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297
CHAPTER 10
ACCOUNTING SYSTEMS FOR
MANUFACTURING OPERATIONS
CLASS DISCUSSION QUESTIONS
1. Managerial accounting differs from financial
accounting in the following ways:
(1) Financial accounting records and re-
ports transactions and events using
generally accepted accounting princi-
ples (GAAP), while managerial account-
ing is not restricted by specific rules.
That is, managerial accounting records
and reports whatever information is use-
ful to management for decision making.
pany or its segments.
2. For a company that produces desktop com-
puters, memory chips would be considered
a direct materials cost. For a cost to be con-
sidered a direct materials cost, the cost must
be an integral part of the finished product
and a significant portion of the total cost of
the product.
3. Product cost information is used by manag-
ers to (1) establish product prices, (2) con-
trol operations, and (3) develop financial
statements.
c. Process cost systems accumulate costs
for each department or process within a
factory.
5. Job order costing is used by firms that sell
custom goods and services to customers.
6. Materials should not be issued by the store-
keeper without a properly authorized materi-
als requisition. Both the storekeeper and the
recipient of the materials should initial the
materials requisition when the materials are
9. The use of a predetermined factory over-
head rate in job order cost accounting
assists management in pricing jobs. By
estimating the cost of direct materials and
direct labor based on past experience and
by applying the factory overhead rate, the
cost of a job can be estimated. The prede-
termined rate also permits the determination
of the cost of a job shortly after it is finished,
which enables management to adjust future
pricing policies to achieve the best combina-
298
b. Direct labor cost, direct labor hours, and
machine hours.
b. Underapplied
12. The simplest satisfactory procedure for
disposing of a relatively minor balance in the
factory overhead account is to transfer it to
Cost of Goods Sold.
13. Product costs are composed of three
elements of manufacturing costs: direct
materials cost, direct labor cost, and factory
overhead cost. These costs are treated as
assets until the product is sold. Product
consulting, advertising, or legal services.
Job cost sheets would accumulate all direct
be transferred to the cost of services on the
income statement.
15. a. The objective of JIT processing is to
produce products with high quality, low
cost, and instant availability.
b. JIT processing combines traditional
manufacturing functions into work cen-
ters where workers are cross-trained to
complete several functions. Also, ser-
vice activities such as repair and
299
EXERCISES
E10–1
a. Direct materials cost
e. Factory overhead cost
E10–2
a. Direct materials cost
f. Factory overhead cost
E10–3
a, b, d, f, g
E10–4
a. Period cost
b. Period cost
c. Period cost
d. Product cost
j. Product cost
k. Period cost
l. Period cost
m. Product cost
E10–5
a. period
b. plant depreciation
e. direct materials
f. process
300
E10–6
a. Materials requisitioned for use (both direct and indirect)
b. Factory labor used (both direct and indirect)
c. Application of factory overhead costs to jobs
E10–7
a.
Cost of goods sold:
Sales ................................................................................... $375,000
Less gross profit ............................................................... (120,000)
Cost of goods sold ............................................................ $255,000
b.
Direct materials cost:
Materials purchased .......................................................... $200,000
Less: Indirect materials .................................................... $ 15,000
Materials inventory ................................................. 25,000 (40,000)
Direct materials cost ......................................................... $160,000
301
E10–8
a.
RECEIVED ISSUED BALANCE
Receiving
Report
Number
Quantit
y
Unit
Price
Materials
Requi-
sition
Number
Quantit
y
Amount
Date
Quantit
y
Amount
Unit
Price
Jul
y
1 250 $1,500 $6.00
309 400 $7.50 July 5 250 1,500 6.00
400 3,000 7.50
7401 480 $3,225* Jul
y
10 170 1,275 7.50
422 800 8.00 July 20 170 1,275 7.50
b. Ending wire cable balance:
320 at $8.00 ................................................................ $2,560
c. Work in Process ($3,225 + $5,115) ................................ $8,340
d. Comparing quantities on hand as reported in the materials ledger with pre-
302
E10–9
a. Materials transferred to Work in Process: $134,060*
Materials transferred to Factory Overhead: $1,665
*$134,060 = $56,425 + $38,810 + $14,275 + $24,550
b.
Balance Sheet
Assets = Liabilities + Stockholders’ Equity
Work in Factor
y
Materials + Process + Overhead
E10–10
a. Materials purchases ...................................................... $530,000*
*$52,000 + $100,000 + $360,000 + $18,000
b. Materials transferred to Work in Process .................... $506,600*
*$50,650 + $99,550 + $356,400
303
E10–11
a. Factory labor costs transferred to Work in Process: $80,700*
*$80,700 = $5,000 + $11,150 + $9,440 + $18,060 + $20,200 + $13,250 + $3,600
Factory labor costs transferred to Factory Overhead: $14,000
b.
Balance Sheet
Assets = Liabilities + Stockholders’ Equit
y
Work in Factory Wages
E10–12
a. Factory labor costs transferred to Work in Process: $2,900
Factory labor costs transferred to Factory Overhead: $260
Supporting Calculations:
Labor Costs (Hourly Rate × Hours)
Direct
Labor
Hourly (sum of Indirect
Rate Job 560A Job 560B Job 560C job costs) Labor
304
E10–13
a. Factory labor costs transferred to Work in Process: $ 18,000*
Factory labor costs transferred to Factory Overhead: $1,750
*$6,400 + $3,900 + $4,800 + $2,900 = $18,000
c.
Balance Sheet
Assets = Liabilities + Stockholders’ Equity
Work in Factor
y
Process + Overhead
21,600 (21,600)
Statement of Cash Flows Income Statement
No effect 0 No effect 0
E10–14
a. Factory 1: $16.75 per machine hour = $375,200 ÷ 22,400 machine hours
b. Factory 2: $9.50 per direct labor hour = $2,660,000 ÷ 280,000 direct labor
hours
d. Factory 1: $(1,450) negative (overapplied) ($28,700 – $30,150)
Factory 2: $2,000 positive (underapplied) ($230,000 – $228,000)
305
E10–15
The estimated shop overhead is determined as follows:
Shop and repair equipment depreciation ......................................... $ 91,000
Shop supervisor salaries ................................................................... 250,000
Shop property taxes ........................................................................... 40,000
Shop supplies ..................................................................................... 15,000
Total shop overhead ..................................................................... $396,000
E10–16
a. Estimated annual operating room overhead: $1,260,000
Estimated operating room activity base (number of operating room hours):
Hours per day ..................................................................... 12
Days per week .................................................................... × 7
Weeks per year (less repairs & maintenance weeks) ...... × 50
Estimated annual operating room hours ......................... 4,200
Predetermined surgical overhead rate:
306
E10–16, Concluded
c. Actual hours used in March .......................................... 330
Predetermined surgical room overhead rate ............... × $300
Surgical room overhead applied, March ...................... $ 99,000
E10–17
a. Cost of jobs completed and transferred to
Finished Goods: $825,000*
*$180,000 + $225,000 + $140,000 + $280,000 = $825,000
b. Cost of unfinished jobs at October 31:
E10–18
a. Direct materials used and transferred to Work in Process: $13,200*
*$13,200 = $4,000 + $5,000 + $2,700 + $1,500
Indirect materials used and transferred to Factory Overhead: $2,000
d. Cost of completed Jobs 7-01 and 7-02 ......................... $21,180*
*$9,220 + $11,960
307
E10–18, Concluded
e. Actual factory overhead incurred ................................. $5,150*
Factory overhead applied to jobs during July ............. (5,040)**
Underapplied factory overhead for July ....................... $ 110
*$2,000 + $1,650 + $1,500 = $5,150
Applied Overhead**
Job 7–1 ...................................................... $1,620
E10–19
a. BRIDGER BIKES INC.
Income Statement
For the Month Ended July 31, 20Y6
Revenues ............................................................................ $918,000
Cost of goods sold ............................................................ (550,000)
Gross profit ........................................................................ $368,000
Selling expenses ................................................................ $132,500
Administrative expenses ................................................... 80,000 (212,500)
Operating income .............................................................. $155,500
b. Materials inventory:
Work-in-process inventory:
Materials used in production ................................. $329,000
Direct labor .............................................................. 160,000
Factory overhead (80% × $160,000) ....................... 128,000
Additions to work in process ................................. $617,000
308
E10–20
a. Direct labor costs for April .......................................... $ 434,000
b. Media purchases for April ........................................... $1,300,000
c. Overhead applied during April (40% × $1,300,000) ... $ 520,000
E10–21
The CEO must not have been listening very closely at the conference. Just-in-
time is not primarily an inventory reduction method. Just-in-time is a process
improvement philosophy that focuses on reducing time, cost, poor quality, and
uncertainty from a process. Large inventories are merely a symptom of poorly
designed processes. Thus, the CEO’s statement is naive. The company must first
309
E10–22
This is an actual situation facing the U.S. apparel industry. Warren Featherbone
and other U.S.-based apparel manufacturers are discovering the strategic power
of just-in-time. Rather than competing with the offshore manufacturers on price,
these companies are providing smaller quantities with much faster delivery. The
retailer is able to order and receive goods in smaller, more frequent batch sizes.
As a result, the retailer is able to move with fashion trends more quickly. If, for
example, a particular style is proving popular, the domestic manufacturer can
E10–23
Piecework compensation is a characteristic of a traditional manufacturing philos-
ophy that is inconsistent with just-in-time. Under just-in-time, workers are viewed
not just as laborers but as valuable assets of the company. The company wants
workers to also bring their minds to the job. Thus, workers should be compen-
sated for contributing to process improvements, for training themselves to work
other jobs in the cell, and for managing themselves. This might involve an hourly
310
E10–24
a.
A B C D E F G
1 Patient Franklin Patient Krame
r
2 Activity
Activity
Usage ×
Activity
Rate
Activity
= Cost
Activity
Usage ×
Activity
Rate
Activity
= Cost
3 Room and
meals
1 days $225 per day $ 225 4 days $225 per day $ 900
b. Patient Kramer apparently had a more serious condition than did Patient
311
E10–25
a.
UMBRELLA INSURANCE COMPANY
Product Profitability Report
For the Year Ended December 31, 20Y2
Workers’
Auto Comp. Homeowners
Premium revenue ................................... $ 7,200,000 $ 6,500,000 $ 9,200,000
Less estimated claims ........................... (5,040,000) (4,550,000) (6,440,000)
Underwriting income ............................. $ 2,160,000 $ 1,950,000 $ 2,760,000
Administrative activities:*
New policy processing ..................... $ (240,000) $ (232,000) $ (656,000)
Cancellation processing .................. (84,000) (60,000) (480,000)
Claim audits ...................................... (160,000) (50,000) (350,000)
b. Workers’
Auto Comp. Homeowners
Underwriting income as a
percent of premium revenue ......... 30.0% 30.0% 30.0%
312
E10–25, Concluded
d. All three insurance lines have the same percentage of underwriting income to
premium revenue (30%). The differences among the insurance lines are in the
way they consume administrative activities. For example, the Homeowners
insurance line has the least profitability due to its high use of administrative
313
PROBLEMS
P10–1
Product Costs Period Costs
Direct Direct Factory
Materials Labor Overhead Selling Administrative
Cost Cost Cost Cost Expense Expense
a. X
b. X
c. X
k. X
l. X
m. X
n. X
o. X
p. X
q. X
r. X
