QUIZ 2
CH 4/5/8
(20 MARKS)1.Gold Nest Company of Guandong, China, is a family-owned enterprise that makes birdcages for the South China market. A popular pastime among older Chinese men is to take their pet birds on daily excursions to teahouses and public parks where they meet with other bird owners to talk and play mahjong. A great deal of attention is lavished on these birds, and the birdcages are often elaborately constructed from exotic woods and contain porcelain feeding bowls and silver roosts. Gold Nest Company makes a broad range of birdcages that it sells through an extensive network of street vendors who receive commissions on their sales. The Chinese currency is the renminbi, which is denoted by Rmb. All of the company’s transactions with customers, employees, and suppliers are conducted in cash; there is no credit.
The company uses a job-order costing system in which overhead is applied to jobs on the basis of direct labor cost. At the beginning of the year, it was estimated that the total direct labor cost for the year would be Rmb110,000 and the total manufacturing overhead cost would be Rmb275,000. At the beginning of the year, the inventory balances were as follows:
Raw materials .......Rmb13,000
Work in process ............Rmb30,000
Finished goods ...................Rmb65,000
During the year, the following transactions were completed:
a. Raw materials purchased for cash, Rmb150,000.
b. Raw materials requisitioned for use in production, Rmb158,000. (Materials costing Rmb135,000 were charged directly to jobs; the remaining materials were indirect.)
c. Costs for employee services were incurred as follows:
Direct labor ..
Rmb100,000
Indirect labor
Rmb40,000
Sales commissions .
Rmb22,000
Administrative salaries ....
Rmb35,000
d. Rent for the year was Rmb36,000. (Rmb30,000 of this amount related to factory operations, and the remainder related to selling and administrative activities.)
e. Utility costs incurred in the factory, Rmb90,000.
f. Advertising costs incurred, Rmb88,000.
g. Depreciation recorded on equipment, Rmb80,000. (Rmb66,000 of this amount was on equipment used in factory operations; the remaining Rmb14,000 was on equipment used in selling and administrative activities.)
h. Manufacturing overhead cost was applied to jobs, Rmb
.
i. Goods that cost Rmb490,000 to manufacture according to their job cost sheets were completed during the year.
j. Sales for the year totaled Rmb995,000. The total cost to manufacture these goods according to their job cost sheets was Rmb550,000.
Required:
1. Prepare journal entries to record the transactions for the year.
2. Prepare T-accounts for inventories, Manufacturing Overhead, and Cost of Goods Sold. Post relevant data from your journal entries to these T-accounts. (Don’t forget to enter the
beginning balances in your inventory accounts.) Compute an ending balance in each account.
3. Is Manufacturing Overhead underapplied or overapplied for the year? Prepare a journal entry to close any balance in the Manufacturing Overhead account to Cost of Goods Sold.
4. Prepare an income statement for the year. (Do not prepare a schedule of cost of goods manufactured; all of the information needed for the income statement is available in the journal entries and T-accounts you have prepared.)
(20 MARKS)2.Harwood Company is a manufacturer that operates a job-order costing system. Overhead costs are applied to jobs on the basis of machine-hours. At the beginning of the year, management estimated that the company would incur $380,000 in manufacturing overhead costs and work 47,500 machine-hours.
Required:
1. Compute the company’s predetermined overhead rate.
2. Assume that during the year the company works only 45,000 machine-hours and incurs the following costs in the Manufacturing Overhead and Work in Process accounts:
Manufacturing Overhead
Work in Process
(Maintenanc 47,0 ?
(Direct 980,0
e)
00
materials)
00
(Indirect materials)
20,000
(Direct labor)
170,000
(Indirect labor)
105,000
(Overhead)
(Utilities)
77,500
(Insurance)
26,000
(Depreciation)
91,500
Copy the data in the T-accounts above onto your answer sheet. Compute the amount of overhead cost that would be applied to Work in Process for the year and make the entry in your T-accounts.
3. Compute the amount of underapplied or overapplied overhead for the year and show the balance in your Manufacturing Overhead T-account. Prepare a journal entry to close out the balance in this account to Cost of Goods Sold.
4. Explain why the manufacturing overhead was underapplied or overapplied for the year.
(20 MARKS)
3.
Contrasting ABC and Conventional P roduct Costs
Siegel Corporation manufactures a product that is available in both a deluxe and a regular model. The company has made the regular model for years; the deluxe model was introduced several years ago to tap a new segment of the market. Since introduction of the deluxe model, the company’s profits have steadily declined. Sales of the deluxe model have been increasing rapidly.
Overhead is applied to products on the basis of direct labor-hours. At the beginning of the current year, management estimated that $3,080,000 in overhead costs would be incurred and the company would produce and sell 10,000 units of the deluxe model and 50,000 units of the regular model. The deluxe model requires 2.0 hours of direct labor time per unit, and the regular model requires 1.0 hours. Materials and labor costs per unit are given below:
Deluxe
Regular
Direct materials cost per unit ...
$50.00
$30.00
Direct labor cost $30. $15.
per unit ........
00
00
Required
1. Compute the predetermined overhead rate using direct labor-hours as the basis for allocating overhead costs to products. Compute the unit product cost for one unit of each model.
2. An intern suggested that the company use activity-based costing to cost its products. A team was formed to investigate this idea. . It came back with the recommendation that four activity cost pools be used. These cost pools and their associated activities are listed below:
Estimated
Overhead
Activity
Activity Cost Pool and Activity Measure
Cost
Deluxe
Regular
Total
Purchase orders (number of orders) .................
$
60,000
500
1,000
1,500
Rework requests (number of requests) ...............
280,000
800
2,000
2,800
Product testing (number of tests) ..................
240,000
7,000
3,000
10,000
Machine-related (machine-hours) .........
2,500,000
4,500
8,000
12,500
$3,080,000
Compute the activity rate (i.e., predetermined overhead rate) for each of the activity cost pools.
3. Assume that actual activity is as expected for the year. Using activity-based costing, do the following:
a. Determine the total amount of overhead that would be applied to each model for the year.
b. Compute the unit product cost for one unit of each model.
4. Can you identify a possible explanation for the company’s declining profits? If so, what is it?
(2 2 0 MARKS )
4.
Cost flows and Unit Product Costs in Activity- - Based Costing
Hunter Corporation uses activity-based costing to determine product costs for external financial reports. At the beginning
of the year, management made the following estimates of cost and activity in the company’s five activity cost pools:
Activity Cost Pool
Activity Measure
Estimated Overhead Cost
Expected Activity
Labor related ..........
Direct labor-hours
$200,000
20,000
DLHs
Production orders ....
Number of orders
$110,000
5,000
orders
Material receipts ..
Number of receipts
$108,000
1,800
receipts
Relay assembly ..
Number of relays
$960,000
12,000
relays
General factory ...
Machine-hours
$1,260,000
70,000
MHs
Re quired
1.Compute the activity rate (i.e., predetermined overhead rate) for each of the activity cost pools.
2. During the year, actual overhead cost and activity were recorded as follows:
Activity Cost Pool
Actual Overhead Cost
Actual Activity
Labor related
$
205,000
22,000
DLHs
Production orders ......
107,000
4,500
orders
Material receipts ....
112,000
2,000
receipts
Relay assembly ............
980,000
13,000
relays
General factory .....
1,300,000
73,000
MHs
Total overhead cost ........
$2,704,000
a. Prepare a journal entry to record the incurrence of actual manufacturing overhead cost for the year (credit Accounts Payable). Post the entry to the company’s Manufacturing Overhead T-account.
b. Determine the amount of overhead cost applied to production during the year.
c. Prepare a journal entry to record the application of manufacturing overhead cost to Work in Process for the year. Post the entry to the company’s Manufacturing Overhead T-account.
d. Determine the amount of underapplied or overapplied manufacturing overhead for the year.
3. The actual activity for the year was distributed among the company’s four products as follows:
Actual Activity
Activity Cost Pool
Product A
Product B
Product C
Product D
Labor related (DLHs) .........
7,000
1,000
8,000
6,000
Production orders (orders) .......
800
900
1,100
1,700
Material receipts (receipts) .....
4
Relay assembly (relays) .......
3,500
2,000
3,000
4,500
General factory (MHs) ..........
16,000
26,000
17,000
14,000
a. Determine the total amount of overhead cost applied to each product.
b. Does the total amount of overhead cost applied to the products above tie in to the T-accounts in any way? Explain.
(10 MARKS)
5 Equivalent Units; Cost Reconciliation — Weighted Average Method
Martin Company manufactures a single product. The company uses the weighted-average method in its process costing system. Activity for June has just been completed. An incomplete production report for the first processing department follows:
Quantity Schedule and Equivalent Units
Quantity
Schedule
Units to be accounted for:
Work in process, June 1 (materials 80% 10,000
complete; labor and overhead 60% complete) ...........
Started into production ..........
64,000
Total units ...........
74,000
Equivalent units (EU)
Materials
Labor
Overhead
Units accounted for as follows:
Transferred to the next department ..........
68,000
Work in process, June 30 (materials 50% complete, labor and overhead 20% complete) ...........
6,000
?
?
Total units ...........
74,00
?
?
?
0
Cost per Equivalent Unit
Total
Whole
Cost
Materials
Labor
Overhead
Unit
Cost to be accounted for:
Work in process, June 1 ...................
$
11,900
$
6,800
$
2,100
$
3,000
Cost added by the department .........
107,270
53,550
22,120
31,600
Total cost (a) .......
$119,170
$60,350
$24,220
$34,600
Equivalent units (b) .
71,000
69,200
69,200
Cost per EU, (a) ÷ (b) ....................
$0.85
+ $0.35
+ $0.50
=
$1.70
Cost Reconciliation
Total
Cost
Cost accounted for as follows:
?
Required:
1. Prepare a schedule showing how the equivalent units were computed for the first processing department.
2. Complete the “Cost Reconciliation” part of the production report for the first processing department.
(10 MARKS)
6. Interpreting A Production Report — Weighted- - Average Method
Cooperative San José of southern Sonora state in Mexico makes a unique syrup using cane sugar and local herbs. The syrup is sold in small bottles and is prized as a flavoring for drinks and for use in desserts. The bottles are sold for $11.00 each. (The Mexican currency is the peso and is denoted by $.) The first stage in the production process is carried out in the Mixing Department, which removes foreign matter from the raw materials and mixes them in the proper proportions in large vats. The
company uses the weighted-average method in its process costing system.
A hastily prepared report for the Mixing Department for April appears below:
Quantity Schedule
Units to be accounted for:
Work in process, April 1 (materials 100% complete; conversion 95% complete)
11,000
Started into production ..
150,000
Total units to be accounted for .....................
161,000
Units accounted for as follows:
Transferred to the next department ..............
155,000
Work in process, April 30 (materials 100% complete, conversion 30% complete)
6,000
Total units accounted for
161,000
Total Cost
Cost to be accounted for:
Work in process, April 1 .
$
22,810
Cost added during the month ........................
599,000
Total cost to be accounted for .....................
$621,810
Cost Reconciliation
Cost accounted for as follows:
Transferred to the next department ..............
$604,500
Work in process, April 30
17,310
Total cost accounted for .
$621,810
Cooperative San José has just been acquired by another company, and the management of the acquiring company wants some additional information about its operations.
Required:
1. What were the equivalent units for the month?
2. What were the costs per equivalent unit for the month? The beginning inventory consisted of the following costs: materials, $19,450; and conversion cost, $3,360. The costs added during the month consisted of: materials, $375,000; and conversion cost, $224,000.
3. How many of the units transferred to the next department were started and completed during the month?
4. The manager of the Mixing Department, anxious to make a good impression on the new owner, stated, “Materials prices jumped from about $1.80 per unit in October to $2.50 per unit in April, but due to good cost control I was able to hold our materials cost to less than $2.50 per unit for the month.” Should this manager be rewarded for good cost control? Explain.