ACCT 2230 Chapter Notes - Chapter 2: Variable Cost, Income Statement, Financial Statement

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20 Oct 2014

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Direct materials: those materials that become an integral part of a finished product and can be conveniently traced to it. Indirect materials: small items of materials such as glue and nails that may become an integral part of a finished product but the costs of tracing them exceed the benefits. Direct labour or touch labour: those labour costs that can be traced easily to individual units of product. Indirect labour: the labour costs of janitors, supervisors, material handlers, and other factory workers that cannot be conveniently traced directly to particular products. Manufacturing overhead: all costs associated with manufacturing except direct materials and direct labour. Conversion cost: direct labour cost plus manufacturing overhead cost. Prime cost: direct materials cost plus direct labour cost. Overtime premium: the extra hourly wage rate paid to workers who must work above their normal time required.

Related Questions

Bramlett Company has several divisions and just built a newplant with a capacity of 20,000 units of a new product. A standardcosting system has been introduced to aid in evaluating managers'performance and for establishing a selling price for the newproduct. At the present time, Bramlett faces no competitors in thisproduct market, and managers priced it at standard variable andfixed manufacturing cost, plus 60% mark-up. Managers hope thisprice will be maintained for several years.

During the first year of operations, 1,000 units per month willbe produced. During the second year, production is estimated to be1,500 units per month. In the first month of operations, employeeswere learning the processes, so direct labour hours were estimatedto be 20% greater than the standard hours allowed per unit. Insubsequent months, employees were expected to meet the directlabour hours standards.

Experience in other plants and with similar products ledmanagers to believe that variable manufacturing costs would vary inproportion to actual direct labour dollars. For the first severalyears, only one product will be manufactured in the new plant.Fixed overhead costs of the new plant per year are expected to be$1,920,000, incurred evenly throughout the year.

The standard variable manufacturing cost (after the break-inperiod) per unit of product has been set as follows:

Direct materials (4 pieces @ $20 per piece) $ 80
Direct labour (10 hours @ $25 per hour) 250
Variable overhead (50% of direct labour cost) 125
Total $455

At the end of the first month of operations, the actual costsincurred to make 950 units of product were as follows:

Direct materials (3,850 pieces @ $19.80) $ 76,230
Direct labour (12,000 hours @ $26) 312,000
Variable overhead 160,250
Fixed overhead 172,220

Bramlett managers want to compare actual costs to standard toanalyze and investigate variances and take any correctiveaction.

REQUIRED
A. What selling price should Bramlett set for the new productaccording to the new pricing policy? Explain.
B. Using long-term standard costs, compute all direct labour andmanufacturing overhead variances.
C. Is it reasonable to use long-term standard costs to calculatevariances for the first month of operations? Why or why not?
D. Revise the variance calculations in Part B, using the expectedcosts during the first month of operations as the standardcosts.
E. Provide at least two possible explanations for each of thefollowing variances:
1. Direct labour price variance
2. Direct labour efficiency variance
3. Variable overhead spendingvariance
4. Fixed overhead spending variance

orchidbutterfly579

Hello,

When attempting to access the Study Guide/Workbook to AccompanyManagerial Accounting (1st edition), I need assistance. In thet-tables, h. is showing to be $46,700. However when I read h. atthe top for given data, it reads "completed all jobs but one; thejob cost sheet for this job shows $2100 for direct materials $2000for direct labor $4100 applied overhead". Can you please help me tounderstand where the $46700 is coming from? Is there a formula? Iam trying to complete the work in process inventory and finishedgoods inventory t-tables.

Thank you in advance for your assistance.

Question:

Study Guide/Workbook to accompany Managerial Accounting (1stEdition)

Chapter 2, Problem 5PSA

Problem

Recording Manufacturing Costs and AnalyzingManufacturing Overhead

Christopherâs Custom Cabinet Company uses a job order costingsystem with overhead applied as a percentage of direct labor costs.Inventory balances at the beginning of 2009 follow:

Raw materials inventory	$15,000
Work in process inventory	5,000
Finished goods inventory	20,000

The following transactions occurred during January:

(a) Purchased materials on account for $26,000.

(b) Issued materials to production totaling $22,000, 90percent of which was traced to specific jobs and the remaindertreated as indirect materials.

$10,000 for assembly workers

3,000 for factory supervision

1,000 for administrative personnel

1,500 for sales commissions

(d) Recorded depreciation: $6,000 for machines, $1,000for office copier.

(e) Had $2,000 in insurance expire, allocated equallybetween manufacturing and administrative expenses.

(f) Paid $6,500 in other factory costs in cash.

(g) Applied manufacturing overhead at a rate of 200percent of direct labor cost.

(h) Completed all jobs but one; the job cost sheet forthis job shows $2,100 for direct materials, $2,000 for directlabor, and $4,000 for applied overhead.

(i) Sold jobs costing $50,000; the company usescost-plus pricing with a markup of 30 percent.

Required:

1.Set up T-accounts, record the beginningbalances, post the January transactions, and compute the finalbalance for the following accounts:

Raw Materials Inventory

Work in Process Inventory

Finished Goods Inventory

Cost of Goods Sold

Manufacturing Overhead

Selling and Administrative Expenses

Sales Revenue

Other accounts (Cash, Payables, etc.)

2. Determine how much gross profit the companywould report during the month of January beforeany adjustment is made for the overhead balance.

3. Determine the amount of overâor underappliedoverhead.

4. Compute adjusted gross profit assuming thatany overâor underapplied overhead balance is adjusted directly toCost of Goods Sold.

Step-by-step solution

Step 1 of 1

Req. 1

Raw Materials Inventory		Work in Process Inventory		Finished Goods Inventory
1/1 15,000	b. 22,000	1/1 5,000	h. 46,700	1/1 20,000	i. 50,000
a. 26,000		b. 19,800		h. 46,700
Bal. 19,000		c. 10,000		Bal. 16,700
		g. 20,000
		Bal. 8,100

Cost of Goods Sold	Manufacturing Overhead		Selling and Administrative Expenses
i. 50,000	b. 2,200	g. 20,000	c. 2,500
	c. 3,000		d. 1,000
	d. 6,000		e. 1,000
	e. 1,000		Bal. 4,500
	f. 6,500
		Bal. 1,300 Overapplied

Sales Revenue		Other Accounts (Cash, Payables, etc.)
	i. 65,000	i. 65,000	a. 26,000
			c. 15,500
			d. 7,000
			e. 2,000
			f. 6,500
		Bal. 8,000

Supporting Calculations:

b. Direct Materials $22,000 x 90% = $19,800;

Indirect Materials $22,000 x 10% =$2,200

c. Selling and administrative salaries = $1,000 + $1,500 =$2,500

g. Applied manufacturing overhead = $10,000 X 200% = $20,000

h. Ending Balance in WIP = $2,100 + $2,000 + $4,000 = $8,100

Cost of Goods Manufactured = $5,000 +$19,800 + $10,000 + $20,000 - $8,100 =

$46,700

i. Sales Revenue = $50,000 X 1.3 = $65,000

Req. 2

Unadjusted gross profit = $65,000 - $50,000 = $15,000

Req. 3

Manufacturing overhead is $1,300 overapplied.

Req. 4

Adjusted gross profit = $65,000 â ($50,000 - $1,300) =$16,300

Comment

Dover Chemical Company manufactures specialty chemicals by a series of three processes, all materials being introduced in the Distilling Department. From the Distilling Department, the materials pass through the Reaction and Filling departments, emerging as finished chemicals.

The balance in the account Work in ProcessâFilling was as follows on January 1:

Work in ProcessâFilling Department
(4,200 units, 70% completed):
	Direct materials (4,200 x $16.2)	$68,040
	Conversion (4,200 x 70% x $10.6)	31,164
		$99,204

The following costs were charged to Work in ProcessâFilling during January:

Direct materials transferred from Reaction
	Department: 54,200 units at $16 a unit	$867,200
Direct labor		295,310
Factory overhead		283,730

During January, 53,700 units of specialty chemicals were completed. Work in ProcessâFilling Department on January 31 was 4,700 units, 40% completed.

Required:

1. Prepare a cost of production report for the Filling Department for January. If an amount is zero, enter "0". If required, round your cost per equivalent unit answers to two decimal places.

Dover Chemical Company
Cost of Production Report-Filling Department
For the Month Ended January 31
Unit Information
Units charged to production:
Inventory in process, January 1
Received from Reaction Department
Total units accounted for by the Filling Department
Units to be assigned costs:
		Equivalent Units
	Whole Units	Direct Materials	Conversion
Inventory in process, January 1
Started and completed in January
Transferred to finished goods in January
Inventory in process, January 31
Total units to be assigned costs
Cost Information
Cost per equivalent unit:
		Direct Materials	Conversion
Total costs for January in Filling Department		$	$
Total equivalent units
Cost per equivalent unit		$	$
Costs assigned to production:
	Direct Materials	Conversion	Total
Inventory in process, January 1			$
Costs incurred in January
Total costs accounted for by the Filling Department			$
Costs allocated to completed and partially completed units:
Inventory in process, January 1 balance			$
To complete inventory in process, January 1		$
Cost of completed January 1 work in process			$
Started and completed in January	$
Transferred to finished goods in January			$
Inventory in process, January 31
Total costs assigned by the Filling Department			$

Feedback

1. Calculate equivalent units for materials and conversion costs. Calculate the cost per equivalent unit for materials and conversion costs. Calculate the costs assigned to the beginning inventory, the units started and completed, and the ending inventory.

2. Journalize the entries for (1) costs transferred from Reaction to Filling and (2) the cost transferred from Filling to Finished Goods.

(1)	Work in Process-Filling Department
	Work in Process-Reaction Department
(2)	Finished Goods
	Work in Process-Filling Department

Feedback

2. Remember that there are three types of inventory; materials, work in process, and finished goods. What costs are captured in the work in process account? Are these units 100% complete or are they being transferred to another department?

3. Determine the increase or decrease in the cost per equivalent unit from December to January for direct materials and conversion costs. If required, round your answers to two decimal places.

	Increase or Decrease	Amount
Change in direct materials cost per equivalent unit	Decrease	$
Change in conversion cost per equivalent unit	Increase	$

4. Discuss the uses of the cost of production report and the results of part (3).

The cost of production report may be used as the basis for allocating product costs between Work in Process and Finished Goods . The report can also be used to control costs by holding each department head responsible for the units entering production and the costs incurred in the department. Any differences in unit product costs from one month to another, such as those in part (3), can be studied carefully and any significant differences investigated.

ACCT 2230 Chapter Notes - Chapter 2: Variable Cost, Income Statement, Financial Statement

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