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ACTG 2020 Chapter Notes - Chapter 5: Reciprocal (Grammar), Finished Good, European Cooperation In Science And Technology

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mag0sea
23 Feb 2017
School
York University
Department
Accounting
Course
ACTG 2020
Professor
Greg Chiykowski

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Document Summary

For manufacturing firms, unit costs are essential for: For service firms, unit costs are used to determine: Used by firms that have a variety of products that are quite different from each other. Jobs are tracked separately (e. g. costs are accumulated by job) E. g. tax retur(cid:374) fir(cid:373) (has to track each perso(cid:374)"s taxes separately) Used by firms that produce identical products/services. Jobs are tracked together (e. g. costs of one unit is identical to the cost of another, so costs are accumulated by process/department) Production costs consists of direct materials, direct labour, and manufacturing overhead. Direct material and direct labour are easy to track to individual jobs. Manufacturing overhead is all production costs other than direct materials and direct labour and is more difficult to trace to jobs. ***two ways are commonly used to measure unit cost of production: actual costing and normal costing.

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Related Questions

I. The basic parts of a joborder costing system are the:

A. Cost______________ and _________________ procedures.

B. ____________________ documents.

C. Accountsthat a company uses when it incurs costs for direct ____________,direct ________________, and ___________________.

II. Accounting for materialsrequires three types of entries.

A. With the ______________ of materials,debit Materials Inventory and credit Accounts Payable.

B. With the _______________ of directmaterials to ________________, debit Work in Process Inventory andcredit Materials Inventory.

C. With the transfer of__________________ materials to production, debit Overhead andcredit Materials Inventory.

III. Accounting for labor requirestwo types of entries.

A. For payroll costs incurred for_____________ labor, debit Work in Process Inventory and creditPayroll Payable.

B. For payroll costs incurred for_______________ labor, debit Overhead and credit PayrollPayable.

IV. Accounting for other overhead requires twotypes of entries.

A. Other overhead includes plant____________, property _____________, insurance, and_______________.

B. To record _____________ overhead costs,debit Overhead and credit Cash or Accumulated Depreciation.

C. To record _____________ overheadcosts, debit Work in Process Inventory and credit Overhead.

D. The actual (debits) and estimated(credits) overhead costs are ________________ at the end of theperiod to determine the accuracy of overhead costrecognition.

V. To recordthe transfer of ________________ units, debit Finished GoodsInventory and credit Work in Process Inventory.

VI. When a companyuses a perpetual inventory system, two accounting entries are madewhen products are sold.

A. To record the sold product’s________________, debit Accounts Receivable (or Cash) and creditSales.

B. To record the sold product’sassociated ____________, debit Cost of Goods Sold and creditFinished Goods Inventory.

VII. Each job in production has a job order_________________.

A. Hasspace for direct materials, direct labor, and overhead costs.

B. Includesthe job order number, product specifications, customer name, dateof order, projected completion date, and a cost summary.

C. Forincomplete jobs, they make up the _______________ ledger for theWork in Process Inventory account.

D. When ajob is completed, the costs are totaled on the_____________________.

1. Unit cost is computed to_____________ items in inventory.

2. Product ___________Cost = Total Costs for Job ÷ Number of Good Units Produced

VIII. Job order costing systems are also used in______________ organizations.

A. Job ordercost cards track ________________ contracts.

IX. Overhead costs are allocated in foursteps.

A. Step 1: _____________ the overheadrate.

1. A ________________ overheadrate is calculated as estimated overhead costs divided by estimatedcost driver activity.

B. Step 2:______________ the overhead rate.

1. Costs are assigned by multiplyingthe actual cost _____________ activity by the predeterminedoverhead rate.

C. Step 3:Record ________________ overhead costs

D. Step 4:_________________ applied and actual overhead amounts

1. Ifover- or underapplied amounts are minimal, credit or debit_________________.

2. Ifover- or underapplied amounts are material, adjustments should bemade to the inventory accounts affected.

X. The__________________ approach to applying overhead costs is to use asingle plantwide rate.

XI. The moreaccurate _____________________ approach to applying overhead costscreates many smaller activity pools and establishes separate ratesfor each pool.

Cost-Based Pricing

Companies use various strategies to set price. Since cost is animportant determinant of supply and is known to the producer, manycompanies base price on cost. Still other companies use atarget-costing strategy, or strategies based on the initialconditions in the market.

A cost-based pricing approach starts with product cost and thendesired profit is added. Usually, there is some cost base and amarkup. The markup is a percentage applied to base cost; itincludes desired profit and any costs not included in the basecost. Companies that bid for jobs routinely base bid price oncost.

Example: Linder Company makes and sells vitaminsupplements. The following information from last year's accountingrecords showed:

Cost of Goods Sold $254,000
Selling and administrativeexpense 86,360
Operating income 111,760

The markup percentage must include all costs that are not a partof cost of goods sold plus the desired profit. For Linder Company,the markup on COGS is found as follows:

Markup on COGS = (Selling and administrativeexpenses + Operating income)/COGS
= ($86,360 + $111,760)/$254,000 =0.78 or 78%

Now, if Linder Company produces a new product with manufacturingcost of $2 per unit, the unit price at this markup is:

Price = $2 + (0.78 × $2) = $2.00 +$1.56 = $3.56

A Company does not have to use Cost of Goods Sold as the basisof the markup. For example, a job-order firm might decide to usethe markup on prime costs (direct materials and direct labor) tocost jobs. Suppose that Carl's Custom Cabinetry wants to price jobsbased on prime costs plus a markup on prime cost. Last year'sincome statement revealed the following information:

Prime costs $134,000
Overhead 73,700
Selling and administrativeexpense 38,860
Operating income 50,920
Markup on Prime Cost = (Overhead + Selling andadministrative expenses + Operating income)/Prime cost
= ($73,700 + $38,860 +$50,920)/$134,000 = 1.22 or 122%

Carl is pricing a new job with estimated direct materials of$4,300 and direct labor of $1,800. The estimated price is:

Price = ($4,300 + $1,800) + (1.22 ×$6,100) = $6,100 + $7,442 = $13,542

Neither Linder Company nor Carl's Custom Cabinets must use theprice figured according to the markup. This is just a firstapproximation. Carl, for example, may want to set a lower price inhopes of getting more business from this particular customer.Linder Company may want to charge a higher price based on marketconsiderations.

Target Costing

Another approach to pricing a product or service is targetcosting. The target cost is based on the price (target price) thatcustomers are willing to pay. The Marketing Department determineswhat characteristics and price for a product are most acceptable toconsumers. Then, it is the job of the company's engineers to designand develop the product such that cost and profit can be covered bythat price. Japanese firms have been doing this for years; Americancompanies are beginning to use target costing. So first the targetprice is set. Then the desired profit is deducted, and theremaining amount is the target cost.

Target cost = Target price -Desired profit

Determining the target cost is relatively easy. Actuallydesigning and manufacturing a product that will achieve the targetcost and sell for the target price is more difficult. As a result,target costing is an iterative process as the firm works to refinethe proposed product to meet the cost and price targets.

Price Discrimination

Price discrimination refers to the charging of different pricesto different customers for essentially the same product. TheRobinson-Patman Act was passed in 1936 as a means of outlawingprice discrimination by manufacturers or suppliers; services andintangibles are not included under the act.

The Robinson-Patman Act does allow price discrimination undercertain specified conditions: (1) if the competitive situationdemands it and (2) if costs (including costs of manufacture, sale,or delivery) can justify the lower price. According to the secondcondition, a lower price offered to one customer must be justifiedby identifiable cost savings and the amount of the discount must beat least equaled by the amount of cost saved.

To compute a cost differential, the company creates classes ofcustomers based on the average costs of selling to those customers.Then all customers in each group are charged a cost-justifiableprice.

Example: Raul Company manufactures specializedelastic bandages used to reinforce athletes' wrists or ankles. Raulsells to a number of individual physical therapists and athletictrainers as well as to Medallion Gym, a national chain of physicalfitness facilities. The average manufacturing cost is $169 per case(a case contains 100 plastic-wrapped elastic bandages). RaulCompany sold 350,000 cases last year to the following two classesof customer.

Price Quantity
Medallion Gym $235 175,000
Individual trainers and physicaltherapists $241 175,000

Medallion Gym requires that the bandages be individuallypackaged in boxes with the Medallion name on the label. This boxand special labelling costs $0.34 per unit. Raul also pays allshipping costs, which amounted to $1,400,000 last year.

The individual trainers and physical therapists order in smalllots that require special picking and packing in the factory; thespecial handling adds $20 to the cost of each case sold. Salescommissions to the independent jobbers who sell Raul products tothe trainers and physical therapists average 10 percent of sales.Bad debts expense amounts to 1 percent of sales.

The cost per case for each customer category can be computed asfollows:

Medallion Gym:
Manufacturing cost per case $169.00
Box and special labelling ($0.34 ×100) 34.00
Shipping ($1,400,000/175,000cases) 8.00
Total cost per case $211.00
Individual Trainers and PhysicalTherapists:
Manufacturing cost per case $169.00
Special handling 20.00
Sales commission ($241 x 0.10) 24.10
Bad debts expense ($241 x0.01) 2.41
Total cost per case $215.51

Profit and profit percentages are as follows:

Medallion
Gym		 Trainers and
Physical Therapists
Price per case $235.00 $241.00
Less: cost per case 211.00 215.51
Profit per case $24.00 $25.49
Profit percentage 10.21% 10.58%

The company will need to see if the profit percentages range areclose to one another; if so, there would be a cost justificationfor the price differential. If not, the company may need toconsider potential price discrimination and change its price forthe customer group that it considers to be "out of line."

For each of the following situations, determine whether or notthere is price discrimination according to the Robinson-PatmanAct.

1. Dr. Jeffrey Lowman, M.D., chargesless to patients who he feels cannot afford his usual fee.- Selectyour answer -YesNoItem 1
2. Damian Company manufacturesspecialty jams and jellies. Damian is located in Amarillo, Texas,and sells only to stores in the Amarillo area. Sometimes Damianoffers a price break to store owners whose children attend the sameschools as Damian's children. - Select your answer -YesNoItem2
3. A national manufacturer of hairproducts charges a significantly lower price to large chain storesthan to smaller stores. The price differential is not supported bycost differences. - Select your answer -YesNo
Step 1 You work for Thunderduck Custom Tables Inc. This is the first month of operations. The company designs and manufactures specialty tables. Each table is specially customized for the customer. This month, you have been asked to develop and manufacture two new tables for customers. You will design and build the tables. This is a no nail, no screw, and no glue manufacturing ( no indirect materials used). You will be keeping track of the costs incurred to manufacture the tables.
The cost of the direct materials that can be used to manufacture the table are as follows. These cost are on a per unit basis.
Table Top $ 1,100.00
Table Leg $ 200.00
Drawer $ 310.00
Assume a $25 per hour wage rate to the assembly employees.
The company uses a job order costing system and applies manufacturing overhead to jobs based on direct labor hours.
The company estimates that there will be 12 direct labor hours worked during the month.
The estimated manufacturing overhead cost for the month is:
a. Factory supervisor salary per month $ 3,000.00
b. Rent for the factory per month $ 600.00
c. Depreciation of factory equipment per month $ 600.00
Total Estimated manufacturing overhead $ 4,200.00
What is the predetermined manufacturing overhead rate?
Step 2 The first order you received was to manufacture a table using a table top and four legs. This is your Job #1. Go to the "Job #1 Cost Sheet" tab. There are three assembly employees that spend 2 hours each to make the table. Here, you will calculate the cost of making the table by calculating the direct material, direct labor and applied overhead cost. Complete the job cost sheet by calculating the direct material, direct labor and manufacturing overhead applied that would be incurred for job #1.
Step 3 The customer that has ordered Job #2, wants a table that is the same as Job #1, but wants to also add a drawer to the table. There are three assembly employees that spend 3 hours each to make the table. On the "Job #2 Cost Sheet" tab you calculate the cost of making the table by calculating the direct material, direct labor and applied overhead cost.
Step 4 Here you will find a list of transactions that must be recorded for the company for the month of December. On the "General Journal" tab, you will record all of these entries in proper journal entry format. The following is a list of transactions that need to be recorded for the company for activity in the month of December. Record these in the "General Journal" tab using the proper journal entry format. Please use the following accounts: Accounts Receivables, Raw materials, Work in process, Finished goods, Accumulated depreciation, Accounts payable, Salaries and wages payable, Sales revenue, Manufacturing overhead, Cost of goods sold, Salaries and wages expense, Advertising expenses, and Depreciation expense.
1-Dec Raw Materials purchased on account, $11,000.
5-Dec All Raw Materials needed for Job #1 were requisitioned from the material storage for use during the month. Assume all materials are direct.
10-Dec The following employee costs were incurred but not paid during the month:
Total cost incurred for direct labor for Job #1 Cost Sheet.
Salary for supervisor of the factory $3,500.
Administrative Salary $2,000.
15-Dec All Raw Materials needed for Job #2 were requisitioned from the material storage for use during the month. Assume all materials are direct.
16-Dec Rent for the month of December for the factory building incurred but not paid $600.
17-Dec Advertising costs incurred but not paid for the month was $1,400.
20-Dec Depreciation for the month of December was recorded on equipment was $750 ($150 for equipment used in the factory and the remainder for equipment used in selling and administrative activities).
22-Dec Manufacturing overhead cost was applied based on direct labor hours to Job #1 based on the POHR determined on the "Job Cost Sheet".
26-Dec Job #1 was completed and transferred to Finished Goods during the month.
28-Dec The completed table from Job #1 was sold on account to the customer for $16,000 during the month. (Hint: Make sure to account for the cost of the table that was sold using the cost from the job cost sheet.)
31-Dec Direct labor cost incurred but not paid for three employees to start manufacturing Job #2. The employees only worked one hour each, three hours total during the month and they did not complete their work on the job.
31-Dec Manufacturing overhead cost was applied based on direct labor hours to Job #2 based on the POHR. Only three direct labor hours were worked on Job #2 during the month.
31-Dec Any underapplied or overapplied overhead for the month was closed out to Cost of Goods Sold.
Step 5 Post the journal entries that you recorded on the "General Journal" tab to the "T-accounts" tab. This is the company's first month of business, so there will not be any beginning balances. Compute the balance for each T-account after all of the entries have been posted.
Step 6 Prepare a Schedule of Cost of Goods Manufactured and a Schedule of Cost of Goods Sold on the "Schedule of COGM and COGS" tab for Job #1 and Job #2 that were worked on during the month by the company. Make sure to follow the format noted in your book (pg. 87). (Hint: This is the company's first month of operations and therefore the beginning balances will be zero.)
Step 7 Prepare an Income Statement for the month using the Traditional Format on the "Income Statement" tab.
Step 8 Answer the additional questions below
Check Figure: Cost of Goods Manufactured= $4,150
What is the ending balance for raw materials?
What is the ending balance for work in process?
What is the ending balance for finished goods?
What is the actual manufacturing overhead cost incurred during December?
What is the total applied manufacturing overhead cost during December?
What is the unadjusted cost of goods sold?
Was the manufacturing overhead for the month of December overapplied/underapplied ?
What is the amount of Manufacturing overhead overapplied/underapplied?
What is the adjusted cost of goods sold?
What is gross margin?
What is net operating income?
What is the total prime cost for Job#1?
What is the total conversion cost for job #1?
What is the total product cost for job#1?
What was the period cost incurred for the month of December?
What is the contribution margin for Job #1 (assume that all selling and administrative cost and all manufacturing overhead costs are fixed.)?
What would be the actual (not applied) total fixed manufacturing overhead cost incurred for the company for the month if the order in Job #1 is for five tables instead of one table assuming this cost is with in the relevant range?