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(a) Use in financial accounting: In financial accounting, product costs are needed to
determine the value of inventory on the balance sheet and to compute the costof-goods-sold expense on the income statement.
(b) Use in managerial accounting: In managerial accounting, product costs are
needed for planning, for cost control, and for decision making.
(c) Use in cost management: In order to manage, control, or reduce the costs of
manufacturing products or providing services, management needs a clear idea
of what those costs are.
(d) Use in reporting to interested organizations: Product cost information is used in
reporting on relationships between firms and various outside organizations. For
example, public utilities such as electric and gas companies record product
costs to justify rate increases that must be approved by state regulatory
agencies.
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3-8
3-1
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Memorandum
Date:
Today
To:
President
From:
I.M. Student
Subject:
I recommend direct-labor hours as the best volume-based cost driver upon which to base
the application of manufacturing overhead. Since our products are made by hand, direct
labor is a very significant production input. Moreover, the incurrence of manufacturing
overhead cost appears to be related to the use of direct labor.
2.
Memorandum
Date:
Today
To:
President
From:
I.M. Student
Subject:
I recommend either machine hours or units of production as the most appropriate cost
driver for the application of manufacturing overhead. Since our production process is
highly automated, machine hours are the most significant production input. Also, our
chips are nearly identical, so the amount of overhead incurred in their production does
not vary much across product lines. The incurrence of manufacturing overhead cost
appears to be related closely both to machine time and units of production.
EXERCISE 3-40 (10 MINUTES)
Overhead distribution: Allocation of the hospital's building maintenance and custodial
costs to all of the hospital's departments.
Service-department cost allocation: Allocation of the hospital's Personnel Department costs
to the direct-patient-care departments in the hospital.
Overhead application: Assignment of the overhead costs in the maternity ward to each
patient-day of care provided to new mothers.
3-2
Copyright 2015 McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written consent of McGraw-Hill Education.
2.
3.
The finished-goods inventory consisted of job no. 3154, which cost $175,750
[$78,000 + $42,500 + ($42,500 x 130%)].
4.
7,880,900
32,500
1,430,000
870,000
29,500
415,000
$2,777,000
50,500
3-3
Copyright 2015 McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written consent of McGraw-Hill Education.
50,500
6.
7.
0
7,880,900
$ 7,880,900
175,750
$ 7,705,150
50,500
$ 7,654,650
No, selling and administrative expenses are operating expenses of the firm and are
treated as period costs rather than product costs. Such costs are unrelated to
manufacturing overhead and cost of goods sold.
3-4
Copyright 2015 McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Accounts Payable
3,500 Bal. 1/1
191,100
189,000
1,400 Bal. 12/31
Work-in-Process Inventory
Bal. 1/1
23,800
Direct
168,000
material
Direct
210,000 1,005,200
labor
Mfg.
630,000
overhead
Bal. 12/31
26,600
Finished-Goods Inventory
Bal. 1/1
16,800
1,005,200 994,000
Bal. 12/31
28,000
Manufacturing Overhead
633,500 630,000
Wages Payable
2,800 Bal. 1/1
205,800
210,000
7,000 Bal. 12/31
Sales Revenue
1,134,000
Accounts Receivable
Bal. 1/1
15,400
1,134,000 1,128,400
Bal. 12/31
21,000
3-5
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No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Percent
Traceable
Traceable
Cost
80%
60
90
90
50
$3,000,000
270,000
67,500
337,500
75,000
$3,750,000
Golden State Enterprises overhead (i.e., the nontraceable costs) total $1,050,000
($4,800,000 - $3,750,000).
1.
2.
3.
The total cost of the Davis Manufacturing project is $96,000, and the billing is
$115,200, as follows:
Professional staff salaries
Administrative support staff
Photocopying
Travel..
Other operating costs.
Subtotal
Overhead ($75,000 x 28%).
Total cost.
Markup ($96,000 x 20%).
Billing to Davis
$61,500
3,900
750
6,750
2,100
$75,000
21,000
$96,000
19,200
$115,200
4.
6.
Professional staff members are compensated for attending training sessions and
firm-wide planning meetings, paid vacations, and completion of general, non-clientrelated paperwork and reports. These activities benefit multiple clients, the
3-6
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consultant, and/or the overall firm, making traceability to specific clients difficult if
not impossible.
3-7
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No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Predetermined
Overhead Rate
$8 per hour
10 per hour
8 per hour
10 per hour
Calculations
$400,000/50,000
$320,000/32,000
$200,000/25,000
$280,000/28,000
February
$600
340
May
$600
340
2.
Direct material .............................................
Direct labor...................................................
Manufacturing overhead:
20 hrs $8 per hr .................................
20 hrs $10 per hr ...............................
Total cost......................................................
160
$1,100
200
$1,140
February
$1,100
110
$1,210
May
$1,140
114
$1,254
3.
Total cost......................................................
Markup (10%) ...............................................
Price ..............................................................
4.
Predetermined rate
5.
6.
February
$ 600.00
340.00
177.80
$1,117.80
Total cost.......................................................
Markup (10%) ................................................
Price ...............................................................
$1,117.80
111.78
$1,229.58
May
$ 600.00
340.00
177.80
$1,117.80
Notice that with quarterly overhead rates, the firm may underprice its product in February
and overprice it in May.
3-8
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No reproduction or distribution without the prior written consent of McGraw-Hill Education.