Question 1

For the month of January,Year 1,Ghent Corporation had a beginning balance of $103,200 in work in process.During the month,the company added the following costs to work in process: direct materials,$90,900;direct labor,$54,000;and manufacturing overhead,$81,000.The ending amount of work in process was $37,400.What was the cost of goods manufactured for the period? Prepare a schedule that shows the calculation of the cost of goods manufactured.

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Question 2

On December 31,Year 1,Zeus Manufacturing reported the following balances in its inventory accounts: $\begin{array}{|l|r|}
\hline \text { Account } & \text { Balance } \
\hline \text { Raw materials inventory } & \$ 21,000 \
\hline \text { Work in process inventory } &32,500 \
\hline \text { Finished goods inventory } &36,500 \
\hline
\end{array}$ The following events occurred during Year 2:
a)purchased raw materials for cash,$375,000
b)raw materials used to make products,$359,500
c)direct labor costs of $204,000 were paid in cash
d)estimated overhead applied to work in process,$183,600
e)paid cash for actual overhead costs,$180,500
f)completed products that cost $704,500
g)sold goods that had cost $696,000 for $985,000 cash
h)paid cash for selling and administrative expenses,$206,000
Required:
1)Prepare Zeus' schedule of cost of goods manufactured and sold for Year 2.
2)Prepare the income statement for Year 2.
3)Calculate the balances in the Raw Materials,Work in Process,and Finished Goods Inventory accounts as of December 31,Year 2.

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Question 3

Describe the basic differences between absorption and variable costing.Why are managers sometimes motivated to produce too much inventory when income is computed under an absorption costing system?

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Question 4

In calculating product costs,actual direct materials and actual direct labor are charged to the work in process account;however,an estimated amount of overhead is charged to the account.Why is overhead accounted for differently than the other costs of production?

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Question 5

Which is required for preparation of a company's external financial statements: absorption costing or variable costing? Which is frequently used for internal decision making?

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Question 6

Lake Manufacturing estimated its product costs and production volume for the upcoming year by quarter as follows: $\begin{array}{|l|c|c|c|c|}
\hline& \text { 1st Quarter } & \text { 2nd Quarter } & \text { 3rd Quarter } & \text { 4th Quarter } \
\hline   \text { Direct raw materials } &\$ 390,000 & \$  235,000 & \$ 350,000 & \$ 792,000 \
\hline  \text { Direct labor } &312,000 &  188,000 &280,000 &  633,600\
\hline  \text { Manufacturing overhead } &\underline {234,000 } &  \underline {423,000}&\underline {420,000} &  \underline {316,800}  \
\hline  \text {Total production costs } & \$ 936,000 & \$  846,000 & \$ 1,050,000 & \$ 1,742,400 \
\hline  \text {Estimated production in units } &39,000 &  23,500 & 35,000 &  79,200\
\hline
\end{array}$ The company expects a significant increase in volume in the fourth quarter due to holiday sales.The company does not expect overhead costs,which are predominately fixed,to vary with production volume or to vary significantly from previous years.Selling prices are established using a cost plus pricing strategy where cost is the product's estimated quarterly cost.However,the company finds the wide variations in short-term unit cost difficult to use.Specifically,unit cost fluctuations complicate pricing decisions and many other decisions where cost is a consideration.
Required:
1)Compute the company's expected cost per unit for each quarter of the year.
2)How would you suggest that overhead costs be estimated to solve the company's unit cost problem? Calculate the unit cost per quarter based on your recommendation.

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Question 7

The Hamilton Company planned to produce 150,000 units during the current year.At that production volume,the company estimated that its overhead costs would amount to $637,500.
Required:
1)Calculate the predetermined overhead rate per unit based on expected production.
2)Assume that actual output totaled only 145,000 units but the actual overhead cost incurred was $637,500 as expected.How much overhead cost was allocated to work in process? By how much was overhead overapplied or underapplied during the period? (Be sure to indicate whether over- or under-applied. )
3)Assume that actual output totaled 150,000 units as expected but actual overhead costs amounted to $600,000.How much overhead cost was allocated to work in process? By how much was overhead overapplied or underapplied during the period? (Be sure to indicate whether over- or under-applied. )
4)Summarize the conditions that lead to over- or under-applied overhead.

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Question 8

The cost structure for Chiang Company, which began operations on January 1, is provided below:

Variable selling and administrative costs are $4 per unit sold.
During the year, the company produced 4,000 units and sold 3,500 units at the $60 selling price.

Required:

1) Prepare an income statement under absorption costing.
2) Prepare an income statement under variable costing.
3) Explain the difference between the two income amounts.
4) What absorption costing disadvantage does this exercise emphasize?

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Question 9

Redmond Manufacturing Company began operations on January 1.The Company was affected by the following events during its first year of operation:
a)Company issued stock to owners for $100,000 cash.
b)Purchased materials,$8,000 for cash.
c)Transferred $4,000 of direct materials to production (Job #1: $3,000;Job #2: $1,000).
d)Paid direct labor costs,$5,000 (Job #1: $2,500;Job #2: $2,500).
e)Paid $3,000 cash for various actual overhead costs.
f)Allocated overhead to work in process at 60% of direct labor cost.
g)Completed Job #1 and transferred it to Finished Goods.
h)Sold Job #1 for $8,400 cash.
i)Paid $200 cash for selling and administrative expenses.
Required:
1)Record the above events in the T-accounts provided.Label your transactions (a)- (i).
2)Determine the ending balance in the work in process account.
3)Prepare a schedule of cost of goods manufactured and sold.
4)Compute the amount of gross profit earned on Job #1.

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Question 10

Selected T-accounts from the books of Street Manufacturing Company are provided below:  Required:
1)Assuming overhead was allocated on the basis of direct labor cost,compute the predetermined overhead rate.
2)Compute the amount by which overhead was over- or underapplied.(Be sure to indicate whether over- or underapplied. )
3)Compute the cost of goods sold assuming that the company writes off any over- or underapplied overhead directly against cost of goods sold.
4)Compute net income for the period.
5)Compute the total amount of inventory that will be reported on the end-of-year balance sheet,including the balances from all of the company's inventory accounts.

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Question 11

Describe the conflict between the need for cost information to make managerial decisions and the timing of the availability of actual cost data.How do companies resolve this conflict?

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Question 12

What is a volume variance,and what is its cause? Under what circumstances is the volume variance unfavorable?

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Question 13

Selected accounts from Harper Company are provided below:  Required:
In the space provided,briefly describe each indicated transaction.Transaction (a)has been completed as an example. $\begin{array}{|l|l|}
\hline \text { Transaction } & \text { Description of Transaction } \
\hline \text { (a) } & \text { Common stock issued for cash } \
\hline \text { (b) }  \
\hline \text { (c) }  \
\hline \text { (d) }  \
\hline \text { (e) } \
\hline \text { (f) }  \
\hline \text { (g) }  \
\hline \text { (h) }  \
\hline \text { (i) }  \
\hline\text { (j) }  \
\hline
\end{array}$

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Question 14

Winken,Blinken,and Nod is a law firm specializing in real estate litigation.In addition to the three partners,the firm employs nine associates who work directly with clients.The average budgeted compensation for the twelve professionals is $240,000.Each lawyer is budgeted at 1,500 billable hours per year.All professional labor costs are included in a single direct cost pool and are traced to jobs on a per-hour basis.All non-professional labor costs are included in a single overhead cost pool and are allocated to jobs using professional labor hours as the allocation base.Budgeted overhead costs total $1,800,000.The firm is considering bidding on some work with a local university.The job is expected to require 100 hours of professional labor.
Required:
1)Compute the budgeted direct cost rate per hour of professional labor.
2)Compute the budgeted (that is,predetermined)overhead cost rate per hour of professional labor.
3)Compute the budgeted cost for the university job.

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Question 15

At the beginning of the year,Hilliard Company estimated that its total overhead cost would be $250,000 and its production volume would be 80,000 units.Total actual overhead cost for the year was $246,000.The actual number of units produced during the year was 78,000.
Required:
1)What amount of overhead was applied to the products Hilliard completed during the year?
2)Calculate the volume variance for the year.Indicate whether it is favorable or unfavorable.Do not round intermediate calculations.
3)Calculate the spending variance for the year.

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Question 16

Select the term from the list that best matches the description or definition.Enter the number of the best answer in "Your Answer" column. \(\begin{array}{|l|l|l|}
\hline \text {Your Answer } & \text {Defiution or Descrivtion} &\text {  Term }  \
\hline & \text { A. Asset account used to accumulate cost of materials that will be used to make the company's products   } &\text {1. Absorption costing }  \
\hline & \text { B. Asset account containing product costs associated with units that have been completed and are awaiting sale   } &\text {2. Applied overhead }  \
\hline & \text { C. Practice of capitalizing all product costs, including fived manufacturing costs, in ilwentory  } &\text {3. Cost of goods}  \
\hline & \text {  D. Asset account used to accumulate all product costs associated with production } &\text {4. Cost of goods sold }  \
\hline & \text { E. Amount of overhead costs assigned to Work in Process
using the predetermined rate
  } &\text {5. Finished goods iwentory }  \
\hline & \text {F. Product costing system that does not incluck fived manufacturing costs as part of the cost of inventory} &\text {6. Manufacturing overhead account   }  \
\hline & \text {G. Calculated by dividing estimated overhead costs for the period by scome measure of estimated total production activity for the period   } &\text {7. Overapplied or underapplied overhead   }  \
\hline & \text { H. The result of allocating more or less overhead cost to Work in Process than the anount of actual overhead costs incurred  } &\text {8. Predeternined overhead rate   }  \
\hline & \text {  I. Schedule that summarizes the flow of manufacturing product costs } &\text {9. Raw materials inventory }  \
\hline & \text {J. Product costs associated with prochicts that were sold during an accounting period} &\text {10. Retained earmings}  \
\hline & \text { K. Temporary account used to accuunulate the actual overhead costs incurred and the total amount of overhead applied to Work in Process  } &\text {11. Variable costing}  \
\hline & \text { L. Eqpity account that is the culnination of all earnings kept in the basiness since inception  } &\text {12. Work in process inventory }  \

\hline
\end{array}\)

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Question 17

Michie Company's management accountant prepared the following income statement relating to its second year of operations using the absorption costing format: \(\begin{array}{c}
\hline \text {Michie Company } \
\hline \text {Income Statement (Absorption Costing)} \
\hline \text {Year Ended December 31, 2014} \
\begin{array}{|l|c|r|r|}
\hline \text {Sales } & (50,000 \times \$ 20.00) & & \$  100,000 \
\hline \text { Cost of goods sold } & & &  \
\hline\text { Beginning inventory } & \left(10,000 \times \$ 10.00^{*}\right) & \$  100,000 \
\hline \text { Variable and fixed manufacturing costs } & \left(45,000 \times \$ 10.00^{*}\right) & 450,000 \
\hline \text { Cost of goods available for sale } & (55,000 \times \$ 10.00) & 550,000 \
\hline \text { Less ending irventory } & (5,000 \times \$ 10.00) & 50,000 & \underline {  500,000} \
\hline \text { Gross margin at standard } & &&\$ 500,000\
\hline \text { Adjustment for volume variance } & (5,000 \times \$ 2.00^{*}) & &\underline { 10,000} \
\hline \text {Gross margin at actual } & & &\$  490,000\
\hline \text {Less operating costs:} & &&\

\hline \text {Variable selling and administrative costs} & (50,000 \times \$ 2.00) &\$ \quad 100,000&\
\hline \text {Fixed selling and administrative costs } && \underline {    150,000   }&  \underline { 250,000} \
\hline \text { Net income } & &&  \underline { \$  240,000} \
\hline
\end{array}
\end{array}\) Breakeven point under absorption costing 20,000 units.
* Variable manufacturing costs of $8.00 plus fixed manufacturing costs of $2.00.
** The $2.00 fixed manufacturing cost per unit is based on budgeted production of 50,000 units.
Since actual production was only 45,000,an unfavorable volume variance of $10,000 occurred.
The company uses a standard costing system.The only variance that occurred during the period was the $10,000 unfavorable volume variance.
Required:
1)Prepare an income statement for Michie Company under variable costing.
2)Compute the breakeven point in units (total fixed costs ÷ unit contribution margin)under variable costing.
CHANGE NEEDS TO BE MADE TO TABLE
Change the "2014" to:
Year 2

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Question 18

Selected accounts from Madison Company are provided below:  Required:
Determine the following: $\begin{array}{|l|l|l|}
\hline & \text {Item} &\text {Amount}  \
\hline 1 & \text { Actual overhead costs } \
\hline 2 & \text { Cost of goods manufactured } \
\hline 3 . & \text { Cost of goods sold } \
\hline 4 & \text { Direct labor cost incurred } \
\hline 5 & \text { Direct materials used } \
\hline 6 & \text { Estimated overhead charged to production } \
\hline 7 & \text { Finished goods ending inventory } \
\hline 8 & \text { Gross margin } \
\hline 9 & \text { Income } \
\hline 10 & \text { Indirect materials used in production } \
\hline 11 & \begin{array}{l}
\text { Over- or under-applied overhead (show } \
\text { dollar amount and whether over- or under- } \
\text { applied) }
\end{array} \
\hline 12 & \text { Raw materials purchased } \
\hline 13 & \text { Raw materials ending inventory } \
\hline 14 & \text { Work in process ending inventory } \
\hline
\end{array}$

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Question 19

Describe the schedule of cost of goods manufactured and sold.What information does it include,and how is it used?

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Quiz 11: Product Costing in Service and Manufacturing Entities