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SOLUTION
(15–20 min.) Terminology, interpretation of statements (continuation of 2-36).
1. Direct materials used $118 million
2. Inventoriable costs (in millions) for Year 2017
Plant utilities $ 8
Indirect manufacturing labor 21
Miscellaneous manufacturing overhead 15
Direct manufacturing labor 40
Plant supplies used 9
Period costs (in millions) for Year 2017
3. Design costs and R&D costs may be regarded as product costs in case of contracting with
4. Direct materials used = $118,000,000 ÷ 2,000,000 units = $59 per unit
5. Direct materials unit cost would be unchanged at $59. Depreciation unit cost would be
6. In this case, equipment depreciation is a variable cost in relation to the unit output. The
amount of equipment depreciation will change in direct proportion to the number of units
produced.
2-43 Labor cost, overtime, and idle time. David Letterman works in the production
department of Northeast Plastics (NEP) as a machine operator. David, a long-time employee of
2-1
NEP, is paid on an hourly basis at a rate of $24 per hour. David works five 8-hour shifts per week
Monday–Friday (40 hours). Any time David works over and above these 40 hours is considered
overtime for which he is paid at a rate of time and a half ($36 per hour). If the overtime falls on
weekends, David is paid at a rate of double time ($48 per hour). David is also paid an additional
$24 per hour for any holidays worked, even if it is part of his regular 40 hours. David is paid his
regular wages even if the machines are down (not operating) due to regular machine
maintenance, slow order periods, or unexpected mechanical problems. These hours are
considered “idle time.”
During December David worked the following hours:
Hours worked including
machine downtime Machine downtime
Week 1 50 6.0
Week 2 44 2.0
Week 3 46 4.0
Week 4 45 3.5
Included in the total hours worked are two company holidays (Christmas Eve and Christmas
Day) during Week 4. All overtime worked by David was Monday–Friday, except for the hours
worked in Week 3; all of the Week 3 overtime hours were worked on a Saturday.
Required:
1. Calculate (a) direct manufacturing labor, (b) idle time, (c) overtime and holiday premium,
and (d) total earnings for David in December.
2. Is idle time and overtime premium a direct or indirect cost of the products that David worked
on in December? Explain.
SOLUTION
(20 min.) Labor cost, overtime and idle time.
1.(a) Total cost of hours worked at regular rates
50 hours × $24 per hour $1,200
4,440
Minus idle time
(6.0 hours × $24 per hour)
144
Total idle time 372
2-2
(c) Overtime and holiday premium.
Week 1: Overtime (50 – 40) hours × Premium, $12 per hour $ 120
Week 2: Overtime (44 – 40) hours × Premium, $12 per hour 48
Week 3: Overtime (46 – 40) hours × Premium, $24 per hour 144
Week 4: Overtime (45 – 40) hours × Premium, $12 per hour 60
(d) Total earnings in December
Direct manufacturing labor costs $4,068
Idle time 372
2. Idle time caused by regular machine maintenance, slow order periods, or unexpected
mechanical problems is an indirect cost of the product because it is not related to a specific
product.
2-44 Missing records, computing inventory costs. Ron Howard recently took over as the
controller of Johnson Brothers Manufacturing. Last month, the previous controller left the
company with little notice and left the accounting records in disarray. Ron needs the ending
inventory balances to report first-quarter numbers.
For the previous month (March 2017) Ron was able to piece together the following
information:
Direct materials purchased $120,000
Work-in-process inventory, 3/1/2017 $ 35,000
Direct materials inventory, 3/1/2017 $ 12,500
Finished-goods inventory, 3/1/2017 $160,000
Conversion costs $330,000
Total manufacturing costs added during
the period
$420,000
Cost of goods manufactured 4 times direct materials used
Gross margin as a percentage of revenues 20%
Revenues $518,750
2-3
Calculate the cost of:
Required:
1. Finished-goods inventory, 3/31/2017
2. Work-in-process inventory, 3/31/2017
3. Direct materials inventory, 3/31/2017
SOLUTION
(30–40 min.) Missing records, computing inventory costs.
1. Finished goods inventory, 3/31/2017 = $105,000
This problem is not as easy as it first appears. These answers are obtained by working from the
known figures to the unknowns in the schedule below. The basic relationships between
categories of costs are:
Manufacturing costs added during the period (given) $420,000
Schedule of Computations
Direct materials inventory, 3/1/2017 (given) $
12,500
Direct materials available for use 132,500
Direct materials used 90,000
Conversion costs (given) 330,000
Manufacturing costs added during the period (given) 420,000
Manufacturing costs to account for 455,000
Cost of goods manufactured (4 × $90,000) 360,000
Cost of goods available for sale 520,000
Some instructors may wish to place the key amounts in a Work in Process T-account. This
problem can be used to introduce students to the flow of costs through the general ledger
(amounts in thousands):
2-4
Direct Materials Work in Process Finished Goods
Cost of
Goods Sold
Beg Inv 12.5 Beg Inv 35 Beg Inv 160
Purch. 120.0 DM used
COGM 360 360 COGS 415 415
To account
Available
2-45 Comprehensive problem on unit costs, product costs. Atlanta Office Equipment
manufactures and sells metal shelving. It began operations on January 1, 2017. Costs incurred for
2017 are as follows (V stands for variable; F stands for fixed):
Direct materials used $140,000 V
Direct manufacturing labor costs 22,000 V
Plant energy costs 5,000 V
Indirect manufacturing labor costs 18,000 V
Indirect manufacturing labor costs 14,000 F
Other indirect manufacturing costs 8,000 V
Other indirect manufacturing costs 26,000 F
Marketing, distribution, and
customer-service costs
120,000 V
Marketing, distribution, and
customer-service costs
43,000 F
Administrative costs 54,000 F
Variable manufacturing costs are variable with respect to units produced. Variable marketing,
distribution, and customer-service costs are variable with respect to units sold.
Inventory data are as follows:
Beginning:
January 1, 2017
Ending: December
31, 2017
Direct materials 0 lb 2,300 lbs
Work in process 0 units 0 units
Finished goods 0 units ? units
Production in 2017 was 100,000 units. Two pounds of direct materials are used to make one unit
of finished product.
Revenues in 2017 were $473,200. The selling price per unit and the purchase price per pound
of direct materials were stable throughout the year. The company’s ending inventory of finished
goods is carried at the average unit manufacturing cost for 2017. Finished-goods inventory at
2-5
December 31, 2017, was $20,970.
Required:
1. Calculate direct materials inventory, total cost, December 31, 2017.
2. Calculate finished-goods inventory, total units, December 31, 2017.
3. Calculate selling price in 2017.
4. Calculate operating income for 2017.
SOLUTION
(30 min.) Comprehensive problem on unit costs, product costs.
1. If 2 pounds of direct materials are used to make each unit of finished product, 100,000
2. Manuf
acturing Costs for 100,000 units
Variable Fixed Total
Direct materials costs $140,000 $ – $140,000
Average unit manufacturing cost: $233,000 ÷ 100,000 units
Finished goods inventory in units: =
$20,970 (given)
$2.33 per unit
= 9,000 units
3. Units sold in 2017 = Beginning inventory + Production – Ending inventory
4.
Atlanta Office Equipment
Income Statement
Year Ended December 31, 2017
(in thousands)
2-6
Revenues (91,000 units sold × $5.20) $473,200
Cost of units sold:
Beginning finished goods, Jan. 1, 2017 $ 0
Cost of goods available for sale 233,000
Operating costs:
Marketing, distribution, and customer-service costs
($120,000 + $43,000) 163,000
Note: Although not required, the full set of unit variable costs is:
($120,000 ÷ 91,000)
2-46 Different meanings of product costs. There are at least 3 different purposes for which we
measure product costs. They are (1) pricing and product mix decisions, (2) determining the
appropriate charge for a government contract, and (3) for preparing financial statements for
external reporting following Generally Accepted Accounting Principles. On the following table,
indicate whether the indicated cost would be included or excluded for the particular purpose. If
your answer is not definitive (include or exclude), provide a short explanation of why.
Type of Cost
Purpose:
Pricing/Product
Mix
Purpose:
Government
Contract
Purpose: Financial
Statement (using
GAAP)
Direct Material
Direct
Manufacturing
Labor
Manufacturing
Overhead
Marketing Costs
Distribution
2-7
Type of Cost
Purpose:
Pricing/Product
Mix
Purpose:
Government
Contract
Purpose: Financial
Statement (using
GAAP)
Expense
Customer Service
SOLUTION
(15 min.) Different meanings of product costs
Type of Cost
Purpose:
Pricing/Product Mix
Purpose:
Government Contract
Purpose:
Financial Statement
(using GAAP)
Direct materials Include Include Include
Direct manufacturing labor Include Include Include
Manufacturing overhead Include Include Include
Marketing costs Include Exclude* Exclude
Distribution expense Include Exclude* Exclude
Customer service Include Exclude* Exclude
* – These costs are generally excluded but may be included if specifically required for a specific contract.
2-47 Cost classification; ethics. Paul Howard, the new plant manager of Garden Scapes
Manufacturing Plant Number 7, has just reviewed a draft of his year-end financial statements.
Howard receives a year-end bonus of 11.5% of the plant’s operating income before tax. The
year-end income statement provided by the plant’s controller was disappointing to say the least.
After reviewing the numbers, Howard demanded that his controller go back and “work the
numbers” again. Howard insisted that if he didn’t see a better operating income number the next
time around he would be forced to look for a new controller.
Garden Scapes Manufacturing classifies all costs directly related to the manufacturing of its
product as product costs. These costs are inventoried and later expensed as costs of goods sold
when the product is sold. All other expenses, including finished-goods warehousing costs of
$3,640,000, are classified as period expenses. Howard had suggested that warehousing costs be
included as product costs because they are “definitely related to our product.” The company
produced 260,000 units during the period and sold 240,000 units.
As the controller reworked the numbers, he discovered that if he included warehousing costs
as product costs, he could improve operating income by $280,000. He was also sure these new
numbers would make Howard happy.
Required:
1. Show numerically how operating income would improve by $280,000 just by classifying the
2-8
preceding costs as product costs instead of period expenses.
2. Is Howard correct in his justification that these costs are “definitely related to our product”?
3. By how much will Howard profit personally if the controller makes the adjustments in
requirement 1?
4. What should the plant controller do?
SOLUTION
(20-25 min.) Classification of costs; ethics.
1. Warehousing costs per unit =
Warehousing costs
Units produced
=
$3,640,000 $14 per unit.
260,000 units =
If the $3,640,000 is treated as period costs, the entire amount would be expensed during the
year as incurred. If it is treated as a product cost, it would be “unitized” at $14 per unit and
2. No. With respect to classifying costs as product or period costs, this determination is made
3. Paul Howard would improve his personal bonus and take-home pay by
4. The controller should not reclassify costs as product costs just so the plant can reap
short-term benefits, including the increase in Howard’s personal year-end bonus. Research and
development costs, costs related to the shipping of finished goods, and costs related to
2-9
Howard stands to personally benefit from the reclassification of costs. The controller should
insist that he must adhere to GAAP so as not to submit fraudulent financial statements to
2-48 Finding unknown amounts. An auditor for the Internal Revenue Service is trying to
reconstruct some partially destroyed records of two taxpayers. For each of the cases in the
accompanying list, find the unknowns designated by the letters A and B for Case 1 and C and D
for Case 2.
Case 1 Case 2
(in thousands)
Accounts receivable, 12/31 $ 8,000 $ 3,150
Cost of goods sold A 31,800
Accounts payable, 1/1 4,500 2,550
Accounts payable, 12/31 2,700 2,250
Finished-goods inventory, 12/31 B 7,000
Gross margin 18,000 C
Work-in-process inventory, 1/1 3,000 1,500
Work-in-process inventory, 12/31 0 4,700
Finished-goods inventory, 1/1 5,000 7,000
Direct materials used 13,000 19,000
Direct manufacturing labor 4,500 8,500
Manufacturing overhead costs 9,500 D
Purchases of direct materials 13,500 10,500
Revenues 52,000 52,300
Accounts receivable, 1/1 3,000 2,100
SOLUTION
(20–25 min.) Finding unknown amounts.
Let G = given, I = inferred
Step 1: Use gross margin formula Case 1 Case 2
Step 2: Use schedule of cost of goods manufactured formula
Direct materials used $13,000 G $19,000 G
2-10
Direct manufacturing labor costs 4,500 G 8,500 G
Add beginning work in process, 1/1 3,000 G 1,500 G
Step 3: Use cost of goods sold formula
Beginning finished goods inventory, 1/1 $ 5,000 G $ 7,000 G
For case 1, do steps 1, 2, and 3 in order.
For case 2, do steps 1, 3, and then 2.
Try It 2-1 Solution
The following table shows the total costs of gasoline and insurance and the cost per mile if the
truck is driven (a) 20,000 miles and (b) 30,000 miles.
Number of Miles
Driven
(1)
Variable Gasoline
Costs
(2) = $0.15 × (1)
Fixed Insurance
Costs
(3)
Total Costs
(4) = (2) + (3)
Cost per Mile
(5) = (4) ÷ (1)
20,000 $3,000 $6,000 $ 9,000 $0.45
Try It 2-2 Solution
We first calculate the cost of direct materials used and then total manufacturing costs incurred in
2017.
The cost of direct materials used is:
Beginning inventory of direct materials, January 1, 2017 $12,000
+ Purchases of direct materials in 2017 85,000
Total manufacturing costs incurred refers to all direct manufacturing costs and manufacturing
(i) Direct materials used in 2017 $ 90,000
2-11
Try It 2-3 Solution
(a) Cost of goods manufactured refers to the cost of goods brought to completion, whether they
were started before or during the current accounting period. Some of the manufacturing costs
incurred during 2017 are held back as the cost of the ending work-in-process inventory.
The cost of goods manufactured in 2017 for Diana Corporation is calculated as follows:
Beginning work-in-process inventory, January 1, 2017 $ 9,000
Ending work-in-process inventory, December 31, 2017 8,000
(b) The cost of goods sold is the cost of finished goods inventory sold to customers during the
current accounting period. Cost of goods sold is an expense that is matched against revenues.
The cost of goods sold in 2017 for Diana Corporation is calculated as follows:
Beginning inventory of finished goods, January 1, 2017 $ 15,000
s
2-12
