.......,.... 260.Ooo ldle capacity variancc (3175ohours r $rll .......................o......... S l5,OOOunfav. Budget allowancc bassd on actual hours worked (see above) $665,ooo Budget allourancebased on standard hours allowed: Varlable overhead (60,000 standard hours allowedr 6 mriable overheadrate).o.......,...,. s?6O,OOO Fired ovgrlrgad budgeted r.....r..rr.r.'.....r............ 275.OOO 6:15,OOO
Vari abl g cffi ci e ncy varia nce .ro............,..,.
...
S 3O,OOOunfav.
hd 65;O00actuafhoursr $Ovariableoverheadrate $39O,OOO 601000 standard hourg allowed r $o variabre overhead rate.... 360,Ooo Variable efficiency variance (5rOOO hours r $61 ,......,..r.........o.. $ 3o.ooounfav. 651000 actual hours r 34 firgd ovgrhgad rirtrg.......................... $zoo,ooo 60,000 standard hours allowed r 30 fired overhead J?to.....,... 240,000 Firgd cffi ciency variance (STOOO hours x $4)............................. $ 2O,OOOunfav.
Chapter 18
CASES cl8-1 (il
(21
The use ol participgtive cost gtandards to motivate plant managorg and department heads has several benefits. These benefits rcsult from contact with erecutive managomentthrough the interchange of ldeab, negotiation betweenthe partles, and a final compromisein establishing the standard. This allorvs the plant managers and department heads to personallyidenUfywith these standards' which wilt increasetheir desire to achieve a goal they have acceptod. In this caso, howeve6 the standard-setUngpnocessdoes not sppoar to be partlcipative.Erecutive managementappearsto follow through with the interchangeof ideas, but the negotiationand final compnomiseare missing. Executivemanagementmerely reviews necomm€ndationsbefore setting the standards,without discussing the standardsfurther with plant managemenLAs a consequence' plant managonsmay become frustrated with the standard-setting system and a negativeirnpact upon motivation could result. (bl The use of tight, but attainable,standardscan have a positive motivation effect on departmentheads and plant managers.Ttris is particularly true if they participatedIn setting the standards and are confident that good performancewitl be recognizedand rewarded' However,if the standardsaro perceivedas being unattainable'then the motivation'will probablybe negaUvebecausethey leel there is no uso in trying lor an unreachablegoal, The unfavorablevariances being the norm seems to imply that the standardsaro too tight' and this coutd be part of the causo for the low motivation among firstline supervisors. Under the present system, there is no motivation for department heads to control overheadcosts becauseall overheadcosts are allocated on the basis of actuatunits produced,and the actual productionoutput in other departmentscan have a significantimpact on the overheadcost chargedto each department. The use of standard, pradetermineddepartment factory overhead rates, apptied on the basis of standard activity allowed for actual produc' Uon,should provideuseful cost control informationand enhancecost control on.,thepart of department heads. Fl
Chapter ta
477
c18-2,
(r)
(21
(a)
The characteristics that should be present in a standard cost system to encoufiage positive employee motivation include: (f) partlcipation in settlng standards from all levels of the organizatlon including purchasing, engineering, manufacturing, and accounting; (21 the integration of olganizatlonal communication by translating the organizational goals and objectives into monetary terms for the employees; (3) support of the standard cost system by executive management; (4) standards that ane perceived as achievable and accurate and apply to contlollable costs. (b) A standard cost system should be implemented to motivate employees positively by: (1) communicating the corporate objectives of a standard cost system; l2l solicitlng imprcvement in standards fipm employees; (3) using a standard cost system to prcvide a guide-to action, not a straight lacket. (Although signlficant variances should be expiained, employees should not feel that the standard ls a mandate. Gontinuous imprcvement shoufd be the goal.); (4) not overemphasizing variances, although standard cost variances often are used for individual perfotrnance review and reward, (Employees should be encouraged to take actions that will benefit the company as a whole rather than simply to meet standard.) (a) Management by ercepilon focuses management's attention only on those ltems that deviate significanily frc; the standanl, The assumption is that by foregoing a thorough, detalfed analysis of all Items, the manager has morretime to concentrate on other manage_ rial activities. (b) The behaviorar rmplications of management by exception Incrude both positive and negative implications. on thl positive side, this technlque increases management efficiency by concentrating only on slgnificant variances, ailowing time for the h"n.gg to concentrate on other activities. on the negative side, managens tend only to focus on the negative variances rather than the positive ones, limitlng their employee interactions to negative reinforcement or punishment. This technique may not indicate detrimentar trends at an early stage, and fragmentation of efforts can occur fipm deallng only with the specrfic probrems rather than gtobar issues.
Chapter 18 I
ClA-2 (Concluded| (31
Employee behaylor could be affected advercely when standard cost vari' snces aro the sole basis for performance evaluaUon.Employeesmay gubyeft the system and attempt to build slack into the standard so that they can meet or exceedthe standard.There can be a mlnimal level.of motivation sinco erceptional performanco is not rewarded' Employees may tend to engage In acdvlUesthat atp not In tlre best overall Interest of the companffust to mest standard. Oveltmphasis on price variances can rtsutt in a large number of low cost vendorsrhlgh levels of Inventoryt and poor quality materials and parts. Oyet€mphasis on efficiency vari' ancas can ltsult in long production run3, large work ln process inventories, and attempts to control quality through inspection alone.
cl8-3 (1)
Had Stevensnot confined his initiat remarks to telling the employeesthat producgon standards were too tow, but rather erplained whyr the results of the confsrence would certainly have been monoeffective. Furthermore,he should have lemained with the grouP and ioined the discussion. He lailed to establishtwo-way cotnmunication'to exchange ideas,to air differencesof opinion,and to provide neasonswhy certain practices could or could not be followed. Had he remainedwith the groupr Stevenscoutd have stated that he had been thinking about the problem of production standardsand, In his opinion, such and such should be done. Then he could have asked the group what lt thought about fottowingthe ouUlnedapproach.The ensuingdiscussionshould shape a suggestedcourse of action nopresentingtho groupb opinions as well as those of Stevens. lt is poor pracUcefor a managerto abdicate,as Stevensdid in this incidenl An important part of a managerbiob is to provide effective leadership,to show tha way by offering a plan, by giving neasons'and by taking into account suggestionsoffered by the members affected by tho plan. Usingthis approa-ch,the managerlsideas, the groupb wishes, and the needs of the enterprisa can be blended into an effective program. h might be that the employeeswenecorrect, that standardsshould be reduced.For example,errors In calcutatingthe standardsano possible. The employeesmust be given the opportunityto present reasons for their nocommendations. Both facts and experienceare important in determiningthe level of productionstandardsadopted. Stevensshould abstain from forcing any decision.lt may tako severalweeks or months for events to demonstrate what standardsshoutdbe established,for they will bo influenced,among other things, by the verificationof the employees'major beliefs,the cor' rectness of Stevens'statements,the extent of modificationsrequiredt and the fult comprehensionof the situationby tho employoes.
Chapter 18
179
Ct8-3 (Concludedl
(21
The subject of raising productionstandards,in itself, is not a popular ono among e-mployees. Ons must be quite naive to betievethat an employeewill_acceptan increasein production standards without some explanation of the reason it is requested or required. The issue in this Incident could be better identified as sHow can the enterprise survive?' or sHow to Increaso our production outputDor .rHowto regain " st-ng competitiveposition for our company.t one might also raise the question of whether Stevenswas adequately in touch with the attitudes and beliefs of the Department B employ"u" ' torrard their worknespeciallyprcduction standards,He does not appear to be. Better communication,improvedsupervision,and effective leadership apparenily are in order. Stevensshould calt another meeting with the production employees of Departmelt-B' indicatingthat he wishes to off-erto the group additional pertinentinformationonproductionstandards.Next,tre1trouloget together all data dealing with the companyb produciion it"ndards and fair profits on the ownerb investment,the continuity of the enterprise, and other significant and applicabledlta. Preferabli it " "aoitional data shoufd be in a visual form to increasetheir effectivdness.Also, it is advisablefor Stevensto talk informallywith leaders oi o"p"rtment B empfoyeest-o discoverwhy-thegroup recommendedtower production standards.He can use this informationto shape friJpiesentation at the forthcomingmeeting, The best approachfor Stevensto foltow at the meeting is to: (al thank each memberfor his or her interest and past participation, (bl advisethat additionalinformation,vitat to the modification present productionstandards,will be presented,foltowedUV of a g.oup discussion, (c) present the adrJitionalinformation in a forthright (dl remain with the group and join in the discussion manner, from which the decisionon productionstandardswifl evorve. CGA-Ganada(adaptedf. Reprint with permission.
Chapter 18
)18-4 :il
Standard direet cost of I ton-gallon batch of raspberry sherbert follows: Direct material: Raspberrles (25 qtst r $gO per qt.l ..............'. Other lngredienb (1Ogal. I $45 per gat.!........ Direct labon Sorting (((3min. r 6 qts. raspborries)+ 6O min.) r$gperht-|......................rr.......o...rr.............
S8.oo 4.5O
S1O.5o
$2.70
1'8o Blendlng(ll2 min. + 6O min.)r $9 per hB)........ Packaglng (4Oqts.- r $.38 per qt.l Total dirsct standard cost per ten-gatlon batch of sherbert ...
4.5o 15,20 99o.2o
'6 qts x (5 qts. + 4 gts.! = 7.5 qts. reguired to obtain 6 acceptable qts. "4 qts. per gal. r 1Ogal. = 40 gts. l2l
(al
For the most Fartrthe purchasingmanageris responsiblefor unfavorable materials price variances.Gausesof unfavorablematerials price variancesat GoldKingare likely to includo one or moneof the following: (11 failure to correctly forecast price incraases l2l purchasingnonstandardor uneconomicallot sizes (31 purchasingfrom suppliers other than those offering the most tavorableprices
(b) The productionmanageror foreman is usually held responsiblefor unfavorablelabor efficiencyvariances.Causesof unfavorablelabor efficiencyvariancescould include one or mora of the tollowing: (ll poorly trained emplolrees (21 substandardor inefticient equipment or machinery (31 inadequatesupervision (41 poor quality of materials (in particular,the raspberriesthat must be sorted by handl
Clppter 18
181
cl8-5,
(11
Standardunlt cost per cutting board Diract material: Lumber (1.25 board feet r (F + f) + 5| r $3 per board foot).. Footpads (4 pads r $.O5 per padl Total direct materials Direct labon Prcparc and cut 112+ 6O hour per board r ((5 + 1! + 5 x $80 Assemble/finish(15 + 6O hour r $8;,.... Total dirsct labor
2.00 $3.e2
Total standard unit cost......r.......r..........r................,..........r.ro.
s8.93
aaaatataaaa
(21
(31
$4 .5o .20
9l.zo si.92
The advantagesof implementinga standard cost system include the loflowing: (al Standardcosts are incorporatedinto the accountingsystem, making record keeping easier and facilitating cost anallsis. (bl standard costs providethe basis for building a company budgeL (c) standard costs ssrvo as goals; they encourage cooparation and coordinationamong all elementsof the corporation.The variance analysis associated with standard costs provides a feedback slrstem to those responsiblefor controllingcosts. (a) The role of purchasingmanagerin the developmentof standards includesestablishingthe standardcost lor material required by the bill of materials,determiningif the companyshoutd take advantage of price raductionsavailablethrough economic order quantity,and obtainingdata regardingthe availabilityof materiats. (b) The role of industrial engineerin the developmentof standards includes preparingthe bill of materiatsthat specifies the tlpes and quantities of material required;establishing,in conjunction with the manufacturingsupervisor,any allowancesfor scrap, shrinkage,and waste; and participatingin time studies and test runs to facilitate the establishmentof time standards. (cl The role of cost accountantin the developmentof standards includes reviewingall informationregarding material and labor standards received from other departments,establishingthe labor rate gtandardsbased on the type of labor required, deteimining apptication rates for indirect costs such as material handling and factory overhead,and convertingphysicalstandards such aJ hours and quantitiesto monetaryequivalents.
Chapter 18
/t82
cl8-6
(rl
Price Unit Gost Actual Standard \/afiancg Variance Cost Quantitv . Cost Material $ 424 unlav. So5 8r48o $2.oo $2'05 Maran................ (11260llaV. (.051 .75 .7O SatOI.................. 25r2OO (1.8541faV. (.tol 1.OO .9O cra|yn..o.....r....... l8r54o Ngt matgrials purchaseprice varianco..........r.........'...r.....o...'-$(3€9Olfav. Actual quantifies at individualstandard materials costs: Maxilo...,.... 8r48OgallonsO $2.0O......-.r.. S161960 Safer......... Cralyn....,...
o o
25r2OO 18.54O
18r 9OO 18.540
.7 5 .........,. 1.0o.......,...
s54r4OO.OO
92220-gallons Standard (expectedl output from actual input (52,22Ox .8O= 4lJTAI multlplled by $1.3Owolghted averageot
standard materials COSIOutpftt ...,..'...................r........o..... 54.308.80 unfa% Matgrials mir Varial|CO......r................'r.................'......o...'..... t_9!.2O
Standard(expectedloutput from actual input at weighted averagO Of etandafd matefials COSIOUtpUt.,.....,..,............. S541308.8O
Actual output quantity at weighted averiageof standard materialscost (4OrOOO r $1.3O!...,................,...,................52.OOO.OO Materials yield varianc $1i998.8o unfav' a ar ar aa a aaaa a at aaala
aaaaaata.aa
araaaaa
An analysis of the portion ol the mix varianco attributable to each material follorvs: ,La.trl
Ma:en....
. Actu.l
ttrrd..d
Qr,rrnttt
Forrnslr
8,48osab. :H
r
Totrl Acfirl gg3ggl
r
OulndV Urlnc ltryrdrrd
Qurntity
Fonnrdr
Yrrirdon
52,220gay 8,355salr
300 o25
62,220
25,060
Crayln... 18,540
2t23 625
32"220
18,799
l%0,
Wgar".
J
34-9c"r.
r-
Co.t
I
1% gab. 32.00
Selcr.....253OO
Roundlngdlflerencc.
[lrtrrirb }Ir
at nd.td lJnlt
.75
1.OO
Vrr!gg911
S25o.oounfav. lOO.5Ounfiv.
(259.oo) fav. (.30) unfav. f_9!39
Clppter 18
4&t
Cl8-6 {Concluded} (21
Belore LAB ChemicalCompanymanagementcan controt costs, they need to know which costs ara out of line, within whosa area of-responsibility has the cost variancoappeared,what is the ggtuseof the cosi varisnce' and who has the responsibilityto correct the cause of the varignce. Standardcosts and the variancesfrom them help managementto begin to answer thess issues.Specifically,the variances indicate where managementshould begin its invesfigation: (al Price variations-the informationto identity the causes of the price variancesusuallycan be obtainedin the PurchasingDepart-unt. A review of purchasingproceduresand rccords woutd disclose whether the varianceswenacaused by permanent changesin prices,poor purchasingpractices,or poor productionsJheduling requiring incurence of extra costs to expedite shipments.The informationobtainedwifl identity the department responsiblefor the extra cost and provide clues to improvethe control. (bl Mix and yield variances-the informationto identity the cause of thesa variancesusuallycan be obtained in the proiuction departments. A review of materialsrecords and handling procedurcs would disclose whether the mix variance was caused by the use of wrrongproportions,entering excess materials into the process becauseof carelessness,or adjustmentof the mix to accommodate off-standardmaterialsquality caused by the same factorr. Thus, the yield variancewould often be explainedby the same information. Nonstandardproportionswould often result in nonstandardyields and excessmaterialsinputs.Tho informationobtainedwould hetp identifythe departmentresponsibleand provideclues to improve the control,
c18-7 (1)
(al Materials-quantity purchased..............,.........,.....,.. 5,2OOlbs. Unfavorable (b)
unit cost ($2.iO - 32) ........,...........t....... x $.lO Materials purchase price variance.......,...............,,... $ S2O unfav. Materials-quantity used.o.....,...... 5,30O tbs. Materials-qu a ntity req uire d at sta ndard (5,OOO units produced x 1 lb. per unit).............'..:............. S.OOO Unfavorable quantity.................o............,......r........... 3oo lbs,
ItanOlrOcost per lb. ........................ r $2 Materiatsquantityvariance . $ ffi unfav. ......,.....:.:::::::::: (c)
Directlabor used 8,20O hrs. Unfavorable unit hourlyrate ($4.1O_ S4).................. x $.1O
Direct labor rate variance
S 82O unfav.
r
i
Chapter l8
481 1
C18-7(Continued| (dl Direct labor used Direct labor required at standardfor 5'000 units pfOd UC gd .r..............i..r.............ooo...r.................t.r...
8r2OOhrc. 8. OOO
2OOhrs. Unfavorabtg dirgCt labor llS€...................................'. x $4 Standard wagg rate per direct labor houl...-'...r........ gffiCignCy VarianC8.............,....rt..........., DirgCt labOf -9999 unfaU (el
Analysis by expenses of the factory overhead controllable variance for 5rOoOunits of production:
J:*"9. 'Ji:-''l:'"f;' or":*'ilo "ilH:l'.:. !:Jll1il,i J,:";'9, Ovcr (Undcrl Output Chargcd Variable factory overhead: $ gr84O tndirgct 1abor.......o......r.....r.....r......r...,. SU pplieS.-Oil ............r.......o.....r,......,o....
$lOrOOO s (16Ol
3r3 0O
2t5OO
8OO
3.2OO
2.5OO
7OO
Allocated variable seryice department COSI...................r....r.r.,...'.................
TotalvariablefactOryoverhead....o....r. $16,340 Fixed factory overheadz Superuisioll..........
92,475
D e p r e c i a ti o n..............,.......r .,.o.....,.....r3r. 75O 1,250 Other fixed costs ..,........... ,.... .. $ 7,475 Totat fixed factory overhead Totaf ........ro....,......................................... 523.gl 5
(21
315.OOO 31.34O $2,250
S 225 O O
3r 750 1,250 $ 7'250
$
522,25O
Sl ,5.99
ZZS
Clearlyindicatingwhere the responsibilitiesfor price and quantityvariances tie and chargingthe variancesto the departmentswith initial responsibilityreducesthe conflict but does not eliminateit. The specific cause(slof the varianceneedsto be determinedbefore there can be certaintythat the proper departmentis charged.For example' if materialswere purchasedat higherthan standardprices because the ManufacturingDepartmentrequireda rush order,then the price variance is the responsibilityof the ManufacturingDepartment.ll the materials providedby the PurchasingDepartmentwere of slighUylower quality than specificationsrequired,due to carelesspurchasing,the excess quantityused by Manufacturingis the PurchasingDepartment'sresponsibitity.
:
Clppter tg
.rEs
Cl8-? [ConUnued] Even if the variances anBpnopedycharged can be argued that the purcjrasing b"p"rtrentbto the two departments, it varianli is influenced by the orc€sr_quantity requirod bi M;;-"cturing. -oepartrienit fi this case, the extra 3oo pounds will increase.itr.e. g G ri"n"e (accumulated over_severalperiodslryrd_rrasin by $SOt36Olbs. I $,iO;. The S3Ois the foint responsibility of the two dipartments. (31
Generally,the ManufacturingDepartment price of the overhead items' T?r"'r-rore, manager cannot controf the $te prices srrouiJ not inffuence the data in the departmentalrepo*. r,irn"r, the allocation method for gervicedepartment costs is not "umci"nliv erptained ioletermine what part (if any) of this variation can be identirilo iliut il; ;-";"rtment. The fixed overheaditems listed in this case iirmattv ment managerb control. Suppliesand indirect "r. ort"ioe a departcontrol can be erercised-it ne o"p"*r"ntal labor remain. level over the amount of items used' Therefore,emphasissrroirci placed on the quantities be within the variances'wittr iittte ;r;;;ii""i" on dolar vatues.The major use of the doliar valueswoutd be io estabfish the guantity level of eachvariancethat would be economicatly worth managementb attention.
I I I
Chapter18 1
Cl8-7 (Concludedl TO: Departmont Managen-Manufacturing FROM: Performance AnalYsis RE: GontrollabIe Factory Orerhead Performance-N ovember Quantitv
Percent Gompared to standard
rndirect tabon Favorableindirect labor use 4oh 1OOhrs. (doltar value-94O01 Supplies-olt: 2ooh Unfayorableoil use (dollarvalue-SSOOl I'O0Ogals. Commentarv: The dollar value of the oil variation and its large percentagerequire identifying the cause and applying control procedures. The indirsct labor variation, althoughfavorable,should be investigatedto be sura that it does not represent unaccomplishedactiviUesaffecting other aspects of the operatlons. Gomoutations: lndirect labor: Hours usgd...r.......'..,...r...'r'.....o.....'.o..........'...........
214OO hrs'
Standardhours for 5,OOO units of output '
(4)
(5rOOO r .5 hrs.)...............,o...,....r....'................'.., Favorable indirect 1aborvariation...,....................... Dollar value at standard wage rates.........,.......'. Supplies--oil: Oil consumed....,..............r................,.......r....'.....'.' Standard quantity for 5,OOOunits of output.......'... Unfavorablg oil consumption........o.........,............... Doltar value at standard oil prices,..................r'.....
2.500
__199hrs. 1199
6rOOOgals. 5.OOO lrO0O gals. lSOt The immediate reaction might be to dismiss the department managen However, careful thought would require analysis of the situation to deten mine (al if, on an overall basis, the department is being operated economically (if so, then dismissal may be undesirable|; and (b| if the cause of such behavior is due to management reaction to unfavorable variances without regard to size, or to undue emphasis by managsment on individual variances to the erclusion of measurement of overall performance. lf it is assumed that the manager is porforming satisfactorily on an overall basis and should not be dismissed, then two possible solutions can be considered: (al Revise reporting methods to emphasize overall performanco. (b) Revise reporting on labor to combine direct and indirect labor into one item for performance evaluation-
I
Chaptor l8
487
cl8-8 (1)
(21
(a) Revisingthe standardsimmediatelywould facltitate their use in a master budget. Use of revisedstandards would minimize production coordinationprobfemsand facilitate cash planning. Revisld standards would facilitate monEmeaningful cost-volurie-progi anafysis and result in simpter,monomeaningfufvariance analysis.Standards are.oftenused in decisionanalysissuch as make-o".-lrv,p-ar"t pricing, or product discontinuance.The use of obsolete standards would impair the analysis. (b) Standardcosts are carried through the accounting system in a standard cost system. Retainingthe current standaroianJ eifanoing the analysisof varianceswould eliminatethe need to make changes in the accountingsystem. Changingstandardscould have an adversepsychologicalimpact on the persons using them. Retainingthe current standards would preservethe well-knownbenchmarksand aftow for conJi"tln"y in, reportingvariancesthroughoutthe year. Variancesa-reoften computed and ignorcd. Retainingthe current standardsa1d expandingthe anallrsisof varianceswou-tJ-io.r" diagnosisof the costs and woutd increasethe lirerirroooltrit " significant varianceswould be investigated. (a) changesin prime costs per unit due to the use of new direct material. Changesdue to direct materialprice: ((newmaterialprice - old materialprice)x new materialquantity = ($T.Zt- $Z,OO) x t pound)., $ .77 unfav. Changesdue to the effect of direct material quantityon direct materialusage: ((oldmaterial quantity- new miterial quantity) x ofd materiarprice = (1.25- 1.ool r iz.ooi.:.:..... (r.75)fav. Ghangesdue to the effect of direct material quantityon direct labor usage: ((ofdlabortime - new rabortime) x otd rabor rate = ((24+ 60) - (22 + 60))r $i2.6oj............:.:........... (.42ltav. Totalchangesin prime costs per unit due to the use of new direct materia|............,.....,.............. $(i.4Olfav. (b) changesin prime costs per unit due to the new labor contract ((newraborrate - ord taborrate)x new rabortime = (S14.4o- Si2.60l rl22 * 6d))............:.:.:......... .66 unfav. Reductionof prime costs per unit ($1S.OS _ $13.79) $ (.7alfav.
, r - \
CHAPTER19 DtscussroNQuEsTloNS O1$'1. Whm rtandetd cotr an nof ircorponlc4 hry rnayb. ucedfotth. Putpocs cl prichg' budgrel' hg, and canlrolling6t bd if |hcy an not uscd tor twrntory cocthg, tho advaniagerlrqn lho Bving cl clodcal dlorl in accounthgcannol bc oblahed O1$'2. With actual cost methodq it ir tirsl noceesaty lo rolect a coat flow melhodJifo, fifo, averago, 'l ob. lt lhen ncccsgary to keep detsiled rccordr ol quarililicr and prbo atd b mrko laidy cun' phx calcubticrs cl invontory cods. Wilh a statl' dard cocting syclm, crly quantitieg, nol prirxs, murl br taken into accounl' facililaling both ncod keephg and cabubtbnr. Stan&rd codl abo prwiJr el stllol Ol 9'3. Tho nurnber of variance occountg is delermhed by (a) the nunrber ard typc cil variancec lhat are to lppeat in ttatomont! for managemont u!c, and (b) lho need for casy dbp€al of variarcer at thr ond O ,6" ;ircal prrird, particularly whon thr variancec are not trested uniformly h finan' cial Catementg and for analyrcs. Ol$.t. (a) The standad coct ol prcduc-trcsnpleted and productc sold can be detormined inmedbtely withord wailing lor lhe aslud c€l to be cabuloted. With stsndsrd costr, rnmhly stalomontr can be prepared nrorc qubkty. (b) A firm producing a greal many dillerent products finds it praclically impossible to delermine the actual cost of each product The use ol standard costs will facilitate the preparaticn of hcorne statementsby producl lines. (c) Keeping linished goodr stek recor& in quantiiier mly will result h derical savhg, s i n c e l h i s e l i m i n a l e sl h e n e c e s s i l y f o r recording lho aclual unil cost of each nceipl and i*ruc or strbmml. 0195. Thr standard cethg ol invcntorics depends cr (a) lhe types of standardr cmployed, (b) the degree of guccesg that the company haa in kceping overall sstual cost! h lhe with standard cod!, std (c) the ccrrcepthcld with regard io the nsl suilablc khd of cost. at$€. (a) Defenal of variancor is supported qr the grounds that. il th. rtandardg in usc arc basod qr nqmal prbr, efficienqy,and ornpul levels, posilive and negstivc varionces can be expoctod to offget src anothcr h thc long run. Becaule varisncc account belances al any givon point in limo aro duc to recurringrcasonol and businesr
(b)
(c)
488
cycb llwtuatbnr. and brcaur prrkdic reporlhg requirementr rcault in arbilrary balarcer d cutcill daleq varianc. smt a parlicuhr culrff dalc ar nd astignabb to oprrating r!!ull! of lhr prriod lhrn ond€d They will carrcel oul ortr lino and herefore shorrH br carriod b |hc balarrco rheeL Varbrccq appesrhg ar clrarger or credilr qr |frr ircqnr rtdemrnl an rognrdrd ar approprbr ctrarges or crcdils in thr pcrF od in whk*r they arise. Thcy an conski rrcd tho resuh €t larrorable or nfavorsblo dcpadurcs frqn nonnd (ttatdatd) condi' tione and aro disckcscd rcparalely frorn cot of goodr soH at stendatd" Thb pro' vUer rnanagemerdwih mobscured hlo.' mElbn for inmedialc correclivc aclkxt and cod cil goods sold lnventory etl shouH not b. digtortod by variancer that represenl abnormal etficienciet or ineffi' cionci.t. Thc slandard cocl roprorenlr thal Irnount which is rearcnably fieces' sary to produce finishcd products and should lherelon be considored the bcct measure of the scst of goods mgnufac' tured and inventory cool, as bng ar the underlying operating conditionr remain undranged. The argumenl for allocating variancea belrvo€ninvenlories and cost of goods sold is that standard cogts are a uselul tol for purposes ol managerial control, bul shqrld not bc substitutesfor actual hictorF cal cetr h the financial slatemenla Only aciual historical costs shouH be used for tinancbl reporlhg, even though lhey arc greater or leas than stEndatd cootl, and wilhgut regard to lho reasqlr for their differsnceg lrom stan&rd costt. Standard cod varianco3 are no{ gahs or loeses but costs (or reductions therein) ol goodl manufacturedand should be allocaled between invenloriegand cosl ol goodr rcld. To treat |hem ar gahs or lcser h the period h which they arise disfofi both tho inventoryand gres profit figurea. Thir distortbn will bo cven gtealer if tho clatl' dardr are Lackhg in rccuracy or rcliability. Further, lo tubsliluto standard coslt lor actual historicajcost8 h thc lirancbl atal*. rnrnb rgptslontr an unwarranledcacrilicr ol objeclrvity.
Clupter t9
189
E)GRCTSES
Er9-1 Price Yarlancerocorded at the time materials are received and pfacad in the storcltom: ilaterials (2oroo0 r $.421..r.o.r..........o..........D..........,.... 8,400 Materials Purchase prico Varlance (2O,O0Or $.O3).... 600 Accounts Payable,(2o,OOo x $.45)..,..,,.r.,............... Work In Procass (8r2oo r 2 r ilZl
r...............,..........o.
MaterfatdeuanutyVarlance(t oo i $.42;...,..:::.::::,,.,..
Matgrlalg (l 0r5Oor $'lzl .................,.................o...
9,OOO
6rggg
42 6,930
Materialsrscorded at astuaf cost when-reccived,and price variance determined at the time materialsars lssued to production: M a t e r i a l s ( 2 O , O 0 Ox $ . 4 5 ) . . . . Accounts Payabte .'.......'.....,..r.r.r......r.....o..-....r...r..
9,OO O 9,0o0
work in Proggss (8r2oo x 2 rg42l
..,..,..........,.o,....D.... MaterialsPrica UsqgeVariancalio,soo , S.0g1......... 6,ggg 495 MaterialseuanUtyVariance(t oo , i.ce;...J..:...::::,..... 42
Materials (16,500 x $.as).
7 1425
Prica variancedeterminedwhen the productlon until the materiarsare materialsara-received,but not chargedto actuartypracedIn process: Matgrials(2oro-oo r grfoo Materiatspurchase$a2)....,........................,............,. prici variance,iid,doo x $.o3).;. 600 Accountspayable (2o,oo0, S.asi..... 9,ooo Work In Prccgss (gr2o0x 2 r-$.42)..,,......,...........o..r... 6rggg Materials (ioo;C.4t::.,.,...,,n..,.... luqntitrVariance Materials(i 6rsoor $,42).-................,:::........,.......,. 42 6,930 Materials Usage Variance (16,500x $.o3) |rigpurchaseprice 4ss Materiars varianie.,1..,.,................. 495 E19-2 (1)
Materials(l2'O.OO Ae purchasedr $S Sp) ..........or..,.o.961000 Materialspurchasepiice Vari"n""..,...,:.:.:....,............ g60 Accountspayable
96,9g0 Work in process(12,BOO Se r Sg Sp) lOZ,qOO Materiatseuantity Variance.........::.:.::.:::::...... Materiats(r3,oooAe issuedr 38 apt::::.........:.::::: 1,600 1o4,ooo
#n
Chaptor t9 1
E19-2 (Concluded)
l2l
Averaqecosting
Total Cost Beginninginventof!..,.............. $ 15r88O PUrChaSgg.........".rr.................. 96.900 Availablefor use. Materials... Accounts
Unit Cost s7,94 g.og 8.OOaverago
Quantitv 2,OOO 12.OOO 14.OOO
96rg60 Payable ...r..........o....r..r...'................r.r....
96,96O
Work ln Process (12r8oo SQ r $S Sn,............o......t...! lO2rdoo Materials Quantlty Vadance (i3,OOO - l2rBOO)r $S Sn i,600 Materials Price Usage Variance (t3'OOOAe r (s8.o6AP - $8 SP)) 780
Materials(13rOOO AQ r $8.O9AP}.,..,..,..,,..........,...
(3)
I 04,78O
Fifo inventorv Work in Process(sameas abovg|...............,.............r. 102,4OO Materials QuantityVariance(sameas above|.,........i.. 1 , 6 0 0 Materials Price UsageVariance 760 Materials (($Z.ge r 2'OOOunits) + (S8'o8 r I l rooo units)) ..........o......o...............,..r.,.
(4)
1O4,760
Lifo inventorv work in Procgss (same as above) ...........................o...102,4OO Materials QuanUty Variance (sarne as above}..........,.. 1,600 Materials price Usage Variance.....,.......r...,..,.......r.,... 900 Materiats ((SB.OA r 12,OOOunits) + (S7.94r l r0oo units))............,...........o..........,...... 104,90O
E19-3 Payroll'...
............t,..,r.....o.r..,.........,.,,r..,.........
18,048
Accru gd Pa1rrclt....'.,.......,r...,......................,..r.,..r,..
18,048
Work in Process (2rdOOx 314 r Sg.5O).r........r......r..r,r. 1 7 , 1 O 0
LaborEfficiencyVariance(1Zox Sg.io)
Labor Rate Variance (1,g2O x S.1O)............ Payrolt (1,92O x $9.4O)
1,14O 192 18,O48
Ctlr,Ots t0
191
Elg-4'
Work in Prpcess (lO'OO0unltg r 2 SQ per unlt r $2 Spl'....,..r.,.... 40rooo Materials Prlce Varlancc (($e.tOAP - $Z S4 r 2lrO0OAQI.....................,.. 2,too Materialg QuanUtyVarlancc ($2 SP x (2O'OOO SQ - 2l'OOOAQ)).........r...,.....,.. 2,OOO Materlals (21,OOOAQ r S2.1OAPI
Work in Procass (lo,oo0 unlts r 114SH per unlt r $i2 SR) Labor Rate Variance ( ( $ 1 Z . Z OA R . $ 1 2 S R ) x 2 , 4 O OA H ) . . . . . . . . . l-abor Efficiency Variance
44,l Oo 3OTOOO 480
[$12 SR r (2,40OAH - 2,500 SHD
Payroll (2,4OOAH x SIZ.ZO AR) ........
1,2O0 29,2go
Er9-5 (f)
l2't (31
Work in ProcessGt7FO rate r l2rO0OSH).................. 84rOOO Applied FactoryOvefi ead ..,...,,,,...................,....... AppliedFactoryOverhgad....r.........r........,.................. 84,OO0 Fagtory Ovgrhoad Contro1...r.,..,...r.........-,..roo.
(21 f3) (4)
84,00O
Volume Variance (S4.5Ofix. rate r (l5'OOOBH - l2'OOO SH)f ........, l3,5OO Controllablg Varianc6.....................r......,.......,........ Factory Overhead Control (S 9 1 ,0 0 Oa ctu al - S84,O0O apptied) ..
7,00o
Factory ovgrh gad Contro1....................r................,..... 56,OOO various crgdits r-...,..r........r.......,............................
56,0OO
Work in Process (i l'OOOSH r $5 FO rate)..,........,...... 55,OOO Applied Factory Ovorhead .o....,........
55rO0O
Applied Factory Overhead............r.,....,..........,.......,...55,OOO Factory Overhead Controt.. ..,,.....,....
55,O00
E 1 9 -6 (1)
84,0OO
Controllablg Variance....,........r.......'...............r....,.,... 4,00o Volume Variance (S2 fir. rate r (1O,OOO BH - 1i,OOOSH)) _ Factory Overhead Control ( S 5 7 , O O Oa c t u a l - $ 5 5 , O O O a p p l i e d ) . .
6,5OO
2rOOO 2,OOO
r - l - \
KP
Chagtor 19
=79-7 llt
i2l
B}
Work In Process (4rgOOSH x $10 FO tiato),.,............... 7618OO Applled Factory Overhead
76,8OO
Applied Factory Overhead Factory OverheadGontrol
76,8OO
Variable Efficlency Variance ($4 var. rate x (5r2OOAH - 4r8OOSH)l ............,.,.r VolumeVarlance ($12 llr rate r (5;OOOBH - 4800 SHll .......,,r....... SpendlngVarlance Factory OverheadContml
76,8OO
I'OOO 214OO 2,6OO
($78,200actual . $7618OO applied)..r,..,.,.,...,...,...r.
1r4OO
:19-8 fl 2l
Work in Process (Z'0OOSH r $11 FO ritof ,..........r,..... 77,OOO Applied Factory Ovgrhgad r...........o........r.........o..... Applied Factory Overhead
Factory OverheadControl 3)
77 |OOO
77,OOO 77 |OOO
VariableEfficiencyVariance
(98 var. rato i (Z1600AH - Zroog SHlt ..........,....,. 4,8OO Volume Variance BH - T'OOOSH}!...........o...... 3,OOO Gt3 fix. rate x (BTOOO Spending Variancg'.........r.r...............r..r..r.........r.....,r.. 1,7OO Factory Overhead Control ( $ 8 6 , 5 0 0a ctu a l - $ Z Z ,OOO a p p l i ed) ..........,..r ,..,......
9,50O
Clppterrg I
l-
Ei9-9 . Percentage of curnent-year labor cost element In finished goods and cost of goods sold: oh
Flnishadgoods,lgrooo units x $,01abor..,...............D.. ##:; Gostof goodssold (ftom cumontproduction), (91ro0ounib - lSroOOunitsix Sl faiot ............._g94.ooo b
sgsq@9
Allocation of cumant-yeartabor variances:
20 80
too
Finishedgoods (*?f0_9o_l 2o%o1,.............r...r.............. Sior4oo cost of soods sotd (g52,ooor tioy"1...............:::::....... 4t.600
lga€99
End-of-yearbatances: Balance
at standald...'.........r......o........r...r...o...............
Finished Goods
$tTirooo
Jaborvariances aiiocation...................,. P:f:ll:arb lO'4OO yearb variances, Last I !t
alt appllcableto "o"i-oi-;;il; sofdon a fifo ftow assumrition .r......................-__-_--
Gost of . Goods Sotd $819,OOO 41,600
5,goo -s866.400
E 1 9 - to Percentageof units in inventories and cost of goods sotd: Direct Labor and Materials Factorv Overhead o/o Units Units % 1' 500 2soh 5OO lOVo l r2OO 21oh 7 r2OO 24oh 3,300 55oh 3.300 660h _q@@@@@@@@@@@@@@@@g 5.OOO 7_oo% 10c.o.h
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Allocation of variances: I I
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Total Work in Amount Process $ (150.001 $ (37.501 500.oo 125.OO 600.0o 60.oo l12OO.OO 120.oo 1,5OO.OO 150.oo (1,800.00t (180.oo1
$r,sso.gg
Gost of Goods Sofd $ (3o.ool $ (82.so) 100.oo 275.OO t44.OO 396.OO 288.OO 7g2.oo 360.oo 990.oo (432.OO1 ( 1 , 1 8 8 . O O ) Finished Goods
s43o.og $:,i-g3.sg
-\
ChWtor 19
$1
E19.I I APPENDD( Work In Procest ($4 FO rate r 3'{5O unltr I 1.5 SH per unltl
2Or7OO 20r7OO
Applled FaCtOfy OVgfhgad.............................'..............F...
2Or7OO 680
Appllgd FaCtOfy OVeffiead .r........o............x'or8r.o.,............-.o.
Lifci"n"y Varlinco St4Fo rate r (5'320All -5'175 SHll""" ldle Gapiclty Varlanco(33 llr rats r (8,000BH- 5'320Al0!
4040
SpendlngVarlancc
Fagtory Overhead contJol ..-.
1r97O 21r35O
EI9-i2 APPENDX 188,OOO
Work In Process ($2o FO ratc r 9'4OOSHI
t88,OOO
App ll g d Factory Overh ea d .......r....rr.....
Apptled FaCtOry OVefhgad....o...........'....o..o....'.....o.'........D..188,OOO
Varfable Efticlenqy Varianco SH))..'......'.'........... 614OO Gt4.5OYaf.I (f 0'600 All - 914OO Flxed Efflclency Varlanco 18,600 fh. r (10'600 Alf - 9r4OOSHll ..'.""r"""'o"" GNl5.5O Spending Variance ...o.o.... ldle Capacity Variancc Glt5.5O fir. r (lO'OOOBH - lOr6OOAl'l)1.............'.o...
Factory OverheadControl
aaaatat
aaaaaa
7,2OO 9r3OO 195,5OO
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Pt0-l AQ purchasedx 32 SPI ..'........r................t 66rOOO Materlats(33rOOO Materials Purchasg Pricg VariancO..............,............o'.... AQ purchasedx ${.96 AP) ..,. Accounts Payable(33,OOO
1r32O 64,68O
Work In Prcces8 (OroOO oqulyalent unlta r 6 SQ r $2 SPf '.'... Materials Quantlty Variancc AQ lssued r 52 SP) Materlals(4O,OOO
80,OOO
72rOOO SrOOO
Work In Prtcess (5r8OOequivalentunlts r7l4 SH r $8 SRl.,. l 1 , 6 0 0 300 Labor Rate variance ($g.zo AR - $s snl r 1r5o0AH)......,..... 400 labor EfficlencyVariance($8 SR r (1,5ooA]l - 1,45OSR]l.... PayrollGb8.2O AR r l 'SOOAH|.....,.......,....o...........,........... 65rOOO
Factory Ovgrhgad Contrc|..,...r.....
VariousCrtdits...
65rOOO
Work in Process (5,5OOequivalentunits r 314SH r Sl0 FO rate1........ 66rOOO Applied FaCtory Ovgrhgad '.D......'.......'......o.................t...r
tr
iD
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12,3OO
Appli gd Factory Overhgad .'...'.'............o...r...........r................66,OOO Controtlablg Varianco ......,.,..r..........r..........r.r....r........r.,..,..... 500 Volume Variance ($12 fired rate r (4,OOOBH - {,125 SH}} Factory Overhead Control ....,r...............,.................,.......
g6,ooo
1,5OO 5,OOO
Finished Goods (5r2OOunits r $26 standard cost),......r....o.... 135,2OO Work ln Procgsg ..........,,.......,.,,.., ..r,.,.r....r, 135,2O0 Accounts Receivable (5r50Ounits r 940 sales pricel ..,..,...... 22O|OOO Sa1es...........'.r..r.................
.,....,.,,........
22O,OOO
Cost of GoodsSold (5r5O0units r 326 standardcost).,......... f 43,OOO Finlshgd Goods...,...r...........,..................t.......r........,....r...
143r OOO
1#
Chapter 19
P19-2 Materials Labor Overhead gnd 2r4OO 2r4OO transferred out this period 2r4OO Units completed 300 300 300 Less all unltg In bgglnningInventofi,...............,r gtsrted and completed thla Equlvatentunlta period 2r1OO 2rloo 2,1oo Add equiyalent unlts requlred to completc o too beginnlngInventory 150 2ao Add eguivalent unlts In endlng lnventory r......-.. 50 100 213OO Equivalentunitg ol producUonthis period......... 2r3OO 2r3OO Multlply by standard guanUtyof lnput per unit 5 unlts 3/4 DLH of product 2MH Standard quantity of Input allowed for work producedduring the period l_l.5oo 1_J25 !.600 Materials(l1,0OOAQ purchasedr $0 SPI Materials Purchase Price Vari Accounts
66rOOO 1,OOO
Payab1e.........r...r............rr...........r..r.....r...........
67,OOO
Work in Process ($OSP x 11r5OOSQ allow€d).....,.,,......,....... 69rOOO Matgrials QuanUty Variancc r...........o................o.................... 3rOOO Matgrials ($6 SP r 12roO0AQ lssugd|............o.....,,........r
72,OOO
Work In Procesg ($i2 SR r lrT25 SH aflowodf .............,...o..... 20t7OO l-abor Rate varlance ($12.10 AR - $rz snl r l,7oo AH!........ 170 Labor Efficiency Variancc ($12 SR r (1,7OOAll - 11725SH)l ...,...ri..........,,.......r. Payroll
300 20r57O
a a aaaaaaaataa
aaa aa aa a a t att
aa
Factory ovgrhgad Controt..............................o.....,................. 69,OOO Various Grgdits..........ro,...........r..,...
......,.r..,.....r,
09,ooo
Work in Process (Sf 4 FO rate r 41600 SH a!!owod|...........,.... 64,4OO Applied Factory ovgrhgad........,..-.r.r.,r.......,..r..........,,....
64,4OO
Applied Factory overhgad ......o.,........,r............r..o.r....,..r........ 64,4OO Variable Eflici ency Variance (S2.80yar. rate'r (4,9OOAH - d,6OOSlIl) ................. 840 Volume Variance (St t.Zo fix raten x (5,oOOBH - 4,600 SHI) 4r48O Spending Variancg.t,........,,.. ...........r,. Factory Overhead Control ,..........,.....................
720 69,OOO
'S1 4 FO r a t e x 2 O o hva ri a b l o= S 2 .g Ova riabter ate " 314 FO rato - S2.8Ovariabte rate = 311.2O fired rate
I I I \-
Ctaplstg 197
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Plg€' Materials
Conversion Cost -Efoo
3,OOO 2,OOO
3.OOO 2'OOO
beginnlng lnvantofl ...r.......D...t................... o Add egulvalent unlts ln ending Inventory....D...o....r...., 2,OOO Equlualent unlts of producUon Urtg penoA ....,........,... ---' 4,O0o Multlpfyby
2rOOO 1.500 5,5OO
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-Unltsggmqfot-odand transfermd out this period ....... L'8gsall unfts In beglnnlng lnventoty........:......:.:.,...... Equlualentunlts startod and compteteOthis perlod... Add equlvalent u-nftsrcqutred to complete
5,ooo
standardquaniltyof lnput p"i uiii
Of prOdUCt................Dor..ea11..11....1..i.......!.....
6 unlts Standardquanilty of fnput altowed for work produceddurlng thc perfod,............o.,........ 24.OOO _
1t2 hour Z,ISO
Materlals($'5qsP r goroooAe purchasedt .,,.........,..o..........
Matgrials Purchase Price variancg.........ror.....................,o..r.,lsrooo lrooo Accounts Payab|ett"rr.........r.........r.....'...........r...r.r.......... 16rooo
work fn PrccesL.F:?o , 24roooSe altowed),.................., _sp izrooo MaterlalseuantityVariance ..... 2so
Materiars ($.sb sp;-;d#iliiffiil':::::.::.::::.::.::::.::::
Work In prccess
72,zso
6f 9-9! , 2r7SOSH .............,....o..o. 2TTSOO -a-fl91ved| LaborRatevarianco ((sro:t6AR- sro $ii;'iiiiooAH usedt r,eso Labor Efficiency Variance Glfo sR r (2r8ooAH - 2r7s_?sl0).....,..............ro,.......... PayronGto.zs AR r 2,600 ax useii:::::::::::.:...............:::
Work In Process($12 FO rate r 2rlSASH allowrod),...............33rooo AppligdFactoryovgrhgad.'.......................,....t,............... FactoryOverheadContro|.....,..... various credits......:.::::::::::::::.::::::..::::.:.::::.:.:..:.,::::::..::.::3 i ,ooo Applied FactoryOverhead....,..,.. """"""""""'..r....'...........,. controltablevarian"" .....,....:::::::, t
\
vofume varfance Fe nred;;;i{iilH;ffi;1iil. Factory
1r5oo 27,e5o 33rooo sr,ooo
33rooo
2so
overheadcontrot.-.::............,r............,...,......o....
2,2so 3i rooo
r I
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Chapter19
P19-3 (Concludedf unlts x $14 standard costr) Finished Goods Inventory (5,OOO
7O,OOO 70tO0O
WOfk in PfOCeSS ..r.........o...r.r...........o.........r.....................
'Materials
(6 unlts O $'50 eachl'.'... $ 3.oo 5.(X' Labor lll2hovr O $1O per hour) por 1'50 hourl...... Overhead:Varlable lll2hour e 33 Fixed (1/2 hour O $9 per hour).......,.. 4.5O Total standard cost per unlt of product.............. 9!4.00
Cost of Goods Sold (5r1OOunits x $14 standardcost).,......... 71r4OO 71t4OO Finishgd Goods lnventory...................'.'...o...........'.......... Accounts Receivable(5r1OOunits x922 sales prlce|....,....... 712eOO 1"l2r2OO
GGA-Canada(adaptedl.Reprlnt wlth permlsslon. P19-4
ENSLry CORPORANON Income Statement For Year Ended December 31. 2OA
Sales((2O'0OO unlts + 1101000unlts - 12r0O0unltsl r $251.....r......$2,950,000 Cost of goods sold at standard (118,0OOunlts x $17.60) .. 2.076.800 Gross profit at standard ....,...,.......r....r.,..o.,,.......,,......,......,..........,.. $ 87312OO Add ngt manufacfuring variancg....r.....,...r....o.,....,............,............. 9O1
Grossprofiq adjusted to actua1...,.....
$
873,290 68O.5oO
$
192.79O
Lgss markgting and administrative expe[s€s,...,..............r,...t........ Opefating
InCOme..................'t.'.'.....o...r.....r....r...'...........'..'.".t.r.'r..
I Manufacturing variances:
Unfavorable Favorable $ 3,750
44,OOO
s48.760 Net favorabte vartanco ........
1, 1 0 0 s48,85O 48,780
!:-s
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Clnpter 19
199
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Pl9-4 (Gontinuedf
Materials: Agtual quantity r average cost fbs. r 1.485 per lb.]..........,...,.........rr.r....,......... [25OtoOO s37tr25O quantity Astual r standard cost (250,OOO lbs. t $i.5O per lb.f 375.OOO purchase Matgrials price variance.........,..........,..............r. E_e,7soffav. Thansferredinto production(24O'O0O lbs. x $1,So1...ri....... $360,OO0 standard quantity for l is,ooor eguivafentproduction ynits (23O'OOO lbs. r $1.5o per lb., or liS'OOOunits r $3 pgr unitl.t...............r..................o...r..............r........o....
Matgrials quantity variance...........,.,.........
345.OOO
-L _!5l0o9unfav.
Pound Basis
Thansfgrrgdout of work in process..,...r.............,.,.r.. 22OLOOO Beginnlng inventory (all completed|.......................... 20.ooo Startgd and compfgtgd this period .............,.r........... 2OO,OOO Add gnding inventoly....,.......................o.........r...,.....30.ooo Total
'Dr"tt....t....ot...r.........rr.....r.r....................r.....rr
?39e9
Unit Basis 110,O0o
lo.ooo I O0,oo0 15.OOO 115,OOO
Labon Ac'tuallabor cost.......D......"..'...r............r.,......r....o.........,. $l,3l3rzGo -iiiea,ooo
Actualhoursr standardraborrate(16r,ooohoursr $81
l-aborratg variallco,'.'."........'.'......r...,..,....r,,.,........,.,.,.i. E-zsrzeo -
v
Actual hours x standard labor r?ttG)....,................,........,... $1,288,OOO Standardhourc r standard labor rate (l661500hrs.il I per hour,or ll irooO units * r $i 2 per uniU.......... 1.332.00 0 . $8 LaborefficiencyYariance..,..,.,........................r......,.,...... fav. S__(4!.,OOO}
I
unfav.
I
Chapter 19
ffi I
P19-4 (Concluded) r* Computatlon ol equivatent pmductlon for labor and tactory overtread: Unit
Hour
Thansferredout of work In Process
In pfOCeSS.'.................... Beglnning InVentOltsflOfk Staftgd and COmplgted this pefiOd .,...........o............. Add 3/5 tO COmplete beginning inYefltgtJ..........r...... Add I /3 Ol endlng inVentOfy.r..t..........'............o...r..... TOtal
.aaaa..ra...r.r...a.o..o.....aaaa.aaa.....r...a.aoa..rar..aaar.aar.aa
Basis 165,000 15.OOO l5OrOOO
Basis 11O,OOO IO,OOO lOO,OOO
I,OOO 7.500 166.500
6,OOO 5.OOO I I l,OOO
Factory overhead (two-variance rnethod): ACtUal fagtOfy OVgfh gad ....o....,.r.'...r..........r'..........'.....'..o.'.
$295,5OO
Budgetallowance: Variableoverhead(1I t 'OOOunits r $1.5O|... $169'500
287.500 Fifgd OVgfhg4d........,...r..,.....,...,...........r....... -!3L@ 8.OOOunfau COntrOltablg VafianC8.................i...'.'.....'........'.'..........t..... $ $287,5OO Applied lactory ovorhead(t I l r0OOunits r $2.601.............. 288,600 BUdget
a11OmnCO...............o.rr..r........r.o....................t....o....
VOlUmg varianCg..................................o......o.......tt............o.
P19-5
:S
(l,1ool fav.
KALMAN COMPANY lnterim Income Statement For the Second Quarter, 2O-
SalgS (SOOTOOO f $3Ol ....r....o.....o..................r....................'............ $18,o0o,ooo 10.800.ooc gOOdS COSI Of SOld at Standard (600'000 f Sl 81......'..'...t.o'.......o... GrosS prOfit at Standald ....................r....r...............'.......ot.............$ 7,2oo,ooo
Adjustmentsfor standard cost variances:
$ 237,800 Matgrials price variance1..........'...'...o................. 38,OOO Labor efficien cy Yarianco2......'........................... t35,OOO Overheadspendingyariancos.... 8,00o Variable oyorhoad eflicie ncy yarianco4 .............. gad Ovgrh Yolumg yariance5.....................o.....'...' ---j Adjusted gnoss profit o...,........, ............. $ ......,....... Less commercial erpenses: MarkeUng orpensos ($t8,OOO,OOO r 1Oo6)..'.......$1'8OO'OOO Administrative oxpensos (SOTOOO,OOO r 25oh)'.... 1'5OO.OOO lncome b e f o r e I n c o me ta x......... S Loss income tar erponse (S3,483,4OOr ( s 3 , 7 5 O , O 0/ 05 7 , 5 O O , O O O ) ) . . , . Ngt
incom€
.,.......o....,..r............r............o.............'.'r......'.'.....'."""
416.600 6,783,400 3.300,ooo 3,483,4oo '1,741.700
sJJ4E-9e
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501
Pl9-5,(Continued) rrhe materialsprice varianceshould prorated be between work in process,finished goods,and cost of goodssold as ioltows: Endingbalanceof $72,OOO work in process $18 per unit Endingbalanceof finished goods
$goo,ooo $18 per unit
4'OOOunits
5O,OOO units
Totalunits in endinginvgntori€s...,........................
5!_,ooounits
Jo!"! units produced during second quarter.......... Totalunits in endinginventori€s.....,....,.........,....... 45O,OOO 54.ooo Units producedand sold duringsecondquarter.., 3g6.ooo I
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Materialsprice variancecharged - 396,OOOx 27O,OOO = 5237'600 to cost of goods sold T56:FOO zsince the tabor efficiencyvariance is not regardedas significant, all of it is chargedagainstsecondquarterincome. oA portion of thE overhead spendingvarianceis attributable to the overtime premium paid. since the overtiire-premiumwas incurred in order to meet sales forecastsfor the entire year' the portion of the spending variance resutting from the overtimepremium isg.ob raborp",' unii at regurar rate x Sooh= S4'50/unit)shouldbe proratedover the entire y""r. proportion in to the sales of each quarteras follows: Productionin excess of capacity (euarters 1 and 2 onry): Quarter1 = 465,000_ 43OrOOb = 35,0OOunits Quarter2 = 4SOTOOO - 43O,OOO = 2O,OOO units overtime premium resurtingfrom ercess production: QuarterI = 35,OOO unit! x $4.SO/unit= $f SZ,SOO Quarter2= 2OTOOO units x$4.5o/unit = 9O.OOO Totalovertime premium for first six months _S24Z,SOO Prorationof overtimepremiumportion of spendingvariancebased on sales: Quarter2 = -s600'ooo x s247'5oo A' Et.-^r^^-. total overtimepremium= $99rooo $l FoAooo
Chapter 19
Pl9-5 (Goncludedl The overhosdspondlngvarlanco chargedagainstsecond quarter income is calculated aa follorvs: Total overheadspendingvariancefor second quarter.-............... 91261000 9O'OOO qUartefOVertimepremiUm......,... AmOuntresulting frOmSeCOnd $ 36tOOO Amount rgtatgdio unexpgctgdIngff|cignc|93.................r............ quarter on second to Amount ol overttme premium chargeable 99.OOO the basts of salgs attocatlondgtgrmingdabovg.................... Total spendingvariance chargedagainst second quarter income SI-95'O0O aSincetactory overheadis chargedto productionon the basis of direct labor hours,an unfavorablevariabteoverheadefficiencyvariance occurs because of the inefficient use of direct tabor.The amount of the unfavorableoverhead variableefficiencyvariance is determinedas follorvs: labor eff lclency varlancc l-abor coot per unR
r varlablcovsrheadper unlt = #
r 32 = $g,ooo
5Thecompany pollcy is to report a volume variancoon Interim statements only il actual producgon Oittersirom the ptannedproductionschedule. Sincs actual productionis equal to budgeted producUonthrough the end of the second quarter,there is no volume yarianceto be chargedagainst second quarter income. P19-6 (1)
FactorY Material Material Labor Overhead A B .| 15r0OO 15rOOO 5,0oo 15,OO0 6,000 6.000 6.000 6.000 I,ooo IrOOO 9,000 9rOO0
Units completed and transferred out...... Less beginning Inventory (att unitsl.......'. Started and compteted this period.....'.... Add work this period in inventories: 2,OOO 3,OOO 2rOOO o Beginning inventorlf ..........,.r.'....r...... 2.500 1,250 2.500 5,OOO Ending inventory .............r................. Equivalent units of Wgstco.....,..,......,...... 14,0OO 13r 5OO 13,250 13,5OO x 11l2 x 113 Standard quantity per unit of Westco...... x i x o 81,OOO 6,625 --l!I!ioo Standard quantity alIowgd.................,..... :14.OOO : Materials ((15,OOO ,. x $21). r 314) + (BO,OOo Materials Purchase Price Variance,..............,.r......'........ x S3l).... Accounts Payable (15,OOOr $13) + (8O,OOO
3TO'OOO 65rOOO
Work in Process ((14,OOO x $2)1...........,. 3 5 8 , O O O r $f e} + (81,OOO 5,4OO ........r.......'r............ Materials Quantity Variance Materials ((14,2oOr $14) + (82,3oOr $2ll
435,OOO
363,4OO
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C@ter 19
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Pl9-6 [Goncluded] I
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Work In Plocgss (0t825 r $r o) ........................,...r.........r.. o6,25O labor Rate Varlanco (61500r GltO - $l l)l ror,,,......,.,.....,.. 6,5OO labor Efficienciltariance ((6,025 _ tirsoo, r $lO) ..... Payroll (8t5oo r $l ll ..o...o........'..rts...,...........,........o.-. Work In Procggr (4r5OOI $24.............................r.........., 1 2 l , 5 o o Applled Factory Overhead..... Applied Factory Ovorfi o8d ....... t2t,5oo aaaaaa.aaaa
VolumeVariance((5,OOO - {,5001r Spending
!
$241 ........,..............oD. Variance ..............o.......-.........o...o...ro.....oo..
121,500
l2,OO0 11,2OO 300 722,OOO
VariableEfticiency Variance([4'SOO - dr4oOlx $3]..:: Fagtory Ovgrheadcontrol ....r..........................,.........
:
7r25O 71,50O
(21 b
Labor-Efficiency Varianc4.................o.............................. 1,25O Spending Variance.D............r...............................r..,........r 11r2OO Variablg Efficigncy Vartanco...........,................................ 300
Income^ Summary.......!...r...........r....o...................r...r........
Materialspurchase price Variance.......,......:::.......... 7 6 , 1 5 0 MaterialsQuanUtyVariance,..........o....r.,......r..,..,......
Labor Rate Variancg............o.....o..........r.o.................. Volumg Variance....r.r.......r.......r...o.....................r...... I b
S
b
\
(3)
PACIFIC MANUFACTURINGCOMPAilY Incomo Statement
lales ((4r0oo+ l5rooo - 3rooolr $601......t,...........r...r..... s924,OOO Cost ol goodssold (f 5r4oo x Slol r............o........,o........o.. . 6t 9.000 9-* profh at standald ..............D................................... s3O8,OOO Adjustments for standard cosi variancos: Matgrlalspurchaseprice variancg....,.........,............. s65,ooo Matgrialsquantityvariancg..............................,r...,.. 5,4OO Labor rate varianto..........i........!..............o..r.........r... 6,5OO Labor effic i ency varian ce ........,......,..r....... t....,........., ( 1,2501
.spending variancg............'r..........r....t.......rD..,....r.....
Variab Ie e ffi ci e n cy vari an ce :..........,.......r.,....,.t......... ( 1 t , 2 o o l
Volume yarianco..........r.............................rr. I
v
65rOOO 5,4O0 61500 1 2,OOO
Adjustedgross profit..... Lesscommenciirexpen";; ::::::::""""""""""""""""""' ::.::::.:::::::::.::. ::.::::::::.:::: l n c o m e t a x e x p e n s e ( 3 O 7 ox S111,gSO).....
N e t i n c o m e ,.......
(3oo) l2.ooo
76,150 $231,850 120.OOO $1 I 1,85O 33.555 s_7q.?95
,
Chapter 19
w ?79-7
ill Materialg (4OOOollterr AQ purchas€d r 94 Sn.r............ IOOrOOO 800 Materiale Purchase Prico Varlancc.. 159,2OO ACCOUntg Payable ....'...r.......................................ro.. Work In Process flO'OOOunits r 3 liters SQ Per unit r $4 SPI Matgrials QUanUty VarianCe ...,......r.'r.............o.r.....'o......
t2o,ooo 4,OOO 124rAOO
Materials (31 ooo llters AQ issued r $tl SP|...........". unlts r 112SH r $Z Sn1.'-'...---t 35rOOO Work In Procegs(lOrOOO 2,O16 Labor Rate Variancs ($7.42 AR - $7 SRI r {1800 AH).-.... (4'8oo All SR r Varlanco L^aborEfflclency Sl7 StOOO
SH)|....................r......r...'......r.o...i...............t.
PayfOll Gt7142AR f 4180O AH) .......,......r.o....r.r...........
Work in Process(iO'OOOunits ,,112 SH r $15 FO ratel...
75,0OO 75rOOO
Applie d FaCtOfy Ovgrh gad.......o..,,....'.r.....'................ FaCtOry Ovgrhgad COntrOl .o.r.............o...'...................t..... VariouS Grcd1t3....r...o.r.........r......................t..............
8lr 5OO 81,5OO
FinishedGoodr (l O'OOO units r $23 standard costl ........ 230,OOO Work In ProcgS8.........................,o........r.........'....r.....
Cost of GoodsSold (8,00Ounits x $23 standard cost) .'.- 184,OOO Finishgd
GOOdS........r'...r....r...o.........o.................r..t.'.
Accounts Receiyable(81000units x 340 sales ptieo)"".. Sa1gS....r.....r...
23O,OOO 184,OOO
32OlOOO
r.rr.rrr..r........r...r.....r..........t.t..
Markgting and Administrative Expenses......'...D..'........... 5O,oOo VariouS Ct€dits..........................................r.r...tt.t......
I,4OO 351016
320,OOO 5O,OOO
I
I
Chapter19
505
P1s-7iContinueCl 121Aetual factory overhead. Budget aflowancebased on ir8OOsctuaf hours: Variable overhead ($8 variable r:ater 4rgooAl{ ....... ...........4..... S28r8OO
Firgd ovgrhgad.............r...r....................r.,...r 4g;5oo Spending variance......r.......'.......r.o.......rr.r.......rr...r........rr..r
s81,5OO
78,3OO $ 3,2OO unfav.
Budget allorlrrance based on 4r8OOactual hours (from
above).........'D.....r..r..rr....t....r.......'.................
s78,30o
Budget allourancebased on B'OOO standard hours: Varlable overhead ($6 varlabfe rate r 5rO0OSH) ...........,.........,......,.r..........r.....33OTOOO Firgd ovgrhgad.'.o...-....r'.-....r.o...r.'.D.............. lgrsoo Variable efficlency Yariance....'.........o...........r.,..........,....or..
Budgetallonrancebasod on S'OOO standard hours (from above)........o..'......r..r...............,...r.....,r s79,5OO Applied factory overhead (Sf S FO rate r 5,OOOSH)............ 75,OOO Volume variancg..'......'.......r......r......o......rr.,...o.....,....,...,..r. $ 4,5OO unfav. (3)
Sa
GRINDLECORPORATION Income Statement For November
I esttt
ttt""
"""tt
o" "
'. o....t...........r
Less cost of goodssotd: Standard
r...........r.
r.... r.....r.r..r.....r..................r
cttSt............i............o..,r................ri.
$320,OOO
$l g4rOOO
Netunfavorabtevariances(Schedule i1.......,.....,...... 1O.316
194,316 s 125,684 MarkeUng and administrative orpenses.............. ...,r............ 50.o00 Income bgforg tar95.......r.......'.........................r...........r.........r..rr....... $ 75.684 Gross
profit
tt"""to"......rr...ro...........r.........r........r.r.r...r....r......,..rD....r..,
i l
Chaptar 19
ffi
P19-7(Goncluded| Schedule1 GRINDLECORPORATIOII Schedule of Variances For November Materials purchase price variance Materiala quantlty variance ........... Labor rate variallco .................'..... Labor efficiency variance
taaa
S 8oo
aaatata
$ 4,OOO 2rO16 1r4OO
Factoly Overhgad epending YarianC9..................................r.. 3r2OO Factory ovg rh gad va ri a bl g eftl ci gncy vari anc8 ...............r...'.. Factoryovgrhgadvolumg
1r2OA
4r5OO
variancg..'..........r.....r'.........'.........
$13,716 (3.4001
$3,4OO
SlOt316 Ngt unfavorablg YarianCg......r.....r......r.r..........'.'....r..r.'..........
CGA-Canada(adaptedf.RePrint with pennission. P19-8 (1)
Total
Allocated to Wor|r In Procaar
Materials price usage variance......r.. sl,5oO 660 Materials quantity variance.......,....... 250 Direct labor rate variaflco .......,......... (30o) Factory overhead spending variance Total variances ..r..r.,.................,......., $z,t1o Discounts lost on purchases............, 120
Tota1..................................,.....,,.... : $2,23o : : :
:
ssoo sl,ooo $gzs 220 50 (60l
440 2AO 4
3teOO
l24ol _(99J
80 40 $75Q Si,48o
%
Work in Procesg: Materials (t r2OOunits r I O006).....,..,...l r2OO 33 lrs Direct labor (1r2OOunits t 5O06).......,. Factory overhead (l,2OO units x 5O%) Fi n is hodg o o d s ( 9 OOu n i ts x l OO%)..,..." 9OO 25 G o s t o f g o o d s s o l d (1 ,5 o Ou n i ts r 1 OO%l 1.5Oo 41 2B Total .........'..............o..........'t..."""""'
165 75
$7ro $1,4OO $SZS
Materials Production Units
Allocatad to Coct of Goods Manufachrred Coat ot Goodl Flnlghed Sold Gooda Total
1_99_
30 35€5-
s625 275 125
(1501 9875 50 S925
FactorY Overhead Labor Direct
ProProduction duction Units % Units % 600
20
600 20 900 30 30 900 1 , 5 0 0 50 1 , 5 0 0 5 0 _gpoo 1 0 0 :3 -. O O O t o o
I
Chapter 19
fi7
Pl9-8 (Conctuded)
(21 Work in process at standard cost
Fastory Oven head
Direct Materiafs Labor
Total
lOOVol... s 8,4OO Direst labor 17r2AO units r $g r SOo/o1.. $ 4,8oo Factoryoverhead(ir2OOunits r $2
r
SOTol ......r...r.o...r.r...r....r.r......r
sl,2OO $t4,4OO
Finishedgoodsat standard cost: tttai"@.....,r,....... 6,3OO Dituct labor (9OOunits x $g) .....D......r.. Factoryoverhedd(9OOunits x $2)....,..
7r2OO
l,goo
15,3OO
Cost of goodssold at standardcost: tvtatg ......... 1 O , 5 O O Direct labor (i'SOOunits r Sgl ............ 12,O0o Factoryoverhead(lr5OOunits x S21..,. 3.OOO 25,500 Total mfg. cost at standatd cost... s25,2OO s24,OOO s6,OOO $55,2OO Less work in process,Dec.gi, t9_... 9.400 4,800 1,200 f 4.400 Gost of goodsmanufacturedat Standard COSI....................r....,...r.$16,800 Add: Variancga11ocation.................,.r 1r44O $1g,2oo $4,8oo s4O,80O 200 (24o1 1 , 4 O O Allocation of discounts lost on purchases...............,........r...... Cost of goods manufactured at actual
80
cost...,.......r...............r.....,.,........... [q€20
(3)
80
$lgrgoo
Work in Process S 8,4oo
Materials at standard cost ..........., Materials-price variance ailocation........'.. 500 -quantity variance allocation ....... 220 -allocation of discounts lost on purchase3............,............r.... 40 Total matgriats.,........,... ,........r $ 9 . 1 6 0 Direct labor at standard cost .....,.........,.,..... $ 4,8OO Direct labor-rate va riance allocation .......... 50 Total direct |abor.................................... 4.950 $ !a ctorV overhead at sta n dard cost...D..r........ $ 1,2OO Factory overh ead--op.n ain g r"ii"n "" allOCation.........,.....................r.....r... (601 factory overhead ....,.,...., _loull . Igt"l $ 1.140 inventories at actuat cost... $15.150
$4€so s4e/80
Finished Goods $ 6,300 375 165
Total $14,7OO 875 385
30 $ 6,870
70 $18.030
$ 7,2oo
$tz,ooo
75 $ 7.275
$ i,Boo (e0l $ 1.710 $15.955
725 $12,t25
$ e,ooo (150) $ 2.850 $gl .oo5
*t Chapter 19
PI9.9 APPENDIX Cotton Cloth
Units comploted and transferred out this period....,. 3'OOO ........................1,00O Lgss all units In beginning Inventol'1f Equivalent units started and completed this period 2,OOO Add equiyalent unitg required to complete
Dver 3rOOO LOOO 2rOOO
o
O bgginning InvgntOfl .t................'..........r.............. 75O Add equivalent units in ending inventory.............r..., Equivalent units ol producUon this period.........,o...., 2r75a Multiply by standard quanUty of Input per unit
750 2r750
Ol p rodu Ct
[email protected].
I pint
Stardard quantlty of input allowed for work producedduringthe period......,..,............,......... Eg99
2J50
Materials-Cotton Cloth (5,OoOyards AQ purchasedr $f SPI 5rO0O MaterialsPurchasePrice Variance--CottonGloth ................ 500 yards AQ purchasedx $1,1OAP) Accounts Payable(5r0OO Materiats=Dyes[2r5OOpints AQ purchasedx $,50 SP]......,.. Matgrials PurchasgPricg Variancg-f,l1/€s........r...,......... Accounts Payable(2,5OOpints AQ purchasedx $.49 API
Convcralon Cost 3rOOO I,OOO 2rOOO 750 250 3,OOO tt2hour 1.500
5,5OO
1r25O
25 7 1225
Work in Process(5r5OOyards Se allowed r $l Sp) ..,.,..,..,.... 5,500 MaterialsQuantityVariance-Cotton Ctoth....................,..,.., 100 Materials--CottonCtoth (5,OOO yards Ae issuedr $1 Spl
5,goo
Work in Process(2r75Opints Se atlowedx $.5o Sp)........,.... 1 , 3 7 5 Matgri aIs Quantity Varianc e-Dy€s ......,..........,,...,........,. Material-Dyes (2r7O0pints AQ issued x S,50 SP|.....,....
25 1,35O
Payroll(1,55o All r $5.9o AR|................................................ 9,145 Accrued Papoll (and employeewithholding accounts),..
9,145
!'l/orkin Process(lr5OOSH attowedr $6 SR)............,..........t. 9,00o LaborEfficiencyVariance($e SR r (1r5SO AH - I,SOOSR)}..,. 300 Labor Rate Variance((gs.goAR - $6 sRl r i,550 AHi ..... Payroll
"'...................r..r.......r..'..r.r
Factory Overhead Contro1....,......r..,, Various Credits.......,.......................
r....................
..rr.....
155 91145
l6rl OO
Work in Process (1r5OOSH altowed r $1O FO rate)....,.. 15,OOO Applied Factory Overhead..........,... ......o....r.......
16,1OO
15,OOO
I
C,lWter 19
509
I
lr
Pt 9-9 )APPEHDIX (Conctr.rdedl
I
>
Applled Factory ovgrhead ......r...........r....,.............r...............
15,OOO 650
Chlerhead Spending Variancg...o........r...r..............or................
OverheadEffielency VariancegllO rate r llt55o fH - lt5oO Slfl) .............r.....................r.r........ 500 Overheadfdle Capactty VariancoGt7flxed rata r (t t600 BH - 1t55O AH)l ....:...'...............r,o......o............ Factory overhgad Cohtroi.......r...........,..................,.-,...r.
Finished Goods (3'OOOunits r $i O.5Ostandard c(lst!.....,,..... Work In Process......o.............o..........r...r...r..rrrr......D.........
350
31,5OO
3l,5oo
AccountsReceivabre (3rroounitssotdx $rc salesprice)...,. {3,4OO Sa1gs tttr""ttt""tt.......r.r.o.r.rr....D..r....................a..a.....r.r....o Cost of GoodsSold (3rlOOunlts r $lO.SOstandard costl...,.. Finishgd
Goods '....r........o.tr.................o......r.rt..o............r,
16,5OO
43r4OO
32r55O 32,55O
Cost of Goods So|d tt...........o.......r.r.o.......................r..............
Matgriafs Purchase price variance-DyiErg..,.,......,....or....o...... 2r195 25 Matgrials Quantity varf ancg-.Dygs.............r,........!.........,,...t. 25 Labor Rate Variance............rr.....t..............o........o..........r....... t55 Materiafs Purchase price Variance_Cotton G|oth.......... Materlals Quantity varianc+--cotton croth.,....D......r..,.... Labor Efficiency variancg ......r.......,............,......,.......,.... Overhead Sp_en d ing Variance,....,..,................................. Overhead Efficien cy Varian ca ..r.....................,,............... overhea d I dle Capiclty Varian cr) .,..,...::.::::::...,...............
500 100 300 650 500 350
Pl9.IO APPENDIX
Materiafs(1o ooo kg Ae purchasedr $z sp).........,...............2O,OOO MaterialsPurchasePricg variancg,..,...,.,........r.............. 500 Accountspayabte(tO OOOkg Ae purctraieJ r $i.9S Apl 1 g,5OO Work in Process(90Ounits r 9 kg Se per unit x $2 Sp1......;.. 1 6 1 2 O O MatgrlalsQuantityvariancg'.:..............................,.........,...... Materiats(B 600 kg Ae issueor $z spt.:::::::.................. 1 , 0 o 0 17r2OO Work in Process(9OOunits r 2 SH per unit r $1O.5OSR)...... 1 8 , g o o LaborRateVariance((Slr.55 An-_-S_to.so sR) r 1,74oAH)... 11927 l-aborEfficlencyVariance(SlO.5OSR r (71740A|l _ 1,goosH))...,....r..........,.. 630 PayrollfSt r.ss AR r i,7do AH)........::::::::::::::::::::.::.:..:::: 20,Og7
tI
5to
Chagtor 19
Pl g-l o APPEIIDX (Concludedf Factory Ovgrhead Conttpl.....-...........'............................'...... 24rOOO VarlOur Crgd1t4...r....................................r.....o................t
Work In Procegg(9OOunlts r 2 SH r $13 FO rgtel .............ror. 23r4OO Applled Factory Oryerhead Applled Factory Overhead ldle Gapaclty Varlano SilO fhed rate r [2,OOOBH - I,74O At0' SpendlngVarlancc... Varlable Eftlclency Varlancc Str?var: rstc r ll,74o Alf - 1,8OOSHll Fixed Efticloncy Variance ($f O fir. ratc r 11,740 All - 1,800 SHll Factory Overhead Gontrol
2d,ooo 23,4OO
23r4OO 2rOOO 520 180 000 24,7OO
FinishedGoods (9OOunits r $65 gtandardcostt..........o......... 58r5OO Work In Procgss r..'...........................r..rr..........................
58t5OO
CGA-Canada(adapted|.Reprint with permiesion.
-T
L
I I
I
\i
I
f-
Chaptcr tg
L L
l
5tl
CASES
cl9-t (1)
t
I
b
! I t:
(21
The guotation implies that sactuaf'manufacturing costs form able basis for inventory costing becausethey we; incurred tha preferin producing the inventory, The notion that actuaf costs are the only acceptable costs for inventory purposeshas been ctrallengedby advotates of Accountants who advocate usinl stanoaru "o=tr-1orstanoard costs. believe that standard costs ate iore nepnesentativerepo*ing purposes of the true cost of the product than actuat costs. Ttr"v r"intain that r"t"n"us ars measunesof abnormalinefficienciesoiabnormal efficien"i""; therefore, variances cannot be inventoriedand should bs immeJiai"iv t""ognized in determiningnet income of the period-rather than p--#"o to inventories and cost of goods sold. Thus, tire costs attached t'o irre-product aru the costs that shoufd have b?:n in"uo"J, not the Many accountantsbelievethat u"ri"n""" costs itr"t rrur" incurrpd. do not have to be inventoried as long as standards ale currentty gut it standalds attainable. ano not up to date, or if they reflect ttreoriticat pe*orm-ancerather than perf ormance under t""=onib ty efficieni "onoition", irr"i, l-on""ptualty, th e variancesshould be split uet1vg.en,rr" departures from attainabrestandirds and til;;i;n o"r,ion tirai;it}" that does not. Most accountantsagree that unfavorabfe r"ri"ni"lresutting from the differencebetween standarus uaseJ on theoleticai parformanca and those based-onnormat p-erforman* "r,ourJ i" ti"ffi'i" product costs and pr''oratedto inventoiiu" "nJ-il"t iiiooo= sotd. n ; is ress agresment relating to variances.resulting fror; the diffeilr""'i"t,reen performance and standards actuat based;; ;;;,nd (attainabrelperforrnance. standard cost advocatesbefieveirr"lii-"=e variances should be expensedbecause they nepresent abnormal conditioi"-.'t,,"ny other accountantsbelieve that tirese t"ri*t"" nepnesent part of the actuat cost of producingthe goodsand, theref;, shourd u":irr"t"d as product costs and proratedto inventories and "o"t or goodssord. The three To"t-appropriateatternativeme$rodsof variancedisposition woufd require the ioltowingentries: {a} Cost of GoodsSolJ..
Finished cooJ"rn;;;i;:::::::::::::.::::.:::::::::.:::.:: r,l3l V a ri a n ce ...............
I
fb)
C o s t o f Go o d s S o td ......--- - ------ """""""""""o""' variance........:.::.:::"""""..
ltso0 l,soo
(c) Finish.ed Goodsrnr"ntorr::::::::::::::::::::::::::::::_::: , 1,soo variance............... .............:.:..:::::..::::
t,soo 1,soo
r ' lI
5t2
Chaptor 19
Ct9-l (Concludedl The first journal entry is in accordancewith the discussion in part (ll as. (3) the most appropriatEmethod of handlingvariances.Cost of Goods Sold is charged-withthe excess cost above what it should have taken to complete the proiect, based on a nonnal (attainable)standard. Tho costs stanivariancei| resuttingfrom the differencs between the theoretical goods and sold dard the normal standard should be proratedto cost of inventories,based on the relative proportion of the associated cost contained in each. ln the situation presented,the entire $l'OOOis charged to FinishedGoodstnventoryinstead of being prorated to inventories and cost and goodssold becausethe productionis includedsolely in finished goods inventorY. The second;ournalentry can be justified as an appropriatemethod for dispositionof the variance primarily on practical considerationsbut has litge theoreticaljustification. The practice of charging all variances to Cost of GoodsSold (or against current revenue!often has been justified on the grounds of simplicity,convenience,and immateriality. The last entry woufd be appropriatewhere it is desired to adiust the standard cost inventoryto actual costs. Many accountants would advocate this entry in the circumstancespresentedbecausethe inventory would then bi stated at actual costs of production.However,when this method of variance dispositionis foltowed,the asset inventory will be carried on the financial statements at an amount that exceeds the cost that should havebeen incurred.Thus, inefficienciesin operationsane being capitalizedas assets in the financiatstatementswhen this method is applied.
CHAPTER 20
ouEsTloHs DrscussloN O2Gl.
O*Z
O2O3.
O2G4.
O2$5.
O2O€.
nd aflect the per unil Ptodttt cosl. Dirrct costing toports Ete mote oasily undcctood by managemcnl becausc lhc Etal.mmi! f ollo* mrna genronl's doctsbn' rnsking Ptoc.r33s morc closely than do gal.ments. a\rorption 6l (d) Rrpodhg thc tctal fixed ccl lor thc perird in tho incorrrr rlatcrnent dirccts manag.rncnfs dlentian lo the relatirnship of such to Prolils. 6l (o) Thr dirninatbn ol allocated jcint fixed cet prrmitr a mot. objeclive appraisal ol incornr conlributions according to producls. tafes areas, kinds of cuslorners, elc. Cot-nclurnr rclaticnships are highli ghled. (f) Thr rinilarity ol lho undertying concepts ol diroc'l cosling and flexible budgels facilitatca th. adopibn and use of theso methods for reporting and cost conlrol. (S) Dircct coeling provides a means ol cGting invrnloqy lhat ir similar to managemenl's cqrcopl of invenlory cosl as lhe currenl oul-of-pockel erpenditurei necessary lo produco or replace the hvenlory. (h) Cle&al costs ate lower under direcl cosling because the m€lhod is simpler and dosr nol require involved allocalions ol fired cosis o special analyses of absorption data. (i) The cornputation ot product cosls is simpler and rnore reliablo under direct ccling because a basis lor allocatinglhe fixed costs, which involves eslimales and peraonal ludgment, is sliminatod. 0,20-7. Argumenls 8gainsl lhe use of direcl cosling include the follaring: (a) Separalian of costs inlo fixed and variable might be difficult, especially when such cosls aro semivariable in nalure. Morefixed c6ts{tc over, all coslsincluding variable at sorne level ol produclion and in the bng run. (b) Long-range pricing ol products and olh€r long-range policy decisions require a knowledge ol complele manufacturing cost, wtrich would reguire addilirnal separsto computalions to allocale lixed overhead. (c) Thc pricing of invenloricr by tho direct cotling method i3 not accoptable lor inco.r|c lax cornpulation purpo!os. (d) Direcl costing has not been recognized as conlorming with generally acccpled accotnling principles applied h lhc prepara' tbn of financial statomonls for rtockholclorr and lho gencral public.
Diracl cosls arc dirccl tnaletials, dirccl labor. and clhcr cost3 ditccuy assignrabb to e product ir r procrduro by which only Aj1qgl-Cailigg prirn costt plur variabb faclory ovrrhoad aro rttigrt d !o ! Ptoducl or irvrntory; ell firrd cods porbd cstc. aro srrUorcd wilh thc mrnulac' rt esrcietd Ptoduc{ €ir turo of e product end ircludo di?cct mat.tieb' dirrl labor, and lactory orcrhead. Thcs. catr arc chstgod againsl rcvcnuc Es s€sl of goods rold. or shovn on thr bahnco sheel as invenle rier of work in ptocett and finished gooda' P.riod costs are asseiatcd with thc passage cil timc and sre included as cxponggs in lhe in' cdrrc stalemerd. Under dircct esting, lired frc' tory overhead is trealed as a pcriod coet nther than !s a produc'l cosl. Under direct costing, only Ystiabl. manulac' are ircludcd in invcntory. Undcr ab' turing 6ts rcptioo costing (thr cunrnt. gcncrally acccpled method of cor'ling invtnlory for extemal rcporl' hg), all nranufeeturing coets, bolh variablt and tixed, are included h invontory. lt iB argued that lired manulacturing cosls 8te thc exp€nses of mahtahing productive capacfy. Such expenses ara mo.c closoly associatod with thc passage ol time than with produciict activity and rhould, thereforc, bc chargcd lo Period erp.nre ralher than to tho product. The direcl costing method ir useful lor hlemal roporting because il locuses attention on lho fixed-variable cosl relalbnshp and the contribulion margin concept. lt facililates managerial decisioo making, product pricing, and cosl conIrol. lt allows corlain calculalidrs lo bo readily rnade, guch as break-even pohts-and contributian mirgins of products, cales lerrilorios, operalrng divisions, otc. Tho leus on the contribution margrn (salos revonue less variabie costs) enables managemont lo cmphasizo prolitabilily in mshing shorl-run busincss decisions. Fixed cosls aro ncl oasiv cstlrollable in the short run and hence may not bo parlicuhdy relevanl for rho.l.run bushess decisistr. Argumenls lor thc urr c{ direcl cosling hclude tho lollrwing: (a) For profit-planning end decition.making purpo3es, mlnlgem.nl requir6r coslvolumo-profil rolelionship data that 6r. moro rradily eveilabb from direcl cort ltal.mcntr than from ab3orption cort rtalements. (b) Sincc lixcd laclory overhead is abrcrbed as a perird cogt, fluctuatbns in production and diffcrcncrr briwcen thr numbcr ol unils produccd ahd tho numbcr rold do
(c)
513
511
Clnpter fr (r)
Prbfitr dotorminod by dirrct cothg en not'trua rnd prcpor, b*llr cl lhr uclurixr cl fnrd prcductixt qtr thrt rn prn of tolel prcductbn corl. .nd invontory. Pradwtion rculd nd br porbb wilhort plrnl frilitiel, rquipmonl, olc. To dirrr g.rd lh€. fu.d str violdeo tho grrnl pdrrcipb cl mrbhhg co.t, with rov'rrnu.. (f) Tho olnirdim lrqn hvrn. ol tir.d str tory r.rultr ir r lowor figuro end @rut qurot red|rticn G||rrpodod *odrhg crpfd fq firerrciel rnrr),!b purpor. A2O€. Assrrnhg thrt h. qurntity cf rndhg invmtory b larger than thr qurntity ol btginning invrntory and lhr lilo mothod b urod, op.nling incqnr urhg dirrt strrp rpuld br rrnallor tun oprrating irrornr urhg abtorptbn corting. Diroct corling oxcludor firod lrctory ovrrhord fronr invonlorio boceul ruclr cotr rro conridrrcd to bo porbd cortr which rf. axponrod whon incunod. In cqrlrerl, ebrcrptin sthg ircludot tirrd frtory ovtrhred in invrntorio bocruro sirch cotr en suidond to br product ots, whbh aru rxprcrod crly whon thr prcdLnt arc sold. Whrn tho guentity of invrntory irrcrotrl during a poriod, dr.st c6ti1g producco a brrer dolbr ircroaro in hvrntory than obcorptbn ccoting, bocaurt firtd cortr aro oxp.nsod rathrr lhan cherg.d lo invrntory. Sincr e rmelbr anpunt of cuntrl prird sl ir chargnd epirut incornr undrr tht lbrorptioo corting mrthod whrn invonlorior incrour, ebrorptioo cating Incom. would br lergor thcn dirrct cotting ncgTl..
Q2G9. Thr brrah-ovm pcirl b the Xint et rtrbh costr and r.vcnua irrc h eguilbrium, rlowing noither pofil nor lora lor thr busirrsr. O2Gl0. Thc ccntrbutixr rnargh it lhr nsutt ol rrrbtract. n9 variablo cql lrcrr tho ralcs figun. Tho contributiqr margh indicatcr lhr arrpunt rvailablo . fq th.
[email protected] of tirrd co.t arrd lot proltl. o 2 G t1 . , (a) R(BE) = - F
t-v
or (ir *ordr): Brv$uo rt
tho Totst tir.d c6t brrakrvrnpc*rt= EJ,ilf,Gffilr por dollar cl ralos
(b) O(BE) =;L P_C or (h rords) Unilt of ubr at Total tix.d coot = broehrvrn pc*rt Cartribulbn rrrargin
product o2or2. (r) Dolr' of 'vonw #;1of (21 Volurrr oaorrtp{rt,rxprrsed h unrb, ptrcant of capacity, lelol, rnaatun|.
or lom.
othil
(3) (4) (t (0)
Totrl cat lin . Verieblo cod rna. Firrd coet rrrr,r pcirl &rl-rvon
m
Lorenr-
(8) Pnlil enr (9) Sd..litr. @o13. An rdpb of tho rrpra.d bohrvbr cl a firm.t frporrr.f end rtvrnur lor thr purp€o of csrdructhg r bn hvm ch.rf b uruetly nrtrictod lo tho qrtpr, lovrlr rt whi*t Uro firm i likrly to oponh. Artumplbor rbout thr lovrl of firod god, tro nlo of verirbb st, and salcs prbos rn buod qr tho oprnting srditisrr ard msn. rgrriel policior thtt will bo in olfrct ovor tho reoclrd ostpul bvob. Thesc oxp.cled output lovrlr roprcsrnt thr firm,r rrltvanl rangc, and thr sl-vplumr-prc{it rrbtlxrr}ripr r}ronn in e brodr.evtn ctrerl err applkrblo mly to output ltvob within thir rango. Tht bohavior of fixcd cod. variablo cod, md ralot prbco at tcvob ol orjtpul bobw or oboyr thr rebvenl rangc er. lik ty lo ruuft in an ontiroly dilforrnt rt of coolyoluntr-prc{il nlaticxrshiu bccauro of cfungrd op.trling csrdtbnr c nranagrrbl polbio. Tho trl Srat hr cct and nvtnuo lirer qr e breal. rvon cherl arc typically txtrndcd past thc uppor and lowcr lirnitt of thr rcbvant rango thouH no! thordoro, bo intrrprotod to mean that thcy aro vrJU for lhrao bvob of ouqpd. A bnakrvon chart rtr*ing cot-volumoprof. it relalicnrhigr for rll bvdr ol ovtput could bt drvolopod. Tho rhrpor of hr cod and rovonuo linrr in euch r chart could not, howcvor, bo trpoclod lo approrimatr rtraight-linr (linmr) p.ncrnt. By rcstrictingthc undorlyingccl.and . rov.nua bchavior aslumptionr in broak-ovon Inalys.s to a relativelynarrow output range (tho rang. orcr whi:h thr firm b likcly to opcrate), it ir urually poesiblolo rlsumo linear bchavior paltornr wilhoul any rignificant dietortbnr in sl-volurno-prc{il rc latianrhpr, thereby airnplifyng the analyris. tf tho rangr wer wtrich o firm ir likely to opor. a|l ir guitr widr, curvilinearfunclionr may bo ompbyrd; or it may bo dcsirsblo lo dcvclop e numblr of brcak.ovrn charlr, oach hlving ilr own rllovanl rang., for which thr undrrlying cort and rcvcnua bohavior arrumplionr erc valiJ. O2G14.Woaknesseshherenl h thc preparatbnand usc of brcak.cven analpis arc: (a) Whon morc thst ane product ir producrd, lhr cqrtribulicr margin of ooch producl will probably diflor. Accordhgly, a broak. ovon analyrb for tho urholooprratbn wiil not hdbat. tho csttribtuirn of rach preduci to firod co.t and thc volunr rcquirod lor oach product
Ctugtcrfr
(b)
Somo'costr en elrnosl impouible to dalsify ccrduJvcly ar bchg ri{rer fired avarbbh (c) Grnrnl rcqronic conditioor and othrr rrtrmal hcton rmy rflect ho dete urod h th. rrtsl)ttb. (d) In thr final enalyrb, fird coct b nlatod !o productir:n end ralor rn4 thrrofon, may drcnrtr romrwhat dur to docreard production and ralcr-cnd vbr vonr. (r) Ouilr oftcn cstr hcrcare tharpt el crrtah pcirn! in prcdraion and raler lcvett . and lhen levol or,lt until a ccrtain gmster rlagr of production andlor rahs ir rcedrcd, el wtrbh tino hc phrnanoncr ir rcpealcd ar production and/or talrr are agair ircreased. (0 Pedormancr murl bo conrlanlly comparod to thr bnal-ovcn analyab h older to determhr whrihcr thr csrdilirrrr that rxirlrd at tho timr of thr colculatlons havc heH lruc, and whether any changes have been cqrsUered. 42S15. (a) With cales pricr prr unit and totat fired cogl rcmaining cqrrtant, thr brcak.evcn poinl movcr up rapidly ar unil variabb cool ir increased; at thc samc timc. the brcak-ovon poinl moves down as unil variablc cost ir decreased (b) A decrease h fired cst krwerc the break. even poinl. An increase in fired cost npver the break-cvenpoht higher. Q2S16.The mangh ol salefy b a seleetedLbs fgure less break-evensales. The rnargh cl satety is a cushion agninst sales decreases.The greater the margin,lhe groatefthe cushbn againstsufferinga bsc. Q2Gl7. Cct-ye1g6r-profil relationshipi: lhe retatronship of pofil to sales volurne. Thb relaticrship is importsnt lo,rnnagement because ,rEvragoment lries el all timos to keep volume, cost, prrce, and product mix in a ralio that will achievc a desirod level ol profit. ,
5t5
O20-'t8.Thc.Tf,"9ty of Conrtreints lr r spccializad ycnion d dirud corUng for urc in ghorl-run optlmizaton dccirionr. A dittincUon batwecn TOC and dircct costing ir thgt TOC focuscc on only thc purely verieblc coltr rnd doa not consider dlrcci labor to bc puroly verieblc. Q20-19.Mosl cornpenict thrt deesify 6nt tnto ftxeO and variablc c8tcgoric! bcst dircst lebor ar verlablc, co In dirrl cottinE, dircct lebor i, arigncd to productr ar e wrleblc or incramantsl cort-of producilon. tn thc Thcory of Conrtreintr, dlrcct labor lr sdpuletcd to ba not purcly vsriablc rnd lhcrclorc is not traltcd ar an incramcntsl cost of output. Thc diffcrcncc betwccn thc contribution margln rnraruru ln dlrcct coillng snd thc lhroughput mcalurc in TOC lr that ilroct lebor lr onc of thc cost! daduclcd from sslcr to celculsle conlrlbutjon mergin, but dircct hbor is not r coEt to bc drductcd hom relcr in calculetin0 throughput Thcrc arc mrny dtflcrencs in Grnphesir bctwecn dlrcct corting and tha thc6ry ol conrtraints. For aremplc, whllc dlrect coitlng ir widaty ug6d er sn eccounling epproach foi i:t!"ln"t reporting of incomc and pioduci cort. TOC dcalr hcavily wlth thc improyorncnl ot conslreinl! or botilaneckr In . producllon syslcm. Q2o-20.Throughput ir tho rata at which a rystem gangratas moncy through s8ler. lt i3 cslculsted ar srlcr minur thc purrty varisbte coslq and ottrn th. only purcty varieblc cost ig lhc cost of materials. Q20-2l.Elevating a conrtraint maanr improving tha conslrairtimproving thc condltions at a bonlenecl In the lystsm. tts slgnificanca is grcatrst lf the constraint ls thc fightast one in ' lhc aystom: thcre, any improvcmcnt wilf increaaa lho totsl throughput of lhe entire 3yElem. An improvomentin product guallty can hetp elavalr a constraint bccausc lt can iaducc the workload on r bottlcnecl resourca. For oxemplo, ramoving - dctecilva unilt _bafora ralhor lhan eftor thsy roach thc bottteoeck meens therc wlll bo fewer units passing through lhe botilanock. Thig har approrimatetf thc samo cffect on thc bottteneck ai increesingita capacity.
\ \
516
Chapter2O
E)(EBCISES E20-l Operating income tor 2OA using direct costing:
Salgs (9Or0oor $1 21.............r.r
slrOSO,OOO
Variablecost'of goods sold (gOrOOO r Gross contribution margin Variable marketing and administrative expenses
aaaaaaaaaaaaa
$
aaa ta ao aaa
(9o,00or $2ol
Contribution
18,OOO
marglJl ........'.........o...r.......r.r.r...r...o....r............r,
s 702,O0O
Less fixed expensess FaCtory Overhgad .'..'................................o..
Marketingandadministrativeexpenses..... Operating
72O,OOO
$2OOTOOO
14o.ooo
incomg.............r.......r..r.,.....r.r..r.....,.rr................rr
$
340.OOO 362.OOO
E20-2 (1)
Variablecost per unit: . ST,OOOTOOO total variable cost
eO% manufacturingcost portion ql2oo'999- total variablemanufacturingcost
S4,2OO,OOO total variable manufacturing cost
S3O per unit
1n
Fixedcost per unit: S11,2OO,00O total fixed cost 59o/omanufacturingcost portion q_5,6oo,00ototal fixed factory overhead 55,600,00Ototal fixed factory overhead 160,000units normatproductionvotume Full cost per unit at standald .......................... Numberol units sold duringthe year.........,.... Cost of goodssold at standardunder absorption costing ..,,.r....,..r.,..,,......,,.....,...r.
(21
35 per unit
s65 x
lOO,OOO
s6fggooo
9 n i t " a c t u a l t yp ro d u ce d d u ri n g th e year ..,...,........ 14O,OOO Uni t s s o l d d u r i n g th e ye a r..,........... l OO,OOO Unit increase in inventory 4O,OOO St a n d a r dv a r i a b l e ma n u fa ctu ri n gcost per unit........ s30 Ending inventoty at standard direct cost ..............r.........t.. sl,20O,OOO
Chagterfr
5t7
E9,O-z(Concluded) (31 NormalproducUonvolume Unlts actually produced during thg ygar,..o..........,r..........o. Ercgss of budget over actual productiort .............r............. Fixed fagtory overhgad per unll...,....D..........o...o..............r.. Factory ovgrh gad volume variancg...,..-..,..............,,......o,...$ -
(4)
lgo,ooo l40,ooo
20,ooo $ss Too,ooo
Sales(tOO,0OO unlts r $f AOl
$ tg,ooo,ooo
Gtoss contributionmargin...D....,........
$ 15,OOO,OOO
Standard varlable cost of goods sold (iOOTOOO units x $?O unlt variable cost!.........r............r.......r...r......r.....r..r........ 3,OOO,OOO
variabfesellingerpense(sz,oooroOo variabfecost r 4avol.
2,9o0,000
Contribution margill ........,.'...............D.'...o...........o...r..........$ l2,2OO'OOO Less fired costs. ll'2OO'OOO aaaaaaaaaaaaaaaaaaaaaaaaaaaa
operating income undgr dirgct costing.......,,........,.,.....r.... $ I,OOO,OOO E20-3 (11 Incomestatement using absorptioncosting: Salgs(9'OOO r $SO1 .....,.'...........,......."...,....,...,.......,.......,... 27O,OOO $ Cost of goodssold (9r00Or ($lO + $S)l.....r,..........r.,...r...... 135,OOO Gross
pfofit.......r................r...r........r..ro.r.rr...r..o.......rrr..r......
(21
Factory ovgrhgad.,..or...ro.......................r,
$
-$
85.OOO
zzo,ooo go,ooo iBo,ooo
$COTOOO
Commgrcial erpens€S...,...,..................,.. so.ooo Operating incomg '....................,...,.........r,..,.r....,..........,.*
.=
50.ooo
Incomestatement using direct costing: r $30)..........,.... ....r,............,..r......... 9ales (g,OOO $ Variablecost of goodssold (9r000r $1o)................D....,..o.. Contribution marg ilt ...................or..,,,......... Less fired erpenses:
(3t
i3s,ooo
$
Less commercial expenSBS............'or......o...............r.......... Operating Incomg..o............r"....o...rr.........o..,............,,........
go.ooo
ll_goJqg computations explainingthe difference in operating income: Absorption costing operating income..,.....o,.,.....,...o,.o..r..... g5rooo Dirgct costing operating incomg.,,.........,...,.,..................... $ go.ooo Diffgrgnc8""..................r.....,o...................r.......................,. l_.(5,oogl Unlts produced during the period.....................,........,.,..r... grOOO Units sold during the period................,............ grOOO Unit decrease in finished goods inventory ...,...,....o. f f "OOOI Fired factory overhead charged to each unit of product under absorption costing .......................,........r 35 Differenco............ ....,.,...,.......r.......r....., g_ (SrOOO}
I
Chagterfr
518
E20-4 $6ro00 =
tEs2.OO
$e'ooo -
i-.eo
$g,ooo = $iorooo break-eyenpoint in dollars
-60
+ $2 = 5rOoObreak-evenpointin units $lO'OOO (orl $8'ooo - $,6'ooo - srooobreak-evenpoint in units
Stroffi-o
m-
5,OOO units r $2 = $lO'OOObreak-evenpoint in dollars E20-5 $ Dirgct 18bor..........
Variablelactory oYefiead
aa
Variable marketing gxpsnsG)...'.....'................o!......'.......r.r...r........'....r..
1.oo 1.20 ,50 .30
s__g,og
Totafvariable cost per unit
SalgS price per Unit.'.........'....o'...r..'............r.. $ 5.OO Variablg cost pgr U11it..r.............r....r.r..r.........r........".r..r....r.................. 3,OO Contribution margin per urtit.......o.......'..r.r................'..........o.....rr....'..S
2.oo
Fixgd factory ovgrfrgad.........'.r.......r.......t....'......r......rr.r.....r.......rr.......$15,OOO Firgd markgting erpensrg .......................... 5,OOO ..,r,....r..................r Firgd administrative expeflSg.......'.'..........,.'.....r.'..........,...rr..r.r........r. 6,OOO Total fixgd grpgnse,....r.....,..........,.....o...,....,.... r...........r. s26,OOO
(1)
326,000 total fixed cost
$2 contribution margin
= 13,000 units of salesto break even
(21
13,OOO units r $5 per unit = S65'000salesto breakeven
(3)
$26,00Olixed g.ost.+$1O,09Oprofit = i8,000 units $2 contribution margin
(41
18,OoOunits r 35 per urit = $9O,OOO sales
E20-6 Plannod salgs r.........o................o............,. Break-even sal es .....r........
......,..r,......o......
Margin of safety
of,stP -oo'90=o llryin 52,OOO,OOO
Planned saleJ
$2,OOO,OOO l r5OO,OOO
s 5oo,ooo = zs'h Marginof safetyratio
L L L L L L L
Clpptarn
E,.o-7' r{r l
- ,
L
$9r3OO .42
break-evensalos $l 5,OOO
$16'ooo = g2o,oooagtualsaleo
t2l
S'o99=
(31
PR = C/M r M/S; PR = .62 t .25 =.155 r .155 = $3rlO0 profit for the month 32O,OOO
L L L L
5r9
1 - .25
.76
E20-8
(r)
$3o'ooo = $so,ooobrsak-evonsaleg
(21
= $59'9oo = $o2,5oosalesfor the year T0'oo:o 1 -.20 .80
.oo
P R = C /M x M/S ; P R = .2 Ot.6O = .12
$92,500t .12 = S7,5OOprofit for the year (3)
gs
$82,5OO 25,OO0 contrfbution margin (38215oor .8o)..,..r...,........,....,.,..............$37,5OO Sal
aa..raaaa...aaa...a.aaaraa.ra..r.aaaaa..r..r.o......
variablecost stg2rsoor (l -.60)).......
L E20-9 !
Chip A
Chip B
L
Sales:
L
Variable cost: r 30g6)............r.... GIaOOTOOO 24O,OOO OOr "5oA1....,............,.... GfrDl,2OO,O Contri b uti on ma rg i n...r...o.,......r........ $560,000 $ Planned operating prcfit.........r.o...... Firgd cost .r..............,.........,.
I lb
I i-
(1 OOTOOO r $S! ..o.......r......r........,... (2OOTOOO r $61 .,,...o.............r.........
Total
$8OO,OOO
$l,2oo,ooo
$2,OOO,OOO
3OO,OOO 540,OO0 9OO,OOO $1,460 r O00 270.OOO $1.190.O00
5m
Chaptor2O
E20-10 Sales price per unit. Variablecost per un|t,.......r......... Gontributionmargln per ultit ......
Tbbles $110 50
Chairs $gs 20
s60
fixed cost $72O,OOO
_81_€ $l'5OO,OOOsales to break even
1 - ((Sso+ (4 x $zop * (9t 1o + (4 x $3s))l or alternativelp $72O,0OO flxed cost ($60 + (4 r $15)l * (911o + (4 r S35)l $lr5OO,OOO sales
rc
sales $1,50O,OOO to break even
= 6,0o0hypotheticalpackages
or alternatively; S72O,OOO fixed cost
360 + (a r Sis| CM
= 61000 hyryothetical packages
61000packages r I table per package 61000packages x 4 chairs per package 6,000tabfesr31iOpertable = $ 24,oOOchairs x $ 35 per chair = Total salgs to brgak evgn.....,...o....,. $l
= =
6,000 tables to break eyen 24'OOO chairs to break €ven
660,000 B4O;OOO r5oorooo
E20-11 Salgs price per unit ................-...r... Variablg cost per unit,..........r.....r,r.. Unit contribution margin.................. Expected sales mix,........,r,..........r... Contribution margin per hypothetical pickigo ..................
Produst L $20 12
Product M
s 8
s s
sls 10
x 2
s16
x 3
+
s15
= $st
521
Ctpptcrfr
(Concluded)
eo-1i
(11
fired cost S372'OOO = l2rOOOpackagesto brsak ovon margin contribuUon $31 = 24rO0Ounits of L 2 unlts of L l2'OOOpackagee r 3 unlts of M = 38,OOO units of M l2'OOOpackager r = S2O $ 48o,ooosales of L 24rO0Ounits of L r 54O,OOO sales of M 36,000 units of M x $ f 5 = Bfgak-gVgn
l2l
Sa1gS.t......r..................r.
9l,o2o,oo9
$372,OOOfired cost + $93,OOOprofit - l5rO0Opackagesto achieveprofit $31 contribution margin l5'OOOpackages x 2 unlts ol L = 3OTOOOunits of L packages r 15,OOO 3 units of M = 45,OOO units of M 3O,O00units of L x $zo = $ 600,000 sales of L = 45,O0Ounits of M x $ 1 5 675,000 sales of M Sales to achieve profit....D......,...r..... $1 1275,OOO
E20-12 (il
Variablg manufacturing CoSt........r......'.........r.........r.,......... $2to,ooo Firgd manufacturing Gost.,....,.,.........r...r..,..............,........., 8O,OOO Variable marketing expenso ..........,..r..,.........r...o..D....r. 105,OOO Fired marketing and administrative axpenses .r.,,,............. 6O,OOO Total costs to produce and sell 70,0OOunits...oo............,..., _$4s9,oo9
S455,OOO total cost 70,OOOunits
= S6,50sales price per unit to break even
(21
($80r9OO.+ 360,0O0) fired cost = Si,g52 units 38-$4.5o-(ro%r$B)
(3)
($ 1 2 4 ,o o o+ $ 5 o ,o o o)fixed cost 38 - $4.5o - (r 5% r S8l
=
8o,ooo units
CGA-Canada(adapted).Reprint with permission.
P
AnW20
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173
E2&|4
I
L
(i)
throughpuUunit =sales-materiats cost= $45-($fC+ ${) = $i:}0
, L
(2)
Maximum thmughput per mon0r is ${44000. Total thmughput tur a period is tre g3o/unit (hom rcquircmed f) multiplied by the number of units shipped; units are limited by ttre loyrestcapacdy operation, which ls Surface Prep's 4800 units per month: d800 units/monfi x $3olunit = ${44y000lmonth.
i
I
(3)
E2o|5
r-
(f )
No, Oreyshould not acquire tre equipment Gloss Coat ls nst the tightest constraint so increasing its capacity will not help.
(2')
Tgto,llaximum monfily tlrroughput will not increase'
(3)
Yes, an addifonal Surface Prcp (SP)crew should be hired. The increase in overall thmughput rnore thaniustilles ffre cost
(4)
Maximum ttrrcughput witl increase by about ${5'000 per montfi (500 unitsfnronth x $3o/unit).SP is the tiglrH constrain! so increasing its capacity will incrcase $roughput of the entire system until SFs improvement causes anofrer conslraint to become tfre tightest Glcs Goat, tre secon&tightest constraint presentfy has capacity 500 units higherifian SFs.
! ! !
Surface Prep is the tightest constraint with a dS0Gunit capacity.
.
: !
E2G'6 s
(1)
Yes, an inspection should be created just prior to Surface Prep (SP).For each 1,000 shipped, 50 defectirrcs enter SP-26, 1d and 10 arising in tlre tfree preceding operationq rcspectivcly. SP trstlre tightest constraintr so removing de{ectives priorto SP will increase total system tfrroughput At S30 throughput p€runi! the 50 added units (perthousandshipped)doiustify the added inspection.
(2)
Removingall defuctives just prlorto SP will increase tfie number of good units entering SP by 5U1r000or atrout 5"/o.Vyilfi SP presenffy handling 4800 units per rnonffr,a 5o/oinclease in units shlpped lE .05 x d80O = ?4r0.Additional thtoughput will be 240 unitstnontr x $30funit = f/r200 per mon0r. BGGau$eltre inspection will cost $1,800 per montlr, tre monfirly adrantage of the added inspection operationwill be Ft,200 minus $11800,or $5'4O0per nrcnffr.
s , \' ', ! \. '
I
I
ChwterZ0
521
PROBLEMS P20-1
ON IIIASTERPIECE TOOLCORPORATI Product-LlnelncomoStatement (ContribuUonMargin Approachl Ecctronlc Tooh
PncumaUc Tooh
31 '5OOIOOO
tir00O'OOO
Total StrOOOrOOO
Sslct.-,-....-.....o*...s--...roo.ru-
Locr varlrbb co.t of goodr told-..*.
5OO'O0O
7O0r000
lrOOr00O
800'0OO
3
SOOTOOO
Hand lpolr 35OO'OOO
2OO'OOq 33O0'OOO
Orocr.contrlbuUon mlrgh.....o-o.F. l-acr wrlcbb markcUng crpcnrc! (packlng rnd drlppln!).....-..-...-.-..
llr6O0rOOO
Contrlbutlonnargln
sl,3:to,ooo t
700,000 3 aoo,ooo
3250,000
25O,OOOt
loo,ooo 3 loorooo
3 5o,ooo
450'O0O
200'O0O
2OO'0OO
s0r0q!-
!
7OO'OO0 t
3OO,OOO 3
3OO'OOO
31OO'OOO
t
E|IO,OOOf
aoo,099- U9'009.
t
25O,OOO
1OO,99q
IOO'OOO
5OTOOO
Leu tracceblc thcd opanlc*
t
Manufacturlng MarkcUng (advertblng)..,.............-.. Totel tnccrble
lked arpcntc...-.
ProductcontrlbuUon-.*..-.-H--
l1!0'@_
Leo common lkcd arpontrt:
3 3r0,ooo
Manufuctrrlngl. MarkeUn92 AdmlnlgtraUon ...--.
Totel common thed crpcnrc3 --. OporaUngIncomc
IOOrOOO
150.O00 S $
550.000 IOO.OOO
r $1,950,000 abaorpUon coat of gmdr rold - $tTAOO,OOO vnrlablc costr - $250'000 traceablc fhed coct 2 Ssoo,ooo total marlcettng cottr i2sgrooo yarlabto openao - 3+5o,ooo advertlalng expenaa
525
Ctpptcrfr
P2A-2'
(rl
ROBERTSCORPORATION Income Statement For Year Ended 2O-
$1,3OO,OOO r $251 Sales (52,OOO gold: goods Cost ol Standardfull cost (52rOoOr $f 5! ...'...'..... $78O,OOO 2,OOO Net unfavorablovariable cost variancos '. SrOOO 787,OOO Untavorablo volumg varlancer.'.'.......r...... c 513'OOO Grcsr prlflt. Less commenclalerpenseo: Variableorponses (52'OOO r $11.,......o...... $ 52,OOO
Fired orpsnses
t80.ooo
Operating fncome under absorption costing
s
rUnlts budgeted for production during ttte year.........r......, Unlts actually produced during the year ....o.....................
Fired factory overhead chargedto gach unit.......,..,...,.... Unfavorablevolume variance $
232.OOO 281.O00 5O,OOO 49,O0O I'OOO
$s 5,000
ROBERTSCORPORATION lncome Statement
l2l
For Year Ended 20-
Sales (52,OOO r $251 Cost of goods aofd:
$1,3OO,00O
Standard variable cost (52r00Or $lO)...... $52O,OOO Net unfavorabla variable cost variances.. 2,OOO 522,OOO Gross contrlbution margin......D.....'...'...........................o.....$ 778,ooo Variable commencial expensgs (52rO0Ox $11 .....,,....,..,...,.. 52,00o Contribution margill ...........,.,r.........Dor.......... $ T26,000
Less firsd costs: Factory sverhead (5O,OOO units budgetedr $51
$25O,OOO
Commgrclal expensBs.........,o...,,...r...,...... 1 8 0 . O O O 430.OOO Operating Incomg undgr dirgct costing..,.............,Do....o....r. $_?egJgq (31
Operating income under absorption costing.......,..,.....,..... $ 2 8 1 , 0 0 0 Operating Income undgr dirgct costing...,o..o..i.........r....,.... 296.O00 D1ffgrgnco......t...............................................'.r'..'.......r..r..r
l__0_9'o991
Unlts produced during the year............o.o...,......i.........r...r.. Units sold during the year ......r.....,............o,......r...............r
49,OOO 52,OOO
Unit decrease in finished goods inventory. Fired factory overhead charged to each unit under
(3,OOO)
35 $
(15,OOO)
rI g
526
Chapter20
720-3 (1)
PLITCIDCORFORATIOH Income Statement For Year Ended 20-
Sales (48,000x $161 Cost of goods sold: Standard full cost (481000r $9)............... Net unfavorable yariable cost yarlancos,, Favorable volume variance' Gross proflt Less commenclalerpenses: Varlableerpenses (48'OOO r $l)...............
$768,0OO 9{32'OOO lr0OO
Fixgd oxpenses......o..........t......r..........r.....
(3,OOO}
€o,ooo $338,OOO
$48rOoO 99.O00
147.AOO
OperatingIncome undgr absorptloncosdng ...,o...........r.,... $_1e,Lqoo tUnlts budgetedfor productlon durlng the yoar................. 50,OOO Units actuallyproducedduring the yoar...,r.....,..r.......,.,... 51,000
(r,o0o) Fixed factory overhead charged to each unit
tzl
x 3 3 s (3.OOO)
PLACIDCORPORATION lncome Statement ded 2(F
Sales (48t000 x $f 0) ......r'.....................'..............,......o.r.r...$768,0OO Cost of goods sold: Standard variable cost (481000x $61......., $2g8r0OO Net unfavorable variable cost yariances.. 1,OOO 289,OOO
Grosscontributionmargin.......................o.............,, Variablecommercial expenses(48,000x $11 Contribution
margiJ| ..........r.....r..r....r.r...t.....r...r.r.r.r............
Less fixed costs: Factory overhead $15o,o0o _ (50'000 units budgeted r $3)...-........,.. Commerclal expenses.................,..,...r..... gg.0oo Operating income undgr dlrgct costng.,.......,..................., (3)
Operating income under absorption costtng,..,,.......o.,r..,... uperating income undgr dirgct costing........................o..... D iffg rg n c,e .........'....r....r...............
$czg,ooo 48,OOO $431,0O0
249,OOO
$1_g2J9g $19{,OOO t82.OO0
$__9,OOO Units produced during the year.......r.........,...,..r,................ 51,OOO oo . . . . ' . . r . . r . r . . . . . . . r . . . . . . . . . . . . . . . . .
U n i t s s o l d d u ri n g th e ye a r.:..,......... Unit increase in finished goods inventory Fixed factory overhead charged to each unit under absorption costing Difference............
48,OOO
3,0oo
s3 $ I,ooo
l
I
Qppterfr
527
P204 I
(rl
Quarter
Absorption costing; Sa1 gS r..a............r.......r.r..r...r...r..........t..........
Dirgct matgrlals......,..............,...... Dirgct 1abor..........'..,r.r....'..'...'......r.......rr..r.
First Second $2OO,OOO s26O,OoO 3 3O,OOO s 2O,OOO 6O,OOO 4O,OoO
45,0OO Variablg factory overhead..,...........,......r..... g2,4OO Fixgdfagtory overhoad......'.................'..o.r. Cost of goods manufagtured....r,......,......... $197,4OO Beginninginventory Cost of goods available for 8a19..r............,.. sl97,4OO Ending inventoryor..'..........'................'..r.'... 65,800 t Gost of goods so1d......................,...r........o.. s 1 3 1 , 6 0 0 GrOSS pnOfit..............'...........r....rrt..............t $ 68,400 Marketing and administrative oxpenses,.... 25,OOO Operating incOme ....'................r.......r......... $ o3.4oo
SOTOOO 62,40O s 152,4OO 65rgOO
s2l8,2oO
3o,480 2
s187,720 3 72,zao 28,OOO
s_9.289
| $1 + $2 + $1.5o + ($62,coo + 30,0001= $6.s8 $6.58 x IO,OOOunits = $65,9OO 2 $1 + $2 + $1.5O + ($6Z,COO+ 2O,OOO) = $7.O2
(21
$7.62x 4,ooounits= S3o,4Bo Directcosting:
Quarter First
--
$260,ooo
Dirgct matgrials .......,..r....r..r..............r...,.... $ 3O,OOO Dirgct 1abor...........................r.....,.....,,........ 6O,OOO Variable factory overhead........r.................. 45,OOO Variable cost of goods manufactured......,.. $135,OOO Beginning inventory......o...,.....r.....,r............ Variabtecost of goods availabfefor safe.... $l35,OOO Ending inventory........,.....,.,................,.....,. 45,OOO Variable cost of goods so1d,..,....,................ $ go,ooo Gross contributi o n margin,...........,...,......... $l l o,ooo Variable markeUng and administrative exp9ns9s.............. 1O,O0O Gontribution margin...............................r.... $ 1 o o , o o o
$ 2O,OOO
....ir.o.......'.rr..........r..r...r......r...rr.....r....
4O,OO0
3O,OOO
$ 9o,ooo 45,00o $135,0O0 18,OOO $1 17,OOO
$143,O00 13,O00
$13o,ooo
t-Hfi".iffffffi:............. .......$ gz,4oo Marketing and administrative
$ 82,400 15,OOO
Total fired expenso Op e ra ti n gi n co me
$ 77,4oo s 52.600
15,OOO
J
Second
s2oo,ooo
Salgs
..r.................,,. ....r .......r .........,..
$ 7z,4oo E 22,609
'528
Chapter20
P2O-4(Concluded|' (31
Quarter First Second $4g,4oo $ e4rzgo 22,AOO 52,600
OperaUngIncome under absorptioncosting Operatinglncome under direct costing...... DiffefgnC
g ............!..........r.r............i...r.......t
$2O,8OO
glg'3291
$65,8OO
s 3O,48O 65,80O
$os,goo
s(3s,320)
ChangeIn inventoly under absorptioncosting: Ending inventory,.....r....r..............r.......,.. Beginning inventofl ...........r.r............r..r..
lncreasg(decrease|in invento[.....,....... Ghangein Inventoryunder direct costing:
o
Ending inventory......,i,....,...,...D........o...... $4s,ooo Beginning inventorlf................o.,,.....r...... o Qrri nnn In crease (decrease) in inventor]......,...... wvtvvv Differencs between absorption and dirgCt
COSting.......o.....rrr....,.........r.....r.r...
P20-5 (11
_$2o,8og Capital Intensive
S 18,ooo 45,OOO
s(27,O001 s (8,320)
Labor Intensive s30.00
Salesprice ....,........, $30.oo Variablecosts: Matgrials............,...........,... ss.oo $5.6o Direct labor ....,....,.,.. 6.OO 7.20 Variablefactory overhead.,..........,........ 3.00 4.80 Variablemarketingexpens€s............... 2.OO _l_6.0.9 2.oo 1 9 . 6 0 Gontributionmarginper uflit......,..........,.r sl o.40
sg
(al
Gapital-intensive manufacturingmethod: Fixed factory ovgrhgad..........r.'....'..............r.rr.'...r..r...r $2,44O,000 Fixgd markgting grpenses....,.................r.....,..........,.... 5OO,OOO Total fixgd cost...................., ...........r..r......t...
_S2,94o,oog
S2,940,OOO fixed cost
s l 4 contributionmargin per unit
= 21O,00O units of sales to break even
(b)
s1,32O,oOO 5OO,OOO
_S1,829,ogq
S 1 , 82 0 ,OOO fi re d co st = 1 7 5 , O O Ou n i t s o f s a f e s to break even SlO.4Ocontribution margin per unit
-\
Clppter fr
P2O-5,(Concludsdl (21
Klmbrgll Companywould be indifferent betweon tho two alternaUvemanufacturing methods at the volume of sales for which total cost was egual under both alternatives.Let O equal the quantity of units of product manufactured and sold.
6lo r al
+ $2,94o,oo0= l$ig.oor el + $f ,B2o,ooo
- $1,82O,OOO = (Stg.eOx Ql - ($fS r O1 $2'94O'OOO $ i ' 1 2 O ' O O O= $ 3 . 6 O r Q 311'lll = O
Total cost will be the same for both manufacturing methods at 311,l i l units of sales. P20-6 (11
The number of units to break oven at a per unit sates price of $38.5o: Variable costs: $ 60,000 4O,OOO Variablg factory ovgrhgad,.r.............. 2O,O0O Variablemarketingand admlnistrative erpensgsr,.......o...... 1O,O00 Dirgct 1abor.......,...r...r,...r....
$13O,0OO
s?o'ooo+ $15ro99 = Y,ulo=o,o = 3,60obreak-evenunits s38.50- $26.00' 512.50 'S13O,OOO -r 5,OOO units = $26 variablecost per unit
(21
units that must be sold to produce an $1g,ooo profit, at a g4o per unit sales price:
$45'990+ $18,ooo= 90o- $zs (3)
The price castleton must chargeat a SrOOo-unit sales level, in order to producea profit equalto 2Oohof sales: Let r = S,OOOx= 4,OOOx= r =
g
su?'99o = l,soo units S14
sales price per unit 5,000(926)+ S45,OOO (.2x1 + 5,OOO $175,OO0 $Cg.ZSsalesprice per unit CGA-Canada(adapted).Reprint with permission.
T 't
ChWter fr
5g P2A-7
I
92
E4
Salegprlce Per unit Less: Variablemanufacturingcost per un|t......,..,.... Variablegelllng erpenso per unit 15ohof sales pricel
$121.oo
$ 96.00
9.OO
8.8O
Total varlablg cost per unit...........,....i.............
$1 3O,oO
$1 04.8o
3 50.oo
$ 71.20
ContrlbuUonmargin per unit
$180.OO s176.00.
!
*S160sales price per unit In 19A + (9f 00 r 107cincrease in 19Bl Total fixed factory overhead ((2O'O0O B2b + 4Or00OB4ts)r S25 per uni$,....,.....,,...... Slr50OrOOO Totaffixed selling and administrativaorpenseS............r..r, 2O7r33O $1,7o7,33O
protit + (1 - .4!f fired cost + (S135,OoO S1,7O7,33O l2B2\ x $5O GM eachl + (3 B4b r $71.20 CM eachf pretar profit $1,7O7,33Ofixed cost + $225,OOO $313.60CM per package
=
$1,932,390 = 6,i62 packages si!13.60 6,162 packagesr 2 units of 82 = 121324units of 92 9,162 packagesx 3 units of 84 = 18,486units of 84
v
Clpptcr fr
-
,
P2Gg (l)
-
53'
The 2OAsales mir in units is l:2 (7O,OOO tape recorders; 14O,OOO electronic calculators). Lat r = Number of tape recorders to break oven 2t = Number ol elastronlc calculators to break even At break ovon: Salec = Variable cost + Frred cost gt22.5or) = $8r + 2 gi9.5o$ + $l,32o,ooor $tsx + 2 $15r + $,45x = $8r + $l9r + $1,32O,0O0 $8Or = $27r+$1'32O'OOO $33r = $1,32O,OOO r = 40,OOOtape-recorders 2r = SOTOOO electronic calculators r Fired costs; Factoryovgrhgad.o.,...,..r.............r I 2gOrOOO MarkeUngandadminlstrailvo...... ITO4OTOOO
Tota1...........,.....................,......, gl!92o,ggg :
Chaptorfr
,Q
t2o€ (Contlnuedl The followtng lormula can bc used to calculatc the galcs dollars required to carn an aftertar proflt ol 9oh on ralec, using 2OBestimates:
2l
s = vc(sl+FC+ #]} Where: S VC FC p T .
= NecessarYsales dottars = Variable cost stated :ur a pencentageof sales dollars (Sl = Fixed costr = Desired profit stated as a pencentageof sales dollars (S) = Income tar rato =
.4esr+$1r3??rqoo2*-'O9(Sl' (1 -.551 + .2S s = .465 + $1r377rOOO .34S = Sl'377'OOO S = S4'O5O'OOO s
'lVariablecost rate for tape recordels and electronic calculators: Electronic Tape Recorders Calculators
Satesprice...,..........
Per Per U n i l % U n i t .,.........'......91!.OOl00oh$?g{q lOO.O%
%
_
Variabfecosts: Matgrials
..........rr,..r....,!..............'..r...'.
$ 3.60
$ 3.60
3.3O 2.2O Direct labor 2-OO 2.OO Factory overhead............,. TOtalvafiable COSI...............,.,......... $ 7.8O 52c/o $ 8,9O 44.5oh
Contributlonmargi11............r.......t........... $f-.n
&
qU.lo
W
Composito variable cost rate per dollar of sales: (.2O r Tapo recorder variabte cost rate| + (.80 x Calculator variable cost rate| = .2O(.52) + .8O (.445) = .l04 + .356 = .46 zFired costs: Fagtory ovgrhgad.............,.,...............,..,...r....,,.'..'.......,'. $ 2SOrOOO I 'O4O'OOO MarkeUng and administrative
s
ooi:u,:::.:::::::.].].::..:::.::::::::::::::
Chagter2O
533
P?IO-A.(Goncluded) (31
Let
x = Number of tape recorders to break even 3r = Number of electronic calculators to break even At break even: Sales = Variablecost + Fixed cost $lSr + 3($20xl = $7.80x + 3(g8.9oxl+ $t,37Z,OoO 9l5x + $6Or = 7.gox+ $26.ZOx+ $trgZT,OOO $75x = $34.5Or+ $1,377,OOA $4o.sor = $1r3z7rooo r = 34,OO0tape recorders 3x = 102,O0Oelectronic calculators
P2A-9 (11
(al
In order to break even' Almo must sell 5oo units determinedas follows: O(BE}
=
E P-C
$100,000 3400_s200
=
5OOunlts
where F = fixed cost, p = safes price per unit, and c = variable cost per unit. (bl To achievean afteptax profit of $24o,ooo,Almo must sell 2,5oo units determinedas foltows: a =
F*"
p-c
_ $ 1 O O , O O 0 + ( S 2 4 O , o O o + ( l -_. e$oi )O) o , o o o + $ 4 o o , o o o S 5 o o , o o o =F=-66_-
$4oo_s2oo
= 2,500units
wfierER F, and c are definedthe same as in (lxa), and n is the after-tar profit objective.
Chapter20
534
P2O-g(Conctuded| l2l Almo Gompanyshould choose alternaUve (a! because it will result in the largest aftertar Profit. Attematlvc (al: unlt ralct prlcr x 350 unltrl + ((3{OO- 3lO prlcc rcductlon} r 2,7oOunlta} Revenuc = G34OO = !14O'OOO + $972'000 = tlrllaOOO VarfablcCoct = 32OOpor unlt x (350 unltr rold + 2r7OOunltr to bc roldl = i810,000 Atter-tar Prcflt= (Rcvcnuo- Varlablo C5gt - Fhod CorQ r (l - Tar Batel r (l - "t) = Gtl,l12,ooo - 3o1o'o00- 31OO'Ooo) = 3{O2,OOO r.6 = t241,2OO Alternattvc (bl: Revenuc = Gi4OOunlt asler prlcr r 350 unlts) + ((9400- 3SOprlce reductlon)r 2,2OOunitg) = 3140rOoo+ $814'Ooo = 3954rOOO VarlirblcCoct = {320Oper unlt r 35O unttr} + ($2OO- t25 coat reducUon)r 2,2OOunits) = 37O,OOO + 3385,0OO = $4.f5,OOO Atter-tar Proflt= (Revenuc - Varlable Coct - Fked CosQ r (1 - Tar Rate) = S1954,000- $455,000 - 3100'oo0) r (1 -.4) = 3 3 9 9 , 0 0 0r . 6 = $230,400 Alternattvc (c): Rwenuc
= CI4OOunlt rabt prlco r 350 unltrl + $4O0 r 11- 5% prbo reductim) r ?rOOOunits) = 314O'O0O+ 370OI0OO = 39O0,00O
vartablo Cost = izoo per unlt r {35o unltr aold + 2,ooo unltr to bs aold} = 9470,00O After-tax Prollt= (Revonuc - Vartablo Coct - Fhed Coge r (l - Tax Rate) = ($9oo,ooo- S47o,ooo- Gll0o,ooo - 31o,00o cost reducUon))x (1 -.4) = S34OTOOO r.O = $2O4,00O
* \
v \
-
-
Clppter fr
P20-70 (1)
Egtimated brpak-even point based on pro forma incomc statement 3819t ttttt"""............tr.........................r................................
$l orooorooO
Varlablc costs: costof goods80ld...-....r-...........t.'....,..... $6rooorooo Commlssionspaid to agents................... ZTOOOTOOO8TOOOTOO Contribution margill.....'.............r....................o.o.....r......,....
$ ar"ttrt*
Gontributionmarginratio - $. ?'oo0'ooo = 2oo/o CIM $t0r0oo,0oo ' $loorooofired cost , = $5o0,o0obreak-evenpoint zortffi (21
Estimatedbreak-evenpointwith the companyemployingits own safespen;ons: Variable cost railos: gost ol goodssold to sales (g6rOOOrOOO + gIO,OOOTOOO)........
600h
Commissions on salgs.......r.-......r......r.........r............D...........r.. 5% Totaf variablg cost ratio...r...'..r....,..r..or...r...,................r..,... 65%
contribution margin ratio = 1 - 6sohvariable cost ratio = 3soh Fired costs: Administrative"..'.o...r..........'..'...r............r......r...!r.....r.r..I es manager "t.........r...r..........r........r....o.r.....,....o.,.,.ro.. !af
$1OO,0OO 160,000
Salariesof satespersons(3 x $30,ooo)....::::::::.....,.........
go,ooo
Total fixgd costs.'..................'.........,...,..r...r.,..r..,.,r.....
_$3sg,oog
S35O,OOO fixed cost gsoh CIM
= SI,OOO,OOO break-even point
536
Chapter2O
P2O-10(Concluded| (31
Estimated sales volume to yield net Income proiected In pro forma lncome statement with Independentsales agents receiving 25ohcommission: Total Income bgforg Income t3I ..........'r..r..!r.....'.........r.....r.t
Fired cogt Total lixed cost and pJEfit...,.............................
Sl T9OOTOOO lOO,OOO
_Eooo,ooo
Variable cost ratios: Cost of goods sold to sa1gs.................o....,....,.. Gommissions on salgs .......'...,..............r..... Total variablg cost ratio .,..,r,....o..r..,.,.,....
600/o 250h
_ *
g50h w
Gontribution margin ratio = 1 - 85% variable cost raUo = 15oh fixed cost and profit S2,OOO,0OO 15% CtM (41
= S13,333,333safes
Estimated sales volume to yield an identical income regardlessof whether the company employs its own salespenionsor continues with independentsales agentsand paysthem a 25ohcommission:
. v
Total cost with agonts = Totalcost with companyb receiving25ohcommission own sales force
-
(85% variablo cost r sales| = (95%variable cost x salesl + $100,00Ofired cost + $350,0O0fired cost
-
29ohxsales = s250,000 sales = $1,25o,Ooo
Chapterfr
c20-l' (ll
537
CASES
Becausa star Gompanyuseg absorption costing, Income from opera$ons la Influcnced by both sales v_otumeand productfl; volume. sales volume wag Incrcased In the tlovember 3o forecast, and at standard gross profit ratag this would incroasc Income-from operafion" lv SSri-oo. XorrLJ"i--during this same period, production volume uras belo* it forecast causrngan unprannadvotumeva;anc; ;i $;ffi. e January I Tho vorume variance and the increasedmarketingerpenses (due to the lo% Increasein sales) overshadowedttre aoaid pronL trom ""1"", as folours: InCrgaSgd 881O8...............r...............r.......r...
s26,800 27',2OO $ 5,goo
Increasedcost of goods cold at 8tandard... Increasedgross profit at standa1d.,............ Less: Volumg variancg ...rr....o..........r.........r...... $6,OOO
lncrgasgdmarketing erpenso.,.....,........, Decreasein income from operations,.,....,..
1r34O
7.340 (1,7401 -$
t
Chapter20
5g
C2A-1(Goncluded! l2l
Star Company coutd adopt dlrect costing. Under direst cosUng, fixed manufastirrin-gcosts would be treated as period costs and woul.dnot be asJigneOto pfoductlon, Gonsequently,earningswould not be affected by votums, but only by sales Yolume.Statements prepared on a proA-ucUon direct-costlng basis ars as follows: STARCOMPAMT Forecasts of Operatinq Results for 20-
Foracasts as ot JanuarvI November3O .,....,......,... $268'000 $294r8OO
Sal e3........o.....
Variablecosts: Manufacturing Markgtin$
$182,OOO $2OO,2OO' 14r 74O l3,4OO
.t.....t....t..t...to"to""""o'ot"r"tt' .....t........r.tt......t......."""o"tt"ttttttt
sl95,400 s214,940
Total variabl g CoSt .........tt.'.'."""""""'r"' COntfibUtiOn mafgift,.............r,.............".'o...'..
Fired costss Manufacturin
g .......t............o.ir.o.....""tttrt"r"
Administrativg o....t........................""'r"t"""
S 72,600
I
79,860
$ 3O,OOb $ 3O,OOO 26,80O 28,80O
Total fi xed cost'....'........r......r.....-........-..' $ 56,800
I
56,800
$ 15r8OO 9-23'960Incomefrom operations'......".......r.....r...r..,..... 'S182,000x l looh = S200'20O Reconciliationof differencesin incoms from operations: Januaryl: No differenceIn absorptionvs. direct costing because fixed factory overheadwas expensedin both cases. $3O,OOO lncome from November 30: Ooerations $23,o60 DifeCt COSting.r..........r..r....................,............................r 14,060 ...............'......'......' AbSOfptiOn COSting .,....,,...... Diff g rg n cg................r.......r.......
r.....r..'......t
"r " t""
ttt ttt "tt"
'
s 9,ooo
Fixed factory overhead included in cost of goods sold at standard: in January 1 forecast November 3O lorecast (S3O,0OO s33,OOO ....:- ........ + l Qo h sa te s vo l u me i n crease) 3O,OOO ...,.' ,....... J a n u a ry 1 fo re ca st...........'
s 3,ooo
Underapplied fixed factory overhead Diff grgncg..................1'................'...........r...............r..t.'..
6,OOO S gtOOO
Clppter fr
539
c20-2 (rl
In absorpuon costiDgrBtscurently omployed by RGB Corporation, factory overheadis considereda product cost rather than a periodfired Firad tadory overheadis appfied to production based on a normal cost. capacityof I'ooo,ooo units. Thu3,the fixed factory overheadis applied to products in the samo manneras variable costs, even though it does not vary with production.In addition, lf production ano sai.s are equal duringthe year,fired factory oveihead is deferred as part not of inventory costs-(whenproductionerceeds sales)or releas"o ,pon sales of the Inventory(whensales erceed producUon)During2oA, productionexceededsales, rcsulting in a portion fired factory overheadbeing Inventoriedin finisheigooo-s-ratherof the than being
expensed in 2oA. This resulted in 2oA operatin! income being targer than lt woufd have been ll all fired factory overhead had been charged against 20A sales revenue. Then in 2oB, sales exceeded produc-
tlon, resultingIn morefired factoryoverheadbeingctrargeo against salesnevenuo than was incurredii 2oB.First,RniJtreogioos were 2oB sotd out of inventorywhich meant th9 part of fired factiry overtreadthat lhaf was incurred in 2oA and inventoried in 2oA was charged against
2oB sales revenue.Second,fired factory overhead,^r"" uid"raiptied in 2oB becauseonly 85o,ooo units lvere produced (isorooo units less than normal capacity used in determining itre tactory overhead cd In an unfavorablevotumevariancethat was chargediaie). This resultto the cost of goodssold in 2oB. Both of these occurences increased the cost of goods sold and resulted in a reduction gnoss of profit and operating income in 2OB.
5
Chapterfr
ffi
C2O-2(ConUnuedf l2l
(rt
ROBCORPORATIOII OpcnUng lncomo 9tatamcnt For the YearsEndedNovember30,20A and 20B (h thourend$ ?OB
20A,
30,ooo Vrrlrbb cst of goodr rold: g0OrOOO unltr et 35,00--IOOTOOO unltr rt 35.OO-*TOOTOOO unltr et 3550**@ntrlbuUon nrrgln *...*,.-s-. Fh.d.pcntc$ Fllcd frctory ovcrlrced D...s.'. 8cllhg rnd rdmlnlttntlv. -.* OpcnUng
tr)
311,2OO
.3r500
tr'5oo 5,350
3p5O
t 5,850
t4,5OO
33'3oo
33'000 1.500
.f'5OO
3 lro5o
0
Incomr ....'.-......o'o...ts
4"800
f "5OO
RccmclllaUon: 204 OpcnUng lncomcrbrorpUon corUn g .,.-.....--.{ OperaUng Incomod lrcct coaUn9,...........-.,.......,.
3 900
Dlfferrncr
Dtffsroncr eccounted for rr followr: hvcntory changr undcr rbrorpUon cocUng: Endlng Invcntory: 30O,0OO unltr rt 38,00..., 150,000unltr rt 38'80,... BcAlnnlngInvcntory:..-.......
208 3
o
1,050
3 9oo
r ro*r
tZragg 31,320
0
32r4oO
SOO,0O0unltr rt 38.00.... hvrntory changr under dlrcct coaUng: Endlng lnvcntory: 3OO,OO0unltr at $S.0O.... 150,ooo unltr at 35.50.... Baglnnlng Inventorp
2,1OO
3 (1,080)
t1"500 $
825
1,5OO
O
3OO,O0O unltr at 35.OO.... Dlflcroncr
o4lt
(s75)
1,5OO
t
eoo
3
{4o5)
.u
Clpptrfr
541
Cz.G.?(Goncluded) (3)
The advantagesof direct costing for internal reporting include the followlng: (al Direct costing aids In lorccasting and in erraluaungreported income for internal managementdecision-makingpurposes,becausefixed costs alt not arbitrarily allocated between accounting periods (or among different products, eafes territories, operating dlvisions, etc.!. (bl Fired costs ars raported at Incurred vatueg (and not absorbed values|' Increasingopportunityfor monoeffective controt of these costs. (cl Profits vary directly with sales volume and are unaffected by changesin inventorylevefs. (dl Analysis of the cost-volume-profit ralaUonshipis facilitated, and management is able to determine the brsak-oven point and total : profit for a given volume of prcduction and sales. The dlsadvantagesof direct costing for Internal reporting inctudethe following: (al Managementmay fail to consider properly the fired cost element in long-rangepricing decisions. (bl Direct costing lacks acceptabitity for external financial raporting or as a basis for computingtarable income. As a consequonce,additional record-keepingcosts must be incured to use direct costing. (c) The separationof costs into fixed and variable elements is a costi-y pnocess.In addition,the distinction between fixed and variabtecoit is not precise and not reliabteat alt lEvelsof activity.
c20€ (11
(21
Daly would determinethe numberof units of Producty that it would have to sell to attain a 2oo/oprofit on sales, by dividing total fixed costs plus desiredprofit (t.e.r2oohof sales price-perunlt multiplied by the unfts to attain a profit) by unit contribution margin {i.o., sales price !o% per unit less variablecost per unit). lf variablecost per unit increasesas a pencentageof the sales price, Daly would have to sell moneunits of Product Y io break even. Because the unit contribution margin 0.o.,sales price per unit less variable cost per unit) would be lower,Daly woutdhave to selt mora units to coverthe fired cost in order to brreakeuen.
i
t -r
Chapterfr
t12
C2O-3(Goncludedl
(31
The llmitatlons of brpak-eyen and coat-volume-profit analysis ln managerlal declslon maklng follow: (al The snalyslg lg fundamentalfy a gtaUc enalysis' and, In most casor' changeo can be determlned only by recomputlng ltsults. lf a breakoyen chart la used, changes can be shown only by drawing a n€Yv chart or geries of charts. (bl The amount of fired and yariable cost as well as the slope of tho eales llns, ls meanlngful ln a defined riangeof acUvity and must be redefined for actlvity outside the relevant range. (cl The analysisls hlghly dependent upon a meaningfulgeparationof llred and varlable costs, whlch may be dlfficult to obtain In actual pracUco. (dl The analyslais based on a slngle mir of producta. lf the mlx ls erpected to change,the rpsults must be rpcomputed. (el The analyslsassumesthat productiontechnology (i,e., labor producUvity, level of automation, and product specificaUons| will be unchanged.ll changes In productiontechnology are erpectpd to occur, the analyst must consider tho expected effects on costs. (0 The analysisassumesthat selling prices, input prices' and other market conditions will not change.Erpected changes must be IncorporatedInto the analysis.lf a rango of possfble changes can occur, e different rasult must be determinedfor each possible corlbinaUon.
CHAPTEN27 DISCUSSIONQUESTIONS @1-1.
Dillcrential6t b thr ditference h the cct of allrrnative choicoc. Thc cconqrrist calb ruch cdb marginal, and the engineer calls them ircnrncntal. A21-Z Marginal cosl (or ditlerential cost) is the cost ircunod by increasingthc present outptrt The coeil,lhenfore, would nol have been hcuned il -additional lhr u n i t r h a d n o t b e e n m a d e. Marginal cosling (or diract costing), on the o,trer hand, is a cclhg approach h wtridr crly variablc rnanulacluring cost! are charged to ' prcducls, and thur to invenlory, while fixed manufacluring coelt ar. lreated ar period coslr and are charged olf withourtbecoming psrl of hventory cools. @1€. Incremcntal coslr are important in decision rnakhg, bccausc the least cosily or most profitablo allemative cannol be determined unless . incremental costs are known. lncremenlal coslr are lhe costs that musl be incurred in order to cornpletesn €ctivity that is being conriicred. These co3tt must bc known h oder lo onrpare each arrailableEliernative. O21-{. Differentialcets do nol clrrespond to any pe. eibb accounting calegory, because they are oriented loward the future rather than the past and lhey treat producl costs on a differential rather than a total cost basis. Furlhernroro,cor. tain costs relevant for ditferentialcost analysis (o.9., opporlunitycost and imputed cost) are nol recordod h lhe accounls. Conversely,certain costs recorded h the rccounts (e.g., fixed cosls thal will remain urchanged) are inelevanl for dilferential cost analysis. The diflerential cod corrceptis a corcept for cosl analysis and nol cosl accumulatbn purposes. O2t-5. The flexiblebudget b uselul h differenlialcet analyses,because lhe incrementgbelween each ditferenttevel ol ouiput representtho ccl thal must be incurred il additisral business is undertaken.As bog ar lired costs rernah con_ rtant under all rates o{ oulpul, variablecosts are alwala the ditferontial costs. lf fixed costg change in the flexiblebudget,differentialcosts will includethe incremenlalelementof fixed cogl rellectedin the llexible budgel O21€. Historical costs are usually irrelevant because they have been created by a past decisbn lhat cannot bc changed by a luture decision. Historical costr obtained frorn accounling rec. ords oflen include arbitrarilyallocatedfixed cosl thal rnay not be relevantto dilferentialcoet analysis.
g3
@,1-7. Variablc corl ir important bccauso it can always be idantified as a differential cost. However, dillerentbl ccls msy also includr addltiqtal fixed cctr. O21€. Sunh coeilsare incccrerable ccts that ar not relevanl b futuro decisisrs. O2t-9. A fixed corl would bc relevant in deciding bctwecn altcmstiver il the lhed erpenditun ir an oul-of-pockot cost required in ordor to undertake an allemative (e.g., the cet d rcnting eguipment needed lo provido sulficienl capacity in deciding whelher or not to accepl an offer); or if a fired erponcfture can bt avcii ed by undertakhg an altemalive (e.g., supervi. eory ralaries that will be discontinued in the evenl of a plant cbeing). Q21-10. Oppoatnrty coctr are the measurablovalue ol an opporlunity blgassed by rejecling an alternalive use ol resources. 021-1 1. Appendir Lhear prograrnming b a rnathematical lechnique decigned lo argial decision makers in detcrmining thc allocalbn of resources that would be reguired to mEximizeor mhimize the objeclive lunctim; i.e., it b a tool that can be used by business ,nenagerll lo determinethe mix of inpuishecersary lo maxirnize contributbn rnargin or minimize cost. Linear programming is an algorithm that maximizes or minimizes a function ol several variables subject lo one or,Tpre con. slraints.The functionbeing optimized and the conslraintl sro agsumed to be linear wilh respect to produclion activity. Q21-12. AppendixThe unit costs usod in linear pro_ gramming problems are the lraccable variable costs. Costs murl be traceable lo the prcduct and variablc with respect to prcducticr quantily in order to affect changes in total po. duclion cost and total contribution margin when changes in productbn quantity and mix occur. O21-13. Appendix(a)Thearea bounded by the tinee AB, BC, CD, and DA b calfedthr sohrlbn space because il represenls thooe quantilies and cqnbi. nalions ol standard and doluro models lhal can be produccd, given the availablecaprity o{ thc grinding and polishingmrhiner.
!
Ct@ter 2t
544 (b)TrlangleBCF represenlslhose of slandardand comblnations dolura modelsthat could bc PtD duced by thc poltshingmaclrlnes hJt mt by the gdndingrnaciinee. TrlanglcCDE reposonte$c lovol ol productlonthat tho gtindlng nracfrhcscouldatlain,bul nol th. poliahfngmacfilnor. (c)Polnt C denolesthc oPtimum solutbn bocauseanYolher level of snalnablcprodwtbn will result ln a srnallertotal contdbulionmargin. ll can bc identiliedbY com' putlng lhe lolal conttibulionmargin availablelrom thc productbn and sale of thc combinatlonof standErdand delure modelsdcnotcdby cach corncr pointand chooslngthc cornorpoinl wilh thc largosltotal conltibution margin.Altematively,a seriesol CM lines can bc construclod, which havc a slopc cgual lo -l multipliadby lhc unit conlribution marginavailablelrom lha produd
identifiedby thc horizontaleris, dividedby thc unit contribulion marginavailablotrorn Utc prodrcl idontifiedby tn verticsl 8xb. Thc ptofit lino farthestfrorn lhc ori$n. poinl A, rcPtts.nb lht gtcalosl totel contrlbullonmargin. and In thb casc, il Passasthtottgh Poinl
c.
021.14. AppendixThcsimplexmsthodi3 an ilsrativc ptoaas tul finds lhc oPtimumso|tr tion to a llnoarpmgrammingProts lem. Thc simplexmethod,which is based on malril algobta, is a syslematic way ol cvaluatingsacfi cor- nor point in the teasibloaraa. Tha prooassbeginsat thc zero level of prodrclionand systematicallyrnoves lrornonc comctpoht to anothcruntil tho optimalsoluuonis found. Each movc provitJeslhc lsrgosl por unll in the objeclivofunc' improvement tion.Th€ ptocesscontinussuntil lhe objsdivc fundion can no longer be improvod.
I
Clnpter 2l
545
E)GRCISES F27-7 Saleg ($1.90 r 5 0OO kg).............r....,...........r........
Gost to manufactut€: Dlrcct materlalr ($.eO + $.0i| r 5 OOokg).._... Dircct labor (3,50r 5 O0Okg)..,.. Factoryoverhead: Indirect labor ($.2Or 5 000 kg) ...........,....... Power ($0OO+ 3O'OO0) x 5 0OOkg).,.r......... SuppliesS1.02x 5 OOOkff)...............r........... Maintanance and repair ($.027r 5 000 kg) Deprcciation (i3r00o + 24 months),..........-j.. lnsurancg($,OOZ r 5 oOOkg)......,.....,......,,.r Payroll
targ!.......oo.......r......r........rrr....o.....o..r
Gost of goods producedand so|d,......,.................
$9,ooo s3,O50 2,5OO I,OO0 100
'too
135 725 35 160 .7.205 s1,795 150
Gross profit contributiGtll ..,............rD....................r Administrativg gxpenso......D....ro...,.................,..... Profit contribution
from accepting new business
s1.64s
E21-2 (1) Estimatedcost of the additional loo,ooo units: Ma te ri a ts(($ 1 5 0 ,OOO /1SO,OO0 units) x iOO' 0OO units) D i re ct l a b o r (($ {f z,5oo / 15o,oo0units) x loo,ooo units) .... Variable factory overhead
slOO,OO0 75,OOO
( ( $ 7 5 , 0 O O/ 1 5 O , O O , u n i t s x) 1 0 O , 0 O Ou n i t s ) o r
($125,o0oat loo% capicity - bzs,ooo:Jt dol%capacity) Fixed factory overhead (9125'o0oat 1ooo/ocapacity- $f oo,oo0at 6o% capacity) Total differential cost of manufacturingthe additional 10o,o0o units '.........o.......'...............,......o...,.rr.....r............r
{2}
5O,OOO 25,OOO $25O,OO0
Total cost of producing 250,O00 units in Janua4n
Materials .........D, Direct |abor....,.....r.......... Factory overhead:
Variabfe. Fixed Total cost
....,...
Budgct for 15O^0OO Unitr
$150,OOO 112,500 75,000
10o,ooo $437,5OO
Diffcrcntial Cost for lOO.OOO Unitg
$too,ooo 75,OOO 5O,OOO 25,OOO
$2gg,ooo
Total Cort for 25O.O0OUnltg
s25O,OOO 187,50O 125, o00 t25,OOO J68Z@
l r\
546
Chagter2l
E21-2 (Concluded) Saler price rcguirsd to achieve a 2Oohmark up on production cost:
(31
Production cogt per unlt ($6871500+ 25O'O0Ounits)..,....r...........r $2.75 Plus 2Oo/cmark up on cogt ($2.75 r 2O%l .55 Safer price reguired to achfeve 2Oohmark up on cost............o..... $3,3O
E21-3 Revenuefrom ttre rpecial cale (15,0OOunits x $12,5Oeach).. $1BZ,5OO Lesr differontial costs: Direct materialr ($2O,OOO + lO'O0Ounits) x 15,000 unftsl $3o,ooo Direct labor (($3S,OOO+ 1Or00Ounits) x l5rOOOunits|.......
Additional overtime premium on apecial order Variablefactory overhead(($1Or00O + 1O'0OO units) x 15rO0Ounits).......................,,.ro.
Additional fired overhead from equipment
52r5OO
l0r0OO 15,000
t€nta1...... 7,OOO Variable marketing oxpen3es (($201000+ t 0 r O0 0 u n i ts)xl 5 1 0 0 0 u n i ts) ........o..r .......^..., 3OTOOO i44.5oo Additlon to annual company profit resulting from special 3a1e...........,.....,.......
q
Chapbr2l
547
: !
l
F214
No, Hunungrtonshould not accept Lufkinb offer because it would be $5'OOOcheaper to make the part.
|-
Gost lf purchased from Lufkin (1O,OOO r ttf S) Cost lf manufactured by HunUngrton: Direct materiab... Direct labor....,o.r variable factory overhgad ............-.o.......,......r.. Rent from thlrd party forgone lf part
!
manufactllF9d........r...........r..t......r...ro...r.r.....
Additional fired factory overhead eliminated lf part purchasedfrom Lufkin (1O,OOO x $3)..,. part Savings lf manufactured by Huntin!fto11...,....
s180,O00
s2O,OO0 55,OOO 45,000 15rOOO
3O.OOO 165.000 $ ,|5.ooo
This solution assumesthat a monoprofitable use of the fucilities does not exist than that derived frcm the saving of $is,ooo. oth;;;, ir woufd be preferable to buy Part M-l from Lufkiriand'use Huntington's facilities for the monoprofitable activity.
I
S
e3-5
\-
The company ehculd purchase the pistons from the outside supplier because lt woufd cost $6,oo0 less than manufacturing them at the Tlcson plant. The differential cost of manufacturing pistons at the Ttrcson prant: Dircct matgria|s.r.....r...........r........,......t..r...r..... $i 6OrOOO' Dirgct |abor.........r....r........oo.........r...r.......r.,.....
SOTOOO
Variablefactoly overhead(2Oo/c r S24O,OOOi.... 48,OOO Incrpmsntarfixed cost for machineryr6ttri.... gorooo lncrementalfired cost for additionai supervisol ..........,..r.o................
Total differential cost to manufacturr
4O,OOO
80ro00 pistons..........o..r...r.r....,.,.......,....... $3SgrOoo Gost to purchase g0,OOOpistons lrom Wichita Machine Works (ge.COper piston x SO,OOO pistons)...r..,......,.,,..,............r........... 352rooo Cost savings available from purchasing the pistons from the wchita Machine w-orks rather than manufacturing them at the TUcsonplant. $ 6,O0O
I
-
548
Chapter 2l
E21-6 (ll
Yes,the sales managert pnoposalto drop Tift from the product line and increasethe produetlonof Mift should be accepted because it will determined as follows: Increasethe companyb income by $4,OOO, Contribution margin from sale of Tift: units)...,. Revenuefrom sale of Tift (Sor T,OOO Less variable cost of manufacturingTifts
$czrooo
Materials($Z x T'OOO units|....... $14'OOO Labor stl x 7r0OOunits)............. 7r0OO Variable factory overhead ($f x T'OOOunits!.......o.....,.... T'OOO 28'OOO Gross contribution margin from sale of Tift ..,.. S14,OOO Less variable markeUngerpense from sale of Tift ($1 r 7rO0Ounits|..................r..........,...,.. 7ro0o $ 7ro0o Contribution margin from sale ol4,0OOadditional units of Mift: Revenuefrom.saleof additional Mift {$lOr4rOOO units}.......,..r.....r....,..,......,........9{OTOOO Less variable cost of manufacturing additional Mift: Materials ($2 x 4r00Ounits)......, S 8r0O0 Labor ($2 x 41000units|..,.......... 8r0OO Variable factory overhead ($1 r 4'OOOunits1o.................r 4'OOO 2OTOOO Gross contribution margin frpm salo of additional Mift..................r..........., 92or00O Less yariable marketing oxpense from sale of addiUonal Mift ($f r 4,OoO'units|.....,....,r....o. 16,000 4'OOO Additional contribuUon margin from converting capacity to to production of 4'OOOadditional units of Mift...,......,......... $ I'OOO Additional advertising expense required to sell 4,000 additional units of Mift ..r............................,.......r..........,..... 5r0OO Additional income from dropping Tift from product line and converting capacity to production of 4,000 additional units of Mift...............r....'.'..r.........o..'....'.
r.........'...r........
$ 4,ooo
-
\
Clppter2l
E2l-e (Goncluded) (21
Montrealshould considerwhether dropping Tift from the product line will result in decrcassd sales of Mift and Lift in the long run. For erampte, if the three products ara complementary,customers may prefer to maintain only those Eouncs3of supply from which the full product line is available. The present ability to sell moro Mift by dropping Tift may be a short-run condition.lf this is a concern,the cost of resuming Tift production at a later date should also be considerad. CGA-Canada(adapted). Reprint with permission.
E21-7 Silver Polish per Jar Sales price..,...
,.r,,............,............. $a.oo $ .4o 2.50 .30
s3.20 Contribution margin .......r...r......r.......r. Opportunity cost from further processing rather than sefling Grit 332 (7/D4 r ($2.0O- Sl.60)).r,....,.......,...,........ Ngt contribution margin per unitr.................................,,....
$
.80
.lo !_ ,tg
$5,600 avoidable fixed cost + $.7O = 8,OOO,the minimum number of jars of silver polish that must be sold to justify further processing of Grit g37. E2 1 - 8 (1)
Direct tabor hours (DLH) = 1,000,000doses to be packaged required for the job I,OOOdoses per DLH = 1,000 DLH Direct labor ($S x I 'OOOhours) ......,..,,,........r. s5,OOO Variable factory overhead ($2 x l,OOODLH)....,.. 2,OO0 Administrative expense 1,OO0 Total traceabl e out-of-poc ket costs.............
_gg,ogg
Minimum price per dose
=
Total traceable out-of-pocket costs 1,
= .sPlo9?= = $.ooe l rOwr.rrvuu
1 - -
; \
Chwter2l
sfl
E21-e(Concluded) l2l
Marimum allowable = Marimum rsturn after tares (l - TaxRatel return belore tarog =
'Og
FZoi=
!!
'O9
=
so_=
-t5 r r o iorr 15o/o
Total traceable out-of-pocket costs (from requirement(1ll--r-.... $ g,ooo FiXgd laCtOry OVgrhgad ($5 f I rOOODLFI r.........o.r.....'..'..r........... TOtal lUll COStrr....................o.............r...........t..............t....r....t....
MaffmUm allOWable f6tgfn 115% f $1 3rOO0),...,........r.............o'..
5rOOO
$13,O0O 1,95O
TOtal bid priCe...............r................r......r.......r.r..o..........t.........t... :S14t95O
Bid price per doso =
Total bid price doses ITO0O,OOO
sl4.950 = s.o1495 = iFociFoo (3)
(4)
The factors that Hall Companyshould consider before deciding whether or not to submit a bid at the maximumallowableprice include whether Hall has orcass capacity,whether there aro availableiobs on which oarrlings might be greater,whether the marimum bid of $.O15contributes toward coveringthe frxed costs, and whether this iob could lead to moFo profitable businesswith Wyant in the future. The competitiveenvironmentof the industry should have been consid' ered by Wyant Memorial Hospitalto determinewhether or not a lower price could be obtainedthrough competitivebidding.The hospitalshould also have consideredthat cost-plus pricing is not usually viewed uni' formly by prospestivebidders, is difficult to compute lor products produced in smass' quantity,and is better suited lor products that are uniqueand high priced.
Chapter2l
55',t
v3-0 Franchlsefee collections per day Averagegllss rovenuagper tnanchiseper dEl|............,.......... $ soo Numbgr of franchiSOS............'..................o........o...o..r.............. r 42O Total gnoss rBvenu8.......r.....o......'..............r'............orr.......r.r... s2lO,OOO Franchisg fgo ............. x .25 Avgraggdaify franchisetge collgctiofls..........,.,o.......,..r......... 52r5qg _$ First proposal(i.o.,use local messongerservice to collest and mait checks only): Averagedaily franchisefge coflegtions,.....,..........,...............o s 52,500 Days savgd.,...r,..
x2
Total float saved.,,,,.
s l 05,OOO
Beforg-tar opportunity cost.'..o...."..........,r.......ot.r..........r..,..r. x 15% Avgragg annual savings.....'.r..o.r...................,..............,.r.t,...r.. 1 5 , 7 5 0 s Lgss cost of mgssenger sg|'icg............r...o.......r...,.r.r,....,...r... 2O,OOO
Annualreductionin incomeif pmposalimplemented.............
_s (4,2sO)
Second proposal(i.o.,use local massonger.servicewith a lock-box arrangement): Average daily franchise fee colteetions ....,....,r...........,.,.......D. s 52,5OO Days saved.............r........................r..r.r.....r.r..........i..r..........r,
x5
Total float savgd r....'.......................'.......r...........,...... $262,5O0 Before-tar opportunity cost ..!,,......... x 15o/o Average annual savings.....r..........r.........r,,,.,r..........-...............
Less costs: Messengerservice
$ ss,375
aa
a a a aa a.
ra
aa
a a a
Gompensatingbalance ($iS,OOOr i5yo)...,......
$2o,ooo
2,25O 22,25O Annualincreasein incomeif proposalimplemented....,,.,...... l?Jr5 $
I
-
'
Chagter2l
552
Ezl-10 Silk-gcreen method: circuit Prepare tcraon 17 1/2 hours r 2O'OOO bOafdA f $6.5O).........r.................................r...r.
circuit Scrsen patterns (1/3 hour r 2O'OOO bOafdC I $0.501......r.........................r................
$l95,OOO #t,333
TOtal cO8t.................rr.........
$238,333
AZ-17 pnocess: $ 65,000 circuit boardsx $6.50) Labor (1t2hour x 2O'OOO and equipment Monthly cost for materials 48,OOO rental gnd operation ($41000r 12|.............--.... TOtal
GC)3t..........'..r......r.r...r..............o..................t.
113,OOO
Annual savings from changing from silk-screen method tO thO ngW AZ-l 7 prOCes3..........'....r.........r.r.....t..
$125,333
H
Chapter2l
553
E27-11 APPENDIX
Let Mr Ml Te Tr.
= = = =
marking board as.semblodin automated assemblydepartment marking board assembledin labor assembty depirtment tack board assembledin automated assem6ly department tack board assembledin labor assembly oepirtmlnt Me
Mr-
Tr
Tr.
Salgs price per unit........o..................$60.OO $60.00 S4s.oo $4s.oo
Less yariable costs: Direct materials:
$ o.oo s 6,00
BaSg ...........r.....
6.00 S 6.00 14.50 14.50 7.75 7.7s Frame .r.................r.................... 8.25 8.25 4.25 a.25 Direct labon Cutting Departmeftt.....,...........,. 2.OO 2.OO 2.OO 2.OO Assembly Departmellt ............... .60 3.OO .60 3.OO Variabla factory overhead: Gutting DepartmeDt.....,.......,.r.,. 2.45 2.45 2.45 2.45 Assembly Departmellt ...........,... 3.30 2.25 3.30 2.25 Variable marketing expens€s ......,. 3.OO 3.OO 3.OO 3.OO Total variable costs per unit....r.,... $ 4 0 , 1 o s 4 1 . 4 5 s33.35 @ Contribution margin per 1111it............. $19.90 $18.55 $11.65 $10.30
Covering
Objective function: Maximize CM = $f g.gO Ml + $i8.55 Mr- + $t t.OS Te + $iO.3O TrSubject to: .2O M^ .05 M^ .15 M^ OM^ .O5 M^ 1M^ 0M^
+20 + .25 + .15 + .O2 +O +1 +0
Ml Ml Ml
+ .2O Tr + .2O Tr. < 3O,OOODLH In Cutting + .05 Tr + 35 TL S 4O,OOODLH In Aesembly + .15 Te + .i5 TL s 25,OOOMH In Cutting
M!+ Ml + Ml + Mt+
O .05 O 1
Te + Tr + Tr + Tr +
.02 O O 1
Tr Tr. 7r, Tr-
s 1,5OO MH In LaborAssembly S 5,OOOMH In Automated Assembly ) 3O,OOOunlts eales contract > 3O,OOOuntts salee contract
Chaptorzt
. 5r1 E21.12 APPENDX'
Let L = the number of legal pads R = the number of rcgular pads Objectivefunction: MaximizeCM = $f 8L + $12R Subject to: minuteslabor (2 peoplex 7.5 hour r 60 minutesl 6 0 boxes daily marimum demand (3O0boxes per week + 5 work daysl
2OL+lORs9OO
L+
Rs
OU
L + R ( 60 boxesdaily'demand 50 4E
40 30
10Rs 900minutesol labcr
20 10
0
'r0
20
30
A = (L=0, R=O) B = (L=411, R=0) c =(L=30,R=3Ol= D =(L=O,R=60)=
60 50 = (S18Xo) + = (318x4tt) + (318X3o1 + (S18Xo) +
40
70
80
(312X0) = (312X0) = (812X3o) =
(sl2xso)=
90R SOCM $a1o CM S9OO CM <- Maxlmum CM S72O CM
CGA-Canada(adapted).Reprint with permission.
Qppter 2l
555
E21-13APPENDIX Graphicmethod: Objective functlon: Marimize CM = 4 a + 3 b Constraints: Za + b I 'OOO Time a+b 8OO Leather a
When:
a = O b = 11000 Time b = gOO Leather No b Buckles
't200 1't50 11 0 0 1050 1000 950 900 850 800 750 700650 500 550 500 450400
s
4OO Buckles When: b = O: a=5OO e=gOO a=4O0
TimeConstraint
Constraint ,Bocxle
'l(n
300250 200 150 100
Leather Constraint
4n
A-ll
s 0 I 1ls_01lz s o ls s o la s o ls s o lo s o iz s o ia s o lg s o l r o s o l l l s o r l 2"5 o r 1 0 0 2 0 0 3 0 0 4 o o 5 o o 6 0 0 7 o o B o o 9 0 0 1 o 0 o . 1 1 0 01 2 0 0 1so0
Tlying values at each of the corner points,
A=(a=o , b=o); 4(o) + 3(61 =g OCM B = (a= o--, b= Boo);aioi + giabot= $2,aoo cM c = (a = 299, p = 600);cizbol+ sioooi= Sz,ooocM <_ D = (a= 499, =
p 2oo);cicooi+ sieooi -' = Szizoocii E = (a- 4o0,b = o); nicooi + 3iot = Sr,ooocii
Optimum combination woutd be 2OO a and 600 b 2OO (4) + Goo (3) = $2,6OOCM
:
Chapter21
sffi
E21-14APPENDX Graphicmethod: cost function is: Minimize C = $3x + $4y Subiect to constraints:
4r + 8Y 7r+2y 1.51 + 5Y
q
,
( 1 , 3 .s )
3.5
,,',K%w
Product a Constraint
r.5* I 0
Possiblesolutions: Points A
x
v
o
B
1
c
5
D
10
7 o 3.5 3 1.5 15 o 30
3x
4y 2A 14
3r + 4y
6
21 30
o
$28
t7
-+
OpUmumgolutlon: Uge 1 ton of x and 3.5 tonr of Y tor a mlnimum total cost of 317
Chapter2l
557
E21.15 APPENDIX
Let x = poundsof hardwoodper batch Subject to: x + y y = pounds of softwood per batch ,gr + .5y .2x + .5y Minimize:C =.sOX +,4OY 30.000
I
] FEASIELE AREA
.2r . .5y>6.000
5.000 x. Pounds Ot Hardwood Der BalCh
Gorner point B values: , 2x + .5 y= 6 '0 0 0 . 9r + .5 y= 1 2 ,OOO . ox = 6 ,0 0 0
x
= lo,ooo
Substltute:
.2(lo;oobJ+ .sy= 6,ooo ,5y = 4,ooo y = 8,O0O
Cor ner point C values: .2x +.5y = 6,000 x + y=24,OOO
Multiplyby 2z,4x+ y = l2,ooo -r+ v=?9.99o
'6r
= ff33
Substitute: .2 (2O,OO0) + .5y = g,OO0 .5y = 2,OOO y = 4'ooo Tryrngvatuesat each of the corner points: -ol+
A = (r = o. v = 24,ooo!; $.19! g,sooc s.4o(z4,ooo)=$ B = {x=1o,ooo, y= sioooiii.:qiro,oooi*i.oo( s,ooo}=$ 8,200 c+ c = (r =2o,ooo, y = e,oooii$.soizo,oooi. i.co ( 4,ooo)=$1i,600c
optimalsolution:1o'ooopoundsof hardwood per batch groo0 poundsof softwoodper batch resurts and in a cost equarto tho Sg,2oostandard-perbatch
Chagtar2l
5g
PROBLEMS P21-1 (il
The dlfferenUalcost analyslsfor the GlasgowIndustries' order for I 20,O0Ovalves lollows: $2'160'000 tncrementalrevenue($18 per unit x 120'000units) lncrementalcosts: Variablecosts: Dlrect materials ($5 per unlt r 120'0OO
unitsl
$
Direct labor (96 Per unit r 120'000 U nltSl
.....o............o...
t..t..........tt......t.....
'
8OO,OO0
72O,OOO
Variableoverhead(36 x 1/2 hour per unlt r l2OrOOOunlts).....r..".D......i..oo...
36O,OOO
Shippingexpense($1 per unit r I 2OtO00unitS)..o...........................t..... 120,OOO Total variablg costs .....r.............r.'......$1,8OO,OOO Fixed costs: Supervisory and clerical costs (12O,O0O + 3O'OO0per month x 1,848,O0O pgr 48,000 month|...............r............ 2r000 $1 Incrsment to pretax profit as a result of aCCeptlng thg Offgr..........r............r..'.'.....r............r.'.....r'..
tzl
$--XZ'99O
The mlnimumunit sales price that Sommerscould accept without reduc' ing net income must cover all differentialcosts (i.e,,tho variable costs plus the out-of-pocketfixed costs).Therefore,the minimumsales price per unit would be: Variablecost per unit: $ 5.oo Dirgctmatgria|s.............,....r......................... Direct labor
..,....r.....i..,.,..r,
O.OO
Variableoverhead($6 per hour r 112 hour per unit)........r................................... 3.OO Shipping grpgnse....o............o..........,....r.......,
1.O0
Additionalfixed cost per unit: Supervisoryand clerical costs (S12,000 total cost + 3OTOOO units!.,........................
.40 M i n i m u m u n i tsa l e s p ri ce ...................,..r ........r ..$15.40
L
Clnpls2l
559
P27-7,(Concluded) (31
SommersCompanymanagamentshould conslder the following factors before accepting the Glasgow Industries orden 8' The effect of the apeclal order on Sommers'aales to other customers at tfie rcgular sales price. b. The possibillty of establishing contactg in the internaUonal marketplace as a nesultof the sales to GlasgowIndustries,which could lead to market erpanslon. c. The wear and tear on machinerythat might increase maintenanco and rcpairs and result in a prematurereplacementof the machinery. d. Possible retaliation by competitors who may learn of Sommens' deep price-cutting actlon, including risk of a price war that would disrupt rcgular selling prices;
P21-2 (tl
lmpact on net income if APAaccepts bid: Submittgd bid..........rr.............................r.o..,.,.....r Lgss salgs commissiofl ......,...,...............,...,rr.....r. Ngt sa1gs.....................o.........................trr.rr.........
Variablecosts: Dirgctmatgria|s......r.,,................r...........,......... 32gr2OO Dirgct
1abor...r.t....................r.r.o...D..r.....r...o.....r
Variablefactory overhead(3O%of dirgct labor)* .'..r......'..........,..................o......
$t65,000 | 6,5OO s 148,50O
56rOOO
l618OO
l02,ooo $ 46,500 18,600 $ 27,9OO
"J:*J";Tl',f,*::::::::::::::::::::::
'The lactory overheadrate is Soohof direct labor dollars. Based on the erperiencefor the fiscal year snded September-3o, the rate due to the. variablefactory overheadcost is gO%($2,ZSO+ $7,5O0). (21
Framarwould realize a positive contribution margin of $1z,goo before incometax, increasingnet incomeby $7,380,if the $l 27rooocounteroffer is accepted: $ 127,OOO 12,7OO
sl l4,3oo 102,OOO $ 12,3OO 4rg20
g__L389
ffi
Chapter2l
Pzl-2 (Concludedl (31
The lowest price that Framar could quote on this machinery without + ,9f. This bid woufd cover reducing lts net lncome ls $1131333($IOZ'OOO and the exactly the sum of the variable manufacturing costs ($I OZ'OOO| l0oh sales commission,thereby resulting in no increase in contribution margin and no income tax.
(41
lf Framar Inc. accepted all of its work at prices similar to the $127,OOo counteroffer, a loss situation could result. The analyses for requirements (11,(2),and (3f vveroshort-nrn decisionsIn situations In which Framar had ercess capacity. Consequently,the analyses concentrated or covering only tha differential variable cost. However,wfien all orders ane considered, Framar must cover both its variableand its fixed costs. A bid for all work similar to the one for $127r0OOwould not cover Framarb fixed cost. Galcufationsrestating the most recent entire fiscal year on the $127,000 price/variablecost relationshiparo as follows (00Osomitted!: Salgs ($l StZSO x 1.2451'...r............or.......r......r.........r'....o.....'r... Lgss COmmiSSlOll .....r.............rr.....r..........o...r............................
$1 91609 1r961
$17,648 Expenses (per income statement for year ended 9/3O|: Variablecost....... $15,750
$15,75O
Markup on variablecosts = 9127'OOO- 7.245 s102,OOO
Clppter2l
56't
P27-3
(1t
An analysiscomparingcosts of each alternative: (al Sehedule overtime hours:
otrertimeHourc Reouircd May June July
I'OOO 2rOOO 2,OOO
AUgUSt .r.............o...'.'....
215OO
Septemb91.,.................. Octobgr ............r...r....,.,
2r50O 2,OO0
In efficien q (5oh1....-..... Total overtime houns.....
l2,ooo 600
_13€oo
Additionaflabor costs (72r8oor $6 r f .5)...........,..r........r$t 13,400 Rglatedfringe bgnelits ($l tgrcoo r .10f.........,.o.......,.r.... 1 1 , 3 4 O Differentialcost if overtimeis scheduled...D....,,.....,........ $124,74O (b) Hire temporary workers: Ertra hours ttquiled .... 12,OOO fn efficien cy fa ctor (25%r....r...,t.., 3r00o Total hourc tequi1ed...,.....r..... 15,000 Hourlyrate for temporary workgrc.....r....,.....t.....D.........D.. xSo Differentialcost if temporaryworkerc hired.......,............ s 9O,OOO There anono fringe benefit costs with temporary worker€. a a a aa a a a aa a a a aa,
aaa aat
a t aa a l ataaaaaat
Y
,g
w
Clppter2l
721-3 (Continued) (c)
Erpand labor foree and rchedufe level productlon of IO,OOOunits per monthl lf the labor force le expanded co that level production can be gcheduledrValbec will produce lOrO0Odolt house unitr per month, requiring 5'ooo dlroct labor houn. This meanr that 12,ooo additlonal regular dlreet labor houra will be roquired during zoa with no ccheduled overtime or need for temporary wortens, ar chown below: Requlrements Montfr Annual Forgcast production In units.o....o................
_Iggoo
Diroct labor hours required 5,OOO Former direct labor constraint in hour!...... 4rOOO Addltlonalregularhours In zOa ..,..............._l'ooo Direct labor costs: Regulartime (12,O0Ox $Ol $72,0OO Relatedfringe benefits ($72,OOO x .2O|... 14,4OO
l_?g,ooo 6O,OOO 48,OOO 12,O0O
$86,4OO
AddiUonalinventory carrying costs (refer to the achedule of lnventory levelr below): Average monthly inventory with overtimg or temporary wortol'tl .......... 13,846 Average monthly inventory with level productiort .,r,................
16,231
Diflerence 2,38,5 EsUmatedannual cost of carrying Inventoryper unit ....r.............r...,........ r 3 1 Differential costs if level production is USgd
i...a...a...a.....raaaa.r......r.....rr.r...............
21385
sqgn85
drapter 2l
5A?
P21-3 (Concludod) Schedule of Inventory Lsvels Lsrt Day of Month Docrmbcr. Jenurry 8............. Fcbnrery Aprll'..-........................... May.........-rt..o...............!r
JUlf ....r....-r......r........r...rr
Scptcmbcr.........r.....,...... Octobcr ....,............ Novtmbcr....................... Dcccmbcr. Avcngr pcr montfi crcludlng Etoty rtock (divldo by t3)...... Salaty rtock ............,....,. Avcragc monthly invantory
Urc Ovcrtimc Lcvcl Produetion or Tcmporery Workerr' Bcolnnlnar Prcductlon Salcr I,OOO qooo I,O0O IrOOO to,ooo I,OOO t0,ooo lo,ooo I,OOO 8,OOO ra(X)o torooo I,OOO IrOOO l4'OOO to,ooo IrOOO 1O,O0O l6,0oo lo,ooo 8,000 12,OOO l8,ooo torooo IO'OOO 12,000 t8,000 l0r0o0 12,000 13,00o f 8r0o0 lO,OOO 12,OOO 13rOO0 t4,ooo to,o0o l3,ooo t2,ooo l l,ooo 1O,OOO t3,ooo I,O0O 8,OOO IO,OOO 12,OOO I,OOO 6,OOO lO,OOO 8,OOO
Endino' 8,OOO
lo,ooo t2,ooo l4rooo 16,OOO 18,OO0 lg,ooo 16,000
t4,oo0 t I ro0o IrOOO
o,ooo I,OOO
128,099
159,000
9,849 4,O00
12,231 4,O00
13,848 unitr
16,231 unltr
'Ercludcr ralcty rtock of 4,OOOdoil hougc unltr.
Alternative (c) affords the lowest estimated differential cost. (2',
There aneseveral noncost factors, or factors that are difficult to cost, that Valbecshould consider in conjunctiorwith the cost analysisof tire three alternativecourses of action. Relevantfactors include: (al Considerthe degree to which Vatbec'snegulartabor force is wilting to work overtime. (b) The tabor force may plan on ovsrtime pay as part of their normal work situation. lf wages should be reduced because overtime is not scheduled,due to the use of temporary worke6 or an expanded labor folee, then the morale of the tabor force coutd deteriorate, laborersmight seek wo$ elsewhere,laborers might seek base pay inc*ases, or the tabor force might decr€ase its efficiency. (c) Overtime does provide a certain degree of flexibility, should sales volume and patterns not occur according to the fo#casted plan. (d) lf the labor force is to be expanded,Valbec must be sure there is an adequatesupplyof skilledworkers.
I ai I
l
i-l I
I
Chaptor 2t
P274 GroupI productioncosts: " Matgrials ($9.27 + 251 .....................i......"......t....o....o...........
.131 ,948 1.422
Labor (S19.48t2.51 + 251........
Variablefactoly overhead($eee x 150
2.501 $ Total variable cost (S2.5Olx (3 + 2l r 2'OOO1..........t............. $25,01O Additional fixed factory overhead....... ..........r.. 7 rO4O Total variable unit cost......o.....o.....r.,..o,.r
s 32,O5O Gmup ll productlon costs: Materlals (93.9O+ 20) LabOr (($tZ.l6
,180 1.219 1,824
$
X 2) + 2O!....r.r.....'.....r...r..........r.....................
Variabfgfactory ovgrhead($t.ztO r 150%1................-.,......
9__3.22O Totafvariablecost (t03.22O x (2 + 2 + 4l x 2r0OO1..r.....,....,.... 951,52O Additional fixgd factory ovgrhgad ,.r..,..,r....,...r..........ro.........
IrOOO
s57,520 Sales ($54 x 2,000)
$116.O00
Group I costs: Outside suppliers: Dissection knives ($.f,ZOr 3 r 2,OOO)...,......,. $ 1 9 , 2 o o Scalpels ($3.SOr 2 x2rOOOloo,..........,.,.,.......r 13,2OO
q?2,40O Group I production costs (computed aboye|..,..
i$
s32,05O
32,05O
Group ll cosG: Outside suppliers:
Scissors($g.OOr 2 r2,0O0l sl2,ooo TWegzgrs($2.97| 2 x 2rOOO)..........r.............. 1 1 , 8 8 0 Clamps(Sg.zar 4 r 2ro0o1........i.........,...o.....26'24o s5O,120 \ l Groupll productioncosts (computedabove|.... 957,520 t ' /
so.tzo 6rOOO I,OOO 12,OOO 6,OOO
sl14,170 s
1.830
Clppter2l
P214 (Goncluded) Production of Group I compononts l_esscostly than purchasing fiom outsides. fc and purchaslng G-,u-p lt componenta lrom outsiders ls fess i[;;;;;:' fng them. However,tho estimated operating profit contribution "o"tiv ls only marginafly posluve ($1'830 or 1.60/oof the eifimated iares fi-gure)anJ"nv oecossary addiUonalmarketing cost ralated to the dlssection Instrument sets would funtlrer reduce the erpected protit contrlbuUon. Present annual fired factoly overhoad ls ercluded from the differential cost analYSls'becausethese costs wllf be Incurrad whether oinot the sets alt marketed. Basedon the information assombredby the study team, the proposar has little merll
I I
-
Chaptor2l
ffi
P21-5 lll
The lowest prlce Chemco should bld for a one-Umespeclal order of pou;& (25 totsl would be $?4r75O,whlch is equal to the variable 2STOOO costs ol the order, determined as follows: Diroct materlals: on a one-tlme-only speclal order, chemlcals used In manufacturing the firmb main product have a relevant cost ol their expected future cost, repnesentedby ttre current market price per pound. chemicals not used In current production have a relevant cost of their value to the firm. pounds' CW-3 (4OOpounds per lot r 25 lotsf = 1O'0OO substitute cN-S on a one-foFonebasis to its total of 5,5OOpounds.The relevant cost iS the salvagevaluo.. The remaining4'5OOpounds would be CW-3 at the relevant cost of $.gOper poundrits expected future COst
aaararaaaraaaaaaaaa.aaaa.rarr.raaa.aaao.aaaaaaaaatoa.aaaaaaaaa..aaaaatt.aaaaa"
JX-6 (3OOpounds per lot x 25 lots r $6O per pound)"""""' MZ-g (2OOpounds per lot x 25 lots x $1.60 per pound)..""" BE-7 (1OOpoundsper lot r 25 lots r ($.eScost per
s
500 4r05O 4,5OO IrOOO
1,375 pOUnd - $.lO handling pgf pOUnd|)...........'.r...,...'..,..'..r'.... TOtal d ifgCt matgfials COSI'....."........!.................t..............." sl8,425
Direct labon (60 DLH per lot r 25 lots) = l,5OODLH Becauseonly 8OODLH can be scheduledduring regular time this month, overtime would have to be used for the remaining7OOhours; therefore, overtime is a relevant cost for this order. l r5OODLH x S7.0Oper DLH at regulartime lilte."'..'...""'r"' 7oo DLH r $?.50 overtimepremiumper DLH..""""""""." TOtal difgCt
labOf COSt,......r...'......r.......r..'............r...'..r....t...r
s1o,5oo 2,450 $12,950
Factory overhead: This special order will not increase fired factory overhead cost, and it is not an order for a continuing proiect that shoutd contribute to the Fecoveryol fired factory overhoad. Thereforo,the fixed factory overheadis not relevant,and the retevantfactory overheadcharge is the variable factory overhead rate. $ 3,375 1,5OODLH x $2.25 variable factory overheadrate Total differential cost ol manufacturing this special order and the minimum bid price for the order....-
g1/99
Cluptx2l
fi7
P2t €'(Concludod) l2l
Calculation of the price for rccurring orders of 25,OOOpounds (25 lots) follours: Dirsct materials: Because of the posslbillty of ftrtura orders, all raw materials must ba charged et thelr erpected future cost, reprasented by the currrnt market price per pound. CW-3(4OOpounds per lot r 25 lots r $.gOpar pound|..,......, $ I,O0o 4r500 !t6 (3OOpounds per tot r 25 lots r $6O pgr pound|.,......... MZ-9.(2O0pounds par lot r 25 lots r $l,gO por pound)........ g,oo0 BE-7 (l OOpounds per lot r 25 lots r $,65 per pound).:......... IrE25 Total dirggt matgrials cost .........-...........t......o........r..........D..., s23,125 Direct fabon $oo/col the production of a batch (goo DLt{) can be done on regularume; the remaining600 DtJl direcuy ciauseoveF time to be Incured and aru, thus, a retevani cost of this new prcducl 1r50oDLH r $7.0o regularrate per DLH..........,.r,................. $lo,5oo 600 DLH r $3.5Oovertimgpremiumper DLH....D................ 2rlOO Total direct labor cost $t2,6OO Factory overhead: All new prcducts should contribute to the racovery of fired factory overhead as wert as cover ail variable costs. Therefore, the overheadcharge woutd be thE full overheadrate.
lt50o DLH r $8.0o per DLH..r.....'.r.....................r..,..r,..,.r...r.. $ I,O0O Full manufacturing cost..'......'...r..!....r....r.....r...........r.....r.......r. $c4,7ZS Markup ol 4O"/oon cost ($44rZ2S x .4O)
17.ggo
Fufl manufacturing cost plus 4oo/orf.arkup........,...!....r,.,........,...
$62.6{s
I U
Chapterzl
5ffi
P27-6 Present Caoacity Sales: r $10 5O,O0O x $lO 25,OOO Variableerpenses: Direct materials: 5Ot0OO I $2..........r......rt.....'......
Total
$5oor0oo $25O,OOO $75O,OOO
$loo,ooo $ 47,OOO
25,OOO r ($2 x.94) 5O,OOO x ($Zx.O6) Direct labor (94 x'1.O51......$4.2o Factoryoverhgad...r.....,...r. L30
s* JifJ"s,:ffi :.::.:::.
Additional Capacity
(6,0ool $ l 4 t , o o o
275,OOA 12,00o
Total variablg gxpense,......o,o....
137,5OO 6,00o
412,5OO
$184,5OO
Contrib ution margifI.,........,.............o........ $ 1 1 3 , O 0 O Fired expenses: Fact o ry overh gad'........r.......r....... t I 72,5OO Markgtfn g erp gnsg ................r.r.... 11 , 0 0 0 Increaso in advertising (511,O0Ox.1Ox.251 Additional plant depreciation: 3260,000 + 25 yrs. = $1O,40O S 84,OOO+ 20 yrs. = 4r2OO $ 1 4 ,6 0 0 S 1 4 , 6 0 0r . 9 5 r = Total fixed expense
$ 1 5 , o O O $ 87,5OO 275
13,870
11,275
13,870
$ 83.500
S 29.145
s112.64s
O pera t i n gi n c o mg ...............,..,..,..............$_298O_q
S 36.355
$__85,955
'57o allocated
to inventories.
The expected operating income from additional capacity ($36,355) should be evaluated as to whether or not it is a satisfactory return on the additional capi(See Chapters 23 and 241. ($2OO,OOO tal investment of S344,OOO + $84,OOO)
Chapter21
569
P 2 1 -7 (1)
MAru( CORPORANON Boston Plant Gomputation of Number of unlts of Xoff Requlred ro Gover Fixed Factory orerhead and Frxed Regional promoilona! costs Total fOOOsomitted) per Unlt Sa|9s....,..r....,...1
a aa aaat
ataaat
a a at aaaaa
a a taa
a
s2,200
s2o
$ sso
$s
Variablefactory costs: Difgct DirgCt
matgrials ..ro..,r.....r.r........r.r........o.. labOr'................r.........r.r..r...Dt.....r.
660 440
g
sl,g5o
sls
S sso
ss
Variablefactory overhead.......r............... Total variablg cost ..............r......ts....t....o, Contribution margi11,..................rr..r..r....,....
Units required to cover fixed factory overhead and fixed regular promotional cosls:
(21
MARX CORPORATION schedule of Budgetedcontribution Margin and operating Income lf Boston OperationsAre Expanded Under plan A (OOOs omlttedl Total $7,400
Boston Ghlcaqo g4,OOO s3,4OO
s 1 , 8 5 0 s 85O $t,000
2rO2O 1,O2O tr,000 1,390 680 700 s5,250 s2,55O s2,700 s 2 , 1 5 0 S Bso $1,300
s 1 , 6 0 0 S 7oo $ 9oo 320 220 100 $t,920
s s20 $t,ooo
$ z3o
$
310 l.
s S3,4OOBoston sates
ffix tt-
54,000 Chicago sales
ffi
(70) 142.
s 300 168-
(8o) s(2121 $ 132
$31O Home office cost = $tAZ x $3f O Home office cost = $f Og
rl
'l -l
-
Chapter 2l
570
P21-7(Continuedl MAR)( COBPORANON Schedule of Budgeted Contribstlon Margin and Operatlng Income lf Boston Plant [s Closed and Ghlcago Operations Are Expanded Under Plan B Chicago Operations (ooos omittall S3l
OEa...aaaaaaaaaaaaa....aa.raa...a......rr...ro..a..aaa..a.a.aara....
$8,2OO
Variable factory costs: Diroct matgria|S........i...r..r.......'r....r..r.'...r.r DirgCt labOr ..r...........o..r.............................
Variablg factory ovgrh gad............""""""" Total variable factoly GoSt'.".........""""""
Sl t55O 1t55O
I,O85 $4,185
GOntfibUtiOn mafgill ..........,.,.......r..r...r..............
Fixed cosB: Fixgd factory overhgador......--.....'.....-..o.-...
RegionalpromoUonalcost............,...r.r...... Total fixgd CoSt...............'.......................... Plant Opgfattng InCOmg....r,........r........,....,.r...... Allocatgd homg office cost........r....................... operating income...,.........r.".o............r.............-
$
95O
200 Si t 150 $ 865 3lO $ 555
Chapter2l
57'
P21-7(Concludedf
schedure B"dsm"??ff ?iH:lI oo"ratins
Incom e "r rs ctosed_andRoyartyAgre",n;;t rs contracted lf BostonPlant UnderPlan G
. . (o0osomittedl
Total
Revenues; Sal eS .....
.r.. !......rr...r.....
ROyaltieS...........r..........r.........,......r......... Total rgvgnu gs .................r........t..r......r...
Variablefactory costs: DirgCt matgrials r................,..rr......r......,.. DirgCt
lab or,....,.....r,..........o.......r.t,,r...o,...
Boston
$4,ooo 275 $4,275
$27s $27s
$l,ooo
Ir OOO Variablg factory ovgrhead.....r..D............r. 700 Total variable factory cost ...........,..o..,.... $2,7OO Contribution margirt...........................,.......r $1,575 $27s Fixed costs: fixe-d fa ctory ovgrhgad ..........,.......r..o..... eso $so Regional promotionat cost,....,.......,........ $ 200 100 Total firgd cost .,.,......r..r...,....r.........o.r.... sl,t50
?llnt operatingincomeandroyafties.........$ 42s Allocated home office cost..,..]...........,.....,. Operating income (toss)..........,....
Chiceoo
$rso
$12s
310
$ lts
$4,O0o
$4,ooo $t,ooo ITOOO.
700
$z,zoo $1,30o
$ eoo r06 $t,ooo $ 3oo 310
$12s
$
flot
I i
-
Chaptorzt
5n P21-8
N.J.:lnstihrteof ManagemonlAccountants(br' Aa unting@npus Rofr,tt(lttonNale, Source:lrhnagoment 19f3fl'WInslihtloof ,rrrV N"ri*al-Associsttn olAccoontants),Spring,1987),pp.4-5.Gopyd0htSpring, All rightsreserved.Beprintedby Accountants(tcrmerlyNatirnalAssociatbnof Accountants). Management permisskrn.
punchasesilica in Ler GtassGompanyshould imptementthe pnoposodplan to plan the dlscount quantitr rne annuat savingsfrom implementauonof the would be 9{8rl5O, determined as follouts: Annual cost with quantity discount plan: Interest orpense to flnance carrying InventorpAverage level of InventorYIn tons: I OIOOO Ler Glassb roquirements.........' Requirements ol other manufactuners + 12 months + 2| average + (3OOTOOO + 12 months * 2) (3O0'OOO minimUm).'........."tt"""o""'t"'
25tOOO
PfiCe pgf tgn With d|SCOUBt.......o..'.................o. TOtal ayefage
COSI Of inVentOfy.....'.'.....'..r.......
35,OOO r $1.80
$g3,ooo
Ratg of intgrgst to carry inventory..............,.... x
5% $
Gost of purchasingInventory(42ofoootons x $1'801.....""'o"' Additional costs to carry additionalinventorp [-abor..............................r.........,................o'.....
3,150 756tooo
$ZOTOOO
Administrativeexpenses.................................'I OrOOO Lost revenuefrom rental of warehouse 1O,OOO 4O'OOO requiredto store additionalinventory..,...."' $799'150
Lessnovonuofrom the sale of silicato other
6OO,OOO tOnS X $2 pef tOn|.........'.r............. manUfaCtUfgfs (3OOTOOO AlnUal COSIOf qUantity diSCOUntp13fl.'......r..'...................'..... $ 1 9 9 , 1 5 0
Annual cost without quantity discount plan: Interest expenseto finance inventory': Averagelevel of inventoryin tons.........'.........r 1 O , O O O Prico per ton without discount"......................' . x $2.OO Totalavgragecost of inventoryr.......,.....r.........$ 2o,ooo rSoh Rate of Intgrgst to carry inventory'.....-............ l,OOO $ .............. Interestoxpense 2 4 O , O O O 241,OOO tons r 32) .'.". Cost of purchasingsilica (12O,OOO Annuat cost savings available by implementing quantity discount ............................ p|an.......
s (41,85O)
Chagter2l
573
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Chapter2l
P21-g(Concluded) Net revenue Potential: The cofored paper brochurg prcvidesthe most net revenue if it can be mailed at bulk mail rates; however,there is a risk of earning only the third best revenus if it must be mailed first class. The glossy paper' if It can be mailed on time, producestAe second largest amount of net ngvsnue;however,the ranking slips to the fourth best net revenue if it is mailed late. The plain paper bulk mail brochure has a substantially lower net levenue than any of the other alternatives'
l2l
.
lmage as a well-run organization: The image would be based upon comparisonof two things related to the mail campaign-the quatity of the brochure (appearance|and the arrival of the brochure immediatetyfollowing the radio and television coverage.The glossy brochure,if it arrives on time, would probably conveythe best image;however,there is some risk that it would not arrive on a timely basis.The colored paper brochurewould be the next best in terms of guality,but the bulk mail alternativeraises some risk of a timety receipt of the brochuresby the potential donors. The plain paper brochure would be ths poorest quality,and because it is to be sent bulk mail, it runs the additionalrisk of not being delivered on a timely basis. lmageas a fiscallyresponsibleorganization: The imageof fiscal responsibilitywill be basedon a comparisonof potentialdonorstperceptionsregardingthe cost of the brochureand cost of the mailing.The glossybrochuremailedfirst class may be perceived as an extravaganceby the potential donors.At the other extreme,the potentialdonorcmay concludethat the plain paper bulk mail alternativeis an indicationthat the organizationis unwillingto devoteadequatefinancialnesourcesto the fund-raisingefforts. The foundationstaff must weigh the consequencesof each of the alternativesand the risks associatedwith them on the three criteria to select a specilic alternative.The staff has good informationon net revenue potential,but needsto obtain informationon the effects of the quality of the brochure,the timelinessof the mailing,and the type of mailingon potentialdonorstopinionsas to what is a well-run and fiscally responsible organization.
Chapter21
575
P2t-t o
(rl
JUSTA CORPORATION Quarterly Income Statement
Total
SalgS
........r..........r..r.....r..............
Local
Reqional sl,3oo,ooo $I 'OOO,OOO S3OO,OOO
Variable expenses; Manufacturing (Schedule A1.... $ 82O,OOO $ 63O,OOO s l 9O,OOO Marketing (Schedule B).....,..... 3l,ooo 24rOOO 7,OOO Total variable expensg .....r.. $ 851,OOO $ 654,000 s 197,OOO Contribution ma1gi11,....,..........r... I 449,O0O I 346,000 s l 03,OOO Separable fixed marketing expense 74,OOO 36'000 38,OOO N e tma rke tco n tri b ution.,.....r ..,... $ 3TSr OOO $ glo,ooo s 65,000 aaaaaaaaaaaaa
Gommonfixed expenses: Manufacturing($l,OfO,OOO sg2orooo).............o.........,.... $ 19O,OOO Admin istrative........,.r..r..,.......,
52,OOO
Total common fixed expense $ 242,ooo Operating incomg r..r..................r l_lg3,ooo
(r)
(3)
el
Product A B c
% 60 70 80
Tota1.........
(1) Product A B
c
(21 % 3 2 2
l4t
(sl
(6)
m
Local variabre Regionar Regionarvariabre Totar varrabre Local Sales Exoenses f2l x f3l s-ales Exoenses l2l r (5) Exoenses l4l + {gl $4oo'ooo $24o,OOO $100,o0o s 60,000 s3oo,ooo 3OO,OOO 210;OOO IOO,OOO 7O,OOO 28O,OOO 3OO,OOO 180;OOO roo,ooo BO,OOO 24O,OOO
9630,009
(3)
$ro,ooo
S82o,ooo
(4) (s) (6) Local Variable Regional Regional Variable Total Variable Local Sales Exoenses(21x f3l Sales Exoenses f2l r f5l Exoenses f4l + l8l s4OO,O0O s12,000 $100,000 s3,ooo $15,000 300,000 6,000 100,000 2,000 9,000 300,00o 6,000 1OO,0oo 2,O0o 9,00o 824,0O0 37,ooo
m
a31,OOO
Separable fired marketing erpense computation: Local R eoi onal Total marketing expense.............r..,..t............., Less variable (schedule B),.....................i........ s6O,OOO s45,O0o 24,OOO 7,O00 Fixed marketing expenss...,........
_$36,oog S3B,ooo
I Y
Chapter21
576
P21-10(Goncluded) l2l
No. Ttre regionalmarket should not be dropped.The regional market sates are adequateto cover variable expenseand separablefixed erpenso of the regional market and contribute $65,000 toward the recovcommon fixed expenseand operating income. ety of the $242'OOO lf the regionalmarket is dropped,the local market contribution margin must absorb its own separablefixed marketing expenseplus all common fixed expenseas shown below: '
Contribution margin o.....r....r.r......""""'r
S 346,000
36'000 Separablefixed marketingexpense""" NgtmarkgtcontributioJl........................$ 31Or00O 242r0oo Total common tixgd expgnsg.....o........." Operatingincomg.....,.'.....t........r..."" 9-994OO to Thus the corporationoperatingincomedeclinesfrom $133'OOO loss contribution the of the amount is This $65,0O0reduction 56g,OOO. from the regionalmarket. JUSTA CORPORATION
(31
QuarterlyIncome StalE!!en.! Total
Product A
Product B
Product
c
sso0,ooo
s4OO,oOO s4oo,ooo
Variable expense: Manufacturing (Schedule A)'.................. $ 820, ooo Marketing (Schedule Bl'.--.....1.-.... 31,00o
$3oo,ooo
s28O,OOo s24o,ooo
3 851,000
i?15,ooo
$1,30O,ooO
Total varlable expense ... Gontributlon margin Fixed erpen3es! Manufacturlng .......-, MarkeUng Administrative ..........
3
449,000
15,000 3185,O0O
8,0oo s288,ooo s112,oOO
8,00o S248,OOO s152,oOO
s loo,ooo 74,000 52,000
Total fhed expense ...... 3 3 1 O , o o O Operatlng Income..... _!._19t,009 iSchedules A & B are in tlre requirement (tl solution.
(4)
When the new product reptaces Product G, the minimum contribution margin per guarter must be at least S162,000 (the present contribution of new fixed expense) in order for Justa margin of Product C + SI O,OOO than it is currently. This contrioff financially worse Corforation to be no incom e of 3133' OOO. b u t i o n m a rg i n w i l l sti l l p ro vi d e oper ating
Chapter 2l
,
577
cAsEs
c27-1 (f )
$21 per unit, a total of 9210,000for 10,000units, is the lorpestprice the companycould acceptwithout reducingbudgetedincome of tne coming quarter'At any lower price,the speciatorder woutd add monoto costs than it adds to rcvenues,rcducingthe comingquarte/s budgeted openatingincome. The price is calc-ulatodto equatttre retevint costs of filling the special order. First' calcufatethe following per-unitvariabfecosts of $ubrunits: Budgetedmanufacturingcosts for the quarter.. Less: Budgetedfixed co_st(3 mo. x $i,ioo,ooo; Budgetedvariabfemanufacturingcosts .. B u d g e t evdo l u m eo f r e g u l a r b u s i n e s s . . . . . . . . . Budgetedvariabtemanuf.cost per regurarunit
$i,200,000 + 1 0 0 , 0 0u0n i t s ffi
Budgetedselling & admin.costs for the quarter Less: Budgetedfixed cost (3 mo. x $900,000) BudgetedvariableS & A gosts for the quarter B u d g e t evdo l u m eo f r e g u l a r b u s i n e s s . . , . . . . . . BudgetedvariabteS & A cost per regulatrunit Regufarsales commission(S/oof $9i pricel.. . . Budgeteds & A cost per unit,exct.commigsion
$3,200,000 2.700.000 $ S0O,0OO + 1 0 0 . 0 0u0n i t s S.0O $ i.SO i-,jEA
-i,zoo,ooo $5,400,000
The casestateshow much to add to the regular direct materiatand directlaborcost rwo otheradjustments must be calculated:(1) The saw is neededfor onfy two months,At a rentalof $S,S00per month,its cost totafs $11'000for the speciarorder,or $1.i0 p"r *ir 1zy'v"ri"ot"oerrr"ad per specialunit is triptethat of a regutarunit, and the casestatesthat this applies to total variabreoverheadand to the variabfe overheadof the cut_off operation.The totatvariabteoverhead cost of a regurarunit is 92.50,and variableoverhead-ofthe regularcut-off operationis a part of that total, so the entircs2'50is.tripledfor th6 spec-iat oruert.nJ no separateadjustmentie neededspecificallyfor the cut-off operation).il" sz.boig inctuoedalreadyin the budgetedcosts of regufarrllF, so the adjusbnentneededto cost the speciatorderis an addttina, $s.00p", ,nitJ6lSr.ro) _$z.so1,or a total adjustmentof $50,000for the special order. sufficientcapacitymust be availabte for the specialorder.(othenrise, accepungit wourdrequirecancering ,"gulr oroe4s),and an opportunitycost aqualto the tost "oru contribuuoi marginon cancetfedorders would be a rplevantcost of the special ord"r.i Crinoing-rn""tin" limitedto 60,000 ie units per monilr, ""p""ity ih" quarterrscapacity is 1g0,000 regutarunits,andS.OuLar the budgetedy9rlt" "o roo,Jobregurarunits reaves availablocapacityequivatentto 80,000 "r reguilunit". Eachspecial-order unit usestriple the grindingtime of a regul"t ,init, special units require the equivarentof 30,00breguraruni6' gri"Jiig"o-io,ooo time,we[ within the 80,000 regularunitsof avaifablecipacity.
t'
,l -l
I
578
eI-1
Cttptor2l
(Concluded|
SpecialOrder RelevantGogtAnalvsig Total oer unit _IO.0AA
Units .... . Relevantcosts of special order: Regularmanufacturingcosts. . . , $120,000 Regularselling& administrative ', costs,excluding commission.. S,0OO Additionalcosts of specialorden Directmaterial. 20,000 Directlabor Variableoverhead.,...... 50,000 Saw rental(2 mo. x SS,S00) 11,000 Metallurgisfsfee 4,000 Relevantcosts of special order. . SA0-A09
$12.00 .50 2.OO S.00 1.10 .40 $Zl,qA
The relevantcost of $21 per specialunit,althoughconsiderablyhigher than that of a regularunit, is far belowthe regularseltingprice of $g0.This ia becaugethe company'scosts are predominatelyfixed costs, plrsumably due to high levelsof automation.The companywill try to negotiateas high a-price as possible,but the $21 figureshould be regardedas an absoluteminimum. (21
Nonquantitative factorsto considerincludethe foltowing: (a) Effectson regularsales ls the customerwho placedthe specialordera now customer?lf so, will they becomea regularcustomerprovidedthe specialorder is successful? will that customeralwaysdemandlargeprice discounts? Will (or does)the customeruse a targequantityof the regularproduct and pay the full regular price lor it? Will regularcustomer-s leam of the speciat,low price?lf so, will they demandrargeprice discountson their futureorders? Will this special,low price start a price war that can erpde regularprices? (b)Effectson empfoyeosand community Will the specialmateriafsand equipmentaffectlevelgof safety, environmentar poilution,and noise in the company,aprant? will emptoyees and managersgainvaluablenewikills and knowledgeby producingthe specialorder?(ihe case statesthat this ig the company,s first opportunityto produ-ceand gell thia particutar type of producl) Will the specialorderrsaffect on totat production volumeenablethe companyto avoid layingoff valuedemployeeein the coming quarter? (c) Strategiceffects lmJrtet share, grou/thlinnovation,etc.) Doesthe speciaforder productrapresonta new or fastgrowing Are thereleaming-curveeffectsoi other advantag""t" 6r g"in"amarket? from addingthe new type of productsoonerratherttrairtatere Are prices and profit marg.ins on thig type of product expected to improve, or is it a matureproductlikely to declinegoon?
Chapler2l 579
czl-2
flt
(21
continuing to obtain coverg from lts own Denver cover plant woufd aflow Blg-Auto to mafntain rtg cunpnt feverof coniroior", coverEand the timing of therr delive-p,--Keep-i-ng the quarity of the the Denver coyer ptant opon atso alfour Brg-Automon. nexiuitityif,"n-pu*hasing tie ttve.ing lrom outslde suppli-r* BIg:Auto coutd niore e"llty alteit"ne'l-oJ"ring", deslgn and changethe quinuues pro.duc"+ if rong-termcon_ tracts are raqulred with outsidesuppliers.lilg-f,*r ""p""iaily should also consider the economiclmpact that closing denver coier will have on the Gomfnunlty and how this might affest ail-autot otrr"i op"rauons in the region. In addiuonr nolationgwith the woikforce at ;th"; plants could be affected by nenvsof a ctoslng and layoffs at Denver C;;;;. (al The fofrorvingrecurrini annuar buogeteJto"t" can be avoidedby closing the Denver Goverplant Matgria 1s.a.o.r........r.............-..r....................o.o......r r....,. Dirgct tabor.r......r...r.........o.r.......r ,-..,..r.r...................'..o....D.... Indlrgct costs:
sl2,ooo,ooo 13,O0O,00o
supgrvisfot ....'...-...r......or....r......or.....r gSrooorooo IndirAct labor ...r...,............................. 4TOOOTOOO
Differentiafpension erpense (S4'00orooo-$3r0o6rooo;............. lrooorooo
grooorooo
(b}Thefol|owingn9cut7ingannua|budgetedcosts",'no.# the decision to close the DenverCover ptant: Depreciation--+quipment... .............. $ S,ooorooo Depreciation-building.........r................,............,,...... 3,ooorooo Continuingpensionerpenses 3,OOO,OOO Plantmanagerand staff ......
corporate a-rocation...*.....::::::::::::::.:::::_.._.::::.:::::: 3:333i3S s*,r*pgq
The depreciationamountsare not retevant to the decisionbecause they representportions of sunk costs tnat are ing 2oA. Three-fourthsof the annuarpension being written off dure)(pensa($3,ooorooo, is not relevantbecauseit wourd wiettrer or not the ptantis closed'The arnountfor ptantmanager "ontinr" and staff is not relevant becausevositoand his it"n rrorrd continue with Big-Autoand administerthe three remainingptants, ir,":"orporate arocation is not relevantbecausethis represents non-avoidabre costs, incurred outsideDenvercover, that a?eassigned to the prant.
I I
-i
-
I
I
I
Chapter2l
fio C21-2 (Concludedl
(cl
The following nonrecurringcosts would arise due to the closing of the DenverGoverPlant: Terminationcharges on canceltedmaterial orders i157ofr..........,....,....r........................$lrSOOtOOO ($IZTOOOrOOO gnipfoymgnt assistSl|C€..............'..o....'.r....................
1 tOOOtOOO
$t'tt"Pgg These two costs are relevant to the decision because they are incurred only if the Denvercover Ptant is closed. Gonsequently' they can be avoidedif the plant is not closed' (d) ltems not specifically mentionedin the case that should be considered by Big-Auto before making a decision inc|ude: (i) The disposalvatue or alternate uses of the plant income tax rates (iii r ' ' Any income tax implications;includingthe appticaUleto gain or toss on the salesof plant and machinery' cost of losing-depreciationtax shields, any depreciationand investmenttax credit recapture,etc' (iiil Outsidesupplierb prices in future years' in fiui Gost to manufacturecoveringsat the DenverCover Plant future years.
Chapter2l
58t
c21-3 I
(1)
(21
FactorsCalcoshoutdconsider,beforeenteringthe consumerproducts market, follow: (al the productb contributionmargin and break-evenpoint (bl consumerdemandfor the proOua in the short nrn and long run (c) the companybability to producethe quantity needed in the short and long run (dl the companyblack of erperiencein the consumermarket and the need for differentmarketingtechniquesfor productssold in the consumermarkets (e) qualityof the competition (n the impact of the decisionon employees,and the effect of the diversionof calco managementeffo-rton total business Alterationol linanciaf forecastsfor use in deciding uetnreln the atternatives: Galcors
|ncomebeforeincometaI.................t.....W,ffioo Add fired manutacturingcost:
lOOrOOGunit lgvgl .,.......................,..... l2Oroo0-unit lgvgt ...,,..............,.o.........
(3)
TSOTOOO -'- - -
9OOTOOO Add shareof current MarketingDepart_ ment,smanagementcosts.........,r....... i OOTOOO operatingmarginr................,...,..,....,.....r $1p?5poo $l prorooo Insteadof a difference of $35,000in391ne Fffit Galco,the new catcurationshowsa $ts,ood operatingmargin (S-1'O75,O0O - $f 'o9o,Ooo)favoringJasco.Ths financial difference is slight' addingsignificanceto the reliabilityof the financialestimatesas well as to the rerevanceof nonquantitative factors, only speculate about tire reliabitityoi ttre two proposars. 9ng :rl The fact that Jascohas experiencein the conslmer market is significant in predictingsuccessor fairureof the proje"i;b; not necessariry for the estimatesfor the expectedbenefits of itre i""ii"ting program or the associatedcosts.lt shoutdbe remembered that the people Jasco recently lost their jobs and pa.v be twing especiailyhard to rook good. similarly,GatcobMarfeting'Department matesin an effort to avoideti-mination may be biasedin its estiof existingemproyeepositions. costs are the same becausecitco will manufacture --L"nytTturing the product' The saresprice differs an_dan of the ($5 s% per $t oo of safes) differencl il il Jates "ipr"n"i[n ,ate is not given. calcob inclusionof assignedMarketing "orili"Joi oepartm"nt managementcosts is perhapsan attemptto hedge its estimates.
I
Y
Chapter 2l
C21-g(Concluded) (41
Significant nonguantitative factorg that Calco's management should GOrlsider inctude: (al impact of the decision of Galcorspresent work force; 1.o.,moralo tosg of lamaining employees if layoffs happen versus the ability of retained employees to work effectively in the new market' (b) abiliUec and expectations of employees from Jasco, if Jasco is selected, (c) the possible diversion of Calco top management effort from its reg' ular tine of business,if it does not hire experiencedtalent. No single item may in itself be important enough to warrant selection of one atternativeovsr anothea The information presented in the caso is. limited and does not give an indicationthat any one nonguantitativefac' tor is moro important than any other. However,any one of the factorc could be sufficiently significanl For instance,the impact of eliminating CalcotsMarketing Departmentpositions,if Jasco is acquiredrls perhaps the biggest single nonquantitative tactor for consideratlon. Since ttrese the management new omployeesdisplace existing Calco.employeesr pnocesscoutd be hamperedby serious human relations problems.
c21-4 (1) (a) The product-line income statement for PrecisionGauge Corporation is presentedon a full costing basis and, consequently,is not suitabtefor analysisand decision making.The fact that tho statement does not distinguish between variableand fixed costs hinders any analysisof the impact of volume changes on profits. ln addition' the statement does not distinguish between costs that are directly related (traceablel to a product line from those that are shared among all products. (b) An atternativeincome statement format that would be monesuitable for analysisand decision making would incorporate the contribution approach to costing, Expenseswoutd be classified in terms of variability and controllabitity;such as, variable manufacturing,variable seltingand administrative,direct fixed controllable by segment (discretionaryl,direct fixed controllableby otherc (committed)rand commonfixed. The common fixed costs would not be assignedto the product lines bscause such an allocationwould be arbitrary.The contribution approachis monosuitable for analysisand decision making becausethere is a meaningfulsegregationol costs.
Chapter2l
5&3
C27-4.lGonUnuedf (21
(al
The suggesteddiscontinuanceof the T-gaugeswould be cost effective, but the suggestio;rsretating to Dgiuges and p-gauges would not be cost effectivo. These conclusions ano based on ttre foilowing quarterly differential cost anallsis. D-gauge P-gause Unit salg8 prico......r...t.....,....D.r..,...
seo
Unit varlable costs: Dirgct materialsr.............,..o....... $f Z
Dirgct 1abor..................r......r...... 20 Variable factory overhead.....,..., gO Selling expenses.......r................ 4 Total variable costs.................r.. $7f Unit contribution matgin........,...,.,. $f g lncrcase (decrease| in units suggested: D-gauge ($SOOTOOO sales + price| 1.5O....o..,.........,....x (5rOOOI _ $gO P-gauge ($l,600,00O sales _r $2O0 price) I .15......,............. x
T-gauge($soo,ooosates* $tgo 'l pfiCef I
.O,,......r..,.....r.o.........
@ -$18o
$2oo S gl
S 50
40 45 .;O
60 60 10 Slgo $ o
qF $ ?4
lr2OO X (5rOOOl
tncrease(decrease|in total contribution margin................... $ (95roool $ ggrgoO $ Decrease(incrcase)in fired costs: D-gauge,$10o,oOO - $2O,00O.... Bo,oOo P-9auge.......,....r.....,...,......,........ T-gaUge ....................,,........,...r..,
o
(1OOTOOOI 4OTOOO
lncrease(decrease)in segment contributioD..........o.,........,......... $ (ls,oool $ll1,2ogl _S4o,oog (b) Yes.The presidentwas correct in etiminating the T-gauges.The Tg?.ug€sales price coverc only lts variabte cost and doeCnot contribute anythingto the .ecoviry of fired tactory overhead p-roo,' tion costs. Thus, the T-gaugetris a zenocontribution margin.
I
-
rrt
-
Chapter2l
-
C21-4(Concludedf (cl
Yes. The president was corect in promoting the P-gauge line rather than the D-gaugeline becausethe unit contribution margin and contribution margin per labor dollar is greater for the P-gaugeline than the D-gaugeline, determinedas follorlrs: D-qauqe
' (dl
(31
' E b
P-qauge
Unitcontributionmargin(see(a)1......r............. $19,OO $74.OO Contribution margin per labor dollan .95 $19 contribution margin * $2o labor..o..o.... 1.85 974 contribution margin + $4o labor r.......o. However,the presidentb decisionsregardingpromotion expensedo not seem well conceived.The decreasedpromotion on the l)-gauge line and the increasedpromotionon the P-gaugeline do not produce sufficient contribution marginto offset the promotion costs. No. The proposedcounseof action does not make effective use of Precision'scapacity.The 15% increasein production volume on the P-gaugeline will not require all of thE capacity that has been releasedby discontinuingthe T-gaugeline and reducingthe D-gaugeline by S0oh.
Yes.The non-quantitativefactors that Precisionshould consider before it decideswhetherto drop the T-gaugeline include: (a) Customerrelations-the sale of D-gaugesand P-gaugesmay be relatedto the sale of T-gauges(i.e.,Precisionmay neLd a complete line of gaugesdesiredby many customersin order to maintainsales demandfor D-gaugesand P-gauges). (bl Labor relations-reducingemploymentmay create labor (personnel) problems.
v
u ' ' -
nt
ClWter2l
585
C21-5APPENDIX (11
t2l
(3)
Let r = rolls of commarcialcarpet V = rolls ol resldential carpet Heavyduty fiber constraint 80r + 40y = 42,OOOlbs. Regularfiber constraint: 2Ar + 4Ay = 24,OOOlbs. Solvingby slmultaneousequations: 80r+ 4Oy = 42,000 2Ox+ 4oy = 24,OOO = 18,OOO 60r = r 3OOrolls of commercialcarpet 80 (300) + 4gy = 42,OOO 24,OOO + 4ty = 42,OO0 4Oy = t I'O0O y = 45O rolls of residential carpet Leastancannotmanufacturethese quantitiesof commerciatand residential carpeting,becausethe direet labor constraintwill be erceeded: Laborconstraint 15r + 15y = lO,5O0 Usingthe requircment(lf solution: r5(3001+ 15(450)= 17r25o,whlch exceedsthe direct tabor hour constraintof 1O,5OO by 75Ohours. Linear pnogrammingis a mathematicalmodel for solving two or mone unknownsin two or more equations.Linear pnogrammingis used to determinea mir of productsthat will marimize the contribution margin or minimizecosts by identifyingthe inputs, outputs, and their related assumptionsand limitations(constraints)and combiningthem in the model.Linearprogrammingcan be used to alfocatelimited facilitiesand resourcesamongtheir manyalternativeuses in such a way that optimum benefitis derivedfrom their utitization.
I II
Chagter2l
ffi
-
C21-5 APPENDIX(Goncludedl (41
Commerclal Residential $8Og $lrOOO Salgsprlce per unit..........'.,.o............r.............r.r Less variable cost Per unit: $120 $ 24O Hearryduty fibgr........................o.r.,...............r 80 RegUtarfib€1..'.........r'......'............................. 40 DirgCt labor......'..........o.........o........................ Vafiablg faCtOfy Ovefhgad.......,r...,...........'..... 1.r.........o....r................rr.....rr.r......................
$
1 50 90
I 50 90
Stro
S44O
Contributionmarginper unit................'....o....... 9-199 Let x y c d
= = = =
rolls of commercialcarpet rolls of residentialcarPet pounds of scrap of heanyduty fiber poundsof scrap of regularfiber
Objectivefunction: MaximizeCM = 480x + 36Oy+ .25c + .25d Constraints: 8Or + 4Oy + c = 42r00Opounds of hearryduty fiber pounds of regular fiber 2Ox + 4Oy + d = 24rOOO 15x + 15y s 1O,5OO direct laborhours
-3360
'| +
Chapter 2l
fi7
C27.8 APPENDIX
(11
l2'l
(31
(4)
The linear programmingmodol starts with an objecuve or goal to be achieved aubject to a set of limiting factors, calted constraints. The linoar pnogrammingmodel alloursthe usor to optimize (marimize or minimlze| the objecUvefunction subject to tha constrainG. The cantral assumptionln all linear pnogrammingmodels In linearity.The linearity assumptionmeans that the objectivefunction and the Constraintsin lhe model can be expressedin the form of linear equations.The constraints can be in tha form of strict sgualities, upper bounds (less than or equal to constraints)rand lower bounds (greatertAan or equal to constraints|. Linearpnogrammingmethodsare appliedmaintyto allocationproblems, 1.o.,allocatingscancenesourcosamong atternativousas accordingto aome objective. The scarco rosourcasfor a businessfirm may include personnel,material, equipment,or capitat.The objective fun&ion may take the form of profit marimizationor soma other measunoof desired benefiL In this particular cass, linear pnogrammingis appropriate becausethe firm of Miller, Lombardi,and york hasan o-uieciivein the form of profit maximizationsubject to restricted r.sou.cis, i.e., staff availablein the short run is restricted in each area. The followingdata woutd be neededto developthe tinear programming modelfor Miller,Lombardi,and york (a! Total managementhours availabtein each category of service provided. (bl Totalhours avaitablefor each category of service provided by each type of staff person, i.e., erperienced and without experience. (cl Numberof microcomputersand hours avaitabte (dl Billingrates for managementand staff. R. Olivashould considerthe foltowingalternativeobjectivesbefore making the staff allocations: (a) Maximizethe computerhours available (b) Minimizetotal variablocosts consistentwith maintaining a high level of professionalservice. (c) NonquanUtativeobjectivessuch as the preferencesof individuals in managementto be in specificareasof service.
CHAPTER22 DISGUSSIONAUESTIONS Effective phnnhg and control ol capital exP€n' dilureg are impodant because: (a) financbl risk is increased by long'lerm conmiUnentr; (b) lhe magniludc of capilal expendilures is aubstantial and the.penaltier for unwir decbbnr arc us0ally severo; (c) deciebnr mEde in this area provide the supporting slruclure for operalhg activF lies of he firm. )22-2. Exampler ol opportunitiesard templations lor unethbal behavbr in the caPilal budgeting area include: (a) prossuro applied to the cosUmanagerial accountanl by superiors or associates to circurnvent the capilal expenditure approval process, in order lo gel a pel projocl approved (b) pressure to wrile olf or dovalue assels below their lrue valur in order lo jusiily replocemenl; (c) exaggerating the expecled economic b e n e l i t so f a p e t p r o j e c ti n o r d e r l o i n c r e a s e t h e l i k e l i h o o do f g e t t i n g i t approved. 1))-3. The ccUnranagerigl accountanthas an obligalion to the company to make sure thal the cornpan/a legilimalepolbies and proceduresar€ not circumventedand lo make sure that the data used in the evaluationof capilal expendilure proposalsare as reliableand realisticas p o s s i b l e .l l a n e l h i c a lv i o l a t i o no c c u r s , t h e cosVmanagerial accountantshouldf irst discuss the perceivedproblernwith his or her immediate supervisor(in order to clarify the signilF c a n c e o f t h e p r o b l e ma n d i d e n l i f yp o s s i b l e counres of aclbn) and lhen with the individual or individualshvotued.lf lhe individualinvolved is the accounlanl's irnmedialesupervisor,lhe. cosVmanagerial accountanlshould consull the next higher levelof management.ll the prob. lem cannotbe resolvedthroughdiscussicn,the cosvmanageria!accountantis obligatedto prq. vide a full disclosureol all the details to the o x o c u l i v o sr e s p o n s i b l el o r e v a l u a t i n ga n d approvhg capilal expenditures. )224. The econorniclile of a project ir the perird durrngtvhbh il produceseamings.lt need not, and probablywill nct, be equal to the physical lile c/ the relatedasset(s).lts lengthdependsprimaril y u p o n l h e o b s o l e s c e n c eo f t h e p r o d u c to r manufaciuringprocossinvolvedor the nature ol the productitsell. Managersusuallyfind it qutle diflicullto estirnateeconorniclife because il depends upon future evontsov€r which they may have littleor no control. o2)-1.
588
Gash oulflows lhat might be expecled for a capilal oxpondilureincludo: (a) purchasc prbe of one or rnore assets (or a down paymont il prcpe@ b purdrased m irslalknont); (b) conslruclbn pericd inlerest and taxes il the prcperty b behg concructcd; (c) machinery and equipmenl letup cost, padiculady if mehhery behg evaluated utilizeg a more advanced lechnology tfran that currently h use; (d) cornPutersoftware development cost if a cornpulgt aided design, cvnpuler aued nranufacturing.or tully cornPutet integrat' ed manulacluringsystem is being purchased; (e) increased annual maintenance and/or power costs resulting frorn more canplF c a t e d o r t e c h n o l o g i c a l l ya d v a n c e d rnachhery or equiprnent (0 lease paymenls, if some or all of the assets being acquired h the project are leased: (g) increasedworkingcapital reguirements (inventory,cash on hand, receivables, payables,etc.) may hcrease as a resull of increasedbusiness generatedby the capital projecL Q22-6. Cash inflows that might be expected fronr e capilalexpenditureinclude: (a) rov€nu€slrorn additional business gen' erated by the project; (b) cost savingscrealed by the capilal expendilurethat resull in a reduclionof cash outllows (8.9., maintenancosav' ings, labor savings, reduced inventory r e q u i r e m e n t sr e s u l l i n g t r o m r e d u c e d setuplimes,etc.); (c) retentionof market share that mighl have been losl il the capilal expendilurewere n o l m a d e ( p a r t i c u l a r l yi n t h e c a s e o f a d v a n c e dt e c h n o l o g i e st h a t i m p r o v e p r o d u c lq u a l i t y ,r e d u c e c o s t s , p r o v i d e m a n u f a c t u r i n gl l e x i b i l i t y ,€ t c . t h a t c a n providea competitiveadvantagelo lho firm wilh the techrology); (d) salvage frorn the sale of the property at the end of the economiclile c/ the capital Prolect. benefils lrom investing A?2-7. Sornenonquantiliable in advancedmanulacturingtechnobgies, such as ClM, FMS,and robotics,include: (a) improvedproducl qualily (abilily to meet closer productionlolerancesand at tho same time reducelhe variabilityin producticnoutput); A22-5.
fuptsP
589 (b)
docmrod nrrchhr trtup and rhorlor nrmufaclurhg aTcb tirnra (wt bh prot ido lho company with tho ability to adjust outpul quanlity end veririy guickly to mo.l rapidly changing curlomcr dornane). Tar &procbtion ie guito likoly to diffcr fronr boofc dcprcciatbn boceurc thc cool r.covery podcrd ueod fc tex purpooor ir. uaually rhorfci than tho oconornic lilr ol tho'assrt uted for finarcial @unting purp6er. Abo, an ecccl. onled melhod of depnciation is tlpbaly used for tex purpo..r, whrrosr tfre iiraigirt-tinr molhod ir npn c{trn trcod for bok purpoer. Book dopreciatbn lhorrH not be cqrsiJored in ulindhg tho friun c8!h tbr, lrrn a projoct belurr bok deprcciatinn har no elbcl qr lho rnornt or linhg of cash tbm. Tax deprccidbn stould bo conrbered in ostF maling lho luturc cach llowr frorn a proioct bocaurc lax deprccialion reduces tarsblo ircqno and, thereforo, tax liability. Tax deprociation rccult! h a tar ravhgs, i.j., a reduction oatar liabilitythat is a caqh outtbw. The timing of cssh flnn's lr affoctod by the tar d€p.scratbo rnothod and thc recovory period usedFiunciel accotrnthg dora sro nol mtirely ruit. ablt for ucc h evaluathg capital expendilure propocsb becauss: (a) Finenciel accounling uter lhc accrual buir. Capilal oxponcftun docioicrr 9enrrally rety on eslimales of cash flows, r a l h e r l h a n r l v c n u e s a n d e x p e n l r es delerminedsr the rccrual basis. ,
A2,4.
Q2-5.
^)2-1O.
@2-11.
(b)
Firancial accounting ir desiTrcd b rnerruro prricdb oamings. Capilal rrponditurc eva.luatbn is cqrcomed with tho lile of a given prc,iecl, rrhiclr reldorn corrorpqrds to urual accorrrting p.rkdr. (c) Financial tccounling mcalunr tho rccultr of oporati
ChapterZ
59
E)GRCISES
E2t2-1
.
Year I
Estimated Demand ln Unitr t2,ooo
Unit Salec Price $25
Unit Variable Cost $15
Unit Contribution Margin $ro
2 3 4 5
12,OOO 12,OOO 12,OOO 12,OOO
25 25 25 25
15 15 15 15
10 10 10
to
Total net pretar cash lnflowr from Inltfal cash outflow (cost of asset}r....r........ $55or0oo Lesr pretax estimated salvagey?hro.......... (i2s.ooo) Excegs of net pretax cash inflows over cost.................
Net Pretax Gash Inflowa @Salgg $l2o,ooo
12o,0oo
12O,OOO 12O,OOO 120,000 36OO,OOO
42s.ooo fl.75J9o
v2-2 Unit Unit Unit Estimated Contribution Demand Variable Sales Year Cost Margin In Units Price 1 o,ooo $3 $12 $g 2 3 8,0OO I 12 3 3 IO,OOO I 12 4 3 1O,0O0 12 I 5 3 10,0oo I 12 6 1O,OOO 3 12 9 7 3 1O,0O0 I 12 8 3 I 8,000 12 I 3 I 0,000 12 10 3 4,0oo I 12 Total net pretax cash inflows from sa|es.,....r........r...,.r Initial cash outtlow (cost of machine).....,...$15O,0OO Less pretar estimatedsalvageva1ue.,........ (15,000) E:
Net Pretax Cash lnflows f:g- S"l* $ 18,OOO 24,OOO 3O,OOO 3O,OOO 30,000 30,000 3o,0oo 24,OOO 18,OO0 12,000 $r46pOO 135'OOO $1 I I rOO0
dtWtsz
Year
59t
Estimated Net Pretar Gash Inflowr
I 2 3 4 5
$f 5,oo0
6
l O,OOO
20,OO0 2O,OO0 20,OO0
l5,ooo
8% Annual Price-level
loiu"t-g!t ( l +.06) l = 1.060 (l+.06)z=1.124 (l+.06)r=l.lgi (1 +.O6)r=1.282 (1 +.O6)c=1338 (1 +.06)c=1.419
Price-level Adiustod Net
cast Elgf
s 15,900 22,490 23,920 25,2& 20,070 14.190
Total price-level adjusted net pretax cash Inflows from operaUons . $121,700 Plug cash inflow from salvage $5,ooo Price-leveladjustlng!|t............. 1.419 7.095 Total price-level adjusted net pretax cash inflowa Larr Initial cash oufftow...,........r...
$128,795 75.000
Ercess of net pretax cash inflowr over Initiat cash outflow,..,........,....r........o... Li3J95 E224 Year
Estimated Net Pretar C"sn t"now"
9% Annual Price-level Adjustment
Price-level Adjusted Net C""tr lnno*s
I $2o,ooo ( 1 + . O 9 ) t = 1 . 0 9 0 $ zr,8oo 2 3O,OOO ( 1 + . O 9 ) z= 1 . 1 8 8 35,640 3 4O,00o ( 1 + . 0 9 ) a= 1 . 2 9 5 51,goo 4 80,o0o g41720 (1 +.09)a=1,412 5 60,o0o (1 +.Ogls=1.539 921340 6 6O,O0O (1 +.0910=1.677 too,82o gor00o 7 (1 +.O9)z=1.828 109,680 I 6O,O0o (1 +.09)a=1.993 | 19,580 I 4O,OOO (1 +.09;e=2.172 80,98o 10 2O,O00 (1 +.oo)to=2.367 47r34O Total price-levet adjusted net pretax cash Inflows from operations...............r....o..$750,4o0 Plus cash inflow from salvage. $iO,OOO Price-level adjustment............. 2.316l 23,670 Total price-tevel adjusted ........ $774,O7O ^ not pretax cash inflows Lesr Initial cash oufi|ow.....t......r.... 25O,OOO Ercess of net pretar cash inflows over Initial cash outflow $524,O7O
Chagter22
592
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ClvpterZ
59?
E22-8
Year
(1) Estimated lnflationAdjusted Net Cash Inflowa
(21 Tar Deprc-. ciation'
(3) Tarable Income (Loss)
(tl - (2) qlo,ooo)
(4',1 Tar Uability With 4OVo Tar Rate
a0% x (3)
I $3O,O0O $40,00o $ (4,OOO) 2 40,000 64,0Oo (24,OO0) (9,6O01 3 5O,OOO 38,4OO t 1,600 4,64O 4 6O,OOO 23,0OO 37,OOO l4,goo 5 7O,000 23,00o 47,OOO 18,8OO go,0oo 6 11,600 6g,40O 27,38,O 7 60,000 o 6O,OOO 24,OOO Total net after'tar ca$h inflows.,,....t..................,........,. Lesr initiat cash outflow to purchase system,_.ro.,.t...... Excess of net after-tax cash inflows over initial cash outflow .......r..r..................i
rear
t 2 3 4 5 I
MA6pg S-year Recovoty Rate .200 ,320 .192 .115 . 11 5 .058 1.000
Depreciable Basis $2OO,O00 2OO,OO0 2OO,O0o 2OOrOO0
2O0,0oo 200,O00
Tar Depreciation $ 4O,0o0 64,00o 39,40o 23,OOO 23,O0O 11 , 6 0 0
gegg,ogg
(5) Net After.tax Cash Inflows $ 34,OOO 49'600 4{i,360 45,2OO 51,2OO 52'040 36,OOO $.?14rOOO 2OOTOOO
q!_u,o0o
w
Chapter2
vJ2-7
Year
(11 Estlmated Periodic Net Cash lnflows
l2l Tar Depreciaiion'
(3) Taxable lncome (Loss) (1)- (2) $ (4,3ool
(4) Tax Uability wirh 40% Tax Rate
q1,72ol 1 $1O,OoO $14,3OO (3,800) (9,5ool 24,50O 15,00o 2 IrOOO 2,5OO 1 7 ,5 OO 3 20,OOO SrOOO 12,50O 12,500 4 25,OOO 8,90O . 6,440 16,1OO 5 25,O0O g,UO 16,10o 8,9OO I 25,0OO gr44O 16,1OO 8r9OO 7 25,OOO 6r20O 15,5OO 4,5OO 8 20,OOO 6,OOO o l5,ooo l5,0oo I 4,O0O 10,000 o 10 l O,OOO Total ngt aftErt-taxcash inflows r........................,.........r..... Aftentar cash Inflow from salvage at end ol economic life: Pretaxcash inflowfrom sa|vage........r......... $1Or0O0 4,OOO Lesr tax payable on sale at 49% tat rate.... Total net aften tax cash inflows
Year I 2 3 4 5 6 7 8
MACRS 7-year Recovery Rate .143 .245 .175 .725 .089 .089 .089 .045 1.000
Depreciable Basis $ l Oo ,OOO l OO,OOO 1 O0 ,OOO 1 O0 ,O0O 1 O0 ,00o l OO,OOO 1 O0 ,00o 1 O0 ,OOO
Net Afteptax Cash lnflows (1) - (41 $ 11r72O 18,800 19,OOO 20,OOO 18,56O 18,560 18,560 13,80O I,O0O 6rOOO 9154,OOO 6,OOO $160,000
Lesr iniUal cash outflow to purchasg systemo...r..o........o... Erces8 of net after..tax cash inflowg oyer initial cash outflow '
(51
Tax Depreciation $ 14,300 24$OO 17,5OO 12,5O0 8,90O 8,90O 8,90O 4,50O
sl oo,ooo
l0o,0oo $ oo,ooo
Chapter22 595
PROBLEMS P22-1 (1)
Year I
2 3 4 5 6
Periodic Cash Inflows $ 20,000 ?2,OOO 24,OOO 19,000 15,OOO 1O,0OO
9lgg,ogg
Year I 2 3 4 5 6
(1 ) Depreciable Basis of Property
$60,ooo 60,000 60,0Oo 6O,O0o 60,OO0 60,000
(21
(3t
Inlladop Adf usted Estlmated Gash lnflours I "r6Jrlce-LoveI AdJustment (1)x (21 (1+.08) 1.O90 $ 21,600 (1+,0$)z 1.169 25,652 (l+.08)g 7.260 30,240 (l+.08). 1.360 24,48,a (1+.O8)r 1.499 22,O35 (1+.0$)c 1.597 15,970 s139,877
(21 S-Year Property Recovery Perrentage .200 .320 .792 .115 .115 .058
(3) Tax Depreclatlon (1) r (2) $12,Ooo 19,200 11,520 6,900 6,900 3,490 $8O,OOO -
ChagterZ
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597
P22-2, cost
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mach|nettt.................r..r....r........rr...........o...r.......o,.........r...
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llet cash outtlow at beginnlngof proiegt.......,.....r.D....o......................... S o,ooo Tar basis of otd maching tradgd |J|...................o....ro.........r..D..r...,or...r...r gro0o Tax basis of new machine ..........r.........t.........
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Original Tar Basis of Old Machine
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Originat Tar Basis of New Machine
$17,ooo 17,OOO
l7rooo 1 7 'OOO 1 7 ,OOO 1 7 ,OOO
(21 S-Year Property Recovery Rate .320 .192 .115 .l l5 .058
(21 5-Year Property Recovery Rate .200 .320 .192 .t t5 .115 .o58
$ 4,ooo
(31 Tar Depreciation Note that year 1 is on Old actually the second Machine y6ar the old property is (1) x (21 depreciated.Therefore, s3,2OO the recovery rate for 1rg2o the second year ls used 1 r 1 5 0 to compute the amount of depreciation on the I,l50 old property in the first 580 q9'ooo year of the capltal erpenditure proposal. (3) Tax Depreciation on New M achine
(11x (21 $ s,4oo 5,44O 31264 1r955 1,955 986
$17,ooo
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599
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($2Oper unlt r gOr0OO unitg per yearf.......:.....,.., $l1600,000 Incremental cost ol manufacturlng yalve stem: Dirgct materialg (1i4.5o x Sorooou nits) ...........,........,o.......... $ 360,000 Direct labor ($f.ZO - $Ao1 per unit r gorooo units)...,.......r. 232,OOO Variablefactory overhead(($l.ZO- $aO) per unit r 80to0o
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72|OOO $
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Totalannuafcosts savingsto make rather than blr1l................ -$ 936.000
Year 1 2 3 4
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Tar Basis of New Tools $2,5OO,OOO 2,5OOrOOO 215O0roo0 2,5OO,OOO
3-Year Property Recovery Rate .333 ,444 .149 .o75
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P252-6(ConUnuedf
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Periodic Net Cash Inflorvs $ 7,5OO 7r2OO 6,9OO 6,6OO 6,3OO 6,OOO 6,OOO
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(1+.101 = (1+.1Olz= (1+.1Ols= (l+.10p = (1+.10;r = (1+.1O10 = (1+.lO)z=
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5-Year Property Recovery
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@l@ .204 .320 .192 .115 .115 .o58
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$4o,099
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Year I 2 3 4 5 6 7 8 I 10
(31 InflationAdjusted Annual 10% Price-Level Adiustment (l +.1o) = 1.1oo (1 +.1O)2 = 1.210 (1 +.10)o = 1.331 (1 +.1O)r = 1.464 (1 +.1Oll = 1.611 (l +.1Olo = 1.772 (1 +.1olz = 1.949 (1 +.1O)8 = 2.744 (1 +.lole = 2.358 (1 + .l Olto = 2.594
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(1) Tax Basis of Depreciable Property $roo,000 1OO,000 I OO,0OO
l2l 7-Year Property Recovery Rate .143 .245 .175
(3) Tax Depreciation Available (1) x (21 $ 14,300 24,5OO 17,500
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610
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611
GASES
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c22-1 Some of the factors that affest the decisionof whether or not to delay the investmentin new cleaning equipmentare given below. Each factor can have two sides (1.e.,delay versus no delay)dependingupon the circumstances involved.
(al' "" oiu onsinsenerar' "oT;: " r3l,?Hhiil:1i"J#l: fi:Hl Business deteriorating-delay.
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I
612
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C22-1(Conctuded) (h)
(il
Gompetitors'plans for obtainingsimilar equipmentand achieving market advantage. High probabili$--do not delay. Low probability-delay. Companywants to maintain competitiveadvantageor meet competition. Ability to predict timing and increasedvolume of demandfmm new or edsting customens. Good-better quality of decision;could defer switch longer. Low,-less reliable criteria for dscision. The better a companyis able to predict new business,the more certain il can be of its decisionand, possibly,the longerit can wait to make a change,
c22-2 Knightis probablycorect in her assessmentthat the proposedcapital investment framework grants too much freedom to the divisions.Neoglobeb long-run performancedependson its capitalinvestments.Whiledivisionsmust have some responsibilityfor capital investmentsfor the proposedorganizationstnrcture to be effective, corporate managementmust maintainadequate control to direct the future courss of the firm. Underthe proposedframeworlg division managementcontrolsa substantialportion of the capitalbudget,and in some year:i' few funds would be availablefor investmentby corporate management. The presentproposalwould reducecorporatemanagementbability to diminish a productline, and it also would impair managementbabilityto have adeguate funds availablefor investmentin new businesses. Capitalinvestmentproceduresshould involveboth divisionand corporate managementsin such a way that divisionmanagementstilt should be able to influencethe future directionof the firm. Such proceduresmight include classificationof capital projectsinto groups,some of which could be approvedby divisionmanagementwithout corporatemanagementstudy, An alternativeto the Neoglobecapitatinvestmentprogrammight have the followingfeatures: (a) All proposedinvestmentproiectswould be classifiedaccordingto their natunHeplacemen! cost savings,erpansion. (b) Replacementand cost savingsproiectscould be adoptedby divisionmanagementalone,without approvalof corporatemanagement,providedan individualproject did not exceeda specifieddoltartimit and the totat of such projectsdid not exceedanotherspecifieddollar timiL The doltar limits would reflect the nature and size of each divisionboperations. (c) All oxpansionprojects,or other projectsthat exceedthe doltar limit, would be submittedto corporatemanagement for evaluationand approval.
ClppterZ
613
c22-3
The process of planning for and ovaluatinglong-terrn commltments of resources is normally relerred to as capital erpenditure planning, evaluating, and controt, or capital budgeting,The capital budget is distinct in that it focuses on the long-term effect of lesources committed. lts primary objectives arc to provide managementwith (ll a formal process to chart its futura coutlsef (21a means of ranking and selecUngamong altornativenesouncecommitments to maximize rcturn on investment and (3) I pnogr:lmfor ongoing evaluation of extant nesourcocommitmsnts. Any significant resource commitmentis viewed as a projecl Hence, the capital budget is composedof projects,some of which are in pnocessand some oi which are pr,oposed.Each project affocts significant periods of time in the ongoinglife of a company.A project often involvesthe evaluation of atternatives and the purchaseof such assets as property,plant, and equipment. lt should also consider,howevor,any proposalor pnogriamthat reguires a signifieant resouncocommitmentover an extendedperiod, such as the development of new products' openingnow markets, and the design and development of major computer pnograms. Onca nesourceshave been committedto a particular project, the project reguires ongoingevaluation;i,e., are the projectb objeciives being meti lf not, it needs to be evaluatedin terms of wtretherthe project should UJ iutained as is, modifiedif possible,or abandoned. McAnguscan make significant use of capital expenditure planning, evaluating, and control. At the division level, projects will need to be defined in terms of those elementsof the plant, or operationof the division,over wtrich the manager has control.On the basisof the facts given,the divisionmanagerhas authorityto operatehis or her plant essentialtyas if it were an independent company.Hence,anythingaffectingoperations,which has required or wilt requiresignificantresourcecommitmentover i significantperiod of time, shouldform an integralpart of that divisionbcapital budgel At the top management level,the presidentmay view each divisionas a project, particutarly for evaluationpurposes.The other describedactivitiesof top management(investigating and evaluating_such things as new markets, etc.) are projects in the capital budgetingsense.Theseand othel new proposatsmay be defined,anafyzed, and evaluatedusing a varietyof avairabretectrnigues. c22-4 (1)
Ametfs revision of the first proposal described in the case can certainty be considered a viotation of the Sfandards of Ethical Conducl Arnett discarded the reasonable proiections and estimates after being questioned and pressured by Earlg, and used figures ttrai frave only a remote chance of occurring. By doing this, Amett viotated tha standard of objectivity (which requires that the management accountant communicate information fairfy and obiectivety and disctose fullyi"iur"nt information that
Chaoter 22
611
C22-4(Concluded)
l2l
(3)
{4}
could noasonablybe expscted to influenco an intended ussrb understanding of the report pnesent€dl.By altering the analysis,Arnett also violated the standard of integrity (which requires that the management accountant (fl refrain from engaging in an activity ttat would prciudice hig or her ability to carry out the rcquired duties ethically, and (2) communicate unfavotableas well as favorableinformation, profes.sionaliudgments, and opinions|.Arnett also violated the standard of competence (which reguires that the managementaccountant pnepanocomplete and clear ruports snd rccommendatlongefter appropriateanalysis of relevant and reliable lnformation). Basedon the facts in the case,Earlewas certainlyin violation of the Standafdsof EthicalConductas a resultof pressuringa subordinateto preparo a proposalwith data that wenofalse and misleading.Earle has violatad the standardsof competence(failedto perform professionalduties in accordancowith ,.. technical standards;and failed to prepare complete and clear reports and reliable information!,integrity (engagedin an activity that would prejudice his or her ability to carry out required duties ethically,actively or passivelysubverted the attainment of tho organizationb legitimate and ethical objectives,failed to communicate unfavorable as well as favorableinformation and professionaljudgments or opinions, and supported activity that would discredit the profession),and objectivity (failedto communicateinformation fairly and objectively and did not disclosefully all relevantinformationthat could reasonablybe erpected to influencaan intendeduserb understandingof the report presented), The elements of the proiestion and estimation process that are compnomised becauseof a predetermined,misleadingoutcome include: (al the quality of the base data, (b) the quality of the assumptionsused, (cl the probabilityof the projection occurring, and (d) the credibility of the people submitting the projection. The internal controlsFore Corporationcould implementto prevent unethicalbehaviorinclude: (a) approvalof all formal capital expenditureproposalsby the controtter and./orthe board of directors, tb) designatingI non-accounUng/financo managerto coordinatecapital erpenditunenoguestsand./orsogrogatingduties during tho preparation and approvalof capital expenditurerequests, (c) requiring all capital orpenditurs prsposals bs roviowed by senior operatingmanagemen!which inctudesthe controtler,belorc the proposalsare submittedfor approval,and (d) requiringthe internalaudit staff to reviowall capital erpendituro proposalsor contractingwith externalauditorsto review the proposal if the corporationdoes not havesufficient personnel.
6t5
QydsZ
c122-6 ' (11 Referringto the specific standards in the IMA's Standards of Ethicat Conduct for Pnctitionerc of ManagementAccounting and Financialllanagement, the conduct of H. Dodge and G. Watson is unethical as discussed below: (al
H. Dodge! first rcvlsion of tlrc proposal for the warrhousc coDyoreion was unethical becausoDodgeb actiong violate the following standards:
Gomoetence.Although thc sstimates used in the analysis are based on managementbjudgment, Dodgeb action in changing reasonabfe estimateato ramote assumptionsls unethlcal. Management accountants havo the responslbilityto propare complete and clear reports and rucommandationsafter appropriate analyses of relevant and reliableinformation. Inteoritv.Dodge has the rtsponslbili$ to avoid conflicts of interost, refrain from subvertingthe attainment of the organizationb legitimate and ethical objectives(profitability),and refrain from engaging in or supporting any activity that woutd discredit the profession. Obiectivitv.Dodge has the rcsponsibilityto communicate informaUon fairly and objectivelyand to disclose fully all relevant informauon that can influenco an intended userb underistanding. (b) G. Watsonb conduet in giving H. Dodge specific instructions on preparingthe second revisionof the proposal is unethical because Watsonbconduct violatesthe lotlowing specific standards: Gomoetenee.Watsonhas the responsibilityto perform his professional duties in accordancowith relevant technical standards, such as using conservatismand realistic estimates in the net present value analysis.Managementaccountants should prepanocomptete and clear rspons and recommendationsafter appropriate anaiyses of relevant and reliable information. confidentialitv' Watsonshould refrain from using or appearing to use confidential information acquired ln the courso of his work tor unethicaladvantagefor personalgain (savingon commutingtime and costs). Intearitv.Watson has the responsibilityto advise all partios of any potenUalconflict of interesl Watson shoutd refuse any favor (tho warshousercducing his commuting time| that woutd appear to influcnco his actions. Watsonshould communicate unfavorable as weil as favorable lnformation and professional Judgmentsand opinions. obiectivitv.Watsonhas the responsibilityto disclosefuly alt rolovant informationthat can influencean intended userb understanding of the analysis.
I
6rO
22 ChaPtor
C22-S(Concluded) Steps recommendedby the Sfaadardsof Ethical Conduct for Pnctitioners of l2l *lanagement Accounting and Financial *lanagement that H. Dodge should follow in attemptingto resolvethis situation are as follows: (al Dodgeshould first investigataand see if Evans Companyhas an estabflshedpollcy for resolving confllct, and lf such a polict erists' Dodgeshould lollow lL (bl Since it sppears tAat G. \f,/atson,Dodgeb superior, is involved, there is no need to confront Watson or discuss this lssue with Watson any further. Dodge should present the sltuaUonto the nert higher level, the vice president of finance, tor rpsolution. (c) lf Dodgedoes not receivoany saUsfacUon,Dodgeshould continue to successivelyhigherlevels,includingthe audit committee and the board of directors, if nscessary. (d) Dodgeshould clarify the concepts of the issus at hand in a confidenUaldiscussionwith an obiective advisor,i,o., a peor. (el lf the situation is still unlesolved after erlrausting all levels of internal revieq Dodge will have no nocoursebut to resign and submit an informativomemorandumto an appropriate representativeof the organization. (0 Unlesslegallybound (whichdoes not appearto be the case in this situation),it is inappropriateto communicatethis situation to authorities or individualsoutside the organization, (g) Dodgemay consult with personal legal counsel. c22-6 (1)
By referringto the IMA'sSfandardsof EthicatConductand taking into considerationthe specific standardsof competence,corfidentiality, integrity,and objectivity,L. Forrestshould evaluateB, Rolland'sdirectives as follows: Comoetence.Forresthas a responsibitityto presentcomplete and clear reports and recommendationsafter appropriateanalysis of relevant and reliableinformation.Rollanddoes not wish the report to bs comptete or clear,and has providedsome informationthat is not totatly reliabte. confidentiatitv.Forrsst should not disctoseconfidentiatinformation outside of the organization;but it also appearsthat Rollandwants to refrain from disctosinginformation to the board of directors that it should know abouL Inteqritv.Roltandis engagingin acUviUesthat could prejudicehim from carrying out his duties ethicatty.In evaluatingRoltanOt Airective as it affects Forres! Forrest has an obligationto communicateunlavorabloas well as favorableinformationand professionaljudgments or opinions.
ChapterZ
617
C22-8,(Concluded)
l2l
Obiectiviw.Tho responsibilityto communicate information fairly and objectivety,as welt as to disclosa fully all relevant informaUonthat could rrasonably be erpected to influsnco reports and rtcommendations presented, is being hampered.The board of directors will not have the full scope of informationthey should have when they ars pnesentedwith the anallsis. By refening to the Slandardsof EthicalConduct, L Forrestshould take the following steps to resolvethis sifuation: (a) Forrestshould first investigateand see if lDl has an established policy for resolutionof ethical conflicts and, if so, follow those procedures. (bl lf this policy does not resolvethe ethical conflict, the next step would be for Forrestto discuss the situation with his supervisor, Rolland,and see if he can obtain resolution. Ons possible solution may be to present a "base casst' and sensitivity analysis of the investmenLForrestshould make it clear to Rolland that he has a problemand is seekingguidance. (c) lf Forrest cannot obtain a satisfactory resolution with Rolland, Forrestcould take the situation up to the next layer of management, and inform Rollandthat is being done. lf this is not satisfactory Forrestshould pnogressto the next level, and eventually to all higher levels of managementuntil the issue is resolved (i.e., the president, audit committee, or board of directors). (dl SinceRollandhas instructedhim not to discussthe situation with anyonoelse at lDl, Forest may want to have a confidentialdiscussion with an objectiveadvisorto clarify relevant concepts and obtainan understandingof possiblecourses of action. Forrestmay want to talk to a close professionalfriend or the IMA "Ethics Hotline"lor this purpose. (e) lf Forrest cannot satisfactorityresolve the situation within the organization,he may resignfrom the companyand submit an informative memoto an appropriateperson in lDl (i.e.,the president,audit committee, or board of directors). (f) Forrestmay consultwith personallegalcounset.
CHAPTER23
DtscusstoN ouEsnoNs O2&1.
Q23-Z
023-3.
Q23-4.
023-5.
023-6.
Q23-7.
The weighted average cost of caphal is computd by lhe lolbwing steps: (a) Calcrlale ech componenl of caFital as a p€rconlage of total capital. (b) Calctlale the after-tax cost of each individual capital componenl (c) For each capilal componont. multiply (a) by (b) and sum lhe resulls. Using the cosl of a specific source of funds may lead to laully decisions. For example, when debl is used, low.return projects would be acceptable while better investments nrruld have to be ruled out in a following period, when @mmon stock shares are soH lo obtain tunrjs. There are two problem areas associated with eslimatingthe firm's weiThtedav€ragecost ol capital-the proportions of each source ol funds and lhe cost ol each souroe of funds. The proportionsthat are expected over the i n v e s t m e n th o r i z o n s h o u l d b e u s e d . S i n c e these amounls are typicallyunknown,the proportionsdesired by managementin the long run aro usually used. With fesp€ct lo costs, the market prices of each source of lunds should be used. Since the market price varies over lime as creditor and investor expectations change, curr€nl market prices adjusted for changes expectedby managem€ntar€ Commonlyused. CGA-Canada(adapted).Reprint with permission. The payback (or payout) period method measuresthe lengthof time requiredby a projectlo recoVerthe inilialinvestmentoutlay. In computingthe accountingrale ol relum on o r i g i n a l i n v e s l m o n l ,t h e d e n o m i n a t o ri s t h e orrgina.linvestmenl,whereas in computingthe accounlingrale of relurn on avaraoe inveslmonl, lho denominaloris the averageinvestmenlThe presenl vatus concepl states that a dollar recetvedtoday is worth more than a dollar to bs receivsd al a fulure date because of the earningsthe 1oday.dollarcan generatein the i n t e r i m .l t i s i m p o r t a n ri n c a p i r a l b u d g e r i n g becauseol the relativeVlong perircdsbelween lhe investmentof tunds and ihe returnol those funds as eamings (i.e..dollars ,eturnoda long Itme in the tuturearo wlrth considerablylesi than lhoso investedtoday). T h e b a s i c d i f l e r e n c eb e t w e e n t h e p a y b a c k methodand the nel presontvaluemethodcon. c a r n s l h s r e c o g n i t i o no f t h e t i m e v a l u e o l monoy. The payback method, which ignores lhe time value ol moneyand all cash llows beyond the payback pericd for the project, is
618
the measure od the time it will take lo recover the inilial cadtal inveslmenl in nct cash infbws. The net present value method does consiier lhe lime value d mon€y. This method involves comparing the present velue d all future cash inflols and outflows of a given project, using some minimum desired rate ol return A posilive resuh implies that the project,s rale of relurn erceeds lhis minimum ralg, whereas a negative resull indicales that the projed,s rate ol retum is less than thb minimurn rate. O23€. ln the net present value method, the discount rate is known; whereas, in the intemal rate ol relurn melhod, the discount rate is not known. ln the internal rate of return melhod, the discounl rate is the one that will resuh in a net prgsenl value ol zero. 023-9. The net pr€sent value method assumes that earnings are reinvesled at a rale of relurn equal lo the tirm's cost of capitat,whereas the intsrnal rate of return method assumes lhal earnings are reinvesled at the rate o'f relum of the parlicularproject being considered.The firm's cost of capilal rate is more realistic.ll an i n v e s t m e n tp r o p o s a l i s p r e d i c t e d t o b e erlremely profitable (e.9., having an internal rale ol returnof 50%), it is unlikelythat similar proposalsare available. Holvever, a firm s h o u l d o r d i n a r i l yh a v e s e v e r a l i n v e s t m e n l opportuniliesal or near the ralo of its cost ol capilal. CGA-Canada(adapted).Reprinrwilh permission. 0 2 3 - 1 0 . S s t l i n g t h e d i s c o u n tr a t e a t s o m e t h i n gi n excoss of the cost of capital in order lo com. pensate for risk and uncerlaintyassocialed *;16 3 r.qpilalexpenditureproposal is concep l u a l l y u n s o u n d ,b e c a u s e t h e r e i n v e s t m o n t polenlial of cash llows is overstated. Cash receivedin early periods has more value than cash received in later periods, because only the cash receivedin the early periods can be reinveslsd.As a consequence,the use of a rat€ in ercoss ol the reinvestmentrate in the nol presonlvaluemethodwill resultin an overstatementof the value of cash recsivedeartyin the life of the capital erpendilure project. A betler approacfiwould be to clmpute lhe terminal value of the cash lbws using lho reinvestment rate (i.e.,computethe value of all cash flows at the end ol the lile of the projecl),and then dis. counl tho total to pres€nlvalue at a risk-ad,iusted discountrate.An even benerapproachis to explicillyconsiderunc€rtaintyby using probabilityanalysis,as discussedin Chapter24.
QrWtsA
6r9
gERCtSES E23-1
Proportion of Funds
Funds-Sounce
Bondg ll0% r (l - 45o/otar rate)) .,....,.... Prcferrtd gtOCk......................r.r.'....!...... Common stock and retained earnings...
390h 20o/o 5,00h 1000h
Afteptar Gost 5.5oh l2.5%o '
15.O7o *f
Weighted Cost 1.65o/o 2.500h 7.50oh 11.0,50h
'
l12o/or $l OOpar value for prafered stockl * $96 market value * ($TS,OOO + 5O,O0Oshares of common stock) .F$f O markst price per gharo
E23-2 Weighted averago cost of capital before bond retirement and sale-leaseback transaction:
(r)
et
(31
(41
Percent Pretax After.tar CapitalComponent Amount of Totaf Cost Cost 8ond3.......o.......r....r....... $ 5,ooo,ooo 50% 8.Oo/o 4.8o/o Prgferrgd gtock....,..,....r 1,000,0o0 10% 9.Oo/o 9.O%
Common gtock and rstained earnings...
4,0oo,ooo
400h 1000h _91_qogo,ogg
72.50h
12.5Vo
(s) Weighted Gost
(21r (a) 2.40h
.s% 5.Ooh 9.30h
Weighted avarage cost of capitat after bond retirement and sale-leaseback transaction:
(r)
(21
(31
(4t
Percent Pretar Afteptax Gost Gost 10.ooh 6.Aoh g.ooh 4.goh g.ooh g.ooh
Capital Component Amount of Total Lease.r.........,.. $ 1 , o 0 0 , o o o 100h Bonds..................r......... 4 , O 0 O , O O O 400h Preferred stock............. 1,00o,ooo l o o h Common stock and retained oarnings... 4,O0OrOOO 400h
s!g,ogg,oog
1000h
12.50h
12.5o/o
(sl Weighted Cost
(21r (al
.600h 1.920h .gooh 5.OOo/o _8.42%
"-\
w
Chapter23
F,.3-3 tl)
Annual cash inflow before fncomet3r.....,..,....,....r,....$15,OOO sl5,ooo Less depreciation(the samo for financial accounUng and Incometar purposes(94O,OOO cost + 8 years)f.,......o...
SrOOO
Annual tarable income ......,....o..... slo,ooo Annuaf Incomet* ($f or0oOtaxable income r AOohl.. 4,OOO Annual income after tares Annual aftgrttax cash inflow.,.....,...,.........o.,r,.....r,.,..r.
$4O,O0OInitial cash outflow
$l1,ooo
= 3.636 yearsto payback
$ 1 1 , O O Oa n n u a l ca sh i n fl o w
tzl
4,OOO
$ 6,000
S6,0OO averago annual Incomo _ .15 or 15oh rate of return
$40, OoOoriginalinvestment
on originalinvestment
E23-4
t1l
tzl
t3)
$34,OOOinitial cash outflow
SlO, OOOannuafcash inflow
= 3.4 years to payback
Present value of annual cash inftows for six years ($1O,OOO annual cash inflow r 3.284).,...o......., Less initial cash outftow to acquire investmsnt.,....... Net present value of investment,.......r..........r..
$37,84O 34.000 ___3'940
cash dgsirgd at gnd of six yeani .....D.....,.....r...r,.,..or........r...r... 534,O00 Present value of $i co-pounded annually at lioh,................ x .432 lnvgstmgnt required ....,................,.,,........,....r.
fl_4$sq
E23-5 Presentvalue of annuarcash inftowsfor io years tl) (S20rooO annualcash inflow r 5.2i6).....,...,...............,.,.. s 104,320 Presentvalue of satvagovalue at end of i o-year life (Sl O,ooOcash inftow from salvager .2701.............. 2.700 Presentvalueof alt cash inf|ows.....r..r....,.r.......,.....,. $107,O2O Less initial cash outflowto purchasepness (1OO.5OO) Ne t p r e s e n t va l u e o f i n ve stme n t
tzl
Present $6,520 net present value = value inder $ 1 O O , 5 O Oi n i t i a l i n v e s t m e n t
L__ j.52q =
.O65 or 6.5"h
ClapbrA
el
E23-8
tr) MACRS FrcoYory Brio
0.200 o.320 0.192 o.115 o.tt5 o.o58
1 2 3
a 5
c
t2l
f3l Co.l Rocovrry Undr Mlg35
StnlghlUno Rrtr
r)
(5)
StnlghtUlrr DrPrchUon
o300 0300 o^200 o-200 o.to0
32,OOO 19"200 11"500 t I r5oo 5r800
lncomr Ter Srvingr (!l x.o%
Dlffon onc4l
t3l - l.)
o.too s 2o,ooo I lo,ooo 2OrO00 2O,000
20,ooo
201000 10,000 _$!oo,goo 3100,000
c4
{01
slo,ooo 12,OOO (8o0) (8,5OOl (8,500) (4,200)
o
Prreont Valrr of tt 0 ta%
o.477 o.7E0 4l8OO (320) o.675 [3/4OOl 0,592 (3/4oO) o.519 (1,6801 o.456
9fr0oo
______9
t8) Prurnt Vrfri ol Trr Srvingn
(olrf7l t3,508 3,691
(2r0) (2,O13) (1,785)
cr88) _93'499
E23-7
(11 Year
UnadiustedEstimate of CashInflows
1 2 3 4 5
s2O,OOO 1 8 ,O00 1 6 ,O00 l O,OOO
t o,ooo $74,ooo
Inflation Adiustment 1.1oooor l.2looo 1.33iOO 1.46410 1.61051
InflationAdjusted Estimate of Cash Inflows $22,OOO.OO 2l,78O.0O 21,29 6.00 14,641,OO 16 , 1 O 5 . 1 O s95,822.1O
t(l +.1 O)nw h e re n = num ber of per iods
(21 Unadjusted Year GashFlours o $(s8,ooo) I 2O,OOO 2 18,0OO 3 16,000 4 I O,OOO
Adjusted Cash Flows
s(s8,ooo)
PV of $1 Q 15o/o l.OOO .970 .756 .658 .572 .497
22,OOO 21,78O 211296 14,641 5 l O,OOO 16,105 present Net value of investment.........
PV of Unadjusted Cash Flows
s(s8,oo0) 17,4OO l3,6Og 1O,528 5,720 4r97O (s.7741 $
PV of Adjusted Gash Flows s(58,OOO) 19r140 16,466 14,013 81375 8,004
$_z9eg
I
*\
e^
Chapter23
E23-8
Year I 2 3 4 5 6 7 8
(tl
l2l
Tar Basis Of New Alrplane
(31 Tax
7-Year Property Recovery Rate o.143 o.245 o.175 0.125 o.089 o.o89 o.o89 o.045
Depreciation on New Airplane (11r (21
$5OO,OOO 5OO,OOO
50o,ooo 500,ooo SOO,OOO 5OO,OOO 5OO,OOO 5OO,OOO
$ 71,5OO 122r5OO 87,50O 62,5OO 44,5OO 44,5OO 44,5OO 22,5OO
$goo,ogg (11
Yrar
Annrrrl Pr.trr c..h lnflowr
1 313o'ooo 2 13o'ooo 3
{ 5 6 7 8 9 10
(4 Trr Drpnclrtlon Dodugtlon
(31 lncnar (DocnerI In Tereblo tncomo (tl - (4
t 7r"50o t 58,500 12!2'5go 7r5oo
l3OrOOO
g7.5OO
12,50,0
13o'o0o 130'000 130'000 13o'o0o 13o,ooo 130'000 130,0OO
02'500 4ar500 a4r500 44'500 2!2,5oo o 0
67'500 8tt"5oo 8!t'5oo 8tt'5oo 1o7r5oo 130'ooo 13O,OOO
(4t
lrcorrrr Ter Rrtr
|;o'h 4o'h
Ft
lnclrrr {Oocrosrl In Incorrrr Ter (3) r {r}
923'4oo 3,ooo
{ot Aftenter c.dr Inflowr (t} - {51
$1oo,ooo 127'ooo
m Pnronl vrluo of $1 e 7gy.
(8t Prrrnt Vrltr of Aft*ter cuh lnflowr (ol r ftl
o.87o t 92,742 96,012 0.756
lO'h
17,OOO
llSrOOO
0.658
74,39
4och looA 4o',A 1o'h 4oV. 40% 40ch
27 'goo {}2oo u,2oo 34'2oo #l'ooo 32,ooo 52,OOO
1o3,ooo 95'8oo 95'8oo 95'8oo 87'ooo 78'ooo 78,OOO
0.572 0.497 o.{t2 o.37o 0.327 o.2g 0.247
58'916 47'013 41,386 36,021 28,'#}e 22,152 1g,2$o
Prercnt valuc of pcrfodlc after-tar caah Inflows Plur prercnt valuc of cftar-lax ralvagc Gtloo,ooo r 11- 4o%l | .24n......
Prcrcnt valuc of carh lntlorvr ovcr urcful ttfc of new a1rp1rnc............... toq Inlttalcaehouulow (costof new arrprane),.. Net prcrent valucof Invettment-.----.-
35'l O,911 "14,8i20
3s31r73i 5oo,ooo t 31,?31
6?3
CtppterTS
F23-0
$38,0O0 GOSIOf neW maChine....,..'..r.........'..............'.....r.'.........'.............,'....'..' ............'......'.................'................ l8,o0o Tt'adg-inallOWanCefOf Old maChlJtO
s2O,OOO 16,000
Net cash outllow at beginningof proiect
Tar basis of old machino traded in
_999'oo9
Tal! baSiS Ot nOW maChine .'.....r..r.....'...rr.r..rt...'........r........
AnnualCOSI Ot Opefating AnnualCOSI Ot Opgfating
Old maChit1O...........o.."........................or.'....... neW maChiltt8 r...............r.....'........................'r
Annual cost savings with ngw machine........'........."r'......'...'.'r'.'r.r.'.....
Year 1 2 3 4 5
(1) Original Tar Basis ot old Machine $20,OOO 2O,OOO 2O,OOO 2OTOOO 2O,O0O
(21
(31 Tar
5-Year Property Recovery Rate 0,320' 0.192 o.115 0 . 11 5 0.058
Depreciation on Old Machino
_
90o,ooo 34,OOO -$ 6rOOO
(r) x (21
$ 6,400 3,840 2r3OO 2r3OO I,i 60
sl6,ooo 'Note
that year I is actually the second year the old property is depreciated. Therefore, the necoveryrate for the second year is used to compute the amount of depreciation on the old property in the first year of the capital erpenditure proposal.
Year 1 2 3 4 5 6
(1) Ori ginal Tar Basis Of New Ma chine
s36,OOO 36,OOO 36,OOO 36,OOO 36,OOO 36,OOO
l2l S-Year Property Recovery Rate 0.200 0.320 0.192 0.115 o . 11 5 o,058
(3) Tax Depreciation on New Machine (11x (2) $ 7,2oo 1l,52O 6r912 4r140
4J40 2,OBf, $36,OOO
't
e1
Chapter 23
E23-9(Concluded) (tf
t4
AllowabloTar Doproclauon*tfitfl How Machlnr
Old Machlno
(41
t3l
AddiUonel Tar EbPn-
Machlnr (11- (21
Annual Cort Savingr wth Hcw Machlno
1 2 3 1 5
Incrrar (Docnarcf ln TrHbb Incomo (4) - (31
s 7,2OO 36,400 3 8OO so,0o0 S 11,52O 3p4O 7,880 0,00o 6,012 2,300 6,000 +A12 1,140 2,300 1,940 6r000 4r14O lrl8o 2rggo 0,000 o 2,089 o 2,Ogg 0,ooo Total Increagc In periodlc cash inftow Lesg InlUal cash ouUay for new machine,.. lncrease In cash lntloursover Initial cash ouuay for new
(11
Year
o I
2 3 4 5 6
Net Afteptax Cash Inflow (Outflowl $(2O,0O0) 3rg2O 91672 5,445 4,336 41792 4,435
(21 Present Value
of sl @ 120h
1.OOO o .8 9 3 4.797 o.712 o .6 3 6 0.567 o.507
(0,
m
Incomo Tax Rrto
Inctrrlo (Dccruarc) ln Incomr Tar (51r (ol
FI
5,200
(1,E8ol 1,399 4rlE0 3,020 3,912
400h 400h 400h 400h
- lzoh . (z"n ,(
Hct Carh Inflow
(4)-m S2,o80 s 3,920
400h 400h
1fJ721 555 1,8O4 'l,208 1,565
6,672 5,44!i 4,3i10 4,792 4,435
s29,6oO 20,o0o machine..,.
(3) Present Value of Cash Flows @ 12% ( 1)r ( 21 $(2O,OOO) 3,5O1 5,319 3,877 2,758 2,717 2,249
l_g'809_ (4)
s420 S42O + $680 ) ) =
(5) Present Value of Cash Flows @ 14%
Present Value
of sl @ 14o/o
l.OOO
o.877 o.769 o.675 0.592 0.519 0.456
!_139 Internal rate of return
(E
(11x(al s(2o,oool
s
3,438 5 , 13 1 3,675 2r567 2$87 2,O22 (680)
t z.76oh
Rec omm e n d a t i o nT: h e i n ve stme n tma y be acceptable becausethe inter nal r ate of return exceeds the companyrscost of capitat; howeyer, the internal rate of return on.this project shouid bt compared with the internal rate of return for other proiects to determine if this is the best use of avaitablefunds.
e5
Chaptor23
E23-10 (rl
ProiectA Cash Inflow (Outflow)
Year
o
$(ts,oool
PV of $1 @ 75o/o
l.ooo
3.352 5,000 l-5 Ngt presgnt va|u9..,..............r..,.........r....
PV of Cash Flow 9(t5,OOOI 16,760
_g_l-i60
Pmiect B
GashInflow (Outflowl ql5,0001
PV of $1 o 150h 1.OO0 o .497 35r0OO 5 Net present va|ug........................'.........!
Year
(21
o
9(1s,000) 17r395 $ 2,395
Proiect A
Year 1-5
PV of Gash Flow
Cash Inflow (Outflow) $(15,OOO) 5,OOO
PV of $1 @ 18% 1.000 3.127
PV of
cgghllgw $(1s,ooo) 15,635
oir"trrn
/ / . - 18oh + t(ffi* S635 lzv"
@ 200h
l.OOO 2.991
g__l4s)
63s
s l n t e rn a fra te -
PV of Gash Flow ql5,oOOl 14,955
PV of 31
\\
))
- .,r9oh+ (zw r.s34) -
19.g70h
Project B
Year
Cash lnflow (Outflowl
o
$tls,ooo)
5
3 5 ,OOO
PV ol $1 @ 18% 1.OOO .437
PV of
cegb_Eow $(15,OOO) 15,295
s
PV of $1 @ 20o/o
1,OOO .402
2es
\\ lnte-rnafrate D s295 - |fioh * (Z"n ,( ofreturn \ S295 + S93O Il-laoh+(2"t"x.241) \
(3)
PV of Cash Flow
s(t5,ooo) 14,070
$__19991 - 18.48%
Using the internal rate of return method, Project A is superior to Project B. Using the net present value method, Project B is more attractive than A. The decision hinges on assumptions made about reinvestment of'cash inflow. Theory suggests resorting to the net present vatue method because the cost of capital reinvestmentassumption implicit in this method is considered more realistic than the internal rate of return method, where a reinvestmentat the project's internal rate is assumed.
!
e6
Chagter 23
PBOBLEMS P23-1
(rl
Weighted
Alternative Source of Portion ol Average Plan Financing Aftertax Cost Total Required Cost (al Debt 12oh r (1 - 40% tax rate) $lo,ooo,ooo 7.200h (b)
Debt
$l0,ooo,oo0 $ 5,ooo,ooo
12"@tel
Prefered stock
goh
(1 - 4% issue cost)
3.60%
$lOrO0O,OOO $ 5.OOO,OOO $IOrOOO,OOO
4.6goh
_9.2e% (c)
Common S2.1Oearnings per share ($2Ox (1 - S% issue cost)l stock
$lo,ooo,ooo 11.o9% $'lo,ooo,ooo
(21 Source of Financing Debt
After.tax Cost lOoh r (1 - 40% tar rate)
Portion of Curent Total
Weighted Average Gost
szo,ooo,ooo
1.330h
s9O,OOO,0OO Preferred stock
goh
Common stock
.$2,10 earnings per share $2o market price per share
slo,ooo,ooo sgo,ooo,ooo 560,000,OOo* Sgo,o0o,ooo
l.OOoh
7.OOo/o
9.330h
3,ooo,ooosharesoutstandingx s2o marketprice per share
&7
Chapter?3
P23-1 (Concluded) (3) AlternaUve Source of After.tar Cost Financing Plan (al 7.200h Marginal cost (from part (1)).......o.... 9.33o/o Current cost (from part (2))......r....t Total cost .........,.....r,.r. (b)
(c)
8.29o/o Marginal cost (from part {1)}.,.......... 9.33o/o Current cost (from part (2)l .,...,....., Total cost ............,.o...,,
Marginal cost (from part (1)1....,....... Current cost (from part (2))..,.....,... Total cost,......r-'rirororr
11.O5oh 9.3370
Weighted Average Portion of Gost Total Reguired .720h
$loo,ooo,ooo $ 9O,OOO,OOO 9.400h
sloo,ooo,ooo _sJ2%.
$ lo,ooo,ooo sloo,ooo,ooo
.83%
$ 9O,OOO,OOO $lOO,OOO,OOO
8.4oo/o 9.23o/o
$ IO,OOO,0OO 1.11oh $IOO,OOO,OOO $ 9O,O0OTOOO 8.4O% $1OO^OOO^OOO _g€l_%
I
\
ts-t I i
r-l
e8
Chapter23
P23-2
Appraisedvalue of the pnopertyrexcludingstorage tank and watgr
lY€llttttttt""""""'aa.a....r.o....aa..a....ar......ar...o...........a....r.a.......oo.
$19O,OOO Replacementcost of storage tank .....,.,,..r......::::.................r.......r..... 250.ooo $44q.ooo Differentialcost of water resulting from ross of wefr:
Water from Glty of Grant Welf
WaterfromCityre Year
2oA 208
zoc zoD zOE zoF
zoc
zoH
of Darnett At g% at 8o/oAnnuaf Annuaf Increts-e-!"".eas"
$ zz,7zo $ 35,2oo 79,539
s gzreo
3g1016
g4,g?! 91,999 98,?1?
4r',os7 qqisaz ez,aag $zo,ooo
106'850
1is,398
tenance present and ValuEof Repair Difference Sili r o"z,
s1'r72o
tro,g-?Z
ssieig
zo,ooo
zoiooo
40-,522
49,264 4z',264 31,046 35,r 30
39,540
.9p,g26
.Tsl .683 .627 .564
.5i3
44',so2 .aoz - 60;322ggry s324,4o9 Jqqpoo Eqlr,oruSzzgllgz ertir"t"a-1"ffir"..ffi....-..:
present value
ttffid
ggr477
sz,s6. s2,2s1 1g,28O r 9,8r 3
2o,2s4
2o,6ge s212,7s1
s€EZJel
The city of Grant must also consider the offsetting increase in property and safestares arisingfrom the onioing economit heatthof this part of the totat businessactivity that occuo t^ritrrin-the city, nri" may cause the negotiatedland price to be reduced. "onrideration of course,-$r, irncertainty of the various estimatesmust be recognized. P23-3
(1) Year
o I 2 3 4 5
PV of Sl @12% 1.OOO .893 .797 .712 .636
.s67
Net p re s e n t v a l u e
Projoct 1 PV ol Project 2 PV of Aftertax Project 1 Aftertax Project 2 CashFfows Cash Flows CashFlows Cash Ffows $(120,OOo) $ (1 2O,OOOl s{12O,OOO} s(l2O,OOO) l O,OOO 2O,OOO 3O,OOO 6O,OOO
go,ooo
-s
B,g3o 15,94O 21,360 39,160 51,O3O 15,420
5O,OOO 45,OOO 35,OOO 25,OOO 2O,OOO
44,650 35,965 24,920 15,9OO 11,34O
l__u,szg
Q9
Chaptor?3
P23-3,(Continued) l2l
Project 1 Afteptax
Year CasnFlows q12O,OO0I o
PV of 91 @ 140h
1.000
.tt77 1O,O0O 1 .769 2O,OOO 2 .675 3O,OOO 3 .592 60,000 4 .519 9 0 ,0 o o 5 Net preSent va|u9.........r........t."' Project I internal - 14oh. (r* rate of return Proiect 2 After-tax Year Casn flows o $(120,0001 50,OOO 1 45,000 2 35,O0O 3 25,OOO 4 5 20,OOO
PV ot $1 o 160h 1.000 .f362 .743 .641 .552 .476
PV ol Cash Flows ql2O,OOO} 8177O
15,380 20r25O 35r52O 46t71O
PV ol $1 o 160h l.OOO ,862 .743 ,641 ,552 .476
PV of Gash Flows ql2O,OOO} 81620 14,860 19,230 33rl20 42,840
-9--9193o ,
$6,630
( $ 0 ,o s o + $ t , 3 3 o ) )
PV of Cash Flows
9(12O,ooo) 43,100 33,435 22,435 13,800 9,520 2,290 $
- r s,,,zoh
PV of $1 @ 18oh
PV of Cash Flows
l.ooo
$(l20,ooo)
.B,47 .718 .609 .516 .437
42,350 32,31O 21,315 12,90O 9,740 $ (2,385)
$2,29O Proiect 2 internal _ .,6oh - t 6.s'oh +("o/o, rate of return ( $ 2 ,z s o + s 2 , 3 B s) ) l.
ChapterZg
P2g-g(Concludedt (31 The net present value of Project I ls greater than the net present vatue of Project 2 ($15r42o compared to $12,6751;however, the internal rate of rsturn lor Proiect t ls less than the fnternal rate ol return for proiect 2 As a tosult, lt ls not altogether clear ll5.A7%ocomparod to I e.9B%ol. which profect ls the moro profitabte. The difference In rankings occur:; because of the dlffersnce In the pattern of cash flows; 1.e.,the cash Inflor,Ysfor ProJect1 are smaller ln early yearc and targer in later years than those of Profect 2. The Internal rate of return for Proiect 2 ii substanUallylarger than the companyrsweighted averago cost of capital. lt may not be possible for the cash floursroceivedin early yea6 to be reinvested at a rate of return equal to the internal rate of return of project 2; consequently' cash florrvsrcceived from Project 2 may not be as vaiuable to the firm as indicated by tha internat rate of return. On the other hand, the weighted avoragocost of capital is a realistic earnings rate erpected by the company ovor the Investmenthorizon.Assumingthat there is no difference ln the riskiness of the expected cash flor,nsior the two projects' lt may be safer to raly on the net present value ranking than the intemal rate of return. This woutd mean that Project I shoutOUe setected. P23-4 (1)
Recoveryof fnitial Outlay After..tar Payback Years Year Cash lnflow Needed Balance Required 1 $3OO,OOO $2,2OO,OOO $1,9oO,OOO 1.OO 2 35O,0oo 1,g0o,ooo 1,550,0O0 1.00 3 4OO,O0O 1,550,00o lrt5o,0oo 1.00 4 45O,OOO 1,150,o0o 70o,oo0 1.00 5 SOO,OOO 700,o00 200,00o 1.OO 6 55O,OOO 20o,ooo o .36 Total payback in years......,,..,....r.....,........,.....,..,...r,...
_9.39
(21
s5,25O,OOO Net income over economic life of asset...,...... AccounUng rate of roturn on originat investment
=
=(
2r2OO|OOO $3,05O,OOO
( Net income * Original investment t E conom ic life i s3, O5O,OOO * $2 ,2oo, ooo = 13,9oh 10 years
63t
Chapter?3
P234 {Goncluded} {3}
Accounting rato of return on averiageInvestment
= ( Net income *,ar"oge \ Economiclife )
o5o,ooo.)* =(/33, ro-l-t (41
investment
f 32,2oo,ooo)= 2T.toh
2
)
Year
Cash lnflow (Outflowl
PV of $1 o 140h
PV of Cash Flow
o I 2 3 4 5 6 7 I I 10
$(2,200,0001 30O,OO0 35O,OOO 4OO,O0O 45O,OOO 50O,0OO 55O,OOO 600,000 650,000 TOO,OOO 7 5 O,OOO
- 1.000 .877 .769 .675 .592 .519 .456 .400 ,351 ,308 .270
$(2,2OO,OO0) 263,10O 269r l5O 27O,OO0 266,4OO 259,5OO 25O,80O 24O,OOO 2281150 215,60O 2A2,5,OO
Net present valug ...........o.........r..,r,..............rr.....
$ zos,zoo
(51
Cash Inflow Year (Outflow) o q2,2oO,OOO} 1 3O0,OOO 2 35O,OOO 3 4OO,OOO 4 450,OOO 5 5OO,OOO 6 55O,OOO 7 6OO,OOO I o50,ooo I TOO,OOO 10 75O,OOO
lnternal rate of = 1 6 o h . ( " * return
PV of $1
PV of PV of $1 Cash Flow o lgoh 1.OOO $(2,2OO,OOO) 259,600 .947 260,050 .718 256,400 .609 248r4OO .516 239,000 .437 225,5OO .370 212,4OO .314 1gBr 25O .296 184,100 .225 17O,25O .191
Q 160h
1.OO0 .862 .743 .641 .552 .476 .47O .354 .3O5 .263 ,227
,
E-- jlr999 sst,95O
($sl,95o +
) =160h + (2'h $ 1 3 4 , 7 5 O, )
PV of Cash Flow $(2,2OO,OOOl 25417OO 25 1,300 243,60O 232r2OO 21 8,500 203,5OO 18 8,40O 172,gOO 15 7,50O 143,250
g_(134lggl x .278 )=16,6%
I
\-i I
6p
Chaptcr 23 l
P23-6 (1 )
Machlnc I
Totalpayback In years
InlUaloutlay Unltonn cash lnftows
s500,0oo-
3125,0OO
4 years
M a c h i n e2 Recovery of lnltlaf OuUay Aftentar Year Cash Inflow 1 $ 60,000 2 75,OOO 3 1OO,0OO 4 i25,OOO 5 1 5 O,0 OO I 2OO,OOO Total payback In years
(21
Needad S6OO,OOO 65O,OOO 475,0OO 375,OOO 25O,0OO 1O0,OOO
Balenee 355O,OOO 475rOOO 376,OOO 25O,OOO lOO,OOO
o
PaybackYoars Rcquired 1.OO 1.OO 1.00 1.OO 1.00 .50 5.50
Machlnc I
Netafter*tarcashInllows Lessdepreclailolt ........
........................,......,.. Sl,ooo,ooo soo;ooo
N e t I n co mo o vo r e co n o ml c ilfe of M achins 1............ A c c o un ti n g ra tc o f ro tu rn o n o ri g i n a l In ve g tm.i t
Fsoo,ooo
_ - i Net income \ or ioinal investm ent r ir " lE"onor ni" J+
poo
\t + S. S O O p O O- 1 2 . 5 % - l/-Ssoo -years \ 8 ) M a c h i n e2 Net aftentar cash lnflows L e s s d e p re cl a tl o n...............,........ N e t I n co me o vsr e co n o ml c life of Machlne 2
Accoun'ng ratc of return on originalInvestmont
s'l,4oo,0oo SOO,OOO
s
poo - r $goo . seoo 'Foo - 1s.7.h l.T yoan, ))
SOO,OOO
633
Clnpter I
P23-6 (Continued)
(31
MachineI Accounting rate of return on averageinvestment
_ - ( Net income * ar"r"ge investment \ Economiclife )
t'gsoo'ooo ) /Ssoo,ooo ) =[ffiJ-[.:f)="u* Machine2 Accounting rate of roturn on averageinvestment
(4t
[$soo,ooo) I I y"""s J
Machine{
PV of $1 Cash lnflow PV of (Outflowl a 150h Cash Flows o l.ooo $(5OO,0Ool ${50o,oool 1-8 4.4g7' 56O,875 125,OOO Net present value of Machino 1 __9_99,87s rPresent value of $.| receivedannuallyfor 8 yearc from Table 23-2 of the text. Year
Machine2 Cash lnflow (Outflow) $(600,000) 5O,OOO 75,00O
PV of $1 o 150h o 1.OOO 1 .fJ70 2 ,756 3 10oro00 .658 4 125,OOO ,572 5 1 5 O,O00 .497 6 20orooo .432 7 30O,OOO .376 I 4OO,OOO .327 Net present value of Machine 2,,.........,..r.,......r.]. Net present value index for Machine 1
PV of Cash Flows
$t6oo,ooo) 43r5OO 56r7OO 65r8OO, 71r5OO 74r55O 86,40O 112,8OO 130,80O
E_lefso
Net presont value
@
$oorBzs = - ."1 2 2
$soo,ooo Net present yalue index for Machine 2
$42, O5O . : - r - =
$600, OOO
. o70
I
Chapter 23
P23-S(Concludedl
(51
tt4aqlilel
Year
o 1-8
Cash Inflow (Outflowl $(5OO,OOO} l25,OOO
PV of $l Cl 18o/o
LOOO 4.O79
PV of GashFlows $(5OO,OOO) 5Og,75O
PV of $1 O 20o/o
l.ooo 3.837
srtlg
PV of Cash Flonrs
$(soo,oool 479,625
_9_eo'gzgl
fnternalrate $9,75O l1oh + ("n ,( ofreturn \ $9,75O + $2O,375 ) ) \ - 1 8 o h+ ( z W x . 3 2 4 ) - 1 8 , 6 7 o Machine 2
Year
o 1 2 3 4 5 6 7 8
Cash Inflow (Outflowl $(6OO,OOOl 5O,OOO 75,0O0
100,o0o 1 2 5 , OOO 1 5 0 , OOO 20O,0OO 3OO,OOO 400,00o
Internal rate of return
PV of Sl @ 160h
l .OOO .862 .743 .841 .552 .4 7 6 .410 .354 .305
-16oh,.(r*
PV of GashFlows $(600,O001 43,10O 55,725 64,lOO 69,OOO 71,40O 82,OOO 1O6,2OO 122,OOO $ 131525
/ s13525 \\ \ $l 3,s2s + S38pso //
Yl:rr
-16oh +12% x . 2 6 1 ) - t o . S Z o
PV of $1 @ 78o/o
l.OOO .847 .7lfj .609 .516 .437 .370 .314 .266
PV of Cash Flows $(6OO,OOOl 42135O 53,850 6O,9OO 64,5OO 65,55O 7 4,OOO 94,2OO 106,4OO
s (38,2501
635
ChapterB
P23-6 (1)
1 2 3 1 5
o 7
(s)
(5)
(4) (3} {2) Gash Total Cash Flow Savinga Caah trom lrom Flow lncreascd Reduced (21+ (3) Malntenancc Capaclty I O,3OO t TBoo $1,500 81480 7,,80 1,2OO 18rO88 17,188 000 u'Sao 25,2AO oo0 25,880 25,560 3Oo 22re12 o 221912 0 22,3OO 22,5OO
Taxablc lncomo (Loas)
Tar Eleprc-. claUon-
(71
f8) Attcr-tax Ctsfl
Flow (4) - {'t}
Tarcr (61r 40%
K)- (5) t (3,OOO)3(1'200)
StoBoo
(8,8O0) 7r72O 19rO5O 19,850 191780 22,5OO
17r28,O 1Or3O8 8}21O 4,21O 3r132
o
3 g,ooo
(3,52O1 3,O88 7r80O 7,890 71912
0,000
l2,oo0 15rOOO l8'OOO l8,o0o 15rOOO 13,500
sloo,5oo Caah Inflow trom aalvagc at snd of economlc lifc' net of tar Gt6'000 aalYagex (1 -.,fO tax rate)). Total after-tax caeh lnflowr
3,OOO 3104,1O0
rThc tax depreciaUon lr determlned by mulUplylng the depreclable basla of 354,O0O 0.e., tho cash purchaeo prlcc plur the tar baclc of zero) by the MACRS percentagea provlded In Exhlblt 224 of thc text for the five-year property class.
(1)
Recoveryof Initial Outlay Year 1 2 3
After.tax Cash lnflow $ 9,ooo 12,OOO 15,OOO
Needed
s54,OOO 45,OOO
33,OOO 4 1B,OOO Total payback in years.r.....,.,....
(21
l g,ooo
Balance $45,OOO 33,OOO l B,OOO
PaybackYears Reguired
o
.,.,......,,....,.r.
Netafter-taxcash inflows (excludingsalvage),...,............. Less financialaccountingdepreciation (:ts4,ooocash + g4,0oo book value- 56,000 salvage).. Less tax on salvage ($6,000salvagex .4Otax rate) Net incomeover the life of the property.
I 1 1 I
_t $1OO,5oo 52,OOO $ 48,5OO 2r4OO $ 46,1OO
! '-ltt I
Chapter2S
P2g-6(Concluded) Accounting rate of return on original investment
Net income \ + Original investment I/\ -:;F 1 ECOnOmTC ilre /
- ir. ssoh - f g-) * ssa,ooo \ 7 years / Accounting rate of return on averagelnvestment
- / Net income- * aretage investment \ Economiclifr ) - l ?/ y$lo,1oo e*s/*|. \
(3)
| 958,ooo+ $6,O00\ 2
)'
20.580h
PV of $l PV of 120h @ Cash Flows o l.OOO $(54,OOO) 1 9,037 .893 2 9,564 .797 3 10,68O 15,00o .712 '111448 4 18,00o .636 5 10,206 18,OOO .567 6 7,605 15,00o .507 ' 7 7 1729 17,1OO .452 Net present valug .............,...r.....,..,............,........ ___9_!!399 *$13,500 cash inflow in year 7 plus $3,6O0 aftentar salvage. Cash lnflow (Outflow) ${54,OO01 9r0oo l 2 'OOO
Year
l,269 -.2O9 N e t p r e s e n t va l u e i n d e r - s l s54,OOO
(4) Year
o 1 2 3 4 5 6 7
Cash lnflow (Outflowl s(54,OOOl 9,000 12,00O 15,00O
1g,ooo l8,ooo 15,OOO * 17,10O
PV of $1 @ 16% l .OOO .862 .7 4 3 .641
.5s2 .4 7 6 .410 .3 5 4
PV of CashFlows s(54,OOOl 7 1758 8,916 9,615 9,936 8,568 6,150 6,053
gl€99
PV of $1 @ 18%
PV of Cash Flows
l.OOO .847 .718 .609 .516 .437 .370 .314
$(s4,oool 71623 8,616 I,135 gr28g 7,866 5,55O 5,369
$
(s531
t S 1 3 , 5 O oc ash inflow in year 7 plus 53,600 aftentax salvage. fnternaf rato of return
$2,996 - 16oh + lZ"t" r ($z,sso + $s53 - t z.oaao/o ))
87
ChapterB
P23-7
(1)
Year I 2 3 4 5 6 7 8 I 10
Periodic Net Cash lnflows
$ 2o,ooo .
25rOOO 3O,OOO
30,o0o 30,ooo 3OrO0O 2510OO 2O,OOO l 5 'OOO l O,OOO
(2',1 Annual7oh Price-Level Adiustment
(l +.Oil = (l +.ofl2 = (1 +.Oflo = (1+.Ofa = (l +.Ofls = (1 +.04o = (1 +.07}2 = (l +.Oflo = (1 +.O7)e = ( 1 + . o 7 1 t o=
l.O7O l'145 7.225 1.311 1.403 1.501 1.606 1.718 1.838 1.967
_$239,ooq (11 Recovery Year I 2 3 4 5 6 7 I
Depreciable Basisof Machine $ 1 OO,OOO 1 OO,O0O l OO,OOO l OO,OOO l OO,OOO lOO,OOO 1 OO,O0O 1 OO,O0O
(21 7-Year Property Recovery
@!ege
o.143 o.245 o.175 o.125 o.o89 o.ogg o.o89 o,o45
(3) Adjusted EsUmateof Net Cash lnflorus
(r) x (21
$ 21,4OO 28.1625 36,75O 39,330 42,OgO 45,03O 4Or150 341360 2Tr5TO 191 670 $334,975
t3l T:ax Depraciation ( 1 1 x( 2 ) $ 14,3OO 24,5OO 17r 5OO 12r5OA 8,9OO 8,9OO 8,9OO 4,5OO
_9!_oo,ogg
,-'l
v
ChWter23
6g
P23-7 (Continuedf
(11
(31
@
Adjusted
Taxable
(51 tncome
(41 Federal
Tax
and
(61 Net Afteptar
Payment Gash State lncome Tar (Reductionl Inflows (Lossl Income Deptu(31r (4) (11- (5) (11- (21 Tar Rate clatlon Year 40% $ 18,560 I2,840 1 $ l 4 ,3 OO $ Z ,iOO 26,975 1,650 40% 41125 24,500 2 29,O5O 7r7OO 4goh 17r5OO 19r25O 3 28'598 4oo/o 7Or732 26'830 12'500 4 28.,814 4ooh 731276 33rl9o 8r9OO 5 30,578 4goh 141452 8,900 36,130 6 27rg5o 4ooh 12,5OO 31,250 8r9OO 7 221416 4A% 11,944 29,860 4,500 8 16,542 40% 11rO28 0 27,570 9 27,570 7,868 11,802 40% o 19,670 19,870 10 Total inflation-adiusted aften tar cash inf!ows....r................,.............:S24Or985 Estimate of Net Cash lnflours $21,4OO 281625 361750 39'330 42rO9O 45,O3O 4Or15O 34,360
(f )
Paybackperiod: Recoveryof Initial Cash $!!ey_
YearsRequired
Net Aftentax Year 1 2 3 4
Cash lnflow $ 1 8 ,5 6 0 2 6 ,9 7 5 29,O5O 28,598
Needed $ 1 0 0 ,OO0 8 1 ,4 40 54,465
Balance $81,440 54,465 25A15
251415
Until Payback l.O 1.O . 1.O
o
Totafpaybackperiod in yeats.,..,.........,,,........,......,.... (21
o.9 3.9
Accounting rate of return on original investment: Total inflation-adjusted afteptax cash inf|ow.................,, Less financial accounting depreciation ..................!......... Net income over economic life of project..,..........,.....,.....
Average
"r,n.rJl return
$24o,985 1OO'OOo l1.!g999
- -Nellqqgrng- - S14o'985 - sr4.oes - - -'Economic life
1O years
Accounting rate of re t urn o n o r i g i n a l A ve ra g e a n n u a l retur n - $14,099 -_r r ' 1410 or 14 .looh investment originat'rn"estme"t Sloo"ooo
-t-
639
Chapter 23
P23-T (Continued) (3)
Accounting rate of return on average investment:
Accountingrate of return on average investment (41
Averageannualreturn Original investment + 2
Net presentvalue and net presentvalue index:
Year
(1) Net After-tax Gash (Outflow) Inflow
o
$ (1 OO,OOO) 18,560 1 2 261975 3 2 9 ,0 50 4 2 8 ,5 98 5 28,814 6 3 O,578 7 2 7 ,6 50 I 22,416 I 16,542 10 1 1 ,8 O2 N e t p re se n t va l u e N e t p re se n t va l u e i n d e x
(s)
$14 ,O99 .2820 or 2A.200h $5O,OOO
(21
@ 150h 1.OOO
(3) Present Valueof Net Cash Flow ( 1 1 x( 2 1 $ (1OO,OOOI
o.870 o.756 0.658 o.572 o.497 o.432 0.376 o.327 o.284 o.247
161147 2O,393 1 9 , 11 5 16,358 14,321 13,21O 1O,396 7,33O 4,698 2,915
Present Value of $1
N e t pr esent value R e q u ir ed investment
e__31€99 $24,883 .249 Sl OO,OOO
P re se n t va l u e p a yb a ck in year s: Present Recoveryof Valueof Initial CashOutlay After-tax Year Cash Inflow Needed Balance 1 oo,ooo $16,147 $l $83,853 2 2 O,3 9 3 83,853 63,460 3 19,115 63,46O 441345 4 16,359 44,345 27 1987 5 14,321 27,987 13,666 6 1 3 ,2 1 O 13,666 456 7 t o,396 456 o Total p a yb a ck p e ri o d in year s
Years Required for Present Value Payback 1.OO 1.OO 1.OO 1.OO 1,OO 1.OO o.0 4 6.04
ll t-
Chapter 23
640
P23-7(Concludedl lnternal rate of return: (21 (t)
(61
Year
Net Aftertar Cash (Outflowl lnflow
o
s(roo,oool
1 2 3 4 5 6 7 8 I 10
18,560 26r976 29,05O 28r598 281814 3O,578 27 1650 22,418 161542 1l,8O2
Present Value of $l €r 20% l.OOO o.833 o.694 o.579 o.482 o.402 o.335 o.279 o.233 o.194 o.162
Valueof Gash Flow Discounted o 200h
(rl r {2} s(1oo,oool 15,460 18!721 16,820 13r784 11 , 5 8 3 1O,244 7,714 5,223 3,2O9 1,912
(51 Present
(41
(31 Present
Valua of Gash Flow Discounted o 220h
Present Value of $l
(r) r (4)
Gl 22o/o
LOOO o.820 4.672 o.551 o.451 o.370 0,303 a.249 o.204 o.167 o.137
s( 1OO,OOOl 15,219 18r127 16,OO7 12,898 1O,661 9,265 6,885 4r573 2,763 1,617 $ ( 1,98s)
-I--!'670 I n t e rn a l rate of = Zooh. return [t*
S 4 ,6 7 0 ( S4,670 + $1,985 " ))=
.2140 or 21.40h
P23-8 (1) (t)
Ycar
Roduco'd Lrbor Cort
1 2 3 4 5 6
315,O0O 25rOO0 30,0OO 30,O0o 30,O00 3O,0oo
'
(41
l2l
t3)
Roducrd Machlno Sotup Tlmo
Boducod InvrntorT Carrylng Cort
Lort Contributlon Mrrgln Avoldcd
34O,0oO 325,000
320O,0O0
(51 Total Poriodlc Srvlngt from CIM Syrtcm ('l)+{2}+{3)+(ll '3280,00O
50TOOO
3:t,ooo
3{)o,ooo
oor0oo
40,0OO 40,OOO 40,0OO 40,0oo
40O,OOO 50O,OOO
4lo,o0o a3o,o0o Gto,ooo
ooo,ooo
73O,OOO
TOO,OOO
Silo,ooo
60,OOO
oo,ooo oo,0oo
(ol
c4
Nct Pcriodic Savingr Additlonal with CIM Malntonanco Syrtom Cort wlth (5) - (6) CIM SFtom
325,ooo 25,O0O 25,OAO z'rO0O 25,OOO 25,OOO
3255,000 385,0OO 5O5,00o 605,OOO 7O5,00o BO5,0OO
al
Chaptor2S
P23-f3,(Continued) rr)
(0)
{81 Tar Dcprcclatlon rnd Amorllratlon'.
Ycar
N.t Porlodlc &vlngr wlth CIM
1 2 3 4 5 o
3255,000 38ti,O0O 5051000 605,000 7O5,0OO 805,000
(1ol
Tarablo lncomo [.ou) fD - (81
Effcetlvo Trr Bato
344O,OOO $(185,000) 88O,OOO (295,OO0) gl,OOO 424|OOO 2TOrOOO 335,OOO 2TOrOOO 43{irOOO 110,000 889,000
(r 1)
(t3l
lr4)
lndcx for Antlclprtrd 8% Ratr ol Inllation
lnflatlonAdjurtrd Prriodis Nrt Aftortlr C.fh lnllorr (121r l13l
112l
Trr Uablllty (Botundl
Prriodic Net Altontrr Carh lnflowr
(e)r (1ol
ft)-(1rl
lOcA 3 rt4,Ooo) 3329,000 (118,000) 503,0.00 40% lgoh 32,400 472,OOO 4Oo/. 134,OOO 471,OOO 4Ach 174,000 531,000 40% 275,gOO 52g,4OO
1.080 1.160 1.260 1.360 1.489 1.587
Total annual InflaUon-adJusted sfter-tar saulngc lrom Investment In CIM system
3
3ri5,32o 580,498 595,470 640,560 780,039 840,'158
s3,798,051
Cagh Inflow from salvageof egulpmentand machinery (S1OO,O0O salvagex 1.587 adJ.x 11- 40% tax rate))
95,22O
Total Inflation adJusted atter-tar cash lnflowl trom Investrnent In CtM system.... Less lnlual Investment (S2,ooo,ooo In equipment ptus S2oo,ooo In software)......
93,893,271 2,2OOrOOO
Ercegs of cost of clM system over inflation-adjusted after-tax eavings
s1,093,271
t
(1t
Y="r_
Roeovcry Proporty Tar Earlr
1 2
82,000,000 21000,000
3 4 5
o
l2l Bato for MACRS 3-ycar _&gFrty
o.20o 0.320 2,000,000 0.192 2r0oo,000 0.115 2,000,000 0.115 2,00o,00o 0 . 0 5 8
(3) Tar DcprcclaUon (1) r (2)
$ 400,000 640,000 384,000 230,000 230,000 116,000 $2,OOO,OO0
(4)
Softwaro Tar Barlr
s2OO,ooO 200,o00 200,00o 200,000 200,000 200,0oo
(5)
(ol
c4
5_ycar Stralght-llno AmortiraUon Fatc
Tax AmoRl:ation (al x (3)
0.200 0.200 0.200 0.200 0.200 0.000
$ 4O,OOO 4O,0OO
4O,00o 4O,0OO 4O,0OO
o
Total Tar Amortl:atlon and Elcprcciatlon ( 3 1 +( 0 )
$
440,ooo 880,000 424,0OO 2TO|OOO 27O,OOO 118,000
s20o,ooo $2,20o,o0o
I
Chapter23
P2g-8 (Concluded|
l2l
Year r 2 3 4 5
InflatlonAdlusted Periodic Net After.tar @[!1.1[gl $55,320 5861498 595,476 640,560 78O,O39
Needed $2,200,O0O 1,844,680 1,258.J82 662,706 221146
Balance $l,844,O8O 112581182 862,700 221746 O
PaYback Years Required 1.OO 1.OO 1.OO 1.OO O.O3 4.o3
Total paybaCk in yearS.......r..r..........r...'..r.............o...rr
(31
Year
o
lnflationAdiusted Periodic Net
Present
Present
Value
Afteptar Cash lnflorrs
of $1 @ 14%
Value of Gash
s(2,2oo,oool
1.OO0
o.877 o.769 0.675 o.592
355,32O 1 588,498 2 3 5 9 5 ,4 7 6 4 64O,580 5 0.519 78O,O39. 6 0.456 935,378' Net present value of investment.............r.......r....
Inflows S(2,2OO,OOO) 311,616 45t,O17 401,946 379,212 4O4r84O 4261532 9--IZgrI-qg
-S84Orl58 aftentax cash inflow for year 6 plus $95,220after-tar salvagevalue at the end of year 6.
t-
_
L
Chaptor23
&B
P23-9, Purchase alternative: {1)
C..h Yoar
1 2 3 1 5 0 7 I I 10 11 12 13 14 15
lnllon
SAOO'0Oo 600,000 6001000 O0Or00o g0o,o0o 0oo,00o 600,000 600,000 800,000 800,ooo 600,000 600,000 600,000 600,000 O0o,o00
(4
(3)
(41
mACAt D.prool. rlon
lrrconre Ter Drprocl-
Hatr
aUon'
.1*l 2# .175 .1Ai .080 .089 .080 .o4{t .000
$286,000 490,000 350,000 250,000 178,000 178,000 178,000 90,000 0
.ooo
o
.o00 .000
0 0
.ooo .ooo
o o
.000
0
lncngr ln Tenblo lncomr lncomr Trr Frto 11)- f3l 40 $314,000 1 1 O , O O O AO 25OrOOO AO 3ti0,0o0 AO aa2,ooo AO 422rOOO .40 122,OOO AO 510,OOO AO 000r000 ,40 800,0o0 AO 000r0oo .40 600,000 AO g00ro0o AO 600r0oo .40 o00,000 AO
Aftsr-l-r cagh lnftow from ratvago at ond of cconomlc |ife........ Total after-ter cagh hflbw frorn the purchacc attarnaUvs l-eca ln1g"1cagh ouUtow -........,... Total after-tar cash Inflow over aconomic tifc of project 'Tho
{q
l0) Incnoo ln Incomo Tar
lal r (51
m X.l Altrntex C.dl Inflowr
(tl - (ol
tl25,OOO $ 471r4OO 44,OOO 556,OOO lOO,OOO 5OO,0O0 14Or0OO 4EO,O00 1O8,8OO 431}200 1e8,800 4il1,2OO 16a,8OO 431,2O0 2O4,OOO 396,0O0 24O,OOO 36OrO0O 24O,O0O 360,OOO 24O,OOO 360,000 24O,OOO 36O,OOO 24O,OOO 360,OOO 24O,OOO 360,OOO 24O,OOO 360,OOO EE,2OO,OOO l2O'OOO" s6,32OrOOO 2,OOO,OOO 90,32O,0OO
deprectatlon b determlned by muttlptylng the depreclabte basle of g2,ooorooo by tho rilAcRg cost recovery percantageg provldod ln E$lbit 212.4of the text for aeven-yosr proporty. -P" ealvage rscslvod at tho end of tho economlc llfe ol the asset would bo fuily tarablo because the tar baslr of tho property would be zero. The aftor-trr cash Inflow would bo 3120'000, l-e., (s2oorooo rorvago vuiuo r (1 - .,{o tar rate)).
Chapter23
644
P23-9(Concluded) Net Aftertax Gash Flow
o I 2 3 4 5 6 7 I I 10 11 12 13 14 15
$(2,OOO,OOO) 474,4OO 556,OOO 5OO,OOO 4 6 O,0 0 0 431,200 431,20O 431,2OO 3 9 6 ,OOO 3 6 O,OOO 3 6 O,OOO 3 6 O,OOO 3 6 O,O0 O 3 6 O,O0 O 3 6 O,OOO 3 6 O,OOO
PV of $1 @ 14% l.OOO .f377 .769 .675 .592 .519 .456 .400 .351 .309 .270 .237 .208 .182 .160 .140
Net present valug ...r.......................r........r....'.......
PV of GashFlow s(2,O0O,OOOl 416,049 427 )564 337r5OO 272,320 2231793 196,627 772,48O 138,996 11 O , 8 8 O 97,2OO 95,32O 74,98O 65,52O 57,60O 5O,4OO $ 727,129
Lease alternative:
Annual cash inflow before lease payment. $OOO,O0O Annual lease payment ....,.....,... . 32O,OOO Annual pretar cash inflow and increase in tarable income $28O,OOO Annual increase in income tax expense ($2BO,O00 r 4o%l i 12,OoO An n u a l a f t e n t a r c a sh i n fl o w fro m l e a se a|ter nativo.,............,..,..,...,.. S168,O0O
Year
Cash lnflow
PV of Annuity s l @1 4 %
1-15
$168,OOO
6.142
PV of Cash Flows s 1 , 0 3 1, 8 5 6
The lease a l t e r n a t ivea p p e a r to b e p re fer able becausethe net pr esent value of the estimated aftentax cash flows is greater than for the purchase alternative ( s1 , 031 , 8 5 6v e r s u s $ 7 2 7 ,12 9 ).
ils
ChaplerA
P23-1o I
Gencral-Rrrpoac Equlpment
(1)
Leasc
Purchasc
SeltConstructod Equlpment
Recurring cash flows from operiations: Estimatedsales volume in units.,.... 4O,0OO 4OTOOO 4O,OOO Unit contribution maryin..................$ l.ss s 1.55 $ 1.90 Estimatedtotal contribution margin $62,000 S62,000 $76,000 Less fixed costs: SupervisioJl ........................'..o..r......r $16,O0O $16,000
$17,OOO 3,O0O 5,O0O MaintenaflCO .......................rrr.........r 3,OOO 2'OOO Total fixgd COSt .r'................r.r......."' $1o,ooo s22,OOO $24,OOO Annual cash inflovrrsbefore tax...,.,,...,.,.. 946'O0O $4O'OOO $S2'OO0
Propefi tares and insuranco....,,.,.,
o o
Lease equipment altemative; Annual gash inflow bgforg tax.,..,.........o......,..r..,..r..,.....r..o...,r..r. $46,OoO
40rooo ..,..o.........,,......-.r.s 6,000
Annual lgasg paymgnt..........o....r...............r...o.....r.r......r.r.ir........
Annual incrgasg in taxablg income... Annual increasg in incomg tar ($6rOOO x 4Oo/o1.,..,e.......r..........,..2r4OO Annual aftgrtax cash inf!ow....,.r...........o....r.,..........r.........,r.....,.r $ 3,600 PV of $1 rgcgived annually for G years O 14oh.........o........,.......,x 3.889 Net present yalue of lease altemative.................,........ sl4,ooo
ChWtor23
646 1
P23-1O(Continuedl Purchaseequlpment alternative: lll
Yrar 1 2 3 4 5 6
Protlr C.rh Inflowr
$lo,ooo 4O,OOO 40,000 4O,O0O 4O,OOO gorooo r'
(4 lncomr Trr Dcprrclrllon'
$25,OoO 40,000 24,000 141375 141375 7r25O
Preaant valuc of net cagh lntlow! L"ecrInlUal caeh outflow
l3l TaHblo lnconrr
(rl - (2t
$15,OoO
o 10,000 25,0.25 25)825 72,750
({) lncomr Trr at lO% Tar Fato l3l r 40%
(5t Nrt Allrr-t'r C.rh lnflowr
tlt - Ft 3 E,ooo $3l,ooo 40,000 o 8,400 10,250 10,250 29,100
33,800 291730 29,750 5O,9OO
t0l
P{l of il o 71%
.aT7 .780 .975 .592 ,519 .456
m
Pll of Net Aftrntrr C.eh lnflowr
l3l x (01 $ 29,818 30,780 22,f,8O 17,fJ12 15,44O 23,21O s139,520 " 125,00O
Net preaent value of purchase alternaUve s 14,520 'Tar depreclaUonle determlnedby multiptyingthe depreclablebasir of the equipmentunder the purchaaealternattuo(Si2s,oo0) by tho tylACBSdepreclaUonnlter provlded ln Exhibit 22-4 of the terL -tncludea aalvagcvatueof S4OrOoo, all ol whlch woutd be tarablerBlncethe equlpmentwould be tully depreclatad for Incomo rtr purpo3esat thc end of the ahth year. Thc total after-tar cagh flow from opcratlonr of S5OrgOO chown tn column (5) b compoaedof after-tax cash Inllow trom operaUonsof S20,goo(9co,ooo- ((S4o,ooo- Sz,2so)r ,40 tax rate)) and the afterta: cash flow from aalvagcof $24,0oo (S4o,Ooor (l - .40 tar rate)).
647
Chagter 23
P23-1O (Gontinued) Self-constructed eguipment alternative: (t) Protlr Crdl lnflowr
352,0oO
1 2 3 1 5 6
H lncomr Ter Doproclrtlon' $3O,OOO 5716OO 341560
(31 TrnHo lnconrr
Ir) - (21 31g,ooo (5,800) 17r/UO 31,300 31,300 71,580
t4)
lncomr Trr d 40% Trr Betr Fl r ao%
3 o,4oo l2,240l
(51 N.t Allor-trr C..h lnflowr
(rl-t l 3o5,ooo
{0)
Ptl of tl o 1a.h ,a77 .769 .875 .592 510 ,4.58
m
FV ol ifot Aftor-trr C..fl lnflowr
{5}r lol 3 3e,991
Prccent valuc of net ca3h lntlow! Lclr Inltlal crsh outtlow
411711 30r391 231372 20,49O 24,3:t9 , s180,294 lE5'OOO'-
Net preaent valuc of purchagcalternativc
3 15,294
52rOOO 5210oo 52,000 52,00o g2rooo "
20r7OO 2017OO 10r44O
6197A 121520 72,320 281624
54.'2.4O 4!iro24 3er48O 39/{80
st,37E
'Tar
depreciation b determined by muttlplying the depreciabte basls of the equipment undsr tho self-construction alternaUve ($180,000, whlch ls the full construction cost Including allocated fired cost) by the IJIACRSdepreciaUon rates provided In Erhibit 224 ol thc text.
" tncludes aalvage valuo of 530,000, all of whlch woutd be tarable, lince the equipment would be fully depreclated for Incomc rrr purpogeo at the end of tha rlxth year. Thc total attor-tar cash flow from operaUons of 353,376 ahown ln column (51b composed of aftcr- 31O,44O)x ,4O tar rate)) tar cash Inflow from operatlons ot 335,376 (352,000 - (|3SZ,OOO and thc after-tar cash flow from talvagc ol 318,000 (S30r00Ox (1 - .4O tar ratel). -'
Because Egelston Corporation ls operaUng at normal capaclty and the construcUon of the new equipment will not Interfere with regular acUviUes,the company ahould not incur any addlUonal flxed tactory overhead. Therctore, the 815,OOOof fixed factory overhead ls not Included In the differential cost of the sett-constnrcted asseL The initial caeh outlay woutd bo $180'000 tutl cost less $15,00Oof altocatedfired factory overhead, or 31O5,OOO.
Chapter2S
P2g-1O(Concludedl (21
EgelstonGorporationshould consider sny proposalthat is erpected to have an.earningsrate In ercess ol the firmrs cost of capital. lf a proposal has a positive net present value,that proposalb erpected earnings will yield a rate of return that erceeds the firmb cost of capital. In this caso, the purchaseof general-purposeequlpment,the constnrctlon of specialpurpose equipment,and the lEaseol general-purposaequipment are all acceptableto EgelstonCorporaUon,becausethe net present value of all three proposalsis positive, EgelstonCorporationshould attempt to marimize the earningsthat can be obtalnedfrom the funds availablefor capital Investments.When comparinga set ol mutually erclusive alternatives,the atternativewith the largest net presentvalue will result in a marimization of stockholder wealth. Accordingly, constnrction of special-purpose equipment app ears to be the most attrastive alternative.Howeve4the net present value should be relatedto any requiredinvestmentby calculatinga net present value index as follours: Constructionof special-purposeequipmenb Net presentvalue Sl5,294 = .4927 Requiredinvestment $165 ,OOO Purchaseof special-purposeequipment: Net presentvalue Sl4,52O = .1162 Requiredinvestment $125,O0O Purchase of general-purpose equipment promises a larger net present value indsr and would be preferable, provided that the investment differenco of $4O,00O($t65,000 - S125,OOO| can be used to earn a net present greater value than S774 ($1S,eg4 $14,5201.
\
&9
Chapter?3
CASES
c23-1 (11
The payback method measuresthe number of years required for the aftertax cash inflows to fully nocoverthe initial cash investment in a project. The paybackmethod emphasizesan organizationb financial liquidity and the riskinessof the capital project in terms of investment recovery.Since long-termforecasts contain moneuncertainty than short-term forecasts(i.e.,it is easier to predict what will happen next year than what will happen lO years from now), the least risky projects will have the shortest payback period. (bl The net present value method recognizesthe time value of money by discountingthe after-taxcash flows for a proiect over its life to time zero using the firmb weighted averagecost of capital. The net presentvalue is the differencebetween the present value of the , after*taxcash inflows, measuredover the life of the capital project, and the cash outflow requiredto undertakethe capital project. Projectsthat have a positivenet present value are acceptable,while those that havea negativenet presentvalue are unacceptable. (c) The internal rate of return method (also called the discounted cash flow rate of return method)incorporatesthe time value of money by determiningthe compoundinterest rate for a capital project that would result in a net presentvalue of zero. A proposal would be acceptableif the internal rate of return erceeds the weighted average cost of capital,and unacceptableif it is less.
(21
ln orderto maximizethe value of the company,CaledoniaDivisionshoutd use the net presentvalue methodor the internal rate of return methodto decidewhich capital projectsshouldbe inctudedin the capital budget submittedto QuibleIndustries.Both of these methodswould identify ProiectsA, B, D, E, and F as acceptable(each has a positive net present value and an internalrate of return in excessof the companyb hurdle rate)rand Project C as unacceptable(the net present value is negative and the internal rate of return is less than the company'shurdte rate). However,ProiectsA and D are mutually exctusive(meaningthat ultimately only one of the two can be pursued).The selection betweenthe two dependsupon the criteria usedto rank the proiecB, i.e., the capital" expenditureevaluationmethodemployedin the selection process.tf the net presentvalue methodis used,Galedoniawould select Proiect D becauseit has a higher net presentvaluethan project A (s24,g74for D comparedto 3691683for A!. On the other hand,if the internal rate of return methodis used,Caledoniawould select ProjectA becauseit has a higherinternalrate of return than ProjectD (gsohfor A compared to 22oh lor D).
(al
6fl
Chapter23
C2g-l (Concluded| (31 In order to maximizethe value of the companyin this capital rationing gituation' the net present value should be used to select the projects to be included In the capital budget becausethe cash inflows aro assumed to be ruinvested at the hurdle rate (the company has a demonstrated earning rate equal to lts weighted averiagocost of capita!|,The intirnal rate of return should not be used, because it violates the rsinvestment rate assumpUonand may be unrellableas a basis for maxlmizingthe value of the companyin a capital rationing situation. Using the net present value method, the most profitable combinationol proiests within the $45O'00Obudget constraint would be to include Projects & B, and F becausethis combinatlonyields the greatest total net present value (net prssent vafue of $l621929 for an initial investmentof $4sorooo).(Note that the combinationof & D, and F is not possible becauseA and D are mutually exclusiveproiects, and that the combinationof B, D, and F is not possiblebecauseit would require a combinedinvestmentin ercess of $45O,OOO.| c23-2 (1)
The 18.2o/orate of return on the investment differs from tha 24ohinternal rate of return becausethe methods used to measurethe returns are different Tha return on investment (18.2Vo1calculation is based on accrual accountingconcepts.lf the reducedoperatingexpenses-legs depreciation-remain constantas planned,the numeratorin the ROIfraction will not changeover the life of the investmenLThe denominatorin the fraction, the investmentbase,decreaseseach year by the amount of the annualdepreciation.Gonsequently, the rate of return calcutatedwill increase each year oyer the life of the investmenl The internal rate of return calculation PA%l is based on discounted cash flow concepts. The cash flows erpected to be received over the life of the investment discountedto the acquisition date aL 24Vo,eractty equaledthe initial cost of the machine. This measunsof return on investment providesa percentagethat is constant for each year of lifE of the investmenl This rate can be computed for each yearb actual operating results if the annualsavingsin operatingerpensesaneconstant and the new equipmentis depreciatedusing the effectiveinterest method based on an interest rato of 24o/o.The method would be essentiallythe same as that emptoyedin amortizing leaseholdsand bonds. Tho depreciation chargeeach year would haveto be such that the numeratorand the denominatorof the ROtcomputationwould changeat the same rate in order to keep the annualreturn on investmentratio constant.
Cllagter23
65t
C23-2,(Concludedf l2l
Recap Corporation can restructure the data from the cash flow analysis to make lt consistent with ths accounUngreports (which contain straight-line depreciationfreceivedby the department manager.Once the investment ls accepted on the basis of its internal rate of return, the data can be converted into the lormat consistent with the accounUng basis used for reporting. Annual contribution from the new investment would be calculated by subtracting the straight-line depreciation from the net cash operatingsavings.The accounfing book value for each of the years of the investmentlifo would also be calculated. The annual contribution would be divided by the investment base (book value| for each year to obtain the rates of return. This would then present the mansger with the different rates of return for each of the yeansof the investmentb life. Thus, the rates would be more comparablewith the actual return on investmentrates experiencedeach year. Alternatively,rather than computing an annual rate of return, it may be more expedientto comparo actual net cash operating savings each year with those forecast in the capital expenditureanalysis,lf actual periodic savingsequal those forecast,tho internal rate of return woutd be equalto the 24% budgeted.
I !
S
CHAPTER 4 QUESTIONS DISCUSSION
I
'I
O4-1. The five Partsarc: (a) Direct nraterblg reqtbn (b) Direct lsbor ceclbn (c) Frlory ovefiead (O Work h Pr@oer hventories (c) Fhbhed grood hvmtorbr iho bahnc" rhoet ir t 3tal.ment ct finsncbl *2. pcrttbt; the hcqrr ctBternont b a dalement of sttYity. The incqne lbtement is ccnplementary in padicubr for to thc babnce sheet, munthg tho ctrange in hr prcprietary equrty Bs a resull of operatims during the year. In |hat respecl' the incornc atatemenl ir eeaentiallynothing more than a major rection of the retained eamings accounl. Thereforc, tht rsvenue and expense accounls in the income 3talemont have been lcrmed'cxplanatoqf ac@unl3, explainingthe cbb and lkrw of r.YcnueE and cxpensee lhat bod to thc new hcqno (or bce) and to the new rrtahed camhgs balancc h the balance sheet. O4-3. Thr ordinary babncr rhecl and incqne slatemenl aro htended to ptwkJe hlormalist as lo financial peilion and resulb of operation of a burinesl, in sctordancc wilh several assump' liqs that arc made h preparhg |he stalements. Frqn the standpoinl cil the criticisms rnade, the most important cil these assumptions are lhal cocl lost appropdale arnortization of cost mea' rurca unelgired cct, and that a business mey bo a$umod lo bc gohg to conlinue operatbns indclinilely into lhe future. Accountingstatemcntg sre usually prepared on lhe heory lhal a cale or gome other definite event is essenlial bcfore revenur is recognized.Basically,the aseot sUe of a balancc aheet coctaha a presontstbn o{ the anrounts cl cost incurred, which can b c p r e s u m e d l o b e n c fi t f u t u r e p e r i o d s . ' A n incornc slalement presents the srnounl of rovcnue recognizedas having been realized during thc period, less the podioo cl all cosls incuned thsl doe3 not appear to be lairly delerrablelo ftnurc perinds. Thc ircome staternonl is prirrnrity a m€asure cd what lres been camcd, and not a measure of 'camhg power.' For plant assots, the balance rheot b pdnarily a rnasure cl accountabilityfor cxp.nditureE,rhowing acguisitioncosls lees codr sllocalod to past operatbns. This rneasure of accounlability may br quile diflerent from 1rur velue.' To hcreese ilg usefuhess as one elemerd in judChC eaming porver, the ircsne stalement is picparcd with a dietinclion between operating and nonoperaling items. For the samo roason, c.rtain iterns may be climinoled frorn the incorne
slstomenl and shown in the statemont ol nrtained eemings. However, the effec-tof nmre' curring and nonoperaling transaclions is not entirelYeliminated. lnfonnalion revoaled by a serios of income 3tatcmentsb morc rignilinnt in iudghg eaming power than informatbn revcaled by ane hcqnc statcmstl. The incqne of a bushess rnay folbw or .Yen exaggetat€ the ups and downs ol the bueinesgcyclo and, therefore, lhe inccne of any crc year will ncl representeaming powor. Changes in law or local zoning ordinances may result in a marked change in lhe eaming powerol a bushess. Ukewise,changesin public taste, devebpment of new prodtrts' apPgarance ol new conrpetilion, acquisition ol subsiJiaries' changes in management and lhe like, all may change earning power and yet not be clearly rellecled, il reflected at all, ir one incorne stale' menl. The accounting use of historical. rather lhan curront, dollars in measuring depreciation and cost of goods sold may resull in distoding any view of earning power obtained frorn a single incorne statemenl. ln regnrd to plant ass€ls, il can be said lhat their value to a going concetn is usually depen' dent uPon the eaming power of the business. Such s value is not necessarilythe same as lQ' uidation value, cost, cost legs amortization. repbcement value, or any other kind of value' The phrase.true value'has no definileconnota' tion. O4-4. Actusldescribes the way cosls are measured. i.e., at actual historical arnounts; /ull absaption describos which elemenis of cost are allocaled to hvenlory accounls, i,e., all elements of rnanulacluring cost are fully allocated to hventories; p/ootss describes how cqsl infonnation is accu' mubted, i.e., costs are accumulatedfor each procossor deparlment in the laclory. O4-5. Prime costing systems albcate only lhe prime costs, direct material and direcl bbor, lo hventory accounts. Direct costing syst€ms, abo called variable costing syslems, albcale the variable manulacluringccts, direcl materbl, direci labor, and variable factory overhead lo lhe inventory accounts.Absorpticn costing systems albcate lo Ilvenlories parl or all of tixed frtory overhead, in addiliooto all varlrble manufacluringcosts. Actual costing m€asuros product costs at actual 04€. hislorical arnounts, while standard ceting measures product costs by ueing predetermined arnountsol resourceg to be coosurrnedand predeterminedpriceso{ those resources.
62 Q,4-7. Preess costing aicumulates costs fot oach pt@olts or department in the ladory end rnah' tains detailcd recordr and calculationr of the cotl of *ork h preest. Job order cting accumulales cotr lor oach irb, lc', balcfi' or contrasl and mEhtains detBilsd records and calculalbng od tho cost! of tork in prceas. BacHlush €st' ing accumulal.r coltr by working backwards through ihc availablc inlormatiqr afler producticn is cornpleted (i.e., at the end of the accounl' hg pori
ChaPter 4 low*ost @nsumor products such as toys, dis' posable Pens,na:ronr'and lighters. 04-12. Aspecls cqrtrnon lo icb order and prccess costing are: (a) They can be used by rervice organiza' tbns. (b) They requin cqrsiderablo detail to calcu' late tho cost ol *ork h Procells. (c) The wprk h process accotnl in the gener' al lcdgcr ir lupported by subsidiary t€cordg. O4-13. A blended cthg method uee irb order ccting lo accumulate soflrc clement(s) ol cost and prcces3 ccthg to accumulaleofienO4-14. Flcxible manufacluring 3yslems consisl of an integrated collection ol automated production pnocesges,autornatedrnaterialsrpvemonl, and cornputerizedsystetn csttrob lo utilize facilities ln etticientlyrnanulacturinga highly flerible variety cl Products. Q4-15. The adnantagesof a llexble nranufacturingsys' le.n over the cther systems include shorl (nearzero) setuPlimes, lhe absence of a learning curve, lflet lead times to chipmont' lower diresl labor cost per unil, lower direct labor cost in total, and bwer work in prccess invenlories. O4-16. Thc hilial cost of creathg a flerible rnanufactur' ing system is much higher than lhat of olher rngnufasturingsystoms. O4-17. l,lanufacturingsetthg suiied for bacHlush cosl' ing are distinguishedby very fasl processing speeds, which rernovesboth the incentiveand the opportunilyto track the detailed costs of work in Pr@ess'
l-
I
t
L I
.
\-
I
63
Chaptor I
EXERCISES
E4-1 Calculation of cost of goods sold (in thousands):
b
TOtal manUfaCtUfingCOSt...........'................r.r.....t Add work in process inventory beginning """""
I
sl 10 80
$1eo
b
I
S
$t oo
GOSI Of gOOdS ayaitablg fOf Sa|g...........o......oo.......
$250 60
Less finished goods inventory, ending ...o......'...... .-,....................'.. Cost of goods sotd .....'.
I
b
90
Less work in process inventory ending.r..........". Cost of goods manufacturgdr.......o.r.-........'....r..'., Add finished goods inventory beginning ........!....
150
$.11D
I S
E4-2 I b
Calculation of cost of goods sold (in thousands): DirgCt matgrials used.....................r...,...r,...'........ DifgCt 1abOf .......................'.r....................r........... FaCtOfy Ovgfh gad .o...'..r..........r.............................
60 80
COSt ........r..............o.............
$230 250
Total manufaCtUring
Add work in process inventory beginning ........'.. I
b
Less work in process inventory,ending G o st o f g o o d s ma n u fa c tur ed....... A d d fi n i sh e d g o o d s i n ventor y beginning........' .... Gostofgoodsavai|abteforsa|e.............. Less finished goods inventory ending..............,.. ..t......'.. Gost of goods sold .......o.............
i
I
$so
$480 210
$27o' 340 $610 27fJ
s340
65
Clpptcrl
E44 (Goncluded) (21 Gost of goods manufactured: Stores,April 30.......'.'........r.,..
s 1O,25O
.....--..----.
105,OOO
PUfChaSgS.................rr.............rr.......................................r.....
sl15,250 12r7AO
LoSS: StOrtSt May 3t ro....rr...........r.................r....o......r..o....or....
sl 02,550 93,500 (4r25O x5221..r,.....,.........o.,............r.,...o...... Dirgct tabor used 77.390 FaCtOfy OYefhead .......r.....r...........o..........r...........'.....r.......'..... Dirgct matgrials
COnSUmgd '......"............rr........t..r....o...........r.
5273r4/,O 61.420
Total manufacturingcost Add work in process, beginning inventory
s334,86O
Loss wgrk in process,endinginventory................r.....,...........52,80O s282,O60 COSIOf gOOdS ....'.....'.........r......................'....... manUfaCtUngd
(31
Endingbalanceof finishedgoods: Finished goods, April 30
+
Cost of goods manufactured
Finished goods, May 31
Cost of goods s ol d
=
S 4 5 , 6 0 2 + $ 2 8 2 r O g O X = s28O,OOO X
=
$ 47,662
Therefore,the finished goods ending balancesis $47,662.
E4€ (al *",i135";;;;;il..:::.::::::.::::::::::::::-:::::: 35,ooo 35,OOO
(b)
Work in Process............ t...........r.... Factory olrgrhead Gontro| ..o............r...,........ Matgrials
(c)
33'OOO 21000 35,OOO
.or..r.....'r.r......................r.r......o.
Payroll
4O,OOO
Accrugd Payro11.....,....,.r,.r..,.....r....,...r..., (d,
Accrugd Payroll .r................,......,...,..............
4O,OOO
4OTOOO 4O,OOO
CaSh....rr........r........o.r...r.........r.........or....
(el
(0
Work in Procgss .................r....o,...,.,..r.......... Factory Overhead control,.. Payroll ..........
Factory gverhead Control C a sh
g2rOOO S'OOO 4O,OOO
4,OOO 4,OOO
Chapter4
ffi
E4-S(Concluded) l8,ooo (g) FactoryOverheadControl.."""'r""""""""" AccountsPayable...........,..............""""
18,OOO
(hl
4,130 FactoryOverheadGontrol.....-.................'."' AccumulatedDepreciation...................'. PrepaidExpenses....r,....,-...........-.......... AccruedPropertyTaxes.,..,........r........"'
2,1OO 780 11254
(il
WOfk in PfOCeSS ........................r..................
36,130 36,130
Factory Overhead Control
o
92,OOO F i n i s h g d GOOd S ........,......,..........................,.. W o rk i n P ro ce ss..........................
92,OOO
(k)
A c c o un ts R g ce i va b l €..............,..................." 8 O , O O O .............. Sa l e s
8O,O0O
4O,OOO G a s h...........r................ Acco u n ts R e cg i va b l € ............................"
4O,OoO
C o s t of Go o d s S o 1 d ........................!........""" 60,000 Fi n i sh e dGo o d s ..r................' ...,...,.,"""" E4-6
(bl
17,5OO '
(c)
1,800
(d)
27,OOO
(h)
17,5OO 1,800 27 |OOO
Accrued Payroll.....,.'......
(gl
6Ot000 13' 5oo
Acco u n ts P a ya b l e
(0
:
13,50O
(al
(e)
_
Work in Procgss ......................'...............,..,. 1 7 , 0 O O 2,000 Factory Ovgrhead Control .r....r..,r.'.............,. 5,000 Marketing Expenses Control ........-............... 3,000 Administrative Expenses Control ...........,.. Pa yro l l 2r5OB Factory Overhead Control C a sh .............. 8,5OO Factory Overhead Control Accounts PaYable 14,8O8 W o r k i n P ro ce ss .....-.-..-. Factory Overhead Gontrol F i n i s h e d Go o d s..'. Wo rk i n P ro ce ss" " " " " "
27,OOO : 2,5O8 B,5OO 14,BOB
60,1OO 60,1OO
Chaptor I
67
E4-O(poncluded) Accounts R9cgivab18.............o...............oo'....
O
8O,OOO
Sa
8O,OOO
Cost of GoodsSold' FinishedGoods 'sl5,ooo
6O,OOO
60,o00
-$1s,roo= $8o,ooo + $oo,roo
E4-7
WALLACE INDUSTRIES Cost of Goods Manufactured Statement For M ay ( in thousands of dollar s)
Direct materials: Direct materials, April 30, 20A.........o Purchases......,...,. Freight
ill ...........r............r.....r....r.r...t..
Direct materials availablefor use.....t. Less direct materials,May.31r 2OA... Dirgct materials consumed.......... DirgCt
s5f o t5
$ zs, 525
sss3 23
s s30 260
tabOr.........roo........i..r.......o.,
Factory overhead: Indirect factory labor ..............,...r....... Utilities ($f gs r go o/o).............,..,...o..r.. Propefi t?,if,..........r.....,.............r......... lnsuranco ($2Ox gO%1..r...,...............r. Depreciation Sl2O + $3O)..... Total factory ovgrhgad,r...r..r.r....... Total manufacturing coSt..........o....r............ Add work in process, April 30, 2OA,... Less work in process, May 31, 20A.,.
Cost of goods manufactured
$eo 108 60 12 50 320
$t,t1o 150 $1,28O 210 $ { . 0 50 :
ChaptorI
ffi
cll{l{ABAR 69ffiplMf Statement of Cost of GoodsSold For Year Ended December 31
E+8
Raw materials: Purchase3 .........'."
$40o,ooo
Less dlgcounts on raw ."" materials Punchagod Lesg raw materials on handt Dgcgmbgr
3{ e 2OA.........""t
4,2OO $ggs,goo 24,0O0 s371'8OO
Cost of raw materials consumod Dirgct labor
lEo,ooo
...........o."""""""""""r'
Factory overheads Factory maintena!1co"............... Factory suppllgs used ....""'t""' Powgr and hgat-factofl ......'...' lnsuranco erpense-factorY buildingand equiPrllollt...." Depreciation-factory bullding and eqUipmgnt..""""""""" Factory superintendence.......... tndirgct factory |abor.........."""' Total factory overhead........ Total manufacturingcosts-,....--.....-.-. Add work in Process,January 1r 2OA Less work in Process,December31t 204 Cost of goods manufacturgd....-........ Add finishedgoods,Jbnuary1r2OA. Cost of goods availablefor sale o....-.. Less finished goodsrDecember3l' 2OA'.....................o.....t......"t"""
Cost of goods sold ....................o.......
s?8,4OO 22t4AO 19,400 4,8OO l7,5OO 1O0,000 20,OO0 222,5AO $774,3OO 84,OOO . $858,30O 3O,OOO $828,3OO 37,5OO
s865,80o . 7O.OQ0
szggJsq
CGA-Canada(adaptedl.Reprintwith permission'
ChaptorI
69
PROBLEMS P4-1 (rl
COMPANY BRTDGEWELL Gost of Goods Sold Statement For Month Ended July 31 (in thousands)
Direct materials consumed,...,.......
.....r......r...,.
s16
24 FactOryovgrhgad ................'.....................................'.....r............ 20 (a)...............................rr..,....,............ Total manufacturing cost s60 Add work in process inventory July 1.......,......,.....,............,........ 1 5 DirgCt
1abOf........r.r.r.................r..........r...................r..rr.r.o....'r..r..r
s7s
Lgss work in processinventory,July 3'l ..........,.......................,...25
Cost of goods manufacturgdr.....,........r..,r....r...,........o..........,....... 55O Add finished goods invgntory, July I (b) .............r....................... 20 Cost of goods availablg for salg r........r............,.,..........,.....o......... S?O Lgss finishgd goods inventory, July 31(G) ................_.-.-.u.r.......... 15 Cost of goods sotd ........,.........'......r.r....................,..,.....,...r......,.. G
Calculations: (a) Costofgoodsmanufactured.......,.............,.. $50 Add work in process,ending 25
s75
L e ss w o rk i n pr ocess, beginning.....,.......- .,... l 5 E q u a l sto ta l m anufactur ingcost.................. _999 (b)
(c)
Cost of goods available for sa|e.,.,......,..r...o. $ZO L e ss co st o f goods m anufactur ed...,.,......,... 50 E q u a l s fi n i shed goods, beginning......,....,,,.. 14 Go st o f g o o ds availablefor safe................... $ZO L e ss co st o f goods so|d........ 55 gg Equals finished goods, ending
Chapter4
'70
P4-1(Concluded) l2l
25,OOO
(al
Matefia1S.o..r..........................o..........o........... AccountsPayable.....................t.|..........
(b)
Work In Process FactoryOvgrhgadGontrol....."""""""""""' Matgrials...............r'........"""""""""""'
16,OOO 2,OOO
(cl
+$5'OOO)"""""""""""t""' Payrolt ($ZCrOoO gd """"""""tr"""""D"""'r' Payro11 Accru
29,OOO
(dl
work in Procgss ..............r....r.....................'. 24rOOO 5,O00 Factory Ovgrhgad Gontrol r""""""""""t"o"
a aa aa aa a aaaa a aa a aa aaal
PayrOll
a
25,OOO
18,OOO 29,OOO
t......."t"""""""t"t""rt"""""""t"
(e)
Finished Goods
(0
AccountsRgceivabte"""""""""""""""""" """' Sales ($60'000 + (75o/oof $6O10O0))
aaaaaaataaaaaaaaaaaaaa'
29'0oo
5O,OOO 5O,OOO
Work in ProcesS"""t""""""""""""""" 105,O00
55,OOO cost of Goodsso1d............................,..o....... FinishgdGoods"""""""""""""'r"""""
105,0OO 55r O0o
Chapten4
P4-2
(11
SCOTTSBURGCOMPANY Cost of Goods Sold Statement For Month Ended June 3O ( in thousands)
Direct materials: Materialsinventory June 1 ........................ Purchases........................., .......... Materialsavailablefor use... ........ Less: Indirectmaterialsused.................... MaterialsinventoryJune 30...........
sls 33
s48 S 1 19
ZO
s,
t,
$ 1 7 17 2 13
Totalmanufacturingcost (b)........ Add work in processinventoryJune 1..................
sl1
4
s1
Lesswork in processinventoryJune 30............... Cost of goodsmanufactured...... Add finishedgoodsinventoryJune 1 (c)............,.
3
sl2
7 sl9 3
Cost of goods available for sale., Less finished goods inventory,June 30 (d)..........:. C o st o f g o o d s so |d ....... Galculations: (a) indirect labor + direct labor = $4g indirect labor + (indirect labor x 6) = $49 indirectlaborxT=949 indirect labor = 37 directlabor=6x$7=942 (b)
(c)
4
sls
C o s t o f g o o d s m a n u f a c t u r e d . . , . . . . . . . . . . . . . . . , . . .$. .1 2 0 Add work in process, ending gO
sl 50
L e ss w o rk in pr ocess, beginning......... E q u a l sto tal m anufactur ingcost.
40 Sl iO
C o s t o f g o o d s a v a i l a b l ef o r s a l e L e ss co st of goods manufactur ed....... E q u a l sf i n i s h e dg o o d s ,b e g i n n i n g
S19O 12O S ?O
Chapter4
72
P4-2 (Concluded) (d)
l2l
(al
Cost of goodsavailablefor saler......'..""""' $ 1 9 0 Lgss cost of goodsso1d......................,......,..{ 5 5 Equalsfinishedgoods,ending...............""" s 3 5 Matgfials
33,O0O
..............r........r...........r...,.........,....
33,OOO
Accounts Payable ...,......r.....,.........o..,.... (b)
Work
in Procgss
.........tr....tt'otr""""""""t'r"'
Factory Ovgrhgad Gontrol ............................
28,OOO I,OOO 29,0OO
Matgrials ........t........'t"""""""""t""t""'
(c)
Payroll
....o................""""tttt"t"t""tt"""""t"
49,OOO 49,OOO
Accru gd Payro11...t..r..""""""""""""""' (d)
WOfk in PfOCgSS ...,..............r.....'.....r.,o..r......
Factory Ovgrhgad Control ....t..r......""""""" Payroll...............""""""""""""""""""' (e)
Finishgd
GOOdS....,rr,.......r....,...,.......o..r.........
42rOOO 7,OOO 49,OOO 12O,OOO 120,OOO
Work in ProcgsS......'.....""r"""o""""""'
n
Accounts Rgcgivabl€........"........"""""tt"""
21O,O0O
+ (50%ot $14o'o00))... Sales($14o,ooo
{55,OOO Cost of Goods So1d...................,....,..ro.......... Fi n i sh g d Go o d s ...'.........."""""""""""'
210,OOO 155,OOO
-
73
ChaPtarI
P4-3 ,
MADEIRACOMPANY Scheduleof Cost of GoodsManufactured For Month Ended March 31
(11
work in process,March I .............r.......r,....... Productioncosts: $lo4rooo tr Dirgctmatgriats..................................... ttt
r
"""""""" Direct labor....r.-....." ..............,......""""""" Factory overhead
l6otooo 8or999 *tt
s 4o,o0o
-344t009
s384,000 36,000 $a8,@'
Lgss work in procgss,March31 ............."""' Cost of goodsmanufacturgd..-.'....,...............'
r Cost of goods sold ($345,O0O) + endingfinished goods inventory ($tos,ooo)- beginningfinishedgoodsinventory(slo2,ooo)= s348r000. 'rpurchases of materialsduringMarch ($l tO,OOO) + beginningmaterials - endingmaterialsinventory($26'000)= SlO4'OOO. inventory(S2O,OOO) = - direct materials ($t Oe'OOO1 r.' production costs for March ($gCC,OOO) direct labor and factory overhead($24O'0Oo). Letx 1.5r x .5x (21
= = = =
directlabor S24O,OOO $l60'000 direct labor factory overhead $8O,OOO
Prime cost: SlO4r0gO Direct materials(requirement(1)).........,..r.o........, l6OIOOO (1))....:....,..................... Dirgct labor (requiremgnt
_9261poo (31
Conversioncost: (1))'......r.....,................. $160rO0O Directtabor(requirement 80'0OO Factoryoverhead(requirement(1)1.............,.....,..
_9240,999
Chaptor 4
P4-4 CompanYA:
s4,oo0,ooo
""""t"""""t"tt""ttt"tt""t"""ttt"""""t"
Salgs
Cost ol goods sold: Finishedgoods inventory Janualy i """ Gost of goods manutactlli9d""""""""" Gostof goodsavailablolor sa|e""""""' Finishedgoods Inventory December3l
S 600,000 3,80O,OOO
$4,4oO,ooo lr2OO'OOO 3,20O,OOO
Cost of goods Sold tt""t'o""t""""t"""t"'
.
s Soo,ooo
Gross profit l2oo/oOf Sales).o......'..............r.....
B: GompanY ' O,OOO ctst of goods availablgtor 3a1o.,..r.........,......5 1 , 5 {o.ooo 2'l _ Less finished goods ending inventory""""""
slJggJoo
COSI Of gOods Sold "tt""t""""""""""r"""""'
CompanYC: Sal
eS
S 429,ooo
..."""t"'rt"t"'ot""t"""""""o"t1""""""t"
Cost of goods sold: Cost ol goods manufacttlrl9d""""""""" Add bsginning finished goods inventory Cost of goods availablolor 8a1e""""""' Less ending finished goods inventory""
34O,OOO 45,OOO $ 385,OOO 52,OOO
$
333,OOO 96,000 $
Cost of goods Sold """"'o"""""""""""' Gross profit """"t""""'r""""""""""""""""' P4-5
Work in Process
FinishedGoods Beg.
(41
35O,OO0
34,0OO 348r00O 38Ct,o(to End.3O,W
Beg. M L(2) FOH
85,O@ End.7S,OOQ
5O,OOO 20O,OOO
loo,0oo 357,W End.17,@
Accnred PaYroll
Materialsand Supplies 2O,OOO 65,OOO
346,OOO
7,0oo
(11
2O,OOO 5O,OOO 70,O@
(8)
259,OOO Beg.
13,OOO 55,OOO 2OO,OOO 268,N
End.9,Ooo
75
Chapter 4
P4-5 (Concluded) Accounts Payable
Accounts Receivable 5 4 ,0 0 0 (7) 5OO,OOO
532,OOO
(6)
77,OOO Beg.
83,OOO
554,OOO End.22,OOO
End.6,00O
Sales
,Factory Overhead Gontrol 2 O,0 0 0 (3) 5 5 ,0 0 0 10,00o 2 ,OOO 13,OOO
18,OOO 65,OOO
lOO,OOO
lOO,AOO
Cost of Goods Sold
Payroll 5 5 ,0 0 O 2 0 O,OOO 255,OOO
(11 l2l
(3)
(41 (51 (61
rtl
(81
(5) 55,000 2OO,OOO
350,OOO
255,OAO
Materials issued to production' 55O'OOO Direct labor, $2OO,000 Total factory overhead' $1OO'0OO Gost of goods manufactured, $346'OOO Cost of goods sold, S35O,OOO Payment of accounts payable' 577'0OO C o l l e cti o n o f a cco u nts r eceivable,5532,OOO Payment of Payroll' S259'0OO GGA-Ganada(adapted).Reprint with Permission.
t
1
Chapter 4
76
P4-6 Work in Process
84,OOO
laaaata
84,OOO
Material8... Cost
ol gOodg
$14o,ooo
SOld ttt"tt""t"""""t""tt""
l7,ooo Add finished goods inventoq/ incl€ase" Cost of goods manufactllhod..'...'...r..""' s157,OOO 2,OOO Add work in process inventory increase Total manufagturing cost -....--.-...........o" s159,OOO Less : Factory overhead.t..... $35'OOO Dirgct t:lbor.......,....o... 4OTOOO 75rOOO Materials used in manufacturing .,.r,...... l_84,OOO Materials
91,OOO
..........t.....t...t"""t"""ttttt"t"tt"tttt"
9l,ooo
Accounts Payablg.....'..""""""""""""" Materials ussd in manufacturing (from above| .........o...."r""""""'rt"""'
Add materials inventoryincrease....'..... Matgrialspunchasgd".........""""'r""""' Payroll .....'.'.......
a ata-aaaa
aaa
$ 84,OOO 7,OOO
$ er,ooo 40,ooo 4O,OOO
Accnrgd Paytoll.......'.........""""""""to"' Work
in ProcgsS ........................tt""t"""tttrt' .........r..........""t""t"""""""""t' Payroll
Factory Overhgad Gontrcl ......r'.r.t,,.....""""' Vari o u s C rgd its.'........"' t " " "" " " "r'r t " " "' Work
in Procgs3
..............'.t""t'o"t"t"ttt"r"'tr
Factory Ovgrhgad Control o..r........ro"""" Finished Goods (12'OOO+ 84'OOO+ 4O'OOO+ 35tOOO- 1 4tOOO)............."""""""""t Work in ProcgsS .............'...r"""""r""""
Cost of GoodsSold (28'000+ 157'O0O45tOOOl .........................'.."t""t"t""t"'
Finished Goods
..............
4O,OOO 4O,OOO 35,OOO 35,OOO 35,0OO 35,OOO
t57,0oo t57,OOO
l40,ooo
l4o,ooo
GGA-Canada (adapted). Reprint with permission'
,<
n
92,OOO 26,530
(c) Payroll... '' Accrued Payroll
86,000 ..............
86,000
Work in Process....................r.............................6Or5OO Factory Overhgad Contro|..........,.,....,...........,..... 1215OO Marketing Expenses Control ,..............t............., IrOOO Administrative Expenses Gontrol 5,OOO 86,OOO
47,33O 188,OOO 241,150 185,5OO (hl Cash !........,r.........,......,.. Sales Discounts,........... Accounts Receivable........... (i) Marketing ExpensesControl Administrative F.xpensesControl Accounts Payable 0 A cco u n ts P a ya b l e Cash
rt
...,......
ZOSrGO2 4r2ig 212rg2}
...,............
18,ooo 12,OOO 3O,OOO 1O4,OOO 1O4,OOO
Chapter 4
78
P4-7 (Gontinued) Materials
Cash l/l
Bal'
(hl
20,O0O (c) 2O8,662 0l
2i28,662 36,412
88,25O
l04,o0o
111Bal. 1o'oooI (d)
(a)
't92,250
102,OOO t7,2OO
Machinery
Accounts Receivable l/ 1 B a l ' (gl
25,O0O (hl 241,15O
212,924
9O,8OO
92,OOO
1/1 Bal. 4O' OOO
26art50 53J,3O
Accumulated DePreciation
Finished Goods
1 t 7 Bal.
(0
9r5OO (g) l 8 8 , OOO
111 Bal.
1B5,5oO
1O,OOO
,97,5OO
AccountsPayable
Work in Process t/l Bal. (c)
(dt (e)
104,OOO 1/l Bal. (a) (b) (i)
1 8 8 ,O0 O
4,50O 6O,5OO 82,50O 47,330
15,5OO 92,OOO 26,53O 3O,OOO ,64\030
(q4,>e3
RetainedEarnings
Accrued Payroll 88,25O 111 Bal.
(c)
111 Bal.
2,25O 8 6 ,OOO
21,25O
Cost of GoodsSold
Sales 241,15O
(g)
1 8 5 , 5 OIO Payroll
Sales Discounts (c)
I
86,0O0 | (c)
86,OOO
LL L I\
t_
Clppterl
79
P4-7 (Concluded)
CommonStock
Factory Overhead Control
I
26,53O (e) l2r 5OO 8r3OO 47,33tO
(b)
(cl
!
(d)
I
47,330
!
Administrative ExpensesGontrol I I !
(cl (il
Marketing ExpensesControf
(cl
5,O0O 1 2 ,OOO
810oo 'l8,0oo
(i)
2l,ooct
17,AOO b
(31
HOPKINS& WHITECOMPANY ThialBalance January 31
$ 36,412 53,23O AcCOuntS RgCgivabl€...tr..............r............................r...... 12,OOO GOOdS......r...........r.o....'..r..r......r...r'..........r......r. Finished 6,830 WOrk ln PrOCgSS.........'.o,.r.,.....,..r'.......r.'....'.rr.'.....r........t 11r2OO Materfals 4O,OOO Machine CSSh '........
aaa aaa aroaaa
Accounts Papble
aaaaaaattaaaa
a aaaa aaa a aa aoaaaaaa
aa taaaaaatta
aa aaaa
aal
a a
aa
Accumulatgd Depreciation....,...,......,,.,.....,....,................ Common Stock..,. at
Retained Earnin Sales Salgs Discounts,...,..
a araotaaaaaaaaa
aataaa
a
s 60,030 l O,OOO 6O,0OO 21r25O 241,15O
4,258 185,5OO 26,OOO l7' OOO
1993,430 _$3e2,499
l
Ghapter 25 DfscusstoNQuEsTtoHs Porcontago d gral'tl lo ralo b a nrasuro of cun.nl operating activilirs. Fevenuo producliwr, coal incurrcnco, Ind corl control arl rnbodied in lhir ratio. Thr capitatrmployd lumovrr ratr ir ! moa3uro of lhc anrount of agsol investment rehtivr to tho activhy lcvel cl th. cornpany. This rato highlights the succcgs o{ adrievirg ealeg vc{urnr with mirimum acsot ' hvcaUnont ard measurcr lhc salesaeneraliqr activity and overafl anscl menagemont. e2s-2. Capitsl omployedcqrsbtr ol nqrcurrent a$ets (invrstmentr in buildingr, machinrry, and oquipmrnt) ar wrll !r currrnl asrctr. Somt finnr do ttcrtur. cuncnt aerr1tsbut p6fer rorking c-Fital; lhat is, lho nol balsnce of curnnt egrtt ard currcnl linbililicr. Q25-3. Tr+o major objectivet that managemonl may havc in mind when setting up a system for m e a t u r i n g l h e r c t u r n o n d i v i a i o n a lc a p i t a l crngbyed an: (a) lo lecuro a summary msasurc of lho profilability of operations, products, and lacililies connecled with each divbirn; O) to obtain hforrnation as to the success ol division manag.rr in conducting thcir portirrr of thc canrpant'c rtivilies. . Q25-4. Dpfuncibnal astbnr that managemenl could lak. lo irnprovc rhorl-term relum on caoital ornpbyed at the expsrse ol bng-run prolitability hclude: (a) Defer or reduce preventivemainlenarrce, which reducel currenl cxpenaebul t h o r l e n r l h c l i l o o f a r ee l s , t h e r e b y ircreaa irg I r.rturr cosi. (b) Rcducr cxponditurr on research snd drvclopmcnt, which reduces curronl expcnr. bul makor thr cornpany less canpelilivt h tho luturc. (c) Rcduco or arrc*J rrnpbycr trainhg and d c v e l o p m e n t ,w h i c h r e d u c e s c u r r e n t cxp.nlro bul makcc lhe company less cqryctiiivo h thr future. (d) Sell ard then nnt nreded assets, I,ltich 9e!s lhcm ofl thc balancc sheet but may cosl the cornpsny rnorc h the bng run. (o) Deler, reduce, or arcid nrodemizaticn of facilities,rspocially rubstantial inyostrncnb h eutornaled manulacluring frililior, wtrich kecpr asrol cosl on thr bal_ anca sheot lotr bU rnalcs thc corngany lcss carpetitivo h tht futurc. 425-5. Uac od lhc rato-o{-rolum-ori-cspilal.emptoyoc, hag the folbwing livr claimod achranlaoes: (a) ll focuses menagemont'satte-nlion on oaming thc bcst pro{it possibleon the capital (tolal assets) avaihblo. ezs-1,
688
(b)
lt lies lognther the rnany phasos ot fiAan.\cial phnning. sales cbjrlives, c6l sttrol, and the prolit gnal. (c) ll aids in detecting the strengthl end. weaknesses wilh respect to lho usr or nonuse of hdivijual assob. (O h serves as a yardstbk h measurirg por-, fonnance and proviCesa basis lor evalua ating inprovem€nl ovo, time ard arrstg divbi:ns. {o) }t devebps a keener eenge of resoqtsi_ . bility and leam eflort in divbisrol ,nan- agcrr by enablirg thcm to measurc and tvaluale their orvn astivilies in he light c/ . lhe brdget and with ,Dspeclto thr resuttr achieved by other divisisrsl rnanagors. r' 025-6. The five lrequently encountered limitatbos of using the rate-of.retum_on-capilal-employed follow: (a) lt may not be reasonable to expcct thr v aame rolum on capital employed lrom each division if the divisions selt thcir respective products in rne*ets that difler _ widely with respect to product developmenl, compelilion, and conrumo drmand Lack ol egreernont on thr gtimum rale ol rclurn might discourlg. \r rnarugen who believe lhe rate is ret at an unlair level. (b) Valuatiqrs of assets cil differentvintager in ditferentdivisions might givo rito to * comparison difficuttieg and misundcratandings. (c) Proper albcation ol conrrnon c€lc and assots requirea dstailed information F aboul tho budgeted and actual uro of cofilmon lacilities. Thc cost of kecping track ol guch detaila rnay be higrh. (d) For the sake of making itrr curiont pcri:a rale of relum on capitaf empbycd -loot good,'managers may be influenced to mEke decisions that are not h thr best _ bngl,run hlerests of the firm. Thir probl e m i s e s p e c i a l l yl i k e l y i l m a n a g c r t expecl lo be in pcitbns for mly a rhorl time belore behg reassignod,thur, por- rv sonally avoiding rcsponaibilityfor , lmg-run corsequoncet. (e) A single moasure of performanco,ruch las rotum on capilal employed, rnay nrult in a fixation on improving thc compo. ncnts of the one moasurc to thc neglect o f n e e d e d a t t e n l i o nl o o t h o r d c a i r a b b activilies. product research and dovclop- \t rnent, managerial devebpmonl, progrorsivc personnel polbict, groodonployoe .
Chapter25
689
l1
Q25-7.
Q25-8. ,
moralo, and good custqncr and public relolbnr arc juol ar irnportanl in oaming a grealcr prc/it and assprhg csltinuour growllt Multiplc pcrformanco moaauro3 aro usod lo oycrcorno tho limitetkrnl cl r rhgh financial rnasur.. Multpll prrlorrnam tnealut$ PttF vidc central rnanagerncnl with a nprc cornpt"' hensive pictutr ol divisimal prdormancr by considering a widcr rangr of managomenl respansbililie3, nsllinamial activilies ar well as fiuncbl performancl. Muhipleperfonnancr mcalurcr cen bo derigncd to provido an incenlivo to divisimal tnanagon to cnlngo h activitieo that havo long'lerm bcnlfil lo lhr company but which may havo r nlgalivr impact on rhort-run protit. Ersmpler includr baric roaearch, now producl drvrlopmrnl, guality improvcmrnt, produclion innovalion, e m p l o y e e d e v r l o p m e n l , . a n dn e w m a r k e l dovelopmcnl. ln additiqr, mulliple moasutcs miligalr tho problem cil trying to evalualc divF sional performincc on the bagis ol a single profil measuro that may be cornputedon diller' enl bsser in each divisicn. Cornrnanforml of managsmenl incentive csn' pensatbn phnr irclude: (a) Co^rh bonuror, whbh erl urually paiJ in a lurrp rum rl thc ond of lhr pcrird and an basod qt a cornbirgtion of ccrporde porlormancr, individual porformancr, and thr managernenllevol. (b) Stock bcnusea, wtrbh arc delermined in essentiallylho same way a! cash bqtusca. (c) Delrrod canpmsalion, ufibh ir paid in cash andor dock ttst do€s ncl vest urdil a future perird. In tryno c8ses, tht rnanagcr io rcguircd lo invrsl annually and thc oqrany rnatchcr lhc stlrbuli
appreciation righls, and pcrlormancc sharlg sro valuabb only if thc cqnpany imprwee h tho bng+rn. Since adbns thal resull h shorltcrm ?nprovements catl have a negativc lmgr term irrpact hng-lerm incentiver probabty arc nPrc oltrlivr. Q2s9. Ttrc basb methods used h pticing irlrcqrpa' nY Itansil96 ar.: (a) trander prbhC basod cr ccl (b) rnatkel-bas€dtranslorPricing (c) cosiflus transfer Ptiing (d) negrctiatedkansler pticing (e) arbilrarYtransfer Prbhg 425-1o. A markot-baced lranster prico provides an incentive for divisional managemenl lo mini' mize cosir h qder to rnaximize dMsimal prof' ilr. In csrtrast, e ccl?luc transler pricc provkJcs no incontive tor divisioosl managcmonl to bo coot etlbiont. ln last il lhe ptdit rnartup ir a percentagoof cosl, there is gubslanlial incentive to bc inelficienl h order to increase total divisicnd PrclfiL a2s-1 1. (a) Negol'aledlransfer pticing: ('t) Advanlage: The profit'center man' agots haYe conlrol over lho lransler prices and can be held responsible lor heir resuftingirnpact on profils. (2) Disadvantage: lndividual manageru, in heir endeavor to msximize profits cil their om divbbns, may rnekc decisiru delrimental lo thc overall prolil of the lirm. (b) ArbitrarYlransfer Pricing: (l) Acfvantage:ll'rs Po.ssiblefor execu' tivo management to eet transfer pricea thot will guide profilcenler managors lo make decisisrs that will maximiza total firm Profits. (2) Dioadvanlage:The profit'center manager! do not havc aulhorily in an aree aflecting the prcfil pedonnancr lor which they will be evalualed. CGA-Canada(adapled). Fteprintwilh permisrbn. Q25-12. Under the dual lransfer pricing approach' lhe produchg (selllng)division hcludes a profit h carputhg itl revenue f rorn irdracornpanycales while the consuming (buying) divigionir assigned only variablo costs of lhe produchg division, plus an equitablo porlion ol fixed costs. Thc producing division lhu+ uses-g t r E n g l e rp r i c e t h a l b e l t e t m e a s u r e s p r r f o r ' rnanc., whitc tho ccnsuming divisbn has avaiF ablc a price more uselul for decisbn'making purposos. The producing divisbn's prolil wor.lld b r o l i m i n a t e di n p r e p a r i n g c o m p a n y ' w i d e tinsrcbl stalemont3.
690
Chapter25
EXERCISES E25-l (11 Capital-emPloYed turnover rato Percentage of ,^r tzt
profit to sales
t3l
=
Sales Gapitalemployed Profit Sales
${,6OO,OOO
=.8
s2,ooo,ooo
s200,000 = .125
$1,600,000
Capital-employed Percentageof Rate ol return on E = .8 x .125 = .1O x profit to sales capftal empfoyed turnover rate
E25-2 (1)
Total corporate assets a t b e g inning of the year ....o.....,.,., $ 6S' 000' 000 Total corporate assets at the end of the year,..o..,..........o. TOTOOO,O0O $136,OO0,O00 -r2
Averagetotal eorporate assets employed during the year $ gg,ooo,ooo Assets used by corporate headquarters8nd not allocatgdto operatingdivisions..........r..........o......,... oooo00 Averageassetsused by operatingdivisionsduring the
year..o......r.....r.....'...'.rr.............r........r...'..'.....o....
(11 Total Average Assets Used By Division All Divisions RecreationalProducts.... 563,000,000 HouseholdProducts..,,,.. 63,000,000 Commgrcial Too1s.,....,,.,. 63,000,000 TOtal
(21 Percentage Used By Division 25eh 40 35
j_oo%-
rr.....o....or,...tr...
(1) Division Sales RecreationalProducts.... s1 5 ,75O,OOO HouseholdProducts ...,.. 2 0 , 1 6 O , O O O GommercialToo1s...,..,..,.1 5 ,435,OOO Overall Corporation.,...... 5 1 r345,OOO
tzl
E_99p9s999 i3) Gapital Employed
(r) r (21
$15,75O,OOO 25,2OO,OOO 22r05O,O0O _$63fOOr0OO
(31
Gapital-Employed Gapital Turnover Rate (l) +-(21 Employed sl5,75O,OOO l.OOO 25r 2OO,OOO .800 22,05O,OOO .700 6g,ooo,ooo .755
69i
pter 25
E25-2 (Concluded)
l2l
(31
(11
(21
(11
tr)
(3) Percentago ot Pmflt to Sales (11*(2) Salcs Proflf Dlvlslon .300 Prodrrct8.,., s4,725,000 315,75O,0OO ffiUonal -200 4,032,OO0 20, t 60,000 Household Produetr ....... 250 15,4iNi,OO0 3,8581750 Commgrg!rl Tools........'.. ,192 51r34lt,OOO 9,86O,0OO OveralI Corporadroll........ Capltal-Employ.d Percontago of Profit Tlrmovcr to Salor Rsta Dlvlelon ,300 1.OOO RecreaUonSl Prodtrctl.-. .200 ,800 Ho usohold Produetr o...-. 2W .700 Commerclal Toob ..oo...-. .192 .755 Overall Co rporatlon .,...-. (21 (1) or altomaUvoty Dlvislon Pro,fft Flecroadona I P ro.ductr-, 9f,725,OOO H o usohold P roductr Do..6r 4,032,0O0 Commorclal Tools..,-...-. 3,858,76O Ovc rall Corporatlon ..,,..., 9,860,O0O
(31 Rsto of Rehrrn on Capltaf Empfoyed (1) r (2) ,300 .180 .175 .1+5 (3) Bato of Return on Capltal Employed
Capltal Employcd sl5,75O,(XX) 25,2OO,OOO 22,O5O,OO0 68,OOO,OOO
(rl + P) ,300 .160 .175 .145
-l
692
Chapter25 t
825-3
(1)
The company must seek to mlnlmlze total @st Since there Is no other market for the 64,000 lons, and since the variabfe cost of S4.5Oper ton ls less than the outside price of $5, the coke-producing profit centerrs supply should be used at least In the short run. In the long run, the S4.SO varlable cost may change, and the flred cost must be covered whlfe reallzlng a reasonableroturn on capltal employed. However, the 35 outslde price may also change when the contract ls ronegotiated. In determinlng the transfer prlce for profit-center proflt computatlons, the blast furnace marulger has a sound basis lor a renegotfationof the transfer price so that lt ls competitive wlth the $5 external price that ls available.
(21
Present Revenue Sales (16,000tons tons) x $9.) $ 96,000 l2O%x 8O,OOO Variablecost (8OrO00tons r $4.5O).......,.. Fixgd cost.....,......,.r,,.,tD..,,...,.r
$ 96,000
Total .,,...,......,r. r,...,...,.........
Costs
$360,OOO 40,OO0 s4OO,00O= 5(304,009)
rSales price - marketing costs Proposed:
Sales (8O,OOO tons x $6) 9480,000 Variablecosts: Production... 53.00 Marketing.,.. .50 $3,50 x 80,000 tons Fixed costs: Present.,.,..r.,.......S4Or0O0 Proposed......,....,. 60,OOO Purchase of coke for blast fumace (641000tons x S5).. Tota| .............r
.......r
s19999 -
$28O,OOo
1OO,O00
32O,O00 $7OO'O00= S(220'0OO)
By making the additional investment, the company woutd be better off by S84'o0o (S304,ooo- $22o,ooo),The cost of capital committed to this investmentshould be consideredby managementin making a declsion on this proposal. (SeeChapter 23.)
693
Ghapter25
Ez'5'4
Ace Divisionshould take on the new customer becauseits gross protit would be increased by $6001000.Aceb cost to manufacture would be the same por unit and in total whether they ars sold to Duece Division or to ttro outside customer (since the quantity is the same)' Thereforer 3rY increaseIn sates nevonuewould immodiatelybe translated into increasedprotit for Aco DivisionUIlitS!...... $l '$OOIOOO Sales novenugfrom nsw customer ($75 r 20,OOO
(1)
SatgS noygnuO from DugCg Dlvision D'..r..'....'..........t...........'. InCreaSe In feVenUe and inCOme ffOm OUtSide S319S........'... -$
Initiat amount from new negotiated transfer price
l2l
Gl75 X 2OrO00 UnitSl...'.......oo.'o..."o...'..."r....'o....".t.....'..
Less manufacturing costs: Variabte cost...... Fixed cost '...'.....
99OOTOOO 3OO'OOO
9OOIOOO 6OOtOOO
$1,5 OO,OOO
200.ooo
GroSS prgtit from tranSfer.............,.....'..'..'.'...r.o.'..,.o'.....'...r S 30OtOOO (3OOtOO0l LOSSaVOidgd On Ofiginal tfanSfef pfiCO...'..'.o.'.....'....,..'....t..
Additionatgross profit from proposedtransfer prico........'.. l-qOO'Ogg S75 Initial UnittfanSfef priCe.r..............,..'.....'.......'...'...'......o...r. Less 112ot average addlUonalgross protit units)),.........t...'r...r.r""""""" 1112r (600T000 + 2OTOOO
l5
Actual transfer price after sptittingthe additionalgross '...'....'........" -S69 profit,.r........... .....',.'..r.. E25-5
No, becausomakingbladeswould savo Dana Gompany$2,5OO,determined as follorvs: Outsidg supplier CoSt(S1.25 x 1Or00Ounits)....',,.'.....'...o...............r.'. sl2,5oo 1O,0OO Variable cost to manufacture by Blade Division.......'.'...'...'..r..........'. Savings to Dana if the Lawn Products Division punchasesfrom the Blade
Division.......r.....r.......r...r............'......."...r.r....'...D.....t......t.r
S 2,500
694
Chapter25
PROBLEMS P25-1
(rl
Springy Leapy Total Sales s42O,OOO S292,5OO 37t2,5OO Variablecost 2gOrOOO units x $,9O., $252,O0O l5O,OOO units r $1.35 s202,5OO 3454,5O0 Fixgd cost....., 13O,OOO 45,OOO 175,OOO TOtal COSI...'."r.'.'..............o.....r'r..o $382,OOO s247,5OO 3629,5O0 lncome bgforg Incomg t3r..........,.r,.r, s_38,o09 _L l!,opg s 8g,o0g Capftal omployod: Variable .o..t.....r.... $ 4z,ooo $ 58,5OO $.too,5oo Fixgd ............r.,'.r.. 148,OOO 91,5OO 239,5OO Total capital employgdro,.,........,,..r _$leg,oog st5o,ooo s34O,OOO
$ gg,ooo s 45,OOOS gg,ooo $19O,OOO $150,0oo s34O,0oo Rgturn on capltal emp|oyed.....,........
(21
(al
ZOoh
300h
24.40h
lncreasespringy producuonand increase Leapy price by $.r5 per unit: Springy Leapy Total Sal € S....r..... r r.....r.,......r... t.rrr.r...r. $487,5OO $ZtO,OOO $697,50O Variablecost3 325,OOO units x S.90.........o...s292,50O lOO'O0O unlts r $i.95........... $ 1 3 5 , O O O s427,5OO
Firgd cost...........,,r...............,o... TOtaI COSt.......... r.t.D.........,..o..
t44,5OO
4O,OOO 18 4,5OO $437,ooo $175,OOO $612,O0O Incomg bgfore incomg tar......... E50€gg s 35,OOO $ 85,5OO Gapitalemployed:Variable....... $ 48,750 s 42,OOO $ 9O,75O Firg d.........o.. 158,OOO 81,5OO 239,5OO Total capital emptoyed.,....o... _S2o6,?so sr2g,sog
_$33q2sg
$ 5O,5OO $ 35,OOO $ 85,5OO $2O6,75O $123,5OO $33O,25O
Return on capital employed,.....
24.40h
29.30h
25.9Vo
695
25 Ch-apter
, -5-1(Goncluded)
(bl
IncreaseSpringy production and continue present Leapy price: Total Leapy Springy $487,5OO sl95,0oo s682,5OO Sale Variablecost: units x 3'9O."--.',..... s292,5OO 325rO0O $135,OOO s427,5OO units x 91.35...'....,r. IOO'OOO COSt.........o...'..""t"t'o"o""' Fixgd _ 144,5OO 3 1 , O O O 175,5OO $437,O0O $166,000 $603,OOO Total COSI.............ot....".""""
g2ep99 $ 79,5oo lncome before incomg tax....'.... Gapital employed: Variabls o...... $ 48,750 $ 39,0OO $ 87,750 158,OOO 8 l , 5 O O 239,5OO Fixgd.."..'..... Totat capital employed....'..,'. -s206,750 _999€0o $n,25o $ 5O,5OO
$ eg,ooo $ 79,5OO
s2o6,750 $12O,5OO s327,25O Return on.capital employed '.."'
(cl
24.40h
24.10h
24.30h
IncreaseSpringy producuon and increaseLeapy price by 3.o5 per unit: Total Leapy Springy s487,5O0 s2oo,oooSoaz,soq Sa I gS..... t..... '........ r..'..... '.. 'r " " t t " Variable cost: 325rOOOunits x S.90..'....,.'.,. $292,50O $135,000 s427,50O l O0 'OOOu n i ts x $1' 35.,......' r . 32,5OO 1 7 7 , O O O 144Jtoo Fixed cost.......
s437,OOO $167,500- s6o4,5OO tncorne before income tar.'...'..- s 5o.5oo s 32,5OO $ 83,OOO $ 48,750 s 4O,OOO s 88'750 Capitat employed: Variable 158,OOO 81,5OO 239'5OO FiXed'.....'.'..' s121,5OO 9328'250 Total capital employed....'..... -s2o6,75o -Total
CoSt'.....t...t....o....r..t"otot
$ 5O,5OO s 32,5OO $ 83,ooo s2O6,75O 9121,5OO 9sza,z:so 25.30h 26.7oh 24.4oh Return on capital employed'..... Note: Ercluding nonatlocable data understates costs and capital employed, As and capital an alternate solution, the nonallocablo fixed cost (S28'OOO) hi ghl i ghtthus figur es, total the in included might bo e mp to ye d(S 2 5 ,OOO) is not full when allocation ing the nonadditive difficulty that can arise made to segments.
-r \
696
Ghapter25
P25-2
1
(1)
Contributionmargin of sales increase (2,4oor (3380- $7o - S37 - S3o - S4s - $rB)1........,..........s432,OOO Loss in contributionmarginon originalvolume, arising from decreasein sales price (15'OOO x S2O).o.......r..,. 3OO,OOO Estimatedincreasein contributionmargin and in income before incomotar if sales price is reduced 5% sl32,oog
(21
Contribution margin frorn sales to WindAir (77r4OOx ($SO- 9l O.5O- $g - $t O11 .,........,.....,....r,.......,.... s374,1OO Loss in contribution margin from loss of sales to outsiders: Total unit capaci 75,00o Sa19stoVtlindAir.....................,..........D,.......-... iZr4OO Balance....,. 57,600 Projectedsalesto outsiders...,.,. 64,OOO a a a a ta aa att
aa atao
aataa
aa
_9,499
(6,400x ($f OO- $12 - $8 - $tO - $6)).,....,.,............,.......4 O 9 , 6 O O Estimated decreasein compressor Division contribution margin and in income before income tax if windAirb needs arg
s 35,500
Supplied....rt'.....t..r..r..r'..............o.r...r....o...'.r.r....r...r......
The GompressorDivision would find it desirable, from its own viewpoint, to accept orders from WindAirabovethe 64rOoO-unit outside customer demand level, up to its 7s,ooo-unitcapacity,becausethere would be a positivecontributionmarginof $Zf .SOper unit. (3)
Gost savingsby using units from CompressorDivision; Outsidepurchasepricer..............................r..,.,...., GompressorDivisionbvariablecost to produce Gl1o.5o+ $B + $10).....r.o...
.rrrraraaata
Savings per unit...............r'..o.r...r.....'.',....r...r....r......,.r........r... Numbgr of compressor:i.........r,......,....r....,.........,....r...,,,.....,r.. Total cost saviD$s'....,..r......,rr!..,D............,...,.......r..
S
zo.oo
28.50 s 41,50 r 17,4OO $722,1O O
Less CompressorDivisionb lost sales to outsiders x $64 (see requirement2})}.....,,.......,,,,.....,,......t...... {614OO 4O9,60O Increasein income before income tax for Nationattndustries _$312,5O0 The decision shoutd be based on what is best for the total firm. lt would be in the best interests of National Industries for the Gompnessor Division to sell the units to the WindAir Division. The net advantage to National Industries is $312,5oo, as shown in the above cafcutations. Since each division is evaluated based on its profits and return on divis i o n i n v e stme n t, th e e xp e ctationsfor the two divisions shoutd be adjus te d b e c au se o f th o e ffe ct o f this decision on individual divisionat per fbr mance.
699
Cr.qpter25
>-5-4 Basedon variablemanufacturingcost to producethe cushionedseat and the Offics Division'sopportunity cost, tho transler price is 911869for a 1OO-unitlot or $18.69 per seat, computedas follorvs: Slr329 VafiabteCOSt,....,.o....'....'....................' 54O Opportunitycost"'or""""""o"""""""' Thansfgrprice........"""'o"""""'o""'o"' 91t899'
(1)
This transfer price was derived as follows: '
VariableGost: GushionedMaterial: Padding.....r.............,......".-'-.-..D.r.'r Vinyl 't......o.......r."'.""""'o"""""""' Totalcushionmaterial.....---r....,.'.'.. Costincreass llO%r..-.-...r.-..'.,".....
32.40 4'0O S6.40 xl'1O
I 7.04 Cost of cushiongdseat.,.................,.......,.'....'.'.. Cushionfabricationlabor cost [$7.5O r .5 DLH]..,.......r.r.,r.,..,.......,.....,,.,......,.
3.75
Variablefactory overhead' ($5.0Oper DLHx .5 DLH)............'..........""""' 2.50 Totalvariablecost per cushionedseat....'..-r...-.. 913.2e sl,329 Totalvariablecost per 1O0-unitlot.... 'Variable overhead for 3O0,OOO hours: ...'....r'..r...,.o......r.. SU p pli eS .,................... '.r'.rD lndirgCt labOr ....r..'...'..r..'.ro......'..'.'...'.r........'.........o.'.. .
POWef
aaraaaa.raaaai.aaaa..roa.arra.raroar..ra..ra....a..tttl..tt...t...ttt.tt.
42O,OOO 375,OOO 18 O,OOO
Employeobenefits: 2Aohof direct labor and indirect labor (excluding zoohof supemisors'salarywhich is a fixed cost) - (2O%r $25Or000)) (S575rO0O ........'....'......'.'r....... 52 5,OOO direct labor hours slEoo,ooo Totalvariableoverheadat 3OO'OO0 Variableovertteadper DLH ($l15ooroo0+ 3o0roooDLF4...,,...o.,.o,...,.'....'..r...'. 35.oo per DLH
\ 1
700
Chapter25
P25-4 (Goncluded)
Opportunlty cost Labor hour constraint Labor hours to make a 10O.unitlot of defuxe office stools (1.5oDLH r 1(x) unlts).....'.'..,........r..,.,.. 1so hours Less labor hours to make a loo-unlt ]ot of cushionedseats (,5 DLH x 100 unlts)......,.,,...., SO hours Labor hours avallablefor economy office stoor ,,, J66 ho,ro Labor hours required to make one economy officg stool ..r.r...r..r...r..............r'.r..........r......r... .8 hour Use of extra labor devoted to economy office stool production(100 hours + ,8 hour)....,.D...o.r.,.,,..o. 125 stools
Selling price per unit......,......., Less manufacturing costs:
Deluxe Office Stool ,...,.,....,...
ss8.50
M a tg ri a l s '...r...." '....'....r tr .........' o...........,..,.o..,.. $14.s5 L a b o n (S 7 .5 0 x 1 '5 D L H) ,.' .....o...............,,...... 11.2s
($z.sox .8 DLH) Variablefactory overhead:
.....,.,..o...,..,,.
Economy Office Stool
s41.60 S15.76
6.oe 7.50
4.00
s33.30
$25.76
s2s.20
s15.84 x 125
x1OO
$2,520 Opportunlty cost of shifting production to the economyoffice stool ($Z,S2O- $t,gg0),...,......
(21
t
-Sl,ggo
g4O
variable manufacturing cost plus opportunity cost woutd be the best transfer price system to use because lt woufd allow the supptying division to be indifferent between selling the product internatlyio another division or selting the product in thelxternal market This transfer price method assures-thatthe supplying division's contribution to profit woutd be the same under either alternative. The sum of fhe variable manufacturing cost and the opportunlty cost repnesentsthe effort put forth by supplying division to the overalt weil-being of the company. appropriate transfer price must attempt to futfitf the company objectivesof autonomy,Incentive,and goal congruence.while no one transfer price can necessaritysatisfy each of these objectivesfully in atl situations,the variable manufacturingcost ptus opportunitycost transfer price should be the most appropriate method for meeting these obfectives in most situations,
701
ChaPter25
j-5
(rl
the cole Division ln orderto marimizdshod-runcontributionmargin' conclusionis sup' silourosccoptthe contractfrom warescompany.This portedby the followingcalculations: Colo Divisiontransferto DiamondDivision
ffi'ooounitsr$1,5oooach}..'.'....'...'........
Variablecost: Division -fgrooo from BaYrside -Purchaso $l t8ootOoo ......"""""' oach) x units $iloO Division processingcost In Cole --(Crooo'unlts Variabte l'5o0'oo9 x$sbo each)....."""""" Gontribution margifl .'...............
$4'5OO,OOO
3,3OOr0OO
sl,20o,ooo
Gole Divisionsalesto Wales9ompany each)o...............'.....-..t$4'375'ooo Variablecost: Purchasefrom BaYsideDivision (3,5OOunits x $5OOeach)..,..,...."""' sl,75O,OOO Variabteprocessingcost in Gole Division 3r15O'OOO l,4oo,o0o " (3r5oOunits r $400 gachl ...."""""" Contribution margiJl .."""""'o""""""""r
Conclusion: contribution margin from transfer to DiamondDivision Contributionmarginfrom sales to WalesCompany"""" Differencein favor of WalesCompanycontract"""""""
$1,225,ooo
$1,20o,ooo 1.225,OOO 25,OOO $
*{ -\ t! i
702
Chapter25
P25-S (Goncluded)
l2l
Cole Divisionb decision to accopt the contract from Wales Company is in the best Interest of Robert Products Inc. because the decision increases the overall corporationb contribution margin. This conclusion is supportod by the following cafculations: RevenuEsand cost savingsto Robert Products Inc.: Sales by Cole Divisionto Wales Gompany (3r50Ounlts r $1r25O9ach1................o.34r375rOOO Sales by Bayslde Divisionto london Company(3r0OO units r $COOoach)..... t',2oO,OoO Cost savings (variablecosts avoided by not accepting the Diamond Division order): BaysideDivision'ssavings (3r00Ounits r $30Oeach).D.,..,.r... 9OOTOOO Cole Divisionbsavings (3rO0Ounits r $50O each) ...ro.,..o,.
i TSOO,OOO $7rg75,OOO
Erpenditures incurred by Roberts products Inc.: Variablecost incured for the Wafes Companyorden Cola Divislon(3r5OO units r $400 each) $i,4oo,oo0 BaysideDivision (3,500 units r $25O OaCh)...t....rr.or......r........o.r......r...D.....;
875rOOO
Variablecost incurred for Diamond Division purchase from London Company (3,OOO units r $ir5OOeach).....,.,.....,.... 4,SOO,OOO Variablecost incurred for LondonCompany order from the BaysideDivision (3'OOOunits x $ZOO each).......o....o.'rjooo
7,375 ooo
600,000
PosiUveoverall contribution margin for Robert Produgts
111G.........'....r.....'...r....r.rr,......r.,..rrr..,....r............
$
6oOrOOO
703
. ChaPter25
CASES c25,-1 (rl
l2l
tho The return on capital employedhas definite limitations for evaluating performanco ol ths Dexter PlanL Too many fastors used to compute the pon return are not within the control of plant managemenl A significant Uon of the "return''gide of the measunols determined by the action of higher tevel managament-+ales and allocated costs. The plant management appsars to have effestive control ovor only a part of the costs incurred at the ptant levet, and the same Is true for tho asset baso. Corporateand dirislon assets are altocatedto tho plant' In additionr it qven though appearsthat specific assets rnay be charged to the ptant tho decisionwas made at a higher level' The case states that recommendationslor promotions and salary increasesfor plant manageniare influencedby the cornparisonof the budgeted return on capital emptoyedto tho actuai return. lt appears that this ptant manager is reacting in direct response to this measunement syrstem.T\ro evJnts have occurred outside his control (the sales decline and extra tand charges|,which will reduce his return on capital employed measure.He has respondedby influencingthose componentsof the measurethat he controts and that will improve this measure.The reduced costs-traini ng, maintenance,nepair, and certain labsr-wo uld not affect sales volume in the short run. lt is also likely that reduction of inventorytevetswill not inftuencethe sales in the short run. Through these actions hs has improvedhis return for 2oA, but it may well be at the erpense of 2oB, or later Yea|:i.
c25-2
(11
Tho shortcomings,or possibleinconsistencies,of using rate of return on capital employedas the sole criterion to evatuatedivisionalmanagement performanceinclude the following: i") Rateof return on capitatemployedtends to emphasizeshort-run performanceat the expenseof long-run profitability.In order to improveshort-run profits, managersmay make decisions that are not in the best interest of tho companyover the long run. (bl Rate of return on capital emptoyedis not consistent with cash llow modelsused lor capital oxpenditureanalysisand, therefore,ffiaY not be comparabtofor divisionsthat uso different accountingmethods or that havo assetspurchasedin different periods. (c) Rato of return on capital employedmay not be controllableto ths same ertent by all divisionmanagers,i,e.,the divisionsmay sell in differentmarketswith different degreesol product development' compeUtion, and consumerdemand.
t\ :V a
:
704
Chapter25
C25-2 (Concluded)
l2l
(3)
(d) The use of a single measuroof performance,such as rate of return on capital employed,may result in a firation on improvingthe componentsof the ono measureto the neglect of needed attention to other desirable acUviUes-research and development, employee development,and improvementol market position. The advantagesof using mulUplemeasuresii evaluatingdivisionalmansgement performanceincludethe following: (al Multiple performancomeasunesprovidea monecomprehensivepicture of performanceby consideringa wider range of management responsibilities. (b) Multiple performancemoasunesemphasizenonquantitativeas well as quantitativeaspects of performance,thereby providingan incentive for divisionalmanagersto engagein desirableactivities,such as, researchand development,employeedevelopment,and improvementof market position,as well as to seek profitability. (c) Multiple performance measuneswill mitigate the problem of trying to compare divisionalperforrnancewith a single measunethat may be computedon different basesin each division. (d) Multipleperformancsmeasunesinclude long-term as welt as shortterm incentives,thereby emphasizingtotal performancerather than just short-term profit maximization, The problems or disadvantagesof impfementing a system of multiple performancemeasuresincludethe following: (al The measurementcriteria are not all equally quantifiableand, therefore, it may be difficult to comparethe overaltperformanceof one division with another. (b) Centralmanagernentmay have difficuttyapplyingthe criteria on a consistentbasis.Some criteria may be subjectivelymore heavily weightedthan other criteria at different points in time, and some criteria may be in conflict with other criteria. [c] A multiple performancemeasurementsystem may be confusingto divisionmanagen;,thereby resultingin diffusion of effort and instability in performance.
*-\
705
i cnapterzs
,3
(r)
(al
Avorage oporating assets omploved: """r" Batance at 12131120F"""" 1'05)" / " """'r Balance' at 12131l2OE (512'600'000
BeginningPlus ending balances Average batanco ($24'600'000 * 2l'
$12,goo,ooo I2TOOO'OOO $24r600,OOO $t 2,3OO,OOO
Ineometrom operationsbeforetaxes @issetsemPloYed
Rate ol return on capital emPloYed
$2,460,0OO
$lZrgOo,ooo = 2ooh (bl
Income from operations bgfore taxgs o,..il.'D.."'r.rt'..'.
s 2,460,000
Minimum return: Average operating assets employod $12,30O,ooo 1r845,OOO 15oh Ghargefor invested capital '..--...'...'.. x ReSidUal
inCOme...rrr..or...rr....rr..o..........r.o........'.r.'.....
$
#=:
615,ooo
Yes. Presserb managementprobably wOuld have accepted the invest' ment lf residual income wenBused. The investment opportunity would have lowered presser's 2OFrate of return on capital employed because historical returns the expected return (16%) was lower than the divisionls_ Management as well as its actual2OF rale (2Ooh). (f 9.3% to 22.1o/") reiected the investment because bonuses ane based in part on the rate of return performanso measure. lf residual incomo weno used as a performance measuno(and as a basis for bonusesl' managemont would accept any and all investments that wsuld incroase rssidual income (i.e.' a doliar amount rather than a pencentagel,including the investment opportunity it had in 2OF'
(31
presser must controt atl ltems related to protit (revenuesand expenses) and investment if it is to be evatuatedfairty as an investment center by either the rate of return on capitat employedor the residual income per' formanco measunes.Presser must controt all elements of the business except the cost of invested capital, which is controlled by Lavvton Industries.
:-\ ;f
1
706
Chapter25 i
c25-4.
(r)
($oOoomitted) Marine Airline Plastics Divisional plofit......-...r.............orr.....o.......... $ 5 , 1 O O S 1 , O 5 O$ 9 , 3 6 0 3,4sO lfsq s70 Add corporate headquarters allocatiolt ...... j_gg gr,r* $ r,ro Adiusted divisional profit s2O,4OO s5,0OO S36,OOO Divisionalcapltal employed. allocaUon 970 252 corporate headquarteni 941 Deduct
Adjusteddivisionalcapltalemployed.......,. _9!9,430 g!,?49 J35,999 Adiusteddlvlslonalrate of return on capltal employed _!:q"n_ _ 47% ____Ze% 8,550 $2,235 S 9 ,930 Adjusted divisionalpro _$ Less 20oh of adiusted divisional capital employed(minimumlevel of income).. 3,886 950 7,O12 R e s i d u a l i n co mo
n*^
-gl'664
sl,285
S 2,918
t2l
All three divisions have a reported rate of return on capital emptoyed in oxcess of the 2Oo/o target rate. However,Marine Division management apparently turned down its Investment opportunity because tho investment had a lower rate of return than the division (24ohfor the investment yersus 25ohfor t:lls division|, which if accepted would havE lowered the divisionb rate lor the year, thereby lowering the annual bonus. Similarly, Airline Division management appears to have avoided fleet replacement tor the samo neason(i.e.,fleet replacementrEturn is 16% versus 21ohlor the divisionfor the year).Plastic Divisionb managementhas achieved the marimum bonus allowableunder the current bonus system and therefore had no incentive to increase profit (which may have been viewed as something that could simply increase next yearb budget). The levised liguras indicate that all three divisions are performlng welt; however' Marine Division's residual income is greater than the other two divisions combined.
(31
Airline Divisionls making an adjusted profit of $2,235,OOO and residual income ol $1'285'OOO. The adjusted rate of return on capital employed is 47oh,which suggeststhat the target rate should be rovised in order to properly evaluate it. Nevertheless,since the division is achieving mono than double the present target rate of 2Oohand more than either of the other two divisions, it appears to be a very good investment. Howover, fleet replacementshould be examinedalong with the computation ol a new adjusted rate of return on capital employedand residual incomg, Assumingthat the $25,OOO,OOO capitat investment does not inctude any corporate headquartersallocationand that the otd fixed assets have a book value equal to market value,tho recomputationfollows:
707
Chapter25 l
-4 (Concluded) lnCfgm gntal diViSiOn pf0fit o........'........r......r..'...r'...."o""' Add COfPOfato he adqUafte fS all OCaUOJl'....',"""""""oo"" AdiU5tgd InCfgmental diViSiOn pnOfit r.'...r..............'......."
$ 4,ooo,ooo 135,OOO
$ 4r135,ooo 2,235|OOO Ad-dadiustod divislonal profit without fleet replacemsnt Adjusted divisional profit with fleet replacefllsllt'..i.....'.. $ 6,370,000 $ 2r748,ooo DiViSiOn CUfnont aSSOt3...r'..-o.....r.'..t............t...t.......tttt"t (tleet feplagemgnt COSI}""""""""' DiViSiOnllXed aSSOtS Adtusted divislonal capital employed with fleet nOplaCOm€J1t..r......-........D.....r.ro.oo..r.............tt........t.....
Adiusted rato of noturn on capital employ€d"""""""'ro"
25,OOO,OOO
E?ulgfoo 230h
AdjUSted diVisiOnal pfOtit'.......r"..r.o'.....'.,'.ro....D.'..........dt$ 6,370,000
Less zlohof incrgmgntalcapital gmploygd'.'................. 5r549,600
AdiUStgd InCfgmgntal fgsidUal inCOme..'..'......'.......r.o..o..s__82o49
(41
(5)
Even when adjusted, the rate of return on capital omployed is above the corporatetarget level and the incrementalresidual income is positive. Furthermore,assuming that profits do not fall in the future' the roturn on assots employed should rise in the future because the amount of assets employed witi Oeclinodue to depreciaUon.As a result' it appoansthat from a quantitative perspective tho airline should not be soid. Nevertheless,the investment required to replace the fleet should be evaluatedusing ono of the capital expenditureevaluationtechniques that considersthe time valuo of money (e.9.,the net present value method or the discountedcash flow rate of return method). Frorn a qualitative perspective, factors such as spill-over businesst offering a futl line to customers, ulUmato profitability vvhenthe economy improvls, possiblo advantags to a competitor from tho sate of the division, €tc,, may override quantitative analysis. Tho bonus schemo should bo basod on nesidualincomo rather than rate of return on capital employedin order to avoid the problem of manageF; making suboptimal decisions from the corporationb overall perspective. The divisionalperformancemeasuresshould be computed without allo' cations of corporate headquarters costs or assets, because such allocations are arbitraryand divisionalmanagerscannot control such costs or the uss of such assets.Also, capital investments(such as the ones faced by the Marine Divisionand the Airtine Division)should be evaluatedby using the capital budgetingevaluationmethods (such as the net present value method or tho internal rate of return method)' CGA-Canada (adapted). Reprint with pei-mission'
7
Chapter25 i
708
c25-5, (l)
(21
(3)
(4)
\*
. psrformance in selecUng measunes Generaf crfteria that should be used to evaluateoperatlngmanagorsIncludo tho following: (al The measunesshould be controllableby the manager and reflect the scfions and docisions made by the managor in the current period. (bl The measunesshould be mutually agreed upon, clearly understood, and accepted by all the parties Involved. (c) The measunosshould (ll reward long-term performance; (2) tie incentive compensation to achieving strateglc (nonfinancial)goals, such as target market share, productivity levels, improvement in product quallty, product development, and personnel developmeng and (3) evaluate opsraUng profits before gains from financiaf transactions; before deductions for approved erpenditures on research and development,quality fmprovements,and preventive maintenance;and before deductionsfor the ifcremental amount of accelerated depreciation, A major expansionof Star Paperb plant was compfeted in April, 2oA. Thls erpansionincluded addiUonsto the production-line machinery and the replacementof obsoleteand fully depreciatedequipmenl As a result, the value of the divisionb asset base increased considerably. Whlfe productivity undoubtedly increased during the first year in the erpanded plant, the increaso was not immediate nor sufficient to offset the Increase In the value of the capital employed, .Apparent weaknesses in the performance evaluation pnocessat Royal Industries include the following: (al There was no mutual agreementon the use of return on capital employedas the only measurementof perforrnance. (bl The feedback from Fortner was insufficient Fortner indicated that Harris would receive feedback about the questions raised concerning the appropriatenessof using the return on capital employed to evaluate performance, but feedback was not prtrvided. (c) There is only one single measureof performance that may give a distorted picture of actual performance at Star Paper. A single rtoasuro could oncouragedivision managementto make decisions that could lmprove short-run return at the expense of long-nrn profits. Examplesinclude deferring maintenance,avoiding plant modernization, eliminatingemployeetraining, discontinuing research and development,etc. Multiple performanceevaluationcriteria woutd be appropriate for the evaluation of the Star Paper Division. The criteria suggested by Harris take into account more of the results of the key decision being made by the manager'angnot in conflict with each other, and emphasizethe batanco of profits with the control of current assets. These thrse measunes are controllableby division managersand, in conjunction with return on capital omployed,provido a monocomplete picture of business success.
25 .Chapter
709
,-('
(1)
(21
The 2oB bonus pool availablefor the managementteams of each division follow: Meyera Service Company Bonus Pool = l0oh r income belore income tar and bonuses = .1OI S417,OOO = S41r7OO Wellington Products lnc. Bonus Pool = loh r (Revenue- Cost of Product| - $4,95010001 = .01 I ($10,0001000 = .Ol I $5r05Or0OO = S50'5OO TVyoof the advantagesand two of tho disadvantagesto Renslen Inc. of the bonus pool incentiveplan at Meyers SeruiceCompanl follow: Advantaoes (al The managementteam will bs moUvatedby tho bonus plan because they have the opportunity to earn addiUonalcompensation lf they work hard as a team and take some risks for the company. (bl Becausemanagementsharos in the benefits of efficient operations, there is an incenUveto control all costs (product costs as well as overhead costs) and to promote sales. Disadvantaqes (al The plan may rnotivate managementto increase tho rbottom line" only and concentrate on the short run. The pfan may encourage managersto sacrifice quality or avoid new product developmentfor the sake of curent profits. (b) Managementmay postponenecessaryexpenditunossuch as maintenance or nessarchand developmentin order to increase currsnt net Incomo. TVvoof the advantagesand two of the disadvantagesto Renslon Inc. of tho bonus pool incentivoptan at WellingrtonProducts Inc. follovn Advantages (al Tho managementteam will be motivated by the bonus plan because each managerhas the opportunityto earn additional compensation by working hard and taking some risks for the company. (bl The managerswifl be encouragedto sell the most profitable mix of products. Disadvantages (al The plan omits accountabilityfor all costs except lor production costs. Therefore, manager:i may leel no obligation to control the costs that aro shown below tho gross profit line. (bl The ptan may cause managersto focus all energiesto maximizing currsnt sales and production regardlessof the impact this could have on the manufacturingplanL There is a strong motivationto defer maintenance,employeetraining, quality improvement,etc., becausethe incentiveis to producoand sell high volume.
Chapter 25 :
7lo C25-G (Goncluded)
(3)
\
Having two differont incontive plans lor the two operating divisions ' coutd result In behavioralproblems and may reduce teamwork/synergy between the two divisionsif the managers of either division ' believe they are belng trsated untairly. ThemanagementteamatMeyersServicomaybe|ievethatthey havo to work harder to achievetheir bonusos because they are responslble for all costs and must achieve overall efficient operations to earn substantialbonuses. The managementteam at Wellington Products may believe that they have less of an opportunltyto affect the size of the bonuses they receive becauseonty changes in sales and/or product costs will increaso the gross ProfiL These perceptionsof Ineguitycoul4lead to decreased motivation that could'result in decreaseddivisionalperformanco, (b) In order to justlfy having dlfferent IncenUve plans for the two divisions, Renslenmanagementcould argue the foflowing: (f l The goals and products of the two buslnesses are different (one is a servlce organizationwhile the other is a manufacturing organizationl and, therefore, should be measured on different crite' ria. For example, the control of manufacturing costs and improved productivity may be the most important factor in maintaining Wellington Prcducts'competitiveness, while lt may be critical for Meyers Service to control all costs to maintain profitability. (21 The plans wenoIn place when the businesseswere acquired and had proved satisfactory previously. (a)
Chapter25
7fl
'>-7
(rl
l2l
(l
f
prob' ln termg ol what is best for the total company in the long run, omar aUtygt,ould not supply Defco with Electrical Fitting X1726for ths 55 Per unii pri"". In this ;s;, I appears that Omar and Defco 6erve different opermiriets and do not represent closely related operating units. Omar interates at capacity;Defco does not. No mention is made of any other probably betis divisionatbusiness, In the long run, Gunnco Gorporation ter served lf omar is permitted to continue dealing with its regular cus' tomers at the market price. lf Delco is having difficulties, the solution p-uiury doeg not lie with temporary help !f" sxpenso of another divi' "! purposed iion, *ttos" gales to regular custorners could be lost' The greater longcourso of acuon should not be toltowed unless it will yield a run pront for the total company (Gunnco)T"n will any o-theralternative. ' Gunnco would be $5.5o better oif, in the short run, if Omar supptied Defco Electrical Fitting 11726tor $5 and sold the brake unit for 949'5O' Assuming that the $s ier unit for fixed factory overhead and administraUve erpensos r"pr"r"nts an allocation of tho costs Delco incurs, regardless of the brake unit order, Gunncowould lose $2.50 in cash flow for oach fitting sotd to Defco, but would gain $B from each brake unit sold by Defco. ln tha short nrn, there ls an advantagoto Gunnco of transferring Efectrical Fitting 11726at the SS price and, thus, selling the brake unit for $49.50. To ilafe this happen, Gunnco witt have to overrule the decision ol Omarb managomenl This action would be counter to the purposes of decentralizeddecision making.lf such action wens necessaryon a regular basis,the decentralizeddecision making inherent in the divisionaliied organizationwould be a sham. Then the organizationalstructure is inappropriatefor the situation. On the other hand, if this is an occurnenceof relative infrequency'tha interventionof corporate managementwill not indicate inadequateorganizational structuro. lt may, however,create problems with division man' agements,tn the case at hand, if Gunnco managementrequires that Electrical Fitting 11726 be transferred at $5r the result will be to enhanceDefcob operatingresutts at the sxpense of Omar.This certainly is not in keeping with the concept that a managerb performanceshould be measuredon tho results achievedby the decision he or she controls. Omar is operatingat capacity and wouid lose S2.5O(S7'5O- 35) for eachtitting sold to Defco.The managementperformanceof Omar is measured by reiurn on investmentand doitar profits. Sellingto Defco at 35 per unit would adversely affect thoso performanco measures'
7
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I
Chapter25
712
c25-8 (1)
Thc Lorar ElegtricCompanywlll earn higher profits lf the necessaryint. gratodcircutts$Cs)aro sold to the SystomsDivision rather than to regulgr customors.Ttrelimprovedproftt will be $l.OOper clock systemas rhown belor* Contrlbutlonmargln from clock gystem: Propogedgalea prlcc
$7.50
rtattaaaaaa
Less varlabloProducUoncosts: Intcgratedclrcutts 1C378(5 O S-f q ..-.-.-..-' Outsldcoompono11t8 "...."........."'o""""""" Clrcuh bOard otchlng.'...D.....D...'.......oD."'.."'
Argemb$ tesUng,iackgglnlf"'.'.-..'F......-marginpor'unlton clock system ContrfbutJon ContrlbutionmarginforgoneIn DevicesDivision: Salgg price of lC 378..........',..r.',....o..'.......'D.D..
$ '75 2.75 ,40 1,35
; i
f3)
5.2s s2.25
$ .ao
,15 Variablg production costs..'.'r....D..'......-.'.'.,..... CorrtrlbuUonmargin per clrcult...Dr.D.'..o..'...'.'.. $ ,25 Unlts tor clOck Eystem....r.'F"...'.'......".o.'D....... r 5 Contrl b utl on m a rg| !l Io9t..'.-.......r..r.......oo..r.'.... Net advantagcto Lorax Companylf clock system le producgd by SytstemsDlvlsion..r""..D,...r'....r
f2)
i
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1,25 :
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lnteruention by cxccutivo msnagsment generally ls not advisable' oxcept In unugual clrcumstances, becausc h takes aytay the delegated decision powor glven to dlvision managementand influences the measunesused to ludgc the pcrfornancc of dlvlsion managemenl h conflicts with Important objectivce of decentralizaUon-division auton o my ovor o p eratIng declalons and doclslons made by those closest to the operating rccnc. Such lnterfercncc cgn rcsult in lower moralc and poorer performancc by dlvlslon mansgement because they will be evaluated uslng moaauncsthat arc not substantlally within their control. However, a divi' clon should ns,tbo allowed to make a decislon that ls not in the best Interest ol thc total compsny oyor tre long nrn. Thc descrlbed policy would avoid the need lor lntervention by erecutive msnsgsmont or an arbiffiion committee, Howeyer,the polisy is undesir' abfe becauac other unfavorable consequsnces outweigh this benelit. With thc described policy, there would be no analysis to determine the most profitable use of an ltem raquired to be transferred at variable cosL In sddltion, e division managerwould have less control over the divisionb operaUons,and there would be an "uncontrollable'influencoon the managerbporformancomoasure;this could result In lower moral tor msnagora.
a
