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6
Fundamentals of Product and Service Costing
Solutions to Review Questions
6-1.
Cost allocation is the assignment of costs in cost pools to cost objects. The cost objects
6-2.
Cost management systems should satisfy the following criteria:
6-3.
Cost flow diagrams serve two purposes. First, they help describe how a cost
6-4.
A job costing accounting system traces costs to individual units or to specific jobs
6-5.
All three systems assign costs from cost pools to cost objects using a cost allocation
rule. They differ in detail of the cost assignments to individual units.
6-6.
6-7.
6-8.
6-9.
6-10.
The basic cost flow model appears as follows:
Beginning balance + Transfers in – Transfers out = Ending balance
Solutions to Critical Analysis and Discussion Questions
6-11.
Although there may be no one correct way to allocate cost, cost allocation can provide
6-12.
There are three important points to consider:
1. The cost system should meet the needs of the users (the decision makers).
6-13.
The basic cost flow model is as follows:
6-14.
It is sometimes difficult (and frustrating) for managers when the cost accountant says
6-15.
Reasons to agree with approach: If the products are not contributing to company profits,
then the products should be eliminated. This will increase overall company profits.
6-16.
The way the “products” are defined will depend, at least in part, on the decision the
dean is interested in making. They may be defined as degree programs vs. non-degree
programs. They may be the different degree programs. They might be the credit hour
(although it is unlikely you would be able to get much information at this level).
6-17.
Answers will vary. Common answers include the number of students, the number of
credit hours, number of classes, number of class sessions, and so on.
6-18.
6-19.
Although it would be ideal for the cost allocation base to have cause-and-effect relation
with overhead costs, it is unlikely to happen for several reasons. One reason is that
6-20.
The allocation base determines the costs assigned to the cost objects. If these costs are
6-21.
There are many reasons why two companies may have different cost systems. First,
dictate the information needed from the cost system.
6-22.
6-23.
Although it is true that the cost of the product will be the same regardless of the cost
allocation method, it does not mean that cost allocation does not matter. We might be
Solutions to Exercises
6-24. (20 min.) Basic Cost Flow Model: Ralph’s Mini-Mart.
6-25. (20 min.) Basic Cost Flow Model: Generic Electric.
a. $32.0 million = $8.0 million + $13.5 million + (.7 x $15.0 million)
6-26. (20 min.) Basic Cost Flow Model.
Based on the basic formula:
6-27. (20 min.) Basic Cost Flow Model.
Based on the basic formula:
BB
+
TI
–
TO
=
EB
6-28. (20 min.) Basic Cost Flow Model.
Based on the basic formula:
BB
+
TI
–
TO
=
EB
6-29. (10 min.) Basic Product Costing: Enviro Corporation.
6-30. (10 min.) Basic Product Costing: Sara’s Sodas.
Materials ............................................
$310,000
6-31. (15 min.) Basic Product Costing: Sara’s Sodas.
If the cost per liter is $0.43 and 4.5 million liters were produced, the total manufacturing
cost must have been $1,935,000 (= $0.43 x 4.5 million). But total manufacturing cost is
computed as:
6-32. (15 min.) Basic Product Costing: Sara’s Sodas.
a. If the cost per liter is $0.45 and 3.8 million liters were produced, the total
manufacturing cost must have been $1,710,000 (= $0.45 x 3.8 million). But total
manufacturing cost is computed as:
6-33. (10 min.) Basic Product Costing: Big City Bank.
Labor ..................................................
$ 35,000
6-34. (20 min.) Basic Product Costing: Luke’s Lubricants.
Total
a.
Sold
b.
Work-in-
Process,
January 31
Production:
Gallons .........................................
900,000
800,000
100,000
Percentage complete ...................
100%
80%
6-35. (20 min.) Basic Product Costing—Ethical Issues: Old Tyme Soda.
a. and b.
Total
a.
Sold
b.
Work-in-
Process,
November 30
Production:
6-36. (15 min.) Process Costing: Sanchez & Company.
Total
Transferred
to Finished
Goods
Work-in-
Process,
January 31
Production:
6-37. (15 min.) Process Costing: Graham Petroleum.
Total
Shipped
Work-in-
Process,
May 31
Production:
6-38. (15 min.) Process Costing: Joplin Corporation.
Total
Completed
Work-in-
Process,
November 30
6-39. (15 Minutes) Predetermined Overhead Rates: Tiger Furnishings.
Predetermined overhead rate = $35.00 per direct labor hour.
Basic
Dominator
Total
Units produced ......................
1,000
250
1,250
6-40. (15 Minutes) Predetermined Overhead Rates: Tiger Furnishings.
Predetermined overhead rate = 175% of direct labor cost.
Basic
Dominator
Total
Units produced ......................
1,000
250
1,250
6-41. (15 Minutes) Predetermined Overhead Rates: Tiger Furnishings.
Predetermined overhead rate = $25.00 per machine-hour.
Basic
Dominator
Total
Units produced ..................
1,000
250
1,250
6-42. (20 Minutes) Predetermined Overhead Rates: Tiger Furnishings.
6-43. (30 Minutes) Operations Costing: Howrley-David, Inc.
The unit costs are:
Fatboy: ............
$4,000
Screamer: .......
$5,000
Fatboy
Screamer
Total
Number of units .........................
2,000
4,000
6,000
Materials cost per unit ...............
$2,000
$3,000
6-44. (30 Minutes) Operations Costing: S. Lee Enterprises.
The unit costs are:
SL1: ................
$2,200
SL2: ................
$2,700
SL1
SL2
Total
Number of units .........................
1,300
1,800
3,100
Materials cost per unit ...............
$900
$1,400
6-45. (30 Minutes) Operations Costing: Organic Grounds.
The unit costs are:
Star: ................
$10.60
Bucks: .............
$12.60
Star
Bucks
Total
Number of pounds .....................
5,000
20,000
25,000
Conversion cost
Solutions to Problems
6-46. (30 Minutes) Product Costing: Tiger Furnishings.
The unit costs are: Basic: $187.38 (rounded) and Dominator: $405.50
Basic
Dominator
Total
Direct materials ............................................................
$10,000
$3,750
$13,750
6-47. (30 Minutes) Product Costing: Tiger Furnishings.
The unit costs are: Basic: $187 and Dominator: $407
Basic
Dominator
Total
Direct materials ......................................................
$ 10,000
$3,750
$13,750
Direct labor .............................................................
64,500
35,500
100,000
6-48. (30 Minutes) Product Costing—Ethical Issues: Tiger Furnishings.
a. The unit costs are different because the two products use the machine hours and
direct labor costs in different proportions. The Basic model is more machine
6-49. (30 Minutes) Two-Stage Allocation and Product Costing: Donovan &
Parents.
a. The overhead rates are $18 per machine hour and 45% of direct-materials cost.
Account
Machine-Hour
Related
Materials
Related
Utilities …………………………. .................
$ 48,000
Supplies ....................................................
$33,600
b. The cost per unit of output is $8.75 for jerseys and $12.40 for shorts.
Jerseys
Shorts
Total
Machine hours used ...........................................
6,000
4,800
10,800
Direct materials costs ………………….
$96,000
$64,000
$160,000
6-50. (30 Minutes) Two-Stage Allocation and Product Costing: Owl-Eye
Radiologists.
a. The overhead rates are $46 per equipment hour and $50 per direct labor hour.
Account
Equipment-
Hour Related
Direct-Labor
Hour Related
Utilities …………………………. ....................
$ 4,800
Supplies .......................................................
$12,600
b. The costs per patient are $114.75 per hospital patient hour and $29.44 per other
patient.
Hospital
Patients
Other
Patients
Total
Equipment hours used .......................................
240
120
360
6-51. (30 Minutes) Operations Costing: Vermont Instruments.
The unit costs are:
Fin-X: ......
$28
Sci-X: ......
$33
Fin-X
Sci-X
Total
Number of units .........................
10,000
40,000
50,000
Operation cost (@ $3 per unit) ..
$ 30,000a
$ 120,000b
$150,000
6-52. (30 Minutes) Operation Costing: DiDonato Supplies.
The unit costs are:
Basic: ......
$17.75
Laser: ......
$30.75
Basic
Laser
Total
Number of units .........................
250,000
60,000
310,000
6-53. (45 Minutes) Account Analysis, Two-Stage Allocation, and Product
Costing: Tiger Furnishings.
a. Cost Flow Diagram
Overhead
6-53. (continued)
b.
Basic
$187
Dominator
$406
Basic
Dominator
Total
Units Produced ...........................................
1,000
250
1,250
Manufacturing Overhead
Machine-hour
related
Direct labor
cost related
Utilities ...................................................
$1,800
$0
$1,800
Supplies .................................................
0
5,000
5,000
Training .................................................
0
10,600
10,600
6-53. (continued)
Product Costing
Direct material .........................................
$ 10,000
$ 3,750
$ 13,750
Direct labor ..............................................
64,500
35,500
100,000
Overhead
Solutions to Integrative Cases
6-54. (45 Minutes) Product Costing, Cost Estimation, and Decision Making: Dolan
Products.
a. To determine product costs and margins, first calculate the Year 1 overhead rate:
Overhead rate
=
Total overhead
÷
Total direct labor hours
The product margins are:
Red
Yellow
Green
Price ................................................
$150.00
$100.00
$75.00
6-54. (continued)
b. To determine product costs and margins, first calculate the Year 2 overhead rate:
Overhead rate
=
Total overhead
÷
Total direct labor hours
The product margins are:
Yellow
Green
6-54. (continued)
c. Dolan should not drop Yellow.
The problem is that some of the manufacturing overhead is fixed and when a
We can use the high-low method from Chapter 5 to estimate the fixed overhead
component and the variable overhead rate. We only have two observations, so
these serve as the high and low observations.
Variable cost =
Cost at highest activity – cost at lowest activity
Highest activity – lowest activity
6-55. (45 Minutes) Product Costing and Decision Making: Brunswick Parts.
This problem is designed to get students to understand the effect that cost systems
a.
The reported product costs include direct materials, direct labor, and manufacturing
overhead.
b.
Based on the reported product costs, it appears that Fredericton is the plant where
