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Langfieldsmith 6e SM ch04
Management Accounting (AF201)
The University of the South Pacific
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CHAPTER 4 PRODUCT COSTING SYSTEMS ANSWERS TO REVIEW QUESTIONS 4 Purpose Short-term decisions: product mix, pricing Longer-term strategic decisions Long-term pricing Plan future product-related costs Control of product costs Reimbursement contracts External reporting (inventory calculation) Current/Future costs Future Future Future Future Current Current Current product All of the information cannot come from one source. The accounting system may accumulate current and past product costs but for some decision making and planning, estimates of future costs will need to be generated outside of the accounting system. 4 The frequency with which managers require product cost information relates to the use to which the information is to be put, i. the decision being made. You will recall from the chapter that managers need cost information to value inventory, for short-term and strategic decision making, for planning and controlling costs, and sometimes for claiming costs under cost reimbursement contracts. In these situations managers may focus primarily on production costs, although the scope of the analysis can be extended to include product-related costs from other areas of the value chain. Hence the frequency with which managers require estimates of product costs varies. Estimates of product costs for long-term decisions will be required infrequently—when strategic plans are being developed or revised. Even short-term decisions about products may be made irregularly. In contrast, product costs for control and for inventory valuation are required regularly, possibly monthly or weekly. Likewise, managers may choose to monitor product profitability on a regular basis. 4 A recent survey of members of the Chartered Institute of Management Accountants (CIMA) found that less than 50 per cent of respondents had systems for costing products in their organisation, and in small organisations this figure fell to 34 per cent (CIMA, 2009). The range of costs included within a product costing system varies from one organisation to another. A comprehensive picture of product costs requires the inclusion of upstream and downstream costs. In practice many businesses confine their product costing systems to manufacturing costs. This is particularly true of small to medium-sized manufacturing businesses since more comprehensive costing systems cost more to implement and maintain. The costing systems that only include manufacturing costs produce the inventory valuations for external financial reporting required by Australian accounting standards. Any additional product-related costs must be identified through special studies. Often, smaller businesses do not have the resources for special studies, and managers may rely on product costs developed for external reporting for making a whole range of decisions. This does not seem ideal, although it must reflect management’s assessment of the costs and benefits of obtaining more relevant product cost information! 4 Managers need cost information to support a range of managerial roles including short-term and strategic decision making, planning and controlling costs, and sometimes for claiming costs under cost reimbursement contracts, and while the production environment in small businesses may be less complex than in larger businesses, these needs may be just as relevant. Managers in small businesses may also need to value their inventory for inclusion in their financial reports. However, small businesses may be discouraged from implementing a product costing system due to scarce resources. This attempt to contain costs can mean that, when making operating decisions, they may rely on costing figures prepared for external reporting purposes. Chapter 4 Solutions Manual to accompany Management Accounting: Information for Creating and Managing Value 6e by Langfield-Smith, Thorne and Hilton. Copyright 2012 McGraw-Hill Australia Pty Ltd 1 4 4 4 Competitive pricing can result in them under-pricing products to the point that they sell at a loss. To evaluate profitability of products the small business must add cost items such as transportation, insurance and customs charges to its purchase or manufacturing costs. When selling price is dictated by the market it is vital to accurately assess costs and, if profitability is lacking, work on reducing costs or move to different products or markets. This is not entirely satisfactory. Product costs may be useful for a range of decisions. Even though the business is a ‘price taker’, it may well need to consider whether it should be making all of the products in the range, as some may be unprofitable. A wrong decision may cost the firm more than it does to run a product costing system. A product costing system may help to control production costs and highlight problems. The firm will need some product costs at year-end to value inventory, even if it is minimal. In making long-term decisions about products, such as which products to produce and what price to set, managers need a complete picture of all the costs associated with the product. In the shorter term, particularly for existing products, the manager may ignore research and development and design costs, since they have already been incurred. In this case, the relevant product cost will include the manufacturing, marketing, distribution and customer service costs associated with the product. When direct material, direct labour and manufacturing overhead costs are incurred, they are applied to work in process inventory by debiting the account. When goods are finished, the costs are removed from the work in process account with a credit, and are then transferred to finished goods inventory by debiting that account. Subsequently, when the goods are sold, the finished goods inventory is credited and the costs are added to the cost of goods sold, with a debit. 4 The four steps followed when applying manufacturing overhead to products are: (a) identifying the overhead cost driver, which is the factor that causes the overhead costs to be incurred (b) calculating the overhead rate, which is usually based on the budgeted annual manufacturing overhead cost, divided by the budgeted annual volume of cost driver (c) applying manufacturing overhead costs to products, by multiplying the predetermined overhead rate by the amount of cost driver consumed by the product (d) overapplied or underapplied overhead is closed into cost of goods sold at year end. 4 Overapplied or underapplied overhead is caused by errors in estimating the predetermined overhead rate. These errors can occur in the numerator (budgeted manufacturing overhead), or in the denominator (budgeted level of the cost driver). It can also be caused by using inappropriate cost drivers to allocate the overheads to products. Overapplied or underapplied overhead should be closed at year end because month-to-month variations are likely to average out over the year. 4 Overapplied or underapplied overhead can be closed directly into cost of goods sold, or it can be prorated among work in process inventory, finished goods inventory and cost of goods sold. If the amount of underapplied or overapplied overhead is significant, it should be prorated. 4 In a job costing system, costs are assigned to batches or job orders of production. Job costing systems are used by firms that produce relatively small numbers of dissimilar products. Job costing would be used in any situation where products are produced to customers’ specifications, such as in a dressmaking business, an architectural firm, or in a panel-beating shop. In a process costing system, production costs are averaged over a large number of product units. Process costing systems are used by firms that produce large numbers of nearly identical products, such as paint, beer or bricks. In job costing situations, the job has specific characteristics that allow it to be identified from the outset, and direct costs can be traced to the job. In a process costing environment, such as producing paint, each litre of paint is identical to every other litre and cannot be distinguished. This means that direct costs must be traced to the production process and then averaged across all units produced. 4 (a) The steps in describing the flow of costs through a single-department process costing system are as follows: As raw material, direct labour and manufacturing overhead are introduced into production, their costs are debited to the work in process inventory account. As the goods are completed their costs are credited from the work in process inventory account and debited into the finished goods inventory account. Chapter 4 Solutions Manual to accompany Management Accounting: Information for Creating and Managing Value 6e by Langfield-Smith, Thorne and Hilton. Copyright 2012 McGraw-Hill Australia Pty Ltd 2 4 Under AASB 102, the cost of inventories is to exclude the cost of abnormal wastage, storage, administration and selling cost. 4 An advantage of prorating overapplied or underapplied overhead is that it results in the adjustment of all the accounts affected by misestimating the overhead rate. These accounts include the work in process inventory account, the finished goods inventory account, and the cost of goods sold account. The resulting balances in these accounts are more accurate when proration is used than when overapplied or underapplied overhead is closed directly into cost of goods sold. The primary disadvantage of prorating overapplied or underapplied overhead is that it is more complicated and time consuming than the simpler alternative of closing overapplied or underapplied overhead directly into cost of goods sold. Chapter 4 Solutions Manual to accompany Management Accounting: Information for Creating and Managing Value 6e by Langfield-Smith, Thorne and Hilton. Copyright 2012 McGraw-Hill Australia Pty Ltd 4 SOLUTIONS TO EXERCISES EXERCISE 4 (20 minutes) Manufacturing cost flows 1 Raw Materials Inventory 227 000 174 000 53 000 Wages Payable 324 000 Manufacturing Overhead 180 000 Work in Process Inventory 18 000 174 000 324 000 180 000 120 000 576 000 Finished Goods Inventory 30 000 120 000 132 000 18 000 Sales Revenue 195 000 Accounts Receivable 195 000 Cost of goods Sold 132 000 2 Fitzgerald’s Fine Furniture Partial Balance Sheet as at 31 December Current assets Cash Accounts receivable Inventory Raw materials Work in process Finished goods Chapter 4 XXX XXX $ 53 000 576 000 18 000 Solutions Manual to accompany Management Accounting: Information for Creating and Managing Value 6e by Langfield-Smith, Thorne and Hilton. Copyright 2012 McGraw-Hill Australia Pty Ltd 5 EXERCISE 4 (25 minutes) Job cost sheet: manufacturer 1 Job cost sheet Job number Date started TB78 1 April Description Date completed Number of units completed Teddy bears 15 April 1000 Direct material Date Requisition number Quantity Unit price Cost 1 April 101 450 $0 $360 5 April 108 600 $0 $180 Direct labour Date Time sheet number Hours Rate Cost 15 April 72 500 $19 $9500 Manufacturing overhead Date Cost driver Quantity Application rate Cost 15 April Direct labour hours 500 $12 $6000 Cost summary Cost item Total direct material Total direct labour Total manufacturing overhead Amount $ 540 9 500 6 000 Total cost $16 040 Unit cost $16 Delivery summary Date Units shipped Units remaining in inventory Cost balance 30 April 700 300 $4812* * 300 remaining in inventory $16 = $4812 2 Managers may use this information to make pricing decisions, assess product profitability, control product costs, and to estimate inventory values. Chapter 4 Solutions Manual to accompany Management Accounting: Information for Creating and Managing Value 6e by Langfield-Smith, Thorne and Hilton. Copyright 2012 McGraw-Hill Australia Pty Ltd 7 EXERCISE 4 (15 minutes) Overapplied or underapplied overhead: manufacturer 1 Predetermined overhead rate = $997 500/75 000 hours = $13 per hour 2 To calculate actual manufacturing overhead: Depreciation........................................................................................................................$231 000 Property taxes...................................................................................................................... 21 000 Indirect labour..................................................................................................................... 82 000 Supervisory salaries............................................................................................................ 200 000 Utilities................................................................................................................................ 59 000 Insurance............................................................................................................................. 30 000 Factory rent......................................................................................................................... 300 000 Indirect material: Beginning inventory, 1 January.................................................................................. $ 48 000 Add: Purchases........................................................................................................... 94 000 Indirect material available for use.............................................................................. $142 000 Deduct: Ending inventory, 31 December................................................................... 63 000 Indirect material used................................................................................................. 79 000 Actual manufacturing overhead.......................................................................................... $1 002 000 Overapplied overhead = = Actual manufacturing overhead – Applied manufacturing overhead $1 002 000 – ($13 x 80 000 DLH) = $1 002 000 – 1 064 000 = $62 000 overapplied 3 Manufacturing overhead.................................................................................. 62 000 Cost of goods sold 62 000 4 The overapplied overhead was caused by the mis-estimated manufacturing overhead rate. The budgeted overhead costs, $997 500, were below the actual costs of $1 002 000. However, the actual hours were 80 000 hours, 5000 hours above budget. This caused overhead to be overapplied. EXERCISE 4 (10 minutes) Basic journal entries in job costing: manufacturer Work in process inventory Direct material inventory Wages payable (38 x $22) Manufacturing overhead (38 x $11) $4454 Finished goods inventory Work in process inventory $4454 $3200 836 418 $4454 The cost per puzzle for job number B67 is $8 ($4454/500). Chapter 4 Solutions Manual to accompany Management Accounting: Information for Creating and Managing Value 6e by Langfield-Smith, Thorne and Hilton. Copyright 2012 McGraw-Hill Australia Pty Ltd 8 2 Dr. Dr. Dr. Dr. Work in process – mixing Cr. Raw materials inventory Wages payable Manufacturing overhead $132 600 Work in process – packing Cr. Work in process – mixing 132 600 Work in process – packing Cr. Raw materials inventory Wages payable Manufacturing overhead 34 200 $75 000 36 000 21 600 132 600 15 000 12 000 7 200 Finished goods Cr. Work in process – packing $166 800 $166 800 EXERCISE 4 (20 minutes) Process costing; no work in process: brewer 1 The cost per bottle is calculated as follows: Mixing Bottling Total cost per bottle 2 = = $1 $0 $1 Journal entries: Dr. Dr. Dr. Dr. 3 $150 000/150 000 bottles $33 000/150 000 bottles Work in process – mixing Cr. Raw materials inventory Wages payable Manufacturing overhead $150 000 Work in process – bottling Cr. Work in process – mixing 150 000 Work in process – bottling Cr. Raw materials inventory Wages payable Manufacturing overhead 33 000 Finished goods Cr. Work in process – bottling $112 500 15 000 22 500 150 000 18 000 6 000 9 000 $183 000 $183 000 Process costing is the correct costing system to use where large quantities of identical units are produced. Where production takes place in more than one department, the costs are progressively accumulated as production moves from one department to the next. It is normal to record the costs of each department separately as these are used for control purposes. South Brew Ltd is following conventional process costing procedures. Chapter 4 Solutions Manual to accompany Management Accounting: Information for Creating and Managing Value 6e by Langfield-Smith, Thorne and Hilton. Copyright 2012 McGraw-Hill Australia Pty Ltd 10 EXERCISE 4 (20 minutes) Proration of underapplied overhead: manufacturer 1 Applied manufacturing overhead $145 000 Actual manufacturing overhead $167 000 Therefore, overhead has been underapplied by $22 000. 2 Calculation of proration amounts: Account Amount Percentage Work in process $ 29 000 20% Finished goods 50 750 35% Cost of goods sold 65 250 45% $145 000 100% Total Underapplied Overhead Account Work in process Finished goods Cost of goods sold $22 000 22 000 $22 000 Percentage 20% 35% 45% Calculation of percentage ¸$145 000 50 750 ¸$145 000 65 250 ¸$145 000 29 000 Amount to be added to account $4400 7700 $9900 Journal entry: Work in process inventory Finished goods inventory Cost of goods sold Manufacturing overhead 3 $4400 7700 $ 9900 $22 000 If all of the underapplied overhead had been closed to cost of goods sold, rather than being prorated, cost of goods sold would have been increased by $22 000 instead of $9900. Thus, profit would have been $12 100 lower under this approach. Chapter 4 Solutions Manual to accompany Management Accounting: Information for Creating and Managing Value 6e by Langfield-Smith, Thorne and Hilton. Copyright 2012 McGraw-Hill Australia Pty Ltd 11 (m) Accounts receivable............................................................ 176 000 Sales revenue.......................................................... 176 000 Cost of goods sold............................................................... $139 000 Finished goods inventory........................................ $139 000 PROBLEM 4 (35 minutes) Job costing; journal entries 1 2 Predetermined overhead rate = budgeted overhead ÷ budgeted machine hours = $840 000 ÷ 16 000 = $52 per machine hour (a) Work in process inventory $80 000* Raw material inventory Work in process inventory Wages payable $80 000 $130 800** $130 800 * $21 000 + $44 000 + $15 000 = $80 000 ** $35 000 + $22 000 + $65 000 + $8 800 = $130 800 (b) Manufacturing overhead Accumulated depreciation Wages payable Manufacturing supplies inventory Miscellaneous accounts $283 500 Work in process inventory Manufacturing overhead $231 000* $34 000 60 000 50 000 139 500 (c) $231000 * (1200 + 700 + 2000 + 500) $52 = $231 000 (d) Finished goods inventory Work in process inventory $315 250* $315 250 * Job 64: $84 000 + $21 000 + $35 000 + (1 200 $52) = $203 000 Job 65: $53 500 + $22 000 + (700 $52) = $112 250 $315 250 = $203 000 + $112 250 (e) Accounts receivable Sales revenue $146 950* $146 950 * $112 250 + $34 700 = $146 950 Cost of goods sold Finished goods inventory Chapter 4 $112 250 $112 250 Solutions Manual to accompany Management Accounting: Information for Creating and Managing Value 6e by Langfield-Smith, Thorne and Hilton. Copyright 2012 McGraw-Hill Australia Pty Ltd 13 3 Job no. 66 and no. 67 are in production as of 31 March: Job 66: $44 000 + $65 000 + (2000 $52) Job 67: $15 000 + $8800 + (500 $52) Total 4 $214 000 50 050 $264 050 There was a zero balance in Finished Goods inventory at the beginning of the period. During the first quarter Jobs 64 and 65 were transferred in and Job 65 was sold. Finished goods inventory therefore increased by $203 000 (i. $315 250 - $112 250). PROBLEM 4 (45 minutes) Basic job costing; journal entries; ledger accounts; job cost card 1 Journal entries: (a) (b) (c) (d) (e) (f) Raw material inventory Accounts payable $33 000 33 000 Work in process inventory Raw material inventory Job G60 1000 $11 = 11 000 Job C81 5000 $11 = 55 000 66 000 66 000 Manufacturing supplies inventory Accounts payable (or cash) 100 Manufacturing overhead Manufacturing supplies inventory 100 Manufacturing overhead Accumulated depreciation: equipment Manufacturing overhead Cash Manufacturing overhead Council rates payable 8 000 8 000 400 16 000 16 000 Work in process inventory Manufacturing overhead Job G60 100 $12 = 1 200 Job C81 700 $12 = 8 400 (g) 100 400 Work in process inventory Wages payable Job G60 100 $20 = 2000 Job C81 700 $20 = 14 000 Predetermined overhead rate = 100 9 600 9 600 $240 000 = $12 per hour $(2000)(10) 910 910 (h) Manufacturing overhead Wages payable Chapter 4 2 500 2 500 Solutions Manual to accompany Management Accounting: Information for Creating and Managing Value 6e by Langfield-Smith, Thorne and Hilton. Copyright 2012 McGraw-Hill Australia Pty Ltd 14 Direct labour Date Time sheet number Hours Rate Cost July – September xxx xxx xxx $2000 October xxx 100 $20 $2000 Manufacturing overhead Date Cost driver Quantity Application rate Cost July – September Direct labour hours xxx xxx $1200 October Direct labour hours 100 $12 $1200 Cost summary Cost Item Amount Total direct material Total direct labour Total manufacturing overhead $11 500 4 000 2 400 Total cost $17 900 PROBLEM 4 (30 minutes) Cost of goods manufactured; overapplied or underapplied overhead; journal entries 1 Cost added to work in process inventory during February: Direct material Direct labour Manufacturing overhead* Total costs added Add: Work in process inventory Subtotal Less: Work in process inventory, February 28: Direct material Direct labour Manufacturing overhead* Total Cost of goods manufactured * 150% of direct labour cost. 2 Underapplied overhead $2000 Chapter 4 = = $26 000 20 000 30 000 $76 000 9 000 85 000 $ 2 800 1 800 2 700 7 300 $77 700 actual overhead – applied overhead $32 000 – $30 000 Solutions Manual to accompany Management Accounting: Information for Creating and Managing Value 6e by Langfield-Smith, Thorne and Hilton. Copyright 2012 McGraw-Hill Australia Pty Ltd 16 3 Journal entries: Work in process inventory Raw materials inventory 26 000 26 000 Work in process inventory Wages payable 20 000 Work in process inventory Manufacturing overhead * 150% of direct labour cost. 30 000 20 000 30 000* Manufacturing overhead 32 000 Various accounts† 32 000 †The credits to various accounts related to actual manufacturing overhead items were $32 000 in total. Finished goods inventory Work in process inventory** Cost of goods sold Manufacturing overhead ** Work in process inventory 31/1/X2 $9 000 26 000 20 000 30 000 28/2/X2 7 300 77 700 77 700 2000 2000 77 700 PROBLEM 4 Flow of manufacturing costs; incomplete data 1 2 The answers to the questions are as follows: (a) $216 000 (f) $60 000 (b) $19 000 (g) $150 000 (c) $70 000 (h) $40 000 (d) $38 000 (i) $15 000 (e) $80 000 (j) Zero The completed ledger accounts (in bold), along with supporting calculations, follow. Bal. 1/11 Bal/11 Bal. 1/11 Direct material Direct labour Overhead Bal. 30/11 Raw-Material Inventory 15 000 70 000 40 000 45 000 Work in process Inventory 8 000 150 000 40 000 Chapter 4 80 000 60 000 38 000 Accounts Payable 12 000 Bal. 1/11 81 000 70 000 1 000 Bal. 30/11 Bal. 1/11 Bal. 30/11 Finished goods Inventory 35 000 150 000 180 000 5 000 Cost of Goods Sold 180 000 Solutions Manual to accompany Management Accounting: Information for Creating and Managing Value 6e by Langfield-Smith, Thorne and Hilton. Copyright 2012 McGraw-Hill Australia Pty Ltd 17 = $60 000 *Direct labour hours (g) Cost of goods completed during November = addition to work in process for direct labour direct labour rate = $80000 4000 hours $20 per hour = beginning balance in work in process + additions during November – ending balance in work in process = $8000 + ($40 000 + $80 000 + $60 000) – $38 000 = $150 000 (h) Raw material used in November = (i) (j) October 31 balance in raw-material inventory Overapplied or underapplied overhead November credit to raw material = $40 000 (given) inventory = 30 November balance in raw material inventory = $45 000 + $40 000 – $70 000 = $15 000 + direct material used – purchases = actual overhead – applied overhead = $60 000 – $60 000 = 0 PROBLEM 4 (30 minutes) Cost of goods manufactured; prime and conversion costs 1 Marco Polo Map Ltd Schedule of cost of goods manufactured for the month of March Direct material: Raw materials inventory, 1 March Add: March purchases of raw material Raw material available for use Less: Raw materials inventory, 31 March Raw materials used Direct labour Manufacturing overhead applied (50% of direct labour) Total manufacturing costs Add: Work in process inventory, 1 March Subtotal Less: Work in process inventory March 31 (90% $40 000) Cost of goods manufactured g $ 17 000g 113 000 g 130 000 c 26 000 g $104 000 c 160000* 80000* 344 000 c 40 000 g 384 000 c 36 000 c $348 000 † These are given, so construct the statement with these inserted first Chapter 4 Solutions Manual to accompany Management Accounting: Information for Creating and Managing Value 6e by Langfield-Smith, Thorne and Hilton. Copyright 2012 McGraw-Hill Australia Pty Ltd 19
Langfieldsmith 6e SM ch04
Course: Management Accounting (AF201)
University: The University of the South Pacific
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